How to Save Money When You Invest
7 min read •
30 sec brief
Investing takes saving money to a whole new level, but it can all come at a cost. Here are ways to save on the most common investment fees you’ll come across.
Investing takes saving money to a whole new level. It gives your money the power to grow much faster than stashing it under a mattress or depositing it in your savings account.
There are smart ways to invest to get the most for your money. Along with the power to grow your green, investing includes fees. It’s vital to understand the fees you’ll pay to save money. Here are ways to save on the most common investment fees you’ll come across.
Brokerage fees are charged by the brokerage firm where your account is housed. Annual broker fees include charges for services such as purchases, sales, consultations, negotiations, account maintenance, delivery and in some cases, inactivity fees (for infrequent trading).
You can minimize brokerage fees by choosing a broker who understands your needs and matches your investing style. Here are a few factors to consider when looking for a broker.
- Account Minimums
- Account Fees
- Personal Investing Style
You can find these fees on broker websites. You may have to dig a little, but there will be a page that details the brokerage fees.
Trade Commission (Stock Trading Fee)
Stock trading fees are charged when you buy or sell stocks. You may also have to pay commissions or fees for buying and selling other investments such as options or exchange-traded funds (ETFs).
Most common charges on stocks and ETF trades are unavoidable, but there are a few exceptions:
- Brokers offering commission-free trading
- New customer promotions that include a limited number of commission-free trades in the early days of the account ( be sure to know what you’ll pay once the deal is done).
- Commission-free ETFs
Besides these exceptions, you’re looking at trading fees between $5 and $7, depending on the broker. Some brokers offer discounts to high-volume traders, and some offer per-share pricing in addition to or instead of, per-trade pricing.
To save money, study commissions on the investments you want to make when choosing a broker. You can find this information on broker websites.
Mutual Fund Transaction Fee
Except for ETFs, mutual fund trades don’t have brokerage commissions. However, they may have transaction fees when buying or selling the funds. Many brokers charge for both, though some only charge to purchase mutual funds. Mutual fund transaction fees vary, but you’ll see fees from $10 to as high $75.
To get the most for your money, select a broker that offers no-transaction-fee mutual funds. Many of these funds will be from the brokerage firm themselves. However, other mutual fund companies sometimes pay brokers to offer their funds without a transaction fee. However, the transaction cost may be passed to you in the form of a higher expense ratio.
You can discover these fees on broker websites, usually near the commission information.
The expense ratio is an annual fee that mutual funds, index funds, and ETFs charge their shareholders. It’s a percentage of assets deducted each year to cover fund expenses, including 12b-1 fees, management fees, administrative fees, operating costs, and all other asset-based costs incurred by the fund. The expense ratio accrues daily and is deducted from the fund’s average net assets. To note, portfolio transaction fees, or brokerage costs, and initial or deferred sales charges are not included in the expense ratio.
For example, a fund with an expense ratio of 0.10%, means you’ll pay $1 per year for every $1,000 invested.
Expense ratios cover operating costs. Actively managed funds usually have higher expenses than index funds and ETFs (which are passively managed).
To put it in perspective, an actively managed mutual fund could have an expense ratio of 1% or more. An index fund could have an expense ratio of 0.25% or less. Consider choosing low-cost index funds and ETFs to save money in the long run.
Expense ratios also include the 12B-1 fee (an annual marketing and distribution fee), and the 12B-1 fee is part of the total expense ratio, when applicable.
You can find the expense ratio on the fund’s page on broker websites, in the expenses or fee table in the fund’s prospectus.
Sales loads are a sales charge investors pay the broker or salesperson who sold them the fund. This charge is expressed as a percentage and usually cost between 3% and 8.5% (capped at 8.5% by FINRA rules).
Let’s explore the different ways loads are charged:
- Front-end loads: An upfront fee subtracted from your fund investment. If you invest $1,000 and the fund has a front-end load of 3%, you actually invest $970.
- Back-end loads: A fee charged when the fund is sold. Typically, the fee is higher if you sell the fund in the first year. The fee decreases each year you have the fund and goes away after 5 or 6 years. Back-end loads are sometimes called “contingent deferred sales charges.” Be aware, additional fees charged by back-end load funds, like 12B-1 fees, may be higher.
- Level loads: Have no upfront sales charge, but usually charge a 1% fee if shares are sold within the first year. Also, 12B-1 fees may be higher than funds with front-end loads, making the fund more expensive to own, even without the sales charge.
Choose no-load funds to save money. No-load funds tend to do better than load funds over time, so it makes sense to choose no-load funds from the beginning.
For details, look on the fund’s page on broker websites, usually near the expense ratio.
Management or Advisory Fee
When you invest, someone manages your money. Whether human, robo-advisor or a combination of both, you pay for their service.
Management fees are charged in addition to the other investment costs. Financial advisors typically charge in a few ways, including:
- a percentage of assets
- flat fee
- hourly fee
No matter how a financial advisor charges, you can expect to pay about 1% of your managed assets for their services.
Robo-advisors manage your investments using computer algorithms and often charge much less, a typical fee is around 0.25% of managed assets.
Some companies combine dedicated financial advisors and robo-advisors, and their price point comes in somewhere in between the other options.
To make your money grow, compare fees for the way you want to invest. Financial advisors should tell you their fees before you sign up for their services, and robo-advisor fees are stated on their websites. Get familiar with the fees associated with investing to make the most of your wealth building journey.
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