We know that many members of our HerMoney community are devoted investors. You often write into Mailbag to tell us of your stock market gains, or you’ve pulled us aside at a HerMoney Happy Hour to share the latest and greatest news from your portfolio … You have your 401(k)s, your IRAs, and your brokerage accounts, and you’re so thoughtful about where you put your money, the growth you hope to see, and the level of risk you take.
And for the thoughtful, long-haul investor, the news this past week has been particularly frustrating and confusing. What happened with GameStop’s roller-coaster week on the stock market? What even is a “short sale” (We explain it in detail here!) and how did the whole thing get started on Reddit, of all places? How easily are the markets manipulated — and what does this incident say about the economy overall?
To help break all of this down for us this week is Karen Finerman. You may know Karen best from the show Fast Money on CNBC. She’s also the co-founder and President of Metropolitan Capital Advisors, and the author of Finerman’s Rules: Secrets I’d Only Tell My Daughters About Business and Life.
Listen in as Jean and Karen break down what happened this last week, in terms that we can all understand. Karen tells us what really went down with GameStop, where the trading platform Robinhood fits into all this (and why people are mad at them now) and why this whole thing was so very surprising.
And if you’ve been wishing you’d somehow been involved, or have been feeling like you “missed out,” think again. “I think that there will be many who are going to get burned in this GameStock scenario,” Karen says. “And so they’re not going to be as excited about joining the next time.”
We all want to “invest with confidence” these days … But what does it take to do that, when the economy is uncertain, and things like the Gamestop boom may make us lose faith in how the market works?
“The market is a forward-looking mechanism,” Finerman explains. “So it doesn’t really focus on what’s happening right now. Clearly, these are some of the worst economics that hopefully we will ever see in our lifetimes: unemployment, GDP shrink, terrible numbers, but the market is looking ahead. The market’s looking through to the vaccine and to the economy opening up, and we have some glimpses of that. But never in my lifetime have I seen as big a divergence between what the data of the economy is showing right now and what it’s projected to be six or eight months from now. It’s an enormous spread.”
Karen also weighs in on what to do when you feel nervous and scared during times of market turmoil.
“You try to ignore it. Your gut reactions are often the absolute wrong thing, right? When the market’s really high, you feel great. ‘Oh, it seems like a great time to put money in.’ And when the market’s really low, you feel like, ‘Oh, this is so dangerous. I’m not going to put money in now,’ but your gut is telling you the wrong thing at both ends of that spectrum,” she cautions. “So you gotta just ignore being nervous and scared. There’s one thing that I really tried to live by in my investing style, which is: Buy when there’s blood on the streets, even if it is your own. And I’ve been in that so many times where there is blood on the streets, I’m part of that bloody mess, but that’s the time to buy.”
Lastly, Karen and Jean also break down the meaning of a “Special Purpose Acquisition Company” (SPAC), and what they do. Then, in Mailbag, we tackle two reader questions on one of our favorite topics: where to put my money. The first is about saving in a HYSA vs. saving in the stock market, and the second focuses on whether to maximize retirement accounts or put money somewhere else.
In Thrive, Jean walks us through 2021’s ultimate debt pay-off plan (which you can read about in more detail here!)
Karen Finerman: (00:01)
Well, I think that there will be many who are going to get burned in this GameStop scenario. And so they’re not going to be as excited about joining the next time. And just as we saw, probably in your Pied Piper penny stocks example from 1995, there was probably a lot of burned investors or traders that weren’t likely to get on board again. But every generation finds its GameStop. It’s just called something else. But ultimately this is human nature and will happen again.
Jean Chatzky: (00:39)
HerMoney is proudly sponsored by Fidelity Investments. We can all use a little help reaching our financial goals, especially during uncertain times. That’s where advice from Fidelity comes in. They’re there to help you make smarter, more informed decisions. Visit Fidelity.com/HerMoney to learn more.
Jean Chatzky: (00:58)
Hey everyone. I’m Jean Chatzky. Thank you so much for joining me today on HerMoney. I know that many of you listening are devoted investors. I know that because you have written into the mailbag to tell me, or you’ve pulled me aside at a HerMoney Happy Hour to tell me the latest and greatest news from your portfolio. You have 401ks and IRAs and brokerage accounts, and you’re so thoughtful about where you put your money and the growth you hope to see and the level of risk that you take. And for those thoughtful long haul investors like you and like me, this week has been really frustrating and really confusing. What happened with GameStop and the roller coaster ride it took on the stock market. What is a short sale? Why is everyone now up in arms about Robinhood? How easily are markets manipulated and what does this incident say about our economy overall? With all of this swimming in my head, I reached out to my friend, Karen Finerman. You know Karen. She’s been on this show. You see her on Fast Money on CNBC. She’s also the co-founder of Metropolitan Capital Advisors and the author of a great book called “Finerman’s Rules: Secrets I’d Only Tell My Daughters About Business and Life.” And she made room in her very busy schedule to be here with us today, for which I’m really grateful. Karen, welcome. And thank you.
