Fund expense ratios explained

The expense ratio is a fee that occurs in all mutual and index funds.  In fact, it is even nested inside of exchange traded funds, though in this case the fee is generally lower than it’s index fund or mutual fund counter part.  The options that present themselves in your 401k, IRA, TSP, or non-retirement index fund and mutual fund accounts will have fees that the honest brokers will explain and less than honest brokers will try to obfuscate.

The expense ratio is this:

The annual fee expressed as a percentage of the assets under management charged directly against those very assets.  The expense ratio is paid internally to the account, so many do not realize that this fee exists at all.  However, this fee, if substatial can become a redistributor of wealth from the account to the managing institution.  It is money that is forfeited in exchange for management and operating expenses, reagardless of profits or even losses.

Take a $10,000 portfolio for example.  The value of which did not change through out 2012.  A 1% expense ratio means that $100 is paid out of this fund to the manager/broker, leaving a balance of $9,900.  If the value went up 10% in 2012 instead, the manager would still recieve 1%, or $110, leaving $10,890.  This will effect compound interest and the Time Value of Money over time.  What was a 10% return is now a 9% return.  This will carry on for as long as you are invested in this fund.  It is in your best interest to minimize this fee.  Below are some expectations for what this fee should be.  If your investments fall within this range, there is no real concern.  Even if you can find a lower rate, there may be other benefits with your current institution, such as multiple account discounts, loyalty programs, or the convenience of one stop shop banking.

  • Expect to pay more for an “actively managed” fund.  Fees here range from 0.5% to 1.5%.  They’re not necessarily better.  Remember the manager is not really accountable for your losses and can always explain them away by blaming the market.  Good active fund managers are exceedingly rare to find, and as their funds grow in size, they tend to under perform the overall market, as it is more difficult to move larger amounts of money without being noticed.
  • The index fund is your friend.  The cheaper, the better.  These funds track a computer generated index portfolio of stocks based on a pre established rule set.  All personal bias and emotion driven mistakes are removed here.  The S&P 500 is an example index.  Index fund expense ratios should be below 0.5% and can reach close to no cost.  The Thrift Savings Plan available to federal employees and military service members offers some of the lowest rates possible at 0.025%.  That’s right, $2.5o for each $10,000 invested.  Now that’s a good deal!
  • Fund houses that specialize in funds, particularly actively managed funds, may have front-end and back-end load fees.  These are fees to buy into and then sell out of the fund.  In the past, these fees could be up to 5% on either side.  This fee in general has been done away with as consumer champion Vanguard has driven this fee out of the fund industry.
  • In addition, certain funds have fees if sold within a certain period, commonly 2 to 12 months.  If you plan on being long term in these funds, this is not necessarily a bad deal.  The reason for these fees is to reduce turnover; which is the rate of buying and then selling assets within the fund.  The action of turnover has negative tax consequences and reduces that ability of a fund to achieve target performance.  Early termination fees should be 2% or less.

For reading additional information of stocks, bonds, index funds, and other investment opportunities, please visit the FPO investment page.


Google can be your friend or your enemy

It all depends if you follow the rules.  Google can make or break your web presence.  Follow the rules and you’ll be fine.  In fact google will help you along the way.  Google is extraordinarily powerful in its searching algorithm.  As such, google can easily separate legitimate content from the fakes.  Here’s some examples.

Google dont’s:

  • Google can tell if you’re keyword stuffing.  At the very least, Google matches up the content of your keywords (tags) with the content of your webpage.  Don’t stuff your pages with keywords.  Keywords should match your content closely.  It’s better to choose fewer keywords that have the strongest tie ins to your webpages.
  • Presently, Google doesn’t have a favorable view towards tag clouds.  It’s a shame, since the legitimate purpose of tag clouds is to aid in Web 2.0 navigation.  Interested in the “Big topics” the tag cloud helps out massively.
  • Link usage.  There’s no issue here if the purpose is to enhance your content, however, if your links are designed solely to pass traffic, Google can tell.  To Google this looks like link farms acting as hubs between content that isn’t very related.  Google will penalize on site if this is found to be the case.
  • Broken pages.  If it’s difficult for Google to crawl, your “importance to Google” may be reduced.

Google Do’s:

  • Get their Webmaster Tools.  This Google app will let you know if you have broken links, duplicate meta data, not enough meta, or too much meta.  You can pass a site map directly to Google to help them crawl your website.  This is important for self hosted WordPress sites.
  • Get Google Analytics.  This now plugs into the Webmaster Tools, but Analytics can tell you everything you want to know about your site stats.
  • Use original content.  This is the most important rule.  You can’t go wrong here, either.  If it looks nothing like anything else out there on the internet, Google will show you some love
  • Follow the Google rules and terms of service.

Google is still the authority in search engines.  Playing by their rules not only saves time, but also preserves the hard work you have put into establishing your web presence.

How to earn an extra $500 a month: Part 4

OLYMPUS DIGITAL CAMERAPart 4 wraps up the series on earning an extra $500 per month.  The focus this time is not increasing income, but instead decreasing expenses.  After exhausting all of the previous options, there always remains the option of cutting expenses.  Below are three examples designed to save an average of $500 per month.  It is unlikely that a specific example may fit you perfectly, so the best option is to pick from each example those options that do work for you.

