Financial Topics Archives | Page 165 of 802

Sep

2024

How Donor-Advised Funds (DAF) Work

By Rebecca Lake | invest, Investing | Comments Off

A donor-advised fund, or DAF, is a tax-advantaged vehicle for charitable giving. Individuals, families, and organizations can establish donor-advised funds to further philanthropic efforts while supporting their favorite charities.

Here’s a closer look at what a donor-advised fund is used for, the pros and cons, and how to create one.

Key Points

• Donor-advised funds (DAFs) are charitable giving accounts, administered by sponsors, that allow donors to make tax-deductible donations that can be gifted to charities at a later time.

• DAFs can be established by individuals, families, trusts, corporations, estates, and foundations.

• Contributions to DAFs may include cash, stocks, real estate, cryptocurrency, and more.

• DAFs offer flexibility in charitable giving, allowing donors to recommend how funds are used and invested.

• Potential disadvantages include lack of donor control, fees, and the irrevocability of contributions.

🛈 While SoFi does not offer Donor Advised Funds at this time, we do offer a range of online investing services.

What Is a Donor-Advised Fund?

A donor-advised fund is a separately identified fund or account that exists for the purpose of making charitable donations to eligible organizations. In effect, they’re a sort of charitable investment account. They’re important funding sources for nonprofits that rely on public support via donations or charitable giving.

Donor-advised funds may be established by:

• Individuals and families

• Trusts

• Corporations

• Estates

• Foundations

Multiple donors may contribute to a donor-advised fund, and a third party, (or, the sponsor) administers and oversees it – hence the “donor-advised” moniker. This third party is responsible for making grants to eligible charities from donated funds.

Definition and Purpose

A donor-advised fund, most simply, is a private investment account that’s used exclusively to make charitable donations.

Donor-advised funds may be established to support a variety of 501(c)3 organizations. A 501(c)3 is a tax-exempt organization, as defined by the Internal Revenue Service. Examples of organizations that are supported by donor-advised funds could include:

• Colleges and universities

• Hospitals and healthcare organizations

• Religious organizations

• Animal welfare agencies

• Humanitarian organizations

• Environmental charities

• Disaster relief organizations

Under the Internal Revenue Code (IRC), tax-exempt purposes include “charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals.”

Key Players Involved

The key players in a donor-advised fund are the sponsors, donors, and charities that receive donations. More specifically:

• Sponsors are the organizations that administer the fund.

• Donors are the individuals or entities who make contributions to the fund.

• Receiving charities are eligible nonprofits, as defined by the IRS, per the information above.

When you make contributions to a donor-advised fund, the sponsor manages them on your behalf. You can request which charitable causes to fund with your donation — though this may ultimately be decided by the sponsor — and when donations should be distributed.

Benefits of Using a Donor-Advised Fund

You might wonder why someone would establish or contribute to a donor-advised fund when they could make direct charitable contributions to an organization instead. Answering that question is easier when you consider the benefits offered by donor-advised funds, which can include tax advantages, flexible giving, and more.

Tax Advantages

A donor-advised fund offers an immediate tax deduction for contributions. The deduction applies whether you donate cash or another type of asset, including publicly-traded securities, like stocks.

You’ll need to itemize deductions on the Schedule A tax form to write off donations to donor-advisor funds. That’s one of the main things to know about charitable donations and taxes.

For 2024, the charitable deduction limit is as follows:

• Up to 60% of adjusted gross income (AGI) for cash donations

• Up to 30% of adjusted gross income (AGI) for noncash donations

Deductions reduce your taxable income for the year. Claiming deductions for donor-advised fund contributions could help push you into a lower tax bracket when it’s time to file your return.

Flexibility in Charitable Giving

Donor-advised funds allow for flexibility in deciding where your donations may go. While the sponsor has legal control over assets in the fund, donors can make recommendations on how the funds should be used.

You can make contributions at your own pace, and you can choose the recipient charities at a later time. Donor-advised funds may accept a variety of financial gifts, including cash, stock, real estate, and even noncash or alternative assets, such as cryptocurrency.

Investment Growth Potential

Donor-advised funds give donors a different avenue through which to make investments, and to provide some guidance about how money in the fund should be invested. Investment growth within a DAF is tax-free, so every additional penny your money earns can go directly to the charity or charities you prefer. Note that some DAFs may require regular distributions of funds, which can influence how long assets have to grow.

Potential Disadvantages of Donor-Advised Funds

Donor-advised funds can have drawbacks, both for donors and for the charities that receive donations through them. The main drawbacks for charities are a lack of transparency surrounding donations and potential delays, should donors choose to allow contributions to grow before funds are released. Further, donor-advised funds have been criticized as a tool that can be used by the wealthy to secure tax advantages – the IRS, in recent years, has released new regulations to mitigate that sort of potential abuse.

For donors, the disadvantages can include:

• Lack of control: While donors may make recommendations about investments or which charities should receive funds, the sponsor has the final say.

• Fees and minimums: Donor-advised funds can charge annual fees and other fees, which donors are responsible for paying. Some funds may require a minimum contribution of $1 million or more.

• No reversals: Once you contribute to a donor-advised fund the money must remain in the fund until it’s disbursed to charity. You can’t make a contribution and take it back later.

Setting Up and Contributing to a DAF

Setting up a DAF is simple enough. You need to find a sponsor, open your account, and make a contribution. Here’s more on how the process works.

Choosing a Sponsoring Organization

Several types of organizations can sponsor donor-advised funds, such as public foundations and 501(c)3 organizations associated with a brokerage.

