Smart Money Podcast — How You Could Grow $26K to $44K in 7 Years: Smart Strategies to Try

Welcome to NerdWallet’s Smart Money podcast, where we answer your real-world money questions. In this episode:

Learn how to diversify investments, leverage tax-advantaged accounts, and set realistic goals for long-term financial growth.

How can you diversify your investment portfolio and reduce risk? What are the best ways to save and grow $44,000 in seven years? Hosts Sean Pyles and Sara Rathner discuss investment strategies and realistic goal setting to help you make smarter financial decisions. They begin by sharing a discussion of tax-advantaged accounts featuring Investing Nerd Alana Benson, with tips and tricks on understanding Roth IRAs and 401(k)s, leveraging employer matching, and choosing the right accounts for your needs. Alana also discusses how you can diversify investments for stability, why index funds can reduce risk, and the importance of knowing your timeline for financial goals.

Then, Sean and Sara and joined by their co-host Elizabeth Ayoola to answer a listener’s question about how they can grow their investment portfolio to save $44,000 in seven years. The hosts explore strategies for diversifying investments, managing risk, and setting realistic financial goals, providing actionable advice on using tools like index funds, robo-advisors, and high-yield savings accounts. They also discuss the risks of undiversified portfolios and how to align investments with specific timelines and goals.

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This transcript was generated from podcast audio by an AI tool.

Welcome to NerdWallet’s Smart Money podcast. I’m Sean Pyles. You know what? We’ve made a lot of episodes of Smart Money this year: three episodes a week times, oh, 48 weeks up to this month, give or take a few breaks. We’re talking around 140 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 we were 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 2024, some of our favorite conversations with you and some of our most meaningful advice. Today, we’re bringing you the highlights of our investing coverage. I hope you’ll agree that this is indeed the best of. Now, onto the show.

Hey, listener, we’ve got a special episode in store for you today. Our investing and tax Nerds recently hosted a webinar going deep into how you can level up your investing and tax strategy. So we packaged that up into a podcast episode for you. 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 webinar.

Welcome everyone. I am Kim Palmer. I’m a personal finance writer at NerdWallet, 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. NerdWallet, Inc. 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 basics of investing and taxes, and we think we have some helpful info to share with you. You can always find more at nerdwallet.com or on the NerdWallet app. Our goal today is to kick off a helpful discussion about investing and tax information and tools. Alana Benson writes about investing topics, including stocks, funds, and ethical investing. And now I will hand it over to Alana.

Thanks, Kim. 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’re 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 worrying about investing.

Second, instead of scrimping, try to increase your income. I didn’t start investing until I was in my late twenties, and that’s because one, I didn’t work at NerdWallet yet, so I literally didn’t know anything, and two, I was making around $25,000 a year, so I didn’t have much expendable 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 suddenly 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 hustles, 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 anxieties and 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’s no shame in admitting it. I like money. Most people like money. It’s because money isn’t just money. It’s not like Scrooge McDuck diving into pools of money and buying Maseratis. 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 comfortably without having money stress 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? This 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 you’re younger gives you a huge advantage and more money in the long run.

So let’s say, for example, you just start at that little number one in the box up there. Say you buy an investment for $100. If it goes up the average stock market return of 10%, it could then be worth $110, meaning that you’ve made $10. Then that $10 that you earned also starts earning compound interest on top of the $100 you initially invested. That doesn’t sound like much of a profit, but imagine if you were doing it with way larger amounts of money over a way longer period of time. Now, that 10% is an annualized rate, which means that you’re not going to get 10% every single year. In all likelihood, some years you’re going to finish up, some years you’ll finish down, but over the course of decades, when you average all that out, you tend to get about 10%.

The way you actually start investing is through an investing account, and there’s 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 of. So you’ve got your 401(k)s, 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 401(k), you’ll likely choose your investments from a preselected list or a fund that will automatically adjust itself over time. This means 401(k)s are typically very hands-off.

IRAs, on the other hand, are investment accounts that you open up yourself. IRAs can be opened online through brokerages and actually at 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 401(k), with IRAs, you’ll have to choose your own investments in those accounts.

