Financial Topics Archives | Page 40 of 823

Mar

2025

Modern Monetary Theory, Explained

By Rebecca Lake | Financial Independence, Growing Wealth, invest, Investing | Comments Off

Money Monetary Theory or MMT is an alternative economic theory which says that governments that create and control their own currency should be able to do so without limits. More specifically, the heterodox theory argues that these governments shouldn’t fear incurring debt to further economic growth because they can not run out of money.

MMT emphasizes the creation of more money to meet a variety of economic needs, such as improving infrastructure, improving the quality of government-funded education, or expanding access to healthcare. While that may sound appealing, critics of the theory believe it could lead to an increase in inflation and skyrocketing national debt.

What Is MMT?

Modern Monetary Theory is an economic theory often associated with investment fund manager Warren Mosler, author of “The 7 Deadly Innocent Frauds of Economic Policy.” In the 2010 book, Mosler suggests governments that control their own currency can never run out of money or go bankrupt, since they can simply print more money.

Modern Monetary Theory challenges the idea that governments should pay for spending with taxes. Instead, the theory holds that taxes are a means of controlling inflation amid rising prices rather than funding the government’s spending initiatives. MMT can be seen as an extension of quantitative easing, in which a government’s central bank purchases long-term securities in order to boost the money supply.

Both seek to put more money into circulation, though Modern Monetary Theory doesn’t necessarily support the idea of resorting to negative interest rates to stimulate spending, which can occur with quantitative easing.

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Traditional Economics vs Modern Monetary Theory

In terms of its application, MMT economics is quite different from traditional economic theory. Specifically, it challenges the idea that printing more money to fund spending is inherently bad. Traditional economists view printing money as a less-than-ideal way to manage fiscal policy, since doing so can lead to rising inflation or a devaluation of currency.

Here’s a closer look at how traditional economic theories and modern economic theory compare.

Traditional Monetary Theory Explained: Key Concepts

• When the economy is struggling, the government can give it a boost using monetary and fiscal stimulus, or quantitative easing.

• Governments rely on interest rate policy to control inflation and the stability of currency values.

• Interest rate policy can also be used to stimulate spending during recessionary environments by encouraging borrowing while rates are low.

• Taxes and debt insurance are the two primary means by which governments fund their spending.

• Unlimited government spending and debt can lead to economic destabilization.

Modern Monetary Theory Explained: Key Concepts

• Governments that control their own currency effectively have access to unlimited spending, as they can always print more money.

• A country that follows MMT cannot go bankrupt or become insolvent unless it’s by political choice.

• Unlimited spending fuels economic growth and reduces unemployment.

• Taxes can curb inflation but they’re not their primary source of government funding.

• If a government incurs national debt, it can print more money to meet those obligations without fear of runaway inflation, deflation, or devaluing its currency.

In terms of inflation theory, MMT says the biggest risk is a government outspending its available supply of resources, such as raw materials or workers. But this scenario is rare, since it would require full employment or a shortage of supplies. If it did occur, MMT would dictate that the government could use taxation to manage inflation.

Modern Monetary Theory also states that governments don’t need to sell bonds to raise funds, since they can print their own money. Under this theory, the bond market becomes optional, rather than a requirement for maintaining government cash flows.

Modern Monetary Theory: Potential Benefits

While MMT is considered a radical theory in some circles, it has a simplistic appeal. If governments that control their currency can simply print more money as needed, then they have endless resources to promote economic growth. Deficits don’t disappear under this type of modern economic theory, rather they may grow.

From a taxpayer perspective, Modern Monetary Theory also has benefits, since it may mean fewer tax hikes to pay for government funding initiatives. Just like deficits, taxes wouldn’t disappear. But there’d be less fear of the government introducing new tax measures solely as a means of managing its own spending or debt.

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Modern Monetary Theory Flaws

While MMT has many vocal supporters, it’s also drawn plenty of critics, including Federal Reserve Chair Jerome Powell and Kenneth Rogoff, former Chief Economist and Director of Research at the International Monetary Fund. The consensus, for the most part, is that Modern Monetary Theory poses too great of a risk to national economies. Specifically, critics raise these arguments:

• Unlimited spending is not a catch-all solution. While MMT gives governments leeway to print money as needed, doing so is not necessarily a foolproof solution for tackling problems like unemployment or rising inflation. Again, if there’s a scarcity of resources or full employment, governments still have to rely on taxation to bring inflation under control.

• Unchecked debt is problematic. When an economy experiences a boom cycle, the national deficit may receive less attention. But it can become a very real financial problem governments have to deal with when the economy enters a recession and printing more money may not be a realistic solution.

