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The average cost of finishing a basement in 2025 is $32,000, but there is a huge variation in pricing depending on your specific project. Of course, the square footage makes a difference, as does the particular configuration of your basement, as well as whether you are simply finishing the space for storage purposes or adding an extra bedroom and bathroom as living space.

Whatever your goal, you will most likely increase the resale value of your home while adding to your usable space. The following guide will help you understand the considerations, the cost, and how to get the work done.

The Costs of Finishing a Basement

The cost of finishing a basement has a lot of variables, as most home upgrades do. Weighing what you can afford versus what you want is critical here. While it might be nice to have all the bells and whistles of a sky-is-the-limit home renovation, there are many things that will affect the bottom line during a reconstruction event like finishing a basement.

The national average cost of finishing a basement is $32,000, according to the home improvement site Angi, but there’s a wide range (as there is with the cost of home remodeling projects of all kinds). In this case, it can swing from $15,000 to $75,000. Your number could rise based on where you live and whether you plan to add features such as running water, custom cabinets, or countertops.

Ultimately, the final cost to finish a basement depends on how extensive the work is, as well as the square footage in the planned remodel. Typically, a small basement is considered to be a 300- to 700-square-foot space. Do you have more than 2,000 square feet to finish? Then that’s an oversized amount of space.

According to the home improvement site Angi, a simple process of finishing a basement will cost between $7 and $23 per square foot. However, if you are doing a full remodel, you can expect to spend $30 to $100 per square foot.

You can also use online tools to help you estimate the cost of your remodeling project.


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How to Plan Your Basement Project

The first thing you need to think about when finishing a basement is how you primarily plan to use the space. If it’s mostly for storage, you’ll want to include closets, cabinetry, and a shelving system in your plans.

Or do you intend to use it as a bonus room or lounge? If your basement’s primary function is as a gathering space, you’ll want to wire it so that you have internet, cable, and plenty of lighting and outlets.

Due to their subterranean nature, basements also require waterproofing. The below-grade format of a basement demands special attention be paid to exterior drainage, interior surface materials, and air ventilation, in addition to ensuring a safe way to exit the space during an emergency, like an egress window.

With proper planning, it’s possible to mitigate some of the major expenses associated with building below ground, so do your homework before the rainy season comes. Local government code departments often have building standards to guide the process.

As part of your efforts to keep the finished basement dry, you’ll probably want to install a sump pump for extreme weather events. Built into the floor with an automatic pump, sump pumps give peace of mind for when you’re out of town or have an excess of rainfall.

If you’re finishing a basement to use as an apartment or in-law suite, you’ll need added features like a bathroom and kitchenette. Installing both a bathroom and kitchenette can quickly cause the price to mount with the added costs of cabinets, countertops, appliances, and fixtures, so weigh the decision to add those features carefully against how much use you think they will truly get. Or consider going the budget route, forgoing top-of-the-line furnishings and appliances, if cost is a concern but you need those spaces to complete your basement.

Recommended: 10-Step Guide to Building Your Own Home

Budget

How much it costs to finish your basement will ultimately come down to the features you add and how the work is done. Consider these factors when making a budget:

•   Labor. This may cost $25 to $100 per hour, and you might also need a plumber or electrician to do some specialized work, which could increase the price (as anyone who’s rewired or needed to pay to fix a plumbing leak knows). Typically, labor costs will be 25% of the total project cost.

•   Permits. According to Angi, getting the proper permits for your project can run between $1,200 and $2,000.

•   Materials. The cost of materials, such as flooring, insulation, and drywall, will make up the bulk of your project budget. Expect to pay around 70% of your budget on materials, depending on the specifics of your remodeling.

Other areas where your basement costs may add up include if you opt for high-end materials, if you hire a professional for interior design assistance with the layout or furnishing plans or if you add furniture to the space.


