Smart Money Podcast: DIY Investing and Lightning Round Questions

Sean Pyles: Welcome to the NerdWallet Smart Money Podcast, where we answer your personal finance questions and help you feel a little smarter about what you do with your money. I’m Sean Pyles.

Liz Weston: And I’m Liz Weston. To contact the Nerds, call or text us on the Nerd hotline at 901-730-6373, that’s 901-730-NERD, N-E-R-D. Or email us at [email protected]. Also, hit that subscribe button to get new episodes delivered to your devices every Monday. And if you like what you hear, please leave us a review.

Sean: This episode, Liz and I are yet again taking on a number of your questions in a lightning round. This time we’re answering a handful of your questions around credit, as well as questions around salary negotiations and whether you can have too many credit cards.

Liz: First, though, in our “this week in your money” segment, Sean and I are talking about the pros, cons and potential risks of do-it-yourself investing. As per usual, we need to give this quick disclaimer that Sean and I are not financial or investment advisors. This information is for your own educational and entertainment purposes, and we are not going to tell you how to invest your money. Our job is to give you the tools to make your own informed decisions.

Sean: And with that out of the way, let’s get into it. To start, I think it’s important to understand what it means to be a DIY, do-it-yourself, investor and how it’s done. At its simplest, being a DIY investor means choosing the individual stocks or funds you’re investing in on your own rather than having them chosen for you. And some of those can come down to which kind of investment account you choose, whether it’s a brokerage account, a 401(k), or a robo-advisor account. And think of these accounts as the house that you’ll populate with busy little worker bee investments that will hopefully make you money.

Liz: Oh, I like that analogy. That works. We should always remember, though, that there’s a risk of loss whenever you invest.

Sean: Yes. Maybe some sort of evil hornet is going to infest your house and ruin everything you’ve been working for. But anyway, so you have your house and now you need to determine how it’s going to be populated. And as I mentioned before, when you’re a DIY investor, you can choose your own investments. In this case, you’re basically working as the landlord, scrutinizing each “tenant” that you let in the door. And as you can imagine, that’s a lot of work and it can take some time to do that.

Liz: And this is in contrast to the hands-off approach, like if you went with a robo-advisor. You can think of a robo-advisor as a management company for your house. They would do the work of choosing your tenants for you based on your criteria and your risk level.

Sean: Right. And for a lot of beginner investors, this latter option is just a lot easier. I know it was for me when I first got into investing, I wanted to get into the game, so setting up a robo-advisor account and automating monthly contributions was by far the simplest route for me. The idea of setting up a brokerage account and then doing the research involved to confidently choose individual stocks or funds was just too great a barrier to entry. At least when I was beginning.

Liz: That totally makes sense. When I was starting out, the big innovation was target-date mutual funds because they did something similar. They picked the investments for you, they picked the asset allocation, and the great part was that they got more conservative as you got closer to your target date, which was typically the year you’re going to retire. Now a lot of 401(k)s and almost every brokerage still has target-date mutual funds. And they can be a pretty good solution.

Sean: When I was setting up my 401(k), I found that to be so appealing, because like you said, you didn’t have to choose everything and I said, “I’m probably going to retire in this year, so set it up for me so that everything is making as much money as it can up until that point.” And then I come in for a smooth landing when I’m ready to retire.

Liz: Yes, exactly. And when we’re talking about target dates, so if you’re planning to retire in, say, 30 years, you would pick the target date fund for 2050. You set and forget it. It typically is the kind of thing you want to put your entire account in; putting your money in this and then doing some other things, that kind of messes up the whole point of having a target-date fund.

Sean: Yeah, but on the topic of DIY versus passive investing, some people prefer to go the DIY route because it gives them more direct control over what they’re investing in. And Liz, what are your thoughts on that?

Liz: Well, the evidence is pretty clear that when we take matters into our own hands, we don’t do as well as if we just stuck with passive investments, like index mutual funds and exchange-traded funds. Very, very few people are able to consistently beat the market. This is why Warren Buffet is so famous because he’s been able to do it. And it’s not something that is easy to do, contrary to what you might see on TikTok.

Sean: Yeah, trying to time the market is almost never a good idea. And it’s a great way to, in fact, lose your money.

Liz: And stocks can go down, people.

