One day I compared the earnings of my broker-managed Simple IRA with those of a much smaller IRA I managed myself by investing in companies that struck my interest. Somehow the plan I managed on my own was earning four times as much as the broker-managed one. I decided the fees I was paying the broker weren’t worth it.
Are you wondering about similar decisions when it comes to spending your hard-earned scratch? CBS MoneyWatch's Executive Editor Jack Otter wrote a book for people just like us called Worth It … Not Worth It?
“Wherever I’ve worked, I’ve always been the guy people come to with financial questions,” Otter says. And he discovered that even seasoned entrepreneurs weren’t always clear on financial matters. “I realized that a lot of people in the financial press are talking past those who really need the help,” he explains. “They’re too esoteric. People want a format they can understand and use.”
Here are a few common “worth it or not worth it” issues and Otter’s take on each:
Should you buy or rent a home? In most cases, it makes more sense to buy because a home will appreciate over time and, as Otter says, “be a very valuable asset after 30 years.” Unless you’re a highly disciplined saver and investor, you’re not going to come out ahead like that with renting.
Should I hire a real estate agent or sell my property on my own? “Academic studies have shown that real estate brokers do not get you 6 percent more on your house,” Otter says, “but they do bring skills to the table that most people don’t have.” That being said, if you’re good at research, marketing and negotiating and (here’s the big one) have the time, you’re better off financially not hiring an agent. But for a lot of us, time is money. In that case, hire an agent.
Is it better to buy or lease a car? “I advocate buying,” Otter says, “because you’re able to get the depreciation quicker. When you lease, you’re helping the dealer pay for the maximum depreciation, and then you return the car two or three years later.” Otter says there are cases where leasing might make sense, though. For small- business owners who deduct vehicle expenses on their taxes, leasing might be best, especially if they don’t want the extra debt on their books.
Should I pay off my debt or invest? When it comes to high-interest credit card debt, this is a no-brainer. Pay off your credit card debt first. But with lower-interest-rate debt, like a home mortgage, the answer isn’t as easy. Mortgage interest is tax deductible, so, as Otter points out, “it’s less expensive than other debt.” He adds, “Academic studies have found that you are better off investing money in a tax-advantaged account such as a 401(k) rather than paying off the mortgage early.”
Should you save for retirement or for your kids’ college first? Otter says that for a child born today, it will cost over $600,000 to send that kid to Harvard University for four years. That might make you think it’s time to start putting away for education. But not so fast. Otter points out that you can always get scholarships and loans for college. “You can’t get a loan for your retirement,” he says. “The danger of running out of money before you die is very real. So put your own oxygen mask on before you put the mask on your kids.”
Should I invest my savings in a mutual fund or create my own retirement plan? “I think people have no idea how their savings are being eaten away by the fees mutual funds charge,” Otter says. He says a fee of 1.3 percent may not sound like much, but it can eat up half of your returns. What’s the answer for a small-business owner? Otter advises trying to hook up with other organizations or businesses to get the benefits of a larger umbrella plan. “Or instead of offering your employees many, many choices, do a bare-bones plan. The fees are lower.”