Sep
27
2023
50 Investment Phrases, Decoded

50 Investment Terms and Definitions

By | Growing Wealth, invest, Investing | Comments Off on 50 Investment Terms and Definitions

Some investment terms and definitions may seem complex, but a little research can take the mystery out of most common investing terminology. That can help investors feel even more confident about starting their investing journey. It’s more or less the same as starting any new endeavor — from rock climbing to investing — at first, you need to get familiar with new words and phrases.

Given the girth of the investment space, the sheer amount of investment terminology investors need to know can be intimidating. But the more you read, invest, and envelope yourself in it, the easier it’ll become. If you’re just starting out, though, it may be helpful to get a big rundown of some of the more common investing terms.

Investment Terminology Every Beginner Investor Needs to Know

Here are a slew of common investing terms and definitions (in alphabetical order) that investors may benefit from committing to memory.

1. Alpha

Alpha is used to gauge the success of an investment strategy, portfolio, portfolio manager, or trader compared with a relevant benchmark. You may also hear alpha defined as “excess return” in that it refers to returns that can be attributed to active management, over and above market returns.

2. Assets

An asset is anything that holds value that can be converted to cash. Personal assets might include your home, a car, other valuables. Business assets might include machinery, patents. When it comes to investing, assets are typically the securities you invest in.

3. Asset Class

An asset class is a group of investments with similar characteristics that is likely to perform differently in the market than another asset class. Types of asset classes include stocks, bonds, real estate, currencies, and more. Given the same market conditions, stocks and bonds often move in opposite directions. Most financial advisors typically recommend you invest in multiple asset classes in order to have a well-diversified portfolio and minimize risk.

4. Asset Allocation Fund

An asset allocation fund is a diversified portfolio consisting of various asset classes. Most asset allocation funds have a mix of stocks, bonds, and cash equivalents. These types of funds can be popular as some advisors stress the importance of having diverse portfolios to minimize potential losses.

5. Beta

Beta refers to how risky or volatile a security or portfolio is compared with the market overall. Calculating the beta of the stocks in your portfolio can help you determine how your portfolio might respond to market volatility. You can also gauge the beta of a stock to help determine how much risk it might add to your portfolio.

6. Bear Market

A bear market occurs when the market declines, typically when broad market indexes fall 20% or more in two months or less. Bear markets can accompany a recession, but not always. They often signal that investors feel pessimistic about their investments’ ability to make money and the market’s ability to rebound.

7. Bull Market

A bull market is the opposite of a bear market, meaning prices are rising or are expected to rise for extended periods of time. Bull markets usually mean security prices are rising for months or even years at a time.

8. Blue Chip

Blue chip companies are generally thought to be well-established, financially sound, and therefore high-quality investments. Blue chip stocks are typically large companies, and many of them are household names. In some cases, blue chips may be more expensive to invest in since they can be considered relatively stable and likely to grow.

9. Bonds

When governments or corporations need to borrow money they issue bonds. Investors who buy the bonds are effectively loaning that entity cash, which will be repaid according to the terms of the bond (e.g. a 10-year bond with an interest rate of 3%). Bonds are often considered to be relatively stable, lower-risk investments compared with stocks.

10. Broker

An investment broker, whether a person or a firm, acts as a middleman to help investors buy and sell securities. Brokers may be necessary because some securities exchanges only allow members of that exchange to make an investment order. A broker’s primary function is to help clients place trades, although many brokers also help clients with market research and investment planning.

11. Diversification

You’ve probably heard that you should aim to have a diversified portfolio. That means investing in a range of asset classes that are likely to behave differently under different market conditions, in order to mitigate risk. A portfolio of only stocks, for instance, could be more vulnerable to market volatility than a portfolio that also included bonds, real estate, commodities, and so on.

12. Dividends

When a company shares their profits with investors, these are called dividends. Dividends are often paid in cash (although they can be paid in stocks). Some companies — e.g. many blue chip firms — pay dividends, but not all companies do. Ordinary dividends are taxed differently than qualified dividends, so you may want to consult a tax professional if you own dividend-paying stocks.

13. Dollar Based Investing

Also called fractional share investing, dollar based investing is a way for investors to buy partial shares of stocks. Instead of buying shares of a company, you instead invest a dollar amount. Dollar based investing is a great way for smaller investors to buy into popular companies that they may otherwise be priced out of.

14. EBITDA

EBITDA is a way to evaluate a company’s performance that is considered more precise than simply looking at net income. EBITDA stands for: earnings before interest, taxes, depreciation, and amortization. To calculate EBITDA, use the following formula: Net Income + Interest + Taxes + Depreciation + Amortization.

15. EBIT

EBIT is a simpler way to calculate a company’s profits than EBITDA, as it’s only one part of the EBITDA equation (literally!). It stands for “earnings before interest and taxes.” It’s calculated using this formula: Net Income + Interest + Taxes.

16. EPS

EPS stands for earnings per share, which is a common way investors measure how well a stock is performing. EPS is calculated by finding a company’s quarterly or annual net income and dividing it by the company’s outstanding shares of stock. Increases in EPS can be a sign that the company’s profit performance is on the upswing, whereas a decrease can be a red flag for investors.

17. ETF

Exchange-traded funds, or ETFs, are similar to mutual funds in that the fund’s portfolio can include dozens or even hundreds of different securities, and investors buy shares of the fund. Unlike mutual funds, ETF shares can be traded like stocks throughout the day (mutual fund shares are traded once a day). Most ETFs are considered lower-cost, passive investments because they track an index, although there are actively managed ETFs.

18. Expense Ratio

An expense ratio is an annual fee investors pay to cover the operating costs of mutual funds, index funds, ETFs and other types of funds. Fees are typically deducted from your investments automatically (you don’t pay a separate charge), and they can reduce your returns over time so it’s wise to shop around for lower fees. Expense ratios are calculated using this formula: Total Funds Costs / Total Fund Assets Under Management.

19. FCF

Free cash flow is the money a company has after it has paid its expenses. This number is important to investors because it can show them how likely it is that a company could have extra cash for dividends or share buybacks. A continuous decrease in free cash flow over a few years can also be a red flag to investors.

20. Growth Stock

Growth stocks are shares in a company that’s growing faster than its competitors, typically showing potential for higher revenue or sales. Growth stock companies may be considered leaders in their industry.

21. Hedge Fund

Hedge funds are usually managed by an LLC or limited partnership that invests in securities and other assets using money from multiple investors. Hedge funds tend to be more risky and expensive than mutual funds or ETFs, which often makes them accessible to more wealthy investors.

22. Index Fund

Index funds are a type of mutual fund that invest in securities that mirror a particular index, such as the S&P 500 Index or the MSCI World Index. Indexes track many different sectors, from smaller U.S. companies to big global companies to various kinds of bonds. Each index acts as a proxy for how that market sector is performing; the corresponding index funds reflect that performance.

