It's already hard enough saving money and budgeting for a rainy day and for retirement - we also need to start thinking about saving money on investing. Isn't investing itself good enough?
Well, not all investments are made equal, actually.
I used to pay very high mutual fund fees and got knocked down even more and lost even more money with the 2008 financial market crash. I learned the hard way that even though you are investing, the rate of return and the cost to invest matters because it definitely erodes your future nest egg over time.
Unfortunately the problem is that the first encounter with investing is usually with our bank that we bank with. The mutual fund advisors at the bank get paid for selling you mutual funds (especially the bank's mutual funds).
Mutual Funds Can Have Invisible Costs
This helpful article by Investopedia shows you how mutual fund fees are broken down. Mostly, not only are you charged a fee when you purchase the mutual fund, you are also charged an annual fee which of course, eats into your investment returns and makes the average return seem less dazzling.
This helpful infographic from visual.ly helps you see that even with a small difference in mutual fund costs and fees, such as 0.09% for a very low fee index fund and 2.25% for a higher fee index fund (which is still not that high compared to some usual funds that charge about 3.5% in annual fees), that if you opted for the lower fee mutual fund- by the time you get to retirement, you will have $123,000+ more to play around with. The remarkable thing about that is that it is only a little over 2% difference. Imagine what a 3% difference will make!
Change Is Ahead
Very soon, according to The Globe and Mail, just like with the credit card disclosure statement that breaks your credit card debt down to how long it will take you (e.g., 14 years) to pay off that $400 credit card bill if you pay the bare minimum of $10 monthly, you will soon see a breakdown of how much your mutual fund is costing you.
This is going to be a game changer because more and more people will likely opt for lower cost investing, after they see how much their high fees are costing them.
The Solution: Exchange Traded Funds (ETFs) or Index Funds
Exchange Traded Funds "ETFs" are quickly becoming more and more popular. These are passively managed funds (meaning no one actively tries to time the market and buy and sell funds within the fund). Here's a link to a Globe and Mail article explaining the difference between mutual funds and exchange traded funds if you are curious.
Check out Canadian Couch Potato, it provides couch potato investing by Dan Bortolotti for more information on exchange traded funds and how to choose a portfolio (and a low cost portfolio at that) that fits you best.
Alternately, you could look into the TD e-series funds or Tangerine Bank's Investment Funds (formerly ING Direct), which all have a low Management Expense Ratio of 1.07% as of writing. Some of the funds within the TD e-series funds have management expense ratios as low as 0.33% (which they claim are one of the lowest in the industry).
The benefit to choosing a TD e-series funds or a something like Tangerine Bank's investment funds is that you can contribute regularly (for example, on a monthly basis) without having to pay commission fees. For some brokerages you have to pay a fee to purchase exchange traded funds.
Personally I am a big fan of funds where I can just contribute on a monthly basis without having to think too much. This way you contribute regularly to the fund and so whether the market does bad or does good, it doesn't matter as much because you will be buying high and also buying low.
Hopefully these tips will help you start thinking about how to save money on your investing. After all, it is our hard earned dollars that we have saved up and of course you want to make sure it isn't wasted on fees. No one cares more about your hard earned money than you do!
Bargainmoosers, how do you save money on investing?
Photo credit: Jim Makos