Truth and Consequences
Find out how much bad financial behavior can really cost you
By David Futrelle

(MONEY Magazine) – You've heard it all before. Save more for retirement. Pay off your credit cards as fast as you can. Don't try to time the stock market or chase the hottest mutual funds. But of course, there's a big difference between knowing what's right and doing it. The quiz below will get you thinking about the consequences of some common misguided money behavior--and maybe help steer you back to the path of economic righteousness.

1 Credit Conundrum The typical household has $9,300 in credit-card debt. If you pay only the minimum 2% required each month, how long will it take you to pay off that balance on a card with a 16% interest rate, and how much will you shell out in interest?

A Seven years; $4,500 B 12 years; $9,400 C 43 years; $17,900 D 55 years; $39,300

ANSWER C, 43 years; $17,900. Uh, how badly do you need that plasma TV anyway?

BONUS How much could you earn over the same time period by investing that $9,300 instead, assuming an 8% return?

ANSWER Around $287,000. Are you feeling a little ill about now? Buck up, and whenever you find yourself drawn, as if by magnetic force, to the closest Best Buy, remember: If you keep your credit card sheathed now, you'll be able to afford an even cooler TV down the line. Or one day, perhaps, retirement.

2 Fee Frenzy You put $10,000 in Fancy Pants Growth Fund and another $10,000 in El Cheapo Index Fund. Fancy Pants has an expense ratio of 1.5%; El Cheapo, only 0.2%. If the two deliver an identical 8% return over the next 30 years, how much more will Fancy Pants' fancy expense ratio cost you?

A $2,500 B $8,600 C $30,800 D $99,400

ANSWER C, $30,800. Yep, that's right. The higher expense ratio in the long run will cost you three times your initial investment. You've no doubt heard of the magic of compounding interest. This is the black magic of compounding costs. You'll pay only $6,000 in expenses for the cheaper fund over the same time period, allowing your little $10,000 stake to grow into a fat $95,000.

Look at it another way: The 1.5% in fees that Fancy Pants tacks on each year for fund-manager salaries and slick quarterly statements will end up costing you more than a third of your potential total return. Sure, it's possible that the managers at Fancy Pants could overcome this deficit by roundly beating the indexes (and beating them and beating them, over 30 years). But then again, it's possible my cat could learn to drive a car (better than Toonces, I hope). To find out how much your funds are costing you, check out the cost calculator at

3 Chasing Returns The Firsthand Technology Value fund made a not-too-shabby average annual return of 16% from the start of 1998 until the end of 2001. What did the typical investor in the fund make over the same four years?

A 22% B 16% C 2% D -32%

ANSWER D, -32%. Believe it or not, the average investor in this winning fund lost money--big-time. No, fund manager Kevin Landis didn't run off to an island with a briefcase full of loot. It's because performance-chasing investors timed their purchases badly, pouring into the fund only after it had scored its biggest gains. Although this is an extreme case, it's not an isolated one.

MONEY crunched the numbers for nearly 700 funds during the 1998-2001 period, looking at money going in and coming out as well as returns. We found that while the typical fund gained nearly 6% annually, the average investor earned 1%. So resist the urge to stalk what's hot; put the bulk of your money in that El Cheapo index fund that tracks the broad market.

4 Withdrawal Pangs You've made it to retirement with a cool million in your 401(k). Assuming you earn a reliable 7% on your portfolio, with inflation running at 3%, how much can you safely withdraw each year without running out of money?

A $25,000 B $40,000 C $70,000 D $100,000

ANSWER B, $40,000, or 4% of your savings a year, which matches the real return you're getting on your portfolio (a 7% gain minus 3% inflation). Since you're earning back as much as you're withdrawing from your account, you could, theoretically, live forever without running out of money. Alas, here in the real world, the Great Drawdown can prove a lot trickier, given that we don't know what inflation or our returns will turn out to be. (And you can bet they won't be consistent from year to year.)

Many retirees, used to the fat returns of the last 25 years, may be tempted to draw more than a measly 4% from their nest egg. That way lies danger: Were returns to fall even a point or two below what you're expecting, or if inflation reared its ugly head again, you could run out of money before you hit your goldenest years. And an ill-timed market crash could wipe out your savings in a decade. Far better: Save more and draw down less. Worst-case scenario? You'll end up with a little extra money to give to your ungrateful kids.

5 Drive Time You've decided to live large and buy a blinged-out 2006 sport utility vehicle. Cost: $70K. Assuming that you live seven miles from the dealership and gas costs $2.30 a gallon, how much will it cost you to drive the thing home?

A $1.15 B $2.30 C $3.25 D $11,000

ANSWER D, $11,000, give or take. That's not including the cost of the gas, which would run you about $1.15. The less-than-thrilling mileage is the least of your worries. The typical car or SUV loses about 15% of its value as soon as you drive it off the lot; after three years, it may have lost a third or more. That's why used cars often turn out to be such a sensible deal.

6 Protecting Assets Burglars swiped your laptop, your stereo and your flat-panel TV. (Luckily, your collection of snow globes from around the world is safe.) Your homeowners policy covers the "actual cash value" of anything stolen. So how much will your insurer pay?

A What you'd get if you sold now B What you originally paid for the stuff C What you originally paid plus inflation D What it would cost to buy equivalent items new

ANSWER A. "Actual cash value" may sound like a good deal. But all you'll get from your insurer is about as much as your cheapskate neighbors would pay to buy your old stuff at a garage sale. You'd have ended up with a far bigger check if you had shelled out 15% or so more for a "replacement cost" policy, which would cover the amount you'll have to pay to replace the stolen loot. Bear that in mind when it's time to renew.