10/12/2012 2:29 PM ET|
5 ridiculous rip-offs you can avoid
Unnecessary fees and exorbitant interest rates are just a few ways that companies go after your money. Be wary of these shakedowns.
Some purchases are notorious for being rip-offs. Popcorn or soda at the movies, for example. Anything from a hotel minibar. The "Total Recall" reboot.
But those expenditures are chump change compared with the real shakedowns millions of people face in the financial world. Banks, lenders, investment companies and other financial outfits are determined to fleece us out of millions, if not billions, of dollars.
Here are five of the biggest rip-offs to watch out for:
Excessive investment costs
Whether you'll have enough money for retirement depends on more than how much you save and which investments you pick. The other powerful factor is how much you pay for those investments (and any advice you get along the way).
Here's how the Labor Department puts it:
"Assume that you are an employee with 35 years until retirement and a current 401k account balance of $25,000. If returns on investments in your account over the next 35 years average 7% and fees and expenses reduce your average returns by 0.5%, your account balance will grow to $227,000 at retirement, even if there are no further contributions to your account. If fees and expenses are 1.5%, however, your account balance will grow to only $163,000. The 1% difference in fees and expenses would reduce your account balance at retirement by 28%."
The more you put into your account, the more fees you'll pay over time. While some costs are inevitable, many people are paying too much.
Fees for 401k plans with less than $10 million in assets average 1.9%, according to the Government Accountability Office. People investing with full-service brokerages or in variable annuities can easily pay 2% or even 3% when all costs are considered.
There's no evidence that paying more gets you better returns -- quite the opposite. Small investors are far better off keeping costs to a minimum with low-cost investment options such as index funds. If you need help constructing your portfolio or managing your investments, consider hiring a fee-only planner who charges by the hour. You can get referrals from the Garrett Planning Network.
Capital One, Discover and American Express recently paid fines after the Consumer Financial Protection Bureau accused the lenders of using deceptive marketing practices to sell various credit card add-ons, such as credit insurance that promises to waive minimum payments or pay your balance if you're unemployed or disabled. Consumer advocates have long called these contracts "junk insurance," saying the products are overpriced and full of hidden traps that make the coverage hard to use. The scrutiny has led other banks, including JPMorgan Chase and Bank of America, to start phasing out the products, which were once a $2.4 billion a year business.
Cellphone insurance is another product that's expensive relative to what you get. As Consumer Reports puts it, "Monthly premiums of $5 to $7 and deductibles of $25 for lesser-value phones to $199 for smartphones can add up . . . and the insurer might replace your phone with a refurbished model."
A better approach: Hang on to your old phone, and reactivate it if your new one is lost, stolen or broken. Remember, insurance is best used to pay for losses you couldn't cover out of pocket. If you can't afford to replace your phone, you're buying too much phone.
Other insurance to avoid includes "dread disease" policies, which cover only the disease named in the coverage and not related conditions, and life insurance on kids. The policies pushed by Gerber and other companies are unnecessary and a poor investment. "In 20 years you'd pay $1,602 in premiums for a $10,000 juvenile policy," Consumer Reports notes, "but the guaranteed cash value would reach only $1,536."
More from Liz Weston:
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The reason soda, popcorn and all the other goodies you buy at the movie theatres are marked up so high is due to the fact that the theatres make very little on the tickets they sell. There is no 50 percent take for them. Usually just a couple of dollars per ticket sale.
Most theatres rely on the sales of foodstuff to stay in business. If you don't like to spend all those amounts-eat before arriving at the theatres, drink from the water fountains and/or 'sneak' in a snack in a pocket or purse.
Tutorial: THERE is not a substitute for 'THEIR' or 'THEY'RE' ....look up THEIR differences in definitions in dictionary.com !!!
Great story. There are certainly lots of fees out there that consumers should watch out for. When you have a bank account, that institution loans out your funds, so why on earth should they nickel and dime you when they're benefitting from your deposits? Know that you have other options. Check out Kasasa.com-a leading resource for searching for free checking accounts with no monthly service fees and no minimum balance. You can even find accounts that offer nationwide ATM fee refunds and rewards like high interest.
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