Feb
27
2024
wallet on green background

10 Personal Finance Basics

By | Budgeting & Goals, Financial Independence, money | No Comments

Though money is a very important aspect of life, the topic of personal finance (or financial literacy) isn’t part of most people’s education, neither in school nor at home.

Not knowing financial basics can leave you to wing it when it comes to your money management, meaning you might wind up living paycheck to paycheck, having too much debt, or not saving enough for retirement.

To help you avoid those situations, read up on personal finance basics — the smart and simple steps to budgeting wisely, saving well, and spending sensibly.

These 10 personal finance basics can put you on the path to taking control of your cash and achieving your money goals.

Key Points

•   Personal finance basics include budgeting, saving, investing, managing debt, and understanding credit.

•   Budgeting involves tracking income and expenses, setting financial goals, and making informed spending decisions.

•   Saving is important for emergencies, future goals, and retirement. It involves creating a savings plan and automating contributions.

•   Investing helps grow wealth over time. It involves understanding risk tolerance, diversifying investments, and considering long-term goals.

•   Managing debt requires understanding interest rates, making timely payments, and prioritizing high-interest debt repayment. Understanding credit involves monitoring credit scores and maintaining good credit habits.

Personal Finance Definition

Personal finance is a term that involves managing your money and planning for your future. It encompasses spending, saving, investing, insurance, mortgages, banking, taxes, and retirement planning.

Personal finance is also about reaching personal financial goals, whether that’s having enough for short-term wants like going on a vacation or buying a car, or for the longer term, like saving enough for your child’s college education and retirement.

💡 Quick Tip: An online bank account with SoFi can help your money earn more — up to 4.20% APY, with no minimum balance required.

Top 10 Basics of Personal Finance

Here, learn about 10 of the most important foundations of mastering personal finance.

1. Budgeting Is Your Friend

Budgeting and learning how to balance your bank account can be key to making sure what’s going out of your account each month isn’t exceeding what’s coming in. Winging it — and simply hoping it all works out at the end of the month — can lead to bank fees and credit card debt, and keep you from achieving your savings goals.

You can get a quick handle on your finances by going through your statements for the past several months and making a list of your average monthly income (after taxes), as well as your average monthly spending.

It can be helpful to break spending down into categories that include basic needs (e.g., rent, utilities, groceries) and discretionary spending (e.g., shopping, travel, Netflix). To get a real handle on where your money is going every day, you may want to track your spending for a month or so, either with a diary or an app on your phone.

Once you know everything that typically comes in and goes each month, you can see if you’re going backward, staying even, or ideally, getting ahead by putting money into savings each month.

If you aren’t living within your means, or you’d like to free up more cash for saving, a good first step is to go through your budget and look for ways to cut back discretionary spending. Can you cook more instead of going out? Buy less clothing? Cut out cable? Quit the gym and work out at home?

You can also consider ways to bring in more income, such as asking for a raise or starting a side hustle from home.

Recommended: Input your monthly income to find out how much to spend on essentials, desires, and savings with our 50/30/20 Monthly Budget Calculator.

2. Building an Emergency Fund

You can’t predict when your car will break down or when you’ll have to make an emergency trip to the dentist. If you don’t have money saved up for what life throws at you, you can risk racking up high-interest credit card debt or defaulting on your bills.

To avoid this, you may want to start putting some money aside every month to build an emergency fund. A common rule of thumb is to keep three to six months of basic living expenses set aside in a separate savings account.

It can be a good idea to choose an account where the money can earn interest, but you can easily access it if you need it. Good options include: a high-yield savings account, online savings account, or a no-fee bank account.

Recommended: Ensure you’re prepared for the unexpected by using our emergency fund calculator.

3. Avoiding a Credit Card Balance

When you have a credit card at your disposal, it can be tempting to charge more than you can afford. But carrying a balance from month to month makes those purchases considerably more expensive than they started.

The reason is that credit cards have some of the highest interest rates out there, often over 20%. That means a small charge carried over several months can quickly balloon into a much larger sum. The same is true for other high interest debt, such as some private or payday loans.

If you already have high-interest debt, however, you don’t need to panic. There are ways to pay off that debt.

The avalanche method, for example, requires paying the minimums to all your creditors and putting any extra money toward the debt with the highest interest rate first. Once that’s paid off, the borrower puts their extra cash toward the debt with the next highest rate, and so on.

4. Paying Your Bills on Time

If you miss bill payments or make late payments, your creditors might impose late payment penalties. If you delay payment for a prolonged period, your account could go into delinquency or be sent to collections.

Late payments can also affect your credit score — the number lenders use to help judge whether to give you loans and credit.

Your payment history accounts for 35% of your credit score, so a history of late and missed bill payments can be a major strike against your score. A poor credit score can make it difficult for you to get loans, and the loans you do get are likely to have higher interest rates.

To make sure you never miss a due date, it can be helpful to make a list of your bills and their due dates, set up auto payments when possible, and sign up for reminders.

Get up to $300 when you bank with SoFi.

No account or overdraft fees. No minimum balance.

Up to 4.20% APY on savings balances.

Up to 2-day-early paycheck.

Up to $2M of additional
FDIC insurance.


5. Starting Early to Save for Retirement

When you’re young, retirement can feel far away. But putting money away as early as possible means you’ll have more years to save, spreading the savings across your life rather than racing to catch up.

Perhaps the biggest reason to start as early as you can, however, is the power of compound interest.

Because you earn interest not only on your contributions, but also on accumulated interest, small amounts can grow over time. If you have an employer-sponsored plan, such as a 401(k), you may want to consider contributing, especially if your employer offers to match your contributions.

Depending on your situation, you may be able to open a traditional IRA, Roth IRA, or SEP IRA, as well.

6. Investing

Saving for retirement may not be enough for you to have what you need to live comfortably after you stop working. Plus, there may be things you want to be able to afford later in life but before you reach retirement age.

If you have children, for example, you may want to start a 529 plan to help you invest for their college educations.

For other long-term savings goals, you may want to invest additional money, keeping in mind that all investments have some level of risk and the market is volatile, meaning it moves up and down over time.

To get started with investing, you can choose a financial firm you want to work with and then open a standard brokerage account. From there, you can put your money in a mutual fund or an exchange-traded fund (which bundle different types of investments together), or, if you’re prepared to do a fair amount of research, pick and choose your own stocks and bonds.

7. Getting Insured

When it comes to insurance, sometimes it’s best to prepare for the worst. That means making sure you have health insurance and car insurance (which is required by law). You also may want to consider renters or homeowners insurance to protect your home and belongings.

