How You Could Grow $26K to $44K in 7 Years: Smart Strategies to Try
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details welcome to nerve olets smart money podcast i'm shown piles. You know what? We've made aid a lot of episode of smart money this year, three episodes a week, times of forty eight weeks up to this month, give or take a few breaks.

We're talking around a hundred forty episodes. That's a lot of advice and financial coverage and pretty good advice and coverage if we do say so ourselves and in all likelihood, you didn't hear all of IT, right? If you did.

Thank you. If you you are a public radio, we would send you a tote bag. Anyway, we decided to go back through the archives this month to bring you the best of smart money.

Twenty twenty four. Some of our favorite conversations with you and some of our most meaningful advice today were bringing you the highlights of our investing coverage. I hope you agree that this is indeed the best of now under the show.

Hey, listener, we've got a special episode in store for you today, are investing in tax nerds recently hosted a web on are going deep into how you can level up your investing and tax strategy. So we package that up into a podcast. The nerds talk about what you need to know about different investing accounts, how to get help with your taxes and more. So here's the web.

A welcome, everyone. I am kim palmer. I'm a personal finance writer at nord wallet, where we help people make smart decisions.

One important note, we are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances. New world ink is not an investment advisor or broker and does not provide personal financial advisory services.

Today, we are excited to talk to you about the basic of investing in taxes, and we think we have some helpful info to share with you. You can always find more at nerd wallet dot com or on the nerd wallet dot. Our goal today is to kick off a helpful discussion about investing in tax information in tools, alia Benson rates about investing topics including stocks, funds and ethical investing. And now I will handed over to A.

A. Thank him. Hi everyone. Thank you for joining us today. So before we start, I just want to say a couple of things that often get forgotten when we're talking about investing first. Investing usually comes second to some other goals.

If you are having a hard time paying for necessities or you don't have an emergency fund, it's really important to focus on those things before we even start wear ring about investing. Second, instead of scrumming, try to increase your income. I didn't start investing until I was in my late twenty years, and that's because one I didn't work at nor all yet.

So I like literally didn't know anything until I was making around twenty five thousand dollars year. So I didn't have much extendable income. And when you don't have extra income, it's really hard to prioritize investing and IT just might not even be a good idea to do that.

When I started making more money, IT was sudenly a lot more possible for me to invest for retirement. If it's possible for you and you want to be investing more, look for jobs that will pay you more or look into side hustle, but cutting back on your streaming services probably will not save you enough money for retirement. And finally, if you don't have the money to invest now, that's totally fine.

Some people have serious money anxian, others just don't have the cash. Whatever your reason is, don't stress too much about IT, just keep learning. And when you're able to, you can start investing.

So why do we invest? What is the point of all this? The answer is that it's because we like money, and that's okay.

There is no shame. And additionally, I like money. Most people like money. It's because the money isn't just money.

It's not like scrooge mcduck diving in two polls of money and buying mother is it's not that it's about not being stressed about your money all the time and it's about being able to buy everything that you need and some stuff that you want. Comfortable ly, without having money stressed, take up all of your energy. Money allows us to thrive instead of just survive.

And investing helps you make more money than you could ever possibly make just by working at a job. So okay, what actually is investing? The whole process is very strange.

Investing is the process of money that you already have making additional money for you. And this works through what's called compound interest. Compound interest means that your gains get a little bit bigger every year. And that's also why starting when your Younger gives you a huge advantage and more money in the long run.

So let's, for example, you just start at that little number one in the box up there, say you buy an investment for a hundred dollars if IT goes up, the average stock market return of ten percent IT could then be worth a hundred and ten dollars, meaning that you've made ten dollars. Then that ten dollars that you earned also starts earning compound interest on top of the one hundred dollars you initially invested. That doesn't sound like much of a profit, but imagine if you are doing IT with way larger amounts of money over a way longer period of time.

Now that ten percent isn't annualize rate, which means that you're not going to get ten percent every single year. In all likelihood, some years you're going to finish up, some years you're finish down. But over the course of decades, when you average all that out, tend to get about ten percent.

The way you actually start investing is through an investment account, and there is a couple of different types. But the type of investment account you have is actually really, really important because a lot of them have some pretty significant tax benefits that you want to take advantage. So you've got you for one case, and these are offered through your employer.

