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How Fees Impact Saving and Investing

4 min read • April 09, 2019
30 sec brief

Fees can be the monster that eats a big chunk of your savings. And often we don’t know what we’re paying. It has never been easier to reduce your investing and savings costs.

Fees can be the monster that eats a big chunk of your savings. And often we don’t know what we’re paying. A survey by Consumer Reports found that 40% of participants are in the dark about what they pay in investment fees, and among the folks who know their fees, 40% weren’t satisfied with the fees they were being charged.

Becoming a fee fiend will definitely pay off.

For most investors, mutual funds and exchange traded funds (ETF) are an efficient way to build a diversified portfolio. But there’s a somewhat sneaky fee that can cost you plenty. Funds and ETFs charge an annual fee, called the expense ratio. It doesn’t show up in your statement as a line-item cost. Instead, it is a fee –a percentage—that is shaved from your fund/ETF’s return. If you are investing in a company retirement plan, every fund in your plan has this operating expense.

Expense ratios typically range from 0.03% on index mutual funds and ETFs to more than 1%. (A handful of new Fidelity index mutual funds don’t charge any expense ratio.)

Can’t get worked up about 0.03 v. 1%? You might want to rethink your position:

Let’s say we have two funds that both earn a gross (before expenses) return of 8%. The Cheap Fund shaves off 0.03% a year for the annual expense ratio, and the Costly Fund charges 1%. If you made a $10,000 investment today in the Cheap Fund, you would have nearly $100,000 in 30 years. If you had invested in the Costly fund you will have about $76,000. That’s a near $25,000 swing simply due to the annual fees you’re charged.

The good news is that it has never been easier to reduce your investing and savings costs.

Focus on low-fee funds and ETFs. If you invest in an IRA, moving your money to portfolios with low expense ratios is easy, and there is no tax bill. Even if you have money in a taxable account where you will owe tax on any gains when you move your money (you sell one fund to buy another), it can still be a smart move if you’re paying high expenses. After all, unless you intend to pass that account to heirs, you will eventually owe tax on it when you make withdrawals. Paying now and getting your money reinvested in a low cost portfolio can be smart over the long-term.

You can’t move money from a 401(k) while you are still working for the company, but once you leave, you have the freedom to do a “rollover” into an IRA. This can be a smart move if your 401(k) plan doesn’t offer low-cost investments. You won’t owe any tax when you do a direct rollover from your 401(k) into an IRA account. (Another option: If your new employer allows you to rollover your old 401(k) into your new 401(k), check out if the investment options and fees are a good fit.)

Don’t Pay Transaction Costs. Do your investing at the major online brokerages and you can find a lineup of mutual funds and ETFs that have “no transaction fee” that means you can buy them without paying any sales commission. Stick with the NTF offerings to lower your investment costs.

Sweat the small details. Shop around for investment and savings accounts that don’t charge any monthly maintenance fees. Even if it’s $2 or $10  a month, that adds up over time. And every dollar you pay in fees is a dollar that can’t compound over time.

Unless you are 100% sure you are in fact getting a good deal with your rewards credit card, you might want to rethink whether it’s really worth the $100, or $300 a year. Add up all the annual fees on rewards cards. If you’re not really getting your money’s worth, a quick online search for “no annual fee credit cards” will give you some leads.

Pay for the advice you really need. Many financial advisors charge a fee based on the size of your investment portfolio. A 1% annual fee is common. When you have $250,000 that works out to $2,500 a year, but when your portfolio reaches $1 million, you’ll be paying $10,000. If your advisor is doing the same work as when you had a smaller portfolio, you need to decide if the assets-under-management fee model makes sense. Plenty of financial planners and advisors now offer different fee plans, such as paying an hourly or project fee for a specific service, such as coming up with a college savings plan, or a strategy for how you will cover your health care expenses in retirement.

If the help your most interested in is having someone else handle your portfolio mix and periodic rebalancing,  you may want to check out robo-advisors such as Betterment, Wealthfront and Vanguard Personal Advisory Services. For an annual fee of 0.25% to 0.30% the services plunk your money in a mix of funds and ETFs that are deemed a good fit given your age, investment horizon and appetite for risk. You don’t get personalized hand holding with roboadvisors, but you’re paying a low fee to get professional oversight of your investments.

Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.

About the author
Carla Fried

Carla translates business and personal finance concepts into engaging content that helps individuals make more confident choices in how they manage their money. Her work appears in The New York Times, Money Magazine, Barron's and Consumer Reports.

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