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Welcome to NerdWallet’s Smart Money podcast, where we answer your real-world money questions.
In this episode: Learn pro tips for shopping on social media without overspending, and smart strategies for investing your spare cash.
This Week in Your Money: Personal finance Nerd Kimberly Palmer joins hosts Sean Pyles and Liz Weston for a look at how your social media feed may be leading you to spend more money than you should. To balance all the prompts pushing you to spend, try using browser extensions to compare prices and see deals. Check customer reviews, too, and be aware of how the setting and a false sense of urgency can lead to spending too much and or perhaps sharing too much personal information.
Today’s Money Question: Investing Nerd Sam Taube joins Sean and Liz to answer a listener’s question about how to invest extra money currently sitting in a high-yield savings account. The Nerds take a deep look into the importance of emergency funds and how to set realistic financial goals, offering practical advice on starting your own emergency fund and discussing how your cost of living can influence the amount to save.
They also explain how using online banks can make savings goals more tangible, and then switch gears and dive into the world of investment options, including the mutual funds, exchange traded funds, individual stocks, high-interest savings accounts and money market accounts.
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Sean Pyles: Ever feel like you just aren’t sure where to invest the money sitting in your bank account? Well, this episode, we’ve got you covered. Welcome to NerdWallet’s Smart Money Podcast, where you send us your money questions and we answer them with the help of our genius Nerds. I’m Sean Pyles.
Liz Weston: And I’m Liz Weston. Listener, we know you have questions about money, and we have the answers, so let us know what’s on your mind.
Sean Pyles: You can leave us a voicemail or text us on the Nerd hotline at 901-730-6373. That’s 901-730-NERD. You can also email us at [email protected].
Liz Weston: In this episode, we’re answering a listener’s question about investing the money that’s sitting in their bank account. But first, we’re joined by personal finance Nerd Kimberly Palmer, who’s going to give us some smart tips for shopping on social media. Welcome back to Smart Money, Kim.
Kim Palmer: Thank you for having me.
Sean Pyles: Hey, Kim, you recently wrote about how to shop on social media in an era of scammers and ever-appealing impulse purchases. Online shopping is the norm for so many of us. So, why do you think now is a good time for a refresher about being a savvy shopper, particularly on social media?
Kim Palmer: I think it’s because so many of us are doing it right now. We’ve actually seen a huge uptick in retailers putting a lot of money into their social channels, especially the ability to shop directly through social media, so you don’t even have to leave social media to make your purchases. And about half or almost half of U.S. consumers actually say they have already made a purchase on social media. So, it’s definitely happening more and more. I think we’ve probably all seen our favorite influencer or brand selling on Instagram, I know I have. So, it’s just a good time to talk about it.
Sean Pyles: Yeah. Are you thinking about things like Instagram Lives, Facebook Lives, as well as posts in people’s feeds?
Kim Palmer: Yes, sort of all of the above. What we’re talking about here includes any kind of social shopping or shopping directly on social media. So, that can include when you have an influencer saying, “Hey, I love this product. Here’s my special code for a discount. You can buy it right here. Link is in the bio.” Or it also includes live events where you actually are sort of shopping with an influencer and they’re sending up the codes that you can click on and make your purchase. Basically, anything where you’re on social media and shopping at the same time.
Sean Pyles: Yeah, it’s like these influencers have their own QVC channels on their platforms at this point.
Kim Palmer: Yes, it’s exactly like that.
Liz Weston: Well, overspending can be all too easy on any media, let alone social media. So, how do you pump the brakes?
Kim Palmer: I think the big challenge with social media is that everything feels so urgent, because you’ll often see the influencer say, “Hey, there’s a limited time when this deal works,” or, “There’s a limited number of product.” So, you feel so much pressure to make your purchase immediately, and the key as a shopper is to realize, no, you don’t have to buy it right now, you can step away, take time to think about it, and you’ll probably find another discount code later if you really want it.
Sean Pyles: Mm-hmm. Yeah. We talk a lot about scammers on this podcast and one of their go-to tools is to create a sense of urgency and pressure you into sending money as soon as possible because something bad will happen. In this case, it’s not quite as drastic, but they’re saying, essentially, “You have a very limited time to get this one thing that’s going to totally fix your life, and if you don’t do it, then everything’s going to be crappy for you, so send this money now.” I’m just wary of this whole playbook. So, I think it’s important for people to take a step back, maybe, when they are shopping online and realize they probably actually don’t need that thing that’s in front of them.