You add money to IT and sometimes your employer matches IT. So it's basically free money. If you have a foreign k, you'll likely choose your investments from a preselected list or fund that will automatically adjust itself over time.

This means, for one case, are typically very hands off, I R S. On the other hand, our investment accounts that you open up yourself, I R S can be open online through brokerage and actually had a lot of large banks. They also do that.

So it's likely you can open up an investment account just through your bank, unlike with a four one K I R S, you'll have to choose your own investments in those accounts. Do you may have heard about a thing called a rough I R I or a rough for a one k and it's good if you know the different. So with a, you pay taxes on your money now, just like any other money that you earn.

And then the money you have invested inside that account grows tax free. And you can take IT out tax free and retirement with a traditional I R R for one k. The money you contribute today is pre tax.

So that is, you get to deduct IT from your income taxes this year, so like a nice little treat this year. But then when you cash IT out retirement, you will owe income taxes on IT. This is really, really important.

I've seen a lot of people make this mistake. Your investment account is not an investment. So a rough I array a four one k not an investment if you have a rough at that great night.

But that doesn't mean you're actually invested in anything. So you fund your investment account and then you buy investments from there. But i've heard of people opening a rough array, putting in a bunch of money and then wondering why I didn't grow over the last ten years.

So you have to purchase investments for your money to actually grow. And if you don't do IT, you'll miss out on all of years of groth. So very important.

And there's a couple different types of of investments that you can choose from once you open and fund your investment account. So you've got stocks, i'm sure everyone heard of that. These are shares of ownership in companies.

And the way you make money from them as if they go up in value and some pay you a cut of the company's profits on a regular basis, then you've got bonds. This is when you loan money to companies or the government and they pay you interest funds. Now these are very exciting because they're basically just baskets of stocks and bonds that you buy all at once.

I find IT is still a stack or bond based investment depending on the type of fund that you get. And there's a lot of different kinds such as like index funds or exchange traded funds and mutual funds, but there are all collections of investments that you buy at one time. And I think funds are pretty awesome because if you own a stock and that company goes out of business, you lose all of your money.

But if you invest in a fund that covers one hundred stocks and that same stock goes out of business, your investment is boobed up by the other ninety nine companies. So again, all of these investments, stock pods and funds, you buy them from your investment how, and then you own them in. So let's talk about about the stock market.

Is this like weird nebula term that kind of hard to understand? But the stock market is just where people buy and sell investments, but now people just trade investments online. The stock market is made up of several voter called market indexes.

Now these are basically just predetermined list of companies, and the performance of that overall list can tell us a lot about the health of the U. S. economy.

For example, the S. M. P. Five hundred, something you probably all heard of.

That's just the list of five hundred of the largest publicly traded companies in the U. S. And that includes companies like apple and amazon.

When we say the stock market is down today, that means that on average, most of those companies aren't doing what you can invest in the literal stock market, but you can invest in funds that include all the same investments. These are called index funds because they track a market index. Again, if you have an S M P five hundred index, fun IT should perform pretty closely to have.

The S M P. Five hundred itself is actually performing. The S M P five hundred goes at ten percent a year on average, and six and a half percent after inflation.

This is just an average. So some years the market goes more. Some years IT goes down less.

But when done well, investing can potentially double your money every few years for doing basically nothing, which is my favorite way of earning money by doing nothing. It's great. So let's talk strategy.

This is all about the way that you invest when you put your money in and when you take your money out. Passive investing is where you buy that S M P. Five hundred index fine, and you keep adding money until you attack. It's very boring, but it's effective.

IT can give you that ten percent return average over the long call, but a lot of people want to make more than that ten percent, and they do so by actively and buying and selling stocks, crypto options and other high risk investments. They try to predict when theyll be low, then they buy them, and then they turn around and try to sell them when they're high. These people are called active traders or day traders.

So only twenty percent of active traders make money over six month period. That is not a lot of people. There have been a lot of studies over the years that show that active investing is a way less lucrative fashion than boring.

All passive investing with that, except plus active investing is a lot more work. You have to do all kinds of research and you keeping I on the markets and you can hypotheses there's ally earn more by actively trading versus passively earning the same amount as that historical return of ten percent. But most people end up making less when they actually try IT, not because people are really bad at predicting things.

