We are all in this game to earn some significant money. However, so are the brokers and other facilitators. They will try to make money off of your money! Which is okay up to some point, as long as the benefits they provide outweigh the costs.
As we’re trying to make use of compounding growth, it is important to keep the costs of the investment process as low as possible. This way, you have more money left to actually put to work.
Type of costs
There are two type of costs: initial costs and recurring costs.
Initial costs are costs that you pay only once. An example is buying a new car. Recurring costs keep coming back. Day after day, month after month, year after year. To stick to the example, gasoline is a cost that is recurring. So is insurance.
While initial costs might be high (lets say, €10,000), the effect of recurring costs might be worse (300 a month for insurance and gas surpasses the initial costs already after 3 years (€10,800) !
Therefore, it is imperative to keep recurring costs to a minimum. A daily coffee at a street corner. A monthly subscription to magazines. These recurring costs are often related to habits that we have. And habits are hard to change, so lets not start any bad spending habits.
Why should we keep the costs low?
As shown, our expected 30 year growth rate is 6.7
That means, one euro that we save today, will give us back 6.7 euros in 30 years.
Instead of spending money a fancy dinner only once this year, we can use that invested money and treat ourselves to 6.7 fancy dinners per year in the future!
As you can see, it pays to keep one-time costs to a minimum. Current one-time costs have cost to 6.7 times as much, 30 years from now!
Saving 10 euros per month on transaction fees, doing 12 transactions per year, saves you 120 euros per year. In 30 years, this saves you 3600 euros. Including half the growth factor (as those euros are compounding on average 15 years instead of 30) That saves you (3600 x 3.35 =) 12,020 euros….! woah!
Saving 1 recurring euro per year, adds up to 30 individual euros saved over 30 years. including half the growth factor (as those euros are compounding on average 15 years instead of 30), that saves us (30 x 3.35 =) 100.5 euros!
Reducing recurring costs pays BIG TIME! Recurring yearly costs will have costed you 100.5 times as much, 30 years from now.
So, we now know that it is imperative that we keep costs to a minimum. Rule number 1 is no surprise.
Rule #1: keep (recurring) costs low
We should apply this to our everyday life, but also to our investing decisions:
- Use a low cost broker, without recurring fees. Generally, brokers with only transaction fees are cheaper than brokers with only management fees.
- Dont buy (or sell) funds too frequently, to keep transaction fees to a minimum
- Invest in a low cost index fund, to keep recurring costs to a minimum
because of this rule, I will:
- Invest with Binck Bank. As they only charge transaction fees.
- Invest at least €1000 per transaction.
- Mainly invest in Vanguard ETF’s, as they are very low cost (0.05% – 0.2%).
What do you tell yourself to keep yourself from spending money on things you don’t need?
What ways do you keep investing costs low?