Thanks to Julius Prezelski for finding this expense ratio calculator. Expense ratios are the fees you pay while owning a mutual fund or an ETF. Unfortunately, you don't get a bill at the end of the year telling you the cost of your mutual fund or EFT, leaving many investors oblivious to the fact that their investments have a cost. The fees come out of your account balance and are deducted on a daily basis while the expense ratio itself is expressed as an annual rate.

So, an expense ratio of 1% means you are paying $1 per year for every $100 you invest. It may not seem like much but this expense ratio calculator will convince you otherwise. While we might enjoy the compounding returns that accumulate over time with investments in the stock market, you won't enjoy seeing the impact of compounding expenses.  

Here's a simple example I created on the calculator assuming the following:

• Index fund with expense ratio of 0.10% (for reference, Vanguard's S&P 500 ETF has expense ratio of 0.03%)
• Actively managed mutual fund with expense ratio of 0.75%. Remember that these higher fees contribute to the fact that 80-90% of actively managed funds underperform index funds over the long run. 
• Invest $200/month or $2400 annually
• Earn market return of 7% for 30 years

After inputting these assumptions, you see that the small difference in fees of 0.10% vs. 0.75%, amounts to $24,000+ over this 30 year period. Clearly fees matter so be sure that your students are equipped to find the expense ratios when purchasing a mutual fund or ETF. 

Other ideas with this interactive:

• Let students create their own scenarios after researching different mutual funds and thinking about how much they want to invest on a regular basis with a full-time job. 
• Have students consider the costs when hiring a financial advisor which will add an additional layer of fees: the expense ratio  for the fund that you are invested in + an advisory fee (ranging from 0.5% to 1.0%. 

-----------------------

Your students will get practice finding the expense ratio and other details in this NGPF Activity: FINE PRINT: Stock Index Fund Fact Sheet

-----------------------

Looking for more engaging interactives from the blog? Check them out here. 

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.

More posts by Tim