Karen Finerman: (02:40)
I am very happy to be here.
Jean Chatzky: (02:43)
So you have been an investor for how long, since you graduated from college, 34 years ago, if I’m getting those dates right?
Karen Finerman: (02:52)
Somewhere around there. I started a little bit before college. I had some internships on Wall Street and became an investor starting then.
Jean Chatzky: (03:02)
All right. So you’ve been at this a very, very long time. How does it make you feel when you see crazy things happening in the market? Or is this not really all that crazy – it just feels that way to those of us who are not in it every single day?
Karen Finerman: (03:21)
This is crazy. This is crazy like I have never seen before. It rhymes with earlier crazies, but just the scale of this crazy is extraordinary.
Jean Chatzky: (03:38)
I’m so relieved.
Karen Finerman: (03:38)
It is crazy. Yeah. Never seen anything like it.
Jean Chatzky: (03:42)
Alright. I want to approach this kind of methodically so that we can understand what happened. So let’s start with something that may be a little bit more basic, but is at the heart of this. What’s a short sale and how does it work?
Karen Finerman: (04:01)
Okay. So a short sale is a very difficult concept to understand actually, because it’s not so tangible. But let me try to give you a metaphor that I think maybe helps understand what a short sale is. Instead of talking about GameStop, let’s say a short seller instead, was a ticket broker who fulfilled orders to all kinds of ticketing events, but every year, the big event was the Super Bowl. And so this ticket broker would receive all kinds of orders, people wanting to buy tickets to the Super Bowl. And so they would say, all right, I’ll sell you tickets for $500 a piece. And I won’t give them to you right now, but I promise I will deliver those tickets to you when you need them before you get to the Super Bowl. And the ticket broker has to make good on that promise. So people then start to get really, really excited about this Super Bowl. Mohomes is in it. And Brady. And so they start bidding up the price and bidding up the price. And now they’re willing to pay $5,000 a ticket. And the ticket brokers all excited because the ticket broker’s seen this before. People get super excited about the Super Bowl. But then reality sets in and they’re like, well, it’s hard to go. And maybe I won’t be able to find a hotel. And so usually the pandemonium and excitement about the Super Bowl fades a little. And the ticket broker is able to go on to Ticketmaster or find other people who want to sell their tickets for various reasons. And the ticket broker can buy those tickets and then deliver them to the people that he has agreed to sell tickets to. And that’s what normally happens. But this year, for whatever reason, people are going absolutely berserk over the Super Bowl. They were bidding $5,000. Now they’re bidding $10,000 a ticket. Then $20,000 a ticket. And the ticket brokers like, oh my God. This is the greatest thing ever. I’m selling seats for $20,000 a ticket. But then something weird happens. The ticket broker, who usually then goes maybe onto Ticketmaster or StubHub to find tickets to buy, to fulfill those orders, isn’t able to find any tickets except at a crazy high price. So the broker’s getting nervous. And the banks who’d normally lend to the broker are saying, listen, you got too much risk here. The price keeps going up. You’re going to go out of business and we’re going to be left holding the bag here of debts that you haven’t paid us. We’re going to make you go out and buy tickets on Ticketmaster, at whatever price, to fulfill those orders that you made earlier. That’s what happens when a short seller gets squeezed. When the party that they deal with makes them go out into the market and pay whatever price to fulfill an earlier promise. And that’s exactly what happened in GameStop. The GameStop went to $500 as this frenzy was reaching its peak.
Jean Chatzky: (07:06)
And these short sellers, who had promised to deliver it for less money, had to go out and cover their shorts?That’s what they say right, in wall street parlance?
Karen Finerman: (07:18)
You have to cover your short, or those banks that I mentioned could say, you know what, either you cover your short or we’re covering it for you. And that’s being called bought in. And those prices are always terrible for the broker if that happens. So that earlier broker was selling tickets for $500, for , $1000. He had to go out and buy 10,000, $15,000 tickets to go fulfill that order, those earlier orders from much lower prices. It’s a disaster for the ticket program.
