Not long ago, I made a post about how actively managed funds, like Betterment, are better than not investing at all. Indeed, they will lead to a better future.
Now, for the record, I haven’t changed my mind: I still think they are better than nothing. Still, though, I am always looking for ways to improve, and my finances are definitely one main target of that agenda.
To be totally honest, I was content with Betterment for a few years. But now that I am starting to look at my finances more closely, I realized I needed to make a change. Plus, I started to find some really good resources that give specific, sensible recommendations for what I should probably be doing.
Why fees matter
Recently, my sister found ChooseFI and linked me to some of their podcasts. If you’re new to the concept, FI = financial independence. ChooseFI was started by two guys, and they give some really good personal finance tips. In fact, this podcast is the main reason I decided I need to do everything I can to minimize fees on my investments as much as possible.
The thing that really struck a chord with me was when they got into the granular numbers involved with fees.
The short version is that they compared investing $100,000 with a 0.05% fee to investing that same $100,000 with a 1% fee. In either case, they didn’t have any additional contributions. The difference after 40 years? Over $600,000.
Okay, so the numbers I personally would be dealing with wouldn’t be that dramatic. Still, though, the takeaway for me was that I can, and should, do better. And you should too!
Lower fees, more diversity
I must admit that investing is complicated – to say the least. However, I’ve been soaking up other sources on this topic, such as this podcast from Paula at Afford Anything. The fund she mentions and the one the guys at ChooseFI honed in on is the same: VTSAX.
What is VTSAX? That would be Vanguard Total Stock Market Index Fund Admiral Shares. I bet you can already guess why people typically just refer to it as VTSAX!
In any case, VTSAX has an extremely low expense ratio of 0.04% (which is a slight discrepancy compared to what the ChooseFI podcast mentioned).
With this fund, you are essentially owning a tiny piece of the entire stock market – that is, 3,646 stocks are captured in this one fund.
The biggest downside for many people with this fund is that the minimum investment is $10,000.
What if I don’t have $10,000?
That is a great question, and actually, at the time of typing this post, I am actually starting with less than that myself. As a sort of stepping stone, I will be probably be investing in the Vanguard Total Stock Market Index Fund Investor Shares(VTSMX). This fund has a minimum of $3,000 and the expense ratio is 0.15%. Otherwise, it nearly identical to VTSAX.
If you’d like to learn more about VTSAX, this post, while a bit dated now, gives some good info.
$3,000? Who has that kind of money lying around?
I can see this being a question as well. The reality is that a large portion of people simply don’t have that kind of money lying around. And that’s okay. We all have to start somewhere. What’s important is being willing to change your financial picture.
That said, for some, increasing your income and/or reducing your expenses may be a must. Those topics are the subject of their own posts entirely, but I did cover some ways to cut down on expenses in an earlier post. I do intend to cover ways to make extra money in the future, so stay tuned for that!