If you have children or other people who are dependent on you financially, it can be a good idea to get long-term disability insurance and term life insurance. Many people can purchase health and disability insurance through their employers. If you don’t have that option, it’s possible to go through an insurance agent, broker, or the insurance company directly.

8. Taking Advantage of Credit Card Rewards

If you have a decent credit score, you can look into getting a credit card with rewards that may give you travel miles or cash back on your purchases. If travel is your priority, you may want to look for a flexible travel rewards credit card, meaning their rewards can be applied to many different airlines and hotels.

You may want to look for a card that not only offers rewards but also offers a nice signup bonus for spending a certain amount within the first few months. One with no annual fee would be ideal, too.

Whichever card you pick, it’s a good idea to familiarize yourself with its rewards program: the value of its rewards units (points, miles or cash back), how to redeem them, whether your rewards expire, and any minimum redemption amounts.

You may also want to keep in mind that credit card interest rates are typically a lot higher than credit card rewards rates. So, to avoid seeing your earnings swallowed up by finance charges, it can be wise to make sure to pay your full statement balance by the due date every month.

9. Checking Your Credit Reports Regularly

You can request a credit report for free each year from the three main credit reporting agencies — Equifax, Experian, and TransUnion — at AnnualCreditReport.com.

It can be a good idea to periodically order a copy of your report and then scan it for any errors or signs of fraudulent activity. If you see anything that isn’t right, it’s wise to contact the credit reporting agency or the account provider as soon as possible and file a formal dispute if needed.

Checking your report can help you spot — and quickly address — identify theft. It can also help you make sure there aren’t any errors on the report that could negatively affect your credit score. If you ever want to obtain a lease, mortgage, or any other type of financing, then you’ll likely need a solid credit report.

10. Choosing Your Bank Wisely

There are lots of financial institutions out there, so it can be a good idea to shop around and make sure you find a place that really suits your financial needs. Choices include:

A Traditional Bank. These typically have physical locations throughout the country and offer a wide range of financial products and services. If you want to know you can have an in-person chat about your money, this option might work well for you.

Credit Union. These are non-profit organizations owned by the members of the union. They’re similar to a traditional bank, but membership is required to join, and they’re often smaller in scale and have fewer in-person locations. However, they may have lower fees and higher interest rates than a traditional bank.

Online Bank. These institutions don’t usually have any in-person locations — everything happens online. Because of this, they often have very competitive fees and interest rates. If you don’t necessarily need in-person money talk and would prefer to handle your money at home (or on the go), an online bank could be a great option.

When making a bank choice, it can be a good idea to make sure the bank you choose has a user-friendly website and app, as well as conveniently located ATMs that won’t charge you a fee for accessing your money.

💡 Quick Tip: Most savings accounts only earn a fraction of a percentage in interest. Not at SoFi. Our high-yield savings account can help you make meaningful progress towards your financial goals.

3 Personal Finance Rules to Know

Once you’ve established some fundamental procedures, you can start thinking about some overarching rules that can help you make better money decisions. Three rules you may want to keep in mind include:

•   Keep your goals in mind. Without a clear set of goals, it can be difficult to do the hard work of budgeting and saving. Defining a few specific goals — whether it’s buying a home in five years or being able to retire at 50 — gives you a picture of what personal financial success looks like to you, and can keep you motivated.

•   Learn to distinguish wants from needs. Merging these two concepts can wreak havoc on your personal finances. Needs generally include food, clothing, shelter, healthcare, reliable transportation, and minimum debt payments. Everything else is likely a want. This doesn’t mean you can’t have wants, but it can be important not to trade financial security in pursuit of these things.

•   Always pay yourself first. This means taking some money out of each paycheck right off the bat and putting it towards your future goals. Setting aside money in a savings account, IRA, or 401K plan via automatic payroll deductions helps reduce the temptation to spend first and save later.

The Takeaway

Being good with your money requires a set of basic skills that many of were never actually taught in school. Fortunately, It’s never too late to educate yourself about personal money management.

Learning personal finance basics like how to choose a bank, set up a budget, save for retirement, monitor your credit, avoid (and deal with) high-interest debt, and invest your money are key to reaching your goals and building wealth over time.

One simple way to become more organized with your money is to open the right bank account.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.20% APY on SoFi Checking and Savings.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

SoFi members with direct deposit activity can earn 4.20% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.20% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/31/2024. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

SOBK0823015

Read more
Feb
27
2024
stock market amsterdam

A Brief History of the Stock Market

By | Growing Wealth, Investing | No Comments

The stock market history dates back hundreds of years to 13th-century Europe, but the U.S. stock market didn’t become an established part of economic life until much later, during the 18th century.

Today, the performance of various stock markets in the U.S. and around the world is used daily to gauge the health of different parts of the economy. But the history of the stock market is a long, winding road, with many twists and turns.

Key Points

•   The stock market has a long history dating back to 13th-century Europe and became established in the U.S. during the 18th century.

•   The stock market works by facilitating transactions between buyers and sellers of financial securities.

•   Stock market indexes, such as the Dow Jones Industrial Average and the S&P 500, measure the performance of specific portions of the market.

•   The U.S. stock market has experienced significant events throughout history, including crashes, such as the one in 1929, and recoveries.

•   Stock markets exist worldwide, with major exchanges in cities like London, Tokyo, and Shanghai.

When Did the US Stock Market Start?

Although the first stock market began in Amsterdam in 1611, the U.S. didn’t get into the stock market game until the late 1700s. It was then that a small group of merchants made the Buttonwood Tree Agreement. This group of men met daily to buy and sell stocks and bonds, which became the origin of what we know today as the New York Stock Exchange (NYSE).

Although the Buttonwood traders are considered the inventors of the largest stock exchange in America, the Philadelphia Stock Exchange was America’s first stock exchange. Founded in 1790, the Philadelphia Stock Exchange had a profound impact on the city’s place in the global economy, including helping spur the development of the U.S.’s financial sectors and its expansion west.

In 1971, trading began on another stock exchange in America, the National Association of Securities Dealers Automated Quotations or otherwise known as the NASDAQ. In 1992, it joined forces with the International Stock Exchange based in London. This linkage became the first intercontinental securities market.

Unlike the NYSE, a physical stock exchange, the NASDAQ allowed investors to buy and sell stocks on a network of computers, as opposed to in-person trading. In addition to the NYSE and the NASDAQ, investors were able to buy and sell stocks on the American Stock Exchange or other regional exchanges such as the ones in Boston, Philadelphia, and San Francisco.

These days, almost anyone can open an investment account on their computer or smartphone — a far cry from the days of in-person trading in specific exchanges.

Get up to $1,000 in stock when you fund a new Active Invest account.*

Access stock trading, options, alternative investments, IRAs, and more. Get started in just a few minutes.

*Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

How Was the US Stock Market Created?

The New York Stock Exchange took centuries to become what it is today. In 1817, the Buttonwood traders observed and visited the Philadelphia Merchants Exchange to mimic their exchange model, creating the New York Stock and Exchange Board.

The members had a dress code and had to gain a seat in the exchange. They also had to pay a fee, which increased from $25 to $100 by 1837.

After the Great Fire of 1835 wiped out 700 buildings in lower Manhattan, Wall Street suffered a significant property loss. Fortunately, Samuel Morse opened a telegraph demonstration office, which allowed brokerages to communicate remotely.

In 1903, the doors of NYSE opened with hundreds of stock certificates held underground in vaults.

The stock market surged and hit a 50% high in 1928 despite indications of an economic downturn. In 1929, the market dropped 11% in an event known as Black Thursday. The drop in the market caused investors to panic, and it took all of the 1930s to recover from the crash. This period is known as the Great Depression.

Since then, the market has experienced several other crashes, such as the subprime mortgage crash in 2008.

Although the NYSE was created by a few merchants centuries ago, many investors, exchange executives, companies, and regulators have contributed to its growth and what it is today.

World Exchanges

The NYSE is the largest stock exchange in the world. Yet, there are now exchanges in major cities across the globe trading domestic and international stocks.

These include the London and Tokyo Stock exchanges. Some of the other world’s largest exchanges are located in China, India, Canada, Germany, France and South Korea.

Stock Market History: A Timeline

Here is a timeline of major events in the stock market’s history:

•   Late 1400s: Antwerp, or modern-day Belgium, becomes the center of international trade. Merchants buy goods anticipating that prices will rise in order to net them a profit. Some bond trading also occurs.

•   1611: The first modern stock trading was created in Amsterdam. The Dutch East India Company is the first publicly traded company, and for many years, it is the only company with trading activity on the exchange.

•   Late 1700s: A small group of merchants made the Buttonwood Tree Agreement. The men meet daily to buy and sell stocks and bonds, a practice that eventually comes to form the New York Stock Exchange.

•   1790: The Philadelphia Stock Exchange is formed, helping spur the development of financial sectors in the U.S., and the country’s expansion west.

•   1896: The Dow Jones Industrial Average is created. It initially had 12 components that were mainly industrial companies.

•   1923: The early version of the S&P 500 was created by Henry Barnum Poor’s company, Poor’s Publishing. It begins by tracking 90 stocks in 1926.

•   1929: The U.S. stock market crashes after the decade-long “Roaring 20s,” when speculators made leveraged bets on the stock market, inflating prices.

•   1941: Standard & Poor’s is founded when Poor’s Publishing merges with Standard Statistics.

•   1971: Trading begins on another U.S. stock exchange, the National Association of Securities Dealers Automated Quotations, otherwise known as the NASDAQ.

•   1987: Corporate buyouts and portfolio insurance helped prices in the market run up until Oct. 19, what became known as “Black Monday.”

•   2008: The stock market crashes after the boom and bust of the housing market, along with the proliferation of mortgage-backed securities in the financial sector.

•   2020: The COVID-19 pandemic reaches the U.S. in early 2020, and the stock markets see a large decline and subsequent recovery.

Where Were Stocks First Created?

The concept of trading goods, which laid the foundation for where stocks were first created, dates back to the earliest civilizations. Early businesses would combine their funds to take ships across the sea to other countries. These transactions were either implemented by trading groups or individuals for thousands of years.

Throughout the Middle Ages, merchants assembled in the middle of a town to exchange and trade goods from countries worldwide. Since these merchants were from different countries, it was necessary to establish a money exchange, so trading transactions were fair.

As mentioned, Antwerp, or Belgium today, became the center for international trade by the end of the 1400s. It’s thought that some merchants would buy goods at a specific price anticipating the price would rise so they could make a profit.

For people who needed to borrow funds, wealthy merchants would lend money at high rates. These merchants would then sell the bonds backed by these loans and pay interest to the other people who purchased them.

Who Invented the Stock Market?

The first stock exchange in the world was created in Amsterdam when the Dutch East India Company was the first publicly traded company. To raise capital, the company decided to sell stock and pay dividends of the shares to investors. Then in 1611, the Amsterdam stock exchange was created. For many years, the only trading activity on the exchange was trading shares of the Dutch East India Company.

At this point, other countries began creating similar companies, and buying shares of stock was popular for investors. The excitement blinded most investors and they bought into any company that began available without investigating the organization. These days, this scenario is commonly referred to as a stock market bubble.

This resulted in financial instability, and eventually in 1720, investors became fearful and tried to sell all their shares in a hurry. No one was buying however, so the market crashed.

Another financial scandal followed in England shortly after — the South Sea Bubble. But even though the idea of a market crash concerned investors, they became accustomed to the idea of trading stocks, while keeping the risks of the market in mind.

How Does the Stock Market Work?

what determines stock price

The stock market works by pairing buyers and sellers, who want to trade financial securities, and helping facilitate transactions. Or, in other words, a stock exchange or stock market is a physical or digital place where investors can buy and sell stock, or shares, in publicly traded companies, among other securities.

More stock market basics: the price of each share is driven by supply and demand, as well as investor sentiment, and domestic and global economic trends. Investors need to know what they’re willing to pay for a security (bid) and what a seller is willing to sell it for (ask). There are spreads between those two prices, but in the end, if the two come to an agreement, securities trade hands.

The U.S. stock market is volatile, too. The more investors want to buy shares (or, as demand rises), the higher the price goes. When there’s less demand, the price of a share drops. Prices or values of securities are almost always in flux, even when the markets are not officially open for trading.

And as for how investors make money? Generally, through asset appreciation, which is when an investor buys a security, that security increases in value, and then is sold. As such, investors can make money off of stock market fluctuations, though there are other ways to generate returns.

What Are Stock Market Indexes?

stock market index definition

A stock market index measures the performance of a certain portion or subset of the overall market. Market indexes have many uses, and can come in many forms — there are indexes for assets from different parts of the world, from different industries, and so on. There are widely-followed market indexes, too, such as the Dow Jones Industrial Average, and the S&P 500.

History of Stock Market Indexes

As mentioned, the Dow Jones Industrial Average and the S&P 500 Index are two of the stock market’s most famous benchmarks, or barometers that try to capture the performance of the whole market and even the whole economy.

Founded in 1896 by Charles Dow and Edward Jones, the Dow is a price-weighted average. That means stocks with higher price-per-share levels influence the index more than those with lower prices. The Dow is made up of 30 large, U.S.-based stocks. It was designed as a proxy for the overall economy.