Your goals related to charitable giving may determine which option you choose. If you’re primarily interested in funding local charities, for instance, you might select a community organization that administers a donor-advised fund. On the other hand, if you’d like to have access to a wider range of charities you might consider a DAF offered in association with a brokerage.

Opening an Account

You’ll need to complete the necessary paperwork to open your account once you’ve selected a sponsoring organization. Along with your personal information, you may need to specify, among other things:

• Which charities you’d like to support

• How you’d like contributions to be invested

• The identity of the sponsor

Once the paperwork is complete you can move on to the final step, and begin funding your account.

Contribution Types and Limits

You can decide what form your contributions to a donor-advised fund should take. The options can include, but are not limited to:

• Cash

• Stocks, bonds, and mutual funds

• Traditional IRA or 401(k) assets

• Cryptocurrency

• Real estate

• Private business interests

The fund sponsor should be able to tell you what the minimum contribution is (often around $5,000), if any, and whether there’s any upper limit on how much you can contribute annually. Keep in mind that with any contributions you make, you can only deduct them up to the limit allowed by the IRS.

Donor-Advised Fund vs. Private Foundation

A private foundation can be another vehicle for making charitable donations. Private foundations are 501(c)(3) organizations, and can be established by corporations, but they’re often used by families and wealthy individuals to fund philanthropic activity.

There are several differences to note between the two.

Donor-Advised Fund	Private Foundation
Donors make recommendations about how contributions to the fund should be invested and distributed to charities.	Donors have more control of investment decisions and how contributions are distributed.
Cash donations are deductible up to 60% of AGI; noncash donations are deductible up to 30% of AGI.	Cash donations are deductible up to 30% of AGI; noncash donations are deductible up to 20% of AGI.
No annual payout is required.	Minimum annual payout of 5% of net asset value is required.

Generally speaking, a donor-advised fund usually requires less paperwork and is less costly to establish. It’s also easier to maintain privacy, since you can keep your name as a donor confidential if you prefer. Private foundations, on the other hand, are more time- and cost-intensive to create. Privacy is limited as foundations are required to file public tax returns.

In terms of the difference between nonprofits vs. foundations, they can both be established as tax-exempt, 501(c)3 organizations. However, nonprofits and foundations may have different underlying goals, tax implications, and more.

The Takeaway

Donor-advised funds can offer an avenue for giving if you’re looking for charities to support. You’ll need to have sufficient capital to make an initial contribution but the tax advantages can be substantial. And you can still make contributions directly to qualify for a tax break if you don’t meet the minimum requirements for a DAF.

FAQ

Are donations to a donor-advised fund tax-deductible?

Donating to a donor-advised fund allows you to qualify for an immediate tax deduction. You can deduct cash donations up to 60% of your AGI, or noncash donations up to 30% of your AGI.

Can you name a successor for your donor-advised fund?

Yes, you can name a successor for your donor-advised fund. You may be prompted to do so at the time that you open your account and complete the initial paperwork. A successor essentially inherits the fund from you when you pass away.

What are the typical fees associated with a donor-advised fund?

Donor-advised funds can charge annual or administrative fees. These fees are typically assessed as a percentage of your account balance. The higher your balance, the lower the fee might be.

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Sep

2024

CDs vs Treasury Bills: What’s the Difference?

By Dan Miller | Growing Wealth, Investing, money, Terminology | Comments Off

If you’re looking for a safe place to invest and grow your money, you might be considering both certificates of deposit (CDs) and U.S. Treasury bills (T-bills). Both investment options offer steady and predictable returns, while protecting your principal. However, there are some key differences between them, including how long you need to lock up your money, initial investment requirements, and how your earnings will be taxed. Read on for a closer look at T-bills vs. CDs.

Key Points

• CDs require locking up money for a term ranging from three months to five years, while T-bills generally have shorter terms — between four weeks to one year — which can make them a good option for short-term savings goals.

• The minimum investment for opening a CD varies by bank but is typically at least $500, while the minimum purchase amount for Treasury bills is $100.

• Interest on CDs is taxed in the year it is earned, whereas Treasury bill interest is taxed when the T-bill is sold.

• CD interest is taxable at both federal and state levels, while T-bill interest is exempt from state taxes.

• If interest rates are expected to fall, it can be advantageous to lock in a high rate on a multi-year CD.

What Is a Certificate of Deposit?

A certificate of deposit, commonly referred to as CD, is a type of savings account offered by banks and credit unions. You can also get CDs through brokerages, called brokered CDs, though these are still issued by banks. When you open a CD, you deposit a set amount of money into the account and agree to leave it there for a specific period of time, which generally ranges from three months to five years.

CDs pay a fixed interest rate that is typically higher than the average annual percentage yield (APY) for savings accounts. If you withdraw your money early, however, you will likely have to pay a penalty, often in the form of interest earned over a certain time period.

Like other types of savings accounts, CDs are insured, which means you get your money back in the unlikely event your bank goes bankrupt. CDs at banks insured by the Federal Deposit Insurance Corporation (FDIC) are typically covered up to $250,000 per depositor, per ownership category, for each insured bank. Co-owners of joint accounts at the same bank are typically each insured up to $250,000. Credit unions offer similar insurance through the National Credit Union Administration (NCUA).

Pros and Cons of CDs

CDs come with a number of benefits, but also have some drawbacks. Here’s a look at some of the top reasons you might or might not want to invest in a CD.

Pros

• Guaranteed returns: CDs offer a fixed interest rate, so you know exactly how much you will earn by the end of the term. Even if market interest rates go down, your CD rate will stay the same.

• Safety: As FDIC- or NCUA-insured products, CDs provide a high level of security, protecting your principal up to $250,000.