You may have heard about a thing called a Roth IRA or a Roth 401(k), and it’s good if you know the difference. So with a Roth, 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 in retirement.

With a traditional IRA or 401(k), the money you contribute today is pre-tax. So that is, you get to deduct it from your income taxes this year. So it’s like a nice little treat this year. But then, when you cash it out in 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 Roth IRA or a 401(k) is not an investment. If you have a Roth IRA, that’s great, 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 Roth IRA, putting in a bunch of money, and then wondering why it didn’t grow over the last 10 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 those years of growth. So, very important.

And there’s a couple different types of investments that you can choose from once you open and fund your investment account. So you’ve got stocks. I’m sure everyone’s heard of that. These are shares of ownership in companies, and the way you make money from them is 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. A fund is still a stock- or bond-based investment depending on the type of fund that you get, and there’s a lot of different kinds, such as index funds, exchange-traded funds, and mutual funds, but they’re 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 100 stocks and that same stock goes out of business, your investment is buoyed up by the other 99 companies.

So again, all of these investments—stocks, bonds, and funds—you buy them from your investment account, and then you own them in there.

Let’s talk about the stock market. It’s this weird, nebulous term that’s 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 what are called market indexes. Now, these are basically just predetermined lists 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&P 500 — something you probably have all heard of — that’s just the list of 500 of the largest publicly traded companies in the U.S., and it 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 well.

And you can’t 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&P 500 index fund, it should perform pretty closely to how the S&P 500 itself is actually performing. The S&P 500 goes up 10% a year on average and 6.5% percent after inflation. This is just an average. So some years the market goes up more, some years it goes down less, but when done well, investing can potentially mean doubling 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&P 500 index fund and you keep adding money until you retire. It’s very boring, but it’s effective. It can give you that 10% return on average over the long haul. But a lot of people want to make more than that 10%, and they do so by actively buying and selling stocks, crypto, options, and other high-risk investments. They try to predict when they’ll 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 20% of active traders make money over a 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 old passive investing with that index fund. Plus, active investing is a lot more work. You have to do all kinds of research and keep an eye on the markets. And you can hypothetically earn more by actively trading versus passively earning the same amount as that historical return of 10%, but most people end up making less when they actually try it. That’s 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 it 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 investments, and the strategy. Here’s how financial advisors suggest you prioritize your money when you’re starting to invest. The first thing you want to do is you’re not actually going to invest at all. The first thing is that you’re going to have an emergency fund. 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 $1,000 and you want to use it for an emergency fund, but you invest it. When you have to fix something on your car, suddenly, you go to check your money, and its value could be $600 instead of $1,000, and that’s not good. If you put it in a high-yield savings account, 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 4% to 5% just by sitting there.

Next, you want to get that 401(k) match if it’s available to you because it’s free money. After that, it’s a good idea to look into IRAs. Both IRAs and 401(k)s have what’s called a contribution limit, which is just the maximum amount of money you can put in each of them every year. If you’re able to max out an IRA, then it’s a good call to move back to your 401(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 over a 401(k) if you’ve already gotten your match, if you have to choose between the two. Then, if you max out your 401(k), you can move to a standard brokerage account.

We are back in a moment with more Smart Money. Stay with us.

We’re back and answering your real-world questions to help you make smarter decisions about your money. This episode’s question comes from Kat, who sent us an email. Here it is:

“Good morning Sean and Sara, and hello to Liz. Hoping she’s enjoying retirement. I have a goal to save $44,000 over the course of seven years. I currently have $16,000 in a computer share stock purchase. I usually receive a return of $400 annually. I received a windfall of $10,000 from an inheritance from a family member in 2004 and purchased stock in only one company because my dad worked there, funded my education with his stock sale, and I’m loyal to the brand. I have sold about $8,000 worth for some home renovations over the years. All that being said, what’s the best way to diversify this investment to reach my $44,000 goal by 2031? So, increase by $28,000 or about $4,000 a year. Is this even possible?”

To help us answer Kat’s question, on this episode of the podcast, Sara and I are joined by our other co-host, Elizabeth Ayoola. Hey, Elizabeth.

