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Health & Fitness

Cost, Fees, Expenses, RUN! Fresh Thoughts On How to Evaluate Costs in Your Finances

We have been trained to evaluate and seek out bad words like cost, fees, expenses, and charges. The next piece of advice we typically follow at that point? Run!

Our last post discussed how to evaluate the risk you are taking. Now I want to touch on one of the most misunderstood aspects of people’s finances: cost. We have been trained to evaluate and seek out bad words like cost, fees, expenses, and charges. The next piece of advice we typically follow at that point? Run!

We’re driving deeper into this concept after talking with new clients who share a similar reaction. Most often, the fear of surface costs typically comes from a lack of understanding the actual embedded costs and lost value in the current way of thinking.

In contrast to the latest talking head on the news as well as our natural thought tendency, most costs associated with investing, insurance, and other financial decisions are not black and white. Many costs are variable, meaning that they can change and are subject to moving targets such as account value or the market conditions. Other costs, even though they may be fixed, are derived from very intricate formulas and can be difficult even for the smartest of actuaries to understand, let alone the average investor or consumer.

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When you evaluate the costs inside your plan, try to keep this in mind: not all costs are bad.

We are absolutely cost conscious, and you should be vigilant as well. Understanding built in costs in addition to those external and easily visible is imperative to your long-term goal achievement. Unwarranted costs, whether in your budget, your time, or your investment portfolio, are a drag on your ability to succeed.

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As with anything in life, costs are relative to value and should be viewed the same way when making financial decisions. Around the office, we often remind ourselves and clients that, “In the absence of value, cost becomes everything.” Allow me to paint this picture: would you pay someone 1% to manage your account if they consistently provided you with returns between 12-14%, or would you rather pay 0.2% (considerably lower) for an account that was not actively managed, returning 4-6%?

The answer is rather obvious. Yet many times the explicit dollar figure or simply the comparative percentage gets in the way of true value. What if you have the ability, with marginally higher costs, to have access in select situations to portfolios or managers whose track record has consistently provided lower risk and volatility than a traditional account loaded with retail level investments? Or, did you realize professional managers can access institutional level investments, which can create greater portfolio efficiency and reduce overall costs? Yes, there’s an explicit cost you see on a quarterly statement to have access to the manager, but this often lowers internal costs of the actual investments that most investors never think about in addition to potentially lowering volatility and increasing return.

Seek to minimize cost, but remember that cheapest isn’t always best. We pay for value every time we shop for groceries, purchase a smartphone, upgrade our vehicle, put a down payment on a home, or take a vacation. Without hesitation we all agree that last time we made these decisions, each expenditure could have been made with fewer dollars. We paid for value.

We would love to hear your best story of how you were thrilled to pay just a little more for something in the comments below.

What Should You Read Next?

How to Evaluate... The Risk You are Taking

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