There are several steps required to have a large net worth and become FIRE (financially independent / retire early). One is that you have to save a high percentage of your income. The second is that you have to pay down your debt. The third is that you have to invest your money.
On the path to FIRE you have to make sure you are paying minimal to zero fees. Fees are like a tax that go directly to financial institutions’ bottom lines.
Let’s take a look at the various fees that kill your net worth:
1. Credit Card Fees
Credit cards are often viewed as evil because of the presence of various fees. If you are careful with your finances and shop around for different credit cards you should be able to avoid all fees. I have never paid any of the following credit card fees.
- Late fee: Pretty obvious. All credit cards charge this when you have a late payment
- Foreign transaction fee: Most cards charge to use internationally
- Annual fee: Another obvious one. Some cards charge every year you have the card
- Balance transfer fee: A fee charged on the amount of debt you move from one card to another
- Cash advance fee: Fee to borrow cash against your credit limit.
- Returned payment fee: Fee charged when you have insufficient funds to make your payment
- Expedited payment: Fee to ensure your payment makes it in time
- Finance charge: Wealth killer! The interest charged on your balance.
- Over-limit fee: Charged when you go over your credit limit
Tip: If you can’t pay the balance in full each month, cancel your cards.
2. Investing Fees
Investing fees are not always obvious and may not seem like they are high. However, these fees have the potential to severely limit your investing portfolios. As an example, a 1% annual fee on a $100,000 investment at 7% per year for 60 years will reduce the final balance by $2.5 million!
- Management fee: Wealth killer! Charged annually by an institution as a percentage of the account value
- Transaction fee: Charged for every transaction including stocks, bonds, options, and mutual funds.
- Expense ratio: Wealth killer! Charged annually by a fund
- Front end load: Wealth killer! A percentage of the investment paid up front
- Back end load: Wealth killer! A percentage of the investment paid at the end
- Annual account fee: Yearly charge for an investment account
Tip: Shop around for accounts that have the lowest management and fund fees. Invest solo to avoid advisor fees.
3. Banking Fees
When I was young, my mother would say to me, “I don’t pay bank fees.” I didn’t know at the time that so many people pay these needless bank fees. I did wonder how she never paid them. It turns out that most of these are easy to avoid if you keep a large enough balance in your accounts.
- Overdraft: Allows a purchase to go through if you have insufficient funds in your account
- Account maintenance: Charged every month for maintaining checking and savings accounts
- Insufficient funds: Charged when a transaction exceeds the funds in an account.
- Non-network ATM fee: Fee for using ATM outside of the network of your bank
- International ATM fee: Fee for using ATM internationally
- Check ordering: Charge to order checks
- Excess transactions: Charged for too many transactions per month. Typically on savings accounts.
- Wire transfer: Charged for every wire transfer
- Account closing: Charged to close an account
Tip: Keep enough in your accounts to avoid banking fees.
Paying too many of the above fees will have a negative effect on your net worth. It is important to pay attention to your finances so that you are not needlessly paying these fees and making bankers even richer. With a little bit of planning you can ensure that your accounts are reaching their full potential.
Readers, what are your strategies to avoid paying these fees?