Smart Money Podcast: Nerdy Deep Dives: Investing, Part 1

Sean Pyles: Welcome to the NerdWallet Smart Money Podcast, where we usually answer your personal finance questions and help you feel a little smarter about what you do with your money. I'm Sean Pyles. I said "usually" there, because we're actually doing something a little bit different for the next few weeks. Each Thursday, we're releasing one part of a three-part series all about investing. We know that this is a topic our listeners are interested in, so we wanted to spend some time digging into how to get started investing, how to find the best approach for your goals, and how to manage risk and reward. And I'm joined by investing Nerd Alana Benson for this nerdy journey. So hey, Alana. Welcome.

Alana Benson: Hey, Sean, thanks for having me.

Sean: Yeah. Happy to have you. So one quick thing before we get into this episode. While Alana and I are going to walk you, our dear listeners, through how to think about and get started investing, we still want to hear from you. Send us your thoughts about investing, what's worked for you, where you've run into trouble, and where you might need a little more guidance. Just like on regular episodes of Smart Money, you can call us or text us on the Nerd hotline at 901-730-6373. That's 901-730-NERD. You can also email us at [email protected]. We love hearing from our listeners, so please don't hesitate to reach out.

Alana: And one additional note, courtesy of the NerdWallet legal team, we are not financial or investment advisors. The nerdy info we're discussing in this series is provided for general educational and entertainment purposes, and may not apply to your specific circumstances.

Sean: All right, on with the show. This episode, Alana and I are going to talk about how to get started investing the right way. Before we do that, though, Alana, let's just chat a little bit about your background. We've had you on Smart Money before, but since you'll be our guide for the series about investing, I want our listeners to get to know you a little bit. So can you tell us why investing is something that you totally nerd out about?

Alana: For most of my life, I had no interest in investing. It felt really intimidating and inaccessible, and I would have to spend hours of my life learning how to do it. So I just never really started. I've since learned that investing is actually pretty awesome because it's a free way to make more money.

Sean: Totally. And I'm all about making money, so I can relate. And for a long time, I felt the same way about investing, before I learned more about it. And that's really what we are here to do, is teach people how to invest so they can make money from their own money. And I'm really glad that you are our guide for this series.

This episode, we're going to go deep into attitudes about investing. We're going to do a little bit of myth-busting, and finally, we'll discuss how to actually get started with investing. And then in upcoming episodes, we'll discuss specific investments, like stocks and mutual funds, investment strategies, and how to balance risk and reward when investing. So Alana, kick us off.

Alana: For this first section, we're actually going to explore our own personal money backgrounds. I think the most important thing to think about is why you haven't started investing already. If you're coming to this podcast, there's a reason why you haven't started, and you know that you probably should be investing. And this can be kind of rocky ground for some people. It may bring up emotions or insecurities, but I really believe that understanding the reasons for why you've been hesitant to start can help you overcome them and move forward.

Sean: And as you alluded to, I think that people should do a little bit of soul-searching and think about how their attitudes toward money in general have informed how they've managed their finances. And to put on my Freudian hat, looking into your upbringing can be really helpful. Was your family really money savvy, and was investing par for the course when it came to managing money? Or was your family on a tighter budget and there often wasn't enough money for new clothes, let alone money to invest?

And even families that live comfortable middle class lives sometimes don't think that investing is something that's quote-unquote for them. There was a study from Cambridge University that found that kids' money habits can be set by age 7. So it's really important to understand the habits that you were taught at a young age and how your background influences how you manage your money today.

Alana: And to that point, think about how your current financial situation influences how you think about investing, too. Maybe you have inconsistent income, like if you're in the service industry and your paycheck or tips are not the same month to month. So it can be hard to commit money that you have now to investing if you feel like you might need it later. Or maybe your family has long-held distrust in the financial system, which for a lot of marginalized groups, particularly women and people of color, is totally fair, since there has long been, and still is, institutional discrimination.

Sean: So how do you think people can better understand their preconceptions and personal motivations around money?