• Higher interest rates: CDs typically offer higher interest rates than traditional savings accounts, which can help your money grow faster.

Cons

• Limited liquidity: Funds invested in a CD are locked in for the entire term of the CD. If you need to access your money before the CD matures, you will typically incur a penalty, which can eat into your earnings.

• Could potentially earn more: While guaranteed, the returns on a CD can be lower than what you might earn with more aggressive (aka, higher-risk) investments like stocks or bonds.

• Inflation risk: If the interest rate on your CD doesn’t exceed, or even keep up with, the rate of inflation, the actual purchasing power of your money can erode over the term of the CD.

What Are U.S. Treasury Bills?

Another safe way to invest your money is to buy U.S. Treasury bills. Also called T-Bills or Treasuries, Treasury bills are short-term government securities issued by the U.S. Department of the Treasury. Treasuries are backed by the full faith and credit of the U.S. government and considered one of the safest investments available.

When you buy a T-bill, you pay less than the bill’s face value, which is the amount you will receive at maturity. The difference between the purchase price and the face value at maturity is your interest earned. You’ll owe federal taxes on any income earned, but no state or local tax. T-bills are considered short-term securities because they mature in four weeks to one year.

Pros and Cons of Treasury Bills

Like CDs, Treasuries come with both benefits and drawbacks. Here are some to keep in mind.

Pros

• Safety: T-bills are backed by the U.S. government, making them virtually risk-free if held until maturity.

• Predictable returns: Returns are guaranteed, based on the agreed-upon rate of the Treasury bill that you purchase.

• Tax benefits: The interest earned on a U.S. Treasury bill is exempt from state taxes, which can be a significant advantage for investors in high-tax states.

Cons

• Lower returns: While safe, the returns on T-bills are generally lower than what you can potentially earn by investing in the market over the long term.

• Inflation risk: Like all fixed-rate investments, if the rate you earn on your T-bill doesn’t exceed the inflation rate, the actual purchasing power of your money will diminish over the term of the Treasury.

• Market risk: While treasuries are stable, their value can fluctuate over time. If you sell before the T-bill reaches maturity, you may not get as much interest as you expected.

Recommended: 7 Places to Put Your Cash

Comparing CDs vs Treasury Bills

While CDs and Treasury bills have a number of similarities, there are also some key differences that you’ll want to understand before investing in either one. Here’s a closer look.

Tax Implications

One key difference between CDs and Treasuries is that interest on CDs is taxable at the federal and state level. Treasuries, on the other hand, are exempt from state income tax. If you are investing in a taxable account and live in a state with a high income tax, this can make investing in Treasuries attractive.

Another tax difference: With CDs, you pay taxes on interest earned the year it is added to the account, whether you cash out the CD or not. With Treasuries, the interest you earn is only taxable when you sell the T-Bill, which may be a different tax year than the year in which you bought it.

In both cases, the interest you earn will be reported on Form 1099-INT.

Expected Earnings

With both a CD and a Treasury bill, you’ll know beforehand how much interest you’ll earn if you hold it until its maturity. If you sell a CD early, you may forfeit some or all of your expected interest and also possibly pay a penalty. Selling Treasury bills before they reach their maturity may be possible (since there is a secondary market for them) but if you do, you may not earn all the interest you would earn if you held it to its maturity.

Other Key Details to Consider

When deciding whether to put your money in T-bills or CDs, here are some other factors to keep in mind.

• When you’ll need the money: T-Bills are more liquid than CDs since they typically have shorter maturities and can be sold on the secondary market. If you need access to your funds quickly, T-Bills may be the better option. While you can sell a CD before maturity, doing so typically incurs a penalty that can reduce your returns.

• Initial investment amount: The minimum investment for opening a CD varies by bank but is typically at least $500. The minimum purchase amount for Treasury bills is $100. A higher initial investment requirement could make opening a CD difficult if you are just starting out and don’t have a lot of extra cash to invest.

• Interest rate environment: While T-bills and CDs generally offer comparable rates, you may want to consider time to maturity and where interest rates could be headed. If interest rates are expected to fall, for example, locking in a good rate on a multi-year CD could be a smart move.

How To Purchase CDs and Treasury Bills

You can buy CDs directly from banks and credit unions, either online or in-person. Rates and terms vary by institution, so it’s generally a good idea to shop around to find the best CD for your needs. You typically don’t have to have an existing account at a bank or credit union to open a CD.

You can purchase Treasuries either through a brokerage firm or directly from the U.S. Department of the Treasury at TreasuryDirect.gov. The most commonly offered maturity dates are four weeks, eight weeks, 13 weeks, 17 weeks, 26 weeks, and 52 weeks. T-bills are sold in increments of $100, and the minimum purchase is $100.

Similar Investments to Keep in Mind

If you are looking for a relatively safe place to park your savings and earn a decent return, there are other options besides T-bills and CDs. Here are some to consider.

• Series I savings bonds: I bonds are a type of U.S. savings bond with an overall rate that is based on both a fixed rate that never changes and a variable interest rate,designed to keep up with inflation, that resets every six months. You need to hold the bond for at least one year and will pay a penalty if you cash out before five years. Like T-bills, interest payments are exempt from state taxes.

• Money market fund: A money market fund is a type of mutual fund that invests in CDs, short-term bonds, and other low-risk investments. The money you invest is liquid, and yields are typically higher than regular savings accounts. However, the funds are not protected by the FDIC or NCUA.

• High-yield savings account: While not technically an investment, high-yield savings accounts pay more than the average APY for savings accounts, while offering more liquidity than CDs or T-Bills. Your money is insured, but the APY on a high-yield savings account isn’t fixed, meaning it can rise or fall depending on market rates.