23. Interest Rate

The interest rate is the amount a lender charges to borrow money — and it can also mean the amount your cash earns in a savings, money market or CD account. The baseline interest rate in the U.S. is set by the Federal Reserve. This rate in turn influences savings rates, mortgage rates, credit card rates, and more. Generally, when the Federal Reserve lowers interest rates, the stock market tends to rise.

24. Large Cap

A large-cap company has $10 billion or more in market capitalization. These companies are often considered industry leaders, and are relatively conservative, low-risk, and safe investments. A company’s stock may be considered large cap, mid cap, or small cap.

25. Market Cap

Market capitalization, or market cap, is the value of a company’s total outstanding shares. It’s often used to measure a company’s value and build a diversified portfolio. You can calculate market cap by multiplying the number of outstanding shares by the current price per share. Companies with lower market caps usually have more room to grow and usually are associated with newer companies, meaning they can also be riskier.

26. Mid Cap

Mid-cap companies are usually between $2 billion to $10 billion in market capitalization, putting them somewhere between small- and large-cap companies. Many mid-cap companies are in a growth phase, making them attractive to some investors who believe the company may grow into a large-cap over time, although this is not guaranteed to happen.

27. Mega Cap

Mega-cap companies are the largest companies you can invest in, with a market value of $1 trillion or more. Mega-cap stocks are typically industry leaders and household name brands.

28. Mutual Fund

Mutual funds may invest in stocks, bonds, and other securities — or a combination of these (e.g. a blended fund). Mutual funds can also be industry-specific (such as a mutual fund consisting only of energy stocks, green bonds, or tech companies, and so on).

29. Net Income

When talking about investing, net income usually refers to how much a company makes (or its total losses) after it has paid all its expenses. Net income is therefore usually calculated by subtracting a company’s expenses from its revenue. Investors may want to know a company’s net income because it can help determine how profitable the company is, although EBITDA (defined above) is another measure.

30. Over-the-Counter Stocks

Not all stocks are publicly traded. These “private” stocks, often called over-the-counter stocks, usually have to be traded through a broker. Companies may offer OTC stocks if they don’t meet the requirements to be traded publicly. Such companies are often startups or other small companies. So, while these companies may eventually grow to be able to trade publicly, investing in them also carries the risk that they may fold or even engage in fraudulent activity since the market is far less regulated than publicly traded markets are.

31. Price-to-Earnings Ratio

Investors commonly use P/E, or price-to-earnings ratios, to gain insight into how profitable a company is compared to its stock price. In other words, price-to-earnings ratios can help investors decide if the price of a stock is worth it when compared to how much a company is making.

32. Prime Interest Rate

Banks are likely to offer their best customers — those with the best credit histories and the lowest risk of defaulting — a prime interest rate for a loan. The prime interest rate is generally the lowest rate the bank will offer. A bank’s criteria for determining their prime interest rate may vary, but most banks consider the federal funds rate when setting any interest rate.

33. Portfolio Management

Portfolio management simply refers to how you select and manage the investments in your portfolio. There are many different management styles, such as active or passive, growth or value. Additionally, you can elect to manage your own portfolio or hire an individual or group to manage it for you.

34. Preferred Stock

A preferred stock means investors own shares in a company and get scheduled dividends, similar to how bond interest payments work. Preferred socks may not fluctuate in price like common stocks do, meaning they are often less volatile and risky.

35. Profit & Loss Statement

You probably know what profit and losses are, but do you know how to read a company’s P&L, or profit & loss statement? It can help you determine a company’s bottom line, as it can show you how well a company is doing compared to its peers in the same industry. If you’ve never read one before, this article about profit & loss statements could give you some tips on what to look for.

36. Prospectus

Companies that offer stocks, bonds, and mutual funds to investors are required to file a prospectus with the Securities and Exchange Commission that provides details about the investment they are offering (e.g. the expense ratio, the constituents of a fund, and more). Investors can use the prospectus to better understand a given security and how it might fit in their portfolio, or not.

37. Recession

A recession is a period of economic contraction. The National Bureau of Economic Research (NBER) defines a recession further as a decline in monthly employment, personal income, and industrial production. As an investor, a recession may indicate a drop in the value of your portfolio, although this may be temporary: When looking at the history of U.S. recessions, the stock market has always rebounded, sooner or later, after recessions.

38. REIT

Real estate investment trusts (REITs) are a way that investors can further diversify their portfolios. Instead of having the responsibility of managing an investment property yourself, you can invest in REITs, which are generally large-scale real estate projects that investors can help fund in exchange for partial ownership. Most REITs are publicly traded and pay dividends to investors.

39. Retained Earnings

When looking for a company’s net income statement, you may come across the term “retained earnings,” also sometimes called unappropriated profit, uncovered loss, member capital, earnings surplus, or accumulated earnings. In general, retained earnings is the amount of money a company keeps and potentially reinvests after it gives its investors a dividend payout.

As an investor, knowing whether a company had positive retained earnings can help you determine how much money it has to continue growing. If its retained earnings are negative, that could be a sign the company is in debt and may not be a good investment.

40. Return on Equity

Return on equity, sometimes called return on net worth, can help investors compare how well companies are managing their stockholders’ contributions. You can calculate it using this formula: Net income/Average shareholder equity. A higher return on equity can signal to investors that a company is managing its money efficiently.

41. ROI

Return on investment (ROI) is just that: the return you get after making an investment in a stock, bond, mutual fund, and so forth. Investors generally hope for a positive ROI, meaning that their investment has made a profit. While a good ROI will vary depending on the type of investments you’re making, some investors look to the historic return of the stock market (about 7% annually) as a barometer.

42. Small Cap

A small-cap company usually has a market cap of $250 million to $2 billion. Investors may be attracted to a small-cap company because they believe it has growth potential or may be undervalued.

43. SPAC

SPAC stands for special purpose acquisition company. SPACs are shell companies that list shares on an exchange to raise money so they can merge with a privately held company. Once the merger between the public SPAC and the private company is complete, that company is now in effect a public company — which is why a SPAC is sometimes called a backdoor IPO. Many companies may elect to use SPACs instead of traditional IPOs because they are often faster and less expensive.

44. Stocks

If you’ve made it this far, you probably know what a stock is. To review, a stock is a way to buy a piece of ownership into a company. You can buy and sell your stocks depending on whether you anticipate your stocks will decrease or increase in value.

45. Stock Exchange

A stock exchange is the place where you buy, sell, or trade stocks. Common U.S. stock exchanges are the New York Stock Exchange (NYSE) and the Nasdaq.

46. Stop-Loss Order

A stop-loss order can help investors have more control over their stocks. When a stock reaches a certain price that you choose, your broker will sell, buy, or trade that stock. Having a stop-loss order can help you limit how much money you make or lose in the stock market.

47. Target Date Fund

A target date fund is a type of mutual fund that includes a mix of asset classes to provide investors with a portfolio that adjusts over time to become more conservative as they age. Target date funds are often used to help investors plan their retirements. Target funds are typically constructed around various target retirement years (e.g. 2030, 2040, 2050) so investors can pick a date that corresponds with their hoped-for retirement.