• Rising rates could trigger hyperinflation. If rising deficits are accompanied by rising interest rates, the scales could tip from inflation to hyperinflation. This means rapid, out-of-control price increases and steep declines in currency values. Both of those can contribute to an economic crisis or collapse.

Those who suggest MMT is problematic may point to countries like Venezuela and Zimbabwe as examples of how it can go wrong. Though neither country specifically subscribed to Modern Monetary Theory, both relied on the printing of currency to navigate economic troubles. In both cases, the end result was severe hyperinflation and financial crises.

The Takeaway

Money Monetary Theory (MMT) says that governments that create and control their own currency should be able to do so without limits. If applied to the U.S. economy, Modern Monetary Theory could potentially impact your investments in different ways. So it’s important to keep this theory in mind when building a portfolio.

For example, it’s important to consider how inflation might affect the value of your investments. If inflation rises or the government has to impose tax increases to fund spending, that could affect the profitability and spending of the companies you invest in. Investing in companies that are more inflation- or recession-proof may help to insulate your portfolio against those risks.

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About the author

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.

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Mar

2025

What Is Private Credit?

By Rebecca Lake | Growing Wealth, invest, Investing | Comments Off

Private credit refers to lending from non-bank financial institutions. Also referred to as direct lending, private credit allows borrowers (typically smaller to mid-sized businesses) to seek financing through avenues other than a standard bank loan.

This type of arrangement can remove barriers to funding for businesses while creating opportunities for investors, as a type of alternative investment. Private credit funds allow institutional and individual investors to pool capital that is used to extend loans and generate returns through interest on those loans.

Key Points

• Private credit refers to lending from non-bank financial institutions, providing financing options for businesses outside of traditional bank loans.

• Private credit investments can include senior lending, junior debt, mezzanine debt, distressed credit, and specialty financing, each with different risk levels and repayment priorities.

• Private credit offers potential benefits such as income and return potential, diversification, and supporting business growth.

• However, investing in private credit carries risks, including borrower default, illiquidity, and potential challenges in underwriting and due diligence.

• Retail investors can access private credit through private credit funds, but eligibility criteria, such as being an accredited investor, may apply.

What Are the Different Types of Private Credit?

Private credit investments can adhere to various investment strategies, each offering a different level of risk and rewards. Within a capital structure, certain types of private credit take precedence over others regarding the order in which they’re repaid.

Senior Lending

In a senior lending arrangement, secured loans are made directly to non-publicly traded, middle-market companies. These loans sit at the top of the capital structure or stack and assume priority status for repayment should the borrowing company file for bankruptcy protection.

Senior debt tends to have lower interest rates than other types of private credit arrangements since the loan is secured by business collateral. That means returns may also be lower, but the preferred repayment status reduces credit risk for investors.

Should the borrowing company fail, senior loans would hold an initial claim on the business’s assets. Those may include cash reserves, equipment and property, real estate, and inventory. That significantly reduces the risk of investors losing their entire investment in the event of bankruptcy.

Junior Debt

Junior or subordinated debt is debt that follows behind senior lending obligations in the capital stack. Loans are made directly to businesses with rates that are typically higher than those assigned to senior debt. Junior debt is most often unsecured though lenders can impose second lien requirements on business assets.

Investors may generate stronger returns from junior debt, but the risk is correspondingly higher. Should the borrowing business go bankrupt, junior debts would only be repaid once senior financing obligations have been satisfied.

Mezzanine Debt

Mezzanine debt is a private credit term that’s often used interchangeably with junior debt, but it has a slightly different meaning. In mezzanine lending, the lender may have the option to convert debt to equity if the company defaults on repayment. There may be some collateral offered but lenders also consider current and future cash flows when making credit decisions.

Compared to junior or senior debt, mezzanine debt is riskier but it has the potential to produce higher yields for investors as the interest rates are usually higher. The risk to borrowers is that if the company defaults, they’ll be forced to give up an ownership share in the business.

Distressed Credit

Distressed credit is extended to companies that are experiencing financial or operational stress and may be unable to obtain financing elsewhere. The obvious benefit to investors is the possibility of earning much higher returns since this type of private credit generally carries higher rates. However, that’s balanced by a greater degree of risk.

Risk may be mitigated if the company can effectively utilize private credit capital to restructure and stabilize cash flow. Should the company eventually file for bankruptcy protection, distressed debt investors would take precedence over equity holders for repayment.

Special Financing

Specialty financing refers to lending that serves a specific purpose and doesn’t fit within the confines of traditional bank lending. This type of private credit is also referred to as asset-based financing since lending arrangements typically involve the acquisition of an asset that is used as collateral for the loan.

