NerdWallet's Smart Money Podcast - Crypto Crash, and Growing Money Fast

Episode Date: November 21, 2022

Shockwaves rippled through the crypto world with the collapse of the crypto exchange FTX. To start off this episode, Sean Pyles and Liz Weston discuss what happened — and what it might mean for your finances. Then Sean talks with personal finance Nerds Kim Palmer and Kate Wood about how to grow your money quickly ahead of home improvement projects.  To send the Nerds your money questions, call or text the Nerd hotline at 901-730-6373 or email [e-mail]. Also, for a special end-of-year episode, we want to hear your financial rose, thorn and bud of 2022 — aka the best and worst thing that happened with your money this year, and what you’re most excited for in the new year. Leave us a message on the Nerd hotline, or email [e-mail].  Timestamps: This Week in Your Money segment: 0:00 - 8:17  Money Question segment: 8:18 - 30:50  Like what you hear? Please leave us a review and tell a friend.

Liz Weston, and I'm Sean Piles. If you have a money question for the nerds, call or text us on the nerd hotline at 901-730-6373. That's 901-730-NERD or email us at podcastnerdwallet.com. In this episode, I'm joined by personal finance nerds Kim Palmer and Kate Wood to answer a listener's question about growing their money ahead of big home improvement projects. But first, John and I are talking about the recent collapse of the FTX crypto exchange and what it means for people who use the exchange as well as crypto in general. This is a huge deal in the crypto world. As the New York Times put it, quote, a company once regarded as among the safest and most reliable corners of the freewheeling crypto industry, collapsed practically overnight. Which is wild. FTX filed bankruptcy November 11th after a run on deposits left the crypto exchange with an $8 billion shortfall. was filed, the exchange said that it was investigating, quote, unauthorized transactions as more than $600 million was drained from accounts in an apparent sack, according to

the Coindesk news site. We have an article on our site that traces what happened, who's affected, and what might be next. And you can find that in this episode's show notes post, which you'll find at nerdwallet.com slash podcast. But we thought we'd try to address some of the questions people might have about what's going on and what's next. And before we get into that, a quick disclaimer that we are not investment advisors and will not tell you what to do with your money, crypto or otherwise. So getting into it, one big question that people might have is if they're going to be able to get their money out of FTX. And to be honest, right now, that is unclear. The exchange is in bankruptcy, which means that it could take years to get anything out. And many people may be left with nothing, according to experts.

Yeah, this is kind of scary. But creditors in bankruptcy court basically have to line up to get paid. And often there just aren't enough assets left over to pay everyone. There's no insurance like there is with your bank accounts. There's no FDIC insuring your deposits at a crypto exchange. So there's no guarantee you'll get your money back. This is something that we've talked about over and over again when it comes to crypto, how risky it is, how there isn't insurance. And historically, I think a lot of folks have kind of brushed it off like,

oh, yeah, like that's fine. There's never going to be a big collapse that these people trying to get all their money out at the same time. But that's exactly what just happened. Yes. And some people say, well, there's not insurance in the stock market either the same way there is with bank accounts. And that's true. There is something called the Securities Investor Protection Corporation that protects against losses due to fraud. There is an insurance that helps you with the basic up and downs in the stock market. However, the US stock market is highly, highly regulated. We've learned over time that there are bad actors out there and what we can do to prevent people from getting essentially skinned alive. But with cryptocurrency, it's simply too new. There just isn't that level of regulation.

Right. FTX's problems have obviously had a huge impact on the U.S. crypto market, which had already seen some steep declines this year. Bitcoin, which was worth over $63,000 a year ago, dipped below $16,000 at one point. Ouch. Yeah, a huge drop off. Ethereum was worth over $4,000 a year ago, and that did below $1,100 at one point. And experts aren't sure what other dominoes may fall. So it's a good time to think seriously about your risk tolerance. Yeah, Sean, you mentioned that when we talk about crypto, we always try to mention that it's a risky investment. It should not be a big part of

