Sep
20
2023
Could Hyperinflation Occur in the United States?

What Is Hyperinflation: Can It Happen in the US?

By | Growing Wealth, invest, Investing | Comments Off on What Is Hyperinflation: Can It Happen in the US?

Hyperinflation occurs when prices for goods and services rise uncontrollably. It is an economic condition that fuels nightmares for consumers and for economists alike.

According to data from Johns Hopkins University professor Steve Hanke, there have been more than 60 documented instances of hyperinflation since the 1700s, and in every instance, economic conditions deteriorated so fast that in all cases, national currencies failed, meaning that they lost nearly all of their purchasing power both domestically and internationally.

That begs a key question: Could hyperinflation come in the United States? And, if so, could hyperinflation take down the U.S. dollar and trigger a recession?

Theoretically, the answer is “possibly.” Realistically, the answer is “not likely.” Let’s take a look at hyperinflation and evaluate the possibility of inflation on steroids taking root in the U.S. economy.

What Is Hyperinflation?

If you’re still not quite clear on what is hyperinflation, economists define the term as when the price of goods and services rises uncontrollably over a specific timeframe, with no short-term economic remedy able to bring those prices back down again.

While figures linked to hyperinflation vary, some economists say hyperinflation occurs when the price of goods and services in a country’s economy rise by 50% over the period of one month.

The causes of hyperinflation typically stem from a skyrocketing boost in a country’s money supply without any accompanying economic growth. That scenario usually occurs when a country’s government essentially prints and spends money in short-term bursts, thus triggering a rise in that country’s money supply.

When a government pursues a high level of short-term economic spending at a rate significantly higher than the country’s gross domestic product (GDP) rate, more money flows through the economy. When that happens, the real value of a nation’s currency declines, the price of goods and services rises, and inflation spikes.

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Is Hyperinflation Coming to the United States?

While U.S. inflation rates and the prices of many goods and services are on the upswing, economists dismiss the notion that U.S. hyperinflation is looming for the country for several reasons. First, it’s important to remember that hyperinflation and inflation aren’t the same thing, and the Federal Reserve would likely raise interest rates if inflation concerns grew.

According to data published in September 2023, the annual U.S. inflation rate was 3.7% for the 12 months that ended in August 2023. That’s a significant drop from June of 2022, when the inflation rate was 9.1%, which was led by certain items such as airline tickets, lumber, and hotel rates. Many economists attributed this to ongoing inventory shortages and supply chain issues and the release of post-pandemic pent-up demand.

Even the largest inflation rate in U.S. history — 23% in June, 1920 — wouldn’t come close to approaching hyperinflation levels of 50% in a month. Still, ongoing inflation is something that the U.S. economy hasn’t seen in more than four decades, and it’s a risk that investors may want to consider when devising their portfolio strategy.

How Can Hyperinflation Affect the United States?

Economists have largely downplayed the chances of a hyperinflation in the USA, but with inflation on the rise, it’s helpful for consumers to get a better grip on hyperinflation, in particular, and on inflation in general.

Hyperinflation Causes:

These are some of the typical causes of hyperinflation:

Falling Dollar Value

Like most major global currencies, the dollar trades on foreign currency exchanges. When a country faces inflationary risks, investors grow skittish, and may bypass that country’s currency in favor of more stable currencies. Even without hyperinflation, a weaker dollar can significantly hurt the U.S. economy.

(Hyperinflation is the extreme opposite of what happens during deflation, in which prices for goods and services decline and the value of a currency rises.)

Fewer Major Purchases

As inflation seeps into an economy, high prices may prompt individuals and businesses to defer or cancel large purchases. Consumers, for example, could hold off buying new homes, new vehicles, or major household appliances. Businesses might postpone big-ticket purchases like heavy machinery, office buildings, and commercial vehicles.

Some investors may hesitate to put money into stocks in a down market. All of those decisions could stall economic growth, as fewer dollars are circulating through the economy.

Monetary Policy

When inflation occurs, banks and financial institutions may not lend money or extend credit to consumers and businesses, as confidence in the overall economy wanes.