The Takeaway

CDs and Treasury bills are both considered safe investments, allowing you to earn a guaranteed return without putting your initial investment at risk. However, there are some key differences that can make one a better fit than the other.

T-bills often have shorter terms than CDs, making them a good option for a savings goal that is a year or less down the road, like buying a car. With some terms as long as five years (or more), a CD may work better for a longer-term savings goal, such as making a downpayment on a home. If you’re looking for safety and competitive returns along with liquidity, you might also consider putting your money in a high-yield savings account.

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FAQ

Are CDs and Treasury bills considered safe investments?

Yes, both certificates of deposit (CDs) and Treasury bills (T-bills) are considered safe investments. CDs offer a fixed interest rate over a specified term, and are typically insured up to $250,000, making them low-risk. Treasury bills are short-term government securities backed by the U.S. government, making them one of the safest investments available. They are sold at a discount and mature at face value, with the difference representing the investor’s interest. Both options can be ideal if you’re a conservative investor seeking minimal risk.

Should I keep my emergency fund in a CD or Treasury Bill?

You generally want your emergency funds to remain highly liquid and easily accessible, so a regular savings account can work better than a certificate of deposit (CD) or Treasury bill.

CDs usually require you to leave your funds untouched for a fixed term, with penalties for early withdrawal. Treasury bills also tie up your money, though terms are relatively short (typically four weeks to one year). A Treasury bill might work for an emergency fund if you have other funds you can tap in a pinch before the maturity date. Otherwise, consider keeping your emergency cash in a high-yield savings account or a money market account.

How do CDs and Treasury bills differ from savings bonds?

Certificates of deposit (CDs), Treasury bills, and savings bonds are all low-risk investments, but there are some key differences between them.

• CDs offer fixed interest over a specific term, and are typically used for short- to medium-term savings goals.

• Treasury bills are short-term government securities that mature in a year or less and are sold at a discount.

• Savings bonds, such as Series I and EE Bonds, are long-term government bonds with interest that compounds semi-annually. They are generally intended for long-term savings goals, such as education or retirement.

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Sep

2024

Purchase-Money Mortgage: Definition and Example

By Alene Laney | Home Ownership, mortgage | Comments Off

With a purchase-money mortgage, the seller finances part or all of the property for the buyer, who usually does not qualify for traditional financing.

Keep reading to learn about the benefits and drawbacks of a purchase-money mortgage.

What Is a Purchase-Money Mortgage?

A purchase-money mortgage is also known as owner financing. The seller extends credit to the buyer to purchase the property. This can be a portion of the sales price or the full price.

In other words, the buyer borrows from the seller instead of from a traditional lender. The seller ultimately determines the interest rate, down payment, and closing costs. Both parties sign a promissory note.

They record a deed of trust or mortgage with the county. The seller usually retains title until the financed amount is paid off.

A purchase-money mortgage is a nontraditional financing method that may be needed when the buyer cannot obtain one of the other different mortgage types for purchasing the property.

The promise to pay is secured by the property, so if the buyer stops paying, the seller can foreclose and get the property back.

Purchase-Money Mortgage Example

Not all buyers have financial situations that make it easy for them to get a conventional mortgage. Even diligent shopping for a mortgage may not help them get the home loan they need.

If a buyer has a profitable business, for example, but doesn’t have two years of tax returns to prove steady cash flow, most mortgage lenders won’t take on the risk.

Enter a purchase-money mortgage. With the right property, seller, and situation, a buyer could finance the home with a purchase-money mortgage. The seller would offer terms to the buyer — usually a higher interest rate and a short repayment term, with a balloon mortgage payment at the end — and the buyer would enter into the agreement. The seller would hold title until the loan payoff.

Buyers and sellers who work with seller financing often intend for the purchase-money mortgage to be refinanced into a traditional mortgage with a lower mortgage payment at a later date.

Types of Purchase-Money Mortgages

Purchase-money mortgages can come in several forms.

Land Contract

A land contract (also called a contract for deed) is simply a mortgage from the seller. The buyer takes possession of the property immediately and pays the seller in installments.

Land contracts are often for five years or less, ending with a balloon payment.

Lease-Purchase Agreement

In a lease-purchase agreement, the buyer agrees to rent the property for a specified amount of time and then enter into a contract to purchase the property at a price that’s the current market value or a bit higher.

For this and a lease-option agreement, the seller typically requires a substantial upfront fee, an above-market lease rate, or both. Part of the monthly rent payment goes toward the purchase price.

Lease-Option Agreement

A lease-option agreement is similar to a lease-purchase agreement in that the buyer agrees to first rent the property for a specified amount of time. But with this agreement, the buyer has the option to purchase the property instead of making a commitment to purchase it.

Benefits of Purchase-Money Mortgages for Buyers

• Buyers, including first-time homebuyers, may be able to obtain housing sooner than if they were to wait to qualify for a traditional mortgage through a lender.

• The down payment may be more flexible for a purchase-money mortgage.

• Requirements may be more flexible.

• No or low closing costs.

Benefits of Purchase-Money Mortgages for Sellers

• The seller may be able to get the full list price from a buyer who needs the seller’s help to obtain a mortgage.

• The seller may be able to make some money by acting as the lender, including asking for a down payment and a higher interest rate.

• Taxes may be lower as the amount is financed over time.

Weighing the Pros and Cons of Seller Financing

If you have the option of financing with a purchase-money mortgage, you will want to look at all the angles. It may also be useful to use a mortgage calculator tool to help you determine what a potential payment on a purchase-money mortgage might be.