your portfolio. And here's a case where diversifying by owning a bunch of different types of crypto, while it's a good idea, it's not going to protect you against a general fall in the market. It can be really painful when everything drops at once. Yeah, I'm betting that a lot of people are also rethinking their decision to use an exchange in the first place. Another option is to move your cryptocurrency into a separate crypto wallet. Most exchanges allow you to transfer assets to these wallets, which can be done online on a separate platform or offline on something like a thumb drive with added security features. Again, we have information on our site about the pros and cons of various ways to store your crypto, and we will also link to that in this episode's show notes post. And then I guess we should answer the question, what does this mean for people who

aren't invested in crypto, aren't at FTX, aren't really sure what's happening right now? Yeah, I'm guessing there are a lot of people who have maybe never even heard of FTX aren't really sure what's happening right now. I'm guessing there are a lot of people who have maybe never even heard of FTX before it started making headlines in the past week. And if that's you, you're probably fine. And in that case, your personal finances won't be hugely affected in all likelihood. So I would say use this moment to think more seriously about your risk tolerance in general and when it comes to crypto and just be glad that you're not one of the people affected. Yeah, I think that's good advice. Well, before we move on, one quick announcement. Liz and I are gearing up for one of our favorite

episodes of the year. And listeners, we need your help. The past couple of years, we have asked you to share your biggest financial accomplishment with us for a special end of the year episode. And we are doing that again this year, but in a slightly different way. We want to hear your rose, thorn, and bud of 2022. Now you explained how this works in last week's episode, but in case folks missed that, can you give them a quick explanation? Happily. So this is a game that my friends and I play sometimes when we get together and it's a really nice way to catch up on what we've all been doing in our lives lately. So the rose is the best thing that's happened to you lately. The thorn is something that is not so great that you've been experiencing and the bud

is what you are most excited about in the future. So here is my example for the last week. My rose is that I've been making some pretty good progress in my watercolor painting class. I can tell that I've been learning in this class. My thorn is that I've had some car trouble over the past week, which is not fun to experience. And then my bud is that it's actually kind of a honey bud. My partner and I recently bought a bunch of bulbs for daffodils and tulips and crocuses that we're going to plant in our yard so they come up in the spring. Oh, that's wonderful.

Yeah. What about you, Liz? You're putting me on the spot here. My rose and my thorn are sort of the same thing. We had a memorial service for my father-in-law and it was super difficult to lose him. He was a wonderful man, but the memorial itself was absolutely beautiful. It was actually a wonderful experience to get together with family and with his neighbors and with friends and rotary buddies and just hear some wonderful stories about him. So, you know, sometimes I think rows and thorns can be intertwined.

As far as Bud's, we are making plans to have a family gathering where we make French pancakes, as he put it. So he was a master French pancake maker. So we're going to make a bunch of those and enjoy it, kind of bring in the holiday season with that. What a great way to honor his memory too. Yeah.

Well, listeners, just like last year, we really want to hear from as many of you as possible. So please call us on the Nerd Hotline at 901-730-6373 to share your roses, thorns, and buds. We will also accept a voice memo sent to podcast at nerdball.com. And if you're feeling a little bit shy and don't want to speak aloud, we'll also accept your written thorns, buds, and roses. Okay, well, with that, let's get on to this episode's money question segment. All right, let's do it.

This episode's money question comes from a listener's text message. They wrote, hello, I'd love to get some information on what to do with $10,000 right now. What is a high yield CD versus an IRA CD? What types of investments are out there that would gain the most in the next three to five years?

This money is going to be used for house upgrades in three to five years. So I don't want to sink it into something that will penalize me for taking it out. Thanks. To help us answer this listener's question on this episode of the podcast, we are joined by Kate Wood. And also one quick aside, please tell us who you are when you send us your money questions. We love getting to know our listeners and it can also help us answer your questions better. Well, anyway, welcome back to Smart Money, Kate.