Jean Chatzky: (07:46)
So usually when people sell short, it could be a simple bet, right? That something’s going to go down. If it does go down, they make the difference between whatever they sold it for and whatever they buy it back for.
Karen Finerman: (08:02)
Exactly. Back to the Super Bowl analogy, when people are like, you know what? I won’t even be able to find a hotel. Forget it. I’m going to sell my tickets back. And everybody starts selling their tickets back. And then that ticket broker can go buy it for a hundred and deliver them to the person who paid a thousand dollars a ticket. And they make money. And the ticket broker knows this happens every year. Tickets go nuts and then the price comes down. But this year it didn’t happen that way.
Jean Chatzky: (08:27)
A lot of the people who sell short are professionals, right? They’re not typical 401k investors like I am. What I do is buying stock because I hope it will go up and that’s called buying long. Although we don’t usually refer to it in that way. But is it really something that mostly professionals do or do individuals sell short too, all the time?
Karen Finerman: (08:54)
It is mostly professionals. And mostly, the bet is that the stock will go down – either because it’s overvalued or because people expect something to happen in the industry that will make that company have trouble. But it’s usually professionals, for one important reason to understand. When you short a stock, the amount of money you can lose is literally unlimited. Right? When you go long a stock, you pay $50 for XYZ Corp, the most you can lose is your $50. But if you go short XYZ Corp, and for whatever reason, XYZ literally develops a vaccine and goes to 5,000, 10,000. We could go to any price. You’re short. You have unlimited exposure, which is why it’s really something left for the professionals. And you can see professionals got just an annihilated.
Jean Chatzky: (09:50)
Billions of dollars.
Karen Finerman: (09:51)
Billions of dollars. Literally, billions of dollars. I don’t even know. You might know this, but I don’t even know if you can short in a 401k, which is probably for the best,
Jean Chatzky: (10:00)
You know, I don’t believe you can short in a 401k. It’s one of those things you probably can do maybe in an IRA, cause IRAs are more flexible. But I would actually have to look at that to figure it out. But let’s bring GameStop into the equation now. Because what happened with GameStop, there are other factors at work here. And it reminded me, I actually went into my basement this weekend to try to find this story that I wrote for Smart Money magazine in 1995, about a guy named Bobsha Ramamurthy, who was a chatterbox on AOL. And when AOL was the primary mechanism that we all use to look at what was happening on the internet. And he was talking up penny stocks. And he gained a following. And they called him the Bobsha Man. And he became this character. And it reminded me of what was happening in these Reddit, sub-Reddit groups, particularly Wall Street bets. Can you tell us about the noise and how that became a player in this equation?
Karen Finerman: (11:16)
So two parts of that. There’s the normal kind of thing, just like you’re describing, where for whatever reason something takes hold and people follow it and get all excited about it. And it’s sort of your typical boom and bust. You know, we’ve seen it from tulip mania on to real estate to internet bubble. We see that time and again. But I didn’t realize, until a little way through this GameStop, that there was something else in addition that was going on. And that is, there were a number of Reddit, Wall Street debts. I don’t know if they’re members, followers. I don’t even know. Redditors I sometimes I see them called, who really felt, I would rather lose money if I’m going to be able to screw the big hedge fund. That’s enough satisfaction for me. I don’t need to make money. Normally it’s all about making money, right? Hoping that you’re going to buy and be able to sell to someone else at a higher price. In addition to that, and there were many of those, I really believe there were many there who thought, I don’t care. It’s worth it. And if I can screw the big guy, good. I win. And that I haven’t seen before. Because to me, I referred to this as a kamikaze mission for many of those.
Jean Chatzky: (12:37)
There was this populist anger where, and I went onto the Wall Street bets, sub-Reddit, and took a look at the messages, as I know you did. And they were encouraging each other. Hang on. Hang on. Don’t sell. Even though you could make a lot of money. Because there were people who had bought GameStop, it went up 1700% in January, right? There were people who bought it for 20 bucks and they could have sold it for 300 and made a mint. And they were encouraging each other not to sell just to, as you put it, screw the hedge funds. To force them to cover their shorts and lose billions of dollars.
Karen Finerman: (13:17)
Yes. And here’s the amazing thing. It worked. I mean, there were hedge funds, Melvin Capital’s the one that we most commonly hear about related to this, that were annihilated. Steve Cohen, the most skilled trader out there, bludgeoned by this.
Jean Chatzky: (13:35)
Do you, I have so many follow-up questions. I’m just figuring out which one to ask first because there is so much to unpack here. Let’s go to Robinhood and Robinhood’s role in all of this. Why are people so mad at them?