48. Value Stock

A value stock is a stock that investors believe is undervalued and/or inexpensive compared to its past prices on the stock market or with its competitors. Investors may consider a stock’s price-to-earnings ratio to help them determine if something is a value stock.

49. Venture Capital

Venture capital is money a startup uses to grow its business. This money usually comes from private investors or venture capital firms. Investors may elect to invest venture capital into startups they believe have the potential to be profitable with time.

50. Yield

Yield is another way of referring to the return of an investment over a set period of time, expressed as a percentage. You may hear the term in relation to bonds (e.g. high-yield bonds), but yield is more accurately a measure of the cash flow an investor gets on the amount they invested in a security during that time period, and is different from total return.


💡 Quick Tip: The best stock trading app? That’s a personal preference, of course. Generally speaking, though, a great app is one with an intuitive interface and powerful features to help make trades quickly and easily.

The Takeaway

Getting familiar with a few key investing words and phrases can go a long way in helping you gain confidence when you’re new to investing. Getting fluent with investing terminology is like any other pursuit — there’s a learning curve at first, but the terms will feel more natural as you move forward and start investing regularly.

Learning key investing terms and definitions is only the beginning, though. Putting your knowledge into practice is another thing entirely. Although, it is helpful to know the lingo before diving into investing.

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

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.

FAQ

What are the main investment types?

There are many types of investments, but perhaps the main investment types would include stocks, bonds, funds (mutual funds, index funds, exchange-traded funds), and options, though there are more.

What is the basic rule of investing?

There are many guidelines investors might want to follow, but the basic rule of investing is that you shouldn’t invest more than you’re comfortable losing – which is associated with an investor’s risk tolerance.

Photo credit: iStock/akinbostanci

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.

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Sep
27
2023
What Is Efficient Frontier?

What Is Efficient Frontier?

By | Growing Wealth, invest, Investing | Comments Off on What Is Efficient Frontier?

The efficient frontier is a financial framework that investors can use to build an optimized asset portfolio that attempts to give them the greatest returns within their particular risk profile. In other words, it shows which investment portfolio will be “efficient” or provides a higher expected return for a lower amount of risk. It does not, however, eliminate risk for investors, which is important to keep in mind.

It’s visualized as a curved line on a graph according to an individual’s goals and risk tolerance. The framework is called the efficient frontier or the efficiency frontier because if one’s investments fall within the ideal range, they are working efficiently to achieve one’s goal.

How Does the Efficient Frontier Work?

The efficient frontier concept is a key facet of modern portfolio theory, which was created in 1952 by Harry Markowitz. Essentially, the efficient frontier is the optimal baseline for an investment portfolio. If an investor’s portfolio gives them lower returns because it contains riskier investments, then it may not be as well balanced as it could or should be. It’s also possible for a portfolio to provide returns that are greater than the frontier. As such, as long as a portfolio’s potential returns justify its associated risks, then the portfolio is well-allocated.

Every investor has a different risk tolerance, and their own corresponding goals for portfolio growth. Accordingly, every investor has a different frontier. By adjusting that frontier, the inventors can then see if their current portfolio measures up to the parameters set by the efficient frontier graph, and make changes to their asset allocation accordingly.

💡 Quick Tip: Investment fees are assessed in different ways, including trading costs, account management fees, and possibly broker commissions. When you set up an investment account, be sure to get the exact breakdown of your “all-in costs” so you know what you’re paying.

How Is the Efficient Frontier Constructed?

Investors hoping to utilize the efficient frontier concept as a part of their strategy will create a corresponding graph, and apply it to their specific portfolio.

When constructing the graph, expected returns are on the y-axis and the standard deviation of returns, which are a measure of risk, are on the x-axis. Then, they would plot a curve that shows where the ideal or expected portfolio would land on the graph and the standard deviation of returns.

Once the graph is created, the investor can plot a portfolio or individual asset on the graph according to its expected returns and their standard deviation, and then compare it to the efficient frontier curve. The investor can also plot two or more portfolios on the graph to compare them.

A portfolio that falls on the right side of the graph has a higher level of risk, while a portfolio that is low on the graph has lower returns. If an investor finds that their portfolio doesn’t fall on the graph where they would like it to, they can then make decisions about how to reallocate investments to move closer to the goal.

The curved line reflects the diminishing marginal return to risk. Adding more risk to a portfolio doesn’t result in an equal amount of increased return. Portfolios that lie below the curve on the graph are suboptimal because they don’t provide high enough returns to justify their amount of risk. Portfolios to the right of the curve are also suboptimal because they have a high level of risk for their particular level of return.

Again, the portfolios that display the lowest levels of risk are not inherently risk-free, which investors will need to keep in mind.

Efficient Frontier Example

Efficient frontier can be a somewhat difficult concept to visualize, so consider this: Your portfolio contains two assets. Each asset has its own respective expected annual return, and standard deviation — so multiple variables for each asset.

Data sets for each can be put together showing correlated expected returns and standard deviations, and plotted on a graph, as discussed. That graph will reveal the efficient frontier, and help investors determine which portfolio they’d prefer accordingly.

Again, it’s somewhat difficult to visualize, but practically speaking, a visual chart with different portfolios can be helpful in making portfolio decisions.

Benefits of the Efficient Frontier

The primary benefit of the efficient frontier is that it helps investors visualize and understand whether their investment portfolio is performing the way they would like it to. Every investment and portfolio comes with some risk, and oftentimes with more risk there is more reward. But it’s important to make sure that your returns are worth the risk, and to remember that there is no such thing as a risk-free investment or portfolio.

Investors can use the efficient frontier to analyze the current performance of a portfolio and figure out which assets to adjust, potentially liquidate, or reallocate. Investors can also see if a particular asset is giving them the same reward with less risk than other assets. In this case, they might want to sell the higher risk asset and put more funds into the lower risk asset.

How Do Investors Use the Efficient Frontier Model?

Using an efficient frontier model is one method of building a portfolio made of different types of investments that have the optimal balance of risk and return. No portfolio is without risk, and investors do need to reallocate investments on occasion to continue optimizing toward their goal. But the optimal portfolio would have a balance of high-risk, high-reward investments and more stable investments that still get decent returns.

There is often an assumption that investments with greater risk provide greater returns — as noted. Although this is sometimes true, the optimal portfolio holds both high risk and low risk assets, according to the efficient frontier.

If an investor has a higher tolerance to risk, they could choose to own a higher percentage of investments on the right end of the efficient frontier graph with higher risk and higher return. If an investor is more conservative, they could choose to hold lower-risk assets.

Proponents of efficient frontier claim that more diversified portfolios tend to be closer to the efficient frontier line than less diversified portfolios, and therefore have lower levels of risk, though they’re not risk-free.

