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Investing and Saving Costs • Which products are most suitable?

Steps and keys to understand

by Norberto
20 June, 2022
in Accounting
0
Investing and saving

With the turn of the semester, many people are likely to review the management of their finances. That includes saving or investing. For those who have not invested before, the question may arise about how to invest while saving on costs.

That translates into which investment models will generate the least costs.

Here we must bear in mind, as we will see in the article, that one of the basic keys is to establish the relationship between the risk and the return we are willing to assume, as in some cases, the costs will not always relate well to the levels of risk.

Which products are most suitable for cost-saving investments?

Although there may not be unanimity on this issue, if we were to ask different financial product analysts, many of them would indicate that passive management and index funds are one of the most appropriate tools for investing and saving costs.

An index fund, by nature, is cheaper than any other actively managed fund. That has to do with its character, as it does not seek to beat an index but emulate it. In constructing an emulation, it is done to replicate this index’s composition as closely as possible by including the assets that compose it and the weight of these assets within the index.

That translates into two things:

  • They are more stable and less volatile than a direct investment in a single asset, thanks to diversification and the fact that they are based on replicating the indices.
  • They have a significantly lower management cost as there is no need for ongoing active management. This type of fund is reviewed periodically, e.g., every quarter.
Check ➤  How to find the weighted average?

Which products are not suitable for cost-saving investments?

Generally, any financial product with high costs in terms of commissions or derived expenses. Here we must also consider the charges that the management of intermediaries and marketers may entail.

In the case of index-linked products through automated management platforms, the costs are even lower than for any other actively managed product.

Cryptocurrencies are a clear example of a product that is unsuitable for cost savings. While it is true that the operations themselves do not involve internal costs (holding Bitcoin within the Bitcoin network has no charge), all the commissions related to the purchase of assets, exchange, and redemptions generate expenses that must be taken into account as they can make the operation significantly more expensive.

In these cases, it is assumed that the projected profitability offsets the volume of expenses. But we must not forget that these are highly volatile products.

Why should you never leave overdrafts on your accounts?

Bank accounts are a major financial tool. They are used on an almost daily basis. We sometimes lose some control over their use, and overdrafts can occur. However, overdrafts are a very important enemy of sound finances.

Fortunately, it is important to know that overdrafts are not as frequent nowadays as they used to be: financial institutions are much more reluctant to accept red numbers in an account.

However, red numbers can be generated: either because of a repayment that exceeds the amount or because you have an agreement with the financial institution that allows a certain amount of red numbers.

In any case, they are never a good idea. Let us explain the reasons why.

Check ➤  Contribution Margin Formula • What is it and what is it for?

Why are overdrafts dangerous?

The concept is simple: because of an expense, a cash withdrawal, or a direct debit bill, our bank account not only runs out of available balance but also goes into negative balance; the red numbers.

It depends a lot on what your financial institution will consider and claim. At least three different concepts can demand without being mutually exclusive. That is to say, you can be charged for all three simultaneously.

The overdraft fee can be claimed when the user has made a charge or a cash withdrawal from their account without having a sufficient balance for the amount charged or withdrawn. The transaction is usually made on the largest overdraft balance during settlement.

Lastly, although less frequent, we may also be asked for a fee for claiming debit positions and the steps the institution should take to inform us of our overdraft situation.

As we can understand, some of these concepts transcend the fact that our debit position has lasted for hours or days, something that, for example, is not contemplated in the overdraft fee, so in a negotiation with the financial institution after an overdraft, it will be the least negotiable of the three possible sources of collection.

Each customer may receive a different communication model, and each institution may receive a different model of communication from other institutions. Although there is an obligation to communicate the debit position in detail, this is usually attached to the institution’s regular notification, at least in the first communications.

In short, red numbers are a great enemy of personal finances. They should avoid them in all cases, and they should be covered as quickly as possible when they occur. In general, an account in the red will generate more interest over time than it would cost to finance the debt to pay off the overdraft.

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Contents

  • 1 Which products are most suitable for cost-saving investments?
  • 2 Which products are not suitable for cost-saving investments?
  • 3 Why should you never leave overdrafts on your accounts?
  • 4 Why are overdrafts dangerous?

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