The power of compounding. It’s what grows your money and funds your Financial Freedom. But compounding has a dark side too. Over time, investment fees eat up money you would have invested and costs you unbelievable sums.
Here’s an example: You invest $100,000 in your Income Generator or Growth Engine today. With a 5% return and no fees, you’ll have nearly $340k at your disposal in 25 years. But, if you have to pay 2% every year in fees, you’ll sacrifice 40% of your money to investment costs and have just $204k at the end of the 25-year period!
So, while fees might seem like small change here and there, they can actually consume an astounding chunk of your investment returns. And that can transform your sprint to Freedom into a sluggish crawl.
Today, we’re looking at five ways to reduce investment fees and free up your money to work for you—not your broker!
1. Opt For Investments With Low Expense Ratios
The expense ratio for any given asset is the annual fee you pay for the pleasure of owning it. It covers the costs of operating, administering and managing that fund. So choosing investments that boast low expense ratios goes a long way in cutting your costs.
Whenever you have a choice between two similar assets, consider the one with the lower expense ratio. In general, you’ll find passively managed funds (like index funds) have lower expense ratios than actively managed mutual funds. And exchange-traded funds (ETFs) are typically lower still.
2. Limit The Frequency Of Your Trades
When you buy or sell shares of an asset, you may have to pay nearly $50 in a trading commission fee! When you trade specific assets online via a discount brokerage, that cost may drop to only $5. But even at $5 per trade, those commission fees add up fast.
The solution? Come up with a solid plan for your investments, and stick with it. You never want to sell because of a knee-jerk reaction to market fluctuations. Instead, understand that—if you choose sound investments—your assets will likely rebound over time. And if they don’t, perform a careful analysis and weigh your other investment options carefully.
3. Look Into Commission-Free Investments
Horrified by the cost of commissions? If you choose to use exchange-traded funds in your portfolio, look into zero-commission or commission-free ETFs.
Many major brokerage firms offer hundreds of excellent options. Get complete listings and fund performance reports from TD Ameritrade, Charles Schwab, E*Trade, Fidelity and other firms.
4. Steer Clear Of Hidden Fees
Watch out! Commissions and expense ratios aren’t the only fees you need to worry about.
Before you choose an asset, check what miscellaneous annual fees may be required. Also, see whether your broker penalizes you for holding investments instead of trading with a specified frequency. And be sure to review your fee schedule in case a phone trade or chat with a live broker costs you extra.
5. Work With An Advisor Who’s Working For You
Your investments are costing you something in fees, but is your advisor sucking you completely dry? Always seek out a fiduciary advisor when choosing a professional with whom to work. As a fiduciary, she’s obligated to offer investment advice based on your needs. Otherwise, the advice you get might be more about her commission for selling you particular assets.
Discuss and understand your advisor’s pricing schedule from the get-go. You should know if your chosen expert is benefitting more than you are from your good financial decisions.
Out of necessity, a good investment will have some fee associated with it. But maximizing the growth of your portfolio means making informed choices about your investment costs. When you do that, you’ll be primed to accelerate your journey to Financial Freedom.
Dr. Tony is the co-founder of MindShift.money and the best-selling author of three books on personal and business finances. Having achieved Financial Freedom at 27, Dr. Tony believes that through Financially Fit Bootcamp and Cash Flow Cure everyone can get there. He has made it his life’s mission to help others live a life where their money works for them—not the other way around.