Limits and Downsides of the Efficient Frontier

The main downside of using the efficient frontier tool is that it creates a curve with a normal distribution, which doesn’t necessarily always match reality. Real investments may vary within three standard variations of the mean curve. This “tail risk” means there are limits to the conclusions you can draw from the efficient frontier graph.

Another issue is that investors don’t always make rational decisions and avoid risk. Market decisions involve many complex factors that the efficient frontier does not factor into its calculations. Instead, the efficient frontier assumes that people always avoid risk and make investing decisions rationally.

Finally, the efficient frontier assumes that the number of investors in a market has no impact on market prices, and that all investors have the same access to borrow money with risk-free interest rates.

Investors using the efficient frontier should understand its limitations and might consider using it in conjunction with other tools for analyzing an investment strategy.

The Takeaway

The efficient frontier is one of many useful methods of analyzing portfolios and creating a long-term investing plan. It involves utilizing a financial framework to build an optimized asset portfolio with aims to maximize their potential gains within their particular risk profile. It also involves visuals to help investors get a better sense of where their portfolio stands. Investors should remember that it is not a tool that will help them completely remove risk from their investment portfolio or allocation.

It’s also a relatively high-level investing concept and tool that many investors may not feel comfortable using. There are plenty of strategies and tools that can be utilized in its stead, of course, and it may be worthwhile to consult with a financial professional if investors feel they’re in over their heads.

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.

FAQ

What are common assumptions of the efficient frontier model?

Common assumptions of the efficient frontier model include that asset returns will follow a more or less common distribution, that investors will act rationally, and that riskier investments inherently lead to larger returns.

Can the efficient frontier be negative?

The efficient frontier model cannot be negative, as a negative figure would imply that an investor garnered losses from a given set of potential portfolios. That means that the investor was not actually investing.

What is the difference between efficient frontier and efficient portfolio?

The efficient frontier is a set of investment portfolios expected to provide the highest return for a specific risk level. Efficient portfolio, on the other hand, is a single portfolio that provides the highest return for a specific risk level.

Photo credit: iStock/undrey

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.

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Sep
27
2023

10 Tips for Investing Long Term

By | Growing Wealth, invest, Investing | Comments Off on 10 Tips for Investing Long Term

While short-term investing can be highly risky, investing for the long term is a time-honored way to manage certain market risks so you can reach important financial goals, like saving for college tuition and retirement.

That’s because when it comes to building a nest egg for these bigger life expenses, saving alone won’t necessarily get you where you need to go. You need the boost of investment returns over time to help your savings grow. That’s where long-term investing, also called buy-and-hold, comes in.

The chief advantage of a long-term investing strategy is that “time in the market beats timing the market,” as the saying goes. In other words, by sticking to an investment plan for the long term, your portfolio is more likely to weather its ups and downs, and fluctuations in different securities.

That said, long-term investing isn’t a risk-free endeavor, and there are also tax implications for holding investments long term. Knowing the ins and outs can make all the difference to your portfolio over time.

10 Tips for Long-Term Investing

So how do you go about establishing a long-term investment plan? These tips should help.

1. Set Goals and a Time Horizon

Your financial goals will largely determine whether or not long-term investing is the right choice for you. Spend time outlining what you want to achieve and how much money you’ll need to achieve it, whether that’s paying for college, retirement, or another big goal.

Once you’ve done that, you can think about your time horizon — when you’ll need the cash — which can help you determine what types of investments are suited to your goals.

For example, if you are saving to buy a car in a couple of years — generally a shorter-term goal — you may consider setting aside money in a savings account, CDs, or money market accounts, which are stable and can provide relatively quick access to your cash.

Stock market investing can be more appropriate for big goals in the distant future, such as saving for a child’s education or your own retirement, which could be 20 or 30 years down the line. This relatively long time horizon not only gives your investments a chance to grow, but it means that you also have the time to ride out market downturns that may occur along the way — which may translate to a better ROI (i.e. a higher return on investment), although there are no guarantees.

2. Determine Your Risk Tolerance

Your risk tolerance is essentially a measure of your ability to stomach volatile markets. It can help you determine the mix of investments that you will hold in your investment accounts — but your risk tolerance also depends on (or interacts with) your goals and time horizon.

Longer time horizons may allow you to take on more risk in some cases, because you’re not focused on quick gains. Which in turn means you might be more inclined to hold a greater proportion of stocks inside your portfolio.

How long should you hold stocks? Generally, holding stocks longer can be beneficial from a tax perspective, and from a risk perspective. The longer you stay invested, the longer you have to recover should markets take a dive.

Setting your risk tolerance also means knowing yourself. If you’re somebody who will be kept up at night when the market takes a downward turn, even if your goal is still 20 years away, then you may not want a portfolio that’s aggressively allocated to stocks. While there are no safe investments per se, it’s possible to have a more conservative allocation.

On the other hand, if short-term market volatility doesn’t bother you, an aggressive allocation may be the best fit to help you achieve your long-term goals.

3. Set an Appropriate Asset Allocation

Understanding your goals, time horizon, and risk tolerance can help give you an idea of the mix of assets — generally stocks, bonds, and cash equivalents — you may want to hold in your portfolio. For example, a portfolio might hold 70% stocks, 30% bonds, and no cash equivalents, depending on the investment opportunities you want to explore.

As a general rule of thumb, the longer your time horizon, the more stocks you may want to hold. That’s because stocks tend to be drivers of long-term growth (although they also come with higher levels of risk).

As you approach your goal, you’ll likely begin to shift some of your assets into fixed-income investments like bonds. The reason for this shift? As you approach your goal — the time when you’ll need your money — you’ll be more vulnerable to market downturns, and you won’t want to risk losing any of your cash.

For example, if the market experiences a big drop, you may be left without enough money to meet your goal. By gradually shifting your money to bonds, cash, or cash equivalents, you can help protect it from stock market swings, so by the time you need your cash, you have a more stable source of income to draw upon.

4. Diversifying Your Investment Portfolio

A key factor of any investing is that portfolio diversification matters. The idea is that holding many different types of assets reduces risk inside your portfolio in the long and short term. Imagine briefly that your portfolio consists of stock from only one company.

If that stock drops, your whole portfolio drops. However, if your portfolio contains stocks from 100 different companies, if one company does poorly, the effect on the rest of your portfolio will be relatively small.

A diverse portfolio contains many different asset classes, such as stocks, bonds, and cash equivalents as mentioned above. And within those asset classes a diverse portfolio holds many different types of assets across size, geographies and sectors, for example.

Different types of stocks

The basic principle behind diversification is that assets in a diverse portfolio are not perfectly correlated. In other words, they react differently to different market conditions.

Domestic stocks for example, might react differently than European stocks should U.S. markets start to struggle. Or investing in energy stocks will be different than tech-stock investing. So, if oil prices drop, energy sector stocks might take a hit, while tech might be less affected.

Many investors may choose to add diversification to their portfolios by using mutual funds, index funds, and exchange-traded funds, which themselves hold diverse baskets of assets.

Recommended: What Is an ETF?

