ELIMINATING A ONE PERCENT FEE CAN ADD $ MILLIONS TO YOUR NET WORTH!
Disclaimer: Good Day, Readers. WealthBuildingPowers blog is a financial literacy/competency blog and does not provide specific investment recommendations.
ELIMINATING A ONE PERCENT FEE CAN ADD $ MILLIONS TO YOUR NET WORTH!
When I first started investing, I purchased mutual funds. I knew NOTHING about fees or the consequences (and essentially NOTHING about those funds). At that time, many funds charged an upfront load fee. Meaning, our fund is so “special” you should pay us for the privilege to buy it. Those load fees ranged from one to three percent. Those same mutual funds charged annual fees, typically about two percent. If you invested $5,000.00 in one of these funds, your first-year fees cost you about five percent or $250. Just to break even, you need that fund to increase by 5.5 percent.
WHO BENEFITS FROM FEES?
- Ken Fisher; CEO Fisher Investments- $5.8 Billion – Net-Worth
- Abigail Johnson; CEO Fidelity Investments – $23.2 Billion – Net-Worth
- Stephen A. Schwarzman; CEO and Founder; Blackstone Alternative Asset Management – $37 Billion – Net-Worth
The above billionaires are investment firm CEOs and earn their wealth from client fees. There are thousands more senior leaders and employees in their firms who are wealthy because of client fees!
The people getting rich are the firms collecting your fees!
FEES MATTER!
If you are not calculating the total fees you are paying; you may be cheating yourself out of large sums of money over the years.
- Average 401-K participants paid an average all-in fee of 2.22% of their assets. You may be able to lower your expenses by choosing cheaper investment options, such as low-fee funds/ETFs.
- The average equity mutual fund management fee is about 1.40%
- Most actively managed funds have a load. Loads for mutual funds generally range from 1% to 2%. Most of these funds are sold through brokers. The load pays the broker for their efforts and gives an incentive to suggest a particular fund for your portfolio.
- Financial advisors get paid one of 2 ways for their professional expertise: by commission or an annual percentage of your entire portfolio, usually between 0.5% and 2%. In the same way, you pay a yearly rate of your fund assets to the fund manager. If you don’t pay an annual fee, the cost is the financial advisor’s commission. And if your broker gets paid by the load, don’t be surprised if he does NOT recommend ETFs for your portfolio. That’s because brokers’ commission for buying ETFs is seldom as hefty as the load.
Eliminating one percent or more of fees will make a massive difference over time. The choice to become a more strategic investor could add MILLIONS of dollars to your net worth!
In the below table, I look at an investor saving $400 each month for 20, 40, 0r 60 years. The columns look at what happens if this investor eliminates fees and grows his returns by one or more percentages.
ONE PERCENT SAVINGS MAKES A HUGE DIFFERENCE; THREE PERCENT SAVINGS IS LIFE-CHANGING!
| YEARS /Months COMPOUNDING | Start/Principal Amount; Monthly Contribution | Return on Investment {ROI}: 7% | Return on Investment {ROI}: 8% | Return on Investment {ROI}: 9% | Return on Investment {ROI}: 10% | Return on Investment {ROI}: 11% | Increased Savings By Eliminating 2% in Fees (From 9% to 11% Returns) |
| 20- 240 MONTHS | Principal Amount: $1,000.00 Monthly Deposit: $400.00 | Total Principal: $97,000.00 ROI Earned: $116,624.00 Maturity Value: $213,625.00 | Total Principal: $97,000.00 ROI Earned: $145,106 Maturity Value: $242,106.00 | Total Principal: $97,000.00 ROI Earned: $178,168.00 Maturity Value: $275,168.00 | Total Principal: $97,000.00I ROI Earned: $216,606.84 Maturity Value: $313,607.00 | Total Principal: $97,000.00 ROI Earned: $261,364.00 Maturity Value: $358,364.00 | $83,196.00 |
| 40 – 480 MONTHS | Principal Amount: $1,000.00 Monthly Deposit: $400.00 | Total Principal: $193,000.00 ROI Earned: $879,361.00 Maturity Value: $1,072,361.00 | Total Principal: $193,000.00 ROI Earned: $1,236,985.88 Maturity Value: $1,429,985.87 | Total Principal: 193,000.00 ROI Earned: 1,729,682.00 Maturity Value: $1,922,681.00 | Total Principal: $193,000.00 ROI Earned: $2,411,412.75 Maturity Value: $2,604,412.76 | Total Principal: $193,000.00 ROI Earned: $3,358,419.00 Maturity Value: $3,551,419.00 | $1,628,737.00 |
| 60 – 720 MONTHS | Principal Amount: $1,000.00 Monthly Deposit: $400.00 | Total Principal: $289,000.00 ROI Earned: $4,251,574.00 Maturity Value: $4,540,574.00 | Total Principal: $289,000.00 ROI Earned: $6,993,437 Maturity Value: $7,282,437.00 | Total Principal: $289,000.00 ROI Earned: $11,533,846.00 Maturity Value: $11,822,846.00 | Total Principal: $289,000.00 ROI Earned: $19,102,608.00 Maturity Value: $19,391,607.00 | Total Principal: $289,000.00 ROI Earned: $31,792,414.00 Maturity Value: $32,081,414.00 | $20,258,568.00 |
The above table demonstrates the power of COMPOUNDING (I included three previous blogs below on compounding) AND CONTROLLING FEE COST. You save $400 per month for sixty years in the best-case scenario. You invest that money in the S&P 500 ETF, paying less than 0.01 percent fees. At the end of those 60 years, you saved $289,000.00. Assuming an 11 percent annual return, {over the past ten years, the S&P 500 has returned ~13.6 percent annually} you earned in compound growth over $31 MILLION! Your money did the bulk of the work. You accumulated more than $20 million in your accounts by carefully managing your fee cost.
CONCLUSION – ELIMINATING A ONE PERCENT FEE CAN ADD $ MILLIONS TO YOUR NET WORTH!
If you now agree that fees matter, here are some actions:
You must eliminate every fee you can. First, determine how much you are paying in total costs for each account. Total expenses include the management fees and any equity products fees. Next, make changes within your control. If your 401K is charging higher costs than the national average, write to your Human Resources and CEO and request they examine this and act. You can use https://www.moneycrashers.com/calculate-401k-fees-in-under-5-minutes/ to calculate the fees your 401K plan is charging.
Avoid most mutual funds, and select equivalent Exchanged Traded Funds in your accounts. This action will save one percent or more in fees.
If you have a financial manager request, they identify ALL fees you are paying, including their management fees and fund fees. Next, direct them to select better products with lower costs. Determine if this financial manager is worth one or more percent fees she charges. What does she do to EARN your hard-earned money? If you decide to keep her, negotiate LOWER costs.
Final lesson- The earlier you start investing, the wealthier you will become! GET STARTED NOW!
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I am a proud nerd (as my beautiful wife and daughter have told me) investment and finance blogger with an N.C. State, Chemical Engineering, University Rutgers, MBA and Harvard University, Advanced Management education.
I left a corporate career because I desired to make a difference as a speaker and writer. I was blessed to be coached and mentored by strong women and men in my family and professional life. It is my time to serve and give back.
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I started my first business at ~13 years of age (a small but brilliantly created plant nursery). I am a successful investor in stocks, options, real estate and am happy to share my finance and investment lessons. I am NOT a licensed financial advisor. Please do not construe my suggestions on this blog as recommendations for your situation. As an investor, you must establish your risk/loss tolerance. Investment in any asset involves risk, including complete loss.
Please seek your licensed CPA or fiduciary financial advisors for individual financial advice.
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