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Debt Investing

When Compound Interest Empties Your Wallet

“Compound interest is the 8th wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”

– Albert Einstein

Compound interest is a financial concept I really, really wish was emphasized more in the United States’ education system.  Of the many subjects taught in school, all of them with some value and most of them with a good deal of value, personal finance would benefit all students (and probably most teachers).  A good friend and mentor summarized our shared view regarding the lack of personal finance curricula in formal education: “Why do we spend 12 years in first through twelfth grades, then four more years in undergraduate education, and sometimes several more in additional schooling learning to be better workers only to graduate and have no idea how to manage the money we make?”

The first time I recall a teacher in a formal school setting emphasizing the power of compound interest was in graduate school in an MBA finance class where the teacher, thankfully, spent his first class providing students two hours of personal finance education.  While I was well aware of the power of compound interest by the time I entered the MBA program and had also spent many years investing by then, I was also aware that many people see personal finance as overly complex, so I was glad the rest of the class was getting this lesson.

Compound Interest Giveth

As I wrote previously in Part 4 of the Personal Finance Foundation series, compound interest is a powerful tool for growing wealth over time. Investing money at a given interest rate over a given amount of time can produce huge growth.  Increase either the interest rate or the amount of time the money is invested, or, better yet, increase both, and you’ll see enormous transformations.

Example 1: Roth IRA, $6,000 contributions, 30 years, 6% interest

The 2020 IRA contribution limits allow you to contribute $6,000 annually.  If you were to contribute $6,000 annually for 30 years and receive a return of 6% annually, in 30 years you would have $508,810.06.  Note that of this amount, $186,000 are contributions you made and the remaining $322,810.06 is interest earned.  I want to emphasize that the $322,810.06 is money your money earned for you, and is not money you traded time, energy, sweat, or tears for.

Example 2:  Roth IRA, $6,000 contributions, 30 years, 8% interest

Holding all things equal (maintaining the $6,000 annual contribution for 30 years) and raising the rate of return to 8% would result in you having $740,075.21 at the end of 30 years.  This is $231,265.15 more than the amount you would have in the previous example.  The power of even a slightly larger interest rate invested over time is clear in this example, as just a 2% increase in the rate of return results in a huge difference.

If you use recognize that the maximum allowed contribution to IRAs has increased over time, it stands to reason that in the future you could increase the $6,000 contribution you’re making, resulting in larger returns over time.  Further, the 6% and 8% interest rates I used are below the average rate of return for the S&P 500 stock index for the past 30 years.  With dividends reinvested, the 30 year annualized return for the S&P 500 is 9.4% as of May 10, 2020.  I purposely chose the more conservative 6% and 8% rates of return because I prefer to estimate my returns conservatively.  In other words, I’d rather play it safe in estimating how much money I may have in the future rather than relying on too high a rate or return and then finding myself without enough cash in the future.

While compound interest can grow your net worth immensely over decades, it can also be an immense drain on your financial health.  Here’s how.

Compound Interest Taketh Away

A prominent financial voice and personality has often spoken of the ease of finding investments that reliability generate 12% interest.  While I find his claim questionable, there is a financial liability that can drain you of money at a much faster rate than 12%, guaranteed:  Credit cards.

I use multiple credit cards that give rewards for spending and they have a range of interest rates from 9.9% on the low end to 17.99% on the high end.  The card charging 9.9% was issued by a credit union and the 17.99% interest rate belongs to a Chase cash back credit card.  While we as savers and investors seek saving and investment vehicles that produce the largest interest rates, it’s also important to consider what we do when we carry credit card balances:  We choose to pay credit card companies interest rates that are much higher than we can (most likely) find on our own in investment vehicles. I’m going to walk through a couple of examples to demonstrate the amount of money you hemorrhage by carrying balances on credit cards from month to month.

Example 1:  A credit card with a 9.9% interest rate, a $10,000 balance, and an $84 minimum payment

If you have a credit card with a 9.9% interest rate, a $10,000 balance, and pay an $84 minimum payment until you pay off the credit card, you’ll get the following results:

Expected payoff time:  490 months (about 41 years)

Interest paid:  $31,154

Insane!  $31,154 of interest.  You can see how people trying to get out of the credit card debt hole by making minimum payments, or close to minimum payments, often feel like they’re on a hamster wheel, barely able to make progress.  Also, look at all that interest paid to the credit card companies that, alternatively, could have stayed in your pocket had you either paid off your balances immediately or had you paid them off much sooner.

