As humans we have a very hard time understanding the power of compound interest. It just doesn't make intuitive sense looking at the numbers, yet we can't deny it works.
Once we realise its power, most of us begin a lifelong journey of investing to try and get on the right side of this phenomenon.
As we start socking money away and purchasing shares each month, we think we're doing about all we can to help our cause. But there's many ways to boost the effect of compounding over time.
There's of course the obvious ones, like reducing management fees and taxes.
But one cost that we don't often mention, probably because it seems so small, is brokerage costs. And since these charges have come down so much over time, we think they don't matter. They do.
By trimming this expense, there's more of our cash going into our investments, rather than our broker's pocket. Let's see this in action…
Take a young investor who regularly saves a certain portion of his paycheque and religiously invests in shares every month. If he uses a fancy big bank broker, he may be slugged around $20 per trade. There are at least two brokers out there charging around $10 per trade.
This is true independent of whether you are buying traditional blue chips like BHP Billiton Limited (ASX: BHP) and Commonwealth Bank of Australia (ASX: CBA), or speculative punts like Avz Minerals Ltd (ASX: AVZ).
Let's say he switches to the lower cost broker for his monthly share purchase. He's essentially buying an extra $10 of shares each month, instead of donating it to his broker. Earning a return of 9% per annum, over 10 years this amounts to an extra $1,823.
Maybe that doesn't sound like that much. But over his 45-year working career, this blows out to $63,103. And if he switches to purchasing every two months, the difference balloons to $94,655.
Foolish takeaway
Almost $100,000 extra in the investor's pocket for a couple of small tweaks that are well within his control. Not a bad return on his effort. The lesson is simple. Be careful not to dismiss seemingly small costs. It can often add up to a mountain of money over the long term.
