Financial Twinkies

December 16, 2011

As a dad, one of my jobs is to make sure that my kids learn some foundational nutrition guidelines. So any time I see a story like this, that talks about how many of the popular cereals (some of which I really like…) have more sugar in them than a Twinkie, it catches my eye. Some of the cereals on the list (Honey Smacks, for instance, just sounds sweet and sugary, so that’s not a real shocker!) wouldn’t immediately conjure up thoughts of “I should worry about the amount of sugar in this.” The article goes on to say that, like we do in my family, especially since my middle child has Type 1 Diabetes, reading labels is important and it gives some tips on what to look for, as well as some alternatives to cereal that are fast and easy. I know I’m always looking for quick breakfast ideas before school for the kids, and work for me. Thinking about how reading the labels on food is important made me think about “reading the label” with some financial products, as well.

Recently, I’ve had the opportunity to talk to people who are in the midst of making some decisions regarding financial products. Some have been major (should I refinance my house and pull cash out in order to purchase “investment X” with all of my life’s savings, plus my home equity?) and some have been minor (how can I find a better rate on my CD’s and savings accounts?), but all of the decisions had some “product” consideration. And, what we learned when we “read the label” was often not something that was immediately apparent.

For example, the person who was considering a refinance of her mortgage to purchase “Investment Product X,” had to read 2 labels.

  1. The mortgage refinance.
  2. The investment product’s prospectus.

Here’s what we learned:

  1. The more we looked at the mortgage, the better deal it seemed to have. She was going to be able to, if she simply refinanced without taking cash out, lower her monthly payments AND her term by moving from a 30 year mortgage to a 20 year mortgage at a significantly reduced rate. Sometimes, when refinancing to a new 30 year mortgage, people can go from having just a few years left to having 30 years remaining on the mortgage. At some point, do you want to have your mortgage paid off completely?
  2. The more we looked at the investment product, the worse it looked. There were very high fees associated with the product. There was a very long surrender charge period (a fee levied on the customer if they decide to sell this investment within the next 10 years) and a limit on the amount of money that could be withdrawn. Also, there were “guarantees” that were in place that would not allow the investor to get back less than what was initially invested…BUT…that was in the form of a death benefit and NOT a benefit available during the investor’s lifetime. That was a game-changer!

What we took away from that conversation is that in the process of selling an investment product, sometimes you don’t learn all that you need to learn in order to make the most informed choice. “Reading the label” helps, and if you don’t understand the label, get help. Fortunately, with a diabetic son, we have been forced to understand food labels and they now seem relatively straightforward. But for most people, reading the labels on financial products is overwhelming.

Things to pay attention to when reading the financial labels: Any fees and expenses associated with your product, any limitations on liquidity, or anything that can cause a change (some credit card interest rates will skyrocket if you are ever late on even 1 payment). It’s not fun to read the fine print, but it can prevent you from making a huge financial mistake or show you that you are making an awesome decision. The key is being informed. I don’t want you to buy financial Twinkies thinking that they’re an organic healthy cereal.