The Dow’s 12 initial components were mainly industrial companies, such as producers of gas, sugar, tobacco, oil, as well as railroad operators. It has since gone through many changes and now includes technology, healthcare, financial and consumer companies. General Electric was one of the original Dow members. Meanwhile, Procter & Gamble was added in 1932 and remains in the benchmark today.

Meanwhile, the S&P 500 index was created in 1923 by Henry Barnum Poor’s company, Poor’s Publishing. It began by tracking 90 stocks in 1926. Standard & Poor’s was founded in 1941, when the company merged with Standard Statistics.

Today, the S&P 500 is a market-cap-weighted index, meaning companies whose market value is larger have a bigger influence. Market value or market cap is calculated by multiplying the price-per-share by the number of shares outstanding. More so than the Dow or other gauges like the Russell 2000 Index, the S&P 500 has become synonymous among investors with the stock market.

💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.

What Are Stock Market Cycles?

Speaking of markets being up or down, stocks and the market can fluctuate on any given day. The U.S. stock market has historically gone through larger market cycles in which the market expands and shrinks over the course of weeks or even years.

There are typically four stages to a market cycle: accumulation, mark-up, distribution and the mark-down phase, which can also be reflected in the performance of cyclical stocks. The accumulation phase happens when a market is at a low and buyers begin to snap up stocks at discounted prices.

At the beginning of the mark-up phase prices have been stable for a while, and more buyers start jumping on the bandwagon driving up the price of stock. At the end of this phase, as buyers jump in en masse, the market makes a final spike as it nears the top of a bubble. During the distribution phase sentiment becomes mixed, and in the mark-down phase, prices typically plunge.

Here are some of the most famous U.S. stock market cycles:

1.    During the decade-long “Roaring 20s,” speculators made leveraged bets on the stock market, inflating prices. The rise in share prices was followed by the stock market crash of 1929. Share prices took years to recover.

2.    Corporate buyouts and portfolio insurance helped prices in the market run up until Oct. 19, 1987 — what became known as “Black Monday” among stock traders and investors. Panic selling, along with computerized trading, caused the Dow to fall 23% in a single day.

3.    Investors flocked to technology stocks during the Internet boom of the late 1990s and early 2000s. However, some of these companies weren’t profitable and didn’t have promising business models, causing the bubble to burst until 2002.

4.    A rapidly growing housing market, along with the proliferation of mortgage-backed securities in the financial sector, helped cause years of stock market gains from the early 2000s to 2008. The market then crashed, leading to a deep recession. Shares didn’t start to recover until March 2009.

The Takeaway

The modern-day stock market actually evolved over many centuries. Early brokers traded commodities as well as various types of debt starting in the 12th or 13th centuries. By the 1600s, it became more common for companies to raise capital by selling shares of their stock to finance new enterprises as well as global exploration.

Today, investors enjoy access to a robust array of different markets and types of securities. And technology has made it possible for investors to trade online — or even right from their smartphones.

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).

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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.

Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

SOIN0224001

Read more
Feb
27
2024
grocery and product in bag mobile

How Much Should I Spend on Groceries a Month?

By | Budgeting & Goals, money | Comments Off on How Much Should I Spend on Groceries a Month?

How much you spend on groceries each month will depend on the number of people in your household, your lifestyle, even your dietary preferences. There’s no way around the fact that food is a significant line item in any budget, but there are ways to spend less at the store without resorting to beans and rice or ramen noodles every day (getting takeout doesn’t count).

Whether eating at home or in a restaurant, it’s helpful to give yourself some guidelines so that you and your bank accounts are on good terms. We cover several rules of thumb for how much to spend on food a month so you can better ensure you’re staying on track with your budget.

Key Points

•   The average U.S. household spends $7,316 on food annually, which is about $609.67 per month.

•   The U.S. Department of Agriculture provides monthly food budgets at different price levels to help determine your own grocery spending.

•   Household size, age, and dietary restrictions can affect the amount spent on groceries each month.

•   The USDA budgets assume all meals are prepared at home, and costs vary by age, gender, and family size.

•   Strategies like meal planning, using coupons, freezing meals, and shopping at discount grocery stores can help reduce food spending.

What Is the Average Cost of Groceries Per Month?

The average U.S. household spends $7,316 on food every year, according to a recent Bureau of Labor Statistics (BLS) consumer expenditure survey. That amount — about $609.67 a month, or $152.42 each week — represents nearly 12% of consumers’ income.

A note on inflation: The BLS report used data from 2021. The subsequent year saw food prices increase by a staggering 11% (typically, food prices rise about 2% annually). Over the next year, food prices are projected to rise between 5% and 10% — something to keep in mind as you compare your grocery bill to the national average.

Of course, the amount people spend on sustenance can vary widely, depending on age, household size, dietary restrictions and where they live. For instance, the consumer expenditure survey noted that single-parent family households with children spent more on food compared to single folks. Your eating habits, including how often you dine out or order in as well as a penchant for impulse grocery buys, also affect your bottom line.

Track your credit score with SoFi

Check your credit score for free. Sign up and get $10.*

What Should My Monthly Grocery Budget Be?

When it comes to how much you should spend on groceries each month, the answer will depend on your situation. However, you can use the following guidelines to help you develop a reasonable monthly allowance for your grocery budget.

By USDA Guidelines

The U.S. Department of Agriculture offers a series of monthly food budgets that represent the cost of a healthy diet at four price levels: thrifty, low cost, moderate cost and liberal. These budgets can serve as a benchmark against which you can measure your own monthly spending on food.

Keep in mind that the USDA assumes that all meals and snacks will be prepared at home, and that costs will vary by age, gender, and family size. It updates each plan to current dollars every month using the Consumer Price Index for food.

For example, in March 2023, the USDA pegs the monthly cost of food for a female who is 20 to 50 years old at $241 for the thrifty plan. For females ages 19 to 50, it’s $257 for the low-cost plan, $313 for the moderate-cost plan and $401 for the liberal plan.

The USDA budgets more for couples within the same age ranges. For instance, a household of two might spend $530 on a thrifty plan, $565 on a low-cost plan, $689 on a moderate-cost plan and $882 on a liberal plan.

By Household Size

Your household size should determine how much you spend on groceries each month. As you saw in the USDA guidelines above, different household sizes as well as the ages of individuals affected the amount spent on food each month.

Let’s say you are a family of four with one child aged 6 to 8 and another between the ages of 9 to 11. According to the USDA guidelines, you might spend $979 a month on a thrifty plan, $1,028 on a low-cost plan, $1,252 on a moderate-cost plan and $1,604 on a liberal plan.

The USDA guidelines can provide a starting point for a food budget, but they don’t consider all the variables that can affect cost. That’s why building a personal food budget while using these numbers as a benchmark is best. To do so, you can look at your past monthly spending on food and then compare that number to the USDA food budget guides.

