Why You Should Care About Expense Ratios

Think small

While I understand the basics of what expense ratios are – fees, so the lower the better – I have a hard time explaining what they are and their impact on your money. I’m not a financial professional, so this may be over simplifying. And please, someone, correct me if I’m way off.

I’m going to pretend I’m explaining this to someone who doesn’t want to understand investments, but perhaps should (mom!).

The first official definition I see is from Morningstar:

The expense ratio is the annual fee that all funds or ETFs charge their shareholders. It expresses the percentage of assets deducted each fiscal year for fund expenses, including 12b-1 fees, management fees, administrative fees, operating costs, and all other asset-based costs incurred by the fund.

What?! Am I supposed to know what 12b-1 fees are? The first line says it best: it’s the annual fee charged to shareholder. That’s you, the account holder.

But I don’t see it on my statement. How am I paying this fee? 

Nothing is free. Your investments are managed by people and companies that are in business to make money. Mutual funds and exchange-traded funds (ETFs) bundle their fees into this “expense ratio.” You’re not going to see this as a line item on a statement of your account transactions, but they have an impact on your investment returns.

What are these expense ratio fees for? 

There are different costs with managing different funds and these costs are paid for (at least partly) through the expense ratio fees. These may include paying the fund manager, custodial services, record keeping, legal, marketing, auditing, accounting, etc. Basically, paying the machine that keeps the firm running.

Do I have to pay this? 

Yes, but you have some control in how much you choose to pay.

How much are we talking and how will it impact me? 

Expense ratio fees can range from 0.01% to 2.5%. To any retail shopper, this sounds like small potatoes, but over time, these rates can have a big impact. I searched for a calculator for this example, but found the results varied, so take this just as an example. I used the SEC’s Tool for Comparing Mutual Funds. 

Say you invest $10,000. Assume an average annual gain of a 10% over 20 years:

  • With 0.91% expense ratio = $11,241 in costs; Balance = $56,034
  • With 0.04% expense ratio = $536 in costs; Balance = $66,739

That’s over a $10,000 difference! This is a really simplified example with no additional contributions and without consideration for a host of other factors. But you can control this $10k difference and it only takes a few minutes.

So, what can I do?

Let’s look at your retirement account and see where it’s invested. With Vanguard, I can easily see the expense ratio by fund. Since my IRA is a mash up of multiple 401k roll-overs, my account was invested across over 10 different funds. I have gradually sold them, in order of highest expense ratio, purchasing low cost index funds instead (VTSAX). I’m down to these six (look at that Fidelity at 0.01%!):

I don’t sell them all at once because there’s a $50 fee for making more than one of these transactions within 60 days. And since I’m no good at math, I’m not going to calculate the impact of these waiting periods, I’m just avoiding the $50 hit.

To trade the high expense ratio funds for lower expense ratio funds, I follow the steps from my Vanguard account: 1) buy and sell and 2)  Trade an ETF or stock. I trade “all” of the high expense account. Once that transaction goes through, it will be held in my money market fund until I add it to my VTSAX fund.

I tried to keep this simple, but it’s not a very simple subject for the non-fiscally minded. And I know I don’t know anything – I’m just scratching the surface here.

Booking our first family vacation with Chase Rewards

We’re just dipping our toe into the travel optimizing pond here and I was a bit nervous. It required opening AND using a credit card, so if that makes you nervous, don’t do it. We had to be disciplined and used the card for most purchases and a few large purchases, like summer camp, to maximize points earnings.

Here’s what we did, as well as a few mistakes we learned from:

