# What 0.2% vs 1.5% does over 10 to 40 years

> How much of the final balance different all-in costs take over decades of monthly contributions.

- Course: [Long-Term Investing: Index Funds, Risk and Your Own Behavior](https://productovi.com/courses/long-term-investing.md)
- Module: What does a fund really cost?
- Lesson 18/32, ~22 min
- Source: https://productovi.com/courses/long-term-investing/fee-drag-decades

## A rounding error?

**Alex Tutor:** Still June at Zapas, a week after you counted every cost layer. The pricing page for the November launch is now on your desk.

**Ethan:** A bank fund charges 1.5% all-in, we're at 0.2%. Honestly, 1.3 points sounds like a rounding error. Users care about returns, not decimals.

**Grace:** Then let's show users what the decimals do. Same plan as on our goal screen: \$100 at the end of every month, 5% a year after inflation before costs. Only the all-in cost changes.

**Grace:** If you want a refresher on why a yearly fee matters at all, the household version is in the personal finance course: [Expense ratio: what 2% a year costs](/courses/personal-finance/fees-and-time). Here we go further: four costs, four horizons.

**Dataset (CSV):** [\$100 a month for 40 years at 5% real before costs, by all-in cost](https://productovi.com/datasets/long-term-investing/fee-drag-decades/fee_drag.csv)

Synthetic. `contributed` = money paid in; `balance_c0`, `balance_c0_2`, `balance_c1_5`, `balance_c2_5` = balance at the end of the year with an all-in cost of 0%, 0.2%, 1.5% and 2.5% a year (monthly rate (1 + (5 − c)/100)^(1/12) − 1).

**Balance of a \$100-a-month plan by all-in cost**

| Year | Paid in | 0% cost | 0.2% cost | 1.5% cost | 2.5% cost |
| --- | --- | --- | --- | --- | --- |
| 0 | 0 | 0 | 0 | 0 | 0 |
| 5 | 6000 | 6781 | 6748 | 6538 | 6380 |
| 10 | 12000 | 15436 | 15280 | 14302 | 13597 |
| 15 | 18000 | 26482 | 26064 | 23524 | 21764 |
| 20 | 24000 | 40580 | 39698 | 34477 | 31003 |
| 25 | 30000 | 58573 | 56934 | 47485 | 41457 |
| 30 | 36000 | 81538 | 78722 | 62935 | 53284 |
| 35 | 42000 | 110846 | 106267 | 81284 | 66666 |
| 40 | 48000 | 148252 | 141088 | 103078 | 81806 |

*Real dollars, 5% a year before costs, synthetic data. Lines: paid in, 0%, 0.2%, 1.5% and 2.5% all-in cost a year.*

**Ethan:** At ten years the lines are almost on top of each other. That's my point.

**Grace:** At ten years, yes: \$15,280 at 0.2% against \$14,302 at 1.5%, a gap of \$977. Now follow the lines to forty years.

> **Exercise:** A plan puts \$100 into a fund at the end of every month for 40 years, at 5% a year after inflation before costs. With zero cost it ends at \$148,252; with a 1.5% all-in cost it ends at \$103,078. What share of the zero-cost balance does the 1.5% cost take, in %?

![After 40 years of 100 dollars a month at 5% real, a 0.2% all-in cost takes 4.8% of the balance, 1.5% takes 30.5% and 2.5% takes 44.8%.](https://productovi.com/courses/long-term-investing/diagrams/m5-l2-fee-drag-40y.png)

*Same plan, same market, only the cost differs.*

**Sofia:** Thirty percent. Ethan, that's not a rounding error, that's a third of somebody's pension.

**Ethan:** Okay, but forty years is extreme. Most of our users won't stay that long.

**Grace:** Then check every horizon. The share lost grows steadily; there's no point where it stops mattering.

> **Exercise:** Same plan (\$100 a month, 5% real before costs). Match each horizon to the share of the zero-cost balance that a 1.5% all-in cost takes.

**Grace:** And here's the gap in dollars between our 0.2% and the bank's 1.5%, horizon by horizon: \$977 after 10 years, \$5,222 after 20, \$15,788 after 30 and \$38,011 after 40.

**Sofia:** The person paid in \$48,000 in total over forty years, and the cost gap alone is \$38,011. Almost as much as everything they put in.

> **Exercise:** Same plan (\$100 a month, 5% real before costs). After 30 years the balance is \$78,722.46 with a 0.2% all-in cost and \$62,934.78 with a 1.5% all-in cost. How many dollars is the gap? Round to whole dollars.

**Ethan:** Fine, the gap is real. But why is the drag so much bigger than the fee itself? 1.5% of something can't be 30% of it.

**Grace:** Look at it from the return's side. Before costs the plan earns 5% a year. A 1.5% cost leaves 3.5%. What share of the yearly return does it take?

> **Exercise:** A plan earns 5% a year after inflation before costs. Its all-in cost is 1.5% a year. What share of the yearly return before costs does the cost take, in %?

**Sofia:** So the pricing page shows the rate, and then what it does over the user's own horizon?

**Grace:** Yes, and labelled as an example. Our 5% is an assumption, not a promise. The cost is the only certain piece of the picture.

**Ethan:** And if the bank fund simply earns more? Their sales people say the managers are very good.

**Grace:** Then it has to earn 1.3 points more every single year, after all its costs, just to end level with us. Last month's fund records showed how rarely a lead like that repeats.

> **Exercise:** To end a 40-year plan level with a fund that costs 0.2% all-in, a fund that costs 1.5% all-in must earn about 1.3 percentage points a year more before costs, every year.

> **Exercise:** The pricing page must describe a 1.5% all-in cost to a user saving for 40 years. Which line tells them what it means?

**Sofia:** One detail for the design: should the 30-year number be in real or nominal dollars?

**Grace:** Real, like the whole plan. A nominal number would look bigger and mean less. Write "in today's money" right next to it, so nobody reads it as a promise.

**Ethan:** Alright, I'm convinced. Give me one message I can paste into the pricing page brief.

> **Exercise:** Ethan said a 0.2% vs 1.5% all-in cost is "a rounding error". In 2–3 sentences, answer him with numbers from the synthetic plan (\$100 a month, 5% real a year before costs) and say what the pricing page should show.

**Grace:** Good. Next week we read the documents where these costs hide: the fund factsheets.

> **Key ideas**
>
> - A yearly cost is charged on the whole, growing balance, and the money it takes stops compounding.
> - In the synthetic plan (\$100 a month, 5% real) a 1.5% all-in cost takes 7.3% of the balance after 10 years and 30.5% after 40; 0.2% takes 1.0% and 4.8%.
> - The gap between 0.2% and 1.5% grows from \$977 at 10 years to \$38,011 at 40, against \$48,000 paid in.
> - Compare a cost with the expected real return, not with 100%: 1.5 of 5 is 30%.

> **Educational, not advice**
>
> This lesson explains how investing works; it doesn't tell you what to buy. Investments can fall and you can get back less than you put in. Check the current rules where you live or ask a licensed professional.

- Previous lesson: [Every layer of cost: fee, spread, FX, platform, tax drag](https://productovi.com/courses/long-term-investing/every-layer-of-cost.md)
- Next lesson: [Reading a factsheet: index fund, ETF, accumulating, tracking difference, domicile](https://productovi.com/courses/long-term-investing/reading-a-factsheet.md)

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