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Smart Money Podcast: Safeguard Your Finances: Tips on Emergency Funds, Insurance, and Index Fund Investments

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

Learn how to build a financial safety net to conserve your wealth and the ins and outs of investing in index funds.

How can you build financial resilience to protect yourself from life’s economic curveballs?

How do index funds work, and what should you consider when choosing one?

Hosts Sean Pyles and Sara Rathner discuss how you can use elements of financial planning to minimize risk exposure. They offer tips and tricks for financial risk mitigation, including the importance of establishing an emergency fund, understanding the value of disability insurance, and the sometimes overlooked role of community support.

Then, investing writer Alieza Durana joins Sean and Sara to help answer a listener’s question about how to choose different types of index funds. They explain different fund management styles, how to evaluate expense ratios and investment returns, and considerations for choosing the right index fund based on individual financial goals and risk tolerance.

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Episode transcript

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

We all face a unique individual set of risks in life. What you do to mitigate those risks before a crisis happens can mean the difference between a relatively quick recovery and extended financial hardship. This episode, we’ll give you three ways to protect yourself and recover from the inevitable. Welcome to NerdWallet’s Smart Money Podcast, where we help you make smarter financial decisions one money question at a time. I’m Sean Pyles.

And I’m Sara Rathner. This episode we answer a listener’s question about index funds. How do they really work and what makes them appealing investment vehicles and what makes one better than another?

But first we’re going to talk about the risks that we all face and how you can use your money and network to protect yourself.

There’s nothing like an uplifting topic to start off the episode, right, Sean? So what got you thinking about this?

Well, I do love a slightly morbid topic, I’m not going to lie, but I’ve always been one to try to anticipate what curveball might be coming around the corner to knock down the life that I’ve worked so hard to build. And as I make my way through the coursework to get my certified financial planner certification, the idea of risk has come up a lot. How can you use the elements of financial planning to minimize risk exposure? It’s something that we should all think about.

All right, so Sean, you’re in the middle of studying this. What’s the answer to that question and how can people use elements of financial planning to mitigate risk?

Well, I want to start by saying that you don’t need to hire a financial planner to do this, anyone can. Just think about your life. Every day we use money as a tool to get what we want out of life. Right? And a crisis like your car’s transmission going out or being unable to work due to injury or illness, or a weather disaster that upends your life can siphon our cash into restoring our baseline instead of making progress on our goals. And that’s really the core of this exercise. Think about how you can use the resources at your disposal to get what you want out of life and avoid what you don’t want. So I want to talk about three steps that anyone can take to make themselves more personally and financially resilient in the face of a crisis.

Well, that makes a lot of sense. So what’s up first?

You know it, you love it or maybe you loathe it, the emergency fund. Really, general guidance is to have three to six months of necessary expenses saved up. And when we say necessary expenses, that would be things like housing, groceries, medicine, the absolute essentials.

Yeah, I think people can sometimes dismiss how helpful an emergency fund can really be. It’s not a super sexy concept and we hear about them all the time, but saving up six months worth of expenses can feel really daunting and it can take literally years to accomplish, but then one incident happens and your savings can be totally depleted, just gone. And the thing is, having that money saved up in an emergency fund can prevent you from getting into debt because you have the cash on hand to cover the cost of that unexpected emergency. And it can also prevent you from having to tap into your investments or your retirement savings to cover those costs because doing both of those things can have consequences for your long-term financial well-being.

Right. Think about your emergency fund as your first line of defense to quickly resolve a crisis. And we know that the listeners of Smart Money are pretty financially savvy, but listener, ask yourself, “Do you know how far your emergency savings would go if you suddenly had to cover a big expense or you lost your income entirely?” Find out. And that brings me to the next thing I want to talk about, which is protecting your income if you are unable to work. In this context, that means looking into disability insurance.

Disability insurance is a product that can pay out a portion of your income, around 40% to 60%, if you’re unable to work. And it’s important for everyone in their working years because if you were suddenly unable to do your job or any job for that matter, how are you going to sustain yourself long-term? Disability insurance can help.

One in four Americans will become disabled before reaching retirement age, according to the Social Security Administration. A risk of 25% might not sound extreme, but this is actually where financial tools like insurance products can come in handy. At their best, insurance can help you cover a risk that is one, relatively unlikely to happen, but two, could be financially catastrophic.

Here’s another way to think about this. Your ability to earn an income is perhaps your greatest single asset. So if you got sick or injured or unable to bring in this income, what’s your plan B? Disability insurance can be that plan B.