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How to Save Money on Basement Remodeling

There are many ways to save money on basement remodeling, the first being doing the labor yourself. If you’re simply going for a basic basement remodel for storage, this is a project you likely can DIY even without a lot of prior home renovation experience.

You might, for example, want to add corner shelves, install a pegboard system for mounting your tools, or build a wire rack system to store your bulky items — all basement finishing tasks you can tackle yourself without hiring outside labor.

If finishing your basement requires extensive electrical work and/or plumbing, however, you’ll likely want to call in a licensed professional to do that work.

If you’re on a tight budget, you might rethink installing a kitchenette or a bathroom, which is where your basement refinishing costs often add up quickly. A budget-friendly option for cabinetry could be purchasing from a resale shop or using old cabinets from another part of your house that you can refresh with an inexpensive coat of paint.

Recommended: The Top Home Improvements to Increase Your Home’s Value

The Takeaway

A basement remodel could serve multiple purposes — adding living space or storage to your home — while simultaneously improving your quality of life and the resale value of your home. With the average basement finishing project costing almost $32,000, you may also need to consider financing options, such as a personal loan to use for home improvement.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

FAQ

How much to finish a basement?

According to the home improvement site Angi, the average cost to finish a basement in 2025 is $32,000.

Can you finish a basement for $10,000?

While the average cost to finish a basement is currently $32,000, it may be possible to do the job for $10,000 if it’s a small and simple job and if you find a lower-cost but qualified contractor.

What is the most expensive part of finishing a basement?

The most expensive part of finishing a basement is often the materials themselves, which can account for a majority of the cost.

Photo credit: iStock/PC Photography

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SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SOPL-Q225-063

The average cost across the United States to install central air conditioning was $5,958 as of mid-2025. That price can, however, fluctuate based on such factors as where you live, the size of your home, and what kind of unit you choose.

Here, learn more about air conditioning costs, your options, and how to get the best possible price if you do choose to install central cooling.

What Factors Play a Role in Installing Central Air?

Many factors go into the cost to install central air conditioning, including the brand of AC you choose, the unit itself, and the overall size of your home. A central air conditioning unit alone can cost thousands of dollars. For instance, a split unit air conditioning unit will typically run between $2,000 and $3,000 on average; a packaged central air conditioning unit will be somewhat more, typically between $2,500 to $4,500. (More in a minute on the difference between these types of systems.)

If you add in the labor of an air conditioner contractor, the cost to install central air ranges from $3,500 and $7,000 on average. But that number can range depending on where you live, the type of AC system your home needs, and the condition of your existing air ducts.

According to HomeAdvisor, these are the average air conditioning unit costs with installation:

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Pre-Installation Evaluation

Some helpful things to think about when evaluating your home for a new air conditioning system include a careful analysis of how big of a system your living quarters need. The price jumps quickly for larger units, so it’s often smart to make sure you’re not overdoing the cooling capacity for your project.

Ease of access for installing the bulky ducting system of a traditional air conditioning setup is important, so if you have a tight basement or attic crawl space, expect to pay more in labor costs than if you had more room to mount all the equipment and pipes easily.

Also, think about where you’d want to locate the duct feeding into the room. You might have to cut through hardwood or tile, for example, to gain an access point for the air to flow. Or there could be a spot in your house that needs a little more airflow and will therefore require multiple ducts into the room.

Though an AC installation typically just takes one day, if extensive cutting into floors or walls or ductwork is required, it could take several. If this might disrupt your quality of living, you’ll likely want to consider staying with family or friends as your central air is installed — or move into a hotel, the cost of which should factor into how you make a budget for your overall air conditioning costs.

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Types of AC Units

Affordability and preference help determine the type of air conditioning unit that you’ll need, which affects the overall central air cost. A traditional split system — with air conditioning on one side of the unit, heating on the other — is on the lower end of the pricing range vs. packaged units. In addition, more complex models that include heat-pump, hybrid, and geothermal functionality can run substantially higher.

