Let’s talk about nickels, dimes, and hundreds of thousands of dollars.
I got to thinking about this Sunday morning as I internally chastised myself for leaving a window AC unit and some old tools in my car.
They had been there since late December, out of sight, and out of mind as soon as I closed my trunk, every single time.
While punching in numbers for my personal budget going into the new month, I ran the numbers to see exactly what the answer to, “I wonder what that is costing me in gas?” could be.
My car weighs 2,500 to 2,590 lbs according to the manufacturer, so add me in and we’ll call it 2,750. Add in the AC unit (~60 lbs.) and tools (~40 lbs.) and we’re at 2,850. It added 3.6%.
My car averages about 25 MPG, I just hit 12,000 miles year-to-date earlier this month, and the average Maryland gasoline price is $2.45 since I started needlessly hauling the stuff around.
It cost me $42.33 because I didn’t want to take 15 minutes to haul some tools inside and organize them, and 30 minutes of driving and about a gallon of gas to drop the AC unit off at the dump.
Big deal, right? A net of about $40.
I’m not a miserly penny-pincher, but yes, it is a big deal. Here is why.
Cost Without Benefit
I was irked because I set myself up to pay a cost with no benefit. The same amount of work was required to deal with the extra weight, regardless of when I handled it.
I paid an extra $40ish for nothing. I left money on the table and someone else picked it up.
Unfortunately, tens — if not hundreds — of millions of people in the U.S. alone are doing the same, but in a far worse way.
A week ago, NPR ran a story called “Is Wall Street Eating Your 401(k) Nest Egg?”
It focused on a new employee at a manufacturing firm in Minnesota named Justin Johnson who just enrolled in a 401(k) program.
Mr. Johnson let NPR staffers listen in on a call as he talked with a financial adviser assigned to helping his employer’s 401(k) enrollees work their way through the process.
Here is an excerpt from the article:
“The fees in this retirement plan make it “extremely competitive,” says the financial adviser, who is with EFS Advisors in Cambridge, Minn. That sounds good. But it doesn’t appear to be true. Federal disclosure documents show the fees are more than three times higher than other plans available to employees at companies like this one, according to Ian Ayres, a law professor at Yale Law School.”
The financial advisor was charging 2% per year, which for the services provided, is way too high. Check out what that 2% does to an account with 7% growth over 40 years to the right.
Following this revelation, the company’s HR director got on the phone and called three financial firms. One quoted her a plan with total fees of 0.64%.
All it took was the realization that there was a cost with no benefit to cut fees by about two-thirds, and will put tens, or hundreds, of thousands of dollars in the pockets of each employee when they’ll need it the most.
Benefit Without Cost
Not being swindled is only half the picture, though.
That is because there is functionally no difference between paying an extra couple percent, and not capitalizing on an extra couple percent discount.
In fact, you can even double-dip as an investor.
Not only can you stop paying someone who adds no benefit to your retirement savings, you can also buy shares at a significant discount.
In Mr. Johnson’s case, he could have cut out the 2% annual fee charged by the unscrupulous financial advisor, and bought shares at up to 5% off.
The effect is immediate and profound. For example:
A $5,000 investment in Agnico Eagle Mines the “normal” way will net you $57 with its 1.14% annual dividend yield.
Add in the no-fee discount offered for shares and you could effectively pull in $307 in the first year.
Or how about a REIT with a much higher payout. Healthcare Realty Trust Inc. is a REIT with a 4.42% yield.
A $5,000 investment would bring in $221. With the discount offered with no fees, in the first year that effectively becomes $471.
An initial $10,000 investment at an effective 5% vs. 7% compound annual growth rate over 40 years resulted in just under an $80,000 difference, as NPR shows in the graph above.
Add in a discount on each and every share you buy, and we’re talking about potentially hundreds of thousands of dollars to gain.
It is a benefit with no cost.
Money on the Table
A couple percentage points matter a whole lot over time.
I paid an extra 3.6% for gas up until Sunday. That $40, using NPR’s modest 7% CAGR (the S&P 500 averages about 10% since inception) could have been $642 in 40 years when I’ll be 73 and (hopefully) retired, and it would have made no difference to me now.
Worry about the money you leave on the table when there is nothing to be gained.