Sean: Yes, absolutely. I will say that the DIY approach can actually be a fun way to experiment with next-level investing. That was something that I did where, when I felt comfortable enough with having my retirement funds going, my robo-advisor accounts going, I opened up a brokerage account so I could buy a couple of stocks and play around with it. But it’s not my long-term, serious investing strategy. It’s a way to poke around, learn a little bit, without having serious risk of loss.

Liz: And what I love about what you did is that you put your retirement first, you put your money in your retirement accounts, and then you experimented with a robo-advisor, and then you went off to try the DIY through the brokerage accounts. So, in my point of view, if you’re just experimenting and having fun, then DIY’ing a little on the side can help you learn about investing. That’s great. But again, the proven path to investing success is diversification. And you really need to invest in thousands of different companies to be truly diversified. Mutual funds and exchange-traded funds are what give you that kind of diversification. OK, well, I think that’s about enough on stocks for one episode. Let’s get to our lightning round of money questions.

Sean: Agreed. And here is our first listener question.

Listener 1: Hi, I’m calling to see how many points you would lose for a late payment that’s reported to the credit bureau by one day. Thank you, bye.

Sean: This is a great question and it’s one that we see pretty often at NerdWallet. People wondering whether a single day after they miss a payment, whether that’s going to undo years of hard work on building their credit scores. So Liz, what is the answer here?

Liz: The good news is, if it’s only a day late, it’s not going to be reported to the credit bureaus. Generally, it has to be 30 days late or more. So maybe the better way to say it is that if you skip a payment, you’re in trouble. If you’re a little bit late, you pay a late fee.

Sean: It’s also worth pointing out that the damage done to your credit, if you do “skip a payment,” will vary greatly depending on where your score is to begin with. Generally, the greater your score, the higher you have to fall if you do miss a payment.

Liz: Yeah, it’s like a mountain. The higher you get, the farther you can fall, and the harder it is to get back up there.

Sean: Yeah, yeah.

Liz: Even a single skipped payment can knock 100, 110 points off your scores. It’s a big deal.

Sean: Yeah, right. We have a credit simulator at NerdWallet where you can put in your credit score and you can see what might impact your score one way or another based on different events happening, like missing a payment.

Liz: That’s a really helpful tool. Another helpful tool, auto payments. I am a huge fan of making sure at least the minimum payments get paid on all the bills. And actually, now we’ve got it set up so that the full payment is just taken out of our checking account. I don’t want to be even a single day late.

Sean: I know. I am a big fan of automated payments. And it’s funny because I talked with Garrett, my partner, about this all the time. He does not want any sort of bank touching his money on his behalf. And there have been times where he’s signed up for a new credit card and then kind of forgot about what the due date was. And then it wasn’t a skipped or missed payment by 30 days, but he did end up getting an email and he’s like, “Oh shoot, now I’ve got to stay on top of this.” And for me, I don’t want to have to worry about that. I want to know that my bills are going to be paid, on time, in full, and I’m continuing to build my history of on-time payments.

Liz: Yeah. And we’re lucky that we have good jobs with good pay and we don’t have to worry about running on fumes. I remember in the past, that has not always been the case. Sometimes you do need more control over what’s going out and what’s coming in. But as soon as you get any kind of level of financial comfort, those auto payments can be super helpful.

Sean: There was one last thing I wanted to throw out around late payments is that they do tend to stick on your credit report for seven years from the date of that missed payment being reported.

Liz: The impact of a skipped payment is going to be the maximum right when it happens, and then it fades over time. But it doesn’t completely go away until it falls off your credit report.

Sean: Right. OK, well, let’s get onto our next credit-related question, and I can read it.

Sean: This is from Justin who said, “Hey, guys, I had a question about whether my credit score is affected when paying the current balance right away versus the statement balance. For simplicity’s sake, let’s say I don’t carry a balance at the moment, then I charge $650 before the statement closing date. If I want to make sure my credit score stays good, do I need to wait until after the closing date for the $650 to go on my statement balance and then pay it off? Or can I start paying my current balance immediately after the purchases have been processed?” Thank you, Justin.

So it seems like Justin is wondering whether it is better for their score to pay off charges right as they’re processed, or whether it would have some sort of negative impact on their score if they wait until it is processed as part of their statement balance.

Liz: The short answer is, pay it off before the statement balance. And, to back up and give a little more context, when you have a credit card, you are allowed to charge for a certain number of days. And then on the statement closing date, that is the balance that’s typically reported to the credit bureaus. And you are supposed to make a payment after that, before the due date, and then everything’s groovy.