And as always, when it comes to insurance, it pays to shop around. So get a few quotes from different insurers before going with the one that will give you the coverage that you need at the right price. We’ll link to an article in the show notes with more information about how to shop around for disability insurance. And listener, you might also already have one of these policies through your employer. After I finished my CFP class about insurance, I looked into getting a disability policy for myself and my financial planner showed me that the policy I have through NerdWallet actually provides pretty decent coverage. So I’m just considering that box checked.

Yep. I actually had part of my parental leave paid through disability insurance, so thanks, NerdWallet.

There you go. Okay, so the last two ways to protect yourself from risk that we’ve been talking about have been about individual actions that you can take. But whenever we talk about resilience and risk mitigation, it’s really important to remind folks that you are not an island. To weather the ups and downs in life, we need our local communities and people who we can help when they’re in need, folks that we can have meaningful relationships with and those that we can rely on when we need a little bit of help ourselves.

And we all know that building a network of friends or a sense of community can be really, really hard when you’re an adult. Trust me, I get it. You’re busy and you have a job, maybe a kid or two or seven, and the idea of building community can sound so tiring or really just corny, honestly, but it’s genuinely important. And making friends can be easier than you think. I mean, I’ve met so many friends just walking my dog around my neighborhood and it turns out that walking a friendly dog around is a really great conversation starter. So maybe just adopt a friendly looking dog.

I’ve met some of my best friends in Portland at the dog park, so there you go. Maybe that’s the secret. If you don’t have enough friends right now, get a dog. But Sara, have you been able to call on your neighbors or a local community for help when you’ve needed them, maybe getting that cup of sugar?

Oh, I have absolutely borrowed cups of sugar. Neighbors have said, “Hey, can I have a bag of ice, an egg.” All sorts of things. I live on a very social block, but one thing recently that happened is I caught some daycare related illness. I always have some daycare related illness. That’s why half the time on this podcast I sound like I’m underwater. Sorry everyone. So I had to go to urgent care at one point and we just picked up our baby from daycare and handed him off to some neighbors with a bottle and a couple of diapers and they kept him entertained and happy until we got back home. So having that just on our block was so, so, so helpful because having to bring a baby into urgent care is kind of a pain in the butt unless you’re there for the baby. So we were able to keep him happy and I was able to take care of myself thanks to my neighbors. How about you, Sean?

So we had a horrible ice storm in January that made the roads nearly impassable and knocked out our power for over a day. So I did what any reasonable 32-year-old adult would do. I called my mom and she was able to come and deliver us some much needed coffee that helped us get through the worst of having no power when it is zero degrees outside.

Well, that is lovely, and that’s absolutely the importance of having people who you know well and trust and who you care about, who care about you in your immediate area. It’s absolutely something to work toward if you’ve recently relocated to someplace new. So listener, here’s your homework assignment. Think about who you might be able to call on locally in a time of need. And if you can’t think of anyone, there’s no time like the present to put yourself out there, adopt a dog, build some local relationships and strengthen your sense of community. Well, maybe the dog is optional, but do all the other things.

At the end of the day, mitigating risks is all about knowing where you’re vulnerable and taking steps to build up your defenses so that you can sleep easier at night. And that’s going to look a little bit different for everyone, but the time to do this is now, when you are hopefully not in a crisis and have the time to establish some safeguards.

All right, I’m going to call it and say that that is enough scary stuff to talk about for one episode.

Yes. So we’re going to get into this episode’s Money Question in a moment, but first, let’s check in on our Nerdy Question of the Month, which is a fun one. What is your weird money habit, behavior or principle?

Here’s one that our listener texted us. They said, “I have several money things that others think are weird, including separate savings accounts for my long-term spending goals. So I have one for my emergency fund, one for when my car dies and I need to replace it. One for when things break in my home, like when my air finally dies and I have to replace it. One for that bathroom remodel I want to do, et cetera. The weirdest thing is I hate taking money from my savings. So for example, when my microwave died and I could/should have covered it with my emergency fund. Instead, I tightened my belt on spending for the month and paid for it through other spending. I also have what I call my rule of three, for any found money, which is anything that isn’t my normal pay, tax return, bonuses, even refunds, I break it into three. One third goes to pay down debt, one third goes to savings, and one third I can spend on anything I want.”

Listener, are we the same person? Because I do the same thing. You’re not that weird if you’ve got at least one companion in this, okay?