I am so excited to be here. Thank you. We have so much ground to cover. And before we get into it, one quick reminder that we are not investment advisors and won't tell you what to do with your money. All of this is for general educational purposes only. So I want to start by defining what a CD versus an IRA CD is. So a CD is a certificate of deposit. That's a form of savings account with a fixed interest rate and term. For example, you could get a return of 3.5% with a one-year term. Certificates of deposit don't typically allow easy access to your cash during the duration of the term, and it's also worth noting that the

longer your term, the better yield you'll get in general. Now, an IRA CD is a certificate of deposit within an IRA, which is just a tax advantage retirement account. And to answer the listener's question, this might not be a good idea for their goal because of early withdrawal penalties on earnings, unless the listener is 59 and a half or older. It's worth noting that you can withdraw the money that you put into an IRA CD, but that wouldn't really help our listener who's looking for growth right now. Let's also talk about which investments would really gain the most in the next three to five years since that's the time horizon we're talking about here. If you are invested in the stock market and with an annual rate of return of 10%, which is historically average given the annual rate of return of the S&P 500, that $10,000 would grow to a little bit over $16,000 after five years. But because our listener wants this money within three to five years, the stock investment really

might not be the best choice. NerdWallet suggests that people don't invest money that they'll need within five years. And with a certificate of deposit, many of which have an annual percentage yield of around 3.5% at the time of this recording, you would have around $11,600 after five years. Now there is one strategy using CDs that might help our listener, and it's quite nerdy. So strap in, put on your extra nerdy glasses, because I'm about to get into some numbers here. So there's something called a CD ladder. And with this route, you invest the money that you have across multiple certificates of deposit. And here's how that would work. For our listener who has $10,000 to invest, they would potentially spread out their money like this. They put $2,000 into a one-year CD, $2,000 into a two-year CD,

and so on into three-year, four-year, and five-year CDs. So you're spreading the $10,000 across five different certificates of deposit that have different terms. Then at the end of each certificates of deposits of Deposits term, you put the original $2,000 deposit plus the interest earned into yet another CD. And then in our listeners case, they would probably want to choose their next CDs to let them have access to that money at the three or five year mark because that's their current timeline. There are a few key benefits of the strategy. Namely, you. There are a few key benefits of the strategy. Namely, you have increased access to your cash because of the varying terms of your CDs,

and you can also get access to better interest rates since longer-term CDs generally do have higher rates. If that does sound just too complicated for you, I do have a simpler option, a high-yield savings account. Basically, a lot of the online high yield savings accounts, they're now offering yields that are over 2%. So it's not as high a yield as a CD, but it does give you easier access to your cash. Right. So those are a few different ways to put some money in different vehicles to have them grow over three to five years. Now let's talk about home improvements and return on investments of home improvement projects. So Kate, we've been

sitting here silent learning so much about CDs. Now we're going to rely on you to talk with us about how folks can make the most of their home improvement projects. So how do you think about this? So when I'm thinking about home improvement projects and ROI or return on investment, something that you need to think about is, okay, some people have this idea that if you're spending money on your home, this is like a one in one out proposition, like, oh, well, you know, I spent $1,000, I'm going to get $1,000 back. That is definitely not the case. Depending on the type of home improvement that you do, the return on investment could be all over the place. Now, if you're planning on staying in the home, and so it's something that you're going to do and enjoy, and this is for you, who cares if

it's earning you the money back. But since this listener was focused on like, okay, I want to get the most out of this investment, possibly they are looking at in three to five years doing home improvements that are geared toward selling the home, in which case people are often looking at, okay, if I spend this money to do this upgrade to my home, what am I going to get back, right, when I put that home up for sale? And that's a really different consideration than just like, well, what do I like? Or what do I want? Yeah, a less tangible thing like, okay, I really like this color of paint on the walls, it's going to give me a return on investment because it simply makes me happy. But if you're sinking money into a house, hoping it will gain actual value that you will recoup when you sell the house, that's a very different factor. And I'm wondering if you can think of

specific types of renovations that will give folks the best ROI on their investment. So this really varies. And frankly, you know, right now, not a lot of projects are giving a ton of return on investment for a variety of reasons, including the cost of materials and labor, which continues to be an issue. So Remodeling Magazine does an annual cost versus value report. And it's always really interesting. You can dig into national or regional numbers and look at a whole variety of different projects at different price points and see what kinds of renovations are giving the best ROI. In general, the ones that don't really give you much return on your investment are actually some of the ones that people think of right away when they think about upgrading their homes or if I'm going to renovate my home, what am I going to do?