Hey guys. I love this topic. And I am hoping that the universe is hearing and is going to send me a windfall because moving is hurting my feelings. The cost is hurting my feelings.

All right, so before we get into Kat’s question, this is a good time to remind our listeners that we are not investment advisors, and this is not individualized advice. What we Nerdy people are about to discuss is for general educational purposes only.

Thank you for that reminder, Sara. Okay, so our listener has a really interesting investing puzzle. They have an undiversified portfolio and a very specific target. They want to grow their money by $28,000 in a matter of seven years without any additional investments. This is likely impossible, but fortunately, our listener has a lot of options available to them to mix up their investing strategy that might get them closer to their goal. So I ran some numbers in NerdWallet’s investing calculator using the average annual after-inflation return of 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 undiversified portfolio. It’s really just in one stock.

So what did you find, Sean?

Okay, so I ran a few different scenarios. One where they don’t invest any additional money and get a 7% return. In that case, their balance is estimated to be about $26,000 in seven years, and that’s an increase of about $10,000, but it’s not where they want it to be. Another scenario I ran is one where they invest $150 per month in a diversified portfolio that reflects the stock market, and they get that same 7% return. That would get them to a little over $42,000 in seven years, and that’s fairly close to their goal, but still not quite there. Then I ran a third scenario where they invest $200 per month in a diversified portfolio, but only get 5% growth on their investments. In this case, their balance would be a little under $43,000 after seven years, so that’s getting them to their goal effectively.

So what’s the point of running all these numbers? It’s 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.

Yeah, inflation has something to do with it too, so you definitely want to 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 a five-figure sum in a few years,” or, “I have X amount of dollars to invest per year,” but somehow it seems attainable if you break it down into how much you need to contribute per month because then you could work 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 calculators in their free time anyway?

Right, I do. But I love to see the potential returns that I could get. And I do think these tentative numbers are great, but I also still worry about the risk as the listener does too, because there’s no guarantee the company they’re invested in or the stock market will yield any of the mentioned yields consistently over the next few years. So I think this is a good time to touch on the diversification piece because that can increase the odds of the listener achieving their goal.

Absolutely. And I want to talk about why Kat’s portfolio might be so undiversified. I suspect it has to do with something called familiarity bias. With familiarity bias in investing, people tend to invest in companies that they are familiar with, as you might imagine. In Kat’s case, it’s the one that their dad worked at. 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 company. But this can be a very risky way to invest. So Sara, Elizabeth, I would love to hear what you think about this kind of investing strategy and what it could mean for someone.

I love when people ask me what I think. Okay. I think it’s noble to want to 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 underperform at any time, right? I do think a great real-life 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 with that house. The shower was incredible. I was picturing myself in the house, all the things I’m going to be doing, “manifesting,” and then unfortunately, I did not get the house, and I shed some tears. And I had to start back at 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 I’m moving to, spent money to look at all these houses, and in the end, didn’t yield any fruit.

You put all your eggs in one basket, and that’s the risk of not diversifying, right?

Yeah. And not only do you have that risk of putting too many eggs 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 Enron to a bunch of people, right?

We all know what happened there. So the thing is, companies are run by human beings, and human beings are flawed. Companies are susceptible to things that could affect their performance over time, that any one person who works in the company can’t necessarily control. There are all these forces outside of the company that affect it. The thing is, there are ways that you could analyze performance and assess a stock’s 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.

Or the time. I don’t. I don’t want to do it. I mean, that’s a lot of spreadsheets, guys.

So then you’re left picking a stock based on feelings, which is essentially gambling. It’s pulling a lever on a slot machine. There’s no art, science or math involved in making that decision. It’s literally just, “Well, I’ve heard of this company. My friend works there, my family member works there, I’ve worked there. I 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 in whether or not to invest 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 flawed decision-making, even us.

Right. If someone really wants to invest in a company because they just love that company, that could be their financial goal. However, Kat’s goal is to grow their money, and as we know, the best way to do that typically is by having a well-diversified portfolio that is just more efficient on the whole.