If your spending is much higher than the USDA’s estimates, it’s essential to determine why. It could be due to unavoidable factors like where you live, or it may stem from discretionary decisions, such as eating out at restaurants. If it’s the latter, it may be helpful to look for ways to cut back on spending, so you can redirect money to other goals like building an emergency fund.

How Dining Out Fits Into the Equation

The USDA’s budgets only consider food prepared at home, yet a food budget will likely also need to account for meals eaten at restaurants. The BLS reports that the average household spends $5,259 a year on food at home and $3,030 a year on food away from home.

Eating at restaurants is more costly than preparing food at home, so restaurant spending can be an excellent place to start making cuts when looking for wiggle room in a food budget.

Strategies to Keep Track of Your Food Spending

There are a number of budgeting strategies that can help you keep track of your spending. Here are some to consider if you’re trying to keep better track of your food spending:

The 50/30/20 Rule

The 50/30/20 rule is a simple strategy for proportional budgeting that breaks down a budget into three categories of spending. Here’s how it works:

•   50% goes to essential needs. These are necessary expenses, such as rent, groceries, and health insurance.

•   30% goes to discretionary spending. These are fun purchases that you don’t technically need to survive.

•   20% goes to savings. The 50/30/20 method separates discretionary spending and saving for financial goals, such as retirement, a down payment on a house, or paying off debt faster.

The 50/30/20 rule is a relatively simple form of budgeting, so it can help individuals keep their eyes on the big picture and avoid getting bogged down in minute details. That said, because it isn’t detail-oriented, it can be hard to pinpoint problem areas, such as places where overspending occurs.

Recommended: Input your monthly income to find out how much to spend on essentials, desires, and savings with our 50/30/20 Budget Calculator.

The Envelope Method

The envelope method seeks to make budgeting more concrete by limiting most spending to cash transactions. It works by allocating a set amount of cash each month to different spending categories, such as groceries or entertainment.

At the beginning of the month, write each category on individual envelopes. Decide how much you want to spend in each category for the month, and put enough cash to cover that amount in each respective envelope.

This method takes discipline. You can only use the cash in each envelope to make purchases in that category. When the money’s gone, it’s gone for the month. That means you can no longer do any spending in that category.

Zero-Based Budgeting

A zero-based budget is one in which you assign each dollar of your income a specific purpose. For example, you may decide to spend $1,000 on rent, $325 on food, $200 on student loan payments, $100 on savings and so on, until there are zero dollars left without a job to do. While this type of budget can take a lot of effort, it can help you think carefully about every dollar you spend and be mindful of setting aside savings.

By getting your budget on track with a checking and savings account with SoFi, you’ll have enough to work toward financial goals, like paying off student loans and saving for retirement.

Tips to Help Reduce Your Food Spending

Whether your food budget has gone out of control or you’re interested in spending less in general, there are several ways to lower your food budget.

Try Meal Prep

Shopping at a store without a plan can be a budget-buster, as it can lead to unneeded purchasing. To stay on track, create a meal plan that lays out breakfast, lunch, and dinner for every day of the week.

Once you’ve created a menu, check to see what ingredients are already in the kitchen. Make a list of the items you’re missing and the amounts that are needed. Buy only those items at the store.

Consider planning some meals that have overlapping ingredients, as buying ingredients in larger quantities can be cheaper. You’ll also want to consider preparing meals you like and can cook relatively quickly. That way, you’re not tempted to get takeout one day when you’re tired and don’t feel like cooking.

Take Advantage of Coupons

Using coupons can help buyers save money at the checkout counter. Grocery stores or major brands often offer discounts in coupons — look for them online, in a grocery store flier or in the mail.

Before you buy, however, make sure you actually need the food item. If there isn’t anyone in your household who will drink that carton of oat milk, it’s better to leave it on the shelf than to cash in your coupon.

While taking advantage of an individual coupon may not add up to much savings, using many coupons over time can start to open up space in your food budget. The same is true of buying store brands, which may be a dollar or two cheaper than their name-brand counterparts. Over time, and multiple purchases, those couple of dollars can add up to significant savings.

Freeze Meals

Having meals or ingredients ready in the freezer encourages you to eat at home instead of making the excuse of having nothing to eat in your house. It can be as simple as buying frozen vegetables, some form of protein or straight-up frozen meals (it’s still cheaper than dining out). You can even make your own freezer-ready meals by cooking additional portions of meals — eat some for dinner, then freeze the rest for later.

Shop at Discount Grocery Stores

The cost of food can vary widely from store to store, so consider visiting different stores to find budget-friendly prices. A great way to check if a grocery store offers lower prices is to look at their weekly flier. You’ll be able to find sales and other advertised goods and identify which stores offer the best deals on items you’re most likely to purchase.

Some stores may offer certain foods in bulk, such as grains, nuts, coffee, and dried fruit, which can be cheaper than buying the same packaged food items.

Getting a handle on how much you spend on food can help you build a larger household budget. That way, you may be able to set aside money for savings or other financial goals.

The Takeaway

As you can see, there’s no hard-and-fast rule for how much you should spend on groceries each month, as that varies based on your unique situation. However, everyone can likely benefit from giving their grocery budget a hard look and seeing if there’s anywhere they’re overdoing it.

Envelope and spreadsheet averse? Another way to track your grocery budget is with the SoFi money tracker app, which lets you easily set monthly spending targets and see where you’re spending the most.

See how your current food spending fits into your overall budget.


External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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.

*Terms and conditions apply. This offer is only available to new SoFi users without existing SoFi accounts. It is non-transferable. One offer per person. To receive the rewards points offer, you must successfully complete setting up Credit Score Monitoring. Rewards points may only be redeemed towards active SoFi accounts, such as your SoFi Checking or Savings account, subject to program terms that may be found here: SoFi Member Rewards Terms and Conditions. SoFi reserves the right to modify or discontinue this offer at any time without notice.

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

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.

SoFi members with direct deposit activity can earn 4.20% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.20% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/31/2024. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

SORL0523017

Read more
Feb
27
2024
man with beanie on computer

Can a Roth IRA Lose Money?

By | Growing Wealth, Investing, Preparing for Retirement | Comments Off on Can a Roth IRA Lose Money?

It is possible to lose money when you invest in a traditional or Roth IRA (Individual Retirement Account), depending on what investments you choose for your Roth. All investments can lose money — including those within any type of retirement account.

That’s why it’s important to invest your Roth in assets that reflect your risk tolerance. If you invest mostly in stocks, you are at a higher risk for losses in your account. If you invest in less volatile assets (e.g. bond funds), you may be at a lower risk for losses.