5. Starting Investing Early

This tip may seem like a no-brainer, but increasing your time horizon gives you the opportunity to invest in riskier investments, like stocks, for longer. Though risky, stocks typically offer higher earning potential than other types of investments, such as bonds. Consider that the average stock market return annually is about 10%.

Second, the sooner you start investing, the sooner you are able to take advantage of compound growth, one of the most powerful tools in your investing toolkit. The idea here is that as your money grows, and you reinvest your returns, you steadily keep increasing the amount of money on which you earn returns.

As a result, your returns keep getting bigger and your investments can start to grow exponentially. This phenomenon can also help mitigate inevitable losses.

💡 Quick Tip: If you’re opening a brokerage account for the first time, consider starting with an amount of money you’re prepared to lose. Investing always includes the risk of loss, and until you’ve gained some experience, it’s probably wise to start small.

6. Leaving Emotions Out of It

Investing is just numbers and math, so it’s totally rational, right? Well…not exactly. Humans are emotional creatures and sometimes those emotions can get the better of us, leading us to make decisions that aren’t always in our best interest. Letting emotions dictate our investing behavior can result in costly mistakes, as behavioral finance studies have shown.

For example, if you’re investing in a recession and the stock market starts to drop, you may panic and be tempted to sell your stocks. However, doing so can actually lock in your losses and means that you miss the subsequent rally.

On the other end of the spectrum, when the stock market is roaring, you may be tempted to jump on the bandwagon and overbuy stocks. Yet, doing so opens you up to the risk that you are jumping on a bubble that may soon burst.

There are a number of strategies that can help these mistakes be avoided. First, fight the urge to check how your investments are doing all the time. There are natural cycles of ups and downs that can happen even on a daily basis. These can cause anxiety if you pay attention too closely. You might want to avoid constant checking in and instead keep your eye on the big picture — achieving your long-term goals.

Trust your asset allocation. Remember that your asset mix has already taken your goals, time horizon, and your risk tolerance into consideration. Tinkering with it based on spur-of-the-moment decisions can throw off your allocation and make it difficult to achieve your goals.

7. Reducing Fees and Taxes

Be wary of taxes and fees as these can take a hefty bite out of your potential earnings over time. Also, many investment fees are expressed as a small percentage (e.g. less than 1% of the money you have invested) that may seem negligible — but it’s not.

Also, many investment costs can be hard to find, and thus hard to track. Meanwhile, various expenses can add up over time, reducing your overall gains.

Expense ratios

To cover the cost of management, mutual funds and exchange-traded funds charge an expense ratio — a percentage of the total assets invested in the fund each year. An actively managed mutual fund might charge 1.0% or more. A passively managed ETF or index fund may charge 0.50% or less. So you may want to choose mutual funds with the lowest expense ratios, or you may consider passive ETFs or index funds that charge very low fees.

The expense ratio is deducted directly from your returns. You may also encounter annual fees, custodian fees, and other expenses.

Advisory fees

You can also be charged fees for buying and selling assets as well as commissions that are paid to brokers and/or financial advisors for their services. It’s important to manage these costs as well. One of the best lines of defense is doing your research to understand what fees you will be charged and what your alternatives are.

8. Taking Advantage of Tax-Advantaged Accounts

There are a few long-term goals that the government wants you to save for, including higher education and retirement. As a result, the government offers special tax-advantaged accounts to help you achieve these goals.

Saving for Education

A 529 savings plan can help you save for your child’s — or anyone’s — college or grad school tuition. Contributions can be made to these accounts with after-tax dollars. This money can be invested inside the account where it grows tax-free. You can then make tax-free withdrawals to cover your child’s qualified education expenses.

Saving for Retirement

Your employer may offer you a 401(k) retirement account through your job. These accounts allow pre-tax dollars to be contributed, which lower your taxable income and can grow tax-deferred inside the account. If your employer offers matching funds, you could try to contribute enough to receive the maximum match. When you withdraw money from your 401(k) at age 59 ½, it is subject to income tax.

You may also take advantage of traditional IRAs and Roth IRAs. Traditional IRAs use pre-tax dollars and allow tax-deferred growth inside your account. Withdrawals at age 59 ½ are subject to income tax.

You fund Roth IRAs, on the other hand, with after-tax dollars, so money in your account grows tax-free, and withdrawals are not subject to income tax.

There are other tax-advantaged accounts that can work favorably for long-term investors, including SEP IRAs for self-employed people, and health savings accounts (or HSAs), in addition to other options.

9. Making Saving Automatic

One way to continually add to your investments is by making saving a regular activity. One easy way to do this is through automation. If you have a workplace retirement account, you can usually automate contributions through your employer.

Or if you’re saving in a brokerage account you can arrange with your broker for a fixed amount of money to be transferred to your brokerage account each month and invested according to your predetermined allocation.

Recommended: What Is a Brokerage Account? How Does it Work?

Automation can take the burden off of you to remember to invest. And with the money automatically flowing from your bank account to your investments accounts, you probably won’t be as tempted to spend it on other things.

10. Checking In on Your Investments

You may want to periodically check in on your portfolio to make sure your asset allocation is still on track. If it’s not, it may be time to rebalance your portfolio. You may want to rebalance when the proportion of any particular asset shifts by 5% or more.

This could occur, for example, if the stock market does really well over a given period, upping the portion of your portfolio taken up by stocks.

If this is the case, you might consider selling some stocks and purchasing bonds to bring your portfolio back in line with your goals. Periodic check-ins can also provide opportunities to examine fees and other costs (like taxes) and their impact on your portfolio.

What Is Long-Term Investing?

A long-term investment is an asset that’s expected to generate income or appreciate in value over a longer time period, typically five years or more. Long-term investments often gain value slowly, weathering short- to medium-term fluctuations in the market, and (ideally) coming out ahead over time.

Short-term investments are those that can be converted to cash in a few weeks or months — but they’re generally held for less than five years. Many investors trade these assets in short periods, like days, weeks, and months, to profit from short-term price movements.

However, a short-term investing strategy can be risky and volatile, resulting in losses in a short period.

💡 Quick Tip: How to manage potential risk factors in a self-directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

Long-term Investments and Taxes

It’s also worth noting that for tax purposes the Internal Revenue Service (IRS) considers long-term investments to be investments held for more than a year. This is another important consideration when developing a longer-term strategy.

Investments sold after more than a year are subject to the long-term capital gains rate, which is equal to 0%, 15%, or 20%, depending on an investor’s income and the type of investment. The long-term capital gains rate is typically much lower than their income tax rate, which can help incentivize investors to hang on to their investments over the long run.

Recommended: Everything You Need to Know About Taxes on Investment Income

Why Is Long-Term Investing Important?

Long-term investing can be beneficial for the three reasons noted above:

•   Holding investments long term can allow certain securities to weather market fluctuations and, ideally, still see some gains over time. While there are no guarantees, and being a long-term investor doesn’t mean you’re immune to all risks, this strategy may help your portfolio recover from periods of volatility and continue to gain value.

