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Americans may pay more than $369,000 in banking and investing fees over their lifetime, according to a new NerdWallet study. What’s worse is that most don’t even realize it: The study found that Americans on average believe they will spend just $2,244 on these fees over their lifetime.
NerdWallet’s analysis also identified a secondary impact — the shrinking of potential investment returns over time as a result of the fees, deepening the overall loss to more than $1 million.
While avoiding these fees completely isn’t realistic if you plan on investing any of your money — and you should! — there are ways to spend less of your hard-earned cash on avoidable fees.
How to avoid banking fees
The NerdWallet study broke financial fees into three primary buckets: banking fees, 401(k) fees and IRA fees. It found Americans may pay almost $18,000 in bank account fees — most of which are avoidable — over their lifetime. Here’s how to dodge maintenance, overdraft and ATM fees.
Maintenance fees: Checking and savings accounts may both come with monthly maintenance fees, charged by the bank for the privilege of having the accounts. One way to avoid maintenance fees is by taking the action required by your bank to have them waived.
Many banks will waive the monthly maintenance fee on checking accounts if you have a certain amount direct deposited into your account each month or you maintain a minimum daily balance. On savings accounts, your bank may waive a maintenance fee if you maintain a minimum or average daily balance, or set up an automatic monthly transfer from your linked checking account.
Certain banks — many of them online-only banks — don’t have maintenance fees on checking or savings accounts to begin with. So if you don’t want to jump through hoops to avoid fees, you can switch to a bank that simply doesn’t charge them. Several of the choices in this analysis of the best checking accounts charge no monthly fees.
Overdraft fees: Overdraft protection, which kicks in when you swipe your card without enough funds in your checking account to cover the transaction, is optional. If you’ve already opted in, because you didn’t realize it was optional or didn’t understand the alternative, you can opt back out and avoid the accompanying fee. Fair warning, though: Your transaction will be declined if you forgo overdraft protection.
If you want to avoid overdraft fees and declined transactions, some banks allow you to link your savings account to your checking account, and will transfer money between the two if you charge too much. But make sure your bank offers free overdraft transfers, as some charge for this service, too.
ATM fees: When you use another bank’s ATM, you may get hit with two fees — one from your bank and one from the host bank. These can be avoided by only using ATMs that are in your bank’s network, or switching to a bank that reimburses ATM fees.
How to reduce 401(k) fees
Your 401(k) account could cost you almost $207,000 over your lifetime, according to the NerdWallet study. You’re always going to pay some fees with a 401(k), but watching a few simple costs can save you a lot over the long run.
A good rule of thumb when evaluating investments in your 401(k) is that affordable funds aren’t automatically bad funds. High-cost funds won’t necessarily get you to your goals any faster, especially when high fees are eating into your investment returns. When choosing mutual funds for your 401(k), pay close attention to the expense ratio of each fund.
Mutual fund expense ratio: The mutual fund expense ratio is an annual fee charged as a percentage of your investment. An expense ratio of 1% may seem low, but over time, this adds up to a significant amount. Choose funds with low expense ratios (some of the cheapest funds charge less than one-quarter of 1% annually) provided they have a good track record of performance.
The downside of a 401(k) is you’re limited to the fund options your company chooses. However, that doesn’t mean you can’t scour the options you do have for choices with the lowest fees.
If your company’s 401(k) offers only high-cost options, you should probably put more of your retirement savings into an individual retirement account, or IRA, which gives you more choices. However, if your company offers a match on your 401(k) contributions, always save at least enough to get the full match. That’s an immediate return on your investment you can’t get anywhere else.
How to reduce IRA fees
Americans may pay around $145,000 in IRA fees over their lifetimes, but again, these fees can be reduced significantly by choosing the right funds. Unlike 401(k)s, IRAs are set up through a broker not associated with your employer, so you are likely to have a much broader range of funds to choose from with an IRA.
As with your 401(k), you should evaluate mutual fund expense ratios and favor low-cost funds. All of the tips on expense ratios above in the 401(k) section also apply here. Beyond this, you can also look for funds with no sales loads or transaction fees to further reduce your costs.
Mutual fund sales loads: Sales loads are charges or commissions charged on some, but not all, mutual funds. These can be avoided by choosing no-load funds.
Mutual fund transaction fees: Transaction fees may be charged by a broker when you buy or sell investments. If you choose no-transaction-fee mutual funds, you can completely avoid this expense, lowering your total lifetime investment costs. Most IRA providers offer fund screeners that will allow you to filter for funds with no sales loads or transaction fees.
If you find your provider is lacking in fund options, don’t be afraid to shop around. This roundup of the best IRA providers highlights brokers with exceptional investment options — including abundant choices in fee-free funds — as well as several other categories of winners.