And in order to make money on the overall stock market over the long term, you have to be really good at predicting things all the time. So maybe you make a big on one stock, but the odds of that happening again and again are very low. Let's put all of this information together.

The accounts, the actual investment in the strategy. Here's how financial advisers suggest you prioritize your money. When you're starting to invest.

The first thing you want to do is you're not actually invest at all. The first thing is that you're going to have an emergency. This is money that you won't actually put in the stock market. And that's because when your money is invested, its value can change day by day.

Say you have a thousand dollars and you want to use IT for an emergency fund, but you invest in when you have to fix something on your car, suddenly you go to check your money and its value could be six hundred dollars instead of a thousand. And that's not that if you put IT in a high yield savings in that, how you can access that money at any time without risking its value. Plus right now, the interest rates are really high, so your money could be earning four to five percent just by sitting there.

Next, you want to get that four one can match if it's available to because it's free money. After that, it's a good idea to look into iron race, both ion race and for one case, have what's called a contribution limit, which is just a maximum of amount of money you can put in each of them every year. If you're able to max out in I right, then it's good to move back to your four one k and the reason you switch around like that is because of the way the tax benefit works. It's likely more beneficial to invest in an ira or over a four one k if you've already gotten your match, if you have to choose between the two, then if you max up your four one, kay, you can move to a standard burberry cup.

We are back in a moment with more smart money. Stay with us. Today's episode is supported by range rover sport. You know, some vehicles are built for performance, some for luxury and some for adventure. But the range rover sport, it's built for all three.

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We're back and answering your real world questions to help you make smarter decisions about your money. This episode question comes from cat, who sent us an email here. IT is good morning, Shawn and Sarah, and hello to liz, hoping she's enjoying retirement.

I have a goal to save forty four thousand dollars over the course of seven years. I currently have sixteen thousand dollars in a computer share stock purchase. I usually receive a return of four hundred dollars annually. I received a win df all of ten thousand dollars from an inherits from a family member in two thousand four and purchase stock in only one company because my dad works there, funded my education with his stock sale and i'm loyal to the brand. I have sold about eight thousand dollars worth for some home renovations over the years.

All that being said, what's the best way to diversify this investment to reach my forty four a thousand dollar goal by twenty thirty one? So increased by twenty eight thousand dollars, or about four thousand dollars a year. Is this even possible to help .

us answer cats question on this episode of the podcast, sir and I are joined by our other cohoes, Elizabeth eula. Hey, Elizabeth.

Hey guys. I love this topic, and I am hoping the universe is hearing and is gonna mia windfall. Because moving is make the starting my feelings. The cost is .

starting my feelings. It's exchange.

IT would be awesome.

alright. So before we get into cats question, this is a good time to remind our listeners ers, but we are not investment advisers, and this is not individualized advice. What we nearly people are about to discuss is for general educational purposes only.

Thinking for that reminder, Sarah. okay. So our listener has a really interesting investing puzzle. They have an undiversified portfolio and a very specific investing target. They want to grow their money by twenty eight thousand dollars in a matter seven years without any additional investments. This is likely impossible. But fortunately, our listing or has a lot of options available to them to mix up their investing strategy that might get them closer to their goal. So iran ansom numbers and the world is investing calculator using the average annual after inflation return to the stock market on the whole, which admittedly is a little bit different from what our listener is currently dealing with because they have a pretty undiverted by portfolio, is really just in one stock.

So what did you find? shon.

okay. So I ran a few different scenarios. One where they don't invest any additional money and get a seven percent return. In that case, the baLance is estimated to be about twenty six thousand dollars in seven years, and that's increase of about ten thousand. But it's not where they wanted to be.

Another scenario, iran is one where they invest one hundred and fifty dollars per month in a diversified portfolio that reflects the stock market and they get that same seven percent return that would get them to a little over forty two thousand dollars in seven years. And that's fairly close to their goal, but still not quite there. Then iran, a third scenario where they ended two hundred dollars per months in a davers a portfolio, but only get five percent growth on their investments.

In this case, their baLance would be a little under forty three thousand dollars after seven years. So that's getting them to their goal of actively. So what's the point of running all these numbers is to show that there is a huge range of possible outcomes when you invest. And your returns are going to depend on a lot of factors, including how much you can continue to invest, the return of the market and importantly, the types of investments that you hold.