Are Roth IRAs safe? No investment account is ever 100% safe, but because retirement accounts are generally long-term investments, they offer the possibility of growth over time. Also, the more years you invest in a traditional or Roth IRA, the more time that retirement account may have to recover from any losses.

Key Points

•   It is possible to lose money in a Roth IRA depending on the investments chosen.

•   Roth IRAs are not 100% safe, but they offer the potential for growth over time.

•   Market fluctuations and early withdrawal penalties can cause a Roth IRA to lose money.

•   Investing late or contributing too much can also result in potential losses.

•   Diversification and considering time horizon can help mitigate risks in a Roth IRA.

Understanding IRAs

An IRA is a type of tax-advantaged account that may help individuals plan and save for retirement. IRAs can offer investors specific tax advantages that could be beneficial when compared with traditional brokerage accounts (which can be taxed as income).

There are also a few types of IRAs, with the most popular or well-known being the traditional IRA and Roth IRA account.

With a traditional IRA your contributions are pre-tax, meaning the amount you deposit in an IRA is deducted from your taxable income and is therefore not taxed until you withdraw the funds.

The key distinction is that contributions to Roth IRAs involve money that’s already been taxed, so it grows tax free, and withdrawals are also tax free. More on the differences between them below.

Get a 1% IRA match on rollovers and contributions.

Double down on your retirement goals with a 1% match on every dollar you roll over and contribute to a SoFi IRA.1

1Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.

Can You Lose Money in a Roth IRA?

Now, to the main question: Can a Roth IRA lose money? The answer is yes, it can. This is one of the main differences between a Roth IRA vs. savings: Investing involves risk, whereas parking your money in the bank usually does not (with the exception of inflation risk).

There are several reasons that your Roth IRA may lose money.

Market Fluctuations

Given that the money in retirement accounts, including IRAs, is typically invested, the overall value of the account is subject to the whims of the market. That means that if the market experiences a downturn or correction, your Roth IRA balance is likely to decline as well.

That’s not a certainty, however, as IRAs are generally invested in a range of assets, not all of which may be affected by larger market conditions.

Early Withdrawal Penalties

Your Roth IRA can also lose money if you withdraw funds from it prematurely, and thus, are forced to pay early withdrawal penalties. Roth IRAs are complicated, however, in that your contributions can be withdrawn at any time. But you have to be careful with earnings.

If you withdraw earnings from your Roth IRA before age 59 ½ , you’ll likely be assessed a 10% penalty by the IRS.

Depending on the type of IRA you have, you may also need to pay ordinary income taxes, too.

You may want to consult a tax professional to make sure you understand Roth IRA rules that can trigger penalties.

Investing Late

It’s also possible to “lose money” in the sense that you miss out on market gains over time by investing in your Roth IRA too late. Time is an important factor in investing and saving for retirement, and if you start relatively young, time will work for you as the markets tend to rise over the years.

But if you’re about to hit retirement age and have only been investing in your Roth IRA for, say, a few years, you likely missed out on many years’ of appreciation by investing too late. This is why it’s generally a good idea to start funding an IRA as soon as possible.

Contributing Too Much

It’s possible to contribute too much to your Roth IRA, which may end up costing you. There are limits to how much you can contribute each year. For tax year 2023, the Roth IRA contribution maxes out at $6,500, or $7,500 if you’re over the age of 50. If you blow past that maximum, you must withdraw the excess amount or it can trigger a 6% tax penalty from the IRS.

Note that if your modified adjusted gross income exceeds a certain amount — $138,000 for single filers in tax year 2023, $218,000 for those married and filing jointly — you cannot contribute the maximum amount to a Roth IRA.

Allowable contributions are gradually reduced up to $153,000 in income for single filers, and up to $228,000 for married filing jointly. Above those caps, you cannot contribute to a Roth IRA at all.

Custodial Fees

There are also fees to consider. Someone manages your Roth IRA, and they don’t do it for free. As such, you may incur managerial or custodial fees that can affect your account’s overall balance, in addition to the cost of the investments themselves.

Can You Lose Your Entire Roth IRA?

It’s unlikely that you’d lose your entire Roth IRA’s value. Most fees, penalties, and taxes are levied as a percentage of that value, so they would not be able to fully drain the account. Perhaps the closest you could get to losing all of the money in your Roth IRA is if the market sees an all-out collapse, and most assets see their values reduced to zero.

Again — that’s very unlikely, but not impossible. If it were to happen, too, you’d probably have bigger problems to worry about other than the value of your investments!

With all of this in mind, it’s fair to ask, Are Roth IRAs safe to invest your money in?

The answer is that IRAs in general can provide less risk exposure than, say, day trading, although there are still risks to take into consideration. A Roth IRA that’s 100% invested in equities could be quite risky compared with a Roth invested in other assets (e.g. bonds or bond funds, mutual funds, and so on).

Also, the assets in a Roth IRA are usually long-term investments, which tend to help mitigate the risk of losses over time, as your money may have a chance to recover from any market downturns.

Limiting Risk in IRAs

One thing all of the IRAs above have in common is they offer the individuals who hold them a lot of flexibility in investment choices — including mutual funds, property, stocks, bonds, ETFs, annuities, and more. As a result, IRA investors can have a big say in what their retirement portfolio will look like.

And while it is possible that their portfolio may lose money, there are ways to manage that risk. By contrast, 401(k) retirement plans often offer limited investment options, such as a handful of mutual funds or target date funds.

Diversification

Diversification is chief among an investor’s risk management tools. A diversification strategy means spreading money across multiple asset classes, such as stocks and bonds. A portfolio can be further diversified within each asset class. For example, diverse stock holdings might include stocks from companies of different sizes, sectors, and geographical locations.

Diversification helps minimize the effects market risk can have on an investor’s portfolio. There are two main types: market risk, also called systematic risk, and specific or unsystematic risk.

Systematic risk is caused by factors that have a broad impact on the market as a whole, such as inflation or a global pandemic. Unfortunately, there’s not much an investor can do about this sort of risk, unless you’re an active investor familiar with hedging strategies.

The second type of market risk, unsystematic risk, is limited to individual companies, industries, or geographies. For instance, a workers’ strike at a factory could halt production and drag down an automaker’s stock price.

Diversification helps mitigate unsystematic risk. So, if an individual holds stocks in hundreds of different companies, one poorly performing company may have minimal negative impact on their portfolio’s performance. While diversification cannot prevent the risk of loss entirely, it may help individuals’ portfolios less vulnerable to market volatility.

How Safe Are Roth IRAs Considered to Be?

