Expense Ratio

If you could make an extra $1,000 a year would you? Of course you would! If you have a retirement account there is a good chance you are “giving away” over $1,000 a year in expenses to your fund adviser. The first thing you should do when you start looking into your investments is understand how much you are paying the people managing your money and how they are getting that money.

There are 2 main ways managers get money from you.

  • Loads
  • Expense ratio

Loads are ALWAYS bad.

Expense ratios are necessary but should always be low, less than 0.3% if necessary (meaning $3/$1000 invested) or less than 0.15% if possible $1.50/$1,000 invested.This is possible at Vanguard and many other places.
There are many places that will charge you a 1% expense ratio, $10/$1,000 invested! That’s 10x more money than places charging 0.1% (which is also very achievable).

Remember the expense ratio is taken out each year also, not only one time.  
Take an example where someone has $100,000 invested in a 401K.
If they are paying a 1% expense ratio they will pay $1,000 that year to their fund manager.
If they were paying a 0.1% expense ratio they would only be paying $100 a year, saving $900 a year! Does that sound important? It is!

In the Example below I share the result of a .2% expense ratio ($2/$1,000 invested per year) vs 0.6% ($6/$1,000 invested per year). You can see after 10 years you end up paying $836 more in fees with the 0.6% expense ratio.

For more information on expense ratios you should watch this video I made on expense ratios. Then you should go into your 401K or other investment accounts and try to find what expense ratio you are paying.

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