There’s a perceived effort of saving. That is, when you feel it’s too much work for the value you get. But is this really the case? Is it so hard to save money?
Speaking to a colleague the other day I was struck by his laziness to save money. I need to clarify that though, he does save money and has some investments. He isn’t interested in learning or understanding finances though and will rather pay his advisor to do the right thing. To him it’s simply too much effort and his time can apparently be better spent.
I’d agree with him if he was a hot-shot businessman or entrepreneur earning millions, but he’s not. And his evenings (like most of us) are spent socializing with friends or lazing about in front of the TV. So is that better use of one’s time?
Take a look at my Twitter poll on this.
Maybe you can help me with my next post…
Investing can be complex and can take a bit of time and admin when making a decision.
Do you think it’s worth the effort to try to understand all the implications of your investment?
— Brendan (@your_money_blog) January 9, 2018
Setting the stage
Let’s look at a quick example of how a little knowledge can help you save a lot of money!
Mr Investor meets with his financial advisor, Ms Moneypenny, and explains to her that he has 10,000 to invest now as well as an annual amount of 6,000. He’s looking at a medium risk fund and is wanting to invest this over a long term, as part of his retirement plan.
Ms Moneypenny is obviously very excited and offers him the “perfect” solution; a Unit Trust with a medium risk asset allocation. There is an annual fee of 1.92% and an advisor fee of 2.5%. She recommends this investment because it has great growth of 12.5% (or if you’re skeptical you’ll think it’s because of the commission she’ll receive). She obviously explains the complications of investments and makes it all sound mysterious. Luckily for Mr Investor she is qualified and is highly recommend by his friends. Mr Investor trusts her and goes ahead.
Now the exact same scenario, but with a little “home-work” Mr Investor finds an investment with the exact same growth (this won’t happen in the real world, but let’s look at the example). This investment however has lower fees.
He also finds another investment with quite low growth, but the fees are also very low.
The effort of saving vs value
Have a look at the following breakdown of investments. These are simply examples to bring across a point.
Initially the differences are negligible and one can easily think that it’s not worth the effort to understand investments and do your own research. But, the differences in the investment value become bigger over the years.
Over a 15 year period, see how the value of Investment B is almost 37,000 more than Investment A. This is simply because of the lower fees.
Interestingly, Investment C has a growth of only 10.5% but once the fees are taken into account the value after 15 years is still higher than that of Investment A!
The small effort involved in making wise decisions pays off
It’s important to look at growth as well as fees! You can find all the fees and details when reading the Fund Fact Sheets. Also, look out for the “hidden” fees (or small print). There could be special clauses if you wish to withdraw your money under some circumstances. Or there could be clauses about higher fees should the fund perform better. Sometimes the advisor also charges an initial investment fee (and you essentially lose some money before you even invest it!)
It is definitely worth the effort of taking time to read and understand your investment and the implications. Beyond this example you should also consider the tax implications or implications for your Estate should you pass away.
Your Financial Advisor can assist with all this information, but I like to sometimes get a second opinion and do some research myself.
In this example, had Mr Investor spent 2 hours researching some fund options he could have made 37,000! That’s not a bad rate for 2 hours worth of work! In fact, looking at it this way, what is your time worth? So yes it is 37,000 over 15 years, but it really was just 2 hours worth of time. In this case the effort of saving sure pays off!
As with all things, knowledge is power and although one won’t necessarily always make the best decisions and you cannot be guaranteed of anything, taking responsibility for your hard earned cash is vital to your success. No-one really cares about your money as much as you do; especially when you lose it!
Here’s a challenge for you
When next you’re faced with a financial decision, do your own research before consulting with your financial advisor. Question things and use the opportunity to learn as much as you can. If you’re not sure you’ve understood some or other concept, do more research until you get it! This small effort of saving will pay off in the long run!