Investing Money

Lesson: Investing basics

• Lesson 9: Investing basics
• Have an emergency fund before you start investing
  • Do not invest money you cannot afford to lose
  • Do not invest money you need soon
• Start ASAP
• Think long-term
• Understand compound interest
• Use a low or no-fee investing platform
• Don’t try to beat the market
• Where to invest

Have an Emergency Fund Before You Start Investing

Before diving into investing, make sure you have an emergency fund. This is crucial because it acts as a financial safety net, covering unexpected expenses like medical bills or car repairs.

Action Steps:

1. Calculate Your Monthly Expenses: Add up your rent/mortgage, utilities, groceries, and other essential costs.
2. Save 3-6 Months of Expenses: Aim to save enough to cover 3-6 months of these expenses.
3. Use a High-Yield Savings Account: Keep your emergency fund in an easily accessible, interest-bearing account.

Do Not Invest Money You Cannot Afford to Lose

Investing always carries risk, and it’s possible to lose money. Only invest money that you can afford to lose without affecting your day-to-day living or financial security.

Action Steps:

1. Evaluate Your Finances: Ensure your essential needs and emergency fund are covered first.
2. Set Aside Investable Funds: Only use surplus funds for investing.

Do Not Invest Money You Need Soon

Investing is best suited for long-term goals. Money you need in the short term should be kept in safer, more liquid accounts.

Action Steps:

1. Identify Short-Term Needs: Determine any expenses you’ll need to cover in the next 3-5 years.
2. Choose Liquid Accounts: Use savings accounts, CDs, or money market funds for short-term savings.

Start ASAP

The sooner you start investing, the more time your money has to grow. Time in the market is a key factor in achieving financial growth.

Action Steps:

1. Open an Investment Account: Choose a brokerage and open an account.
2. Make Your First Investment: Even a small amount invested today can grow significantly over time.

Think Long-Term

Successful investing requires a long-term perspective. Avoid getting caught up in short-term market fluctuations.

Action Steps:

1. Set Long-Term Goals: Define your investment goals (e.g., retirement, buying a home).
2. Stick to Your Plan: Regularly review your investments but avoid making impulsive decisions based on short-term market movements.

Understand Compound Interest

Compound interest allows your investments to grow exponentially over time as you earn returns on both your initial investment and the accumulated interest.

Action Steps:

1. Learn the Basics: Understand how compound interest works and its impact on your investments.
2. Invest Regularly: Make consistent contributions to your investment accounts to maximize the benefits of compounding.

Don’t Try to Beat the Market

Trying to outperform the market through frequent trading or timing the market often leads to lower returns and higher costs. Instead, focus on steady, consistent investing.

Action Steps:

1. Invest in Index Funds: These funds aim to match the market performance and have lower fees.
2. Adopt a Buy-and-Hold Strategy: Invest for the long term and avoid frequent trading.

By following these simple yet powerful principles, you can set a solid foundation for your investing journey, ensuring financial growth and stability over the long term.

Lesson: Save Money on Investment Fees

Cutting down on investment fees is a simple and powerful way to save a lot of money quickly. Saving money is both easier and more effective than earning more.

In this lesson, we’re going to do just that. We’ll fine-comb your investment fees to find all those areas where you can save money.

Investment Fees Comparison

To illustrate the impact of reducing investment fees, let’s look at a hypothetical scenario with a $100,000 portfolio. Even small reductions in fees can lead to significant savings and higher returns over time.

Here is a table that shows the comparison of the original fees versus the reduced fees, along with the savings for a hypothetical $100,000 portfolio:

By reducing your investment fees, you can save $2,500 annually, which adds up to $25,000 over 10 years. This significant saving can greatly enhance your investment returns over time. ​​

Types of Investment Fees

Before we dive in, let’s briefly educate you on the types of fees you may be paying with your investments:

1. Expense Ratios: This is the annual fee that mutual funds or ETFs charge their investors. It’s expressed as a percentage of your investment in the fund.
2. Management Fees: Fees paid to professionals for managing your investments.
3. Trading Fees: These are fees for buying and selling investments, also known as transaction fees or commissions.
4. Account Fees: These include annual, maintenance, or inactivity fees charged by your brokerage.
5. Sales Loads: These are commissions you pay when you buy (front-end load) or sell (back-end load) mutual funds.

Determining the Fees You Are Paying

Let’s get started on determining the fees you’re currently paying. Follow these simple steps:

1. Log in to Your Brokerage Account:
   • Access your brokerage account online. If you don’t have online access, request paper statements from your broker.
2. Locate Your Investment Statements:
   • Find your latest investment statements. Look for sections labeled “Fees” or “Expenses.”
3. Identify the Expense Ratios:
   • For each mutual fund or ETF, find the expense ratio. It’s usually listed in the fund’s detailed information or summary.
   • Note down the percentage for each fund.
4. Check for Management Fees:
   • Review your account for any management fees. These are often charged if you have an advisor managing your investments.
   • Note the percentage or amount charged annually.
5. Review Trading Fees:
   • Look at your transaction history to identify fees paid for buying or selling investments.
   • Note the amount charged per trade.
6. Identify Account Fees:
   • Check for any annual, maintenance, or inactivity fees listed on your statements.
   • Note these fees and their frequency (monthly, quarterly, or annually).
7. Find Sales Loads:
   • If you own mutual funds, look for any front-end or back-end sales loads.
   • Note the percentage charged and when it was applied.

What to Do Next

Now that you have identified the fees you are paying, it’s time to take action to reduce them:

1. Switch to Low-Cost Index Funds or ETFs:
   • Compare the expense ratios of your current funds with low-cost alternatives.
   • Sell high-cost funds and purchase low-cost index funds or ETFs.
2. Move to a Low-Cost Brokerage:
   • Compare your current broker’s fees with other brokers.
   • Transfer your investments to a broker with lower fees if necessary.
3. Reduce Trading Frequency:
   • Adopt a long-term investment strategy to minimize trading fees.
4. Consolidate Accounts:
   • If you have multiple accounts, consider consolidating them to reduce account fees.
5. Negotiate Management Fees:
   • If you have an advisor, ask if they can reduce their management fee or consider a fee-only advisor.

By following these steps, you can significantly reduce the fees associated with your investments, allowing you to save more money and increase your returns over time.

Impact of fees

Example of Brokerage Fees

Let’s imagine that you buy a stock priced at $300 and you have to pay a brokerage fee of $4 per trade. The brokerage fee of $4 represents 1.33% of the $300.

This means that your stock needs to increase by at least 1.33% before you start making a profit on it.

But wait, it gets worse. You pay the brokerage per trade, meaning both when you buy and when you sell.

Let’s say that over the next two years, your stock has increased by 20%, and you decide to sell it at a price of $360. Again, you pay a brokerage fee of $4, which now represents approximately 1.11%.

The actual gain is $60 (the increase from $300 to $360), but we have paid a total of $8 in brokerage fees (for both buying and selling), resulting in a net gain of $52.

That means we lose $8 or a whopping 13,33% of our gains to brokerage fees.

This example illustrates the impact of brokerage fees on your investment returns, emphasizing the importance of considering these fees when buying and selling stocks.