Karen Finerman: (13:52)
Okay. So Robinhood claimed to be the democratizing new broker. We’re going to charge you zero commission on stocks and zero commission on options. But one of the lesser known, it’s becoming much more widely known, things that Robinhood does do is they take your trading information and this isn’t a data privacy thing. This is your order flow they take. And they sell it to a Citadel, for example. And Citadel can use that information to kind of run your trade. So they know, oh, we got thousands of Robinhood buyers of GameStop. We’re going to buy GameStop and then we’re going to sell it to them, and make a little bit of money on each trade. So that’s one thing.
Jean Chatzky: (14:42)
Is that legal?
Karen Finerman: (14:42)
Yes, it is. They need to disclose it. Do they need to have it on a banner in the front page of the Robinhood app? I don’t know. But they need to disclose it, which they do. And then they also make money on margin loans. So if you want to buy a share of GameStop for $200, I don’t know what the exact amount you had to put up was. Maybe a hundred and Robinhood lends you a hundred. And they charge you interest on that loan. So it was easy to use up. And so everybody was doing it. And what happened though with Robinhood was Robinhood started to lose control of one, they probably were not able to keep up with the speed of all of the trading and what does that mean for how much money they need to have available for downside risk. Because some of those Robinhood investors, they put up a hundred dollars. They bought one share of GameStop at $200 and GameStop is going to trade down a lot and Robinhood could end up losing money on those loans. So the banks that lend to Robinhood say, hey, we need you. You need to get control of this. We need you to put up a lot more money. And this is all happening within one day. And Robinhood just had to shut it down for a while to get a hold of, to understand exactly what their finances were, and how much money they would need to put up. And so Robinhood did not want to shut this down. They did not want to disappoint the Robinhood customer, right? This is a disaster for them, to say you can’t trade in these stocks that you want. That’s a disaster for them. But that was the lesser of the evils that they faced. To me, I think they were facing potentially an existential crisis. Do we have enough money to cover any bad debts that we end up incurring from Robinhood traders, who can’t pay.
Jean Chatzky: (16:41)
To your ticket broker analogy, these are the banks stepping in and saying, if you’re not covering these tickets, we’re covering them for you. So when we had, I mean, we had everybody from AOC to Ted Cruz tweeting that Robinhood, that their shutting down of this process, was unfair to the little guy. You’re basically saying that we didn’t understand the reasons for that shutdown.
Karen Finerman: (17:13)
Right. I think that it is unfair to the little guy and Robinhood really didn’t want to do it. But they had no choice. I mean, think about this. Robinhood wants to go public. This is a disaster. A PR disaster. A disaster for them. They did not want to do this, but they had to. They had to get a hold of this situation. There’s another more nefarious theory that Citadel was short, and Citadel isn’t short GameStop, and they were a giant customer or are giant customer of Robinhood. They buy that order flow we talked, and they were getting crushed on the GameStop short and said, Robinhood you got to shut this down. I don’t think that’s the most likely scenario. To me that banks calling into Robinhood saying, listen, you have to put up more money for us to continue to allow your trades to happen. That’s what I think more likely to happened. And it did end up screwing the little guy. Potentially it might’ve saved some little guys from buying, but they didn’t want to do it. They had to.
Jean Chatzky: (18:17)
It is fascinating. Is it going to happen again and again? Do you think that the Reddit crowd, the retail investor, has now gotten a sense of their power and will continue to band together to use it in this sort of a way?
Karen Finerman: (18:37)
Well, I think that there’ll be many who are going to get burned in this GameStop scenario. And so they’re not going to be as excited about joining the next time. And just as we saw, probably in your Pied Piper of penny stocks example from 1995, there were probably a lot of burned investors or traders that weren’t likely to get on board again. But every generation finds its GameStop. It’s just called something else. But ultimately this is human nature. It will happen again. I don’t know when.
Jean Chatzky: (19:13)
I want to talk a little bit about the economy and the markets as a whole. But before I do that, let me just take a moment to remind everyone that HerMoney is proudly sponsored by Fidelity Investments. And whether you’re looking for guidance to help you through the uncertain market or working on your longterm financial plans, Fidelity can help you meet your goals. In addition to investment advice, Fidelity also has online tools like financial checkups that can help you make smarter, more informed decisions every single day. And you can visit Fidelity.com/HerMoney to learn more. I’m talking with Karen Finerman of Fast Money. Co-founder of Metropolitan Capital Advisors. We all want to invest with confidence these days. It is, at least to me, a confusing time to do that. Because the economy seems to be uncertain and the markets are charging ahead. We will release this show on Wednesday. We’re recording it on Tuesday. And when I last checked, the Dow was up 650 points. So how do we approach our investments, if we are longterm investors, with this? And why do you think that the economy and the markets have become disconnected, or were they always?
