“I’ve Never Invested Before and All My Money Is in a Savings Account. Help!”
In this episode of Money Rehab with Nicole Lapin, Nicole offers financial advice to a young professional looking to maximize her savings and investment potential. The conversation explores building a simple, diversified investment portfolio tailored to the caller's long-term goals like buying a home and starting a family.
Nicole shares strategies to get started with investing beyond traditional savings accounts. She recommends a mix of low-cost index funds and individual stock picks aligned with the caller's interests. The discussion also covers adjusting asset allocation based on time horizons and how to factor in personal milestones when structuring financial plans.
This is a preview of the Shortform summary of the Jun 13, 2024 episode of the Money Rehab with Nicole Lapin
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1-Page Summary
Nicole's experience as an Airbnb host
Nicole Lapin describes Airbnb hosting as a lucrative side hustle with minimal startup costs. She appreciates the ability to monetize her existing property when she's away, earning income to offset travel expenses. Nicole claims Airbnb made hosting straightforward, allowing her to easily generate extra income from her home.
The caller's financial situation and goals
The caller has significant savings ($40K earning 5% interest and $8K in checking), participates in her employer's stock plans, and has $90K invested in a 401(k). While stable, she seeks ways to maximize her money's potential for upcoming goals like buying a house in Denver, getting married, and potentially having children.
Long-term considerations
With a flourishing career and long horizon, Nicole Lapin suggests exploring stock market investments beyond savings accounts. The caller already owns some stocks through her workplace, but lacks a dedicated brokerage account for broader investing options.
Personal life milestones
The caller plans inexpensive nuptials and is open to having up to two kids, though uncertain. These life events factor into her homebuying timeline and overall financial strategy.
Nicole's investment recommendations and strategies
Simple, diversified portfolio
Nicole recommends a 15% income investment in an S&P 500 index fund like SPY or VOO for market exposure. For the caller's age (32), she advises a 68% stock, 32% bond asset allocation.
Follow your interests
Nicole suggests looking to familiar brands and services for initial investment ideas, like buying Apple stock if you love your iPhone.
Define goals and time horizons
For short-term goals like weddings, Nicole counsels slower, liquid options like bonds. But she emphasizes stocks for long-term growth, underlying the need to establish financial objectives like retirement targets.
1-Page Summary
Additional Materials
Clarifications
- Nicole Lapin finds Airbnb hosting to be a profitable side gig with low initial costs. She values the opportunity to earn money from her property while traveling. Nicole believes Airbnb simplifies the hosting process, enabling her to generate extra income effortlessly.
- Nicole recommends a diversified portfolio with 15% in an S&P 500 index fund for market exposure. She suggests a 68% stock and 32% bond asset allocation for someone aged 32. She advises investing in familiar brands or services that interest you, like buying Apple stock if you enjoy their products. Nicole emphasizes the importance of defining financial goals and time horizons for different types of investments, such as slower, liquid options like bonds for short-term goals and stocks for long-term growth.
- The suggested asset allocation percentages of 68% stocks and 32% bonds for a 32-year-old individual like the caller are based on traditional investment strategies that aim to balance risk and return. Stocks generally offer higher growth potential but come with higher volatility, while bonds are considered more stable but offer lower returns. This allocation is commonly recommended for individuals with a moderate risk tolerance and a relatively long investment horizon, like someone planning for long-term financial goals such as retirement. It aims to provide a mix of growth and stability in the investment portfolio.
- A diversified portfolio is a strategy where an investor spreads their investments across different asset classes, industries, and regions to reduce risk. By diversifying, the impact of a poor performance in one investment is lessened by the potential gains in others. This approach aims to balance risk and reward by not putting all eggs in one basket, increasing the chances of overall portfolio stability and growth over time.
