Budgeting For Fees
Everybody Hates Fees But are They Just Misunderstood?
The word “Fee” is older than the language we recognize as English today. It can usually be used to depict any form of payment; however, modern usage tends to give it somewhat of a negative connotation describing an add-on.
Whether something is overused or an outside service is required, the extra charge can be unexpected and seen as an infrequent occurrence. As a result, fees are justified as something that will not continue in the future and are often missed in the average individual’s financial plan. This bias creates a self perpetuating problem, as fees are often a result of poor planning.
A more thorough understanding of how fees work will help in creating a budget that works in the long term and help in calculating the true price of a product or service. The following are the 5 main characteristics of fees and how to approach them.
This fee is usually an add-on to help understand a product or is a repair/maintenance cost. It should be seen as a means to leverage the use of what you have now in order to get the most out of a product.
This type of fee can be a foreseeable expense and should be included in the overall price when making a purchasing decision (this is the true price that the product or service will actually end up costing you).
-Paying for oil changes on a car
-Buying a tutorial for software
-Fixing an electronic device
To decide whether the service fee is valuable, estimate the value of your product at present and look at how valuable it will be after the service. This may be difficult if you are using a qualitative value (what it is worth to you in non dollar terms) but the point is still simple: the service is only worth what it will change. Avoid looking at what you paid for a product when it was new and comparing it to the service fee to keep it going.
Cancellation or Changes
Contracts can be set over a period of time. There may be a stipulation in the contract that if the circumstances change within that period, a party may decide to opt out or modify the deal, given they pay a premium. Look at the probability of an event that would lead to the modification of a contract. If the probably is high enough, you may want to include this in the overall price of a product when making a purchasing decision.
-Cell phone contracts
A rough way of incorporating a cancellation fee into the overall price is to estimate the chance of an occurrence and then multiple it by the fee. If you think this is an odd thing to do, then you are correct, but a rough estimation is the only solution available given a small data set. You can bet that the company on the other end of the contact does a similar calculation.
Usage Penalties And Late Fees
These types of fees are used to discourage a type of activity such as overuse or late payments. Without proper monitoring these surcharges can add up; they should be resolved rather than incorporated into the overall price.
-Overdraft charges on a credit card
-Overuse of minutes on a phone plan
-Extra miles driven on a car rental
If a penalty is setup correctly by the company, it will be more than what it costs to pay for the action beforehand. This may be an effective commitment device for some people if they are trying to limit an action (overusing a credit card), but if that action occurs frequently, it may be worth it to accept the option that will have a lower overall price (increasing the credit limit), or to solve the root cause of the issue (overspending).
Luxuries, Extras, and Warranties
These fees are the miscellaneous items that arrive after the initial point of sale or reoccur on a regular basis. They could be considered as a service rendered or some other form of fee, but I believe they warrant specific mention, as they can often be a waste of money.
Each fee has to be viewed individually in evaluating their merit. An ATM fee may be worth the time it saves (sometimes) but an overweight baggage fee probably isn’t. As a general rule, anything that is offered after the main item, should be met with a higher level of skepticism, as these fees tend to high margin items (more profit to the company). Warranties, package offers, and the extra level up for just a bit more money, can often be avoided.
This guide should give you a basic understanding of how fees work. For more help with your finances, consult a financial advisor in your area.
Shawn Tougas is Co Founder of WealthPrep.ca a resource helping people make smarter financial decisions. Learn more about your finances and connect with a financial advisor if extra help is needed.