Alana: One exercise that I think is helpful is to take 30 seconds and write down all the words that come to mind when you hear the word investing. And don't try to edit yourself. Those words may be key to what's been keeping you from starting. So if your associations include the word “confusing,” that's a pretty good indicator that not feeling like you have enough information may be a stressor and a preventer. Maybe you write down “rich people,” and that can indicate that you don't feel like you have enough to get started and that investing isn't for you. So whatever you think of, write it down and then think about how those words could be stopping your progress.

Sean: Yeah. And after you've dug into your past and maybe had a long chat with your therapist about how your upbringing has influenced how you manage money, I think it's a good idea to be forward-looking and define some goals. People should ask themselves what they're investing for. Having your money make itself into more money is pretty cool, but what are you going to do with it? Do you want to be a homeowner? Are you saving for retirement? And why do you want to invest right now? What is different about where you are right now compared to when you didn't want to invest? And Alana, if we can get a little bit personal, can you talk about what your goals were when you first started investing?

Alana: At one point, I listened to a podcast where the host was talking about investing, and they said that because of inflation, if you don't invest, you'll actually lose money. And this is true. You have to invest just to keep up. And that really stuck with me. Since then, my investing goals have really centered around having enough in my future to be financially comfortable.

And at certain points I've lived paycheck to paycheck, and it's just such a terrible feeling. You're always super-stressed about money and you're thinking about it all the time. And I decided that I really didn't want to live like that anymore. I didn't want it to be running my life. So if I can be stable and pay for car repairs or go for a vacation without worrying about running out of money, that's really what I'm aiming for, especially after I've stopped working.

Sean: Yeah. Like living comfortably, having enough wealth that you don't have to worry about money, you're covering whatever emergency comes up.

Alana: Exactly.

Sean: And I totally get that. I remember the lean years after I graduated college, I just wanted to make enough money to cover my rent and groceries. But my early investing ambitions were pretty simplistic. I had this line in my head from Tina Fey's character in “30 Rock.” Liz Lemon was talking with her boss, and she said something like, "I want to do that thing rich people do where they turn money into more money." I think that's a great way to think about investing if you're not really super-savvy, because that was my goal. And to some extent, it still is my goal. It was only really later that I began to invest with any sense of goal-setting, like buying a house, and I think that's fine. This simple goal was actually my entry point into investing. And you have to start somewhere.

Alana: That's a great point. And I love that Liz Lemon quote so much because, I mean, that's like all that we're doing here. If you have any amount of money, you can then do the rich people thing and just turn it into more money. So kind of like we were talking about, it's just basically magic, right? Investing is magic.

All right, listeners, now that you've done a bit of digging into your attitudes and goals around investing, I want to bust some of the common myths that may have come up. A classic reason people don't want to start investing is because they feel like they don't have enough money to make investing worthwhile. And this is very critical to understand. You can start investing with any amount of money, and any amount is better than none. You can literally start with a single dollar.

So I'll give you an example. Take an average subscription cost to a streaming service or TV or music. And we'll say that's about $15 a month. That's pretty affordable. A lot of people have those. So now imagine instead of paying $15 a month for music, you invested it instead. So then over the course of a year, you would spend or invest $180. And then over 10 years, you would put in $1,800 of your own money. But then if you earn the average stock market return of 10%, you could have around $3,200. So that's an extra $1,400 just for investing it.

And then, if you kept that habit up for 30 years, you could have over $35,000. And it's often likely that even if you can only put in $15 a month right now, down the road your earnings will increase, meaning that you could afford to put more towards your investments over time.

Sean: It's when you see the numbers laid out like this that you really realize the opportunity, and potential opportunity cost to not investing, because you can just make so much over the course of several years. As you said, you don't need that much to get started.

Alana: And investing, once again, is magic, because it's basically free money.

Sean: And again, I've got to throw in this quick note that there's always the risk of loss when investing. As markets go up and down, so too might your account balance. And we'll discuss this more later, but the idea is to invest for the long term so you can ride out any volatility.

And also, as a veteran debt writer at NerdWallet, I need to put in a pitch for another form of investing that people may not think about, which is debt payoff. If people have high-interest debt, particularly credit card debt that can have interest rates upward of 25%, paying that off will almost certainly give them a higher return than investing that money. So in a way, paying off debt, especially high-interest debt, is a form of investing in your financial future. And then once that debt is paid off, people will have that much more money to put back into actual investing.

