SWEAT THE SMALL STUFF

It’s Friday afternoon. Mr. Shah walks into his bank with the statements that he has just received. Being Friday there is a long queue but he waits patiently. He finally gets to the counter at about 3:45 p.m. The teller, Jane, knows that this is her last client and he will take just a few minutes and then she can wrap up. Mr. Shah puts his bank statements on the counter and points to a charge of Kes 150 that has gone through that he was not previously aware of. Jane pulls up his account on the system. Lo and behold, Mr. Shah is sitting with Kes 32,965,567 in his deposit account.In her mind Jane is a bit confused because surely he would not be chasing after a measly Kes 150 with that sort of balance. Forty five minutes later, the issue is resolved. It seems he was charged twice for a particular transaction.

Now, how many of us would have bothered with a difference of Kes 150 especially if our bank account was that healthy? If experience is anything to go by hardly anyone reading this even knows how much their monthly charges are. However perhaps Mr. Shah is that wealthy because of sweating the small stuff and watching his Cents. When it comes to various things in life, we are always told – “Don’t Sweat the Small Stuff”. However as far as application to our finances, I beg to differ with this. During our workshops it always amazes me to see that people do not know how much money is in their bank account, how much they owe on the credit card, what they spent on fuel, what bank account charges are applicable on their account, what fees they pay on policies etc. Some of these amounts may seem very insignificant but it does indeed add up. Here are some real practical examples of how the sweating the small stuff helps.

Sweat the Small Stuff on Loan Fees: Very often we concentrate on the interest rate on loans. However there is what is called a processing fee or arrangement fee that is levied by banks in the beginning on the initial loan amount. Just as an example I called up a bank while writing this article and asked about getting a personal loan. Interest rate quoted was 16% p.a. Arrangement fee was 2.5%. What does this effectively do? It actually meant that instead of being advanced the Kes 2 million I would be given Kes 1.95 million as the difference of Kes 50,000 is the processing fee. However I would be servicing a loan of Kes 2 million. If I include what the actual interest payments would be on this loan, (assuming it is on a reducing balance), the cost of the loan is actually 18.4% for the first year and not 16%. I called another bank and they were willing to charge me 1.5% on the arrangement fee for the same loan amount. Just by taking the time to research on options I would save Kes 20,000. Now this example has taken into consideration a fairly small loan amount so imagine what it will do when you are negotiating on terms for mortgages of larger amounts. Also watch out for banks that are advertising attractive low interest rate loans only to counter this with higher initial arrangement fees.

Sweat the Small Stuff on Investment Charges: I met a Unit Trust sales man who was trying to convince me to invest in his Balanced Fund for one year. He gave me the usual financial salesman spiel of this being a diversified investment. “It has a balance of shares, bonds and cash so the risk is spread” he said. In terms of investment returns he told me that they were confident they could generate 10% this year. I did my own research on this Fund and the charges are a 5% entry fee on any amounts paid in as well as a 2% annual management fee. Let’s do the math here. If I wanted to save Kes 50,000 per month i.e. Kes 600,000 per annum I would pay 5% of my monthly savings on fees i.e. Kes 2,500 which would end up being Kes 30,000 for the whole year. The way Unit Trust funds work, the upfront fees are basically removed prior to the investment taking place. Therefore every month in the fund manager’s books, records would show investment of Kes 27,500 and not 30,000. The difference is of course the fee of Kes 2,500. So over the course of the year I will have spent Kes 600,000 but only Kes 570,000 will have gone into investment. If the fund grows by 10% over the course of the year, and I am then charged 2% on the value of my investment (including the return) as a management fee, my funds will be worth Kes 614,460 at the end of the year. Effectively I would have made a 2.4% return. I can get more of a return putting this money into a safer avenue such as a money market fund or even a one year fixed deposit. The maths does start making more logic as you keep your money longer but the financial sales person in his quest for commission neglected to point out perils of this avenue as a short term home for my money.

Sweat the Small stuff on Bank Charges: I think Mr. Shah was absolutely right to be pedantic. There are a lot of products by banks that offer more transactions per month in return for a higher than average monthly bank charge. It may seem attractive to have access for just one monthly fee to three standing orders, two bankers’ cheques, transfers etc. However you must ask yourself how realistic it is, that you will use all these facilities every single month to make it worth your while. You may be paying Kes 800 per month (almost Kes 10,000 per year) just for the comfort of feeling you do not have to pay extra for a standing order when you need one. How many standing orders, transfers, bankers’ cheques etc over the course of the year will you really need? Even though you will be charged for each of these transactions separately, you may find that it is actually cheaper than the “bundle” offer.

A good friend of mine always says respect money and it will respect you. To start earning this respect, it is the small things that count.

Waceke Nduati-Omanga