Pros	Cons
Buyer may be able to obtain the home with a purchase-money mortgage when other types of financing would be denied	Buyer will not have full title until the total amount borrowed is paid off
Flexible financing allows the seller to help the buyer purchase the property	Buyer may have little negotiating power when forging the deal
Increased equity may allow buyer to refinance into a traditional mortgage at the end of the purchase-money loan term	Seller is able to determine the rate, term, and down payment
	Seller can foreclose if the buyer does not meet contractual obligations

The Takeaway

If you’re able to secure financing from a seller, a purchase-money mortgage may be a good fit — if you have an exit plan in a few years. It’s smart for both buyers and sellers to know the risks and rewards of a purchase-money mortgage.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

SoFi Mortgages: simple, smart, and so affordable.

FAQ

Who holds the title in a purchase-money mortgage?

The seller controls the legal title; the buyer gains equitable title by making payments.

Can a bank issue a purchase-money mortgage?

Yes, but it is not common. A buyer might pay for a house with a bank mortgage, cash, and a property seller mortgage. When the bank is aware of the amount financed by the seller, both the mortgage issued by the third-party lender and the seller financing are considered purchase-money mortgages.

Does a purchase-money mortgage require an appraisal?

Not if the seller does not require one. With owner financing, the seller sets the terms, which may not include an appraisal.

Photo credit: iStock/MicroStockHub

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Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

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Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

This article is not intended to be legal advice. Please consult an attorney for advice.

SOHL-Q324-039

Sep

2024

Does an MBA Degree Increase Your Salary?

By Pam O’Brien | Going to College, Money & Life, Student Loans, student_loan | Comments Off

Earning an MBA, or a Masters of Business Administration, degree can increase your salary, teach you specialized skills, and provide you with new career opportunities. But getting your MBA is expensive, with an average cost of $62,600 for a two-year program vs. $59,684 for a master’s degree in general. A degree from a top-tier school can be considerably more, with tuition and living expenses totaling $200,000 for the program.

Just how big of an MBA pay increase you’ll get in return depends on a number of factors, including the school you attend, the field you’re in, and your previous work experience. Here’s what to know about an MBA salary increase and how much you might expect to receive.

Value of an MBA Degree

An MBA degree can make you more marketable to employers, which can in turn help you land a better job and a higher salary, research shows. And while earning your degree can come with a hefty price tag, taking out MBA loans is one option to help you pay for it.

The median starting salary of recent MBA graduates in the U.S. is $120,000, according to the 2024 Corporate Recruiters Survey from the Graduate Management Admission Council (GMAC). That’s significantly more than the $69,320 starting salary of grads with a bachelor’s degree. Knowing how much you might earn could help you determine if an MBA is worth it.

An MBA can also help you advance in your career. The majority of employers in the GMAC survey said that MBA grads typically perform better and move up the ladder faster than other employees. That places them in high demand in the workplace. One-third of employers from across the globe reported that they plan to hire more MBA graduates in 2024 than they did in 2023.

Average Salary Increase with an MBA

Overall, MBA grads reported a median salary increase of 33% after earning their degree, according to the GMAC’s most recent Enrolled Students Report. Full-time MBA students had a 42% increase in salary, while those who worked and studied for their MBA at the same time said their salary increased by 29%.

However, the amount your salary might increase once you have an MBA depends on the field you’re in. Here’s a closer look.

Salary By Industry and Job Function

The following industries tend to pay well for those who have earned an MBA, making them some of the best jobs for MBA graduates.

Finance

Many MBA grads pursue a career in finance, and it can be lucrative. The average salary for an individual with an MBA in finance is $145,257, but the amount can be as much as $195,000, and that’s not counting possible commissions and bonuses.

Technology

Another hot field for those with an MBA is technology, especially as AI becomes more prevalent. The average salary for MBA grads in tech is about $118,000 a year. However, your MBA salary increase could run higher still and may even include a signing bonus.

Consulting

Those who work as consultants and have their MBA average about $83,797 annually, but the base pay can be as much as $117,000. A consultant’s salary may go up dramatically within a few years, especially if they work at a big firm.

Healthcare

Healthcare management is a popular job for MBA graduates. The average earnings are $88,000 per year, although it’s not uncommon for those in healthcare management to bring home a six-figure salary.

Marketing

After graduating with an MBA in marketing, your annual earnings will be approximately $130,721 on average, and they could be as much as $165,000. That’s well above the average marketing salary for those without a degree, which is $81,330.

Business

The salary for a business analyst with an MBA is $104,629 a year, although it can be as much as $128,000.

Accounting

If you earn an MBA in accounting, you could earn an average starting salary of $126,598. Your pay could even be as high as $166,000.

Factors Influencing MBA Salary Potential

In addition to the field you choose to work in, how much you’ll earn after getting your degree is influenced by such things as the MBA program you choose and your previous work history and salary.

These are the three major factors that can affect MBA salary potential.

School Reputation and Rankings

Although it’s likely to be pricier, going to a top-rated school to get your MBA can pay off in multiple ways. These schools tend to have robust networking programs and employer recruitment opportunities. Some colleges may help prospective graduates find internships and jobs. Also, grads from top 10 schools tend to earn more than those who attend other programs.

Before applying to an MBA program, do your research to see where recent alumni have ended up and which companies have recruitment relationships with the school. For instance, certain coveted employers might always attend a particular school’s job fairs. If a university has connections to companies you might be interested in working at, you may want to apply to their MBA program.