  • We both opened a Chase Sapphire Preferred card and spent the required $4,000 (each) easily within three months to earn 50,000 bonus points (each). Lesson learned: We forgot to have my husband use my referral code when he applied, missing out on 10,000 bonus points.
sailing on the delaware
Sailing on the Delaware River, pining for the Bahamas
  • We set a goal: get enough points to get our family of four to the Bahamas or any Caribbean island over the week of Thanksgiving. Of the Chase rewards travel partners, Southwest was clearly the best option with the lowest amount of points required: I estimated 140k – 150k points for our family, however November travel dates were not released when we were planning.
  • Searched for the best deal: Southwest didn’t release their winter travel dates until May 31, so we knew we had to earn the required points by then. When the flights were available, we had 133,775 total points earned. I used Southwest’s low fare calendar to find the best combination of dates that would give us a 5- to 7-day Thanksgiving vacation with our points, but I kept coming up short.
  • Transferred points from Chase to Southwest: you can’t book Southwest through the Chase portal, so a points transfer is required. This was pretty easy. I transferred 73,000 Chase Rewards points to my Rapid Rewards account and it appeared immediately. I then transferred 60,000 of my husband’s Chase Rewards points to my Rapid Rewards account and when it didn’t appear immediately, I had a minor freak out. When transferring from Chase, you have to enter the cardholders name on the Chase site, plus a Rapid Rewards number. I used my husband’s name with my Rapid Rewards number and when the points didn’t appear, I assumed that using his name with my Rapid Rewards number was a big mistake. The Chase customer service was absolutely great and while we were talking through how to course-correct, the points appeared! I just needed a little patience.
  • Purchased additional Rapid Rewards: Since we didn’t have enough, I purchased 7,000 rapid rewards points for $134 to give me the points required to book our trip.
  • Booked it! It was a rather smooth process despite my human errors. Here’s the breakdown:
    • Earned Rewards: 133,775
    • Purchased Rewards: 7,000 ($134)
    • Total Redeemed Rewards: 139,776
    • Taxes and Fees: $463
    • Total: $597 = $149.25 each!
  • Versus Actual Costs: Flights: $3416.16 +  Taxes/Fees: $664.16 = $1,020.08 each. We saved $870 each – that’s $3,480! There’s no way we would have or could have spent that. And these prices are already higher than they were when I booked just five days ago.

Another thing I learned from the Marla Tanner interview on ChooseFI is that you can, in fact, redeem British Airways miles through Chase. I tried to figure this out online and couldn’t, so thank you Marla for teaching me that you actually have to call the airline. I will keep that in mind, but I think we’ll stick with Southwest for now because our next travel goal is a rocky mountain ski vacation.

A huge thank you to ChooseFI for teaching us how to travel for less!

How we are saving up to 50% on our energy bill

I thought we were in cruise control, fully optimized with our recurring, monthly bills. Until I got an email from our energy supplier.

We’re in Philly with PECO as our energy utility/distributor. About a year ago, just pre-FI for us, I made the switch to a renewable energy supplier, sourcing all wind-powered energy. I can’t remember the intro rate, but it was a good rate – cheaper than the traditional energy providers, and I strongly believe in supporting renewable energy.  Plus, they had an incentive of an annual rebate of 3% of your annual charges back in an account credit. If I did my math right, that’s about a $60 credit we’ll get. This rebate email is what prompted my energy bill digging. The email didn’t state the amount of credit was I getting, just that it was there to claim. There was no amount or timeframe. This lack of info was annoying. So, I dug in:

  1. Our bill has been steadily rising. They don’t provide the KWH rate for each billing period (ugh), but I see we’re paying a bit more and not always when we’re using more energy.
  2. I’m pretty sure that whatever intro rate I had has since gone up; I’m going to take my 3% credit and make a switch to a lower cost supplier that is also renewable. You can do this in PA!
  3. Our energy use is rising.

The Pennsylvania Public Utility Commission has a program called PA Power Switch which allows electric utility customers to choose from a wide selection of energy providers. They vary by proximity, variable versus fixed price, term length, contract fees, and percent that’s renewable energy. This sounds confusing, but it’s not. It’s a very user-friendly search tool and even I understand it.

Here’s where I’ve landed:

  • Our Current with a Renewable Supplier: 0.1429 per kWh
  • Cheapest Traditional Energy Option: 0.0585 per kWh
  • Cheapest Renewable Energy Option: 0.0725 per kWh with 24 month term

Because of my love for this planet, I’m going to support the renewable energy option that offers a kWh rate of 50% lower than my current. (I don’t mind the 24-month term.)

PECO Billing
Our annual energy costs + daily average temps courtesy of PECO

And the PECO site also offers great energy usage analysis and some easy energy savings tips. We’re are doing the following immediately:

  • Cold water laundry – my boys stink, I feel hot water is necessary, but I’ll switch to cold and see
  • Unplug electronics
  • Turn off power strips – why do we leave WiFi and the other office components on all day when we’re not home?!
  • Adjust TV brightness – apparently the factory default is a “showroom” setting. We have it on 0-2 hours per day, so not sure this will have much of an impact.
  • Tell everyone to turn off the lights when they leave the room!