Kim Palmer: Yeah, that’s so true. I think a lot of times, too, we’re often scrolling at night. We see these tempting deals pop up, and so we don’t have all of our automatic filters turned on fully when you’re tired, and so I think it’s extra hard to step away, but so important to do so.
Liz Weston: Well, price comparing and checking your reviews are kind of par for the course with online shopping. Is that easy to do when people are shopping on social media?
Kim Palmer: It is easy to do as long as you give yourself that space and time to do it. So, you don’t want to get sucked into purchasing right away through the app. You want to leave the app, do some searches outside of it, just open up a browser and see what prices are for the product you’re looking at other places. You also want to look up customer reviews, because of course you don’t want to buy something without checking what other people have said about it. And so you just need to make sure you take that time to compare prices and check customer reviews.
If you skip that process, that’s where it’s easier to get into trouble. Of course, I always say, I love using apps to do some of this work for you. So you might want to have a price tracking browser extension to be scanning in the background, do some of that comparison shopping, so you don’t have to do it all manually.
Sean Pyles: OK. You have a couple of go-to apps that you use for this, right?
Kim Palmer: I do. I really like the Honey browser extension. It comes from PayPal. It’s very easy to download and use and have it run in the background. It can pull in discount codes.
If you’re a big Amazon shopper, The Camelizer browser extension is a great go-to one to use because it gives you the whole price history, you can set up price alerts for specific products, so you just want to make sure you’re using something.
Sean Pyles: Mm-hmm. OK, that’s good advice.
So, I want to go back to the idea of scams, because in a recent episode, Liz and I talked about the prevalence of scams online, particularly around shopping on social media. How do you suggest people stay safe when they’re shopping on these platforms?
Kim Palmer: It’s really all about remembering that you are still among strangers and to not really get sucked into that mentality that you should overshare because you’re with like-minded people. Especially on the live shopping events, you see a lot of people commenting and sometimes they’re even sharing personal things, what exactly they purchase, maybe even where they live or where they’re going to be wearing the item they just bought. You just want to be a little careful with that because you don’t really know who these people are, even though you do feel like you’re kind of friends, chatting in person, they’re still strangers. So, you just want to be careful of oversharing.
Then also think about when you do share your credit card or your payment information to actually make a purchase. You want to make sure you’re not actually leaving the social media app and entering it into a third-party site that you’re not familiar with. You also want to consider using a credit card because, of course, credit cards do give you extra fraud protection.
Liz Weston: More and more I’m just defaulting to using Apple Pay, and I think Google Pay or Samsung Pay is similar, because I use a credit card within that app, but it tokenizes the whole transaction so the merchant can’t see my credit card information.
Kim Palmer: I think some people do connect their debit cards to those things. You just want to make sure ultimately you’re using a credit card.
Liz Weston: OK, yeah, that makes sense.
Sean Pyles: That’s good to know.
Liz Weston: But at the end of the day, social media shopping can be a lot of fun. Given all that we just talked about, how can people still find joy when they’re shopping on social media platforms?
Kim Palmer: I think you’re right in that it can be so fun, especially because you’re interacting with people you love: influencers, celebrities, they’re making personal recommendations to you that you might be excited about, and there’s nothing wrong with that as long as you’re taking some extra precautions just to protect yourself. So, you can still enjoy it as long as you’re taking that time to compare prices and keep yourself safe.
Sean Pyles: All right. Well, Kim, thank you so much for talking with us.
Kim Palmer: Of course, thank you.
Sean Pyles: Before we move on, we have an exciting announcement. We are running another book giveaway sweepstakes ahead of our next Nerdy Book Club episode. Next month, we’re talking with Cameron Huddleston, author of “Mom and Dad, We Need to Talk,” which guides us through difficult but really important financial conversations that we need to have with our parents.
To enter for a chance to win our book giveaway, send an email to [email protected] with the subject book sweepstakes during the sweepstakes period. Entries must be received by 11:59 PM PT on August 9th. Include the following information: your first and last name, email address, ZIP code and phone number. For more information, please visit our official sweepstakes rules page. With that, let’s get into this episode’s money question segment.
This episode’s Money question comes from Uli who sent us an email. Here’s their email as read by Smart Money producer Rosalie Murphy.