A lot of people think kitchen and bath. And yeah, these are places where you spend a lot of time, right? Your kitchen's like the heart of your home. Your bathroom can be like a sanctuary. But if you've done improvements to it that are something that you really love, but that a buyer might not be crazy about, like, you know, you redid your bathroom and you put in this like artistic tile that you absolutely love. someone else might see that as like a project where it's like, oh, I'm going to have to take that out. Interesting. I also feel like kitchen and bath are two rooms that are most susceptible to trends. Think about how many people have ripped out their kitchen cabinets and put in all white cabinets and have made these beautiful,

gleaming, stain-covered cabinets now. At least I have a white kitchen and have made these beautiful gleaming stain covered cabinets now, at least I have a white kitchen and it's, you know, very hard to keep clean. I think that those will probably look dated in a few years. Oh, absolutely. Or open shelving in kitchens is another one, right? Where you see it in shelter magazines, it looks fancy, it looks like your kitchen's this gorgeous, rustic museum. When you have open shelving, instead of cabinets, all the dust, all the dust, all the grease, everything that you're cooking, it gets on everything that's on those shelves. You also have to contend with gravity. And maybe you're buying more dishes, because things are falling off the cabinets there.

Yeah, there's a lot going on with that. But that's something that yeah, you know, given time, those might need to be taken out. Also, because a lot of kitchen elements are really pricey. It's one thing if you're doing an update to your home, that's bringing it sort of up to the level of other homes in the neighborhood. Like if you're looking at homes for sale that are comparable to yours, and it's like, hmm, they've got stainless steel appliances and minor white. Okay, you might want to bring yours up to that level. But if I want to put in this whole chef's kitchen, and I'm going to do marble countertops, and I'm going to do this and that, and you're suddenly turning your house into the house with the very fancy kitchen, and it's way above the level of what comparable homes have,

you know, you're potentially adding something that like, if you're a chef, awesome, go for it. But many people might not care about that. Right? If you're thinking about it in terms of putting the home up for sale, it might almost be a negative to a buyer who's like, well, I don't want to pay more just for that. This is kind of the one house that has it. Well, what projects will give folks a better ROI? The projects that gave the best return on investment in remodeling is most recent figures are exterior sort of curb appeal related upgrades. And they're actually really close to the kind of $10,000 budget that this person's talking about. Something that you might not think of as like, oh, you know, this is gonna add to my home's value. Replacing your garage door is something

where yep, you would actually, like you would make that money back and then earn a little bit on the side. Also, if you have a house that's just got vinyl siding, adding some manufactured stone veneer to the home's exterior, kind of spruce it up a little, fancy it up. That also recoups the cash you spend on it very nicely. Interesting. That's not what I would expect. No, not at all. I mean, it really is always the boring things. Almost always is the boring things that have the best ROI. You know, same thing with like replacing your exterior doors, you know, like having a front door that's up to date that generally also holds its value pretty well. But again, like if you're going to stay living in the home and

you're the one who's going to be enjoying it, that, you know, like you said, Sean, your return on your investment isn't monetary. It's you, right? Deriving pleasure, deriving joy from what you've done with your house. You can't put a dollar price on that. Mm-hmm. It almost seems like the safest things to put your money in as an investment are relatively low cost, superficial type things like painting, everything, things that people will notice when they come to look at your house and consider buying it. Although painting honestly can be risky. A lot of- Depending on the color.

Depends very much on the color and also the quality of the paint job uh you can really tell especially with deeper colors and glossier paints so like the more you go away from matte the less forgiving paint is if you are painting your home yourself and when you're looking at real estate photos if you're seeing a room where it's got like a deep color and clearly a DIY paint job, it can make the house look less valuable or just shabbier, frankly. And also, are colored walls more fun than white walls? Sure. But if again, it depends on the color. It depends on the color. And I moved into his place in Portland years ago. There was one really long wall in the living room that was a pumpkin orange and then an adjacent wall that was an olive green.

