The Humble Penny

Create Financial Joy

  • E-mail
  • Facebook
  • Instagram
  • Pinterest
  • RSS
  • Twitter
  • YouTube
  • Home
  • Start Here
  • Academy
    • Financial Joy Academy (Membership)
    • FIRE SuperPower™
    • Super Simple Investing
    • Value Bundle
    • One Grand Plu$ eBook
    • BUDGET FOR LIFE
    • Books I Love
  • About
  • Blog
    • Make money
    • Investing
    • Side Hustle
    • Financial Independence
    • Money Saving
    • Budgeting
    • Managing debt
    • Manage Money
    • Food & Wellbeing
    • Career
    • Blogging tips
    • Family
    • Relationships
    • Reader Case Studies
    • Product Reviews
    • Life hacks
  • Best Resources
  • Start A Blog
  • Collaborate
    • Coaching
    • Support Us
    • Advertise
    • Contact
  • Media
  • Community

Understanding Investment Fees and Why It Matters

January 9, 2018 By The Humble Penny 2 Comments

To help The Humble Penny stay sustainable, this post may contain affiliate links. See our disclosure. Access ALL OUR COURSES (present & future), Regular Live Coaching (with Ken & Mary), Expert Masterclasses, Supportive Mastermind Community, Accountability and much more via our NEW Programme, the Financial Joy Academy (FJA) MEMBERSHIP Programme.

Share
Pin
Tweet
Flip
Share
36 Shares

 

Understanding Investment Fees and Why It Matters

Today’s post on fees could be mistaken for being boring as it’s usually perceived as admin.

However, I can guarantee you that this is probably one of the most important things to focus on as an investor.

When you do your grocery shopping, more likely than not, you’d want to know what it costs you to do your shopping.

You probably even compare the cost of specific items in your basket to other supermarkets nearby or online.

Investing your money is no different. It comes at a cost, which can be considered as the price for a product or service.

This price varies across different platforms and also varies by the type of assets one buys.

For many years, this price of investing has been the subject of much debate and the tide is definitely heading in one direction.

Why is this important?

1. Long Term Horizon

Over a long time, investments in equities for example stand to compound and grow significantly.

The one thing that definitely impacts the return on that investment are costs.

The lower the costs of your investment, the higher the pot of money you have to work for you over time.

You’d think this is pretty common sense, but alot of people don’t pay a great deal of attention to costs.

The other thing to factor in also is the opportunity cost (i.e. missed opportunities) from not investing as cheaply as possible.

2. Trends for the future

There are a bunch of trends that are changing the landscape and appear here to stay:

  • There is a considerable push for transparency with a resulting downward pressure on fees (i.e. the price of investing). 
  • Technology is changing the way alot of Gen X, Gen Y (Millennials) and Gen Z are investing.
  • Passive investing is trumping Active investing (where you’re paying for a manager) as the latter generally don’t outperform the major indexes.
  • Robo advisors are rising to fill the void and offer a hybrid offering that aims to capture the tech savvy, time poor and flexibility seeking generation.
  • Rise of Defined Contribution pension schemes now mean that your financial future is entirely in your hands. So what you actually invest needs to work harder for you.
  • Financial Independence and Early Retirement is here to stay. More people want to stop worrying about money and have the option to retire earlier.

With many of these trends happening at the same time, it is even more of a reason for you to pay a close attention to your costs.

Pause for a minute and think about what you’re putting your hard earned money into and why.

3. Goals

Achieving goals such as financial independence or saving for education for your children have everything to do with the cost of your investment.

Paying too much could make the difference between you retiring early or having to work another few years.

If you’re like me and investing for your children with possibly decades before they touch the money, then this is something you should be all over.

Why are fees charged on investments?

The type of fee that is charged depends on what type of asset you’re buying and from what type of environment (e.g. ISA, SIPP etc).

Keeping it simple, fees are charged for three broad reasons:

  • Doing the admin and keep records of your investments i.e. Admin or Account fees (ongoing)
  • Managing Your Money i.e. Management or Fund fees (ongoing)
  • Other fee such as Stamp duty, commission etc. (one-off)

The admin and management fees are particularly important because they are charged annually or quarterly as a percentage of your money.