And inflation has something to do with that too. So you actually want yeah keep that in mind. What I like about looking at the numbers this way is IT gives you a monthly contribution goal because it's so easy to say I want to five figure sum in a few years or I have x amount dollars who invest per year. But somehow IT seems attainable if you break IT down and to how much you need to contribute per month, because then you could walk IT into your budget with all of your other monthly expenses.

I know that's right, and I actually love calculators. For that reason, I always end up motivated when i'm bored in my free time, who uses calculations, and there are free time anyway.

we do. What do you do? right? I do.

But I love to see the potential returns that I could get. And I do think these sensitive numbers are great, but I also still worry about the risk as the listener does too, because there is no guarantee the company they are vested in or the stock market will yield any of the mention yields consistently over the next few years. So I think this is a good time to such on the diversification peace, because that can increase the odds of the listener .

achieve in our goal. absolutely. And I want to talk about why cas portfolio might be so undiversified.

I suspect IT has to do with something called familiarity bias with mild bias. And investing people tend to invest in companies that they are familiar with. As you might imagine, in case cases, the one that their dad worked debt.

Sometimes this happens when people work for a company for many years and they want to keep investing in IT because they believe in the company's performance. IT helped them over their life, and they probably still feel some kind of loyalty to that. But this can be a very risky way to invest. So Sarah elisabeth, I would love to hear what you think about this kind of investing strategy and what IT could mean long turn for someone I love .

when people asked me what I think.

okay. I think it's no balls to want to.

you know, invest in the company that you have some kind of sentimental attachment to. But I don't think it's the best financial strategy because companies can to perform at any time, right? I do think a great review example for me is that I was recently looking to rent a house, and I only applied to one house, and I fell in love at that house.

The shower was incredible. I was picturing myself in the house, all the things i'm going na be doing, quote and code manifesting, and then unfortunately, I did not get the house and I shot into years and I had to start back square one because I did not diversify my options. And there was some financial risk too, because I went all the way to the place, are moving to spend money to look at all these houses and in the end, you know don't use on any fruit yeah .

you put all your eggs in one basket. That's the risk of not diversifying.

right?

Yeah and and you not only do you have that risk of putting all too many egs in one basket, but simply investing in a company because it's familiar to you doesn't necessarily make IT a good company to invest in. I mean, how familiar was and on to a bunch of people, right? yeah.

Well, know what happened there. So the thing is, companies are run by human beings, and human beings are flawed companies that are sustainable. Two things I could affect their performance over time, that anyone, person who works in the company can't necessarily control all these forces outside of the company that affect IT. The thing is there are ways that you could analyze performance and assessing stocks fair market value to determine if it's a good time to buy or sell shares of that company. But honestly, most of us don't have the knowledge and experience to do that analysis all the time.

all the time.

I don't I don't want to do IT. I mean, that's that's a lot of hard cheese, guys. yes.

So then you're left picking a stock based on feelings, which is essentially gambling. It's pulling a level on a law machine there. There's no art, science or math involved in making that decision.

It's literally just well, i've heard of this company. My my friend works there. My family member works there. I've worked there like the people there. I like their product.

That's all good and that's a really great place to start, but it's not the only determining factor and whether not to use in a company. And so that's why diversifying your investments can be so helpful because IT saves you from yourself and your flawed decision making. And we all have flood decision making, even us.

right? If someone really wants to do invest in the company because they just love that company, that could be a their financial goal. However, cats goal is to grow their money. And as we know, the best way to do that typically is by having a well I diversified portfolio that is just more efficient on the whole. Let's talk a bit about how cat could diversify their portfolio of theirs.

To do this, they would probably first have to sell a certain amount of shares in the stock that they are currently invested in, the one from their father's company that would give them cash to them, invest in a more diversified way. And I should not hear that there are tax implications to selling stock that I will leave that rabbit hole unsprung for now, because that is a deep one, and I don't want to get lost in there. Team, let's talk about this with a proposal caveat that we are not directing cat or anyone else how to invest. What are your thoughts, ideas around how to invest cash that is more diversify than going into a single company that year that work that .

i've actually done this I held stock in a former employer. And at the time, because of where I wasn't life, IT ended up being a pretty high percent tage of my overall portfolio. And I was make me little. I sold off some of that stock to reinvest in index funds. And I did awesome taxes on the gains, but otherwise, IT was a pretty straight forward process, sell the stock, get the cash and then use that to buy shares of funds.