And we moved in in the fall, so it felt very seasonal. But then it also felt very out of touch with the rest of the seasons that we experienced in the Pacific Northwest and just very awkward. So we quickly painted that a bright white. Yeah. I mean, the thing that you risk is that someone will see that, you know, even just an accent while not as striking, but as again, oh, here's something else I'm going to have to deal with after I move in. Yeah. A realtor recently told me that the best way to brighten up your home quickly for a sale was actually to remove all the screens because it lets the sun in. Oh, that is smart. Interesting. Very, very easy. Yeah. And probably doesn't cost you anything. Exactly. Doesn't cost you anything. Well, on the subject of money, let's talk about different ways to fund home improvement projects.

And I'm thinking about things like HELOCs or maybe personal loans or even credit cards. So what should folks be considering when they're weighing which way to fund their project? Right. So this listener has been saving up money, right, and studying a side for home improvements, but you don't necessarily always have cash on hand. You haven't always necessarily been saving for a home improvement. Sometimes your home needs an improvement and you didn't know it was going to need it. And so you need to come up with a different way to fund it. So HELOCs or home

equity lines of credit are becoming a bit more popular right now just because mortgage interest rates are running high. And so these are a type of second mortgage, which means that unlike with refinancing, you don't touch the interest rate on your primary home loan. So if you were able to buy in the last couple of years, or if you refinanced and you have a really advantageous interest rate on your primary loan, you don't necessarily want to touch it. A HELOC is separate. That said, HELOC interest rates are indexed to the prime rate and are not immune to the interest rate increases that we're seeing across the board. So they are higher, but you only pay interest against the money you've actually borrowed, not the entire line of credit.

So yes, you're paying a higher interest rate, but it's not on a tremendous sum of money. Are there certain types of projects that HELOCs are especially good for? HELOCs tend to be good for bigger projects because they do have closing costs associated with them. You will have to pay usually 2% to 5% of the total amount of the line of credit. So you need to be doing something that's extensive enough to merit that cost, you know, in the sort of trouble of getting and taking out the HELOC. Right. But at the same time, they're really nice because they are so flexible. It's a line of credit similar to, you know, having a credit card in that you spend the money like as needed rather than with something like a home equity loan,

where you get a lump sum all at once and then you have to pay that lump sum back. With a HELOC, you need to pay back what you've spent, but you might not necessarily use the entire line of credit and that's totally okay. The big risk with a HELOC as with any type of second mortgage or junior lien is that you are borrowing against your home. So your home is the collateral for the loan. And so you need to be very sure that you will be able to repay the second mortgage

on top of your primary mortgage. And Kate, can you clarify something else for our listeners too? Because we are in an environment right now with rising rates, when you take out a home equity line of credit, are you locking in a rate for the duration? Or are you facing a risk that the interest rate is actually going to go up? I wish I could tell you that you are locking in a rate,

but with a HELOC, you are absolutely not. It is a variable rate product. Well, there are other loan options that tend to have non-variable rate terms. And that's, I'm thinking of personal loans here. Can you talk about how those factor into the suite of options? Personal loans can be really expensive. It depends very much on your credit score and what kind of borrower you are going into the personal loan. I will say like as high as interest rates on mortgages and home equity products and stuff like that are going, personal loans generally still have much higher interest rates. You know, we're talking into the like 25 or 35% range. But you know, that said for something that is a relatively finite project, I would say,

for most people know more than a five figure project. They can come in really handy. There are no closing costs. So there is that. Again, you're balancing that against a significantly higher interest. But because you aren't going through that closing process, you can get money right away. And that can be really handy. For me, I used a personal loan when my roof needed to be replaced, water was getting into my house. And so I couldn't wait around to see like, you know,

let me shop lenders and let me see, you know, what kind of interest rates HELOCs are getting right now. I needed a new roof basically immediately. And so a personal loan was my best option in order to get that money, be able to pay for it and, you know, not have to wait. I think I waited a matter of days. Oh, wow. If that it was very, very fast. Yeah.

