Let’s take a look at how a relatively simple decision can make such a huge impact. Many traditional banks charge monthly account fees. My personal account with my previous bank charged $11/month and it paid 2% in interest.
Some “virtual banks” like ING and President’s Choice Financial have savings accounts that have no monthly fees. They typically pay a higher interest rate as well, for this example let’s call it 4%.
Let’s examine what the real cost is:
$11/month x 12 months = $132/year
But let’s take is a step further. Many banks offer a lower-fee or fee-free account to students or kids until they turn 18 – so let’s assume that we have this $11 monthly account fee from age 18 to age 65 (again, many banks have a reduced monthly fee for seniors).
Let us also assume that we are wise and decide to invest this saved money into an investment portfolio that averages 8% per year.
$132/year @ 8% rate of return x 47 years = $59,783 that could’ve been in my pocket!
So if you have a savings account at a bank that charges a monthly fee, you can see that even a few dollars a month makes a big difference. If anyone would like to step up to the plate and provide their monthly account fee and age, I will calculate your “money lost” and post it here as well. (Warning: it’s depressing!)
Note: we haven’t looked at how much less interest you earned inside your savings account during that time! Since the average, free high-interest savings account pays roughly 2% more than a traditional bank, and assuming that the savings account holds an average balance of $5000, then you are foregoing an additional $100 year in interest paid to you.
I guess I’m feeling sadistic, so let’s look at the new final total:
($132/year (account fee) + $100/year (lost interest)) @ 8% x 47 years = $105,073.
So, about 15 minutes to setup your new account today could save you over $100,000. What are you waiting for?
Disclaimer!: Most people will not invest the savings because it is not an established habit – in which case your savings will be a *paltry* $10,904 over 47 years. That is the magic of compound interest – which I will cover in another post!
I hope this post helped you out! :)