Karen Finerman: (20:44)
That’s a great question. There’s several pieces to it. So the market, it’s not just the market in a vacuum. The market is relative to other asset classes one can buy. So as interest rates have come way down, the attractiveness of bonds has gone way down. So a lot of money that might’ve gone into bond is going into the stock market. So that’s one thing. And another thing is that the market is a forward-looking mechanism. So it doesn’t really focus on what’s happening right now. Clearly, you know, these are some of the worst economics that hopefully we will ever see in our lifetimes. But they’re horrific. Unemployment, GDP shrink, I mean, terrible numbers. But the market is looking ahead. The market’s looking through to the vaccine and to the economy opening up and we have some glimpses of that. And we’ve seen how China has been able to recover. The market is always a forward-looking mechanism now. But never in my lifetime, in my experience in Wall Street, have I seen as big a divergence between what the data of the economy is showing right now and what it’s projected to be six or eight months from now. It’s an enormous spread. We will not see that kind of rebound again for a very long time. And that makes sense why that would happen. We had a complete shutdown of our economy and then opening up of our economy. Hopefully we won’t see those kinds of things again. But so as the market has never, it always looks ahead, but it’s never had such a different view of what six or eight months ahead will look like versus right now. And so it’s odd, but it’s logical to me, that part of it.
Jean Chatzky: (22:35)
So if you are investing for the longterm, and again, I want to come back to this 401k IRA college investor. If you’re looking out five, 10, 20 years, are you just putting money in with every paycheck and buying your diversified portfolio and doing business as usual?
Karen Finerman: (22:58)
I would be. To me, the alternative, what am I going to do? Try to be a market timer. I mean, I can guarantee I will never be able to pick the bottom to buy and the top to sell. Never. So I never try to do it. You just have to, whether it’s dollar cost averaging or however, Jean, you probably have a lot more to say on how to do that. But yes, I think just keep going.
Jean Chatzky: (23:21)
So I get to the point where I’m feeling nervous and scared, and I know a lot of people get to that same point. So what do you do?
Karen Finerman: (23:29)
You try to ignore it. Your gut reactions are often the absolute wrong thing, right? When the market’s really high, you feel great. Oh, it seems like a great time to put money in. And when the market’s really low, you feel like, oh, this is so dangerous. I’m not going to put money in now. But your guts telling you the wrong thing at both ends of that spectrum. So you gotta just ignore that being nervous and scared. You know, there’s one thing that I really tried to live by in my investing style, which is buy when there’s blood on the streets, even if it is your own. And I’ve been in that so many times where there is blood on the streets. I’m part of that bloody mess, but that’s the time to buy.
Jean Chatzky: (24:08)
It’s a line from many good movies, but I’ve watched Inside Man so many times. And when Jodie Foster says, when there’s blood on the streets, buy property, it just makes me have goosebumps every single time. I totally agree with you. I think it’s the right move. I think it’s really, really difficult. I want to ask about one other thing before I let you go. And it’s a little bit unrelated, but it’s something I think is in the news a lot these days. And so I’d just love our listeners to be able to understand what they are. I am hearing a lot about SPACs – special purpose acquisition companies. What are they? How do they work? And should we buy them?
