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.
Unnecessary insurance
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."
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Minimum payments
A credit card can be a convenient payment method that offers plenty of consumer protections, including helping you with merchant disputes and replacing lost or broken purchases. Most cards also come with rewards programs that offer cash back, travel rewards or other goodies.
But the only smart way to use credit cards is to pay them off in full every month. People who pay only the minimums are paying far too much.
Let's say you're carrying a $10,000 balance at 16% interest. The minimum payment, equal to the interest you owe plus 1% of the balance, is $233.33 to start. If you pay just the minimum, it will take you more than 14 years (338 months) to free yourself from the debt, according to Bankrate.com's calculator, and you will have paid an astonishing $12,793 in interest.
Now let's say you boost that initial payment by just $20, and you keep making that $253.33 payment month in and month out. You'll be debt-free in just under five years (57 months) and will pay just $4,291.83 in interest. Round up the payment to $300, and you'll be out of debt in just under four years, paying $3,313.52 in interest.
Better yet: Don't accumulate that debt in the first place. Charge on credit cards only what you can afford to pay in full each month.
Payday loans
Once upon a time (20 years ago), the payday loan industry barely existed, with just a few hundred outlets. Today, they outnumber McDonald's restaurants in the U.S.
This phenomenal growth illustrates how bad we are at math.
The typical payday loan seems straightforward enough. You write a postdated check for $300, to be cashed when your next payday rolls around. In return, you get $270 cash from the payday lender. A $30 fee doesn't seem like much for a 10-day loan, but it translates into an annual interest rate of 365%.
Furthermore, most payday loan borrowers are repeat offenders. They often can't cover the check when payday comes around, so they have to extend the loan and pay another fee. Or they repeatedly run short of cash and turn to this quick but phenomenally expensive resource. The average payday loan borrower initiates nine transactions a year, according to the Center for Responsible Lending.
Ninety percent of the payday lending industry's $27 billion in loan volume is generated by borrowers with five or more loans per year, the center estimates, while 60% of the business is generated by those with 12 or more loans. Repeated payday loans result in $3.5 billion in fees each year.
You have several options to avoid this treadmill. Saving money on a small income isn't easy, but even a modest cushion can help you avoid a payday lender. If you repeatedly run short, a session with a legitimate credit counselor can help you work out a budget and perhaps a debt repayment plan. You may be able to get an advance from your employer or qualify for a small loan from a credit union. Even a cash advance from a credit card would be cheaper than a payday loan.
'Gotcha' fees
This describes a whole universe of penalty fees that bear little relationship to the severity of the "crime" committed.
Ryan Air, for example, charged a woman 300 euros (about $380) for failing to print out her boarding passes before arriving at the airport. (When called on it, the airline's CEO said the woman deserved to pay the fine for being "so stupid.")
Here in the U.S., Spirit Airlines announced it would charge $100 to people who wait until they get to the gate to pay for their carry-ons. The fee is $45 if paid in advance. (Spirit is still the only U.S. carrier charging for carry-ons.)
Budget airlines are far from the only businesses gouging their customers. "Hidden or unexpected fees" was the top reason low-income Los Angeles residents gave for closing their bank accounts, according to a recent study by Pew Charitable Trusts. Some of these bank-less folks now rely on prepaid cards, which are notorious for their many fees. Credit card issuers' fee frenzy, meanwhile, was somewhat reined in by the Credit CARD Act of 2009, which forced issuers to give people at least 21 days to pay and capped late fees at $25. But you may still wind up facing fees to make an expedited payment or if you've opted for over-limit protection.
Some people believe businesses should be able to charge anything they can get away with. That attitude pits ordinary Joes against the fleets of lawyers, M.B.A.s and behavioral psychologists that corporations can hire to construct fees guaranteed to snare the maximum number of people. Which means sooner or later, they'll get you, too.
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Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.