Example 2:  A credit card with a 17.99% interest rate and a $10,000 balance

If you have a credit card with a 17.99% interest rate, a $10,000 balance, and pay a $150 minimum payment until you pay off the credit card, you’ll get the following results:

Expected payoff time:  504 months (42 years)

Interest paid:  $65,558

Again, if you only pay the minimum payment on a credit card, you’re going to spend a very long time paying off the balance.  Granted, the examples above use a static minimum payment while you pay off the balance rather than adjusting the minimum payment based on a percentage of the balance, but the takeaways are the same:  You need to pay more than the minimum payment on credit card debt, otherwise the interest you’ll pay will be outrageous.  In this second example, consider that the $65,558 in interest is cash credit card companies are earning in their “investment” with a rate of return of 17.99%, all at your expense.

Getting Out of Credit Card Debt

Call your credit card company, explain your situation, and ask if you can have a lower interest rate.  Especially during the pandemic, credit card companies are more likely to be empathetic, as they’d rather have customers providing them cash flow rather than customers unable to pay.  Even if the credit card companies aren’t able to lower your rate, you’ll only have expended a short amount of time to call them, so make the call.

Identify spending that isn’t needed.  If you’re not doing so already, track your spending with a budget or cash flow plan.  I have a cash flow plan template you can download here in Microsoft Excel format.

There are plenty of other tools you can use for budgeting or cash flow planning, but your end goal should be to identify spending that isn’t needed.

Stop using credit cards and start paying the balances down.  There are two popular strategies for paying down credit cards:  Paying off cards with the smallest balances first in order to generate quick wins and to generate the associated emotional rewards (this is often referred to as “The Debt Snowball”), or paying off credit cards with the highest interest rates first (this technique is often referred to as “The Debt Avalanche”).  Mathematically, the second plan of attack is best, but humans aren’t purely mathematical creatures, especially when it comes to personal finance.  Both strategies have their merits.

Takeaways

  • Pay off credit card balances every month.  This prevents interest from accruing at enormous interest rates.
  • If you’re working on paying off credit cards, strongly consider paying off credit cards with the highest interest rates first.
  • Interest you’re paying toward credit cards is lining the pockets of credit card companies.  Consider how you can pay yourself instead, namely through saving and investing, and grow your net worth.
  • Once you’re done paying down credit card debt, build a habit of saving cash for large purchases so that you don’t jump on the hamster wheel again.
  • Even better:  Once you build up cash savings for large purchases, consider how you can start using excess cash for investments so that you can reap the benefits of compound interest.
References

I used a calculator from Credit Karma’s web site to calculate payoff times.  This web site also provided the great visuals.

Categories
Debt Investing Saving

Three Lessons from The Millionaire Next Door

The Millionaire Next Door is my favorite personal finance book because of three life-changing lessons it imparts, all supported by mountains of research data gathered and analyzed by two professors, Thomas Stanley and William Danko.  These lessons provided me with a financial enlightenment when I was first learning the basics of personal finance, and I suspect many of you will find at least one of them encouraging, challenging, or both.  These lessons taught me to have a new attitude regarding personal finance, and I hope they do the same for you or your loved ones.

Lesson 1:  The majority of millionaires differ radically from what the media and marketers have you believe.

I grew up on a steady diet of TV and, as you know, advertisers and marketers feed you a stream of images and depicting what the rich are supposed to look like.  Of course, their message equates buying their products and increasing consumption with living like a millionaire.  The Millionaire Next Door shatters the notion that the average millionaire consumes the latest and greatest.

In reality, the average millionaire lives a nondescript life and lives in an average neighborhood. This is logical, as over-consuming would lead one to have less money to save an invest.  Stanley and Danko acknowledge that deca-millionaires, the extremely rich, can afford to consume and live up to the images portrayed by advertisers, but this segment of the population is extremely small.  You are more likely to find the ex-millionaire who has spent their fortune away than you are to find a deca-millionaire who can afford to live an extravagant lifestyle.

Lesson 2:  You will not acquire financial independence as long as your sole source of income involves trading time for money.

Many Americans grow up with the idea that working an 8-to-5 is the only way to pay for life. This mentality is one I grew up with and fails to consider what happens if injury, chronic illness, or another circumstance interrupts your employment.  More importantly, this mentality forgoes any consideration of financial independence, as it assumes one must be an employee their entire life in order to sustain a lifestyle.

