Money Saving Tip: Be Careful What You Buy in a Bank

Here's a piece by Suze Orman that warns us all to be careful what we buy in a bank. Her two main concerns:

1. Be sure you know that investments purchased through banks aren't federally insured.

2. Mutual funds bought through a bank are usually a bad deal because they are so expensive (due to front-end sales commissions, back-end sales commissions, and high operating expenses).

A couple of her key comments:

A mutual fund, or other product you might just happen to purchase while inside the bank, doesn't have one penny of insurance. If your local bank sells you a high-flying technology fund that drops 20 percent in value over the next six months, the FDIC has no responsibility to make good on your loss. Mutual funds are not protected by the FDIC. They're investments, not bank deposits. Big difference.

Chances are good that the mutual funds your friendly local banker is eager to sell you are a bad deal. When it comes to fund investing, you need to focus on the expenses you'll pay to buy the fund and the ongoing expenses you'll pay while you own it.

Then she says something that really makes me like her:

I'm a fan of index mutual funds -- especially for anyone who finds investing confusing -- because their expense ratios can be as small as 0.1 or 0.2 percent a year.

I know it looks like small potatoes, but take a look at this example: You invest $10,000, and the manager earns a gross annual return of 8 percent a year for 20 years. But you pay a 1.5 percent annual expense ratio every year. My index fund has the same 8 percent annualized gain, but I only have to pay 0.2 percent a year for the expense ratio. At the end of 20 years, your account is worth $35,236. Mine is worth $44,913. I could buy a lot more small potatoes than you.

Now multiply that initial $10,000 to equate to the hundreds of thousands of dollars you need for retirement, and we're talking some really big money. That's why I like index funds as well.

Overall, I'm not a great fan of banks. They lose your financial data, can have bad math skills, charge lots of extra (meaningless) fees, lead people into making all sorts of bad financial mistakes, try to tell you how much to borrow (how much they can charge, really) from them, and have fees that continue to rise (including costing Americans $4.3 billion a year to get their own money). They even have lousy marketing offers.

I keep a minimum amount in my bank (I only have a checking account) and the rest is in investment accounts or easy-access cash account like those at Emigrant Direct. Every once in awhile, we have a large amount transferred into our checking account for a special purpose (like when we bought our last car and paid cash for it). Without a fail, the teller always takes note of the amount and suggests several ways they could help "make our money work harder for us." Yeah, right. The translation is: "We can help ourselves to part of your stash." We kindly pass and let them know that the money won't be in the account long. They're always greatly disappointed. ;-)

Comments

[Steve Mertz]

Here's the deal FunSeeker-you know how to handle dough- so Suze says: I'm a fan of index mutual funds -- especially for anyone who finds investing confusing -- So, these same confused folks are going to have a pile of money in index funds at at retirement they have to decide which funds to start liquidating, how much, and when ie, monthly, quarterly, yearly? to pay for their retirement?? I'm a bigger believer in cash flow from dividends and interest! Suze can invest in index funds because she is getting royalties for all those "enlightening" books she hopes people will continue to buy :)

[Blaine Moore (Run to Win)]

Another thing not to buy from your bank is your checks. It's cheaper to go with a company like checksforless.com than to buy through your bank; your bank probably gets the checks from a place like that too but charge you more for it.