In this video I want to show you the power of compound interest and the impact of fees on your investments. So in this particular example we’re going to take a look at three different friends who all invest hundred thousand dollars when they’re 30 years old they decide to put it in their investment for 30 years and so we want to see how much each would have after 30 years at 60 years old so assume that each one of them gets an annual return of seven percent.
So here we have Andrew who has a management expense ratio of three percent for his investments, so a mutual fund for example, and so betty will have a management expense ratio slightly better of two percent and then Charles has a management expense ratio let’s say he has an ETF of just one percent so the difference is doesn’t seem like a lot just one percent between each one of these.
But the difference is for Andrew he’s gonna have seven percent minus three percent fees of four percent. Betty is going to have seven percent return minus two percent fees which is five percent, and Charles is going to have seven percent return minus one percent which gives him a net return of six percent.
So let’s go into our calculator here so you can go into Google and you can just search for “compound interest calculator” and then you can just pull up any of the calculators on Google so I’m going to use the one here on investor.gov which is the U.S. Securities and Commissions calculator, but any calculator will do.
So we’re going to plug in the investment the initial investment of a hundred thousand dollars and let’s say they’re not going to do monthly contributions and for the length of years in time it’s going to be 30 years and then the estimated interest rate so we’re going to do Andrew first so he has a four percent net annual return so we’re gonna put four percent here and then we’re going to set the compound frequency to annually. So once you click calculate you’ll see that Andrew has $324,000 or so the 30 years.
So now let’s go over here and let’s go take a look at Betty here so Betty has a five percent net annual return so we’re going to change this four here to a five and everything else stays the same I’m going to click calculate and you’ll see that betty has in 30 years $430,000 so you can see already that’s going to be huge difference over 30 years that Betty is going to have more than a hundred thousand dollars more than Andrew.
And let’s do Charles as well so Charles is going to have a net annual return of six percent and if we click calculate you’ll see that Charles is going to have $574,000 so over the long run it really makes a big difference the compound interest.
So even if you have just a one percent difference in fees you’ll see that you’re gonna gain over a hundred thousand dollars more over 30 years so obviously Charles has the best amount of money after 30 years because he only had one percent of management expense ratio which gives him an annual return of six percent versus Andrew who has a net annual return of only four percent because his management expense ratio is really high for his fund which is he only has $324,000 so basically the difference is like $250,000 which is like a quarter of a million dollars over 30 years.
So that’s why it’s very important to look at your fees and it makes a huge difference to your investment portfolio over the long run.
So that’s why you have to be very very vigilant about picking a fund that has a low fee this is very very important as you can see with this example here you could have a quarter of million dollars more just by picking a low fee fund.
Hopefully this video was helpful.
Calvin K. Lee Author 