Equipment financing is one example. Say that a construction business needs to purchase a new backhoe. They could get an equipment loan to buy what they need, using the backhoe they’re purchasing to secure it.

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Potential Benefits of Investing in Private Credit

Private credit investing can be an attractive option for investors who are interested in diversifying their portfolios with alternative investments. Here are some of the primary reasons to consider private credit as an asset class.

Income Potential

Private credit can provide investors with current income if they’re collecting interest payments and fees on an ongoing basis. The more private credit investments someone holds in their portfolio, the more opportunities they have to generate regular cash flow.

Return Potential

Investing in private credit may deliver returns at a level well above what you might get with a standard portfolio of stocks, bonds, and mutual funds. The nature of private credit is such that borrowers may expect to pay higher interest rates than they would for a traditional bank loan. That, in part, is a trade-off since private credit offers lower levels of liquidity than other investments.

Investors benefit as long as borrowers repay their debt obligations on time. The exact return profile of any private credit investment depends on the interest rate the lender requires the borrower to pay, which can directly correspond to their risk profile and where the debt is situated in the capital stack.

Diversification

Like other alternative investments, private credit can introduce a new dimension into a portfolio, allowing for greater diversification of that portfolio. Private credit tends to have a lower correlation with market movements than stocks or bonds, which may help insulate investors against market volatility, to a degree.

Additionally, investors have an opportunity to diversify within the private credit segment of their portfolios. For example, an investor may choose to invest in a mix of senior lending, mezzanine debt, and specialty financing to spread out risk and generate varying levels of returns.

What Are the Risks of Investing in Private Credit?

Like any other investment, private credit can present certain risks to investors. Weighing those risks against the potential upsides can help determine whether private credit is the right investment for you.

Borrower Default

Perhaps the most significant risk factor associated with private credit investments is borrower default. Should the borrower fail to repay their debt obligations, that can put the value of your investment in question. In a worst-case scenario, you may be forced to wait out the resolution of a bankruptcy filing to determine how much of your investment you’ll be able to recover.

Again, it’s important to remember that borrowers who seek private credit may have been turned down for traditional bank financing elsewhere. So, your credit risk has already increased. If you have a lower risk tolerance overall, private credit may not be the best fit for your portfolio.

Illiquidity

Private credit investments are less liquid than other types of investments since they operate on a fixed term. It can be difficult to exit these investments ahead of schedule without facing the possibility of a sizable loss if you’re forced to sell at a discount.

In that sense, private credit investments are similar to bonds which also lock investors in for a preset period. For that reason, it’s important to consider what type of time frame you’re looking for when making these investments.

Recommended: Short-Term vs Long-Term Investments

Underwriting

While banks often have strict underwriting requirements that borrowers are expected to meet, private credit allows for more flexibility. Lenders can decide who to extend credit to, what collateral to require if any, and what terms a borrower must agree to as a condition of getting a loan.

That’s good for borrowers who may have run into trouble getting loans elsewhere, but it ups the risk level for investors. If you’re investing in private credit funds that are less transparent when it comes to sharing their underwriting processes or detailed information about the borrower, that can make it more difficult to make an informed decision about your investments.

Ways to Invest in Private Credit

Private credit has traditionally been the domain of institutional investors, though retail investors may be able to unlock opportunities through private credit funds.

These funds allow investors to pool their capital together to make investments in private credit, similar to the way a traditional mutual fund or hedge fund might work. You’ll need to find an investment company or bank that offers access to private credit investments, including private credit funds, funds if you’re interested in adding them to your portfolio.

One caveat is that private credit investments may only be open to selected retail investors, specifically, those who meet the SEC’s definition of an accredited investor, who is someone that fits the following criteria:

• Has a net worth of $1 million or more, excluding their primary residence

• Reported income over $200,000 individually or $300,000 with a spouse or partner for the previous two years and expects to have income at the same level or higher going forward

Investment professionals who hold a Series 7, Series 65, or Series 82 securities license also qualify as accredited.

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Who Should Invest in Private Credit?

Given its risk profile, private credit may not be an appropriate investment choice for everyone. In terms of who might consider private credit investments, the list can include people who:

• Are interested in diversifying their portfolios with alternative investments.

• Can comfortably assume a higher level of risk for an opportunity to generate higher returns.

• Understand the time commitment and the risks involved.

• Would like to support business growth through their investments.

• Meet the requirements for a private credit investment (i.e., accredited status, minimum buy-in, etc.)

Private credit investments may be less suitable for someone who’s hoping to create some quick returns or is more risk-averse.

How Does Private Credit Fit in Your Portfolio?

