Low-Cost Investing: How to Save Money While Building Wealth

Investors typically try to boost wealth without shelling out investment fees that can lower returns. If this describes you, know that you're not alone. Luckily, low-cost investing strategies can help you save money while building your wealth. This article takes an in-depth look at some of these strategies.

Top Low-Cost Investing Strategies

Investing is rewarding and challenging, with many variables impacting your performance. Among these, investment costs play a pivotal role. These costs include fees, expenses and taxes, which can erode your returns and hinder compound growth. Explore these top low-cost investing strategies for building wealth to maximize your investment outcomes.

Understand the Power of Compounding and Long-Term Growth

Compounding, the process of earning interest on your interest, is a formidable force in saving money. It accelerates the growth of your money over time, potentially turning small amounts into substantial sums. For instance, investing $10,000 at a 5% annual interest rate for 30 years without compounding yields $25,000. However, with compounding, it almost doubles to $43,219.42. Being able to earn a consistent 5% interest for 30 years is unlikely, but you can see the power of compounding.

If you invest in the stock market, fees can erode your profits. To harness the full potential of growth, the best plan is to start early and invest for the long term. Time is the key to exponential growth. Equally important is minimizing investment costs. Lower fees mean more money to reinvest. Even a slight difference in fees can have a significant impact. For example, suppose you invest $10,000 in a fund that charges a 1% annual fee and earns a 10% annual return before fees for 30 years. After 30 years, you would end up with $132,676. 

However, if you invest in a fund that charges a 0.1% annual fee and earns the same return before fees, you would end up with $164,494. That's a difference of $31,818 or 24% more. Generally, cutting investment costs maximizes your compounding power, helping you save money while building wealth.

Choose the Right Investment Accounts

Reducing investment costs can be achieved by selecting the right investment accounts to align with your needs and objectives. Common types of investment accounts include:

• 401(k): A 401(k) is a retirement savings plan employers offer. This plan allows employees to contribute a part of their pre-tax income to invest in various funds. The benefits of a 401(k) include lowering your taxable income, tax-deferred growth of your investments, and employer-matching contributions. However, some drawbacks include limited investment choices, penalties for early withdrawals before age 59½ and mandatory withdrawals after age 72.
• IRA: An Individual Retirement Account (IRA) is a retirement savings account that anyone can open with a financial institution or brokerage firm. There are two primary types of IRAs: traditional and Roth. A traditional IRA allows you to contribute pre-tax income and enjoy tax-deferred growth until withdrawal. A Roth IRA lets you contribute after-tax income and enjoy tax-free growth and withdrawal. The benefits of an IRA include offering more investment choices than a 401(k), more flexibility in withdrawals and no mandatory withdrawals after age 72. Drawbacks include limiting your annual contribution amount, penalties for early withdrawals before age 59½ (except for Roth IRAs) and no employer-matching contributions.
• Brokerage account: A brokerage account is an investment account that allows you to buy and sell securities such as stocks, bonds, mutual funds and exchange-traded funds (ETFs). The main benefit of a brokerage account is that it offers the most investment choices and flexibility. Drawbacks include no tax advantages, taxes on capital gains and dividends and fees and commissions for transactions and account maintenance.

To choose appropriate investment accounts, consider your income level, risk tolerance, retirement plans, investment objectives, investment preferences and strategies. It's advisable to take advantage of tax-advantaged accounts such as 401(k)s and IRAs first. Diversify your investments across different types of accounts to optimize your asset allocation and tax efficiency. For example, you might invest in a Roth IRA for long-term growth stocks, a traditional IRA for bonds and income stocks and a brokerage account for short-term trading and speculation.

Explore Low-Cost Investment Vehicles

One of the most critical factors impacting investment returns is the cost of the chosen investment vehicles. Investment vehicles, which encompass stocks, bonds, funds and more, are the tools you use to invest your money. Some of these vehicles carry higher costs, which can erode your net returns over time.

For example, actively managed funds, led by a fund manager trying to outperform the market by selecting and trading securities, typically charge higher fees. However, research has shown that most actively managed funds fail to beat their benchmarks after accounting for fees and taxes. 

Consequently, opting for low-cost, passively managed funds, like index funds and ETFs, is often wiser. These funds offer diversification and low fees and aim to mirror the market's performance. Investing in such cost-effective, passively managed options can help you achieve more favorable returns in the long run.

Consider Robo-Advisers for Low-Cost Professional Guidance 

Robo-advisers, online platforms using algorithms and AI, offer cost-effective professional investment guidance. They personalize portfolios based on risk tolerance, goals and time horizon, handling tasks like asset allocation, rebalancing, tax optimization and performance monitoring. Robo-advisers can be ideal for beginners seeking easy and convenient investment entry, as well as experienced investors looking to save time and money with advanced tools. 

However, they have limitations, including a lack of emotional support and customized advice for complex situations, potential minimum investment requirements and limited investment options. To benefit from robo-advisers, select a reputable platform that aligns with your needs and expectations.

DIY Investing: Educate Yourself to Minimize Costs 

To save money while investing, consider a do-it-yourself (DIY) approach. This strategy entails taking full control of your investments avoiding external service fees or commissions that may eat into your returns. However, DIY investing necessitates self-education on investment basics, strategies and research. You must learn how to manage risk, diversify your assets and monitor performance. 

Numerous resources and tools are available to help you learn about investing without incurring advisory fees, including books, blogs, podcasts and newsletters for insights and tips. Online courses, webinars and videos offer education on investment fundamentals and techniques. Free or low-cost tools, such as calculators and platforms, can aid in planning, executing and tracking your investments. Self-education not only saves money but also enhances your skills and confidence as an investor.

Beware of High Fees and Hidden Costs 

Avoiding high fees and hidden costs is a vital low-cost investing strategy. Fees like expense ratios, sales loads, transaction and advisory fees can significantly impact your returns over time. 

Therefore, you must carry out thorough research and compare fees and costs for different investments. Stay vigilant about hidden fees or charges that might not be transparent initially. Reading the fine print and seeking clarification when unsure will help preserve your investment returns.

Best Low-Cost Brokerage Accounts 

If you are looking for a low-cost brokerage account to start or expand your investments, you may want to consider some of these options.

Low-Cost Investing Strategies for Optimal Returns

Achieving your financial goals is a strategic path that involves maximizing investment returns while minimizing costs. By understanding the power of compounding and choosing the right investment accounts, you can place yourself on a sure footing to build wealth faster. However, you should keep an eye out for high fees and hidden costs that can silently erode your returns over time. With careful planning and attention to fees, you can make the most of your investments and reach your money goals.

Frequently Asked Questions