The credit bureaus and your credit score don’t know the difference between a balance that’s carried month to month and a balance that’s paid off right away. So, the larger implications of this is if you are, like me, a huge credit hound and love to charge everything and pay everything off in full, you still have to pay attention to how big your balances are getting. Because that affects your credit utilization and that can hurt your scores.

Sean: And let’s explain credit utilization for those who are not super-steeped in the world of credit. It basically means how much of your available credit you are using. So say you have a $10,000 credit limit, you want to keep it under generally 30, 33%. Is that right, Liz? Of your utilization?

Liz: There’s no bright line, but we’ll go with that.

Sean: OK. So anything under $3,000 and you should be totally fine. Anything higher than that, it might begin to lower your score a little bit.

Liz: Well, here’s how it works. We say that 30% or less is good, 20% or less is better, 10% or less is best. So if you want the best scores, you keep your credit utilization in the single digits and you keep most of your cards unused. So if you are a real credit score hacker, that’s something to keep in mind. Most of the time, I don’t pay any attention to this, I just make sure that my bills get paid and my scores are in the 800s. So it’s just if you really want to try to squeeze a few extra points out that you even need to worry about.

Sean: One thing that’s interesting is that I do see small fluctuations in my score from week to week, usually around one to three points, depending on how much I’ve charged on my card and whether or not I’ve paid off my balance. And I do tend to pay off my balance weekly, if not more, because I’m also a credit hound like you, Liz. And I know it’s just a vanity number, seeing my score go up or down just a little bit, but I like to keep my balances low so my budget’s in check and my score stays high.

Liz: Yeah, that’s a very common hack to either pay weekly or pay every other week or pay right before the statement closing date. Because that, again, that reduces the balance that’s typically reported to the credit bureaus. Any of those things can help reduce your credit utilization and help your scores. So if you’re really into it, that’s definitely something you can do.

Sean: And this is also a good reminder to not sweat small changes in your score because it probably doesn’t matter that much.

Liz: Yeah. The next question is from James, who says, “I’m a longtime listener, first-time caller/writer. I have two questions. What role, if any, do old addresses play in determining one’s credit score and/or creditworthiness? Consequently, would it be advantageous or disadvantageous or otherwise to have old addresses removed from all three of one’s credit reports?”

Sean: Thanks, James, great question. And fortunately, under the Equal Credit Opportunity Act determining creditworthiness based on your address is illegal. Because it can be discriminatory. And there’s a history of redlining that comes into play here that people may know about. So the answer is that your old addresses should not play a role in determining your credit score or creditworthiness.

Liz: And old addresses generally are a nonissue, nothing to worry about, don’t worry about disputing them off your credit report. Unless it’s an address that you do not recognize. Now that could be an early sign of identity theft or it can be somebody’s finger slipped. You never know, but that’s worth disputing. Otherwise, I wouldn’t worry about it.

Sean: And if you do feel like you are not being granted credit because of an address on your credit report, that is illegal and it’s worth following up on that and trying to fight this discrimination in lending.

Liz: Absolutely. And another credit report issue. The question is, “Can I remove a closed account from my credit report?”

Sean: Unfortunately, no. Accounts that were closed in good standing will remain on your credit report for up to 10 years. But if you defaulted or had late payments on an account, it should come off your report in seven and a half years from the date that it was first reported delinquent.

Liz: And a lot of times these old accounts are actually helping your credit scores. So don’t be in a rush to get rid of them.

Sean: This is one area where the good information will actually outlast the bad information on your credit report, which is a bit of good news.

Liz: Typically. All these things is like, OK, well there’s exceptions there, but yeah, you definitely don’t need to worry about positive things that are reported about you. It’s like positive things being said about you, you like that stuff. You don’t want to get rid of it.

Sean: And it’s easy to be cynical about credit reports, at least for me. And this is one area where it’s like, OK, it’s not all bad news.

Liz: Yes, exactly. There are some good things out there.

Sean: Well, let’s get onto our next question and it comes from Casandra. Here it is: “I was wondering if there is such a thing as too many credit cards? I have a few flights that I need to book and was looking into an airline or a travel credit card, but I already have six. I hardly keep any balances on them and my credit card utilization is always under 5%, making sure to pay them off as much and as quickly as possible. I’m looking for something that would give me perks for travel but wasn’t sure if having another one is a good idea. Any suggestions?”

Liz: Boy, did you ask the right person.

Sean: What do you think, Liz?