Ductless air conditioning systems have been around for years and are rapidly entering the U.S. market from overseas. They can offer affordable efficiency as they cool living spaces. Ductless units have a central compressor and fan with standalone wall-mounted units that eliminate the need for ducting. Instead, a wall-mounted fan serves each room independently. Coolant and drainage lines are routed through the wall back to the centralized air conditioning assembly, making for a clean finish.

Ductwork

When planning central air installation, you should consider what kind of ductwork is best for your home. Ductwork falls into two categories — flexible or rigid — with many different options for materials within each. Flexible and rigid ductwork each has its own pros and cons regarding price, lifespan, efficiency, and flexibility.

The cost of ductwork can vary greatly. The national average cost for ductwork is $1,252, but can range from $453 to $2,188 or significantly higher depending on the job specifics.

The cost to replace old ductwork is higher since it involves both removing the existing materials and installing new ductwork.

Recommended: How Much Is My Home Worth?

AC Installation and Labor

While handy types may be tempted to tackle the central air installation on their own, it might be wise to find a contractor who is well-qualified to ensure that the job is done properly.

City codes departments typically require permits for work like central air installation that can be obtained easily by a state-licensed contractor. Handling refrigerant chemicals like Freon™ also requires a license, according to the EPA.

Many websites offer contractor and price-compare quotes in your area. Angi and Thumbtack both can be good places to start your research. A referral from someone you know also can be a great way to find a vetted air conditioning contractor.

You might also search online communities and neighborhood forums to find a reliable air conditioning contractor. There’s a good chance that someone locally has had similar issues and might be able to recommend a professional contractor to handle your air conditioning installation job.

You’ll also need to consider how to finance this work. Perhaps you have savings to draw upon and tax credits can help. You might also consider a home improvement loan, which is a kind of personal loan in which you receive a lump sum of cash and then pay it back over time with interest.

These loans offer the advantage of typically having a significantly lower interest rate than charging the costs to your credit card. Applying for a personal loan of this kind is usually quick and easy, too.

Recommended: The Top Home Improvements to Increase Your Home’s Value

The Takeaway

The cost to install central air conditioning is, on average, almost $6,000. While that’s a considerable expense, it can include the labor involved in addition to the price of the unit by itself. And it can give you peace of mind knowing you have a new central air system to keep you cool and likely improve the resale value of your home if you plan to list your house or refinance in the future. For this reason, it may be wise to look into your financing options, such as taking out a personal loan.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

FAQ

What is the $5,000 rule for air conditioning?

The $5,000 rule is a way to determine whether it’s worthwhile to replace your a/c system. Multiply the age of your system in years by the cost to repair it. If the result is over $5,000, you should replace it. If it’s under $5,000, then repair it.

What is the average cost to install new a/c?

As of 2025, the average cost to install air conditioning is $5,958, according to the home improvement site Angi.

Does new a/c qualify for a tax credit?

It may indeed. A tax credit is typically effective for qualifying products purchased and installed between January 1, 2023, and December 31, 2032 under the Energy Star guidelines. Claim the credits, up to 30% of costs to a maximum of $600, using the IRS Form 5695.

Photo credit: iStock/Pramote2015

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SOPL-Q225-062

Almost everyone has financial goals — whether it’s eliminating student loan debt, saving for a home, building a million-dollar retirement fund, or all of the above.

No matter what your objectives are, achieving them generally takes more than just wishful thinking. With the right strategies, you can take control of your finances, boost your savings, pay down debt, and make steady progress toward your goals.

Here, we’ll explore some of the smartest personal finance tactics to help you move closer to the financial future you envision.

Strategies to Build Financial Wealth

No matter what your current income, these seven smart money moves can put you on the path to financial stability and long-term security.

Build and Maintain an Emergency Fund

If you get hit with a large unexpected expense (like a car repair or medical bill) or temporarily lose your income and don’t have any emergency savings, you might end up relying on credit cards to get by. This can lead to a cycle of debt that can take months, even years, to break out of, turning a small bump in the road into a major financial setback.