•   In the case of bigger financial goals, e.g. saving for retirement or for college tuition, embracing a long-term investment plan may help your savings to grow and better enable you to reach those larger goals.

•   Last, there may be tax benefits to holding onto your investments for a longer period of time.

Recommended: Short- vs. Long-Term Investments

Investing With SoFi

The most important tips for long-term investing involve setting financial goals; understanding your time horizon and risk tolerance; diversifying your holdings; minimizing taxes and fees; and starting early so your portfolio can benefit from compounding; and understanding how tax-advantaged accounts can be part of a long-term plan.

When you’re ready to invest, whether through retirement accounts, brokerage accounts, by yourself, or with help, these strategies can help you build an investment plan to match your financial situation.

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


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

FAQ

What is a realistic long-term investment return?

The average historical return of the U.S. stock market is about 10%, but that’s an average over about a century. Different years had higher or lower returns. So asking what a realistic long-term investment return is hard to gauge, and it will ultimately depend on the investments you choose, how long you hold them, as well as the fees and taxes you pay.

Where is the safest place to invest long-term?

All investments come with some degree of risk, but a more secure way to invest for the long term might be with fixed-income securities like bonds, which pay a set return over a period of time. Money market accounts and certificates of deposit (CDs) generally also have fixed rates. But remember that the lower the risk, the lower the return.

What is the biggest threat to long-term investments

Long-term investments, like all investments, are vulnerable to market changes. Even when investing for the long haul, it’s possible to lose money. Another threat is the risk of inflation. As inflation rises, your money doesn’t go as far. So even if you save and invest for decades, inflation is also rising at the same time, and your money may have less purchasing power than you expected.

Photo credit: iStock/Pekic

SoFi Invest®

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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.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at https://sofi.app.link/investchat. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

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.

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Sep
27
2023

Guide to What Percentage of Income to Save

By | Budgeting & Goals, Growing Wealth, Life & Career | No Comments

If you want to build financial security and hit your long-term savings goals, it’s probably a wise move to put a portion of each paycheck into a savings account.

Week by week, month by month, and year by year, the money will grow and help you afford your dreams, whether that means buying a house, funding your kids’ education, or having enough cash to retire early. Or all of the above.

But it can be challenging to know how much to stash away. Some people save 10% of their take-home pay, others three or four times that. Still others deposit a round number (be it $50, $500, or $5,000), into their savings account on a regular basis.

So how much should you aim to save? That depends upon a variety of factors, including your personal style and financial aspirations. In this guide, you’ll learn how to use percentages to your advantage when it comes to saving, plus hear smart advice on how to prioritize and reach your goals.

What Percent of Your Income Should You Save?

There isn’t a set percentage of how much of your annual income you should save. Much will depend on your particular circumstances. For example, your income, your cost of living, your expenses, and your debt level will all matter. A person who earns $75K per year, lives in an expensive city, has student loans to pay off, and is supporting a family of four will likely find it more difficult to save money than someone who is earning $125K, lives in a less pricey location, has zero loans to pay down, and is single with no dependents.

That said, you are likely to hear that 20% is a good number to aim for in terms of the percentage of your income to be saved. If that proves too high, then 10% is a good figure to use as a goal.

Pros and Cons of Saving a Fixed Percentage of Your Income

Sure, saving money is important. But what about saving a percentage vs. a specific dollar amount?

There are pluses and minuses to saving a fixed percentage of your income. This approach may or may not work for everyone. Consider the upsides first:

•   It’s consistent. You know that every paycheck, the percentage you’ve indicated will be heading into savings, helping you reach your financial goals. Even if your earnings vary, your savings will be aligned.

•   It protects you against lifestyle creep. If, say, you are saving $500 per pay period and then get a raise, you might just spend all of that additional cash you are earning. Called lifestyle creep, that means your expenses rise, gobbling up your enhanced income.

When, however, you set a percentage to go into savings, you know that the amount will automatically adjust with any income fluctuations. For instance, if your pay varies depending on your hours or goals achieved, you will always be allocating the same ratio of your money to savings, whether you earn more or less.

But there are potential downsides to consider too.

•   When you determine a percentage of income to save, it may feel more challenging to know how much you’re socking away. Again, if you allocate $500 a month to savings rather than a percentage, it’s easy to calculate where you stand at any moment during the year.

•   The way a percentage automatically adjusts to income changes may not suit you. For example, if you are saving 20% of your salary and then get a $10K raise, the amount funneled into savings will rise correspondingly. But what if you wanted to earmark that money to pay down your credit card debt more quickly? You will have to take steps to adjust where your money goes.

The 50/30/20 Rule

If you’re wondering, “What percent of my income should I save?” the 20% figure is likely to crop up often. One reason: the 50/30/20 budgeting plan, which was made popular by Sen. Elizabeth Warren and her daughter, Amelia Warren Tyagi, in a book they co-wrote. It suggests savers should allocate their money as follows:

•   50% of their after-tax paychecks toward essentials like housing, food, healthcare, and minimum debt payments.

•   30% toward discretionary spending

•   20% toward savings

So, someone who takes home $3,000 every two weeks (or $78k per year) might put $1,200 a month into savings. They would have $15,600 at the end of the year.

That’s just a guideline for getting started, though, so don’t panic if putting 20% into savings seems impossible right now. You can start at 10% or bump it up to 30% or more.

Recommended: See how your money is categorized using the 50/30/20 Calculator.

It All Starts With a Budget

Ack. The b-word: Budget. Making a budget may sound boring or even arduous, but it doesn’t have to be either. And sticking to a realistic spending plan can make or break a savings plan.

By prioritizing monthly expenses — from keeping a roof over your head to gassing up the car to indulging in a gelato or good sushi every Friday — you may be able to avoid impulse spending and hold on to more of your hard-earned dollars.

You can track your spending manually with a notebook or spreadsheets, or keep the data in the palm of your hand with a money-tracking app, where you can see your expenses, savings, and earnings all in one place whenever you want to take a peek.

4 Different Types of Savings

Once you determine what percentage you’ll be able to save from your salary, you may want to break down that amount even further, into separate designated “buckets” or sub-accounts for different goals, which could include things like:

1. Emergency Fund

An emergency fund has the potential to turn life’s potholes into speed bumps.

It’s money you can use to pay for unexpected expenses, such as medical bills, home repairs, and fender benders. And your emergency fund might serve as a lifeline if you lose your job and don’t have another source of income.

A good rule of thumb is to save at least three months’ salary, but you don’t have to come up with those dollars all at once.

You could start by saving a small amount each month — and you can always add to the fund when you get a raise, bonus, or tax refund. (You also should be prepared to replenish the fund if you have to use all or part of it at any point.)

The money in your emergency fund could go into a savings account at your local branch bank, or you might want to check out the benefits of an online bank account which might offer no account fees and a solid interest rate.

Get up to $300 when you bank with SoFi.

No account or overdraft fees. No minimum balance.