It depends how you define “safe.” If you’re thinking 100% free from loss, there are no safe investments. That said, Roth IRAs, and many other retirement account types, are generally considered to provide investors with lower risk exposure. They’re generally safer than investing in, say, penny stocks or cryptocurrencies, which are usually referred to as “speculative” investments.

Roth IRAs are usually managed and diversified, and as such, have some degrees of safety built into them to keep investors’ money relatively safe. That said, they aren’t completely risk-free. As mentioned, there are things that can lower a Roth IRA’s overall value — some of which investors can attempt to mitigate.

Time Horizon for Investments

Some investors might want to consider their time horizon in an effort to minimize portfolio losses that can occur at inopportune times. A time horizon is the amount of time an investor anticipates holding an investment until they want the money back.

When an investor is young, they may choose to hold riskier investments, such as stocks in their portfolio. Stocks can offer more opportunity for growth, but — on the flip side — stocks can also suffer big drops in value.

Investors who are many years away from a financial goal, such as retirement, may opt to hold more stocks to take advantage of their growth potential. With many years to go before they need to tap their investments, these investors have time to ride out the market’s swings.

The Takeaway

It’s possible to lose money in a Roth IRA, or any retirement or investment account — it really depends what types of investments are in the Roth.

The market may take a dip, for example, which can have an effect on your Roth IRA’s overall value. You can also see some of that value eaten up by custodial fees or penalties, if you decide to withdraw money. In a broader sense, if you start investing too late, you can miss out on market gains over many years — likewise costing you money.

It’s unlikely you would see your entire Roth IRA’s value fall to zero. But it’s also important to remember that retirement accounts are not risk-free investment vehicles. And depending on the type of IRA you have (traditional or Roth, SEP or SIMPLE), there will be different considerations you’ll need to make about how, when, and why you’re investing.

Ready to make an IRA part of your retirement plan? Learn more about opening an IRA with SoFi Invest®. SoFi doesn’t charge commissions (you can read the full fee schedule here), and members have access to complimentary financial advice from a professional.

Help grow your nest egg with a SoFi IRA.

FAQ

What happens to my Roth IRA if the stock market crashes?

It’s likely that you would see the overall value of your Roth IRA diminish in the event of a stock market crash. That doesn’t mean that it would have no value or you’d lose all of your money, but fluctuations in the market do affect the values of the investments in IRAs.

What are the risks of investing in a Roth IRA?

Risks of investing in a Roth IRA involve potentially incurring penalties for early withdrawals, seeing values decline due to market fluctuations, and even the potential of being assessed tax penalties for contributing too much money during a given year, among other things.

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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.


Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

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.

SOIN0323010

Read more
Feb
27
2024
woman walking through city hall

What Is Financial Wellness & How Do You Achieve It?

By | Budgeting & Goals, Debt Payoff, money | No Comments

In theory, financial wellness is something we all want. But it also sounds a little vague and potentially complex. What exactly does it mean? And, how do you achieve it?

Simply put, financial wellness is the ability to lead a successful financial life. It’s being able to meet your basic needs and manage your money for both the short- and long-term. You can enhance your financial wellness by improving various aspects of your personal finances, including budgeting, saving, investing, managing debt, and planning for the future.

Surprisingly, achieving financial wellness isn’t just about having a substantial income; it’s about how effectively you manage and utilize your resources to build a secure financial future. That means anyone can get there, no matter where they are in their financial journey or how much money they have (or don’t). Read on for a closer look at financial wellness, including what it is, why it matters, and how to apply the basic elements of financial wellness to your own life.

Key Points

•   Financial wellness refers to the ability to lead a successful financial life, meeting basic needs and managing money for the shortand long-term.

•   It involves improving various aspects of personal finances, including budgeting, saving, investing, managing debt, and planning for the future.

•   Financial wellness is not solely dependent on income but on effectively managing and utilizing resources for a secure financial future.

•   It encompasses being able to manage current bills, pay debts, handle unexpected financial emergencies, and plan for long-term goals.

•   By addressing budgeting, savings, debt management, and investing, individuals can take proactive steps towards achieving financial wellness.

What Is Financial Wellness?

Financial wellness describes a condition in which you can manage your current bills and expenses, pay your debts, weather unexpected financial emergencies, and plan for long-term financial goals like saving for retirement and a child’s education. As defined by the Consumer Financial Protection Bureau, financial well-being (another term for financial wellness) is a condition in which “a person can fully meet current and ongoing financial obligations, can feel secure in their financial future, and is able to make choices that allow them to enjoy life.”

Just like overall “wellness” requires adopting practices — like exercising more and eating healthier foods — to help you live a better life, financial wellness is about adopting everyday money habits — like budgeting and saving — to secure your financial stability and freedom. Also like overall wellness, financial wellness is not an end state or final destination but, rather, a way to live day to day.

💡 Quick Tip: Make money easy. Open a bank account online so you can manage bills, deposits, transfers — all from one convenient app.

Get up to $300 when you bank with SoFi.

No account or overdraft fees. No minimum balance.

Up to 4.20% APY on savings balances.

Up to 2-day-early paycheck.

Up to $2M of additional
FDIC insurance.


The Four Elements of Financial Wellness

Financial wellness is often broken down into four key areas of your personal finances. While these elements can overlap, and one can affect another, you can achieve greater results by bringing each under control. By addressing each of these pillars of financial wellness, you can start improving your financial well-being.

1. Budgeting and Financial Planning

Creating a budget that aligns with your income, expenses, and financial goals lays the foundation for financial wellness. Budgeting enables you to allocate resources efficiently, prioritize expenses, and plan for short- and long-term financial goals.

2. Savings and Emergency Funds

Establishing a habit of creating and maintaining an emergency fund to cover unforeseen expenses allows you to build financial security. Having savings acts as a safety net during emergencies and ensures financial stability, since you won’t have to rely on high-interest credit cards or loans in the event of a financial set-back.

3. Debt Management

Effectively managing long-term debt, and eliminating high-interest consumer debt, are vital components of achieving financial well-being. This frees up funds that can then go towards savings and investing and, in turn, help reach your financial goals.

4. Investing for the Future

Investing is a key underpinning of financial wellness because it allows for wealth-building and long-term financial stability. When it comes to reaching your retirement goal, saving as much as possible and starting as early as possible can be keys to success.

7 Tips to Improving Your Financial Wellness

Maybe you don’t meet the definition of financial wellness right now. But that doesn’t mean you can’t get there. What follows are seven relatively simple steps that can help you improve your current and long-term financial health and security.

1. Set Clear Financial Goals

Building financial wellness requires coming up with systems for spending, savings and investing. But before you can focus on specific habits and strategies, it helps to have a sense of what your financial life is like now, and where you want it to be months and years down the road.