The economic fix for skyrocketing inflation typically comes from a country’s central bank. In the United States, that would be the Federal Reserve. When necessary, the Federal Reserve uses monetary policy to slow rising inflation by curbing the U.S. money supply, often by raising interest rates. Higher interest rates give consumers and businesses more incentive to save and less incentive to spend. That, in turn, slows rising inflation.

Recommended: What Is Monetary Policy?

Lower Investment Returns

Inflation eats into real investment returns. As the value of a dollar declines, investors need to earn more than their average return on investment in order to generate the same purchasing power.

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How to Combat Hyperinflation

Individuals can’t do much to combat hyperinflation on their own. In fact, during hyperinflation, economies and societies can break down or collapse. Fortunately, periods of hyperinflation are rare. And remember, the 3.7% inflation rate as of August 2023 in the U.S. is nowhere near the levels of 50% in a month, which is when many economists believe hyperinflation occurs.

That said, there are things that might help individuals lessen the impact regular or high inflation might have on their investments. These actions include having a balanced and diversified portfolio, and investing in Treasury Inflation-Protected Securities (TIPS), in which the principal amount invested adjusts with inflation.

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

Real-World Examples of Hyperinflation

Zimbabwe offers a relatively recent example of hyperinflation. Just over a decade ago, Zimbabwe’s inflation rate stood at a staggering 98% daily inflation rate as the country’s economy went into free fall. That means consumer prices doubled on a daily basis.

Today, the Zimbabwe dollar is very weak, as the country continues to struggle with the issues that often lead to hyperinflation, such as an increased money supply, political corruption, and a major decline in economic activity.

Even historically stable country economies have experienced hyperinflation.

In the immediate aftermath of World War I, the Weimer Republic of Germany fell into economic decline due to war reparation debts and significantly reduced economic activity. The German government printed too much money in an effort to handle its economic obligations and to ignite a stagnant economy. The country faced an inflation rate of 323% per month by November, 1923 — that’s an annual inflation rate of three billion percent.

In today’s dollars, the consumer impact of hyperinflation is particularly onerous. For example, a small cup of coffee that normally would cost $3 would cost $22 at a 1,000% inflation rate. Similarly, a rental payment for an apartment in a major U.S. city might normally cost $2,000. With a 1,000% inflation rate, that rent would cost $22,000.

Hyperinflation also exists on the world’s economic stage in 2023. Venezuela, for example, has an estimated inflation rate of about 400%.

The Takeaway

While hyperinflation is certainly an economic condition any country would strive to avoid, there’s no compelling evidence suggesting it’s on the U.S. economic horizon — now or anytime in the near future. Still, the country has been in an inflationary period since 2022, so investors may consider using some inflation-hedging strategies to reduce its impact.

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

FAQ

How does hyperinflation differ from regular inflation?

Inflation is the rate at which prices for goods and services are rising in a given economy. Hyperinflation is considered out-of-control inflation, at levels of about 50% in one month, and it can be a sign that a severe economic crisis is on the horizon.

Has the United States ever experienced hyperinflation in its history?

No. The closest the U.S. has come to hyperinflation is when annual inflation peaked at almost 30% during the Revolutionary War in 1778.

Are there any warning signs or indicators that could suggest the onset of hyperinflation?

Signs that might suggest that hyperinflation could happen include significant price increases of goods and services (such as increases of 50% in one month), the value of a country’s currency plummets, and economic activity slows or stops.

How can individuals protect their assets and finances during periods of hyperinflation?

Hyperinflation is quite rare, especially in countries with a central bank, like the Federal Reserve, that works to control inflation. However, there are things an investor might do to help limit the impact regular inflation might have. This includes having a balanced and diversified portfolio, and investing in Treasury Inflation-Protected Securities (TIPS), in which the principal invested adjusts with inflation.

Photo credit: iStock/milindri


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

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

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.
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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.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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Sep
20
2023
financial charts

What Is Operating Leverage?

By | Growing Wealth, invest, Investing, Terminology | Comments Off on What Is Operating Leverage?

Operating leverage looks at the relationship between a company’s fixed costs (e.g. rent), its variable costs (e.g. shipping), and revenue. The higher a company’s fixed costs relative to its variable costs indicates a high operating leverage.