You will never acquire financial independence without acquiring assets that appreciate without realized income.

-The Millionaire Next Door

Having assets (savings, investments, businesses, etc.) work for you allows you to achieve financial independence as these assets working for you reduce or remove your dependence on realized income (income you earn via employment).  The more assets you have working for you, the more likely you are to achieve financial independence more quickly.  Think of Dave Ramsey’s debt snowball here, but instead of debt, consider an “asset snowball.”

Lesson 3:  The American dream is alive and well.

We’ve all heard in the media many times that it’s impossible for the little man to get ahead, with stagnant wages, a tepid economy, and any number of other reasons.  The Millionaire Next Door provides all Americans with hope:  The vast majority of millionaires are first generation millionaires, having built their fortunes without the benefit of an inheritance.  That’s right, most people who become millionaires are not trust fund babies and do not have a leg up on the rest of us.  The majority of them live below their means, save, and then invest their way to wealth. The American dream is indeed alive!

Categories
Debt Investing Retirement Saving

Psychology and Fear in Personal Finance

Be fearful when others are greedy.  Be greedy when others are fearful.

-Warren Buffet

Warren Buffet is one of the most successful investors of recent times and provided this great quote in 2008 during the height of the subprime mortgage crisis.  During the 2007-2009 bear market, the S&P 500 lost over 50% of its value and many people close to retirement had to delay their exit from the 9 to 5.  In hindsight, as we sit in the middle of a bull market in 2016, Buffet’s quote is great advice, but how are you supposed to separate yourself from emotion when your nest egg loses over 50% of its value?

S&P 500 2007 - 2009 Bear Market
S&P 500 2007 – 2009 Bear Market (courtesy of Yahoo Finance)

There is no easy answer here, as personal finance is indeed personal, but you can certainly make good, informed decisions in the middle of emotionally charged circumstances.  Buffet was right about the subprime mortgage crisis and the need to buy while prices were low (i.e., while the market had lost lots of its value).  He likely looked at the history of the market and understood that it would bounce back.  As of September 16, 2016, the S&P 500 sat at 2,139.16 versus its lowest value during the subprime mortgage crisis of 676.53 on March 9, 2009.  As you can see, the market has more than returned.

S&P 500 - 2007-September 16, 2016
S&P 500 – 2007-September 16, 2016 (courtesy of Yahoo Finance)

How do you disarm fear and anxiety in personal finance?  Educate yourself.

Peace I leave with you; my peace I give to you. Not as the world gives do I give it to you. Do not let your hearts be troubled or afraid.

John 14:27

How should you manage fear and anxiety when making financial decisions?  Start with education, then don’t stop educating yourself.  Read personal finance books (I highly recommend The Millionaire Next Door), visit personal finance blogs (Afford Anything is my current favorite), and listen to personal finance podcasts (Marketplace is great for keeping up with current financial events; Afford Anything has a great podcast, too).  I’ve found that I pull pieces of information from each of these sources and, as a result, have molded a personal philosophy.

The key lesson here is that education will help you see that American equity markets have more than recovered from the multitude of previous crashes and bear markets.  Buffet understood this and saw that equities were simply on sale.

How else do you disarm fear and anxiety?  Understand risk and reward.

I recently listened to a personal finance podcast where I heard an interesting anecdote involving fear.  A caller indicated they hadn’t invested in the stock market for retirement due to their fear of losing money.  While the caller certainly is correct that avoiding the stock market and investing in something safer, like CDs or cash, will help you avoid risk and the large losses that can accompany risk, he is also missing the other half of the equation:  In finance risk is necessary for growth.

While the caller will seemingly preserve capital by avoiding the volatility of the stock market, their capital will erode over time due to the effects of inflation.  The eroding power of inflation will decrease buying power if not offset by gains.  One option for generating more gains than cash but experiencing less volatility than the stock market is the bond market.  The bond market, though, experiences a good amount of volatility, too.

While someone can certainly go to sleep peacefully knowing they will avoid the volatility of the stock market and keep their money safe (at least until inflation eats away at it), it would be rash to do so without being aware of the rewards that accompany carrying risk.  Over the past 30 years (specifically from January 1, 1985 through December 31, 2015), the compound annual growth rate of the S&P 500 was 8.2% with dividends reinvested and adjusted for inflation.