Let’s talk a bit about how Kat could diversify that 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 then invest in a more diversified way. And I should note here that there are tax implications to selling stock, but I will leave that rabbit hole unspelunked for now because it is a deep one, and I don’t want to get lost in there. But team, let’s talk about this. With the perpetual caveat that we are not directing Kat or anyone else how to invest, what are your thoughts, ideas around how to invest cash that is more diversified than going into a single company that your dad worked at?

I’ve actually done this. I held stock in a former employer, and at the time, because of where I was in life, it ended up being a pretty high percentage of my overall portfolio, and it was making me a little uncomfortable. So I sold off some of that stock to reinvest in index funds. And I did owe some taxes on the gains, but otherwise, it was a pretty straightforward process: sell the stock, get the cash, and then use it to buy shares of funds. Done.

So I have actually not done that. I don’t have experience in that, but one thing I will say is I invest mostly in index funds and ETFs.

And let’s quickly just state what index funds and ETFs are for people who may not know.

They’re essentially like a basket of stock. You get a little bit of this, a little bit of that. There are different kinds of ETFs and index funds that you can get, but they expose you to different industries, different types of companies, so that if one is underperforming, hopefully the other one is doing pretty well.

And they can mirror the performance of the market on the whole, depending on what type of index fund or ETF you’re investing in.

Exactly. Did y’all know that Sean was studying for his CFP exam? See, the knowledge is poking through.

Just sprinkling it throughout the conversation.

This is how he reviews course material.

Truly, it is. Yes. Anyway, go ahead, Elizabeth.

So I do have some stock, though, that I am hoarding, and to be honest, I do need to sell it and would like to put it in an index fund because I have quite a bit of it. What the listener could do, if they’re savvy with investing, is do some research and analysis to see which stocks have consistently performed over the past few years and invest in those companies. But, but, but, I have to put a clause there: They should also keep in mind that just because the stock did well in the past, it doesn’t guarantee it will in the future, and that, my dears, is the risk of investing. They will need to know how to do the numbers to do that. There are different websites and 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 a 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 effective too for Kat, and this is something that I do, is regularly investing in a robo-advisor account where you can tell the platform what your financial goals are, what your timeline is, and then I make regular deposits into this account. I basically am saying, “Hey, I want to retire this year, so right now, when I have a long time horizon, let’s maybe have some riskier 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 and fund my life.” So robo-advisors do a lot of that heavy lifting for you. They’re really inexpensive. So I think that there are all sorts of great options for someone like Kat to look into in terms of ways to invest their money that make it so they don’t have to do a lot of the work themselves.

Yeah. And Sean, you mentioned the investment timeline, so let’s talk about that. Let’s talk about Kat’s 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 advisors 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, while of course understanding there are no guarantees with investing, really. With that in mind, Kat is pretty close to that five-year benchmark, and if I were them, 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 into the stocks that I’m going to be hoping grow for me. If they want to be even more conservative, Kat could just funnel as much money as possible into a high-yield savings account.

Yeah, I definitely second the savings account because I’d just been popping in there, unfortunately having to make withdrawals for this move, and I’ve been seeing lots of green that didn’t come from 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 and a specific timeframe, that tells me that Kat already has a plan for that money, because if not, why seven years and $44,000? Those are not even round numbers.

Yeah, I’m really wondering what Kat’s doing with this money.

Why not 10 years and $50,000? You know what I mean? What’s going on, Kat? Follow up with us. Tell us what’s going on with you.

Please tell us. Yeah, we’re nosy. Let us know.

So curious. So you want to invest with that timeframe in mind, and then if your goals change, you can also make changes to how your money’s invested. So maybe things change for you and you’re like, “Well, I can bump this goal out another three years.” What does that change for me? So periodically reassess, because even though seven years is a pretty short timeframe when it comes to the 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 Nerds and call or text us your questions at 901-730-6373. That’s 901-730-NERD. You can also email us at [email protected]. And remember, you can follow the show on your favorite podcast app, including Spotify, Apple Podcasts, and iHeartRadio to automatically download new episodes. This episode was produced by Tess Vigeland; it was mixed by Megan Maurer, and a big thank you to NerdWallet’s editors for all their help.