Liz: You don’t have to worry about having too many credit cards unless you can’t keep track of them and pay them on time. Between my husband and I, we have a couple dozen credit cards. And again, we have scores in the 800s, we get all the credit, all the credit cards, all the loans we want at the best rates and terms, and nobody has ever raised an eyebrow.

Sean: You guys typically use a spreadsheet to track all of these, is that right?

Liz: I use a spreadsheet at the end of the year just to make sure they’re all paying for themselves. The annual fees that I pay are more than offset by the benefits that I get. And if they don’t, I boot them out. That’s the other thing, you don’t want to close credit accounts if you’re trying to improve your score, but that does not mean you have to keep credit indefinitely. If you are done with a credit card, you don’t want to pay the fee, and you’re not going to be in the market for a major loan, then get rid of that sucker, get something better. There’s lots of great cards out there.

Sean: You can also transfer a card. I recently was in the situation where I had a travel credit card that was going to charge me an annual fee. I didn’t really use it all that much, because, you know, that year of not really traveling, but I was able to transfer it to a similar but less perk-heavy travel credit card that had no fee. So that’s always an option too.

Liz: Yeah, definitely something to ask about. The technical term is for a product change, so if you want to keep it in the same family, the same bank, the same issuer, it’s generally pretty easy to do if you’re in good standing.

Sean: I also want to touch on the part that you mentioned around being able to manage this many cards, because that’s my issue. I have about five different credit cards right now. I just got one because I’m spending a lot more on gas, I wanted a gas reward card, and I think I’m at the point where I don’t really want it any more. Yes, I could keep track of them. I log into my accounts, I know what’s due when, but just for the sake of simplicity and not having to have another thing on my mind, I didn’t really want any more than five.

Liz: And that’s perfectly legitimate. I think having some simplicity in your life is probably a good thing. And I know that, because we have so many, I’m spending a little more mental energy than I probably could. And something for our older listeners to keep in mind is, you do want to simplify your life. If somebody is going to be taking over your finances, you want to make that as simple as possible. So consolidating your accounts and not having so many credit cards is probably a good thing.

Sean: Well, now let’s get on to the next listener question, which comes from a listener’s voicemail. Here it is.

Listener 2: My understanding is that making job changes throughout your career multiple times, even somewhat frequently, can be linked to higher salary and compensation. I wonder if there’s data that reflects this or otherwise in regards to increasing salary across the lifespan of a career.

Sean: Liz, you found a report that proved that, yes, if you do change your job more frequently earlier on in your career, it is linked to higher earning.

Liz: Exactly, yeah. If you’re changing jobs in your 20s and 30s more frequently, this study showed that that results in more income. The effect fades as you get older, and that makes a lot of sense, because in your 20s and 30s is when your income tends to rise the fastest. And then, for many people, their income peaks in their 40s. If you’re college-educated, it peaks in your 50s. And it’s a downhill slide from then, but it’s not straight up and straight down, it’s those early years are really important for setting the baseline of what your compensation will be pretty much for the rest of your career.

Sean: But that said, it’s typically worth sticking at a job for at least one full year so that you can show that you are committed to a job and you’re not hopping quarter to quarter to a new position just to try to earn more money.

Liz: There should be more in your calculations than just money. Benefits, obviously, are hugely important. What’s the 401(k) match? What’s the paid time off situation? There’s a lot of things to be thinking about. And also what’s the forward momentum? Where’s the next place that I can go? So it doesn’t just boil down to money and you don’t want to change because of money.

On the other hand, if you get complacent and stay in the same place too long, you could be passing up some really good opportunities to grow your income. You can cut your expenses only so much. If you really want to move that ball ahead, making more income is the way to go, if you possibly can.

Sean: I also want to say, there’s nothing wrong with sticking around a company for a number of years if you do have a clear growth path and you’re continuing to get raises. There’s a reason that I’ve been at NerdWallet for as long as I have been. But it’s hard to find companies that are like that nowadays.

And we’re seeing so many companies scrambling for employees, so I think in this particular moment where people are quitting because they’re being forced to come into jobs where they don’t feel safe, or they’re not earning enough or being valued in other ways, I think now is a great time for people to try to go out there and get a new job at a different company and try to ask for a little bit more money.

Liz: Yeah, or at least do the research and see what people are being paid. You need to do that every once in a while to make sure that you’re still on track.