S&P 500 - CAGR for past 30 Years
S&P 500 – CAGR for past 30 Years (courtesy of MoneyChimp.com)

As you can see, $1 invested in an S&P 500 index fund on January 1, 1985 would have returned over 1,100% in 30 years.  While I can see how avoiding significant losses would allow someone to sleep peacefully, avoiding a significant amount of the S&P’s gains during this time period would cause me to lose sleep at night.  My advice to the caller:  Educate yourself about risk and reward, then understand how accepting additional risk could result in your nest egg multiplying in size.

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Investing Saving

Investment+Savings Challenge

One of my personal financial goals is to become financially independent.  For those unfamiliar with the term, I define financial independence as follows:  A state in which financial assets generate sufficient income to pay for a chosen lifestyle.  In layman’s terms:  More assets = good, combined with fewer expenses = better.

Financial Independence = Passive Income Generated by Assets > Expenses

I am seeking financial independence so that I will have the freedom to walk away from my current or future job should I need or want to in the future.  One example of when I would potentially want to walk away from my job:  My spouse and I have a baby and we decide that my staying home with the child is our preferred option for care taking.  While I absolutely love my job and my career, financial independence allows for many options in the future that being tied to a 9 to 5 does not.

One key step in achieving financial independence is increasing investment and savings rates. Not only does this increase the amount of assets you have working for you by generating passive income, but you decrease your expenses, thereby accelerating the journey to financial independence.

I’m going to start tracking my investment and savings rate on this site, starting with August 2016.  My investment+savings rate is based on my *gross* income.  Also, I’m including in gross income my employer’s 401(k) contribution, as they give me a portion of my salary each month.  This isn’t a match, but a contribution to my 401(k), so I view it as income and include it in my gross income so that my savings+investment rate isn’t disproportionately inflated by this contribution.

August 2016:  40.29%

 

 

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Investing

Considerations for Investing as a Catholic, Part 2

In my previous post regarding things Catholics should consider when investing, I spoke about one mutual fund family (Ave Maria Mutual Funds) as an example of a fund family that offers investments that abide by United States Council of Catholic Bishops (USCCB) guidelines.  There are certainly other fund families that abide by USCCB guidelines and I wanted to mention some of them here.

Note:  I do not currently have money invested in Ave Maria funds nor in any of the other fund families I am about to mention.  Yes, you’re right:  As a good Catholic, I should strongly consider moving my money to somewhere other than the Vanguard funds where my IRA money currently sits.  I am searching for a good Catholic mutual fund with low fees, so if you know of any, let me know!

Luther King Capital Management (LKCM) has the LKCM Aquinas Catholic Equity Fund (AQEIX) that abides by USCCB investment guidelines.  The fund, though, has consistently under performed its category average.  Its expense ratio of 1.50% makes it a very expensive fund to hold.

Epiphany Funds has three funds to choose from, all of which have high total expenses.  These funds are very small and this is likely the reason for the high expenses.  The Epiphany Fund family

Index Fund Advisors provides a list of Catholic index funds on its web site.  I do not see ticker symbols for these, so I am not able to judge their performance very well, although they appear to perform relatively well.  The expenses for investing with IFA appear to be significant (0.90% annually for accounts with less than $500,000, plus quarterly fees), so be aware.  I like the variety of target date funds IFA provides, as this makes it easier for investors of any age to find an index fund suitable for their stage of life and risk tolerance.

As I mentioned in Part 1, high expenses are the norm for Catholic mutual funds and are the price we pay, at least for now, to abide by USCCB guidelines. Until these Catholic funds gain more assets under management, these high expenses will likely continue.  In the meantime, if you choose to invest in any of these funds, give yourself a pat on the back.

USCCB Socially Responsible Investment Guidelines:  http://www.usccb.org/about/financial-reporting/socially-responsible-investment-guidelines.cfm

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Investing

Considerations for Investing as a Catholic

In a previous post I recommended investing in index funds in order to minimize expenses and better increase your nest egg.  Unfortunately, though, many of the companies contained within a standard index fund conduct activities that are in opposition to Catholic teaching.  For example, the owner of Rick’s Cabaret strip clubs, RCI Hospitality Holdings (RICK stock ticker), is held by, among others, Vanguard Total Stock Market Index Fund (VTSMX and VTSAX).  When you purchase shares in VTSMX or VTSAX, you purchase fractions of shares in the owner of Rick’s Cabaret.  So what is a Catholic to do?

