With the economy in a tailspin, everyone's looking for ways to make the most of what they have. While you can find lots of ways to cut costs in your household budget, you may not have thought to look at your investments as a potential source of extra money.
But plenty of people make big mistakes in the way they invest -- mistakes that can cost you hundreds or even thousands of dollars each year. So if you feel like you've already cut your spending to the bone, open up your brokerage statements and make sure you're not throwing money away with these two tips.
1. Cash is king. Treat it that way.
Most investors have unused cash in their brokerage accounts at least occasionally. If you make frequent trades in your account, you could have thousands of dollars lying idle until you find your next promising stock. And even if you tend not to buy and sell too often, you may still build cash in your account over time before saving up enough to buy shares of the next company on your watch list -- or have some extra cash on the sidelines waiting for what may seem to be a safer time to buy.
Unfortunately, many brokers don't treat their customers' cash with much respect. If you just leave your brokerage money in cash, you may find yourself getting paid next to nothing in interest. Take a look at the most recent rates from some well-known brokers:
|
Brokerage Firm |
Current Cash Interest Rate |
|---|---|
|
E-Trade |
0.05% |
|
TD AMERITRADE |
0.05 - 0.10% |
|
Schwab |
0.02% |
|
Interactive Brokers |
0% |
Source: Company websites.
Some companies offer alternatives if you actively choose them. For instance, for accounts over $500,000, Schwab offers sweep money-market funds with yields as high as 0.71% -- not a big number, but quite a bit higher than its other alternatives.
But if your broker doesn't give you a good alternative, find another place for your cash that will. With rates around 3% or more for FDIC-insured money market accounts at a number of different banks, that comes to $1,200 in lost interest per year for someone with $40,000 in cash in their brokerage account.
2. Find the fund bargain.
If you own mutual funds, you'll find that plenty of funds look a lot alike. What may differ, though, is the price you pay to own them. In some cases, such as with funds held in a 401(k) plan, you may not realize the full cost of your fund holdings.
Often, though, it's just a matter of looking for better alternatives. For instance, take two similar funds: the Vanguard Energy Fund (VGENX) and the Rydex Energy Fund C (RYECX). The Vanguard fund has an expense ratio of just 0.25%, whereas the Rydex fund charges annual expenses of 2.36%. They both have similar portfolios, with ExxonMobil
But as often happens, the lower-cost fund performed better. Vanguard's fund has a five-year return of 11.3%, while the Rydex fund is much lower at 5.9%. And while costs can't account for all of the difference, what is certain is that on a $100,000 portfolio, Rydex investors are paying over $2,100 more in annual fees than Vanguard's shareholders.
So, as you consider how to cut your costs to make ends meet in the tough economy, don't forget to take a close look at your portfolio. Although you may still have to give up $4 coffee or that extra night out, the savings you find from being smarter with your investments may get you a long way toward feeling more secure about your finances.
For more on investing the Foolish way, read about:
- Did the next bull market already start?
- Or is it time to get out?
- These 10 dividend stocks will pay their way.