There is absolutely no problem with paying these fees provided you’re getting alot of value and performance of your money.

However, investments can go up as well as down. Therefore, paying these fees is another way of giving your money away if your assets aren’t working.

You do always have to pay for something, however the trick is to keep that something as low as possible.

This is partly what has led to the rise of passive investing and the demise of the star active manager.

Admin fees in particular is interesting.

Imagine you had a cleaner who asked that you paid them more money the richer you got. What would you say?

What many don’t know is that there are investment platforms that charge a fixed admin fee rather than a percentage.

This little detail alone could transform your financial future if you get it right. 

Although most platforms now offer a cap on admin fees per annum, shopping around to invest via a platform with a low cap is important.

How fees stop your money growing

Below is an example of how paying too much in fees can affect your money growing.

Ben and Lucy have £30,000 in their investment accounts, and manage to invest £200 a month.

However, they invest with different platforms and in different funds, resulting in different annual fees charged on their money.

Although both people earn the same gross return of 7%, their net returns differ by 1.05% (1.50% less 0.45%) annually.

This seemingly insignificant difference in fees over 25 years leads to a difference of £52,607 in their investment pots:

£30,000 investment pot to startBenLucy
Monthly investment£200£200
Annual return before fees7%7%
Annual total operating fees charged1.50%0.45%
Value in 25 years£239,724£292,331

This difference could also possibly arise as a result of Lucy investing in a Passive index fund whilst Ben invested with an Active Manager.

The other point to note is that although Lucy’s portfolio has far outperformed Ben’s, the key point is that they both were invested in some capacity.

Had both of them purely just kept their cash in a current account, they would have ended up with just £90,000!

So focus on being invested at all times, whilst aiming always to keep costs low.

Related:

4 Reasons Why Holding Cash Is Possibly The Worst Thing To Do

9 Smart Ways To Invest £1,000

How to compare costs

The key is to focus on the total “ongoing” costs i.e. the sum of the admin and management fees.

This total cost varies from say, 0.4% for a Passive tracker fund to 1.80% for an Actively managed fund or Investment Trust.

Whenever you’re about to invest your money, make a deliberate point of checking these costs.

 

Are you currently investing your money? Do you know what it’s actually costing you? 

 

Do please share this post if you found it useful, and remember, in all things be thankful and Seek Joy.

P.s. Explore our private membership program at Financial Joy Academy, where we have more than 25 courses and Action Plans created to help families achieve Financial Independence faster this decade.

Share
Pin
Tweet
Flip
Share
36 Shares

FREE Practical Money Course!

This FREE course will show You How to Make Money, Invest for Your Future, Save & Budget better, Generate Cash flow, Work out & Grow Your Net Worth, Manage Debt and work towards Your Financial Independence!

Start Today and Change Your World! Be Fearless!!

Brilliant!! Please check your email now to confirm your subscription ;) Enjoy your course and feel free to reach out to me anytime!

There was an error submitting your subscription. Please try again.

Create Financial Joy Powered by ConvertKit

2 Comments Filed Under: Investing, Make money Tagged With: Costs, Fees, Investing, Total Expense Ratio (TER)

« Previous post
Next post »

Related posts:

  • How To Invest In Stocks With Confidence: Step-by-Step For BeginnersHow To Invest In Stocks With Confidence: Step-by-Step For Beginners
  • How To Become A MILLIONAIRE Investing £10 PER DAY!How To Become A MILLIONAIRE Investing £10 PER DAY!
  • 10 Tips For Smarter Investing10 Tips For Smarter Investing
  • How to Invest In Stocks For Dividend IncomeHow to Invest In Stocks For Dividend Income
  • Pay Off Mortgage Early or Invest?Pay Off Mortgage Early or Invest?
  • Ethical Investing: How to Research and Start Investing MoneyEthical Investing: How to Research and Start Investing Money
About The Humble Penny