Educate yourself regarding Catholic investing guidelines and make informed decisions.  The United States Council of Catholic Bishops (USCCB) released “Socially Responsible Investment Guidelines” in order to provide guidance on this topic:

USCCBhttp://www.usccb.org/about/financial-reporting/socially-responsible-investment-guidelines.cfm

In summary, we have a moral responsibility to avoid investing in organizations that operate in opposition to Catholic teaching.

But, how is a person supposed to navigate through the hundreds or thousands of funds an index fund, much less multiple index funds, invest in?  Thankfully, Catholic mutual funds exist and do this work for us.  Ave Maria Mutual Funds is an example of one of these companies and Ave Maria has two funds, the Ave Maria Rising Dividend Fund (AVEDX) and the Ave Maria Growth Fund (AVEGX), that are rated well by Morningstar.  The 0.92% expense ratio for AVEDX and the 1.17% expense ratio for AVEGX are very high, though, in comparison to Vanguard’s fund lines.  Working against Ave Maria in this case are the active management they have to perform for both funds, as fund managers must weed out non-Catholic organizations, and the sheer size of Vanguard funds, as Vanguard can drive their expense ratios lower (VTSAX has an extremely low expense ratio of 0.05%!!!) due to VTSAX’s $141 billion in holdings versus AVEDX’s $789 million in holdings.

Catholic investors can look at the 0.85% difference in expense ratios between VTSAX and AVEDX and know that the extra money they are paying is helping to build the kingdom.  That being said, I really wish Ave Maria would consider lowering their expense ratios, as the extra 0.85% in expense makes a huge difference over time.

If you were to invest $10,000 into VTSAX with no future investments, a 7% rate of return, and the 0.05% expense ratio, in 30 years you would have $74,989.  (Calculations done on calcxml.com)

Investing in VTSAX

 

If you were to invest the same $10,000 in AVEDX with no future investments, a 7% rate of return, and the 0.92% expense ratio, in 30 years you would have $57,689.  That’s a difference of $17,300 when your investment compounds over 30 years.  That extra 0.85% in expenses wasn’t so small after all.

Investing in AVEDX

 

Unfortunately, until Ave Maria Mutual Funds has more money under management, it will likely not be able to leverage economies of scale in order to reduce expenses.  We meet our initial goal, though, of putting our money into investments that comply with Catholic social teaching, and this is certainly worth some extra expense.

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Investing Retirement Uncategorized

Why You Should Use Index Funds in Your Retirement Accounts

When I first started learning about investing and retirement accounts, I struggled to determine where I should invest my money.  Thankfully, several great personal finance web sites (including Motley Fool and Bogleheads) agreed that investing in index funds led to the most benefit for most people.  Index funds are mutual funds that track what is called a market index, like the Standard and Poor’s 500, and maintain small slices of companies in proportion to the companies’ share of the index.  For example, if Apple currently makes up 2% of the S&P 500, an S&P 500 index fund would place 2% of its holdings in Apple.

Why is indexing preferred over investing in actively managed funds, where fund managers buy and sell stocks on a frequent basis?  The frequent buying and selling of stocks generates commissions for the fund managers and their companies (this is your money going to pay the fund managers).  Additionally, there are often fees associated with the initial purchase of actively managed funds.  At the end of the day, actively managed funds must increase in value not only to match the gains of index funds, but also to cover actively managed funds’ much higher expenses.

Study after study indicates that index funds outperform actively managed funds:

http://www.cnbc.com/2015/06/26/index-funds-trounce-actively-managed-funds-study.html

http://www.usatoday.com/story/money/personalfinance/2016/03/14/66-fund-managers-cant-match-sp-results/81644182/

https://www.bogleheads.org/forum/viewtopic.php?f=10&t=88005

I recommend Vanguard Funds (www.vanguard.com) for index funds, as Vanguard’s funds have the lowest expense ratios.  One fund that is highly recommended by many proponents of indexing is Vanguard’s Total Stock Market Index Fund (VTSAX), which has an extremely low expense ratio of 0.05%.  In comparison, many actively managed funds have expense ratios of over 1.00%.  While this extra percentage point may not seem like a lot, when compounded over time, this extra 1.00% may result in you paying fund managers tens of thousands, if not hundreds of thousands, of dollars that could have been used to grow your retirement nest egg.