You may want to jot down some specific and realistic objectives, such as going on a vacation in three months, buying a house in two years, and being able to one day retire. Having clear short-, mid-, and long-term objectives can help you create a roadmap towards achieving them.

2. Create and Stick to a Budget

To achieve your goals, you’ll need to develop a realistic budget that considers your monthly income and expenses and also allows you to put some money towards savings and debt repayments (beyond the minimum) each month.

A budget is simply a plan for how you’ll direct funds toward all areas of your financial life, such as necessary expenses, discretionary (“fun”) purchases, debt payments, personal savings goals, and investing for retirement.

There are all different ways to budget — the best approach is the one you’ll stick with. One simple and popular budgeting framework is the 50/30/20 rule, in which you divide your monthly take-home income into three categories, spending 50% on needs, 30% on wants, and 20% on savings and extra debt payments.

Recommended: Input your monthly income to find out how much to spend on essentials, desires, and savings with our 50/30/20 Budget Calculator.

3. Pay Yourself First

A simple way to make sure you achieve your monthly savings goal is to automatically transfer a set amount of money into a savings account each time you get paid — in other words, pay yourself first. If you wait to see what’s leftover after you pay your bills and do your shopping, you may not have much — or anything — to set aside.

To get started with saving, you may want to open a dedicated savings account then set up a recurring transfer from your checking account into that account on a set day each month (ideally, right after you get paid). You can base the transfer amount on the savings goal you set out in your budget.

If you want to earn a high rate and pay the lowest fees on your savings, consider storing your savings in an online account. Without the added expenses of large branch networks, online banks are typically able to offer more favorable returns than national brick-and-mortar banks.

4. Build an Emergency Fund

If you don’t have one already, you’ll want to build an emergency savings fund that covers at least three to six months’ worth of living expenses. (If you’re self-employed or work irregularly, you may want to aim for six to 12 months’ worth of expenses.) This gives you a cushion should you lose your job or get hit with a large, unexpected expense — like a medical bill or major car or home repair.

Ideally, you’ll want to keep this money separate from your spending and other savings in an account that is accessible but pays a competitive yield, such as an online high-yield savings account.

Recommended: Take the guesswork out of saving for emergencies with our user-friendly emergency fund calculator.

5. Protect Your Assets

While the emergency fund provides you with some protection, insurance provides more security in other situations. You’ll want to make sure you have adequate coverage when it comes to health, home, and auto insurance. This can offset large, sudden and unexpected expenses and losses, and reduce the possibility of going into debt.

You may get your health insurance through your employer. But with home and auto insurance, it often pays to shop around to find the best deal.

Recommended: Which Insurance Types Do Your Really Need?

6. Pay Off High-Interest Debts

If you’re paying only the minimum on your credit card balances, you may be spending thousands on interest. That leaves you with a lot less money to put into savings or investments to grow your wealth. Coming up with a plan to knock down — and eventually eliminate — high-interest consumer debt will help you save money in the long term and improve your overall financial health.

There are a number of strategies for reducing debt. One is the debt avalanche method, which prioritizes paying down your debts in order of the one with the highest interest rate to the one with the lowest, while still making the minimum payment on the other each month. Another approach is the debt snowball method, which involves paying down your debts in order from largest to smallest, while continuing to pay the minimum on the others each month.

7. Start Investing

The key to building a nest egg large enough to live on in retirement is to start investing regularly as early as you can. Even if you have a low salary and can only afford to put a small amount into your retirement account each paycheck, that money will go a lot further if you start now. That’s thanks, in part, to the power of compound interest, which is the interest your interest accumulates.

If your company has a 401(k) or other retirement savings plan, consider contributing a portion of each paycheck into that account. If your employer matches a portion of your contributions, even better — that’s free money toward your future.

What’s the Difference Between Financial Wellness vs. Financial Literacy?

Financial wellness and financial literacy are interconnected concepts, but they are not the same thing.

Financial wellness involves the overall state of a person’s financial health, encompassing their behaviors, attitudes, and actions towards money management. It includes actions like budgeting, saving, investing, and debt management. Achieving financial wellness requires applying financial knowledge effectively to attain financial stability and security.

Financial literacy, on the other hand, refers to possessing knowledge and understanding of financial concepts and principles, such as budgeting, investing, loans, and credit management. While financial literacy is essential, achieving financial wellness involves not only understanding these concepts but also implementing them effectively to manage finances and achieve financial goals.

The Takeaway

Financial wellness is about more than just the numbers in a bank account — it’s a holistic approach to managing your money that encompasses various elements of personal finance. People who are financially well can comfortably pay their bills and manage their monthly expenses, without living paycheck to paycheck. They can also set money aside for emergencies, as well as short- and long-term goals. They’re quick to bounce back from any financial setbacks because they have the right resources and strategies in place.

By integrating budgeting, saving, debt management, and investing into your overall financial strategy, you can take proactive steps towards financial wellness, paving the way for a more peace of mind now, and a more secure financial future.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.


Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.20% APY on SoFi Checking and Savings.

FAQ

What is an example of financial wellness?

An example of financial wellness is an individual who consistently lives within their means, has minimal debt, regularly contributes to savings and retirement accounts, and has a well-thought-out financial plan to achieve their financial goals.

What’s the difference between financial wellness and financial well-being?

The terms financial wellness and financial well-being generally refer to the same thing — your ability to live within your means and manage your money in a way that gives you both satisfaction and peace of mind. It includes balancing your income and expenses, staying out of debt, and saving for the future.


SoFi members with direct deposit activity can earn 4.20% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.20% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/31/2024. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

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.

SOBK1023019

Read more

CATEGORIES

  • All
  • No categories
Close modal

See what SoFi can do for you and your finances.

Select a product below and get your rate in just minutes.

Student Loan
Refinancing

Personal
Loans

Online
Investments

Other

Terms and conditions apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or other eligible status, be residing in the U.S., and meet SoFi's underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates reserved for the most creditworthy borrowers. If approved, your actual rate will be within the range of rates at the time of application and will depend on a variety of factors, including term of loan, evaluation of your creditworthiness, income, and other factors. If SoFi is unable to offer you a loan but matches you for a loan with a participating bank, then your rate may be outside the range of rates listed above. Rates and Terms are subject to change at any time without notice. SoFi Personal Loans can be used for any lawful personal, family, or household purposes and may not be used for post-secondary education expenses. Minimum loan amount is $5,000. The average of SoFi Personal Loans funded in 2023 was around $33K. Information current as of 2/26/24. SoFi Personal Loans originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org). See SoFi.com/legal for state-specific license details. See SoFi.com/eligibility for details and state restrictions.

✝ To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

©2024 Social Finance, LLC All rights reserved.
TLS 1.2 Encrypted
Equal Housing Lender