I get a lot of questions about index funds and Vanguard on my YouTube channel. I am surprised that I haven’t done a video on what are Vanguard index funds yet!
If you are thinking about retirement and investing, then you are in the right spot. Part of the reason I encourage millennials to pay off debt quickly is so that they can build wealth fast.
I started investing with Vanguard in 2016 and I couldn’t be happier. Grab a snack and take a look at my short and sweet version of Vanguard index funds explained.
This is my video on what are Vanguard index funds with a simple explanation.
What is Vanguard?
Vanguard is an investment company that specializes in index funds. Vanguard offers a variety of investment products and accounts including Traditional and Roth IRAs, 529 College Savings Plans, rollover plans, and individual brokerage accounts.
Vanguard talks a lot about simple and successful investing. Basically, own a fund that buys all of the nation’s publicly held businesses at very low cost in a given market portfolio and hold it forever. This is called an index fund.
If you want to dive deeper, I highly recommend purchasing The Little Book of Common Sense Investing by John Bogle on Amazon.
What are index funds?
Index funds are a collection of stocks that follow the performance of an entire index. The Dow Jones Industrial Average is an index. The S&P 500 is an index. One thing to note from Bogle’s book, “index funds eliminate risk of individual stocks, market sectors, and manager selection. Only stock market risk remains.”
Index funds were created by a man named John Bogle. Bogle also founded Vanguard in 1974. In JL Collins’ book, The Simple Path to Wealth, he writes, “The basic concept behind indexing is that, since the odds of selecting stocks that outperform is so very small, better results will be achieved by buying every stock in a given index.”
So, basically what this means is if you buy individual stock of a company, your odds of outperforming the market is less than if you were to buy and hold every single stock from every single company in a given index.
Index funds keep more money in your pocket than buying mutual funds from a financial advisor
Vanguard index funds are low-cost meaning you will pay extremely low expense fees. These are much lower than what you would pay if you are invested in mutual funds with an independent financial advisor.
“Vanguard index funds are low-cost meaning you will pay extremely low expense fees.”
To illustrate this example, I had fallen into working with a financial advisor shortly after I became debt free in 2014. I paid 5.75% up front and then a 1.26% annual fee for every year after for the rest of my life. Here’s an example of what I would have paid had I put in $10,000 into a mutual fund with an independent financial advisor.
This is a real hypothetical scenario that my old financial advising company sent to me.
This is insane. After 10 years of investing my money with this financial advisor, I could end up with $13,771.67 before expenses. Once the annual expense fee of 1.26% is applied, I’m left with $13,606.41.
Another thing to note, is that over the course of 10 years, I would have paid $2,010.03 in expenses alone. That money goes directly to the company. It doesn’t get applied to my investments. It’s the fees I would pay just to invest my money with them.
Isn’t the whole point of investing money to make money not waste it in unnecessary fees?
Now, let’s look at how much I could earn when I invest the same $10,000 into a Vanguard index fund. My expense fees are at just 0.04% each year.
Does anyone else see this?! My $10,000 investment with the Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) after 10 years turns into a whopping $36,570.53! But this screenshot says exactly how much I’ll pay in Vanguard fees:
For a $10,000 investment, I pay $95 in fees. Compared to the $2,000+ fee bitch slap that I could have received from the mutual fund company, this is an easy decision.
Why should you care where you invest?
You could pay unnecessary and likely very high fees for no good reason. If your goal is to become debt free (which it should) then your logical next goal would be to accumulate wealth as fast you can so you can become financially independent. Financial independence is reached when you no longer have to work and can support you and your family off of your investments.
Most of our parents generation are doing this at 65. But there is a whole community of young abled bodies who are achieving FIRE in their 30s and 40s. Work is optional for them. Work can be whatever they want.
Debt Free Millennials isn’t a FIRE blog, this is a how to become debt free blog. However, I am working on my own FIRE goals and the best thing I have done for myself was to switch over my investments to Vanguard.
Homework assignment: look at your investment fees
I highly suggest to look at your investments this month and research how much you are paying in fees. If you work with an outside financial advisor this is especially important! Understanding fees and how they are structured could mean the difference between average earnings and millionaire status one day. Don’t be average, millennials. Your investments need your attention!