Here’s What Happens When You Pay Investment Fees

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When you pay investment fees, you’ll eat into your returns. Keep reading to learn the impact of fees on your invested money. 

Investing money in a brokerage account is important for your future. You need to make your money work for you and earn a generous return so you can build wealth. But, there’s a lot more to think about when you’re investing compared to when you’re just sticking your money in a savings account.

One of the biggest things you need to consider is the investment fees that you are paying. Some fees are inevitable, but certain investments are a lot more expensive than others. And when you pay high fees, you can cost yourself a lot of financial security.

Specifically, here’s what happens when you get hit with investment fees.

This is the true cost of investment fees

When you pay fees for your investments, those fees eat into your returns. You get to bring home less money, and even if your investments perform very well, you’ll lose out on a big portion of the money that you should have had in your brokerage account.

Just how much money will you lose? A lot depends on how big the fee actually is. Say, for example, you invested $1,000 and earned an 8% average annual return over the course of a decade. If you paid a fee of 0.25%, you would lose $49 of the money you should have had and would end up with $2,159. But, if you paid a 2.00% fee, you would lose far more — a whopping $368 — and would end up with only $1,791.

And these are small numbers. When you’re investing a lot and you’re investing over a long time, the cost of investment fees can be even greater. Say, for example, that you invest $3,000 a year over 35 years and you earn a 10% average annual return. If you pay a 0.25% fee, you would end up with $767,731. But if you pay a 2.00% fee on the same investments, you would have $250,781 less and end up with just $516,950. That’s a lot of money to lose.

Here’s how you can find low-cost investments

Since paying investment fees is bad news, you’ll want to look for ways to reduce the cost of investing.

First and foremost, you should pick a discount brokerage firm that doesn’t charge a commission, monthly maintenance fee, or any other cost of doing business. There are plenty of brokers out there competing for your business and there is absolutely no reason to pick a broker that’s going to make you pay to be a customer.

Next, you’ll want to watch the fees on investments you buy. If you’re purchasing shares of individual stocks, this shouldn’t really be an issue. But if you’re buying mutual funds or ETFs, then it’s important to look at the expenses of your investment.

Ideally, you’ll want to pick a passively-managed investment, such as a fund that tracks the performance of a financial index. An actively-managed fund (where an investment professional picks investments) is usually much more expensive, because you have to pay the fund manager. And, actively-managed funds typically do worse over the long term because even professionals aren’t that great at consistently beating the market.

By carefully comparing fees and choosing the right broker and investments, you can avoid losing a good portion of your return to investing costs. This way, you’ll end up with more money in your nest egg.

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