If you’re able to invest in private credit, it’s important to consider how much of your portfolio you’d like to allocate to it. While you might be tempted to devote a larger share of your investment dollars to private credit, it’s wise to consider how doing so might affect your overall risk exposure.

Choosing a smaller allocation initially can allow you to test the waters and determine whether private credit investments make sense for you. That can also minimize the amount of risk you’re taking on as you explore new territory with your investments.

When evaluating private credit funds, it’s helpful to consider the fund manager’s track record and preferred investment strategy. A more aggressive strategy may yield better returns but it may mean accepting more risk, which you might be uncomfortable with. Also, take a look at what you might pay in management fees as those can directly impact your net return on investment.

The Takeaway

Private credit is a form of financing sought outside of traditional bank loans. For investors, it may be classified as an alternative investment, and it has its pros and cons in an investor’s portfolio.

Private credit can benefit investors and businesses alike, though in different ways. If you’re an accredited investor, you may consider private credit along with other alternative investments to round out your portfolio. Evaluating the risks and the expected rewards from private credit investing can help you decide if it’s worth exploring further.

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FAQ

Is Investing in Private Credit Worth It?

Investing in private credit could be worth it if you’re comfortable with the degree of risk that’s involved and the expected holding period of your investments. Private credit investing can deliver above-average returns while allowing you to diversify beyond stocks and bonds with an alternative asset class.

What’s the Difference Between Private Credit and Public Credit?

Public credit refers to debt that is issued or traded in public markets. Corporate bonds and municipal bonds are two examples of public credit. Private credit, on the other hand, originates with private, non-bank lenders and is extended to privately-owned businesses.

Why is Private Credit Popular?

Private credit is popular among businesses that need financing because it can offer fewer barriers to entry than traditional bank lending. Among investors, private credit has gained attention because of its return potential and its use as a diversification tool.

What Is the Average Return on Private Credit?

Returns on private credit investments can vary based on the nature of the loan agreement. When considering private credit investments it’s important to remember that the higher the return potential, the greater the risk you may be taking on.

Is Private Credit a Loan?

Private credit arrangements are loans made between a non-bank entity and a privately owned business. These types of loans allow companies to raise the capital they need without having to meet the requirements that traditional bank lenders set for loans.

About the author

Rebecca Lake

Photo credit: iStock/Adene Sanchez

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Mar

2025

What is the Difference Between EBIT and EBITDA?

By Rebecca Lake | Growing Wealth, invest, Investing, Terminology | Comments Off

EBIT and EBITDA are two common ways to calculate a company’s profits, and investors may come across both terms when reviewing a company’s financial statements. Though they appear similar, they can present two very different views of a company’s income and expenses.

If you’re an investor or you own a business, it’s important to understand the difference between EBIT and EBITDA and know why the distinction matters.

What Is EBIT?

EBIT is a way to measure a company’s operating income. So, what does EBIT stand for in finance? It’s an acronym that stands for “earnings before interest and taxes”.

Here’s a look at what each of those components means:

• Earnings: This is the net income of a company over a specified period of time, such as a quarter or fiscal year.

• Interest: This refers to interest payments made to any liabilities owed by the company, including loans or lines of credit.

• Taxes: This refers to any taxes a company must pay under federal and state laws.

The formula for calculating EBIT is simple.

EBIT = Net income + Interest + Taxes

The EBIT calculation assumes you know a company’s net income. To determine net income, you would use this formula:

Net income = Revenue – Cost of Goods Sold – Expenses

In this formula, revenue means the total amount of income generated by goods or services the company sells. Cost of goods sold refers to the cost of making or acquiring any goods the company sells, including labor or raw materials. Expenses include operating costs such as rent, utilities or payroll.

EBIT should not be confused with EBT, or earnings before tax. Earnings before tax is used to measure profits with taxes factored in, but not any interest payments the company owes. You may use this metric to evaluate companies that are subject to different taxation rules at the state level.

You can find EBIT listed on a company’s income or profit and loss statement alongside other important financial ratios, such as earnings per share (EPS).

Is Depreciation Included in EBIT?

The short answer is no, depreciation is not included in the context of the EBIT formula. But you will see depreciation factored in when calculating EBITDA.

What EBIT Tells Investors

Knowing the EBIT for a company can tell you how financially healthy that company is based on its business operations. Specifically, EBIT can tell you things like:

• How much operating income a company needs to stay in business

• What level of earnings a company generates

• How efficiently the company uses earnings when debt obligations aren’t factored in

EBIT can be useful in determining how well a company manages business operations before external factors like debt and taxes come into play. It can also help to create a framework for evaluating whether certain actions, such as a stock buyback, are a true sign that a company is struggling financially.