Specialization and Concentration

Every MBA program offers different classes, internships, and hands-on opportunities, and it’s important to look for ones tailored to your goals and career path. Choose a program with specialized concentrations in the field you’re most interested in. For instance, some MBA programs specialize in healthcare while others focus on finance.

If you’re currently in a field that you want to pivot out of — moving from marketing to consulting, say — an MBA could help with career change without going back to an entry-level job.

Work Experience and Performance

The more work experience you have, the more likely you are to score a higher salary once you get an MBA. This is especially true if that experience is relevant to the area of study you’re pursuing. Most people going for their MBA have about five years of experience on the job. And some MBA programs require students to have a certain number of years of work experience before they apply.

Your work performance is also a key factor in what you might earn after you obtain your degree. As mentioned above, employers in the GMAC survey found that MBA grads tended to be better performers on the job. High achievers are more likely to command a higher salary.

Maximizing Your MBA Salary Prospects

In addition to choosing the right MBA program, there are other steps you can take to land a good job and a higher salary when you graduate. Here are a few strategies that can help you get ahead.

• Take advantage of networking opportunities. Get to know your fellow classmates and connect with teachers and faculty members. Go to school gatherings, job fairs, and networking events. Find people who are in the field you’re in, and get to know them.Then make a point to stay in touch with the contacts you make. These people can be valuable resources over the course of your career.

• Apply for internships. Many MBA schools offer internship programs, and they typically expect students to take advantage of them if possible. An internship can give you real-world experience and also connect you to key contacts who may be able to help you find a job when the time comes.

• Seek out alumni. Make a list of the companies you’re interested in working for, and then search out any alumni of your school who work there. Ask to meet with them for coffee or an informational interview. Solicit their career advice. If you make a solid connection, they may keep you in mind for future job openings.

Choosing the Right MBA Program

It’s important to find an MBA program that fits your interests and goals. Look for programs that offer concentrations in the areas and fields you want to pursue. Then review the curriculum and the courses offered to make sure they appeal to you.

In addition, learn where graduates of the MBA program have ended up. What companies do they work for and what kinds of jobs do they have? You might even reach out to ask how they felt about the program and if they would recommend it.

Location

Where the school is located is also a prime consideration. If you’re working and going to school at the same time, you’ll need to find a program in your area. You could also explore top online MBA programs if you want to take advantage of a particular school’s offerings when you’re unable to attend it in person. These programs tend to cost $10,000 less than in-person ones, but you may miss out on networking opportunities.

If you’re a full-time student and you have the opportunity to move to attend school, you could choose an MBA program near the area where you hope to work. For instance, if you’d like to be employed in Silicon Valley, a school nearby might be a good choice for you. It may be easier to get an internship there as well as a job after graduation.

Cost

Of course, the cost of an MBA program is likely to be one of the most important factors in your decision. Beyond the tuition, find out the true cost of getting an MBA at any school you’re interested in. This includes living expenses, books, transportation, and so on.

How to Pay for Your MBA

There are a number of ways to pay for your MBA, such as scholarships, grants, and student loans. You may want to consider both federal and private student loans. Federal loans include Federal Direct PLUS loans for graduate students from the Department of Education. The maximum amount you can borrow with these loans is the cost of attendance, which is determined by the school minus any other financial aid you may have, and the loan’s interest rate is fixed.

Private student loans may have fixed or variable rates, and the MBA loan rates you might qualify for depend on your credit history, among other factors. These loans are offered by banks, credit unions, and online lenders. Be aware, though, that with private student loans, you will not have access to the same federal protections and programs you would with federal loans, including income-driven repayment plans. Also, if you refinance federal student loans with a private loan, you could pay more interest over the life of the loan, depending on its rate and term length.

Recommended: Scholarship Search Tool

The Takeaway

Earning an MBA may help you fulfill your career dreams and earn a higher salary. Research shows that the degree can increase your salary by about 33%, depending on such variables as the school you attend and the field you work in. But getting an MBA can be costly, averaging more than $60,000 for a two-year program, up to $200,000 for top-tier schools. So you’ll want to weigh the pros and cons.

If you decide that earning an MBA makes sense for you, there are ways to help cover the costs and develop a solid budget. You can explore all options, including scholarships, grants, and federal and private student loans, as well as refinancing your existing loans.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.

FAQ

What is the average starting salary with an MBA?

The median starting salary with an MBA is $120,000, according to the Graduate Management Admission Council’s 2024 Corporate Recruiters Survey. That’s far higher than the $69,320 starting salary of graduates with a bachelor’s degree.

Is an online MBA worth the investment?

Whether an online MBA program is worth the investment depends on the program you choose and what you hope to get out of it. Online programs offer greater flexibility and are typically less expensive than in-school programs. According to one estimate, online MBA programs tend to cost about $10,000 less. However, with an online program, you may not have access to all possible networking opportunities or the opportunity to speak with professors face to face. You may also feel less connected to the school and the overall experience.

How long does it take to recoup MBA program costs?

How long it takes to recoup MBA program costs is different for everyone, depending on the price of the program and the salary increase they enjoy after earning their degree. According to the Graduate Management Admission Council, it takes grads of two-year full-time MBA programs about three and a half years of working to recoup the cost. Those who enroll in online MBA programs recoup the cost in about two and a half years of work.

Photo credit: iStock/Xavier Lorenzo

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SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOSLR-Q324-023

Sep

2024

Building a Nest Egg in 5 Steps

By AJ Smith | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off

A nest egg can help you save for future goals, such as buying a home or for your retirement. Building a nest egg is an important part of a financial strategy, as it can help you cover important costs or allow you to become financially secure.

A financial nest egg requires some planning and commitment. In general, the sooner you start building a nest egg, the better.

