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It looks like we've discovered the secret to getting lots of reader feedback: write an article that everyone disagrees with. To be honest, I knew people would wince after reading Nomad's article yesterday. Sure enough, his list of a dozen things he manages to do without generated more negative votes and comments than any article we've ever published. We've written on topics that have drawn thirty times the traffic and only a handful of comments - usually positive ones. Nomad's humor is often hard to get a handle on and like most people who travel a lot, he's developed some quirky consumption habits to keep his luggage light. That said, I warned him about putting the deodorant on his list so he had it coming.
To make up for Nomad's debacle, I thought I'd put together a list for those of us sensible folks that love our spice racks and can't live without hair conditioners. Allow me to share a few insights about some unnecessary things that people pay for that can add up to serious money. While most of the items on this list are targeted at those who are amassing savings and have mid to higher incomes, if you live below your means at any income, they will likely apply to you to. Here's my list of 5 things you REALLY don't need. Doing without them can save you a small fortune over your lifetime.
Money Managers:
Hiring a finance professional to manage your money and put you on the path to riches is an alluring concept. Find anyone that you know that has a money manager and ask them how they have performed over the last 5 or 10 years and usually you'll get a shrug and the following response, "Pretty good, I think". Here's the ugly reality of the money management profession: money managers have underperformed the market indices for years. That should come as no surprise to the astute investor; the money manager has far too high a hurdle to overcome to beat the market. Assuming that your manager is charging you 1.5% to 2.0% of your assets per year in an environment with 6% to 10% returns, it is highly unlikely that they will match the perofrmance of the S&P 500.
Of course, if you have enough money (think $1 million +), you can probably negotiate lower fees and your money manager may have access to special investments like IPOs that might substantially improve the performance of your portfolio. But the average investor won't be well served by a money manager or for that matter a stock brokers. What's your alternative? Educate yourself about the fundamentals of stocks and bonds at sites like Fool.com and get yourself a discount brokerage account. If you don't have the time to make educated decisions, invest in a variety of low cost index funds over time.
When Does it Make Sense?: When you have so much money and so little time that you just don't care. Also, the social connections can be pretty good and might be worth handing over $100,000 for the network.
The Savings: If you average a $500,000 portfolio over 30 years, and you would have paid an additional 1.5% to a manager, you'll save over $200,000 in fees!
Whole Life:
Term life insurance is an inexpensive and appropriate hedge for many people. Anyone that has kids and a mortgage can readily justify having protection against life's uncertainties. Most of us have a 20 or 30 year period of time when we are exposed to financial downside and have people dependent on us. But I've seldom heard a good justification for whole (permanent) life insurance for the average family. Whole life insurance is incredibly profitable for insurance companies and its various terms make it tough to compare plans. Whole life isn't as much insurance as it is an investment vehicle, and over time, it's a lousy one. Insurance companies aren't particularly good about investing money in the stock market (goes back to the first point) and they'll charge you higher fees than your money manager for the privilege of dodging the Estate Tax.
When Does It Make Sense? When you are wealthy (i.e. more than $7 million in net assets) or you have a size-able closely held company that is going to get slammed with the Estate tax and your heirs will need the cash just to pay the taxes.
The Savings: It varies, but bank on tens of thousands of dollars.
Private School:
I have been fortunate enough to attend some of the best public and private schools. Let's not kid one another that public schools are free or low cost. In most cases quality K-12 schools come with higher housing prices and local taxes. Our public higher education system has seen massive tuition increases as state governments have been forced to implement austerity programs. That leaves parents with the financial burden of making up for things like cutbacks in extracurricular activities. But private schools are also facing growing problems: their skyrocketing tuition isn't really producing a positive return. The best college prep schools will always have ready customers and the Harvards, Princetons and Stanfords could double their tuition and still fill all the seats in the lecture hall. But there is a huge swath of lower ranked mid tier schools where the expense can't be justified in terms of bang for the buck. In many cases, they charge nearly as much as the top ranked schools but deliver an inferior education and lower projected income stream for their graduates. In the past, the middle class has been able to use increasing income, student loans, and borrowing against their massive home equity to enable these mid tier schools to thrive. But as each of these comes under pressure, the demand for mid tier schools is starting to wane.
When Does it Make Sense? If your kids can get into the best private schools, if money isn't an issue, or if the public schools aren't really a viable option.
The Savings: The public school alternative would save somewhere in the neighborhood of $250,000 per kid.
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