Yeah. And the spending bucket sounds a lot like how I have my spending and savings bucket set up. So kudos to you, weird listener.

And also debating whether or not to tap into the savings versus just covering something out of my income, which is in my checking account, which is definitely a debate I have all the time when I’m faced with a cost. So listener, you’re doing great. You’re not weird, you’re great. At least we think so.

But you’re weird in a good way. Let’s say that.

You’re the best kind of weird. All right, everyone else let us know. What’s your weird money habit? Do you only use cash for all of your transactions? Are you this hardcore credit card point maximizer? Tell us by texting us or leaving a voicemail on the Nerd hotline at (901) 730-6373. That’s (901) 730-N-E-R-D. Or leave us a voice memo at [email protected].

Also, a reminder that time is running out if you want to enter our Book Giveaway Sweepstakes ahead of our next Nerdy Book Club episode. Our next guest is Jake Cousineau, author of How to Adult: Personal Finance for the Real World, which offers tips to young people on how to get started with managing their money.

To enter for a chance to win our book giveaway, send an email to [email protected] with the subject Book Sweepstakes during the sweepstakes period. Entries must be received by 11:59 p.m. Pacific Time on May 17th. Include the following information: your first and last name, email address, zip code, and phone number. For more information, please visit our official Sweepstakes Rules page.

All right, now let’s get into this episode’s Money Question segment, after a quick break. Stay with us.

We’re back and answering your real world questions to help you make smarter decisions about your money. This episode’s question comes from a listener who would like to stay anonymous. Anonymous wrote, “I just found your podcast and I’m excited to listen to every episode. I studied economics and I remember my macro teacher saying that index funds are some of the best investing decisions you can make. Can you talk about how to choose different types of index funds? I’d like to learn more about investing in index funds, but I recently learned about expense ratios and I don’t know what the thresholds are for an expensive index fund. What are some things to research when picking one? Are there other things to look at, except for the price to purchase one and yearly growth? Thanks.”

To help us answer this anonymous listener’s question, we are joined by investing writer Alieza Durana. Alieza, welcome back to Smart Money.

Thanks so much for having me back.

All right, Alieza, let’s start with Index Funds 101. Can you break down what an index fund is for our listeners?

Absolutely. An index fund tracks the performance of a group of pre-selected investments, which could be from a certain industry, market sector or asset class. They generally aim to mirror the performance of an index like the S&P 500 rather than beat it. The S&P 500 and the Dow Jones Industrial Average stock market indices are two of the most famous ones. That’s a mouthful, but you may have also heard of the Nasdaq Composite Index or the Russell 2000. An S&P 500 index fund, for example, will provide exposure to stocks listed in the S&P 500, which is made up of about 500 of the largest publicly traded companies.

And just to really get into the basics, one thing that I found interesting was that when I was first getting into investing, I found index funds and ETFs and mutual funds to feel weirdly nebulous, like you’re putting your money into this fund thing, but what even really is a fund? It turns out that a fund is just a company and it’s a company that puts the money it receives from investors, like you, into other companies. And it hopes that that money will grow so it can return profits to its shareholders, which again would also be you in this case. For me, putting what a fund is in very clear basic terms helped make investing a little bit more accessible and tangible.

Yeah. Well, speaking of those three different kinds of fund investments that you mentioned, Sean, mutual funds, index funds and ETFs, how is an index fund different from the other two?

So big picture index funds, mutual funds and ETFs are all bundles of investments. But active mutual funds differ from index funds and ETFs in terms of their management style, their investment objective, and how much they cost. The reason this is true is because active mutual funds are managed by an investment manager and they seek to beat the market rather than match it. They cost more because you’re paying someone to choose what assets to invest in.

Yeah. And as always, we should mention that actively managed mutual funds rarely outperform the market. ETFs and index funds can offer a less expensive way to invest and get sometimes more reliable results.

That’s absolutely right. ETFs and index funds offer lower minimum investments and fees than mutual funds. They’re also more tax efficient.

So there are a number of different index funds on the market, which is where things get confusing, right? Because it’s all these funds and they all have all these different things inside of them and it just feels infinite. Our listener is wondering how to choose one over another and what are the main factors that you should consider? They mentioned price and yearly growth, but what else is there?