Ken and Mary Okoroafor are the founders of The Humble Penny and the popular Financial Joy Academy (FJA) MEMBERSHIP Programme - Their mission this decade is to help 10,000 Families achieve Financial Independence. Ken is a Chartered Accountant (ACA, ICAEW) with over 12 years of experience in the investment business. He holds an MBA from Cambridge University & has served as an Executive (CFO) for years. He is also a First Generation immigrant. Mary is a creative and digital specialist. A Londoner at heart with a passion for vegan food, travel & family life. Ken & Mary are parents and have two sons. More here

Comments

  1. maria@moneyprinciple says

    January 9, 2018 at 10:00 pm

    Fair points and great you are getting the message out there. Fees can affect outcome a lot. In fact, the worse are the fees and charges that are difficult to spot (there was an investigation in the IS of different pension accounts and it turned out that a lot of the fees and charges are hidden in the small print). Another thing that annoys the hell out of me, but some of my friends don’t seem to grasp, is paying for managed accounts where the charges can be up to 3-4% – these often under-perform and by the time one has paid the fee we are talking below inflation level return. People can be strange!

    Reply
    • Ken Okoroafor says

      January 10, 2018 at 8:13 am

      Hey Maria, haha I totally get you! 3 – 4% is INSANE! Frustratingly, it is because people just don’t have the understanding of the future implications of these fees. Life gets busy and years pass and people become poorer. There should almost be a checklist that everyone ticks off before they commit their money to an investment, and fees should be on that list. It is usually easy to join and harder to leave. Add to that, an annual review should be done on Return on Investments.

      Reply

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

WELCOME HOME!

About The Humble Penny

My name is Ken Okoroafor and I am the Founder of THE HUMBLE PENNY®. Learning how to Master Money has Transformed my life since my days as a teenage Student and Immigrant. It enabled me to become Financially Independent aged 34!

Today we live purposefully to help others Create Financial Joy and achieve Financial Independence in their lives too.

Read more

Want To Achieve Financial Independence?

FIRE SuperPower in LIVE!

Join 35,000+ Readers

Start An Impactful Blog: Step by Step Tutorial

How to start a wordpress blog

Like & Join Us On Facebook

Like & Join Us On Facebook

Popular Posts

How Much Money You Should Have Saved by Age7.2K Shares
How To Make Money From The Amazon Affiliate Program6.1K Shares
85 Ways To Make Extra Money Today (2020)4.4K Shares
How To Start An Online Business In 7-DAYS3.6K Shares
6 Ways To Start Attracting More Money To Yourself3.6K Shares
30+ Life Changing Books I Recommend3.0K Shares
How We Live Well On A £50 Per Week Food Budget (Family of 4)2.9K Shares
How To Start Building Passive Income For Financial Independence2.8K Shares

Search the Humble Penny

Follow The Humble Penny

  • E-mail
  • Facebook
  • Instagram
  • Pinterest
  • RSS
  • Twitter
  • YouTube

SUBSCRIBE VIA EMAIL

The Humble Penny® does not offer financial advice and is intended for educational and reference purposes only. Use of this site is entirely at your own risk. You should always carry out your own research and take specific professional advice.

  • Back to Home
  • Contact Me
  • Privacy & Cookies
  • Terms and Conditions

Pillar Posts

How To Save Money + Build An Emergency Fund FAST! (10 WAYS🧾)

Side Hustles UK: The Complete Guide to Tax

How To Invest In Stocks With Confidence: Step-by-Step For Beginners

100 Things That Made My Year (2020)

The Unstoppable Power of Being Intentional

Random Posts

Best Paying Jobs For Over 6 Figures A Year

Passive Investing And Why You Should Care

Ethical Investing: How to Research and Start Investing Money

How To Get Your Kids Interested In Money Management

The Humble Penny® does not offer financial advice and is intended for educational and reference purposes only. Use of this site is entirely at your own risk. You should always carry out your own research and take specific professional advice. 

Follow The Humble Penny

  • E-mail
  • Facebook
  • Instagram
  • Pinterest
  • RSS
  • Twitter
  • YouTube
Back to Top
Copyright © 2021 The Humble Penny ·