What Is a Nest Egg?

So what is a nest egg exactly? A financial nest egg is a large amount of money that someone saves and/or invests to meet a certain financial goal. Usually, a nest egg focuses on longer-term goals such as saving for retirement, paying for a child’s college education, or buying a home.

A nest egg could also help you handle emergency costs — such as medical bills, pricey home fixes, or car repairs. There is no one answer for what a nest egg should be used for, as it depends on each person’s unique aims and circumstances.

💡 Quick Tip: Before opening any investment account, consider what level of risk you are comfortable with. If you’re not sure, start with more conservative investments, and then adjust your portfolio as you learn more.

Understanding How a Nest Egg Works

There are a few things to know about how to successfully build a nest egg.

• You have to have a plan. Unlike saving for short-term goals, building a nest egg takes time and you need a strategy. A common technique is to save a certain amount each month or each week.

• You need to save your savings. This may sound obvious, but in order to save money every week or month, you have to put it in a savings or investment account of some sort. If you “save” the money in your checking account, you may end up spending your savings.

• Don’t touch your nest egg. The flip side of that equation is about spending: In order for your nest egg to grow and for you to reach your savings goals by a certain age, you have to make it untouchable. When saving a nest egg, you have to keep your saved money out of reach and protect it.

How Much Money Should Be in Your Nest Egg?

There is no one correct and specific amount a nest egg should be. The amount is different for each person, depending on their needs. It also depends on what you’re using your nest egg for. If you’re using it to buy a house, for instance, you’ll likely need less than if you are using your nest egg for retirement.

As a general rule, some financial advisers suggest saving 80% of your annual income for retirement. However, the amount is different for each person, depending on the type of lifestyle they want to have in retirement. For instance, someone who wants to travel a lot may want to save 90% or more of their annual income.

A retirement calculator can help you determine if you’re on track to reach your retirement goals.

What Are Nest Eggs Used for?

As mentioned, nest eggs are often used for future financial goals, such as retirement, a child’s education, or buying a house.

A nest egg can also be used for emergency costs, such as expensive home repairs, medical bills, or car repairs.

5 Steps to Building a Nest Egg

1. Set a SMART Financial Goal

The SMART goal technique is a popular method for setting goals, including financial ones. The SMART technique calls for goals to be (S)pecific, (M)easurable, (A)chievable, (R)elevant, and (T)ime bound.

With this approach, it’s not enough just to say, “I want to learn how to build a nest egg for emergencies.” The SMART goal technique requires you to walk through each step:

• Be Specific: How much money is needed for an emergency? One rule of thumb is to save at least three months worth of living expenses, in case of a crisis like an illness or layoff. But you also approach it from another angle: Maybe you just want $1,800 in the bank for car and home repairs.

• Make it Measurable and Achievable: Once you decide on the amount that’s your target goal, you can figure out exactly how to build a nest egg that will support that goal. If you want to save money from your salary, such as $1,800, you’d set aside $200 per month for nine months — or $100 per month for 18 months. Be sure to create a roadmap that’s measurable and doable for you.

Last, keeping your goal Relevant and Time-bound is a part of the first three steps, but it also entails something further: You must keep your goal a priority. And you must stick to your timeframe in order to reach it.

For example, if you commit to saving $200 per month for nine months in order to have an emergency fund of $1,800, that means you can’t suddenly earmark that $200 for something else.

2. Create a Budget

It’s vital to have a plan in order to create a nest egg — for the simple reason that saving a larger amount of money takes time and focus. A budget is an excellent tool for helping you save the amount you need steadily over time. But a budget only works if you can live with it.

There are numerous methods to manage how you spend and save, so find one that suits you as you build up your nest egg. There’s the 50-30-20 plan, the envelope method, the zero-based budget, etc. There are also apps that can help you budget.

Fortunately, testing budgets is fairly easy. And you’ll quickly sense which methods are easiest for you.

3. Pay Off Debt

Debt can be a major roadblock in building a nest egg, especially if it’s high-interest debt. Those who are struggling to pay down debt may not be able to put as much money into savings as they would like. Prioritizing paying down debt quickly can help save money on interest and reduce financial stress. Adding debt payments into a monthly budget can be one smart way to make sure a debt repayment plan stays on track.

If you’re having trouble paying down a certain debt, like a credit card or medical bill, it might be worth calling the lender. In some cases, lenders may work with an individual to create a manageable debt repayment plan. Calling the lender before the debt is sent to a debt collector is key, as many debt collectors don’t accept payment plans.

Debt Repayment Strategies

Here are two popular debt repayment strategies that might be worth researching: the avalanche method and the snowball method.

The avalanche method focuses on paying off the debt with the highest interest rate as fast as possible, because the interest is costing you the most. This method can save the most money in the long run.

The other option is the snowball method, which can be more motivating as it focuses on paying off the smallest debt first while making minimum payments on all other debts. When one debt is paid off, you take the payment that went toward that debt and add it to the next-smallest one “snowballing” as you go.

This method can be more psychologically motivating, as it’s easier and faster to eliminate smaller debts first, but it can cost more in interest over time, especially if the larger debts have higher interest rates.

4. Make Saving Automatic

Behavioral research is pretty clear: The people who are the most successful savers don’t mess around. They put their savings on auto-pilot, by setting up automatic transfers based on their goal.

Behavior scientists have identified simple inertia as a big culprit in why we don’t save. Inertia is the human tendency to do nothing, despite having a plan to take specific actions. One of the most effective ways to get around inertia, especially when it comes to your finances, is to make savings automatic.