So I have actually not done that. I don't have experiences that. But one thing I will say is I invest mostly in index funds in ecs.

And that's quickly just state what index funds and E, T, S are. For people who may not know.

there are certainly like a basket of stock, right? You a that there are different kinds, ecs and index friends that you can get, but exposes you to different industries, different type of company is so that if one is under performing, hopefully the other one is doing pretty .

well and they can meet the performance of the market on the whole depending on what type of index.

Finally, if you're investing in exactly the on that sean was studying for his CF p exam, c lodge is poked for you .

just sprinkling IT without the conversation .

doing how he reviews course material.

Really IT is, yes. Anyway, go ahead. One of IT. So I do have some stock though that .

I am hurting and to be onest, I do not need to sell IT and would like to put IT in an index phone because I have quite a bit, a bit what the listener could do if their savy with investing is do some research analysis to see which socks have consistently performed over the past few years and investing those companies. But, but, but have to put a clause there.

They should also keep in mind that just because this socks did well in the past, IT doesn't guarantee IT will in the future. And that, my dear, is the risk of investing. They will not need to know how to do the numbers to do that.

There are different you know websites, platforms they can use to do that. There's also the option of throwing their money into an index fund or a mutual fund with relatively high returns. But again, they need to calculator to run the numbers. Another alternative is to pay a fee only investment advisor who can give them some strategies to try.

And another pretty easy option that might be really cost effective, too, for cat. And this is something that I do is regularly investing in a robot advisor account, where you can tell the platform what your financial goals are, what your timeline is. And then I make regular deposit into this account.

I basically saying, hey, I want to retire this year. So right now, when I A long time horizon, let's maybe have some risky investments and then taper them off to be less risky as I get closer to when I want to actually have this money to spend in fund my life. So rebel advisors do a lot of that heavy lifting for you. They're really in expensive. So I think that there are all sorts of great options for someone like cat look into in terms of ways to invest their money that make us so they don't want to do a lot of the work themselves.

China, you mention an investment timeline, so let's talk about that. Let's talk about cats investment timeline, which they say is seven years. What could that mean for their investment options?

Yeah, well, that actually is so key to this whole puzzle that i'm so interested in. A lot of financial advisors and investment advisers will recommend that you don't invest money that you need within five years, and that is to account for the volatility of the stock market. You want to give yourself the best shot that you possibly can to have your money grow.

Well, of course, understanding there are no guarantees with investing. Really with that in mind, cat is pretty close to that five year benchmark. And if I were, then I would probably choose something like a lower risk etf or index fund so that I have less of a chance of losing the money that i'm putting in to the stocks that i'm gonna hoping grow for me. If they want to be even more conservative. Cat could just funnel as much money as possible into a higher savings account.

Yeah, I definitely second the savings account because I ve just been pop in in there. Unfortunate having to make withdraws for this move. And i've been seeing lots of Green that didn't come for me. So i've been getting some nice healthy deposits in there from the great interest rate. So that's definitely a good option for people.

And with such a specific goal in a specific time frame, that tells me that cat already has a plan for that money because if not, why? Seven years in forty four thousand dollars, those are not even round numbers.

I'm really wondering what cats doing with this money.

I don't like ten years and fifty thousand dollars.

you know. I mean, like you going so you .

want to invest with that time frame in mind. And then you know, if your goals change, you can also make changes to how your money is invested. So maybe things change for you and you're like that I can bump this call out another three years.

What does that change for me? So periodically races because even though seven years as a pretty short time frame when IT comes to investing world, it's still time to reevaluate once in a while what you're doing. And if it's working for you.

that's all we have for this episode. Do you have a money question of your own, turn to the nerves and call or texas your questions at nine o one seven three zero six 3 as nine nine one seven three zero nerd， you can also email us a podcast atter ballot 点 com。 And remember, you can follow the show on your favorite podcast, APP, including spotify apple podcast.

And I hear t radio to automatically download episodes. This episode was produced by test figure IT was mixed by Megan mower and a big thank you to nerd walls editors for all their help. Here's our brief to claim er, we are not financial or investment advisers. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances. Ces, and with that said, until next time turn to the nerds.

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