You can also use EBIT to determine interest coverage ratio. This ratio can tell you how easily a company is able to pay interest on outstanding debt obligations. To find the interest coverage ratio, you’d divide a company’s earnings before interest and taxes by any interest paid toward debt for the specific time period you’re measuring. As an investor, this ratio can give you insight into how well a company is able to keep up with its current debts and any debts it may take on down the line.

What Is EBITDA?

EBITDA is another acronym you may see on financial statements that stands for “earnings before interest, taxes, depreciation, and amortization”. In terms of the first three terms, the breakdown is exactly the same as for EBIT. Plus there are two new additions:

• Depreciation: This term is used to refer to the decline in an asset’s value over time due to things like regular use, wear and tear or becoming obsolete.

• Amortization: This term also applies to a decline in value but instead of a tangible asset, it can be used for intangible assets. Amortization can also be referred to in the context of borrowing. For example, a business loan amortization schedule would show how the balance declines over time as payments are made.

So what is the EBITDA formula? It looks like this:

EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization

Alternately, you can substitute this formula instead:

EBITDA = Operating Profit + Depreciation + Amortization

In this formula, operating profit is the same thing as EBIT. So to calculate EBITDA, you’d first need to calculate earnings before interest and taxes.

You should be able to find all the information you need to calculate EBITDA on a company’s income statement, though you may also need a cash flow statement for an accurate calculation.

EBIT vs EBITDA: Which is Better?

Compared to EBIT, EBITDA offers a clearer snapshot of a company’s net cash flow and how money is moving in or out of the business.

Calculating the earnings before interest, taxes, depreciation, and amortization can offer a fuller picture of a company’s financial health in terms of how operational decision-making affects profitability. It can also be useful when calculating valuations for different companies and/or comparing a business to its competitors.

While EBIT and EBITDA can be a starting point for choosing where to put your money, it’s also helpful to consider other fundamental ratios such as earnings per share or price-to-earnings ratio. Active traders who are interested in benefiting from market momentum, may consider technical analysis indicators instead.

Drawbacks of EBIT vs EBITDA

While EBIT and EBITDA can be useful, there are some potential issues to be aware of. Chiefly, neither formula is considered part of Generally Accepted Account Principles (GAAP). This is a uniform set of standards that’s designed to encourage transparency and accuracy in accounting for corporations, governments and other entities.

In other words, EBIT and EBITDA don’t have any official seal of approval from an accounting authority. That means companies can manipulate the numbers in their favor, if they choose to.

Here’s why: The better a company looks on paper, the easier it may be to attract investors or qualify for financing. Companies that are struggling behind the scenes may use inflated numbers or leave out critical information when calculating EBIT or EBITDA to appear more financially stable than they are.

That could potentially lead to losses for investors who choose to put money into a company because they accepted EBIT or EBITDA calculations at face value. So it’s important to dig deeper when deciding where to invest, as these numbers may not provide a full picture of a company’s financial situation.

The Takeaway

EBIT, or earnings before interest and tax, and EBITDA, or earnings before interest, tax, depreciation and amortization, are two ways to assess the financial health of a company. To recap, EBIT measures operating income, and EBITDA stands for “earnings before interest, taxes, depreciation, and amortization.”

But note that these figures can be manipulated by companies looking to present a rosy outlook to investors, so as always, it’s a good idea to research a company from a variety of different angles before investing in it.

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About the author

Rebecca Lake

Photo credit: iStock/Vertigo3d

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Mar

2025

The Great Resignation, Explained

By Rebecca Lake | Life & Career, money | Comments Off

The Great Resignation is a term used to describe an increase in the quit rate among U.S. employees that began in 2021. Millions of people began leaving their jobs citing various reasons, including low pay, poor working conditions, and negative lifestyle impacts associated with the COVID-19 pandemic.

While the Great Resignation created challenges for many employers, it also presented an opportunity for companies to fine-tune their hiring and retention policies.

Here, take a closer look, including:

• What is the Great Resignation?

• What are the reasons for the Great Resignation?

• How can companies prevent employees from resigning?

What Is the Great Resignation?

The Great Resignation refers to the fact that millions of people opted to quit their jobs during the height of the COVID-19 pandemic. Anthony Klotz, associate professor of management at Texas A&M University, is credited with coining the term.

Data suggests that the Great Resignation began in early 2021, reaching a peak of 4.5 million quits in November of that year, according to the Bureau of Labor Statistics (BLS). Altogether, the BLS estimates that nearly 48 million people quit their jobs in 2021.