Karen Finerman: (24:51)
Okay, what are they? They are a pool of money that a sponsor is offering to shareholders on Wall Street. And so they, for example, you have, let’s say a Jane Doe. She’s really good with consumer products. She’s been a very successful venture capital investor. She decides she’s going to raise a SPAC and they’re going to go out and look for a great consumer products company. And that’s the concept that they’re selling to Wall Street. So she’s wants to raise $250 million as they go out to investors on Wall Street and say, we’re selling 25 million shares of this SPAC, that Jane Doe is going to go out and look for a great consumer products company. We’re selling them at $10 a share. And so investors say, I love Jane Doe. She’s got a great track record. I’m doing it. I’m going to buy shares at $10 a share. And then it’s her job to go out and look for a great consumer products company or whatever her mandate is and find one. And merge it with the SPAC that she’s created, which is basically just a pool of cash. And so to make the math real simple, let’s say she goes out, finds the great concept. It’s worth a billion dollars. But that company wants to grow and they’d like to become public. And they decide it’s easier, and it is easier to become public via merging with the SPAC than an IPO. The cash is already there. It’s already raised. And they decide, all right, we’re going to do this deal. Let’s say it’s a billion dollar jeans company. We’re going to merge together. Jeans company, you could have the $250 million worth of cash. And our SPAC shareholders are now 25% owners of your jeans company. And so we’ve seen a lot of those. There’s really a lot of hype and froth in the electric vehicle space. But the reason, if you can buy shares on a SPAC offering at $10, and that’s the usual price they have, it’s worth doing, because it’s backed by the cash that it owns, and a SPAC shareholder, iff you don’t like that deal that Jane Doe has decided to do, you can sell your shares back to the SPAC company at $10 plus interest. So you have no downside. No downside. And that’s really interesting to me. Those shares are hard to get because everybody knows that there’s no downside. And if she finds something great, people are going to get super-excited about. It’s going to trade well over $10. The SPAC are, they do make sense. And I think we’ll continue to see them. Some of them are trading at ridiculous prices. Absolutely ridiculous. But if you can buy them at 10, it’s worth doing,
Jean Chatzky: (27:49)
Do they start trading at ridiculous prices only after they’ve made their acquisition. And I’m asking this question. I went, I knew we were going to be talking about this and so I have a friend from college and I knew that she had recently launched a SPAC. And I, sometimes I, in addition to my passive investing, occasionally play with some money that I know I can lose. And so I went in and I put $5,000 yesterday into her SPAC, and I bought shares at $10.60 a share, which I figured was close enough to $10 to be okay. But how do these work? And I just bought it. You know, I went into my individual brokerage account that I keep with Fidelity and I just bought it. You looked up the ticker symbol and bought it. It took three seconds.
Karen Finerman: (28:39)
Yeah. You can do that. That’s great. But your question is, do they trade higher even before they found a target?
Jean Chatzky: (28:49)
That was my question.
Karen Finerman: (28:50)
Yes, they do. Because people are so excited about whoever the sponsor is. Whether it’s a moth or, I mean, my God, if Elon Musk were to do a SPAC, I have no idea where it would trade. But it wouldn’t be 10, that’s for sure. But if they shouldn’t, but they do. And then sometimes you will have people who have done multiple SPACs, and the first one was maybe DraftKings, and that was fantastic. So absolutely. It’s going to trade well over 10. Before they’ve done one thing, that’s going to happen.
Jean Chatzky: (29:21)
Boy. Oh boy. We all, including me, have a lot to learn. But this has been an amazing education. And I thank you so much for making time to do this with us. Karen, if we want to keep up with your latest and greatest, where’s the best place to do that?
Karen Finerman: (29:39)
I guess on Twitter. I Think I’m @KarenFinerman. Yes. I’m pretty sure that’s it. Always happy to talk to you Jean. I love talking to you. I was so happy to see your name pop up on my email. So it’s crazy times, that’s for sure.
Jean Chatzky: (29:51)
It’s crazy times. And I look forward to an in-person lunch when we can be in person again.
Karen Finerman: (29:56)
We are long overdue for that.
Jean Chatzky: (29:59)
Thank you so much, and we’ll be right back with Kathryn and your mailbag.
Jean Chatzky: (30:12)
HerMoney’s Kathryn Tuggle has joined me now for our mailbag. Hey Kathryn.
Kathryn Tuggle: (30:17)
Hey Jean. That was a great show.
Jean Chatzky: (30:20)
Well, thank you for teeing it up so quickly. I mean, you know, sometimes I want to switch gears and I want to switch gears without giving you a lot of notice. So I appreciate it.
Kathryn Tuggle: (30:31)
Absolutely. I think it’s so important that we talk about this because nobody that I’ve spoken with, except for Karen apparently, understands what’s happening. It’s very scary. It’s a very threatening feeling to know that you have your money in the market, and then to feel like the market is just a crazy clown show that no one understands and that no one really controls. And I’m glad that we were able to boil it down today.
Jean Chatzky: (30:56)
Yeah. It’s nice to have this network of women that we know we can call on who are in it and willl have the answers. And I feel that way about so many different aspects of life these days. It makes me feel really great about this community that we’ve created. So very happy that Karen is a part of it. Let’s go to our mailbag cause I know we’ve got questions.