 

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Dave Ramsey Debt Investing Retirement Saving

Great Personal Finance Podcasts

One of my favorite things to do on long drives is listen to personal finance podcasts.  There are a handful that I have found (so far) to be better than the rest:

My favorite podcast is Afford Anything with host Paula Pant, as she combines an entertaining delivery with great guest speakers.  Paula encourages listeners to both increase their incomes while decreasing their expenses (increasing the “gap”).  Her focus on increasing income differentiates her from many, many other personal finance bloggers who put a great focus on limiting expenses and frugality.  I certainly think both are important, but Paula’s focus on making the gap bigger blows past the flawed binary view on many blogs that we should focus on either increasing income or reducing expenses, but not both.  Paula provides a ton of insight, too, into real estate investing.  I definitely, definitely recommend the Afford Anything podcast.

The Mad Fientist podcast focuses on reaching financial independence.  The Mad Fientist provides some original (to me) ideas:  How to use a health savings account (HSA) as a “super IRA” account; how to minimize taxes when investing in retirement accounts.

The Dave Ramsey Show podcast is targeted more toward people trying to get their financial house in order, but it is still very motivational.  Dave Ramsey releases three hours of the show every weekday, so there’s plenty to listen to.  My favorite segments are Dave’s millionaire theme hours, where millionaires are interviewed and insights are provided into their spending, saving, and investing habits.

Categories
Debt Investing Saving

Measuring Progress – Tracking Net Worth

As we budget, save, grow our income, and practice self-control in spending, it’s important to have a method for tracking progress.  After all, if we are indeed working to improve our financial lives, shouldn’t we have a way to measure our improvement (or regression)?

I have a coworker who has turned into a terrific friend and we’ll often talk personal finance in our downtime.  He shared with me his primary method for tracking progress in his financial life:  Tracking net worth.  This was definitely a “light bulb” moment and something I started doing (in November 2012) after we had the discussion.

In summary, you list your assets, list your liabilities, and take the difference, which gives you your net worth.  I calculate (actually Microsoft Excel calculates) my net worth every month and this lets me see how I’m doing financially.  Increasing the value of my assets or decreasing debts will send my net worth in the right direction.  Alternatively, keeping monthly tabs on my net worth lets me see where I might be slipping and hurting my net worth, giving me the chance to correct bad habits.

The following is the Excel spreadsheet I use to track my net worth:

Net Worth Spreadsheet
Net Worth Spreadsheet

If you would like to download this spreadsheet, click here.  The spreadsheet includes some simple formulas, including what percentage each asset comprises of each asset category.  Columns F, G, and H detail my net worth history and columns J through P detail what comprises the net worth value.

Categorizing your assets and liabilities can turn into an exercise, as you’ll need to consider whether certain items are assets, liabilities, or both.  For example, you could list your home’s equity as an asset, but you’ll also want to list your mortgage as a liability due to it being a debt owed to the bank.

As you keep track of your net worth, I think you’ll find a sense of accomplishment if you’re growing your net worth.  This will provide added motivation to steer your financial ship properly.  If you’re going in the wrong direction, use this as a tool to help identify what’s driving your loss and what you can do to fix it.  Good luck!

Categories
Investing

Vanguard Admiral Shares

Vanguard investors who have less than $10,000 to invest purchase Vanguard’s entry-level Investor shares .  Vanguard offers investors the ability to “upgrade” their shares by purchasing Admiral shares once investors accumulate a given amount within certain mutual funds.  Admiral shares have lower expense ratios than their Investor shares counterparts, allowing investors to keep more of their money.  From Vanguard’s web site, to qualify to purchase Admiral shares you need to meet one of the following criteria:

  • Invest $10,000 or more in most Vanguard index funds that offer Admiral Shares.
  • Invest $50,000 or more in Vanguard actively managed funds that offer Admiral Shares.

An example of the difference between Investor shares and Admiral shares:  The Total Stock Market Index (VTSMX) mutual fund has an expense ratio of .18% while its Admiral shares equivalent, VTSAX, has an expense ratio of .06%.

If you invest with Vanguard and haven’t visited their web site in a while, you may be able to save yourself money by logging in and converting your Investor shares into Admiral shares.  The conversion from Investor shares to Admiral shares is free, so it’s worth your time to check.