Cost & calculations of finance & investing
Finance:
Fees: Financial institutions charge varying fees for transactions, credit cards and other forms of finance. It is important to compare these fees with other different financial institutions to investigate which is the most suitable for you. Information about these fees can typically be accessed on websites. As well, rates and fees also apply to credit cards which charges an annual fee as well as interest rate per annum. Here is an example of the rates and fees applied to a low rate credit card at Commonwealth Bank,
Interest rates: Interest rates can be calculated using a variety of methods. Two most common methods include flat and effective interest rates. A flat interest rate is where interest is paid on the original amount borrowed throughout the life of the loan. Whereas if the interest on a loan must be paid back in regular payments then the effective interest rate will be used. With a flat interest rate, interest is charged more frequently than the time period specified (e.g. a flat interest rate of 12% p.a. may be charged monthly). On the other hand, with an effective interest rate, the frequency of charging or paying matches the time period specified by the interest rate (e.g. an effective interest rate of 12% p.a. would require annual payments but a rate of 1% per month would require monthly payments).
Incentive Schemes: Incentive schemes take many forms including gifts, interest-free periods and specials. These incentive schemes entice the consumer to purchase a product or service from a company. It is important to read the fine print at the bottom of advertisements to investigate what conditions apply. Incentive schemes such as a free gift or where a purchase of other products can reduce prices is an effective marketing tool to encourage customers to spend more. Here is an example of an incentive scheme that provides interest-free periods,
Investing:
Costs associated with investing:
• brokerage
• entry and exit costs
• management fees
• taxation
Brokerage: when an investor buys or sells shares through a stockbroker, a brockerage fee is charged. This fee may be a set value for an amount of shares or a percentage of the dollar value of the transaction taken as commission.
Entry & Exit costs: Most investments have entry and exit costs in particular, superannuation funds.
Management fees: Asset managers (e.g. those who look after managed funds) charge a fee for service called management fee.
Taxation: Taxation must be paid on interest earned from investments, capital gains made on investments and for unfranked dividends.
(Source: Accounting Concepts and Applications 4th edition, Phillipa Greig, Joan Mackay, Stacey Beaumont, Rosette Sanger, 2008)