Knowing whether a company’s operating leverage is high or low is important because those two factors, when taken into account with revenue, have an impact on profitability. A company with higher fixed costs has a higher degree of operating leverage (DOL), which then determines how much revenue is needed after costs are met — i.e. after the break-even point — to make a profit.

Operating Leverage Definition

The definition of operating leverage is fairly straightforward: It’s the amount of a company’s fixed costs relative to its variable costs. But the impact of operating leverage is best understood in relation to revenue.

That’s because a company with lower fixed costs has a lower break-even point before revenue begins to generate a profit. A company with higher fixed costs, i.e. higher operating leverage, has to work harder to cover its fixed costs and reach that break-even point. What are some of those costs?

Fixed Costs and Variable Costs

Many people are familiar with the idea of a fixed expense vs. a variable expense, as these apply to everyday life as they do in business.

•   Fixed expenses. These are certain business expenses that rarely vary, like commercial rent, for example. It doesn’t matter how much a company earns or loses in a given month, the amount of rent owed on their lease is set at a fixed rate until the contract expires.

Fixed expenses tend to be related to time: e.g. X salaries per year for X employees, the cost of liability insurance, loan payments.

•   Variable expenses. These expenses are related to the selling of a product or service, e.g. inventory and shipping costs, or marketing and sales. Another would be a “work for hire” employee who may or may not stay with the company.

Recommended: How to Read Financial Statements: The Basics

Examples of Hybrid Semi-variable and Semi-fixed Costs

Sometimes costs blend together to create semi-fixed or semi-variable costs. For instance, a business may promise a plant supervisor a weekly salary of $1,500, plus 1% of the cost price for every widget produced under that manager’s supervision.

The fixed cost is the manager’s weekly salary of $1,500. That remains the same from pay period to pay period.

The variable cost is the 1% unit production percentage paid to the manager as an income incentive. That 1% payout is largely unknowable when the promise is made, making it a variable cost.

In another example, a company may pay its corporate finance manager a salary, which represents a fixed cost. Yet that same company may also pay its line workers on a production basis, based on a per-product wage formula. In that scenario, the same company may have dual fixed and variable costs in the same cost pipeline (i.e., salaries and wages), making those costs semi-variable and semi-fixed costs.

When trying to understand a business’s profitability and scalability, combining different metrics with operating leverage, like the asset turnover ratio, may also be helpful.

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Understanding the Degree of Operating Leverage (DOL)

Since every business deals with a combination of fixed and variable expenses, understanding the degree of operating leverage is the next step in gauging a company’s path to profitability.

When a company has higher fixed costs, the break-even point is also higher. But once that point is reached, every additional dollar in revenue has the potential to generate more profit because fixed costs stay the same, regardless of changes in production (volume).

When a company’s variable costs are higher the break-even point may be lower, but additional revenue also potentially drives up the variable costs (because those costs rise as volume rises). This impacts profitability.

High Operating Leverage and Low Operating Leverage: A Comparison

Some industries tend to have a higher DOL and some tend to have a lower DOL. Those with higher fixed costs often include leases for land or buildings, or heavy R&D. Retailers are among those with lower fixed costs vs. their much higher variable costs (merchandise is pretty variable).

High Degree of Operating Leverage

 Low Degree of Operating Leverage
Airlines and automotive Food services (e.g. restaurants)
Energy Retailers (e.g. fashion)
Telecommunications Professional services
Pharmaceuticals Ecommerce

For example an airline has high fixed costs: It has to maintain a fleet of aircraft, pay fuel, salaries, insurance, and so on. A consulting firm has higher variable costs — i.e. the salaries and commissions of its consultant staff.

Recommended: How Fundamental Analysis Can Help Your Investing Strategy

Operating Leverage Formula

The operating leverage formula is a useful way to compare companies within the same industry.

Mathematically, the formula for operating leverage looks like this:

Operating Leverage = [Quantity (Price – Variable Cost per Unit)] / Quantity (Price – Variable Cost per Unit) – Fixed Operating Cost

Example Scenario and Calculation

For example, say Firm ABC has sold 1,000,000 hammers for $12 each. Firm ABC also has $10,000,000 worth of fixed costs, for expenses for machinery, office equipment, employees, among other costs. With unit sales at $12 each and $10 million in fixed costs, Firm ABC pays $0.10 per unit to make each hammer.

