The finance industry is about making money. However, unlike most industries, you can use knowledge of banking and personal finance to save yourself a boatload of cash. Instead of handing your hard-earned cash over to wealthy bank executives, have a good understanding of these seven money secrets so you can keep as much of your money as possible.
Stock Brokers Want You To Trade
According to famed investor Warren Buffett, most of us are better off investing only in low-fee index funds like the Vanguard S&P 500 ETF or mutual funds. It is extremely difficult to beat the markets consistently. Even professional fund managers often underperform the S&P 500.
If investment professionals canâ€™t beat the market, people who donâ€™t spend eight to twelve hours per day learning about stocks and the stock market will perform even worse when picking stocks and investments. Keep in mind, that is exactly what your stockbroker wants you to do.
For most investment accounts, your brokerage is making money when you enter a buy or sell order. That is when they charge commissions. Beware that stockbrokers are incentivized to help you trade as often as possible even when it’s not in your best interest.
Investment Banks Unload Bad Bets
In his book Liarâ€™s Poker, Michael Lewis shares stories about his time on Wall Street in the 1980s. He chronicles the founding of the mortgage bond market which eventually led to the Great Recession. He also shares stories of how Wall Street traders would buy and sell large swaths of securities for the companyâ€™s profit â€“ and for their bonuses.
But those bets donâ€™t always work out how the trader expects. And sometimes a trader knows a bet is going to turn out badly before the markets figure it out. In Liarâ€™s Poker, Lewis shares stories of traders pushing their Wall Street salesmen to sell bad purchases so the customer has to eat the cost instead of the bank. Always beware of everyoneâ€™s motivations when investing, or dealing with real estate or any other financial decision.
Markets Are Efficient Over Time
The recent election season showed us what the markets can do when unexpected news hits. They adjust to incorporate future expected growth and business trends. While it is possible to get lucky in a hot IPO or buying a stock just days before a merger announcement, most of the time our investments will truck along with the rest of the market.
Large investment firms use high-frequency trading and computer algorithms built by MIT Ph.D. graduates to identify and act on opportunities to earn a quick buck. This is why day trading doesnâ€™t really work for most investors, and a long-term focus is the smartest decision. It is easy to make money over many years, but you are seriously outmatched trying to notch wins with intraday trading.
Financial Advisors Put Your Money in Bad Investments
Financial advisors are paid to manage your money and give you financial advice, but unless they are acting as a fiduciary, they donâ€™t always have to align their advice and actions with your best interest.
In fact, many financial advisors are paid a kickback to invest your assets in specific mutual funds. Not all mutual funds are created equal. Some have very low fees, while others charge a lot more. Some have a poor performance track record, while others tend to follow the market or beat it on occasion.
Make sure you know how your financial advisor gets paid, and if they are the right fit for you. In fact, most people do not need a financial advisor at all. Following a simple plan can lead to lower costs and better long-term performance.
401(k) Plans Charge You Fees Twice for Each Dollar Invested
Have you ever sat down and looked at all the fees your 401(k) plan charges over the course of a year? If not, dig out a full year of statements â€“ most 401(k) providers offer this online at no charge, and look at all the fees you paid.
If you are like most people, youâ€™ll notice that you are charged quarterly fees by each mutual fund in addition to management fees charged by the 401(k) company. This adds up to a big chunk of your investments over many years. If you are getting an employer 401(k) match, these types of plans absolutely make sense, but leaving your funds in a former employerâ€™s 401(k) can be a big mistake.
If you have investments or cash sitting in an old 401(k), roll that over to an IRA. After you do, you can choose any mutual fund or other investment you want and stop paying fees to a 401(k) manager for doing nothing more than sending you statements.
Inflation Can Make Your Savings Worth Less
Banks want you to deposit as much cash as possible in checking, savings and CD accounts. However, keeping your savings in this type of account may actually be costing you money, even if you earn interest and donâ€™t pay any fees.
The Consumer Price Index, or CPI, is the most common measure of inflation in the United States. The latest data as of this writing shows that inflation over the last year was 1.6%. That means savings accounts that pay interest below 1.6%, which is pretty much every savings account, are slowly losing value even if the number of dollars in the account is increasing.
You Can Get a Lot of Fees Waived if You Just Ask
To round out this list of money secrets, here is a secret that you can act on any time a bank or credit card company charges you a fee. If you call and ask, they may be completely willing to waive all or part of the cost.
If you are a generally good customer and make a mistake that leads to an expensive overdraft fee, late fee or other charges, give your bank a call and ask if they can help you out by waiving the fee. The worst answer they can give you, after all, is no. But the best case: you spend a few minutes and get all that money back.