The most important lesson I learned freshman year in my college finance class was that $1 today is worth more than $1 tomorrow. This is because I can take todays dollar and invest it, allowing it to grow into a larger amount of money.

But there is also a second part to the reason why: inflation. A dollar today buys more than a dollar tomorrow thanks to the eroding effect of inflation. While many people dislike inflation, it is actually a good thing, when controlled. I go into all of this over at my other blog,

Money Smart Guides (that link will take you to the post in question).

Because of the power of compound interest and time, you need to start investing today. Every day you put off investing, you lose a day of your money growing for you. I know, the market is at an all-time high right now, so you want to wait. Aside from the reason I gave you above, here is why this thinking is flawed:

First, you will keep putting off investing indefinitely. Here is how your “logic” works: “The market is high right now, I’ll wait for a pullback”. The pullback happens and you say, “I will wait until the market starts rising again. After all, I do not want to invest in a market that is going down”. The market rebounds and you say, “The market is high again, I will invest when it drops”. The cycle continues in some cases forever. In other cases, you give up and invest at the top and then the market drops, you get scared and sell.

The key to being a successful investor is to invest early and often and then forget about what is happening on a day to day basis in the market. The sooner you invest, the sooner your money can grow for you. The more often you invest, the more likely you will buy at both highs and lows. This is a good thing because you will buy fewer shares when prices are high and more shares when prices are low. When the market rebounds, you will earn a nice return.

As long as you invest early and often, the only thing left to do is to ignore the market. Think about it, does what happens in the stock market today really matter in 30 years when I need my money? Did Johnny Football or Stacy Cheerleader not going out with you in high school really have a significant impact on your everyday life today? Chances are not really. The point is, when we get bogged down in the details of the stock market on a daily basis, we lose sight of our end goal – to have a nice sized nest egg for retirement. The more you can ignore the stock market on daily basis, the better off you will be.

Where To Start Investing

So I have convinced you to start investing today. Great, but where do you invest? This is a great question. For most people, a discount broker will be best. There are a few that I really like, in particular Schwab and Scottrade. You can learn all about these (among others) in my detailed online broker comparison chart. It will help you pick the best discount broker for you.

Of course, there are others out there that do not want to go through the work (albeit little) of picking a broker and picking mutual funds, etc. For these people there is Betterment. It’s an investment firm that has investments already chosen. You just decide on your goal and an amount to invest each month and you are done. The entire process from account setup to funding takes 10 minutes at most. I use them and love them. Here is a review if you want to learn more.

Final Thoughts

Overall, you have to start investing today. Not tomorrow or next week, but today. Life is hectic. If you put it off for a day, chances are the day will turn into a week, then a month, then 10 years. Next thing you know, you are knocking on the retirement doorstep without any savings. Do not wake up to this all too common reality. Start investing today. For every day you wait, you are robbing your future self.

We hear all of the experts telling us that we need to save for retirement. The more we save, the better off we will be (and the greater the likelihood of retiring in the first place). But over the years, little has been talked about what your investments are costing you. Only recently has there been an uprising to get the mainstream media to report on mutual fund expenses.

This uproar led to 401k plans needing to disclose how much they charge in fees. Sadly though, it has fallen on deaf ears. Most investors still ignore the impact fees have on their portfolio. Many take the price versus quality stand, meaning that you have to pay more for better quality. When it comes to investing, this is just not the case. I will talk about this a little bit more later, but for now I want to show you how much your investments are costing you.

Getting Taken Advantage Of

According to the ICI, the median expense ratio of equity mutual funds in 2013 was 1.25%. What exactly does this mean? It means that for every $1,000 you invest in a mutual fund that charges 1.25%, you are paying $12.50. You might see that and think it is no big deal. But it is for three reasons:

First, this 1.25% is not a one-time fee. You pay it every single year you invest. So if you have $1,000 invested for 35 years, your fee is $4437.50. You might again say, no big deal.

But, odds are you do not have $1,000 invested, you have more. And as your investment grows in value, so too does the fee. If you have $50,000 invested, you are paying $625 per year. Increase your investment value to $150,000 and you are paying close to $2,000 a year. Remember, these two numbers are per year. Over the course of 35 years you pay over $21,000 on the $50,000 investment and $65,000 with the $150,000 investment. Now I have your attention?

Sadly though, the pain does not end there. When the fee is taken from your investment, you lose the opportunity of that money staying in your account and growing. We all know that interest compounds on your investment over time. Well, if you take some money out of the investment, you lose out on the chance for compounding to take place.