Rosalie Murphy: “Hi, NerdWallet, love the podcast. I have about $68,000 total in a high interest savings account, with $10,000 dedicated to an emergency fund. I’m currently maxing out my 401(k) and Roth IRA, and investing about $500 every month in a general investment account through index funds. My question is, I don’t know what I should do with the extra money. I live in L.A., and cannot afford a home here, but it also feels like it’s too much money just sitting there. Should I put more of my money in index funds? Thank you for your time. Keep up the good work. Best, Uli.”
Liz Weston: To help us answer Uli’s question on this episode of the podcast, we’re joined by NerdWallet investing writer Sam Taube. Welcome back to Smart Money, Sam.
Sam Taube: Great to be back.
Sean Pyles: Great to have you, Sam. Before we get into the conversation, a quick reminder for our listeners: We will not tell you what to do with your money. We are not financial or investment advisors. Our job as Nerds is to give you information so that you can make your financial decisions with the utmost confidence.
All right, well, with that out of the way, let’s start by talking emergency funds. Our listener is in a pretty sweet place with $10,000 set aside for emergencies, but I’m wondering, given where they live, whether that would be enough. So, Liz, can you start us off by giving some general rules of thumb around emergency funds?
Liz Weston: Yeah. Generally, it’s a good idea to start with at least a small emergency fund, say, $500. Even saving that, of course, can take some time, but it would probably be enough to cover a lot of small emergencies like a flat tire, losing your keys and having to have a locksmith come to let you into your apartment, things like that.
From there, what you want to aim for is three to six months of your basic expenses. You probably don’t need to factor in things that you could cut back on, like delivery, eating out three times a week, whatever your indulgence is. But if you lose your source of income for whatever reason, you’ll want to figure out what is your nut, what you absolutely need to cover, shoot for one month to start and then eventually build it to three months. And if you can get to six months, even better.
Sam Taube: It occurs to me in the context of this reader living in L.A., that housing can be a very difficult thing to cut back on. I looked up some numbers, and it seems like the average rent in Los Angeles right now is about $2,400 a month for a one bedroom. That’s as of June 2023. So, if you do the math on that, three months of rent is about $7,200.
So, I think in this case, given the guideline of three to six months expenses, you could make an argument that this listener should set aside $20,000 or even $30,000 for an emergency fund, given the L.A. cost of living. Given that they have almost $70K in their high-yield savings account, it sounds like reallocating some of that money is potentially possible.
Sean Pyles: I think it might be helpful for them to go through that exercise that Liz mentioned of really getting clear on what three or six months of basic expenses would mean. That’s going to cover things like rent, groceries, but maybe not everything you would get at the grocery store when you have a steady income. So, in my case, that would be cutting back on things like smoked salmon or other little indulgences, but just know what would get you through a good amount of time if you didn’t have an income coming through.
Liz Weston: Yeah, exactly. If you have other sources that you can tap, like if you have, I don’t know, another income coming in, if you have generous parents, maybe you need a skinnier emergency fund. If you are on your own, if you wouldn’t want to tap those options, then maybe a larger emergency fund would be a good idea.
Sean Pyles: All right. Well, now, let’s get to the fun part. What to do when you have tens of thousands of dollars just burning a hole in your pocket or, in the case of Uli, in their high-yield savings account. Part of it comes down to how to choose short-, medium- and long-term goals. What do you guys think about that?
Sam Taube: Yeah. Some examples of long-term goals could include buying a house, or starting a family, or starting a college fund for your family or even retiring early, whereas the short-term goals we’re talking about here would be things like a dream vacation or a new car.
In general, long-term goals are things that are going to be more than five years out, whereas short-term goals are going to be things that are less than one year out, and there are medium-term goals that are somewhere in between those.
Sean Pyles: What strikes me about Uli’s question is that they don’t seem to know what they want to do with this big chunk of money. I think something that might be helpful for them would be setting up savings buckets. This is something we talk about a lot on Smart Money, and it’s essentially a way to have different sub savings accounts within your high-yield savings account that you have set up already for different goals. I have about half a dozen right now, I think. I have one that is my fence fund. I have one that’s a wedding fund. I have one for taxes, one that’s my emergency fund. And I just put money into these accounts either all at once, if I get a big windfall, or I also do regular automatic deposits from my paycheck into these different savings buckets. That helps me structure my savings for these short-, medium- and long-term goals that I have.