Example #1  ($150+$80+$270)

  1. A newly created cost is the smartphone data plan.  With many 2 phone plans pushing past $200, perhaps a simpler approach is needed.  Here’s the action… drop the phone plans and get a prepaid plan and free internet at your local library.  The savings here can be as high as $150, which still leaves an allowance for going prepaid.
  2. Cut out the $20 per week for office lunches, coffee, etc.  Home cooked food gets better with time and experience.
  3. Downsize your car payment.  If you have a car payment, try trading it in for something older that will reduce of your payment.  A New $24000 car will have a payment of $450 per month with good credit.  Cutting down to a $10000 car will save $270 per month.

Example #2 ($300+$100+$25+$75)

  1. Refinance that car.  Extend the term if needed.  It will be good to free up the cash flow, and car debt for those with good credit it is not that expensive.  If you had three years left and a balance of $24000 at 5%, refinancing to five years at 2%, would save $300 per month.
  2. Cut the cable TV.  With good quality programming on Netflix and Amazon Prime, cutting the high end cable and movie packages will save upwards of $100 per month.
  3. Ask for a reduction in rent.  This applies to good tenants who pay on time.  A vacancy costs a landlord a good amount of money.  On top of that, they are paying 10% management fees and taxes on top of every gain.  Asking for a modest $25 per month (or hopefully more) off of your month should be reasonable to many landlords who wish to keep a good tenant.
  4. Make sure not to buy more insurance than needed.  Insurance is mainly designed to protect personal assets.  If you don’t have much in the assets category, cutting insurance and raising deductibles can free up some cash.  $75 per month alone on health insurance is achievable.

Example #3 ($260+$40+$200)

  1. Carpool, walk, or take public transportation.  This really applies to your second car.  Get rid of that $15000 new car you just bought on a 5 year loan and save $260 per month.
  2. Ditch the home phone.  The home phone and long distance is now becoming more expensive than a prepaid cell phone with unlimited talk.  Since most have the cell phone, this will save about $40 per month.
  3. Refinance the house.  There are many options for no-cost refinancing.  Refinancing a house that you bought three years ago for $165,000 at 5% can now be refinanced at 3.25% for 30 years, freeing up $200 per month.

The FPO series on earning an extra $500 per month has provided multiple methods for achieving that goal of bringing in some extra income.  Combine that with some of the savings methods above, and the result should be a complete transformation of your personal finances.

How to earn an extra $500 a month: Part 3

Office chair and notebookPart 2 of this series explored methods of creating $500 a month additional income by investment opportunities requiring less upfront funds than would be otherwise possible, since the bank’s money is being used as leverage to raise the effective rate of return.  For part 3, FPO will provide guidance on increasing your income by $500 per month through your current job or expanding into various side jobs.

For your current job, there are several options.  Volunteering for overtime is the surest option, however many companies are cutting this back or eliminating it outright.  If its an option, and it fits your schedule…take it.  However, overtime is not right for everybody.  Asking for a raise is another common option, though frequently approached incorrectly.  Instead of asking, think of negotiating for that raise.  By asking, your thought process is centered around entitlement.  How many times has the phrase “I deserve this raise”, or “I’m overdue for a raise” come up?  By negotiating, you can have more power over the conversation.  Just like a supplier to your company would, convince your boss that your value to the company has gone up, and as such so have your rates.  There is no harm in coming up with a number first, as long as its high enough to meet your needs, in this case $500 per month.

Sometimes the raise may not work.  It may be their way, or the highway.  That’s where the side job comes in.  Everyone should have a “Plan B”, something that not only creates some additional income, but also something that can be expanded if your main source of income dries up.

Here’s a list of ideas and what it would take to get that $500 per month goal:

  • Ebay: sellers get 50 free listings per month and fees total around 11% of sales.  If you have an eye for value locally, there is a ready market on Ebay ready to bid up the price.  50 items at $11.11 profit per item before fees gets the $500 needed.
  • Etsy:  Etsy defines the online market for handmade goods.  If you have arts and craft skills, this is the place to do business.
  • Amazon:  Excellent for opening your online store.  Amazon provides all of the code to set up your own store
  • Virtual assistant:  Make money by providing products and services over the Internet.  Fiverr and Odesk are networks through which virtual services can be supplied.  The nominal price on Fiverr for a service is $5.  Do 100 of these and your month is covered.
  • Yard Work: Keeping a dozen medium sized lawns mowed a month should net $500.
  • Logging:  There are places with too many trees and places where firewood permits are allowed.  $10-$15 per cord buys a permit.  Keep costs low and expect to get over $100 per cord depending on locale.
  • Instructor:  Skilled at Kung Fu, MMA, Skiing, Skydiving, Scuba diving, Art, or Dancing?  Leasing space can be split based on time and many community colleges allow for such classes to be taught.
  • A Second Job:  This one may not be agreeable with your current employer, and there’s likely to be schedule conflicts.  Proceed with caution.
  • Trade Shows and Conventions:  These events run the range from antique shows to car shows, sporting events, vending opportunities, and of course holiday bazaars.

There’s no shortage of opportunities.  Find something you enjoy, and good luck!

-The FPO Team

P.S. –> Part 4 is centered around getting that extra $500 per month by reducing your bills.

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