Money Rehab with Nicole Lapin - Should I Be Investing or Saving?

Episode Date: November 15, 2021

You may have heard that “a penny saved is a penny earned,” while other people may have told you that the best way to earn your pennies (and then some!) is in the stock market. But what’s the best move? Today, Nicole helps you decide. Learn more about your ad-choices at https://www.iheartpodcastnetwork.comSee omnystudio.com/listener for privacy information.

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money is working as hard as you do. So why overcomplicate your money? Keep it simple with Bank of America, your one-stop shop for everything you need today and the goals you're working toward tomorrow. To get started, visit bofa.com slash newprosmedia. That's b-o-f-a dot com slash n-e-w pros p-r-o-s media. bfa.com slash newprosmedia. Hey guys, are you ready for some money rehab? Wall Street has been completely upended by an unlikely player, GameStop. And should I have a 401k? You don't do it? No, I never do it. You think the whole world revolves around you and your money.

Well, it doesn't. Charge for wasting our time. I will take a check. Like an old school check. You recognize her from anchoring on CNN, CNBC, and Bloomberg. The only financial expert you don't need a dictionary to understand. Nicole Lappin. Today's Money Rehabber has a fun question about growing your money,

one of my all-time favorite financial topics. Here she is. Hey, Nicole. My name is Allie, and I really need money rehab. All this money stuff is new to me. And so I'm trying to undo years of not paying attention to my finances and take control. One of my goals right now is to grow a better nest egg for myself so I can buy a house in 10 years when I'm 40-ish. I'm trying to decide whether it's better to create a sub-savings account for

the down payment or try to grow some seed money for the down payment in the market. I'd really appreciate any advice you could give. So Allie, before I dive into this question, I highly, highly suggest that you check out episode eight on whether buying a house is right for you. The benefits of buying a house aren't guaranteed like they were in the 50s and 60s. So the question of whether or not buying a house is a smart move has gotten more complicated, and it isn't a one-size-fits-all answer. If you're looking to grow some money across a 10-year window and you're under 50, I would recommend putting most of your down payment fund in the market. But I will never

make you trust me blindly. I will show you why investing is a smart move for you. The reason you're probably considering putting this money in a savings account is probably because some other financial expert, not this one, told you that you can grow your money there. It's the concept of your money generating more money through compound interest. When it comes to borrowing money, we hate this concept. But when it comes to making money, we love it. We've covered this in previous episodes, but if you're new here or you just need a refresher, let me give you a little dictionary definition. When you are making money from the glorious force that is compound interest, it's called APY or annual percentage yield. To be brutally honest with you, you're not going to find a savings account with a super high

APY. Your APY at a run-of-the-mill savings account will likely be something like 0.01% these days. And you might be thinking, okay, that's better than nothing, right? I mean, I suppose that's true, but 0.01 or one basis point is a lot closer to nothing than it is to something. Let me show you why. For easy math, let's say you have $10,000 in your savings account. How much will you make after one year with an APY of 0.01%? Let's crunch the numbers. To calculate how much money you'll earn in your savings account, you take the APY value and scooch the decimal point over two places to the left. Then you multiply that number by the amount of money you have sitting in your bank account. So in this example, we would

take $10,000, the money sitting in your bank account, and multiply it by 0.0001. That's the APY with the scooched decimal point. And you get, drumroll please, $1. $1. So your total in your savings account after one year is $10,001. It's a measly $1. I know you get it. You're like, hello, Captain Obvious. I got it. It's $1.

So generous of that big bank, right? Let's see how this growth will change over time. Next year, you'll be making 0.01% of your new grand total, the initial chunk of money you put into your account plus the amount you've earned in interest. So that is $10,001 times 0.0001, and you get $1. So after two years, your ten thousand dollars has earned a whopping two buccarinis. I think it's fair to say that a point zero one percent yield is not going to change your life. So let's explore how this growth might look in the stock market. Historically, the stock market has grown eight% year over year. Yes, we don't need to do any calculations to recognize that 8% is a whole lot more than 0.01%. But how much do

those couple of percentage points change your bottom line? Let's whip out our example again. So you still have $10,000, but this time you're investing that lump sum in the market. So now we're going to take $10,000 and multiply it by 0.08. So after a year, can I get another drum roll, please? Mike, pretty please and thank you. You get $800. I know I'm almost saying it like a million dollars because it feels like a million dollars in the Austin Powers thing compared to $1. After your first year, you've made $800. That's awesome. So let's keep going. For your second year, you're going to take your new total invested $10,800 and multiply that by an 8% return. This would give you $864 in gains after year two. So the total sitting in your brokerage account after two years is $11,664. So which sounds better to you? $10,002 or $11,664?

I'm feeling pretty confident you want the 11 grand. am I right? But yes, there is always a but. You can't simply empty your savings account and pour it all into the market, not without taking the time to really understand how investing works. Sure, we all want to sign up for an 8% return, but remember that 8% is not guaranteed. If you make the wrong investing choices, you could see far smaller returns or even losses. So keep listening to Money Rehab for tips on how to invest the right way. But if you are gung ho to get into the investing game this very second, check out episode 16, Index Funds and chill for some basic tips. I also want to highlight a golden rule that I think is really under-emphasized in financial literacy. Listen closely. Unless you're making

dividends from a stock, you do not make a profit on your investments until you sell your shares. Let's rewind that last example. If you get 8% gains on your $10,000 investment, you can't really consider that money in your pocket. You need to always remember that your bank account and your brokerage account are two different beasts. The money in your brokerage account is only yours to spend once you cash out on an investment. If you own a stock whose price has doubled in value, you still haven't made any money yet. You just made it in theory or on paper. This is a very common misconception that drives me absolutely nuts. More nuts than I already am. Someone will tell me that they bought some stock for five bucks and now it's 10 bucks and that their profit is double their

investment. No, no, that is wrong. You can only profit on an investment when you sell the investment. Again, your brokerage account is not the same thing as your bank account. So while you can chill, unfortunately, you can't buy groceries with slivers of your index funds. For today's tip, you can take straight to the bank. When you're mapping out your investment strategy, you should be mindful that it's helpful to take a more conservative approach as you get older. My rule of thumb is that your age should be the percentage of your portfolio that's invested in bonds, which are less risky than investing in stocks. So if you're 30, 30% of your portfolio should be in bonds or something similarly safe,

and 70% should be in stocks. If you're 72, then 72% of your portfolio should be in bonds or something safe, and 18% should be in stocks. Money Rehab is a production of iHeartRadio. I'm your host, Nicole Lappin. Our producers are Morgan Lavoie and Mike Coscarelli. Executive producers are Nikki Etor and Will Pearson. Our mascots are Penny and Mimsy. Huge thanks to OG Money Rehab team Michelle Lanz for her development work, Catherine Law for her production and writing magic,

and Brandon Dickert for his editing, engineering and sound design. And as always, thanks to you for finally investing in yourself so that you can get it together and get it all.