Sean: All right and here is our final question of the episode, which is about retirement, comes from Zelda. They say, “Hey folks, I’ve been a faithful listener since my husband and I retired in November and I started to pay better attention to investment strategies. I appreciate your helpful information. We rolled over my 401(k) into an IRA with E-Trade and poured the $100,000 profit from the sale of our home into stock and bond accounts with E-Trade. We are successfully living on our Social Security and pension, and after seven months, haven’t had to dip into the E-Trade accounts. Here’s our question: Does it make sense to continue to keep $20,000 in our bank account or should we invest half of it in our E-Trade accounts? I consider the ready cash a safety blanket, especially as we are still new retirees and finding our way. My husband thinks that we should put some of it to work for us. Or is a market account a good idea for our $20,000? We’re making bupkis at our bank. BTW, I am 67, spouse is 74. Thanks in advance, Zelda.”

Liz: Zelda, I am so thrilled that you are getting interested in investments and money management. That is great. A lot of people just turn it over to their spouse and don’t think about it until they lose their spouse or something happens. So, it’s awesome that you’re taking care of this.

Sean: Yeah. Well, I have a few questions for Zelda. I wish that we could chat with them in the room right now. I’m wondering how much money they have in their retirement accounts, whether they think they’ll need this money within five years, because I’m thinking that they will probably want to keep a safety blanket of cash readily available. Because that’s what it’s for. In an emergency, you got to pull that blanket tight so you’re staying safe and cozy. And if it’s invested, you don’t want to be at the whims of a market going up and down and maybe lose out on some of what you invested.

Liz: When we’re investing and making money, we can kind of lose track of the fact that investments go down as well. And if you don’t have a sizable safety net in the form of an emergency fund, you could be putting your whole lifestyle at risk. So, I would lean towards, if you don’t already have a big fat emergency fund, keeping this money safe.

Sean: And this is also a great opportunity to say, one, we are not financial or investment advisors. And two, it’s great to talk with a fiduciary financial advisor for information, just to bounce ideas off of someone who is really well-versed in this and can help you figure out how best to manage your money.

Liz: And that’s often my first response when somebody says, “I have $10,000. I have $20,000. What should I do with it?” Maybe take $2,000 and take yourself down to a financial planner. You might need a little bit more than that, but the hourly folks, or the people who charge with a retainer, like a monthly retainer, can take an in-depth look at your finances and let you know how you’re doing. And the thing, especially when you’re getting close to retirement, is that you’re making a bunch of decisions that are typically irreversible and can cause you to run out of money faster. So that’s when you really want another set of eyes on your plan, just to make sure. Even if you’ve been the DIY-er, the kind of guy that builds his own house, whatever it is. You need somebody to take a look and make sure that you aren’t forgetting something or missing something.

Sean: Right. There’s so much value in having an in-depth and ongoing conversation and a relationship with someone who is just focused on making sure that you’re getting the best situation out of your money as possible. Because they might think of things that you haven’t thought of. You might mention something in passing about, oh, you have a 529 for a grandkid or something. And they can say, “Oh, well that might change my recommendation.” So it’s worth taking that time, spending a little bit of money, and making sure that you are making the best decision for you.

Liz: And if you are the person in the couple that’s the one who’s good with money, you still need to have this relationship because what if something happens to you? You want your spouse, your partner, to be able to take over. And having some help in doing that would be really, really important.

Sean: All right, well, that was our last question. And listeners, please keep sending us your questions so we can do this again. We have so much fun going through all of your questions. And we do read and listen to all of them and talk about them. And the more we get, the more opportunity we have to do this, so keep them coming.

Liz: Yes, please.

Sean: OK. And with that, let’s get onto our takeaway tips, and I’ll kick us off here. First up, cut through the clutter. Your credit report likely has a lot of information that doesn’t directly impact your score. So only worry about the important factors like building a history of on-time payments and keeping your credit utilization low.

Liz: Next, there’s no such thing as too many credit cards. As long as you can manage the various accounts without too much of a hassle.

Sean: And lastly, optimize your career and earnings. Changing jobs early in your career is likely to boost your earning potential over the course of your life. And that is all we have for this episode.

If 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- N-E-R-D. And you can also email us at [email protected] and visit nerdwallet.com/podcast for more info on this episode. And be sure to subscribe, rate and review us wherever you’re getting this podcast.

Liz: And here’s our brief disclaimer, thoughtfully crafted by NerdWallet’s legal team. Your questions are answered by knowledgeable and talented finance writers, but 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.