Lesson 2 of 4 · 1 minute read
Why fees matter
A fee that sounds tiny can cost you thousands of dollars over time.
When you invest in a fund, you pay a yearly fee called the Expense ratioThe yearly fee a fund charges, shown as a percent of the money you have in it. Lower is better.More in the glossary. It’s shown as a percent of the money you have in the fund. You don’t get a bill. The fee just comes out of your balance, so it’s easy to miss.
Small fees add up
A 1% fee sounds tiny. But it comes out every year, from your whole balance, for as long as you’re invested. Here’s the same investment with different yearly fees:
| Yearly fee | Balance at the end |
|---|---|
| 0.05% | $96,577 |
| 0.5% | $89,093 |
| 1% | $81,538 |
Same deposits, same years, same market. The only difference is the fee.
How to keep fees low
- Look for the expense ratio before you invest. You’ll find it on the fund’s information page.
- Broad Index fundA fund that buys a little of many stocks or bonds at once, to match a whole market. It spreads out your risk and usually has low fees.More in the glossary often have some of the lowest fees.
- Ask about any other fees, like account fees or fees for buying and selling.
- Be careful with anyone who earns a commission for selling you an investment. Ask how they get paid.
Funds charge a yearly fee called an Expense ratioThe yearly fee a fund charges, shown as a percent of the money you have in it. Lower is better.More in the glossary. You don't get a bill. It comes out of your money, so it's easy to miss.
A 1% fee sounds tiny. But it comes out every year, from all the money you have in the fund.
Over many years, a difference of 1% a year can add up to thousands of dollars.
Check the expense ratio before you invest. Broad Index fundA fund that buys a little of many stocks or bonds at once, to match a whole market. It spreads out your risk and usually has low fees.More in the glossary often have some of the lowest fees.
Ask about other fees, too. If someone earns money for selling you an investment, ask how they get paid.