- Exploring stock market investments beyond savings accounts involves considering options like buying shares of companies through stocks or investing in funds that track the performance of a group of stocks. This strategy aims to potentially earn higher returns than what traditional savings accounts offer over the long term. By diversifying into the stock market, individuals can benefit from the growth potential of different companies and sectors, albeit with higher risk compared to savings accounts. It's a way to grow wealth by participating in the ownership of businesses and taking advantage of the stock market's historical ability to outperform other asset classes like cash savings.
- Investing in familiar brands and services based on interests means choosing to invest in companies whose products or services you personally use and believe in. This strategy suggests that if you are a fan of a particular brand or product, you may have a better understanding of its potential for growth and success in the market. By investing in companies you are familiar with, you may feel more connected to your investments and be more motivated to track their performance. This approach can align your investment decisions with your personal preferences and experiences, potentially making it easier for you to stay informed and engaged in managing your portfolio.
Counterarguments
- While Airbnb hosting can be lucrative, it also comes with risks such as property damage, unreliable guests, and potential legal and zoning issues that can arise from short-term rentals.
- Having significant savings is beneficial, but keeping too much money in low-interest accounts could result in a loss of potential earnings from investments with higher returns.
- Exploring stock market investments is a sound idea, but it should be done with caution and possibly with the guidance of a financial advisor, especially for someone without a dedicated brokerage account or extensive investment experience.
- A 68% stock, 32% bond asset allocation may not be suitable for everyone at the age of 32, as risk tolerance varies greatly among individuals.
- Investing in familiar brands can be a good starting point, but it should not replace thorough research and diversification in investment decisions.
- While stocks are generally considered good for long-term growth, they can be volatile, and the caller should be prepared for the ups and downs of the stock market.
- Defining financial objectives is crucial, but so is flexibility, as personal circumstances and market conditions can change, requiring adjustments to one's financial strategy.
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Nicole's experience as an Airbnb host
Nicole Lapin shares her successful foray into the world of Airbnb hosting, explaining how it has become a lucrative side hustle and a smart financial strategy to offset travel costs.
Monetizing existing property is a great side hustle
Airbnb makes it easy to host and earn extra income
Lapin describes how Airbnb has streamlined the process of turning a home into a money-making venture. For Nicole, hosting on Airbnb is a “no-brainer.” She loathes the idea of her house sitting empty and instead prefers it to be collecting checks, thus Airbnb becomes an ideal platform to achieve this. She claims Airbnb to be one of her all-time favorite side hustles due to the minimal startup costs and the ability to capitalize on an already owned property. Nicole details how straightforward the process is: signing up to host is simple and begins to generate additional income almost immediately.
Hosting offsets costs of Nicole's own travels and vacations
Nicole highlights an advantageous aspect of hosting on Airbnb—it helps her fund her travels. The income she earns from guests staying at her place when ...
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Nicole's experience as an Airbnb host
Additional Materials
Clarifications
- A side hustle is a secondary job or gig that individuals take on in addition to their primary source of income. It is typically flexible and allows individuals to pursue their interests, earn extra money, or explore entrepreneurial ventures outside of their main occupation. Side hustles can range from freelance work, selling products online, offering services, or renting out property, providing an additional stream of income to supplement one's earnings. Side hustles have become increasingly popular as a way to diversify income sources and achieve financial goals.
- Monetizing existing property means finding ways to generate income from a property you already own. This can include renting out the property, using it for short-term stays like Airbnb, or utilizing it for other income-generating activities. It's a strategy to make money from an asset that you already possess.
- A "game-changer" is a term used to describe someth ...
Counterarguments
- Hosting on Airbnb requires time and effort to manage listings, communicate with guests, and maintain the property.
- There may be hidden costs associated with Airbnb hosting, such as increased wear and tear on the property, higher utility bills, and the need for additional insurance.
- Not all properties are suitable for Airbnb, and some locations may have legal restrictions or require special permits for short-term rentals.
- The income from Airbnb hosting can be inconsistent and is subject to seasonal fluctuations and market competition.