Alana: That is such a great point. It's so interesting to think about where these different sources of income can really come from. And it's not just where you're putting your money. It's how you're handling existing debt. I think that's awesome, Sean.

Next, I want to talk about popular myth No. 2, which is “I started too late, so I shouldn't bother investing at all.” And the takeaway here is similar to any amount of money is better than none. So if you start investing late, it's so much better than never investing at all.

Sean: And somewhat related to this myth, I want to throw in another investment that I've come across in talking with friends over the past, say, year and a half or so, ever since the pandemic and climate change-related disasters have made the prospect of a future to invest in seem a little shaky, I guess. The myth, and maybe it's more of an attitude, is that the world is just going to burn anyway, so why would I bother investing or saving for retirement?

I actually got into a pretty heated argument with a friend about this last year. They had just left a job and were thinking about pulling all their cash from their retirement fund with that employer and keeping it in a regular savings account instead of rolling it into a new retirement account. I sent them one of our retirement calculators and showed them how much money they could earn through compounding interest if they kept their cash in a retirement account, and that finally convinced them not to make any drastic changes to their plans.

Alana: You're a good friend.

Sean: I try. Sometimes it makes me really upset because I just want them to be set up for the future, and that's our job, to kind of inform them how to make the right decisions. And sometimes I do have to concede that yeah, it feels like the wheels are a little loose on this bus we're all riding in, but that's no reason not to plan for your financial future by investing.

And I'm a huge science fiction fan. People may be familiar with the author Octavia E. Butler. She writes in her book, “Parable of the Sower,” that the only lasting truth is change. The world will almost surely look very different in 20 or 30 years from now, but not all change is bad. And don't you want to be set up for success and potentially retirement one day by taking advantage of the magic of compounding interest?

Alana: Yeah, I definitely agree. It's been super-hard to think about the future lately, but odds are good that you're going to need some level of financial security regardless of what that future looks like. It's really better to not be caught unprepared, even though right now it's really hard to see that future.

But this brings us to our last myth, that investing isn't for people like you or me, or whoever is feeling like investing just isn't for them. So there are so many groups of people who have been excluded from financial systems, and that can create a really negative experience or barrier for people trying to uplevel their finances. So remember, investing is for everyone. And one way to make that feel more true is to find a good investing role model who looks like you or has similar life experience.

For example, if you come from a family of immigrants, you could potentially work with a financial advisor who's also from an immigrant family and can relate better to your experience. And while I don't think getting financial advice from just anyone over social media is smart at all — there's a lot of really bad advice out there and many people are in it for themselves — but there are lots of legit financial advisors from all kinds of backgrounds who are active on Instagram and TikTok. And if you're struggling for investing inspiration, filling your feed with advisors from different backgrounds can be really inspiring. You can also more than likely find an advisor who is giving advice in your native language. So if English is not your primary language, you can look for someone who's speaking your language.

Sean: And there are also ways to invest that can align with your values, like socially responsible investing.

Alana: So now that we understand our personal motivations and we've cleared up some myths and committed to the idea of investing, we can really dive into the nitty-gritty of actually doing it.

Sean: OK, perfect. So how should folks go about actually getting started investing?

Alana: Well, step one is you blow all of your money in cryptocurrency. No, I'm kidding. Please don't do that. No. OK, if you want to invest, you'll need to have a brokerage account. And I know this sounds scary and committing, but the good news is that with many brokers, you don't actually have to start investing and put any money in to get started. You can just open the account without funding it. And just because you opened a brokerage account doesn't mean you're invested. It's just the place that you'll buy your investments from. So you can think of it as a little house for your investments.

Sean: And there are a lot of great options out there for brokerage accounts. Some are more traditional, with names that you might recognize, like JP Morgan or Fidelity. Others are newer, like Acorns and Ellevest. And I do just want to put in a quick note that these providers we just mentioned are NerdWallet advertising partners, full disclosure, but we outline most of these options in our roundups on nerdwallet.com. And we'll include some links to those roundups in the show notes post for this episode. A lot of these providers have really great tools and banking features and access to financial advisors. But first, there are two questions that you should ask yourself. Alana, what's the first one?