To build financial security, it’s important to have an emergency fund that can cover your basic living expenses for anywhere from three to six months, or more. So, if you normally spend $3,000 per month on bills and essentials, you would aim to set aside $9,000 to $18,000 in your emergency fund.

If that dollar amount sounds a little daunting, it’s fine to start small — you might gradually build your fund by setting aside $50 or $100 dollars per paycheck in a high-yield savings account earmarked for emergencies.

Consider setting up a recurring transfer from your checking account into this account each month. Over the course of a year, that bit-by-bit approach to saving money can add up to a much larger sum.

Tackling Debt Strategically

Debt can be one of the biggest obstacles to reaching your financial goals. High interest rates and fees often mean you end up paying far more than the original balance — especially with credit card debt and student loans.

Take credit cards, for example. The average interest rate for credit cards as of May 2025 is 28.63%. If you’re only making the minimum payment, most of that payment is going toward those toward interest charges rather than reducing your balance. This means your debt continues to go up and you’ll end up paying significantly more (possibly hundreds or thousands more) than your original purchases were worth.

If you’re looking to build a solid financial foundation, one of the smartest moves you can make is to prioritize paying off high-interest debts quickly.

Two proven strategies to help with debt repayment are the snowball method and the avalanche method:

•   The Snowball Method: Focus on paying off your smallest debts first, regardless of the interest rate. Once the smallest balance is paid off, roll that payment into the next-smallest debt. This strategy builds momentum and motivation as you see debts disappear one by one.

•   The Avalanche Method: Prioritize paying off the debt with the highest interest rate first while making minimum payments on the others. Once the highest-interest debt is gone, apply that payment to the next-highest interest debt. This method typically results in paying less interest overall.

While the avalanche method is more cost-efficient in the long run, some people find the snowball method more encouraging because of the quicker psychological wins.

Make the Most of Credit Cards

Credit cards can either be a financial trap or a useful tool — it all depends on how you use them. When managed responsibly, they offer several advantages:

•   Cash back and rewards: Many cards offer 1% to 5% back on everyday purchases or points you can redeem for travel, dining, or other perks. These benefits allow you to save money without making any sacrifices.

•   Fraud protection: Credit cards often include strong fraud safeguards, meaning you’re not liable for unauthorized charges if your card is lost or stolen.

•   Purchase protection: Some credit cards offer automatic purchase protection. This benefit provides coverage for items purchased with the card if they are damaged, stolen, or lost within a specific timeframe.

•   Credit building: Using credit cards responsibly — by making on-time payments and keeping your balances low — can strengthen your credit profile. Keeping old accounts open also helps extend your credit history, which lenders like to see.

•   Balance transfers: If you’re carrying a balance on a high-interest card, a 0% APR balance transfer offer could help. These promotions give you a period — often 12 to 18 months — where you can pay off debt interest-free. Just be sure to pay off the balance before the promotional period ends to avoid steep interest charges.

To use credit cards to your best advantage, aim to pay off your balance in full and on time each month, and keep your credit utilization (how much of your available credit you’re using) below 30% to maintain healthy credit.

Build and Stick to a Budget

Budgeting is a cornerstone of smart money management. It helps you see what’s coming in, what’s going out, and where you can make adjustments.

There are many different types of budgets but one simple framework that can help you get started is the 50/30/20 rule. This divides your monthly after-tax income into three categories:

•   50% goes toward needs like housing, groceries, transportation, and minimum payments on debt.

•   30% is for wants — entertainment, dining out, and nonessential purchases.

•   20% is allocated to savings, investments, and paying more than the minimum on debt.

This approach helps you prioritize spending, manage debt, and build a financial safety net.

You can set up a budget using pen and paper, a simple spreadsheet ,or a dedicated app. Many banks also offer budgeting tools that track spending and categorize purchases automatically.