The wave of quitting hasn’t entirely subsided, however. The Great Resignation trend persisted well into 2022, as more employees elected to leave their employers. For example, the quit rate was 4.1 million for September 2022, according to a recent Job Openings and Labor Turnover report.

Who’s Quitting Their Jobs?

The Great Resignation affected numerous industries but not always equally. According to an analysis by Zippia, for example, the industries affected most by the Great Resignation in 2021 include accommodation and food service, leisure and hospitality, and retail. Here are some other statistics on the Great Resignation and who’s quitting their jobs:

• Employees aged 18 to 29 quit more than any other demographic, with a 37% quit rate in 2021.

• Women were 11% more likely to quit their jobs than men, while Hispanics and Asians quit more often than Black or White Americans.

• Those with less education, e.g., a high school diploma, were more likely to quit than employees with some college or a college degree.

• Employees with lower incomes had a quit rate that was double that of those earning higher pay.

The range of people quitting is diverse, as are their reasons for doing so, as you’re about to learn.

Recommended: 5 Ways to Achieve Financial Security

Reasons for the Great Resignation

Now that you know what the Great Resignation is, you are likely wondering why so many people walked away from their work. There’s no single cause for the Great Resignation. Instead, employees began leaving their jobs in response to a combination of factors. Here are some of the top reasons employees chose to quit, according to Pew Research.

• Low pay. Thirty-seven percent of employees said low wages were a major reason behind their decision to quit.

• No room for advancement. Thirty-three percent of people who quit their jobs in 2021 said they did so due to a lack of opportunities to get ahead.

• Felt disrespected. Interestingly, 35% of those who quit during the first wave of the Great Resignation said they felt disrespected by their employer.

• Child care. The COVID-19 pandemic made child care a struggle for many parents as schools closed for months on end. According to Pew, 24% of quitters cited child care as a major reason for doing so.

• Lack of flexibility. Being able to work flexible job hours or put in for time off as needed is important for many employees. Pew found that 24% of those who quit in 2021 cited lack of flexibility as a major motivator.

Other reasons for quitting included lack of benefits, working too many hours, wanting to relocate, or working too few hours. A small number of employees said they chose to quit over employer requirements to get a COVID-19 vaccine.

Here’s how the top 10 reasons for resigning look in chart form:

Reason for quitting	% who said it was a major reason
Low pay	37%
Feel disrespected	35%
Lack of advancement opportunities	33%
Lack of child care	24%
Lack of flexible schedule	24%
Lack of benefits	23%
Wanted to relocate	22%
Too many hours of work	20%
Roof few hours of work	16%
COVID-19 vaccine requirement	8%

Ways Companies Can Prevent Employees From Leaving

Building a resilient workforce is important, but employee retention can be tricky, especially if workers don’t feel motivated to stick around. The Great Resignation has turned up the pressure on companies to provide employees with a more favorable working environment. Some of the ways companies may be able to prevent workers from leaving include:

• Offering flexible work schedules, including the chance to work remotely

• Focusing on building connections with employees and creating a welcoming company culture

• Getting input from employees on what’s working and what could be improved

• Showing appreciation for employees and respecting them at all times

• Offering opportunities for growth and advancement

• Enhancing benefits packages to include things like wellness perks or student loan repayment. The Great Resignation may have a significant effect on employee benefits in this way.

Offering higher salaries may be a starting point, but it could take more than just a bigger paycheck to convince employees to stay put. Thinking creatively and putting oneself in the mindset of the employee can be helpful ways for employers to figure out what’s needed most.

The Takeaway

The Great Resignation involved almost 48 million workers leaving their jobs in the wake of the COVID-19 crisis. This has taken a toll on many employers as they scramble to hire new workers to replace those who have quit. If you’re thinking of quitting, it’s important to get your financial ducks in a row first so you can maintain your standard of living during a job transition.

3 Money Tips

If you’re saving for a short-term goal — whether it’s a vacation, a wedding, or the down payment on a house — consider opening a high-yield savings account. The higher APY that you’ll earn will help your money grow faster, but the funds stay liquid, so they are easy to access when you reach your goal.

If you’re creating a budget, try the 50/30/20 budget rule. Allocate 50% of your after-tax income to the “needs” of life, like living expenses and debt. Spend 30% on wants, and then save the remaining 20% towards saving for your long-term goals.

If you’re faced with debt and wondering which kind to pay off first, it can be smart to prioritize high-interest debt first. For many people, this means their credit card debt; rates have recently been climbing into the double-digit range, so try to eliminate that ASAP.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 3.80% APY on SoFi Checking and Savings.

FAQ

What’s the Great Resignation?