Listener, I think you may want to consider a number of factors including an index fund’s cost, company size, geography, the sector focus you’re interested in, and the minimum investment, basically, to get started. Are you looking for a particular sector such as technology or energy, an index based in the United States or internationally? One invested in stocks, bonds, or another commodity or cash? The answers to these questions are specific to your investing priorities, and if you don’t know what your investing priorities are, that’s okay too, but maybe consider, like, how long and what are you investing for and what kind of risk can you live with, knowing that your investments may go up and down in the short term. You could also think about talking to a financial advisor or having a robo-advisor help you answer some of these questions in putting together your portfolio.

That’s really good advice. And if people are comparing one index fund or another, or a mutual fund or ETF for that matter, I would recommend they check out a fund’s prospectus, which is a pretty ugly, jargony word for essentially what is an about page for the fund. A prospectus details the performance of the fund, fees and the investment objective and much more. These are available online. The Securities and Exchange Commission requires that all funds publish these, so they’re pretty easily accessible.

Yeah. So we talked a little bit … Sean, you just mentioned fees, the magical F word, if it-

The magical four letter F word that is a different one from the one you might be thinking of. But some people might be tempted to choose the least expensive index fund, the one with the lowest fees. What do you think about that? Is cheaper better, or when you pay more, do you get what you pay for?

In this case, cheaper is better. The least expensive index funds could be a great option. An S&P 500 and total stock market index fund from the biggest and most reputable asset managers typically offers the lowest expense ratios. So Fidelity for instance has a total stock market index fund with a zero expense ratio. Low cost index funds are among the most affordable options for those seeking broad market exposure in a single investment. So again, this is a bundle of investments that you get in a single purchase.

So you just mentioned the term expense ratios. Can you explain what that is and what a good one might be in this context?

Sure thing. Expense ratios cover a fund’s expenses from management to marketing and are all part of mutual funds, index funds and exchange-traded funds. Some expense ratios are extremely low or even free, like Fidelity, a great place to start investing.

Yeah. And many expense ratios at this point are under 1%, but it’s worth comparing the expense ratio of one fund versus another because while a 1% expense ratio might not sound like a lot, a 2% also might not sound like a lot. Over time, that 1% difference can mean tens of thousands of dollars in how much you are able to earn from your investment. So do be mindful of that as you are approaching different investment options. And a quick aside, Fidelity is a NerdWallet partner, but that does not affect how we talk about them. So Alieza, I want to go back to the idea of which index fund might be better than another for an investor. How can someone determine whether one is actually a better option for them?

It might be kind of unsatisfying to say it varies, but it does vary from person to person and depends on investment minimums. The asset allocation, so like, what types of investments you’re buying into, like stocks, bonds, cash or another commodity. Your risk tolerance, what level of risk is going to keep you up at night and what can you sleep with and your investment timeline. So how soon do you want your investment money? Index funds can have high investment minimums that could be barriers to investing. So if one index fund requires a lower minimum than another, then that might be a better fit for a new investor with less money to get started. But it might also be a question of what fits into your asset allocation. Do you need more US equities, international equities, US or emerging market bonds, or short-term cash funds? Index funds can easily build a well-rounded portfolio, piecing each of these together. And if someone has a long timeline, a better fund might be a more aggressive one while someone with less time to invest might choose a less volatile index fund.

And what about, here’s an important thing, the performance, how much money you get back when you’re done investing and you’re ready to cash it in? Our listener seems interested in investing in index funds that are growing at a good pace, but since index funds generally follow the market’s performance, how should our listener think about this?

This might surprise you, but performance might not be a helpful way to compare index funds. Index funds are structured to mirror a particular index like the S&P 500. And because of this, they should all have the same, if not very similar, returns. Another thing to keep in mind is that most financial industry professionals will remind you that past performance is not a guarantee of future results.

Well, Alieza, is there anything else that our listener or anyone looking to invest in index funds should keep in mind?

Last but not least, index funds are meant to be hands-off and held long term. So when choosing one, just keep that in mind.

All right, well Alieza, thank you so much for talking with us.

And that’s all we have for this episode. Remember, we are here for you and we want to hear your real-world questions because we’re here to make you smarter about your money decisions. So turn to the Nerds and call or text us your questions at (901) 730-6373. That’s (901) 730-N-E-R-D. You can also email us at [email protected]. Also visit nerdwallet.com/podcast for more info on this episode. And remember to follow, rate and review us wherever you’re getting this podcast.

This episode was produced by Tess Vigeland, who also helped with editing. Sara Brink mixed our audio. And a big thank you to NerdWallet’s editors for all their help. Here’s our brief disclaimer: We are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances.

And with that said, until next time, turn to the Nerds.

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