- Hosting on Airbnb can introduce risks such as property damage or issues with guests, which can lead to unexpected expenses or legal challenges.
- The success of Airbnb hosting can depend heavily on receiving positive reviews, which can create pressure for hosts to constantly provide exc ...
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The caller's financial situation and goals
The caller is in a stable financial position with considerable savings and is looking for ways to make her money work harder for her future plans. She has goals of buying a house, getting married, and potentially having children, yet wants to invest wisely.
The caller has significant savings but wants to make it work harder
The caller is conscientious about her savings, currently holding $40K in a high-yield savings account, accruing at a 5% rate, alongside $8K in a checking account. Her financial prudence is shown by her intent to allocate around 30-40% of her income into the high-yield account. Despite her considerable savings, she is exploring options beyond traditional saving methods to maximize her money's potential.
Long-term financial considerations
The caller is at a crossroads when it comes to life events and investments. With an existing $90K nest in a 401(k) and participation in an employee stock purchase plan with a portion in restricted stock, she has a solid retirement fund and is already familiar with stock investments. Although she recently sold stock from the ESPP and purchased Apple shares as an experiment, she does not yet have a separate brokerage account, which could offer a broader range of investment opportunities.
Investment expert Nicole Lapin suggests that given the caller's flourishing career and long-term horizon, the stock market might provide significant potential for growth. Thus, the recommendation leans toward allocating funds to investments rather than letting it sit in savings accounts.
Personal milestones on the horizon
The caller's personal life is full of impending milestones which impact her financial decisions. She and her boyfriend have differing perspectives on their wedding, with the caller leaning towards saving rather than opting for an expensive event. The couple is also considering a property investment or a honeymoon and is cons ...
Here’s what you’ll find in our full summary
The caller's financial situation and goals
Additional Materials
Clarifications
- An Employee Stock Purchase Plan (ESPP) is a program that allows employees to purchase company stock at a discounted price, typically up to 15%. Employees contribute to the plan through payroll deductions, and the purchased shares are not taxed until they are sold. The timing of selling the shares determines if the disposition is qualified or not qualified for certain tax benefits. ESPPs can also have a vesting schedule, which dictates when employees can access the purchased stock.
- Restricted stock is company stock that comes with conditions on its transferability until certain requirements are met. These conditions could include continued employment or specific performance milestones. It is often used as a form of employee compensation and can be an alternative to stock options, especially for executives. Restricted stock units (RSUs) are a newer form that delays the recognition of income to the employee while still offering favorable accounting treatment.
- A brokerage account is a type of financial account that allows individuals to buy and sell various investments, such as stocks, bonds, and mutual funds, through a brokerage firm. It provides access to a wide range of investment opportunities beyond traditional savings accounts. Investors typically use brokerage accounts to manage their investment portfolios and potentially grow their wealth over time. These accounts are separate from regular savings or checking accounts and are specifically designed for investing in the financial markets ...
Counterarguments
- While the caller has a high-yield savings account, the 5% rate may not outpace inflation in the long term, which could erode the real value of her savings.
- Allocating 30-40% of income into savings is prudent, but it may be overly conservative if the caller is young and has a stable job, potentially missing out on higher returns from more aggressive investments.
- The caller's current investment in Apple shares represents a single-stock exposure, which could be risky without proper diversification.
- Not having a separate brokerage account may limit the caller's investment options and ability to diversify her portfolio across different asset classes.
- While Nicole Lapin suggests the stock market for growth, it's important to note that the stock market can be volatile, and the caller should be prepared for the possibility of short-term losses.
- The caller's focus on saving for a wedding may be financially prudent, but it could also mean missing out on the personal and social benefits of a larger celebration, which some may value highly.
- Considering property investment or a honeymoon without a clear preference could lead to indecision and missed opportunities in both the real estate market and personal experiences.
- The caller's openness to having chi ...
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Nicole's investment recommendations and strategies to overcome investing anxiety
Nicole shares insight into simple yet effective investment strategies and offers advice on leveraging personal interests to make informed investment decisions.
