While you cannot control the returns on your investments, you can control how much it costs to have your money invested. If you have your debts paid off and a solid emergency fund, you can start thinking about investing. Wherever you decide to invest your money, be sure your investment costs are as low as possible. Over time, high investment costs eat at your return and leave you with less money.
Take a look at two investments, Fund A and Fund B, both of which return 10% over a 10 year period. Fund A has an expense ratio of 0.2% while Fund B has an expense ration of 1.5%. For this example, $10,000 is invested in each fund.
Fund A
Expense Ratio 0.2%
Return 10%
Initial Investment $10,000
Ending Investment $25,423
Fund B
Expense Ratio 1.5%
Return 10%
Initial Investment $10,000
Ending Investment $22,299
So even though these funds had the exact same return, with Fund A, you have $3,240 more after 10 years! Where you would you rather have your money?
A discussion of why some funds charge more than others is a post for another day. However, I will note that funds with lower fees are readily available. Take and investment in an S&P 500 index fund. Vanguard investor shares have an expense ratio of .17% (the admiral shares have expenses of .06%!) I am a huge fan in Vanguard in general and especially their index funds. Due to their scale and the fact that most of their funds are index funds and are not trying to beat the market, they are able to keep their fund expenses rock bottom low.
So when you are signing up for your 401k, funding your child’s 529, or opening a taxable investment account for other savings goals, be sure to look at expense ratios. There are differences in what is out there and over time lower fees make a huge difference in the ending balance in you account.
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Day 1: Know Your Monthly Income
Day 3: Calculate Your Net Worth
Day 6: One Month of No Eating Out
Day 7: Start or Increase Your Emergency Fund
Day 8: Move to a HighYield Savings Account
Day 9: Create a Debt Repayment Plan
Day 10: Contribute to Your 401k
Day 11: Calculate Your Crossover Point
Day 13: Turn Your Dreams Into Goals
Day 14: Sell Your Old Books and Clothes
Day 15: Move To A Rewards Credit Card
Day 16: Create A Found Money Account
Day 17: Find A Financial Mentor
Day 18: Calculate How Much You Will Need for College Costs
Day 19: Save on Commuting Costs
Day 20: Base Your Charitable Giving On A Percentage of Your Income
Day 21: Talk To Your Significant Other About Money
Day 23: Stop Trying to Keep Up With the Joneses
Day 25: Stop Thinking About Big Purchases In Terms of Monthly Payments
Day 27: Go Through Your Monthly Budget- Are You Using Everything?
Day 28: Make Sure You Have Enough Insurance
I love seeing the math difference on this! All of my investments are in Vanguard index funds, so the expense ratios are pretty low. I’m looking forward to the day when I’ll be able to start using Admiral shares instead of Investor shares
I’m always shocked by the math, myself. Especially when you start looking at 20-30 year time frames. It is almost free money. Admiral share prices are unbelievably low!