Liz Weston: And if you’re new to the podcast and you haven’t heard us talk about this before, you can use online banks, which typically have the option of setting up these savings buckets or sub-accounts, they call them different things, but you can actually put names on them and you don’t have to pay extra for having more accounts. That’s something that’s different from brick and mortar banks, which is great, there’s no minimums, there’s no monthly fees. So, it really helps you get the psychological advantage of being able to label these buckets, so you keep your mitts off it when, you know, you don’t grab money from one bucket to pay for something else.
Sean Pyles: And it can make the sting of having an expense a little bit easier to endure. I recently had a car repair that was around $500 and it’s kind of weird, but I felt some gratification that I had the money saved in my car fund account that I could put toward this. It didn’t really hurt as badly as if it was just in a general pool of cash that I had, because I knew, “OK, this is money I’ve been setting aside for this specific purpose.” The blow doesn’t really hit me as hard because I’ve already prepared for it.
Liz Weston: Yes. And if Uli is having trouble figuring out what their goals should be, what can they do, Sam?
Sam Taube: Well, talking to people is always a good option. Having conversations with friends and family and financial advisors. Now, granted, in that situation, you should take any advice with a grain of salt, especially if it comes from non-professionals like friends and family. But hearing what other folks would do in this situation, particularly folks you relate to, can help determine what you do and don’t want to do with your money.
Sean Pyles: Mm-hmm. Sometimes I’ll have a conversation with a loved one around money and what you would do with any sort of windfall, and the things that I hear sometimes make me scratch my head. And that’s how I know that I just have different priorities from them, and that’s totally OK. But that helps me get really clear on what I do want to do with my money, because I know what I don’t want to do.
Liz Weston: Yeah, exactly. So Sean, how do you handle balancing different financial goals and saving for them?
Sean Pyles: I am a big advocate of trying to do many things simultaneously, because I am a multitasker, and I’m kind of impatient.
So, I can give a recent example where I had a windfall earlier this year that left me feeling like I had some extra money, like Uli, and so I decided to split the money that I got across a few different goals. I spent 10% on stuff that I wanted. I got myself a new dresser, I got myself a new laptop. And then I put some into a wedding fund that I have, some into my home repair fund, then I put some into a brokerage account. Again, that helps me feel like I’m accomplishing a lot of different things simultaneously. I don’t have to funnel everything toward one specific goal.
Liz Weston: Well, I’m all for blowing at least 10% of any windfall that comes in. I think that’s the fun money that you get to do whatever you want with.
I’m the same way, Sean. I like to be making progress on different goals, but I know it’s very satisfying to funnel all your money in one thing, but that typically isn’t the best way, in my view, to handle financial goals.
I just wanted to throw in that maybe our listeners should think about their bucket list for their lives, things that they want to do, and making progress on that as well. As we’ve talked about here before, I’ve taken several sabbaticals in my career and I’m really happy I did it, because you never know what the future’s going to bring and you shouldn’t put everything off till the future. I think those of us who have a savings orientation are very likely to do that. Hats off that so much money is being saved. I mean, Uli is doing a great job of putting money aside. But just making sure that they’re also spending money on today and creating memories and having experiences, because that’s important to our happiness as well.
Sean Pyles: Yeah, it goes back to the idea that I talk about a lot on the podcast of living for today while you’re planning for tomorrow. I think both are very important to do, so that you don’t find yourself 20 years from now thinking, “I really wish I’d gone on that vacation,” or, “I could have gone backpacking,” when you were a little more able-bodied. So, that’s something to consider too for our listener.
Liz Weston: Yeah. Now, we probably should talk about how Uli should think about investing the money. We talked about long-term, medium-term and short-term goals, and those have different investing guidance, right?
Sam Taube: Absolutely. The Securities and Exchange Commission actually only recommends investing money in stocks if you don’t need it for at least five years. The answer about the best thing for Uli to do with the extra money is going to depend on the goal for that money.
The reason why the SEC recommends this five-year rule of thumb is because sometimes the market tanks, and you want to make sure that your money has a chance to recover from a potential downturn before you need it. So, the average bear market recovery time, based on historical data, can be about 27 months, and a few of them have been as long as five years.
Sean Pyles: Sam, Uli is interested in investing more in index funds in particular on top of the $500 a month that they’re already investing. Can you explain why these are a popular investment option and also what some alternatives might be?
Sam Taube: Yeah. Index funds are popular because they’re hands off. There’s very little management involved in holding an index fund. And they can generate a pretty reliable return over long periods of time. Often, when we talk about index funds, we’re talking about an S&P 500 index fund.