Up to 4.00% APY on savings balances.

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FDIC insurance.


2. Short-Term Goals

Most of us have goals we hope to fund in the next few months or couple of years. This could be anything from throwing your significant other a memorable birthday party to booking that vacation to Positano to affording a new car. You can start your own short-term fund at your financial institution. You can label the account “holiday spending” or earmark it for any other short-term goal: “Fall Wardrobe,” “Beach Vacation,” or maybe a “New Laptop.”

You may want to automate your savings and have money whisked from your checking as soon as your paycheck hits.

3. Long-Term Goals

Setting aside money for a long-term goal — a down payment on a house, a honeymoon in Bali, a year in Paris with your bestie — can feel like a slow slog. But you may improve your chances for success if you set up an account for the money and designate a consistent amount to slip in there from every paycheck.

Depending on your timeline, you may want to check into a certificate of deposit (CD), or you could stick with that same high-interest savings account, which you can build with automatic deposits and link to other accounts with a tracking app. These are secure ways to save towards future goals.

4. Retirement Savings

Another aspect of how much of your annual income you should save involves preparing for retirement. If you have a 401(k) investment savings account available through your employer, you’re likely already building wealth for retirement with automatic contributions every payday. And if your employer offers any type of matching contribution, you have an opportunity to grow your money even faster.

Beyond that, it’s up to you how big of a slice of your savings pie you want to put toward retirement at any time.

If you’re just starting out, and especially if you have some debts to pay off, saving for retirement may seem like the least of your worries. But the earlier you start putting money away, the faster it can grow. Time is the investor’s true friend; it allows you to ride the ups and downs of the market without panicking as you work toward your goals. (Remember, investments aren’t insured, so you need to be aware of the risk involved.)

If you don’t have an employer-sponsored plan — or even if you do, but you want more investment options or maybe more help than you’ve been getting — you can open your own traditional or Roth IRA outside of work. When considering which type of retirement account to open, IRA or 401(k), you might want to keep an eye on what fees might be associated with each plan.

It’s important to note that employer-sponsored plans allow investors to contribute more annually than an IRA would (basic limit in 2023: $22,500 for a 401(k) for those under age 50 vs. $6,500 for an IRA). And if the employer offers a matching contribution, that’s essentially free money you wouldn’t get from an IRA.

💡 Quick Tip: Want a simple way to save more everyday? When you turn on Roundups, all of your debit card purchases are automatically rounded up to the next dollar and deposited into your online savings account.

Deciding on Your Goals

Goals are a good thing: They can provide motivation for saving. But they can’t just hang out there; they probably need some prioritizing. That doesn’t mean that you are picking just one to focus on. More likely, you are going to decide how to divvy up that percentage of your income that goes into savings.

Say you are committed to saving 20% of your income. You may want to determine percentages for:

•   Retirement

•   Your child’s college education

•   A down payment on a house

One person might split that as 10%, 5%, and 5%. Another might instead do 8%, 2% and 10%. It depends on your particular goals, how else you might finance them (perhaps you expect your child to take out student loans), and the urgency of each.

Setting a Timeline

Some goals will be easy to plot on a timeline. For example, if your wedding is in a year and you’re saving $6,000 for your honeymoon, you’ll need to save $500 a month.

Others goals will likely need more finessing. (The amount you might need for retirement, for example, can be tough to pin down.)

But you’ve got this. You’ve probably been editing your mental wish list since you were a kid saving for candy … no, a toy … no, a bike. And you’ll likely be doing that for the rest of your life. If there isn’t enough money, something has to go or at least wait.

Could you drive your old car for another year or two, thereby saving money daily, if it meant getting a house sooner? Should you work another year before taking time off to be a stay-at-home parent? Would a weekend in Vegas be just fine as this year’s vacation if it meant next year you could afford 10 days in Greece? Only you can make those choices.

Deciding how much money you’ll need when you’ll need it, and how long it will take to save it may seem daunting as you start toward each new goal.

But it also can help you stay motivated to note when you’re making headway. And you might even find new ways to cut expenses as you go — especially if you use an app to track your progress.

Pay Off Debt

The average American had almost $8,000 in high-interest credit card debt as of the end of 2022. In addition, many people are also shouldering other debts, such as car loans and student loans.

If you’re a part of those statistics, paying off those debts could be the most important part of your saving plan.

How’s that?

•   Any debt on which you’re paying interest can feel painful. But if you’ve missed some credit card payments and you’re paying the default rate, say 27%, you’re likely putting an awful lot of money toward your past instead of toward your future.

•   High-interest debt can drag you down, so it’s important to ditch it as quickly as possible. Once you know where you stand with your budget and your savings goals, you may want to start by building a sort of “starter” emergency fund and then move forward with a personal debt reduction plan, like the debt avalanche, debt snowball, or the hybrid debt fireball, which focuses on paying high-interest debt in a way that can build momentum and keep you motivated.

Here’s how the debt fireball method works:

1.    Categorize your debts as either “good” or “bad.” (“Good” debts are generally for things that have potential to increase your net worth, like student loans or a mortgage. “Bad” debt is usually considered to be debt incurred for a depreciating asset, like car loans and credit card debt.) As you develop the list, note all the debts with higher interest rates, above what student loans and mortgages charge (say, 8% or higher) This is likely the “bad” debt you’ll want to focus on first.

2.    List your “bad” debts from smallest to largest based on their outstanding balances.

3.    Make the minimum monthly payment on all outstanding debts, then funnel any excess funds to the smallest of your “bad” debts.

4.    When that balance is paid in full, go on to the next smallest on the bad-debt list. Blaze through those balances until all your “bad” debt is repaid.

5.    When that’s done, keep paying off your debt on the normal schedule while also putting more into various savings strategies that will help get you to your goals.

Remaining Flexible

Consistency can be a key to successful saving. Otherwise, it’s just too darn easy to let yourself off the hook from paycheck to paycheck, month to month, and year to year. But that doesn’t mean your savings plan has to feel like a forced march.

Flexibility is also important.

A savings plan that seems smart and doable today may feel like torture six months from now. Or you might get a raise and decide your plan is actually far too easy and you could be socking away much more.

You might need a major car repair (or a whole new car). Get married. Have a baby. Get sick. Get fired. Or get hired for your dream job and have to move to Dubai.

Life changes. So it makes sense to tighten and lighten your budget — and the savings aspect you build into that budget — as necessary. If you’re tracking your expenses regularly, you may be better able to gauge how you’re doing and make any course corrections that much more quickly.

Anything Saved Is Better Than Nothing

It can feel discouraging when you get started on a long-term savings plan. Say you want to accumulate $60,000 for a down payment on a house. Perhaps saving 20% of your paycheck is impossible right now. And putting a couple of hundred dollars as a start can feel as if you will never reach your goal.

But over time, that little bit of money regularly contributed will indeed grow and propel you ever closer to your goal. Getting in the habit of contributing frequently can be a goal in and of itself, even if the amount is not as high as you’d like.

