Guide
Fees and Compounding: Why Small Percentages Matter
Fees reduce the return that can compound. Here’s a simple 0.5% vs 1% vs 2% illustration and how to test fee scenarios in the calculator.
Published: March 12, 2025 · Updated: December 21, 2025 · By FinToolSuite Editorial
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Run fee scenarios to see how a small % changes long-term growth.
Open the calculatorQuick answer
A 1% fee isn’t “just 1%” over decades—it compounds against you. The longer the timeframe, the bigger the gap. Test it in the calculator.
Disclaimer
Educational purposes only; not financial advice. Examples are illustrative; real returns vary and investments can go down as well as up. Fees, taxes, inflation, and rules vary by provider and country. Fees can be structured differently (platform fee, fund fee, trading costs).
What “fees” mean
Fees are recurring costs taken from your balance (percent or fixed). They can include platform fees, fund fees, or transaction costs. The key number is the net outcome after fees.
0.5% vs 1% vs 2% (illustration)
Starting: £10,000. Monthly contribution: £100. Time: 20 years. Gross return: 6% (illustrative). Approx net return = gross − fee (rough approximation).
| Annual fee | Approx net return | Ending balance (approx.) | Difference vs 0.5% |
|---|---|---|---|
| 0.5% | ~5.5% | ~£56,500 | — |
| 1.0% | ~5.0% | ~£53,000 | ~£3,500 lower |
| 2.0% | ~4.0% | ~£46,500 | ~£10,000 lower |
Try these fee levels in the calculator.
Why fees hit harder over time
- Fees reduce the balance each year, so future growth is on a smaller base.
- Compounding works both ways: returns build, fees subtract.
- Impact grows with time, rate, and balance size.
How to model fees in the calculator
If a fee field exists, enter the annual fee. If not, approximate by lowering the assumed rate (e.g., net ≈ gross − fee). Label approximations clearly.
Open the calculatorCommon mistakes
- Ignoring fees entirely.
- Comparing options using gross returns only.
- Mixing one-time fees with annual fees in the same assumption.
- Not keeping assumptions consistent.
More pitfalls: compound interest common mistakes.
FAQ
How do fees affect compound interest?
Fees reduce the balance each period, so future growth is on a smaller base.
Is a 1% fee a big deal?
Over long timelines, a 1% annual fee can create a noticeable gap versus a lower fee.
Why do fees matter more over 20–30 years?
Recurring costs compound against growth; the effect grows with time and balance size.
What types of fees exist?
Annual % fees, platform fees, fund fees, trading costs, and sometimes fixed account fees.
How do I estimate fees if they’re not clear?
Check provider documents and assume a range if unsure; test low/base/high fee cases.
Can fees be deducted monthly instead of yearly?
Yes, some providers deduct monthly. More frequent deductions also reduce the compounding base.
Should I model fees by reducing the return?
As a rough approximation, yes (net ≈ gross − fee). Exact fee structures may differ.
How do taxes and inflation interact with fees?
Taxes and inflation both reduce real outcomes. Fees add another drag; all three lower net growth.
Compare fee scenarios
Run 0.5%, 1%, and 2% fee cases in the calculator to see the range of outcomes.
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