The S&P 500 has a long-term average annual return of about 10% before inflation. That average has held for a good 100 years or so. In some years, it returns more than that, and in some years, it returns less. Sometimes people can beat the S&P 500 through stock trading. But a roughly 10% annual return from an index fund is really plenty for a lot of financial goals, and it just requires so little effort: You just buy it and hold it.
Liz Weston: Of course, index funds are a passive investment. You’re just trying to match the benchmark like the S&P 500. What if you want to be a little bit more active?
Sam Taube: Yeah, there are kind of different levels you can go to in terms of activity. If you want to be just a tiny bit more active than an index fund, you can also buy mutual funds or exchange-traded funds that target a particular segment of the market. So, if you think that tech stocks are coming back after the crash that they went through in 2022, you could buy a tech stock ETF. Or if you think the healthcare industry is going to do well in the coming years, you could buy a healthcare ETF.
Then, if you want to be more active than that, you could buy individual stocks. Blue chip stocks, something like Apple, is probably going to offer a little more stability than a small cap stock, but they serve different needs, and there’s a chance of outperforming the indexes when you’re buying individual stocks.
But the catch with individual stocks is that researching them can take a whole lot of work. You should really extensively look up the numbers and the news around a particular stock before you’re buying, and you should also monitor it pretty closely. That can be a pretty substantial cost, both in terms of time and in terms of mental bandwidth and anxiety. If you’re buying a lot of individual stocks, which is a good thing to do for diversification, then the upfront dollar cost might be a lot bigger than an index fund, which can allow you to invest in hundreds of stocks for one relatively low price.
Liz Weston: Well, and everything you’ve just said, Sam, is the reason I’m a passive investor. I just don’t have the bandwidth to do all the research, and actually being truly diversified can take hundreds of thousands of dollars if you’re investing in individual stocks. So, that’s something to keep in mind.
The other thing is all the research we have showing that most people who try to beat the market fail, so you wind up trailing the market. When you fold all that in, I’m like, OK, passive is the way to go, but everybody’s got to sail their own ship, as it were.
Sean Pyles: And everything that we’ve just been discussing around ETFs, index funds, mutual funds, buying individual stocks, that would be more for longer-term goals, like you said a little bit earlier, Sam. What are some options for putting money into vehicles for shorter-term goals?
Sam Taube: One popular option is a high-interest savings account, and a money market account is another similar option for that kind of thing. The returns you’ll get in an account like that aren’t as high as what you’ll get with stocks on average, but they’re pretty high right now, because interest rates have been going up for the last year. Some of these accounts are yielding more than 4%. The other thing that you get with a savings account that you don’t get with stocks is insurance. The money in a high yield account or a money market account is going to be insured by the Federal Deposit Insurance Corporation up to $250,000 per account. So, you don’t have to worry about it all evaporating in a downturn.
Liz Weston: Yeah, that’s a good point.
Just for clarity, there’s two types of money market accounts, actually. There’s money market savings accounts, which are FDIC insured, and then there’s money market mutual funds, which don’t have that insurance.
If your goal is somewhere between short-term and long-term, well, you can try laddering CDs, which means buying CDs with different maturities. So, that gives you the FDIC insurance that Sam was just talking about. Maybe short-term bonds could be an option as well. It’s a little bit squishy in that medium-term area, but you can research it a little bit more and see what your options might be.
Sean Pyles: Well, Sam, thank you so much for coming on and sharing your insights with us.
Sam Taube: Thanks for having me.
Sean Pyles: With that, let’s get onto our takeaway tips. Liz, will you please start us off?
Liz Weston: Yes. First, know how to save for emergencies. Starting with even a few hundred dollars can help you weather many unexpected expenses. Eventually, work to save three to six months of essential costs.
Sean Pyles: Next, bring in the buckets. Saving buckets are an easy way to organize your savings for different goals.
Liz Weston: Finally, weigh your investment options. Investments like index funds or exchange-traded funds are typically better for long-term goals, while money market accounts and savings accounts can be a better pick for short-term goals.
Sean Pyles: 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] Visit nerdwallet.com/podcast for more info on this episode. And remember to follow, rate and review us wherever you’re getting this podcast.
Liz Weston: And here’s our brief disclaimer. 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.
Sean Pyles: This episode was produced by Liz Weston and myself. Kaely Monahan mixed our audio. And a big thank you to the folks on the NerdWallet copy desk for all their help.
And with that said, until next time, turn to the Nerds