You may have also had this experience with shorter-term goals, such as building an emergency fund. Even if you only start by contributing $20, you will eventually reach your aim with steady saving.

Start Saving With SoFi

If you’re ready to start on the path to achieving a savings goal, look for a financial partner that minimizes fees and maximizes interest, to help your money work harder.

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 4.00% APY on SoFi Checking and Savings.

FAQ

Is it good to save 50% of your income?

It’s a wise move to save a portion of your paycheck, and 20% is an often-quoted figure to aim for. Fifty percent may be too high for many people, but if you can afford to save half of your take-home pay, you may get to your savings goals that much more quickly.

Is 20% of your income enough to save?

Many financial experts recommend saving 20% of your income or more if you can. The 20% figure is part of the popular 50/30/20 budget rule. However, some people may want to save more if possible, especially if they have a couple of major long-term goals they are saving for, such as buying a home, saving for their children’s education, and affording an early retirement.

What is the 60/20/20 rule?

The 60/20/20 rule is similar to the 50/30/20 budget guideline. In this case, it means that a person allocates 60% of their take-home pay to necessities, 20% to discretionary spending, and 20% to savings.

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SoFi members with direct deposit activity can earn 4.00% 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 4.00% 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 4.00% 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 12/3/24. 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.

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.

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Sep
27
2023
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A Guide to Student Loan Settlements

By | Debt Payoff, Student Loans, student_loan | No Comments

The idea of never making another student loan payment may be enticing enough to make your lender an offer. But is it possible to settle student loan debt for less than you owe?

In most cases, probably not. However, there are ways to get a student loan settlement if you’re in dire circumstances — though not everyone gets the chance and the risks might outweigh the rewards. We’ll walk you through some options.

What Is a Student Loan Settlement?

Let’s start at square one. A student loan settlement is settling your debt for less than what you owe on it and then making affordable repayments.

Settlements probably aren’t an option for people who make on-time, minimum payments. A lender isn’t likely to accept a settlement for less than what you owe if they have reason to believe you will eventually be able to pay back the entirety of the loan.

Typically, you can consider settlement if your student loans are in default. Once a federal student loan is in default, the entire balance comes due immediately, unlike loans in good standing, where you’ll have a minimum payment due each month.


💡 Quick Tip: Enjoy no hidden fees and special member benefits when you refinance student loans with SoFi.

Federal Student Loan Settlement

If you have student loans that you’re looking to settle, you first need to make sure you qualify to do so. You’ll need to currently be in default — which means that, if it hasn’t already, your loan will go to collections or a debt collector.

A settlement means you’re making a deal to pay off your loan for less than what you borrowed. This is different from student loan forgiveness, which cancels your loans under certain circumstances.

For a federal student loan settlement, there are three potential options to exit default:

1.    Waiver of fees. You’re now only eligible for the principal balance and interest, not the fees.

2.    Half interest and fees waived. All your fees are waived, plus 50% of the interest. You’re only responsible for the other 50% of interest and the principal balance.

3.    10% of principal balance and fees waived. You’re responsible for 90% of the principal balance and remaining interest.

Which option you choose will depend on the type of loans you have, your financial situation, and your loan servicer. Most of the time, new loan balances are due within a single fiscal year after the new settlement agreement. New terms will vary, but keep in mind that your new balance must be paid in full by the new deadline.

Settling Private Student Loans

If you have private student loans that you want to settle, your options are a bit different than federal loans. Your settlement will depend on your lender and what terms they are willing to accept. Each private lender is different, so you will have to contact them directly and ask their terms for settlement — if they accept settlements at all.

Alternatives to Student Loan Settlements

A student loan settlement is not without consequences. Your credit will likely take a hit when the loan is in default and once it is settled. But if your loans aren’t in default, there may still be other ways for you to lower your monthly payments.

1. Income-driven repayment plans (IDR)

For federal student loans, you can see if you qualify for an income-driven repayment plan. There are four options to choose from: Income-Based Repayment, Pay As You Earn (PAYE), Saving on a Valuable Education (SAVE) Plan, and Income-Contingent Repayment, among others. They all vary based on the details of your financial situation, like your income and family size.

The Department of Education recently started a new IDR program called SAVE. With this program, borrowers can pay as little as 10% of their discretionary income toward their monthly student loan payment, and their loans will be discharged after 20 years for undergraduate loans, and 25 years for graduate loans. Starting in July 2024, eligible borrowers in the SAVE plan will be able to pay 5% of their discretionary income toward their monthly federal loan payments and their loans will be forgiven in as little as 10 years, depending on their total loan balance.

2. Student loan forgiveness programs

There are plenty of ways federal student loans can be forgiven — if you qualify. With forgiveness, your loans are canceled, and you don’t have to pay off a balance, as you would with a settlement.

If you work in public service, education, healthcare, and some other sectors, you may be eligible for federal student loan forgiveness. To take advantage of certain federal programs, like Public Student Loan Forgiveness, you need to make 120 qualifying monthly payments and work for a qualifying employer to be eligible.

3. Discharging a loan

Getting your loan discharged isn’t the same as forgiveness, but it does mean your loan may get partially or completely canceled. You may qualify if you’re permanently disabled, your school closed, or, possibly, you file for bankruptcy. If you’re a veteran with a service-related disability, you receive Social Security Disability Insurance, or your doctor has diagnosed your disability, you might qualify to have your loan discharged.

If you have federal loans, and you feel your school “misled” you, promising jobs or certain salaries after graduation, you may qualify to apply for Borrower Defense Discharge through the Department of Education. As of July 2023, the Biden administration has approved $14.7 billion in relief for 1.1 million borrowers who claim their colleges took advantage of them or the schools closed abruptly. In August 2023, a federal court issued an injunction against the borrower defense discharge program, delaying payments, but borrowers can still submit an application.

Student Loan Refinancing

When you have a few different student loans, it can be overwhelming to pay them all on time every month. And with varying interest rates, it can get confusing.

Refinancing your student loans replaces all of your student loans with one new one. You get new terms and a new interest rate. Your new interest rate is usually determined by your credit score. If you’re having trouble meeting the minimum requirements, you could consider trying to get a cosigner.

Refinancing is a good option if you’re struggling to make your payments on time every month. Refinancing may help you lower payments and possibly your interest rate, depending on your terms. (You may pay more interest over the life of the loan if you refinance with an extended term.) Check out our student loan refinance calculator to get an idea of how refinancing could help your student debt situation.

It’s important to note that refinancing with a private lender means you would lose out on any federal benefits, including access to income-driven repayment programs or potential student loan forgiveness.

The Takeaway

While student loan settlements are rare — especially for federal loans — there are other options for borrowers who are struggling to pay their loans. If you have federal loans, you can apply for an income-driven repayment program and in some extreme cases, you may qualify for your loan to be discharged. Another option is student loan refinancing, though as mentioned above, if you refinance your federal loans you’ll lose access to certain federal benefits.

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


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

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.


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

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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