All right. Well, let's talk about credit cards because that is also, of course, a popular option for covering some of these costs. Is it a good idea? So using a credit card to pay for home improvements depends on, again, your credit worthiness is a big part of it. What is your debt picture right now? You know, are you going to be able to repay the credit card? Because again, higher interest rates, with a credit card. But if you're thinking about taking out a new line of credit in order to pay for home repairs, that can at times be helpful. You know, if you're doing it at a point where you are a well-qualified

applicant and you're going to be able to get a really advantageous card. I do think for me, that was one of the smartest things that I did when I bought my house. I had kept my credit like pristine through months of home searching and then through underwriting and closing. So by the time I'd actually bought my home, my credit score was probably the best it's been in my life. And so the week that I closed on my house, I went on nerd wallet and researched the best credit cards with 0% APR introductory periods. And that was really helpful for me because I needed to spend just a ton of money, right? Not even on fixing things, but on,

you know, going to the hardware store, going to the home center all the time, buying new furniture, stuff like that. But since I wasn't paying interest on it during that introductory period, I was able to spread out what would have otherwise been, you know, fairly big, like oof, one after another, fairly big bills, and then, you know, fit it more into my budget and pay for it over time. So being able to spread out the costs can be really helpful. Beyond home repair, zero APR credit cards can be really handy for simply buying furniture. My partner and I did that when he bought his place. And then when I bought my place, we had 18 months to pay off all the

furniture. And it was so much more convenient than really drawing a bunch of money out of our savings and funding all this stuff. And at the same time, we also got a good amount of credit card points. So that was a nice perk too. Right? Yes, that is true. It's funny. I think that means all three of us have used this strategy because I also, I also use a credit card 0% APR when I had to suddenly replace all of my windows, which is extremely expensive, but they were basically rotting out of their windows. And so I had to replace them. And like you both are saying, I mean, I didn't want to just suddenly come up with all of that cash. And so I had to replace them. And like you both are saying, I mean, I didn't want to just suddenly come up with all of that cash. And so that credit card let me spread out those

payments. But I think it's definitely worth noting that you have to be sure not to miss a payment. If you are late, if anything like that happens, then it can end that 0% intro period automatically. And so you just have to be really diligent about making those payments. Right. 0% APR doesn't mean you just don't pay for it for that entire time. It means there's not interest on your purchases. You still need to be making the minimum payment. And it's worth noting that after that time, there's going to be an interest rate that kicks in and it could be quite high. So if you still have a substantial balance on that credit card by the end of that zero APR period, you could look into potentially moving that over to another credit card with zero APR introductory period. But that can potentially introduce a slippery slope where you're moving

debt from one card to the next to the next. And then you're just perpetually in credit card debt, which isn't a great way to manage your finances for a lot of folks. So just be wary of that trap as well. Kate, thank you so much for talking with us today and sharing your insights. No, thank you. It's always fun to be here. And with that, let's get on to our takeaway tips. Kim, will you please start us off? Yes. Number one, know your investing timeline. In general, investing is not for money that you think you'll need within five years. Next, think about ROI. If you're choosing home upgrades with an eye towards selling or return on investment, go for fixes that are less

taste-based. And lastly, weigh different funding options. Depending on the cost and urgency of your renovation, there are different options available for funding home improvements. And that is all we have for this episode. Do you have a money question of your own? Turn to the nerds and call or text us your questions at 901-730-6373. That's 901-730-NERD. You can also email us at podcast at nerdwallet.com. Visit nerdwallet.com slash podcast for more info on this episode. And remember to follow, rate, and review us wherever you're getting this podcast. This episode was produced by Liz Weston and myself. Kaylee Monahan edited our audio. Jay Bratton wrote our show notes. And a big thank you to the wonderful folks on the NerdWallet

copy desk for all of their help. And remember, we are not financial or investment advisors. This info is provided for general educational and entertainment purposes and may not apply to your specific circumstances. With that said, until next time, turn to the nerds.