The Great Resignation refers to the millions of Americans who have quit their jobs since early 2021. Almost 48 million people left their employment in 2021. Some of the most common causes for the Great Resignation include low wages, employee burnout, inflexible work schedules, and poor work-life balance.

Should you quit for a better paying job?

Not being able to make your budget work is one of the clearest signs that you’re not making enough money. If you believe a better paying job could help you reach your financial goals or, at the very least, make budgeting less stressful, then it could be worth moving on to a new employer. However, consider what you might be giving up in the way of benefits or other job perks to snag a higher salary.

Is it better to quit or be fired?

Quitting a job may look better on a resume than being fired. Additionally, if you’re putting in proper notice in advance, it may be easier to plan your budget as you countdown to your final paychecks. Your employer may also appreciate your giving notice that you plan to make a job transition so they have time to hire someone to replace you.

About the author

Rebecca Lake

Photo credit: iStock/Prostock-Studio

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SoFi members with Eligible Direct Deposit activity can earn 3.80% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Eligible 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 (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below).

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning 3.80% APY, we encourage you to check your APY Details page the day after your Eligible Direct Deposit arrives. If your APY is not showing as 3.80%, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning 3.80% APY from the date you contact SoFi for the rest of the current 30-day Evaluation Period. You will also be eligible for 3.80% APY on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider 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 Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi members with Eligible Direct Deposit are eligible for other SoFi Plus benefits.

As an alternative to Direct Deposit, SoFi members with Qualifying Deposits can earn 3.80% 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 Eligible 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 an Eligible Direct Deposit or receipt of $5,000 in Qualifying Deposits to your account, you will begin earning 3.80% 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 Eligible 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 Eligible 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 Eligible 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 Eligible Direct Deposit or Qualifying Deposits until SoFi Bank recognizes Eligible Direct Deposit activity or receives $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Eligible Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Eligible Direct Deposit.

Separately, SoFi members who enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days can also earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. For additional details, see the SoFi Plus Terms and Conditions at https://www.sofi.com/terms-of-use/#plus.

Members without either Eligible Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, or who do not enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days, will earn 1.00% 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 1/24/25. There is no minimum balance requirement. Additional information can be found at http://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.

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SOBK1122002

Mar

2025

What Types of Stocks Do Well During Volatility?

By Rebecca Lake | Growing Wealth, invest, Investing | Comments Off

Volatility is a measure of how much and how often a security’s price or a market index moves up or down over time. Higher volatility can mean higher risk, but it also has the potential to generate bigger rewards for investors. Meanwhile, lower volatility is typically correlated with lower risk and lower returns.

Developing a volatility investing strategy can make it easier to maximize returns while managing risk as the market moves from bullish to bearish and back again. Understanding the various stock market sectors and how they react to volatility is a good place to start. This can help with building a portfolio that’s designed to withstand occasional market dips or in the worst-case scenario, a recession.

What Causes Volatility in the Stock Market?

To implement a volatility investing plan it helps to first understand what causes fluctuations in stock prices to begin with. Stock market volatility can ebb and flow over time, and how high or low it is can depend on a number of factors. Some of the things that can push volatility levels higher include:

• Political events, such as elections

• Release of quarterly earnings reports

• Natural disasters

• The bursting of a stock market bubble

• Crises that in foreign countries

• Federal Reserve adjustments to interest rate policy

• News of a merger or acquisition

• Changes to fiscal policy

• Initial Public Offerings (IPOs) hitting the market

• Excitement over meme stocks

A global pandemic can also spark volatility, as evidenced in the mini market crash that occurred early in 2020. Coronavirus fears prompted the end of the longest bull market in history, sending stocks into a bear market.

The downturn was significant enough that the National Bureau of Economic Research Business Cycle Dating Committee dubbed it a recession. It was, however, the shortest on record, lasting just two months. (By comparison, it took 18 months for the stock market to go from peak to trough during the Great Recession).

Predicting volatility can be difficult, though there is a tool that attempts it. The Cboe Volatility Index (VIX) is a market index designed to measure expected volatility in the stock market. The VIX uses real-time stock quotes to calculate projected volatility over the coming 30 days. The VIX is one factor that goes into the Fear and Greed Index, which measures the emotions driving the stock market.

💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.

Market Sectors and Volatility

The stock market is effectively a pie with 11 different slices called sectors. These sectors represent the various segments of the market, based on the industries and companies they represent. The 11 sectors identified by the Global Industry Classification Standard (GICS) are:

• Information technology

• Health care

• Financials

• Consumer discretionary

• Consumer staples

• Communication services

• Industrials

• Materials

• Energy

• Utilities

• Real estate

Some of these sectors include more volatile industries than others, and the share of stocks in those industries within a given portfolio can impact how the portfolio reacts during times of volatility.