Kathryn Tuggle: (31:21)
Absolutely. Our first question comes to us from a Laura Jean. She writes, hello. First of all, love the podcast. My middle name is Jean. So hashtag twins, right? I love how you empower women to master their finances. It’s a huge passion of mine. My question is, with interest rates so low for high-yield savings accounts, should I start moving some of my long-term savings into stocks instead of my high yield account. My husband and I max out our 401ks. Our only debt is mortgage. And we have about three to four months worth of expenses in a rainy day fund at our bank. Monthly, we save about 25% of our paychecks like so. 75% goes into a high-yield savings account at 0.5%. And this account is for travel, a baby on the way, future car needs and future house needs. 25% goes into a robo-advisor that’s 90% stocks. We call this our grow wealth account. My question is, should I be putting more into the grow wealth account, seeing as how anything sitting in the high-yield savings account right now isn’t really growing money. What do you think?
Jean Chatzky: (32:27)
First of all, I totally get your frustration with that high yield savings account. I had this conversation with my husband just this morning about the fact that my high-yield savings account isn’t really so high yield anymore. I mean, I think I’m getting four tenths of 1% interest. And it seems like yesterday that we were getting closer to 2%, maybe even more. And it’s frustrating because of course you want to earn some money on your savings, but I wouldn’t, looking at the list of things that you want this money for, I wouldn’t take more risk with it. First of all, that three to four months worth of expenses in a rainy day fund in your bank, I’d like to see you potentially expand that a little bit in this economy, so that it is six-ish months. And that is particularly true if you and your husband work in industries that are connected in any sort of way, so that they would be likely to see a downturn at the same time. I just would feel a little more comfortable with you having a little bit more in emergency savings. The other thing that I would question is, when do you want to do that travel? When is that baby likely to come? When are you likely to buy a car? And when are you likely to buy or improve your house? When we talk about short term versus long term, the short term isn’t really all that short. The short term, in terms of needing that safety and security for your money, is three years at a minimum and five years on the outside. You don’t want to put money at risk in the market that you’re going to need in the next three years, even if it’s not for three years, because if the market does take a significant tumble, you may not be able to make it back in time to pay for that house or that travel or that car or that baby. And so what I really want you to do is look at your time horizon. If you’re looking five plus years out, 10 plus years out, sure, take some more risk. And we know based on research that a lot of women just have money sitting in checking, earning no interest, that really could be and should be invested. But based on the language in your letter, my guess is probably not.
Kathryn Tuggle: (35:12)
That’s great advice, Jean. It is so important to think about what is a longterm goal versus your mid-term goal versus your short-term goals.
Jean Chatzky: (35:20)
Yeah. And the years get kind of squishy. You know, we have to be careful. And even if we feel like, oh my gosh, this money is doing nothing for me, at least it’s still there.
Kathryn Tuggle: (35:32)
Exactly. Our next question comes to us from Cassie. She writes, hi Jean and Kathryn. A friend of mine recommended your podcast to me about a year ago and I’ve been absolutely hooked ever since. While going through a divorce over the past year, the HerMoney podcast has given me so much financial confidence and I’ve learned so much. After a decade in my twenties of excessive spending, traveling, and racking up debt, I feel fortunate to have a stable income and to finally have the knowledge and ability to get my savings in order. Now at 33 years old, thanks to you, I have increased my retirement contributions, I have a solid emergency fund, zero credit card debt. I’ve opened up a small brokerage account and I’m now saving 35% of my income. Wow. I find myself with a small amount of money leftover each month. And my question is about what to do with it. My two retirement accounts I contribute to, a state pension plan and a four 457b, are both pre-tax. So my thought is that I should open a Roth IRA in hopes of getting a tax advantage later in life. I’ll likely only be contributing between $2000 to $3000 a year. I don’t like the idea of having multiple accounts everywhere, but I’m not entirely comfortable putting this extra money into my brokerage account. Is a Roth a wise idea, given that I don’t max out my 457b contributions? Should I be maxing those contributions before I consider something else? My main concern is that the majority of my savings are pre-tax and I expect to have a higher income later in life. I currently earn a hundred thousand dollars a year. If I open a Roth, and then in a few years my income exceeds the limit for a Roth, is it true that I could continue to fund it using what I’ve heard you refer to as the backdoor method? Additionally, I will continue to save for other large expenses, such as a new car and a down payment on a home. However, if needed, would it be possible for me to pull money out of the Roth for a down payment on a house, even if it’s not my first time buying a home? Any advice you have would be greatly appreciated. And thank you so much for doing what you do and for changing my financial life.