Cut Monthly Costs Without Sacrificing Comfort

Once you’ve assessed your spending, the next step is identifying areas to trim back. Here are some common expenses you may want to reassess:

Housing: If rent is taking a big chunk out of your income, you might look into getting a roommate, moving to a less expensive area, or downsizing.

Transportation: Consider carpooling with friends and coworkers, taking public transit, and swapping a costly car lease for a more affordable vehicle. You might also save by comparing car insurance providers.

Cable and subscriptions: Consider replacing a pricey cable package with more affordable streaming services. If you already subscribe to multiple streaming services, you might get rid of the ones you rarely watch. Another way to save on streaming is to rotate your subscriptions (i.e., canceling one service and then subscribing to another when you want to watch something specific).

Dining out: Cooking at home can significantly reduce weekly food costs. Consider doing some meal prepping or batch cooking on the weekends and using a slow cooker on work days to make it easier to resist going out or ordering in.

Online shopping: Consider deleting saved payment methods on your favorite shopping sites to add more friction to impulse purchases. It’s also a good idea to unsubscribe from promotional emails that tempt you to spend.

Also keep in mind that you may be able to cut some of your so-called “fixed” monthly costs, like your cell, internet, and insurance bills. Call around to see if you can get a better deal from a competitor, or simply reach out to your current providers and ask for a better price. Many companies will offer promotions to retain existing customers.

If you’re carrying a balance on your credit card, you might contact the card issuer and ask for a lower interest rate — especially if you have a good payment history or competing offers from other cards.

Start Saving for Retirement Now

The earlier you begin saving for retirement, the easier it will be to reach your goal. Thanks to compound returns (when the returns you earn get reinvested and earn returns of their own), small contributions now can grow significantly over time.

Popular retirement accounts include:

•   401(k): This is a retirement savings plan offered by many employers, often with contribution matching (which is essentially free money). You don’t pay taxes on contributions or earnings until you withdraw the money in retirement.

•   Traditional IRA: A traditional individual retirement account (IRA) is an account you open on your own, not through an employer. Contributions may be tax-deductible, and withdrawals are taxed in retirement.

•   Roth IRA: A Roth IRA is also an individual account, but you fund it with after-tax dollars. This means you pay taxes on the money now but the account grows tax-free and qualified withdrawals in retirement are tax-free.

Financial advisors often recommend putting at least 15% of your pre-tax income each year for retirement (this includes any employer match).

Keep in mind that all retirement accounts come with annual contribution limits set by the Internal Revenue Service (IRS). These limits are influenced by factors such as age, income, and whether or not you (or your spouse) have access to a workplace retirement plan.

Be Smart About Loans

Large expenses, such as purchasing a house, car, or starting a business, typically require more cash than most individuals have sitting in their bank accounts. Loans provide a way to finance these expenses by borrowing money, which is then repaid over time with interest. When considering a loan, keep these smart borrowing tips in mind:

•   Shop around: Compare different lenders and loan types to find the best interest rate, terms, and fees. You can often rate shop online without any impact to your credit.

•   Understand the loan: Familiarize yourself with the loan terms, repayment schedule, and any associated fees or penalties.

•   Only borrow what you need: It’s important that you only borrow the amount necessary for your specific needs, as borrowing more can lead to higher overall debt and interest payments.

•   Assess your ability to repay: Determine if you can comfortably afford the monthly payments based on your income and monthly expenses.

•   Set up automated payments: Automate your loan payments to ensure you never miss a payment — this helps you avoid late fees and potential dinks to your credit.

•   Make extra payments when possible: Pay more than the minimum amount whenever possible to reduce the principal balance and save on interest.

•   Consider refinancing: If at some point you can lock in a better interest rate, consider refinancing your loan. Just keep in mind that extending the loan term can lead to increased overall costs.

