WASHINGTON – Not everyone handles their money badly. In fact, most people manage to make smart financial decisions for themselves and their families, even if they aren't always buying low, selling high, and getting the best deal ever.
But some folks do make money mistakes that cost them dearly. Those people, who tend to be poorer and less well educated, end up "subsidizing" the more well-to-do by overpaying for financial products and services, according to new research from Harvard University. Those overpayments allow savvier savers and investors to get the same products for less than their real economic costs might be.
The study, done by economics professor John Y. Campbell, concluded that "some financial products involve a cross-subsidy from naive to sophisticated households." He singles out mortgages and mutual funds as two types of products that can cost a lot more for people who don't know how to ask the right questions and end up paying too much in points, service fees or brokerage fees. But there are others, as well.
Being at the low end of the economic chain is hard enough, without having to subsidize those who are better off. Here's how to make sure you don't end up being one of the chumps that Campbell writes about.
— Get that education. The more you learn about financial products, the less likely you are to blunder into overpaying for them. You don't need a college education, or even a high school degree, to become self-educated about money. Soak up the free advice on independent sites like http://www.360financialliteracy.org or http://www.moneychimp.com. Read books, read disclosure statements, read personal finance publications. However old you are, if you start learning now, you'll know a whole lot more in five or 10 years.
— Lose the fear. One of the mistakes Campbell isolates is being afraid to invest in riskier assets, like stocks. It's typical for people to avoid investments they don't understand, but if that lack of understanding forces them to keep all their cash in the bank, they are leaving a lot of money on the table. (Or, under the mattress.)
— Research your mortgage and get a second opinion on it. There's been a lot in the press recently about troubled mortgages and foreclosures. But most people are hanging on to their homes and their loans — even if their loans are soaking them. If you had to get a high-interest rate loan or a complicated two-loan plan or an interest-only loan to get into your house, investigate with a few other mortgage companies and mortgage bankers to find out whether you've been in it long enough to refinance to a more traditional, lower-rate, fixed-rate loan. Shop around.
— Stop paying credit card issuers extra money. Fewer than four in 10 families now carry balances on their credit cards and they are the ones who are subsidizing the free ride others are getting. Reorganize your family finances in whatever ways you have to — extra jobs, savings withdrawals, belt-tightening — to eliminate credit card debt.
— Get to know your banker. Go into the bank that holds your checking account and find out how to set up an automatic payment on your credit card, so that you are never late, and never have to pay a late fee. Set up overdraft protection on your checking account, too, so that you aren't faced with sky-high "check-bounce fees" whenever you make a math error. If your bank won't qualify you for overdraft protection (which is a line of credit), keep a cushion of $100 or so in your checking account and forget it's there.
— Save and invest. The more money you have, the more you can do with it. Decent savings allow you to make measured financial decisions instead of panicky ones. When you have solid savings, the good offers — credit cards, bank accounts and the like — will start coming to you.
— Investigate low-maintenance, low-cost mutual funds. Brokers who recommend specialized mutual funds often charge sales loads or hidden fees for them. No-load fund companies offer funds that do similar jobs but cost less. If you're getting a lot of financial advice and don't think you're paying for it, you are probably paying a lot for it. Check out the lifestyle funds and index funds from companies including Vanguard and Fidelity before deciding that you need all that "free" advice.
— Learn to ask "why" and "how much?" If someone is trying to sell you insurance, annuities, loans, accounts, or any other financial product, don't agree to buy it until you really understand why it's a good choice for you and know exactly how much you're paying for it. Ask if there are other products that would serve you just as well and for less money.
— Think of your bottom line. If you're comparing two mortgages, don't just go for the one with the lowest monthly payments. Go for the one that will allow you to pay off the house with the lowest outlays in interest and fees.
— Learn to trust yourself instead of following others. Many investors wind up buying high and selling low because they are always following the crowd. Use the knowledge that you gain to make your own decisions instead of just trying to follow what you think others are doing. Let them start subsidizing you, for a change.