The race to zero is on.
And it’s heating up.
Most major discount brokerages have dropped their headline commissions on stock trading to $0. That means someone can buy stock for no fee.
Well, sure. At face value, it’s fantastic. It’s always better to pay less for the same exact thing.
This is particularly true for those aiming to save and invest their way to financial independence and an early retirement, as I’ve done.
I built my FIRE Fund on relatively modest means. I had a middle-class day job at a car dealership, saved 50%+ of my net income, and regularly accumulated shares in world-class enterprises that pay reliable and rising cash dividend payments.
The plan was to retire by the time I turned 40. I wanted to live off of dividends at a young age.
Well, I retired at 33 years old and now live off of five-figure passive dividend income. The plan definitely worked out better than expected. It’s a great spot to be in.
But back when I first started, I found it difficult to muster up even $1,000 to buy stock. It ain’t easy to save a grand when you’re making barely $40k/year. And that’s when trading fees were still commonly $7 to $10 per transaction.
Those fees add up. Quickly. At, say, $7 on a $1,000 stock buy, I’m paying 0.7%. That’s quite a drag on my dividend income and return.
In response to these fees, I made it a rule of thumb to average no more than a 0.5% charge on my stock buys.
That meant averaging no less than $1,400 per transaction on a $7 commission fee structure.
In this day and age, that might sound nuts. After all, one can go out and buy a single $20 share for nothing.
However, I’m going to play devil’s advocate for a moment here and say that paying fees back in the day was actually an advantage for me in some ways.
From a certain perspective, free stock trades can be a bad thing.
I know that sounds crazy.
But I’ll tell you three big reasons why I could argue this from personal experience.
First, I was forced to think about every single expense in my life.
No matter how small the expense, I had to carefully judge it.
If I’m going to whine and moan about paying $7 to build my wealth and passive income, I obviously can’t sit there and giddily pay $7 for an appetizer at a restaurant, a fancy drink at a bar, or anything else.
It comes down to value, folks.
I heard from so many investors over the years who would bemoan these small trading commissions, but they didn’t seem to have that same attentive attitude toward other (often larger) discretionary spending in their lives. That’s a mistake to pick and choose where you discern value. A $7 fee was a bummer, but a traditional consumer lifestyle was fine. They were being penny wise, pound foolish.
See, I was forced to scrutinize small expenses. And I had to justify the value on everything in my life.
Seven dollars might not seem like much. But just like it adds up on the stock purchases, it adds up in everyday life, too. In fact, it adds up much faster in everyday life.
And that attitude – the scrutiny – scales up as costs rise.
The second reason is, these fees motivated me to save more money.
Knowing that I had to come up with that $7 for a stock trade meant I had to cut that same $7 from something else in my life.
Maybe I didn’t order a pizza on a Friday night. Or perhaps I skipped a Saturday night out to instead direct that capital toward achieving FIRE as soon as possible.
When a mindset takes shape, it’s something that kind of sticks with you for the rest of your life. Habits – good or bad – tend to stay with you.
And I’m thankful for that hardcore focus on value early on.
Moreover, and really more to the point, I was motivated to save more in a very direct way.
What I mean is, I had to regularly come up with the $1,400 on the average transaction so as to limit my friction costs as an investor.
Whereas investors nowadays can just put $50 away on a stock without a thought, I had to put in a ton of effort to come up with that “shopping money” because the “entrance fee” to the store was there.
That had a way of increasing my scrutiny on expenses, because it often came down to a fundamental choice between Item X, Experience Y, or Stock Z. Since stock was what would unlock freedom for me, which is what I prized above all else, it usually won out.
Lastly, I had to fully analyze a business before investing in it.
Because I was committing so much capital to a single purchase at a time, I had to think very carefully about what I was doing and whether or not I was fully confident on an idea.
That meant going through the fundamentals, judging competitive advantages, weighing out risks, and thoughtfully estimating value. I had to do all of that before even thinking about plowing my hard-earned cash into a stock.
There was no easy or cheap way to just move in and out of stocks back then, which helped me to craft my investor mindset just as much as my saver mindset and value mindset.
I realized frequent trading was a bad idea. But I was kind of coerced into staying honest and becoming a true long-term investor because the fees restricted me to a degree.
So that’s my experience as someone who saved and invested in dividend growth stocks with the aim of achieving FIRE. And I’ve operated under both the old fee structure and the new no-fee structure.
With all that said, free trades can still be wonderful.
I’m a big fan of free trades.
Free is awfully nice. I’m happy to take advantage of free trades, even though (or perhaps especially because) I’m no longer aggressively accumulating stock.
But I think having the right mindset in place is incredibly helpful.
Make sure you’re an investor, not a trader.
Don’t let these free trades allow you to slip on your lifestyle choices. There might no longer be an “entrance fee” to the stock store, but that doesn’t mean you shouldn’t still scrutinize your expenses (no matter how small) or get away from focusing on value across your entire life.
So save, focus on value, and scrutinize your purchases (stocks and otherwise) as if those high fees are still in place. Pocket the difference. And grow your wealth and passive income even faster than you otherwise could have!
What do you think of free trades? Did you used to pay fees? Ever find that fees motivated you to save and invest even more?
Thanks for reading.
P.S. If you’re ready to achieve financial independence and retire early, check out some amazing resources I personally used on my way to becoming financially free at 33!