"A small percentage" ... "a nominal fee" ... these are little words you might not notice when you're looking into investment funds. But the little fine print can cost you big bucks down the road if you're not careful.
Investment Income - Fees and Expenses = Your Investment Income
Most investment funds charge fees and expenses to cover the costs of managing the funds. Some charge more than others, so it makes sense to know what they charge before you invest in any one fund.
Why should you care? Because it's your money that pays these expenses, not your employer's or anyone else's. The fees and expenses come straight out of your investment income.
While fees and expenses may sound like nothing, they can add up - so it makes sense to know how much you'll be charged before you invest.
What's a percentage or two among friends? Take a look at the expenses on a $50,000 nest egg that earns 8% per year before fees:
|Expenses paid:||If expenses are 0.25% per year||If expenses are 1.25% per year|
|After 5 years||$846||$4,154|
|After 10 years||$2,473||$11,863|
|After 20 years||$10,555||$48,407|
|After 40 years||$96,167||$404,382|
As a general rule, over a 30-year period, an investment fund's 1% annual fee could eat up about 25% of the fund's value.
As you can see, being a successful investor means knowing what you'll spend, as well as what you'll earn!