The high cost of "low" fees
tl;dr • Even the smallest fees can be a big hinderance to your wealth growth • Credit card annual fees may be OK if you're able to make up for them with rewards • Most fees are easy to reduce or avoid
It was a turning point in my understanding of managing personal finances when, many years ago, I watched my accounting professor mathematically demonstrate how a checking account monthly fee alone could add up to more than a million in opportunity cost over a lifetime. Although that was in a different country, with a different currency, interest and inflation rates, we can quickly replicate that thought exercise using updated numbers for the U.S.:
Monthly fee of a regular checking account at the two biggest U.S. banks (Chase and Bank of America): $12
Average life expectancy in the U.S.: 80 years
Age upon first bank account opening: 16
Average return of the S&P 500 (1972–2021): 11.17% (nominal) and 7.00% (adjusted for inflation) – Ref. Investopedia
If my HP calculator skills are still any good, this rough estimate results in an opportunity cost of $1,585,915.89 (nominal), or $177,106.93 (adjusted for inflation) for this single fee alone!
Of course one may point out (correctly so) that "past performance of the S&P 500 is no guarantee of future performance" to challenge these numbers, but that's not actually the point. The idea here is to show that even the lowest fees are like head wind to your flight towards greater prosperity, and intelligently avoiding them as much as possible is paramount to speeding up.
Avoiding Checking and Savings account fees
Nowadays, it's fairly easy to avoid checking and savings maintenance fees. There are many banks that don't charge maintenance fees at all, and most banks at least allow customers to avoid them by keeping a minimum balance or by receiving a monthly direct deposit.
There are other fees we should be aware of and do our best to avoid or lower, such as ATM fees, wire transfer fees or checkbook order fees.
SoFi Banking accounts charge no maintenance fees, reimburse most ATM fees in the U.S., and charge no checkbook order fees.
For those who travel internationally, I highly recommend the Charles Schwab Investor Checking account, which charges zero fees on ATMs withdrawals all over the world. It also has no maintenance fees, and has the extra benefit of being part of the Zelle network for interbank transfers. I recently used this account for cash withdrawals while traveling abroad and I’m quite satisfied.
Make sure you do your own research and don't hesitate to move your business to a different bank that fulfills your needs with a lower fee schedule.
Credit card fees
Credit cards can have complex fee structures that may be hard to navigate, but as a rule of thumb, there's only one fee that one might consider incurring: the annual fee. Still, annual fees should only be considered if – and only if – the rewards one is earning from having the card make up for the fee. That's a huge if.
Late fees and interest should be avoided like the plague. Period. Of all my 20+ open credit cards, I have absolutely no idea which one has the lowest late fees or interest rates, as I'm extremely diligent with following the rules I outlined in my previous article Credit cards 101.
A credit card fee that one should be mindful of, however, is the foreign transaction fee. It's fairly easy to completely avoid such fees when traveling abroad by simply using the right credit card, so make sure to do so.
Investment fees
Investment funds usually come with maintenance and performance fees that can eat up a substantial portion of your earnings in the long run.
As an example, the Vanguard's Total Stock Market Index Fund (VTSAX), a very popular investment fund, charges a 0.04% maintenance fee, which is quite reasonable as of today.
According to the fund's profile page, the average maintenance fee for similar funds is 0.80%. Even though it may not sound like a lot, $10,000 invested over 10 years in a fund that charges 0.04% in fees will mean about $95 paid in fees, whereas in a fund that charges 0.80% in fees will mean about $1,827, almost 20x more!
Bottom line
Never settle for less (or, in the case of fees, "more") than you could. Do your own research, and keep researching for better alternatives that may come up.
This post was not intended to exhaust all the possible fees one may find when navigating the financial system, but to bring awareness to the fact that incurring unnecessary fees can quickly grow into a huge obstacle in your path towards building wealth. The good news is that it doesn't take too much effort to avoid or substantially reduce them.
Disclaimer
I may receive compensation when you click on links that I share.
This is not financial advice. I am not a certified financial planner or advisor, just an ordinary guy trying to sort out his own finances, sharing his perspective with no guarantees. Use the information provided at your own discretion. You are highly encouraged to do your own research before making any personal finance decision.