March 23, 2014
Money has its own language. What is basis points and why should an individual understand the meaning?
Money has its own language. What is basis points and why should an individual understand the meaning?
There are many words that are used in the language of money, such as load, which means a commission which means a type of fee, an individual needs to know these words because they need to know what they are getting themselves in to, you need to know what you are doing and investing in. To some a no load index fund at Vanguard is plain English but to some you might as well be speaking Spanish. People need to know about commissions, interest, returns after costs, and so much more, everyone needs to keep learning about this. The more you know the farther you can go.
Basis points are 1/10th of a percent when you are talking about interest.
Basis points are important to know because you need to know what your return is, if someone told you that your interest or fees went up by 1 basis point its 1/100 of a percent in most cases and 1/10 when talking about house loans. You need to know what people are talking about and what you are getting yourself in to. Its normally 1/100 not 1/10 like i said in the upper post unless its a unique case.
You provided plenty of information on the topic, Garrett. Well done! Let’s review.
1 basis point = .01, 10 basis points = .10, 100 basis points = 1.0
When looking at a loan, an investment, or any other type of financial decision, you should give plenty of thought to the costs you will incur with that agreement. Costs matter!
Let’s take a look at an investment. Many people pay well over 100 basis points per year when investing their money (managed mutual funds run by “smart” people are a good example). Some people pay something close to 300 basis points per year (cash value life insurance and annuities are examples). This is not wise. Expenses you pay them comes out of YOUR pocket. There is a better way.
When investing, identify the low cost method and then feed that account month after month after month. No-load index mutual funds at a place like Vanguard.com would be a wise option. You can invest while keeping your basis points below 20 per year. As your account grows, you can get that number under 10 basis points per year.
You end up keeping more of your money as you continue to reduce the yearly basis points you pay to the financial industry. YOU win!
You’ve hit the ball out the park! Inecidrble!
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