Stocks that tend to bear up under the pressure of a downturn or recession are generally categorized as defensive. You may also hear the terms “cyclical” and “non cyclical” used in reference to different market sectors. A cyclical sector or stock is one that’s volatile and tends to follow economic trends at any given time. Non Cyclical sectors or stocks, on the other hand, may outperform when the market experiences a downturn.

What Stock Sectors Do Best During Market Volatility?

Defensive stock market sectors tend to do better when the market is in decline for one reason: they represent things that consumers still need to spend money on, even when the economy is weakening. That means they may be of interest if you’re investing during a recession.

The following sectors tend to do the best during times of volatility:

• Utilities

• Consumer staples

• Health care

Here’s a closer look at how each sector works.

Utilities

The utilities sector represents companies and industries that provide utility services. That includes gas, electric, and water utilities. It can also include power producers, energy traders, and companies related to renewable energy production or distribution.

Since people still need running water, electricity and heat during a recession, utilities stocks tend to be a safe defensive bet.

Consumer Staples

The consumer staples sector covers companies and industries that are less sensitive to a changing economic or business cycle. That includes things like food and beverage manufacturers and distributors, food and drug retailing companies, tobacco producers, companies that produce household or personal care items and consumer super centers.

In simpler terms, the consumer staples sector means things like grocery stores, drugstores, and the manufacturers of everyday products. Since people still need to buy food and basic household or personal care items in a recession, stocks from these sectors can do well when volatility is high.

Health care

The health care sector includes health care service providers, companies that manufacture health care equipment, distributors of that equipment, health care technology companies, research and development companies and pharmaceutical companies.

Health care is a defensive sector since a recession usually doesn’t disrupt the need for medical care or medications.

💡 Quick Tip: It’s smart to invest in a range of assets so that you’re not overly reliant on any one company or market to do well. For example, by investing in different sectors you can add diversification to your portfolio, which may help mitigate some risk factors over time.

What Sectors and Stocks Are More Volatile?

When a recession sets in, defensive sector stocks can be a good buy. The period before a recession begins is often marked by increased volatility and declining stock prices. The impacts of that volatility may be more deeply felt in these sectors:

• Consumer discretionary

• Financials

• Communication services

• Energy

• Information technology

• Commodities

• Industrials

• Materials

These sectors represent more volatile industries that are more likely to be affected by large-scale market trends. For example, the financial sector suffered a serious blow leading up to the Great Recession. A decline in home prices paired with faulty lending practices prompted widespread defaults on mortgage-backed securities, leading a number of financial institutions to seek government bailout funding.

On the other hand, some of these same sectors do well when the economy is coming out of a recession and entering the early stage of the business cycle. For example, the consumer discretionary sector, which includes things like travel and entertainment, typically rebounds as consumers ease their purse strings and start spending on “fun” again. The industrials and materials sectors may also pick up if there’s an increase in manufacturing and production activity.

Understanding the relationships between individual sectors and the business cycle can make it easier to implement a sector investing approach. With sector investing, you’re adjusting your asset allocation over time to try and stay ahead of the economic cycle.

If you suspect a recession might be coming, for example, a sector investing strategy would dictate shifting some of your assets to defensive stocks. On the other hand, if you believe a recession is about to end and stocks are set to bounce back, you may shift your allocation to include more volatile industries that tend to do better in the early stages of the business cycle.

Volatility and Business Cycles

Identifying volatile industries generally means considering which sectors or stocks are most sensitive to changes in the economic cycle. Aside from recessionary periods, the business cycle has three other stages:

Early Stage

The early stage of the business cycle typically represents the initial recovery period following a recession. Consumers may begin spending more money on non essentials as the economy begins to strengthen. This is also called the expansion phase, and it may coincide with periods of inflation.

Mid Stage

During the mid stage, the economy begins to hit a peak or plateau with growth leveling off. People are still spending money but the pace may begin slowing down.

Late Stage

The late stage is also called the contraction stage, as economic growth lags. The late stage of the business cycle is usually a precursor to the trough or recession stage.

The Takeaway

Volatility is unavoidable but there are things investors can do to minimize the impact to their portfolio. Diversifying with stocks, exchange-traded funds (ETFs), or IPOs could help create volatility hedges.

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

Photo credit: iStock/Serdarbayraktar

About the author

Rebecca Lake

SoFi Invest®

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SOIN0723032

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Is it better to quit or be fired?

What Types of Stocks Do Well During Volatility?

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What Stock Sectors Do Best During Market Volatility?

Utilities

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What Sectors and Stocks Are More Volatile?

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