So, we’re lowering our usage and lowering our rate. It will be very interesting to see how much we actually save per bill. Full transparency: Our last bill was $175 with an average daily use of 25.8 kWh. I will update in a month!

How can we use Chase Rewards for travel from Philly?

Chase Rewards offer the best value in a travel points program. Except if you’re flying out of Philly. American Airlines owns PHL and American is not a Chase Rewards partner. I thought I could triangulate with the Star Alliance partnership: British Air is is a Chase partner and British Air and American Airlines are both Star Alliance partners, but I could not see how I could transfer Chase Rewards to British Air to American Air. As far as I can tell, you can’t.

Other Chase partners, like Delta and Southwest, fly out of Philly, but everywhere we want to go (anywhere in the Caribbean) has a connection.

Accepting that I had to give up on the non-stop to the Caribbean dream, I’m going for value. We’ve had our cards since January 2018 and we’ve earned about 130,000 Chase Rewards. That includes the 50k bonuses. With 130,000, there’s only one airline with which we can redeem rewards for four airline tickets: Southwest. Now, Southwest has had a few terrible incidents recently, which makes me nervous. But perhaps because of these incidents, now may be the best (i.e., safest) time to fly with Southwest. We’re planning to take the kids to the Bahamas over Thanksgiving, but Southwest isn’t allowing booking this far out. I’m hoping the holiday booking fares don’t exceed the points we have.

Depending on this experience, we may open the Chase Southwest card in 2019 because it seems we can get more for our money/points with that airline and the annual companion ticket is a great deal, especially with a family of four. However, I may look at what card offers American Airlines has because Philly is an American hub.

This is all my fault. I just got so excited about Chase Rewards, that I didn’t thoroughly research the airline partners. Let this be a lesson learned! It’s not a bad mistake, just some inconvenience with dreaded connections; worth the free tickets we’ve earned.

phl from plane Philly from the Air

Connecting Financial Independence with Environmentalism

Yesterday was Earth Day. Every day is Earth Day.

A part of the path to FIRE (Financial Independence Retire Early) involves consuming less and this really resonates with me. It’s not being frugal to save money, but it’s being frugal to really think about what you need versus want while considering the true value of each purchase. I haven’t been too great at this lately, but all big purchases get scrutinized for their value.

I’ve written about the every day things we do without – cable, subscriptions, expensive cell phone bills, eating out, etc. – and the big ticket items we’re doing without – kitchen remodel and pretty much any large home remodel that applies to this old house. Obviously none of these things are necessary, so these aren’t tough decisions. We have debt and spending money on anything else seems foolish.

And I can be foolish. This laptop I’m using is physically breaking down with missing parts, dents and dings, and running very slow at times. Couple that with a very persistent, soon to be birthday boy asking for a gaming laptop. And we’re getting one. What’s the value in that? Our family laptop will die and now we have one that the kids won’t complain about. There’s a lot of value in that.

But, I digress. Back to the planet.

nc sunset.jpg

 

Listening to NPR’s Living Green segment yesterday got me thinking there’s more we, as a family, can do. Computers aside, I think we’re pretty good with our environmentally-friendly and frugal and then, sometimes we’re not.

  • Paper products: We use cotton napkins, but we always have a roll of paper towels. Keeping cotton napkins, cloths and rags handy will help reduce that waste.
  • Compost: We don’t. We did in Seattle but in our Philly ‘burb, it’s available, but cost prohibitive. We have room in our yard to do something about this. I’ve composted yard waste, but I’d like to get a vessel so we can compost food waste, too.
  • Food: I’ve been trying to cut out meat during the week, but sometimes the convenience of cooking what we know wins. We can make a more concerted effort on this.
  • Water: We do wash a lot and we don’t have an efficient machine. We adjust the water levels, but it’ll be interesting to see if we save any water by running full loads only.
  • Clothes: I need to find a second hand store I like!
  • Stuff: We have too much! It drives me nuts. I need to purge and minimize. I feel like I’m always doing this, but I’m not making progress. I will start with one room at a time, working from the top (bedrooms) to bottom (basement).
  • Plastic: Stop buying the ziploc bags and use reusable containers and bees wax wraps.

I’m going to see if my library has All You Need is Less – this book was mentioned in the radio show.

I think the food and clothes will yield the biggest cost savings, but it’s not about the cost, it’s about the planet and, in turn, our health.