The Takeaway

Smart financial strategies aren’t just about cutting back — they’re about making intentional choices with your money. Whether you’re paying down debt, investing for the future, or fine-tuning your budget, every step you take brings you closer to your financial goals. With the right tools and mindset, long-term financial success is within reach.

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FAQ

What are the top 3 financial habits?

Top financial habits include: 1) Budgeting: Tracking income and expenses to manage money effectively. 2) Saving: Setting aside a portion of income for emergencies and future goals. 3) Investing: Growing wealth over time by putting money into stocks, bonds, or other assets. These habits help ensure financial stability and long-term security.

What is the SMART concept in finance?

The SMART concept in finance stands for Specific, Measurable, Achievable, Relevant, and Time-bound. It helps in setting clear and actionable financial goals. For example, instead of a vague goal like “save more,” a SMART goal would be “save $5,000 for a vacation you want to take in one year by setting aside $417 each month.” This framework ensures goals are well-defined and easier to achieve.

What is the 70/20/10 rule in personal finance?

The 70/20/10 rule in personal finance suggests dividing your income into three parts: 70% for monthly bills and everyday spending, 20% for savings and investments, and 10% for additional debt payments or charitable giving. This rule helps maintain a balanced budget, ensuring you cover essentials, build wealth, and manage debts or contribute to causes you care about. It’s a simple and effective way to manage your finances.

About the author

Kylie Ora Lobell

Kylie Ora Lobell is a personal finance writer who covers topics such as credit cards, loans, investing, and budgeting. She has worked for major brands such as Mastercard and Visa, and her work has been featured by MoneyGeek, Slickdeals, TaxAct, and LegalZoom. Read full bio.

An expense ratio is the annual fee that mutual funds and exchange-traded funds (ETFs) charge investors, to cover operating costs. The fee is deducted from your investment, reducing your returns each year — which is one reason why expense ratios have been shrinking.

Typically, investors may look for funds that offer lower expense ratios, as high expense ratios can take a substantial bite out of long-term returns, affecting investors’ financial plans. Here’s a look at how expense ratios are calculated, what they encompass, and other factors worth considering when choosing a mutual fund or ETF to invest in.

How Expense Ratios Are Calculated

Though individual investors typically won’t find themselves in a situation where they need to calculate an expense ratio, it’s helpful to know how it’s done. To calculate expense ratios, funds use the following equation:

Expense Ratio = Total Fund Costs/Total Fund Assets Under Management

For example, if a fund holds $500 million in assets under management, and it costs $5 million to maintain the fund each year, the expense ratio would be:

$5 million/$500 million = 0.01

Expressed as a percentage, this translates into an expense ratio of 1%, meaning you would pay $10 for every $1,000 you have invested in this fund.

As you research funds you may come across two terms: gross expense ratio and net expense ratio. Both have to do with the waivers and reimbursements funds may use to attract new investors.

•   The gross expense ratio is the figure investors are charged without accounting for fee waivers or reimbursements.

•   The net expense ratio takes waivers and reimbursements into account, so it should be a lower amount.

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How Expense Ratios Are Charged

A fund’s expense ratio is expressed as a percentage of an individual’s investment in a fund. For example, if a fund has an expense ratio of 0.60%, an investor will pay $6.00 for every $1,000 they have invested in the fund.

The cost of an expense ratio is automatically deducted from an investor’s returns. In fact, when an investor looks at the daily net asset value of an ETF or a mutual fund, the expense ratio is already baked into the number that they see.

The Components of an Expense Ratio

The fees that make up the operating costs of a mutual fund or ETF can vary. Generally speaking, the investment fees included in an expense ratio will include the following:

Management Fees

The management fee is the amount paid to the person/s managing the money in the investment fund — they make decisions about which investments to buy and sell and when to execute trades. Management fees can vary depending on how much activity is required of these managers to maintain the fund.

Custodial Fees

Custodial fees cover the cost of safekeeping services, the process by which a fund or other service holds securities on an investor’s behalf, guarding the securities from being lost or stolen.