Set up automatic transfers to your savings account online every week, or every month. While you’re at it, set up automatic payments to the debts you owe. Don’t assume you can make progress with good intentions alone. Technology is your friend, so use it!

5. Start Investing in Your Nest Egg

The same is true of investing. Investing can be intimidating at first. Combine that with inertia, and it can be hard to get yourself off the starting block. Also, you may wonder whether it makes sense to invest your savings, when investing always comes with a possible risk of loss (in addition to potential gains).

You may want to keep short-term savings in a regular savings or money market account — or in a CD (certificate of deposit), if you want a modest rate of interest and truly don’t plan to touch that money for a certain period of time. But for longer-term savings, especially retirement, you can consider investing your money in the market. SoFi’s automated investing can help you set up a portfolio to match your goals.

You can also set up a brokerage account and start investing yourself. Whichever route you choose, be sure to make the contributions automatic. Investing your money on a regular cadence helps your money to grow because regular contributions add up.

The Power of Compounding Interest

When saving money to build a nest egg in certain savings vehicles, such as a high-yield savings account or a money market account, compound interest can be a major growth factor. Put simply, compound interest is interest that you earn on interest.

Here’s how it works: Compound interest is earned on the initial principal in a savings vehicle and the interest that accrues on that principal. So, for instance, if you have $500 in a high-yield savings account and you earn $5 interest on that amount, the $5 is added to the principal and you then earn interest on the new, bigger amount. Compound interest can help your savings grow. Use the following compound interest calculator to see this in action.

With investments, compound returns work in a similar manner. Compounding returns are the earnings you regularly receive from contributions you’ve made to an investment.

Compound returns can be achieved by any type of asset class that produces returns on both the initial amount — or the principal — as well as any profits or returns that are generated after the initial investment. Some investment types that earn compound interest are stocks and mutual funds.

💡 Quick Tip: Are self-directed brokerage accounts cost efficient? They can be, because they offer the convenience of being able to buy stocks online without using a traditional full-service broker (and the typical broker fees).

Why Having a Nest Egg Is Important

A financial nest egg can help you save for retirement and/or achieve certain financial goals, such as paying for your child’s education. By building a nest egg as early as you can, ideally starting in your 20s or 30s, and contributing to it regularly, the more time your money will have to grow and weather any market downturns. For instance, if you start investing in your nest egg at age 25, and you retire at age 65, your money will have 40 years to accumulate.

Investing in Your Nest Egg With SoFi

Like most financial decisions, building a nest egg starts with articulating goals and then creating a specific plan of action to reach them. Using a method like the SMART goal technique, it’s possible to build a nest egg for retirement, to buy a home, pay for a child’s education, or other life goals.

Because a nest egg is typically a larger amount of money than you’d save for a short-term goal, it’s wise to use some kind of budgeting system, tool, or app to help you make progress. Perhaps the most important ingredient in building a nest egg is using the power of automation. Use automatic deposits and transfers to help you save, pay off debt, and even to start investing.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Invest with as little as $5 with a SoFi Active Investing account.

FAQ

What is a financial nest egg?

A financial nest egg is a substantial amount of money you save or invest to meet a certain financial goal. A nest egg typically focuses on future milestones, such as retirement, paying for a child’s college education, or buying a home.

How much money is a nest egg?

There is no one specific amount of money a nest egg should be. The amount is different for each person, depending on their needs and what they’re using the nest egg for. For instance, if a nest egg is for retirement, some financial advisers suggest saving at least 80% percent of your annual income.

Why is it important to have a nest egg?

A nest egg allows you to save a substantial amount of money for retirement or to pay for your child’s education, for instance. By starting to build a nest egg as early as you can, the more time your money has to grow.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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What Is a Donor-Advised Fund?

Definition and Purpose

Key Players Involved

Benefits of Using a Donor-Advised Fund

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Flexibility in Charitable Giving

Investment Growth Potential

Potential Disadvantages of Donor-Advised Funds

Setting Up and Contributing to a DAF

Choosing a Sponsoring Organization

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Contribution Types and Limits

Donor-Advised Fund vs. Private Foundation

The Takeaway

FAQ

Are donations to a donor-advised fund tax-deductible?

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CDs vs Treasury Bills: What’s the Difference?

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What Are U.S. Treasury Bills?

Pros and Cons of Treasury Bills

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Comparing CDs vs Treasury Bills

Tax Implications

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Similar Investments to Keep in Mind

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FAQ

Are CDs and Treasury bills considered safe investments?

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Purchase-Money Mortgage: Definition and Example

What Is a Purchase-Money Mortgage?

Purchase-Money Mortgage Example

Types of Purchase-Money Mortgages

Land Contract

Lease-Purchase Agreement

Lease-Option Agreement

Benefits of Purchase-Money Mortgages for Buyers

Benefits of Purchase-Money Mortgages for Sellers

Weighing the Pros and Cons of Seller Financing

The Takeaway

FAQ

Who holds the title in a purchase-money mortgage?

Can a bank issue a purchase-money mortgage?

Does a purchase-money mortgage require an appraisal?

Does an MBA Degree Increase Your Salary?

Value of an MBA Degree

Average Salary Increase with an MBA

Salary By Industry and Job Function

Finance

Technology

Consulting

Healthcare

Marketing

Business

Accounting

Factors Influencing MBA Salary Potential

School Reputation and Rankings

Specialization and Concentration

Work Experience and Performance

Maximizing Your MBA Salary Prospects

Choosing the Right MBA Program

Location

Cost

How to Pay for Your MBA

The Takeaway

FAQ

What is the average starting salary with an MBA?

Is an online MBA worth the investment?

How long does it take to recoup MBA program costs?

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