Alana: The first one is do you want to pick all your investments, like your stocks and mutual funds, and manage them yourself, or do you want help? So this is a super-easy question that I know some people will overthink. Investing for your future becomes a lot easier to do if you're not stressing about it. So if the idea of managing your own investments is scary, or you have no interest in doing it, you don't have to.

There are these great things called robo-advisors that will pick investments and manage them for you based on some personal data, like your time frame until you retire. Robo-advisors are also pretty inexpensive. Several charge only one dollar a month, and others charge 0.25% of your assets, which is pretty inexpensive. If you have $10,000 in your account, you'll be charged $25 a year. Robo-advisors make a lot of sense if you just want to set and forget your investing practice. But if you'd rather have a human manage your investments, you can work with a financial advisor. And advisors tend to be pricier, but if you have a complicated financial picture, they can help with a lot of different things, like estate planning and taxes.

The other option is if you want to do it yourself, or you prefer not to pay a management fee, is to manage your investments on your own. And this is also a great option, but will require a little more legwork on your end. And we'll cover that work, like picking investments, in the next episode.

Sean: Right. And one quick note about financial advisors. If you are going to find one, it is typically best to find a fee-only fiduciary financial advisor. That means that they have to put your financial interest ahead of their own.

Alana: Yes, that is very important.

Sean: So the second thing that you'll need to think about is what type of investing account you'll want to open. Even if you opt to go with a robo-advisor, you'll likely need to make a choice about this. So we're going to cover just a few types here. The biggest breakdown you'll likely see is between a standard brokerage account and a retirement account. You may actually already have a retirement account if your employer offers a 401(k).

You can open up an individual retirement account, or an IRA. There are a few different types of IRAs, and the biggest difference lies in how they are taxed.

In a traditional IRA, the money you are putting in is tax deductible, but the money you take out in retirement is taxed as ordinary income. A Roth IRA has the opposite tax treatment. The money you put in has already been taxed, and distributions in retirement are not taxed. Sometimes people opt for a Roth IRA if they think there is a good chance that their tax bracket will be higher in retirement than it is now. IRAs also have some restrictions on when you can pull your money out because they are really meant for retirement, not short-term goals.

Alana: And it's really encouraging to think about the fact that if you have a 401(k), you're already doing this, so it's not too much of a big step.

So let's talk a little bit about standard brokerage accounts. These are investment accounts that aren't for any specific purpose. Unlike retirement accounts, there are no rules on contribution amounts, and you can take money out at any time. So if you're saving for retirement and you've maxed out a 401(k) and an IRA, you can continue saving in a taxable account.

And once you answer these questions, whether you want to invest on your own or get some help and what specific type of account you're going to need, you can explore brokers and figure out which have the services and the accounts and the add-ons, like banking, that you'd be interested in. And again, it's worth repeating that just because you open a brokerage account, that doesn't mean you're guaranteed to earn money with your investments. There's always the risk of loss when investing.

Sean: All right, I feel like we've covered a lot of ground in this episode.

Alana: That's for sure.

Sean: But we are not quite done yet. We have some nerdy homework for you to complete before next week's episode. Alana, what is it?

Alana: So first, understand your mindset around investing. Complete the investing associations writing exercise and dig into your background, personal motivations and biases to understand why you haven't invested until this point and what's driving you to make the change now.

Sean: Next, really dig into your goals and define them. What do you want from your future, and how can investing help you get there?

Alana: Lastly, think about your investing style. You can invest on your own or get help from something like a robo-advisor. And neither one is the right one unless it's the right choice for you.

Sean: All right, and that is all we have for this episode. For more information about how to get started investing, check out our show notes post at nerdwallet.com/podcast. We'll see you guys next week for the next installment of our nerdy deep dive into investing, with a discussion of different investment vehicles.

Alana: And before we go, a quick reminder from NerdWallet's legal team. While Sean and I are knowledgeable and talented finance writers, 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.