Here is an example. You invest $10,000 in a fund that charges you 1.25% and I invest $10,000 in a fund that charges me 0.25%. We both keep our investment for 35 years and it grows at the exact same rate, 8% per year. At the end of the 35 years, how much money do we have invested?

Your investment is worth $95,000. My investment is worth $135,000, which is a difference of over $40,000! You paid just over $17,000 in fees and I paid just over $4,000 in fees. But there is still the opportunity cost. You higher fee caused you to miss out on over $35,000 of additional growth.

This is why fees matter and why you need to pay attention to them. The more you pay in fees, the more you lose out on additional investment growth. As I said before, there is no correlation with higher fees equaling higher returns. It does not work that way. In fact, the less you pay in fees is better because these tend to be index funds which simply track the market. See my last post on passive investing to learn more.

These index funds do not have a management team that they have to pay to pick and research stocks, so they can charge a lower fee. Do not get caught up in the idea that a fund manager is going to beat the market, he or she will not. Yes they may do it here and there, but over the long-term, no one has consistently beaten the market. You are better off paying a lower fee and taking what the market gives you.

But I Am Not Paying A Fee

Some might try to tell me you are not paying a fee because you never get billed for it. Unfortunately, you are getting billed, you just do not see it. The way fund fees work is that they are taken off the top, before you even see anything. So, if your fund charges 1.25% and they tell you that you earned 8% this year, the fund really earned closer to 9.25%. You just saw a return of what was left over after they took their fee. (Side note: if the professionals take their fee off the top, should this not tell you something? Think about it: it is the same thing the IRS does, they take their cut before you see yours. This is why you need to set up automatic saving and investment plans, because they work. You save and invest before you see the money.)

Final Thoughts

Do yourself a favor and pay attention to the fees that your investments are costing you. I bet you have some that will make you sick. If you need help with calculating everything yourself, check out my post reviewing Personal Capital. If you want more information on how to become a successful investor, be sure to read my stock market millionaire post. Remember, by not know how much fees are costing you, you are short changing yourself.

Over the past few years, the idea of passive investing has really started to gain in popularity. But what exactly is passive investing and is it some new strategy to beat the market? Below you will learn everything you ever wanted to know about passive investing.

Passive Investing Defined

If you know what passive income is, then you have a good idea of what passive investing in. If you are not familiar with passive income, it is a way to earn money without actually working. For example, when you go into to your place of employment and get paid, that is considered to be active income. You are an active participant in earning the money. If you do not show up, you do not make money.

Passive income is the complete opposite. Think of the money in your savings account earning interest. You did nothing other than put the money in the account. You earned money regardless of what you did, even when you slept!

Most investments are considered active investments because portfolio managers are trying to beat the market. They are researching stocks every day, buying and selling trying to outperform an index.

A passive investment then is simply an investment in the market or index itself. There is no portfolio manager researching stocks, buying and selling everyday. The investment simply holds the same underlying investments that the index does. Whatever the market earns, you earn.

So Why Choose Passive Investing?

You may be wondering if you can choose to earn a higher return than the market, why would you not do that and ignore a passive investment? This is a great question. The reason why more investors are choosing to go the passive investment route is because no one can consistently beat the market.

You will find some portfolio managers that do beat the market in a given year. The problem is that they do not do it consistently. So why not just change your investment each year? This too is a great question and many investors try to do exactly this. But it does not work because you do not know what funds will beat the market until the year is over. So basically, it is a crapshoot as to whether or not you beat the market when you invest in actively managed funds. Here is a great study from Dalbar showing that the average investor (someone that tries to beat the market)

only earns 2% per year.

Another Factor For Choosing Passive Investing

There is one other thing you need to understand about active versus passive investing: the costs. I will go into greater detail about this in an upcoming post, but for now, understand that when you have a portfolio manager running a fund, that person and his team needs to get paid.

Their pay is funded by the management expense that the fund charges you annually. Because of this, actively managed funds tend to cost more than passively managed funds.

The typical equity mutual fund that is actively managed charges a management fee of 1.40% per year. This amount might sound small to you, but over time, it adds up. Again, I will talk about this in more detail in a future post.

Final Thoughts

The overall takeaway from this post is that there are two styles of investing: active investing and passive investing. Active investments are trying to earn a higher return than the market while passive investments are simply trying to earn what the market earns.

Since active investments do not beat the market on a consistent basis, it makes more sense to just take what the market gives you and invest passively.