When it comes to investing, many of us focus on the potential returns, the growth of our capital, and the dividends we might receive. However, one crucial aspect that often goes overlooked is the cost of investing. In the latest episode of the Financial Freedom Pod, Certified Financial Planner Warren Ingram joins Bruce Whitfield to discuss just how devastating overpaying for investing can be.

To illustrate this point, Warren presents a compelling scenario. Imagine two individuals, Warren and Bruce, each starting with £80,000 and investing it in the same way, expecting a 7% annual return over 25 years. The only difference is that Bruce pays 0.5% in fees annually, while Warren pays 2%. At the end of 25 years, Bruce’s investment grows to £386,000, whereas Warren’s investment only reaches £271,000. The difference? A staggering £115,000 lost to higher fees.

This scenario highlights a critical lesson for all investors: it’s not just the cost itself that matters, but the lost growth on that cost over time. Even a seemingly small difference in fees can lead to vastly different outcomes in the long run. As Warren points out, “It’s the cost plus the lost growth on the cost over a long period of time that really starts to hurt.”

Understanding and managing your investment costs is essential for achieving long-term financial success. Warren advises investors to analyse their costs thoroughly, considering all layers of fees that might be involved. “Don’t just look at the one layer; there might be three or four layers in your costs of investments,” he warns.

Moreover, it’s crucial to work out these costs in actual currency rather than percentages. Psychologically, 1% or 2% might not seem like a lot, but when translated into real money, the impact becomes much clearer. For instance, over a year or a month, these seemingly small percentages can equate to thousands of pounds lost to fees.

The episode also teases an upcoming discussion on the power of compounding – both as a benefit and a potential pitfall. As Bruce aptly summarises, “If it works for you, you’re winning. If it works against you, as in this example, you’re losing money, and that is not a very good outcome at all.”

In conclusion, this episode of the Financial Freedom Pod serves as a vital reminder to all investors: pay close attention to your investment costs. By doing so, you can avoid losing significant growth to fees and ensure a more prosperous financial future.

Tune in to the full episode to gain deeper insights into managing investment costs and to prepare for the upcoming discussion on compounding.