Start with a simple, diversified investment strategy
Nicole advocates for a straightforward and diversified approach when venturing into investing.
Recommend investing 15% of income in an S&P 500 index fund
Nicole endorses the idea of investing 15% of one's income in an S&P 500 index fund. She explains that doing so offers a little piece of the 500 largest companies, including big names like Apple and Nvidia, and suggests that it is difficult to beat the market. Therefore, buying into an S&P 500 index fund, which essentially means buying the market, is a sound strategy.
Nicole gives specific examples of S&P 500 index funds, including SPY, VOO, and IVV, and advises the caller to pick one, emphasizing that while these funds have slight differences in fees and allocations, they are largely the same. She further expands her personal diversification strategy to include index funds like the Russell 2000, which tracks smaller cap companies.
Suggest a 32% bond, 68% stock portfolio allocation given the caller's age
Nicole suggests a starting asset allocation for the caller, who is 32 years old, to be 32% in bonds and 68% in stocks. This typical starting point can be adjusted to a 30% bond and 70% stock allocation, if preferred, to match the individual's comfort level and investment objectives.
Leveraging existing consumer habits and interests for investment ideas
Nicole advises the caller to consider investing in familiar territories, like the companies behind the products and services they already use and enjoy. Through this discussion, Nicole indicates that investing in what you know and like, such as Apple or Nvidia, can be a beneficial strategy. If someone loves their iPhone, for instance, it might make sense for them to invest in Apple.
Emphasize the importance of defining financial goals and time horizons
Nicole walks the caller through the process ...
Here’s what you’ll find in our full summary
Nicole's investment recommendations and strategies to overcome investing anxiety
Additional Materials
Clarifications
- An S&P 500 index fund is a type of investment fund that aims to mirror the performance of the S&P 500 index, which represents the 500 largest publicly traded companies in the United States. Investing in an S&P 500 index fund provides exposure to a diversified portfolio of leading companies, offering a simple way to invest in the broader stock market. By investing in such a fund, individuals essentially invest in a slice of the overall market rather than selecting individual stocks.
- Asset allocation percentages like 32% in bonds and 68% in stocks represent the division of an investment portfolio between different asset classes. Bonds are typically considered less risky but offer lower returns, while stocks are higher risk but potentially provide higher returns. The specific percentages are based on factors like the investor's age, risk tolerance, and investment goals. This allocation aims to balance risk and return within the portfolio.
- The Russell 2000 is an index that tracks the performance of approximately 2,000 small-cap stocks in the U.S. stock market. Investing in an index fund like the Russell 2000 provides exposure to a diverse range of smaller companies, offering investors a way to potentially benefit from the growth of this segment of the market. These index funds are passively managed and aim to replicate the performance of the underlying index, providing investors with broad market exposure in a cost-effective manner.
- A Certificate of Deposit (CD) is a financial product offered by banks, credit unions, and thrift institutions. It involves depositing a fixed amount of money for a specific period in exchange for a higher interest rate than regular savings account ...
Counterarguments
- While investing 15% of income in an S&P 500 index fund is a common recommendation, it may not be suitable for everyone, especially those with high debt levels or insufficient emergency funds.
- The S&P 500, while diversified across industries, is still focused on large-cap U.S. stocks and may not provide sufficient international exposure.
- A 32% bond allocation might be too conservative or too aggressive for some 32-year-olds, depending on their risk tolerance, financial situation, and investment goals.
- Investing in companies based on personal interests and consumer habits can lead to a lack of diversification if not balanced with other investments.
- The advice to invest in what you know can sometimes lead to overlooking broader market opportunities or emerging sectors where the investor may not have personal interest or knowledge.
- Defining financial goals and time horizons is crucial, but the process can be complex and may require professional financial advice beyond simple budgeting.
- For short-term goals, even stable investment options like bonds can be subject ...
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