Tag Archives: 401k

The Biggest Investment Mistake I Ever Made

When I finally started making enough money to invest beyond my 401K or emergency savings account, I was so excited to get started that I committed the cardinal sin of novice investors: I succumbed to transaction fees.

There I was, knowing darn well that transaction fees can seriously erode the value of your investment – but doing it, anyhow. Call it laziness, willful ignorance, or the hazy hope that somehow the rules of investing simply didn’t apply to me. Anyway you cut it, I was shooting myself in the foot every time I clicked the “trade” button and another $7 went out the window.

Investing Fees Hurt More Than You Think

If you think I’m over-reacting, bear with me for a second here as I demonstrate a simple example. Let’s say I invested $100 in stock of ABC company, paying $7 in transaction costs. That would mean the value of the stock would need to rise 7% just to cover the transaction fee. Ouch.

I was so eager to invest my money in the market, that after every paycheck I’d do it again, and end up paying too much just for the sake of buying stock or ETFs. After all, $7 here or there didn’t seem like that much money.

But my poor little investment account was suffering under the burden of transaction costs. And I wondered why I wasn’t seeing the numbers grow more significantly.

401Ks Suffer, Too

This problem isn’t limited to online brokerages or individual investment accounts, either — 401Ks, mutual funds and many other investments carry fees, as well. MSN Money created a chart demonstrating how the simple “little” one or two percent fees many of us pay on 401Ks, for example, can seriously damage your future wealth.

For example, a worker investing $5k per year for 40 years into their 401K would have over $878,000 if their fees were 0.5%, but only $475,000 if they paid 3% fees.

The Solution

The first thought that came to mind when I realized how much my investments were struggling against transaction fees was to invest less often, so that I’d have fewer transactions, and save on fees.

But that’s not a good solution, because I knew that the time value of money was important — that the sooner I invested my money, the faster it’d grow. Plus, I wanted to invest regularly and “pay myself first”.

So, I started searching for online brokerages with lower costs, and what I found surprised me:

First, trading on many ETFs is free, depending upon the broker. Charles Schwab, TD Ameritrade, and Fidelity, amongst others offer free trades on several of their most popular ETFs. They’re a good alternative to index mutual funds (such as funds that track the entire stock market, or particular sectors therein).

Mutual fund trades can also be had for free, but usually only when it’s the online broker’s own fund. The benefit of this, however, is that it also makes automatic investing possible. For example, you can set up an automatic investing account with Vanguard to invest regularly in Vanguard mutual funds, thereby helping you remove a barrier to investing.

Read the Fine Print

While these are great ways to eliminate or significantly reduce the burden of transaction fees on your investments, they do come with a few caveats. You should be aware that in many cases, you’ll be limited to a certain number of transactions per month, making it difficult for you to actively trade or change your positions frequently.

You’ll also need to take note of other fees and expenses – such as any administrative costs or processing fees. Fees are fees and they can all eat into your investments.

Finally, you should be aware that not every ETF or mutual fund may be available commission-free — and that this may be used to entice you to purchase funds that do carry fees. It’s possible to construct a well-diversified portfolio on commission-free funds, alone, but it’ll take a little research(more on this later).

Still, I’ve saved hundreds of dollars in fees and taken some of the weight off my investment account. It’s now climbing the financial returns hill a little more quickly.

Have you had success with no-commission funds and trades? Share your experience below!




DOMA’s Gone! Here’s What it Means for Gay Couples’ Finances

flagAfter the Supreme Court’s historic 5-4 decision today striking down the constitutionality of The Defense of Marriage Act (DOMA), married gay couples can enjoy many of the same benefits and legal recognitions of their heterosexual counterparts. This is news worth celebrating, since it’s not only a historic step toward equality, but also of great benefit to gays’ financial futures.

Some of the immediate benefits include the ability for married couples to file taxes jointly and an elimination or reduction of the estate and gift taxes — all of which can result in thousands in savings.

It’s worth keeping in mind, however, that DOMA’s repeal currently only benefits same-sex couples in states that already legally recognize such marriages. Still, because more states are likely to approve gay unions in the coming months and years — and further Supreme Court decisions may emerge — non-married gay couples should take action to protect joint finances.

Here’s what gay couples should do to take advantage of their new protections:

Create a Will

It sounds simple (and perhaps a little morbid), but many gay couples haven’t yet contemplated what will happen to their estate upon their passing. That’s a shame, because it was at the heart of the issue that brought the landmark DOMA case before the Supreme Court: The spouse of a deceased gay person was required to pay hundreds of thousands of dollars in additional taxes because they weren’t an officially recognized spouse.

If you don’t have a will, get one – and make sure your spouse or domestic partner is listed as you wish. A living will is also useful if you intend for your spouse or partner to make decisions for you in the event of catastrophic illness, or if you wish to have them serve as executors of your estate/power of attorney.

Though the laws regarding domestic partner benefits are more nebulous, there is reason to believe benefits will soon (or eventually, anyway) be extended. Plus, even states that don’t yet recognize gay marriage may do so in the future. Consult with an attorney about the legal nuances here; you’ll want your will to have the best odds of treating your spouse or partner as the recipient of your inheritance (or whatever portion thereof you intend).

Notify Your Employer 401K  and/or Insurers

Notifying your employer and/or insurers of your same-sex marriage or domestic partnership is important if you intend on sharing insurance benefits or listing a spouse or domestic partner as beneficiary.

The same applies for your 401K and IRA — make sure your loved one is listed as beneficiary, and update their status if you marry or enter a civil union. Inquire with your individual plans about their same-sex policies.

Get Married

If you were already planning on doing so, getting married makes more sense than ever now, since you will receive the full protections under the law. Domestic partnership recognition offers weaker protections in some jurisdictions, so it’s to your advantage to marry, if possible. Even if you don’t live in a state that recognizes same-sex unions yet, it may be to your advantage to get married in one that does. That marriage may be recognized in your home state sooner rather than later, and the benefits of DOMA may even apply to you. (Such legal nuances have yet to be worked out. Stay tuned to the news and consult with an attorney, as needed.)

Create Joint Accounts

Creating or updating joint financial accounts — such as credit cards, brokerage accounts, and so forth — can establish a pattern of financial “legitimacy” that can be of benefit if you live in a state without strong same-sex union protections. If you already have such accounts, be certain to list your significant other as beneficiary. If you choose to marry out-of-state, it may be to your benefit to open joint accounts there, since those states may afford your account greater protections.

Update Your Mortgage or Lease

Ditto here for updating your mortgage or lease with your spouse’s or partner’s name and legal status, should you wish to share their associated priviliges and responsibiilities.

Tell Your Friends and Family

Make sure your immediate circle knows of your relationship status; in case anything happens to you, they can be aware of and support your wishes by corroborating your relationship’s significance.

Stay Informed

Laws, right and responsibilities regarding gay unions are evolving rapidly, so stay informed. Most states’ ACLU websites can be of help, as can local gay rights organizations. Keep up to date on the important changes that impact your life together — and your pocketbook.

From the Five Ten Twenty Club, congrats on this historic win!


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