Marketing Fees

Also known as 12b-1 fees, marketing fees are used to pay for the advertising of the fund, some shareholder services, and even employee bonuses on occasion. FINRA caps these fees at 1% of your assets in the fund.

Other Investment Fees

Investors may be forced to pay other investment fees when they buy and sell mutual funds and ETFs, including commissions on trades to a broker. The cost of buying and selling securities inside the fund is not included as part of the expense ratio. Additional costs that are not considered operating expenses include loads, a fee mutual funds charge when investors purchase shares. Contingent deferred sales charges and redemption fees, which investors pay when they sell some mutual fund shares, are also paid separately from the expense ratio.

How to Research Expense Ratios

Luckily, you do not have to spend your time calculating expense ratios on your own. The Securities and Exchange Commission (SEC) requires that funds publish their expense ratios in a public document known as a prospectus. The prospectus reports information important to mutual fund and ETF investors, including investment objectives and who the fund managers are.

Online brokers often allow you to look up expense ratios for individual investment funds, and they may even offer tools that allow you to compare ratios across funds.

Average Expense Ratios

Expense ratios vary by fund depending on what investment strategy it’s using. Passively managed funds that frequently track an index, such as the S&P 500 index, and require little intervention from managers, tend to have lower expense ratios. ETFs are usually passively managed, as are some mutual funds. Other mutual funds may be actively managed, requiring a heavier touch from managers, which can jack up the expense ratio.

Expense ratios have been falling for decades, according to the most recent Morningstar Annual U.S. Fund Fee study, released in May 2025. In fact, that report notes that in 2024, the average expense ratio “paid by fund investors was less than half of what it was two decades ago.”


💡 Quick Tip: How to manage potential risk factors in a self directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

What’s a Good Expense Ratio?

When considering expense ratios across mutual funds and ETFs, it’s helpful to use average expense ratios as a benchmark to get an idea of whether a specific expense ratio is “good.”

Investors may want to target funds with expense ratios that are below average. The lower the expense ratio, the less expensive it is to invest in the fund, meaning more profits would go to the investor vs. the fund.

That said, some investors may prefer to invest in actively managed funds, which typically charge higher fees than passive or index funds.

Looking Beyond Expense Ratios

When comparing mutual funds and ETFs, an investor might choose to consider other factors in addition to expense ratios.

It can be a good idea to consider how a particular fund will fit in their overall financial plan. For example, individuals looking to build a diversified portfolio may want to target a fund that tracks a broad index like the Nasdaq or S&P 500. Or, investors with portfolios heavily weighted in domestic stocks may be on the hunt for funds that include more international stocks.

And it’s also a good idea to know the key differences between mutual funds and ETFs. ETFs, for example, are generally designed to be more tax efficient than mutual funds, which can also have a big impact on an investor’s ultimate return. ETFs are generally lower in cost than mutual funds as well.

The Takeaway

Expense ratios seem small, but they can have a big impact on investor returns. For example, if an individual invested $1,000 in an ETF with a 6% annual return and a 0.20% expense ratio, and continued making a $1,000 investment each year for the next 30 years, they would earn $81,756.91, and spend $3,044.76 on the fund’s expenses.

But expense ratios are only one of many factors to consider when choosing a mutual fund or ETF. Fundamentally your investment choices have to fit into your larger financial plan. But cost should always be a concern.

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FAQ

What is an expense ratio?

An expense ratio in investing is an annual fee that many funds, such as mutual funds or ETFs, charge investors to cover operating and management expenses and costs.

How are expense ratios calculated?

Expense ratios, funds generally use a formula that divides total fund costs by the total fund assets under management.

What expenses does an expense ratio pay for?

Funds typically have many types of expenses and fees, and an expense ratio can wrap together management fees, custodial fees, marketing fees, and commissions together into a single annual charge for investors.