Jean Chatzky: (37:39)
Wow. I love this letter. And first of all, Cassie, congratulations. Like you have just executed a brilliant turnaround, and the credit goes a hundred percent to you. Because even though we can make suggestions, you did this. I mean, you really, really did it. And it’s just amazing. I love the idea of some tax diversification here. I like the idea of you opening the Roth and funding it, in part to give you that tax diversification, but also because yes, it is flexible enough, in order to allow you to get at the money to purchase a home, because you can pull out the contributions at any time, even if you can’t pull out the proceeds. The ability to take the proceeds for a home purchase is a first-time home purchase just like the ability to take the proceeds for education, but it does give you a tremendous amount of flexibility and then down the road, yes. If you want to continue to build up this stockpile of money that you’ve already paid taxes on, so that you can pull the money out in retirement without having to worry that a big chunk of it is going to go straight to uncle Sam, you can do a backdoor conversion, which essentially means making a contribution to a traditional, non-deductible IRA, and then converting those assets into Roth assets by paying whatever taxes you owe on the growth. And then converting those assets into Roth assets by paying the tax bill now, rather than later. I think you’re approaching this really, really smartly. The only thing that I might put on your list that is not on your list right now, is a visit to a financial advisor. I mean, it’s clear that you are earning a good amount of money. You’re putting away a good amount of money. Let’s set some goals. Let’s set some dates when you want to reach those goals. And then let’s benchmark our way there, so that you have an actual plan for making it happen. You may be able to access a financial advisor through your work-based retirement account. That’s a very good way to go. If you’re looking for a recommendation, you can go to HerMoney.com and you can find some vetted recommendations through our Wealthramp partnership. But I think even if you just sit down with an advisor for a couple of hours, it would be a couple of hours that’s well worth your time.
Kathryn Tuggle: (40:46)
I am such a fan of that. And reading between the lines of her letter, her concern about having multiple accounts, I really don’t think should be a concern. We all need to have a mix of accounts and a variety of taxable and nontaxable accounts. So I think that a financial advisor could help her feel more secure with her decision.
Jean Chatzky: (41:06)
Yeah, no question. And I didn’t even, I completely whiffed on that part of the question. So thank you for picking it up, Kathryn. No, I think one way to avoid the administrative confusion is to try to open the Roth where you have your brokerage account, so that you could see it on the same screen when you sign in to the online portal.
Kathryn Tuggle: (41:26)
Absolutely. Thank you so much, Jean, for the great advice.
Jean Chatzky: (41:30)
Absolutely. And in today’s Thrive, the ultimate debt-payoff plan for 2021. As we enter this new year, the average credit card balance stands at a little over $5,300. If you are just making minimum payments because Coronavirus took a wrecking ball to your finances, we get it. That’s okay. But many of the consumer relief measures that made it possible to financially survive 2020 are not going to last forever. And when they expire, you’ll need a plan for paying off your debt. At HerMoney.com this week, we’ve got a rundown of how to pay your debt off once and for all. Start by taking an inventory of your debts. Before you come up with a payoff strategy, you need to organize the details of your debts all in one place. So create a spreadsheet or just go with a legal pad in hand and list your credit cards, your student loans, your car loans, your personal loans, your mortgage, and any debts you have, including the amount and the interest rate. Next, choose a debt payoff strategy. You’re going to want to rank the debts in the order that you want to pay them off. And there are two basic methods to doing this. The first is called the snowball method, because like a snowball rolling down the hill, you rank order your debt in order of balance size – from small to large. And you start by putting all your extra money toward paying off that smallest balance while making minimum payments on the rest. And once that small balance is retired, you move into the next larger one, and the next larger one, and the next larger one, until everything is paid off. The other method is called the avalanche. And here you stack your debts from highest interest rate on down. You put all your extra money toward that highest interest rate debt, make the minimum payments on the rest. And then work your way down in interest rate order. Personally, I like the avalanche because it saves you more money and it gets you out of debt faster. But some people like the psychological boost that you get with the snowball. Finally, get serious. While you pay down your balances, you’re going to have to live within your means so you’re not creating more debt. And that may mean making some lifestyle changes. If you’re not already tracking how you spend money, look at your last few credit card statements. Where is your discretionary money going. Based on your habits, figure out where you can cut back and start putting those changes into action. Thank you so much for joining me today on HerMoney. Thank you to Karen Finerman for the insight on market moves and investing. I hope you enjoyed it as much as I did. If you like what you hear, please subscribe to our show at Apple Podcasts. Leave us a review. We love hearing what you think. We want to thank our sponsor, Fidelity. We record this podcast out of CDM Sound Studios. Our music is provided by Video Helper and our show comes to you through Megaphone. Thank you so much for joining us and we’ll talk soon.