Here’s what that equation looks like in mathematical terms, and what the operational leverage outcome winds up being:

Operating Leverage = [1,000,000 x ($12 – $0.10)] / 1,000,000 x ($12 – $0.10) – $10,000,000 = $11,900,000/$1,900,000 = 6.26 or 626%

Based on that calculation, a 10% increase in revenue will result in a 62.6% operating income (i.e. profit) increase for Firm ABC.

But if you ran the numbers for Company XYZ, another hammer manufacturer, with different fixed costs and different variable costs, the amount of profit generated by an increase in revenue would also be different — and this could provide an important point of comparison for investing in one company vs. another.

💡 Quick Tip: Distributing your money across a range of assets — also known as diversification — can be beneficial for long-term investors. When you put your eggs in many baskets, it may be beneficial if a single asset class goes down.

How to Use Operating Leverage

Operating leverage helps to determine a few things. First, it’s used to measure the break-even point for a company. That’s the point at which expenses are covered and profit is zero — knowing this can help set appropriate per-unit prices.

That’s because changes in revenue naturally impact operating income, but calculating the DOL can reveal what that means for individual companies: i.e. how much will a 10% change in revenue affect profit? A high DOL company might see higher profits once fixed costs are covered. But if revenue decreases, there would be downward pressure on its margins.

Knowing the DOL can also help assess whether a company is getting the most out of its fixed-cost assets (e.g. the cost of the factory, machinery, maintenance), or are there efficiencies that might help generate higher operating income (profit)? By managing fixed cost items better, a company might increase profits without needing to move other levers like price or number of units sold.

The Takeaway

Operating leverage is an important metric in business. It can help analysts or investors better understand a company’s fixed costs relative to its variable costs, and how revenue will impact profit owing to the difference in break-even points.

For example, a company with higher fixed costs has higher operating leverage than a company with higher variable costs. So the higher DOL company will see a substantive change in profits as sales increase past the break-even point.

A company with higher variable costs (and lower operating leverage) will see a smaller profit on each sale — but because it has lower fixed costs, it likely won’t need to increase sales as much to cover those items.

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 does it mean to have high operating leverage?

When a company has higher fixed costs it’s said to have a higher degree of operating leverage. This means the break-even point for that company is also higher. After that point, every additional dollar in revenue has the potential to generate more profit because fixed costs stay the same, regardless of changes in production (volume).

What does it mean to have low operating leverage?

When a company’s variable costs are higher, it has lower operating leverage (i.e. lower fixed costs). In that case the break-even point for that company is lower, and a lower proportion of additional revenue will go toward profit, because variable costs go up as sales rise.

How do you improve operating leverage?

One way to improve operating leverage is to reduce fixed costs where possible. This will lower the break-even point for a company and potentially increase profits. That said, different companies are structured differently, and improving operating leverage may require changes in variable costs versus a company that will benefit by lowering its fixed costs.

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.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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
20
2023
Are Scholarships Taxable?

Are Scholarships Taxable?

By | Financial Independence, student_loan, Terminology | Comments Off on Are Scholarships Taxable?

Generally, scholarships used to pay for qualified educational costs at an eligible educational institution aren’t considered taxable income. The same goes for any grants used to pay for college tuition and fees.

However, there are some cases in which scholarship or grant money may be taxable. For example, if you have money left over after covering your qualified education expenses and use it for other costs (such as room and board or school supplies not required by your program), these funds typically count as taxable income.

If you or your student received scholarship funding, it can be helpful to know ahead if it will contribute to your tax liability. Here’s what you need to know about identifying taxable scholarships and handling filing requirements.

Scholarships That Are Tax-Free

Students can be exempt from paying taxes on their college scholarships if they satisfy certain criteria. For one, they must be enrolled at an accredited college, university, or educational institution that maintains regular attendance.

Additionally, scholarship funds must be used to pay for qualified education expenses — a determination made by the IRS. Under this definition, qualified education expenses include the following:

• Tuition

• Mandatory fees (e.g., athletic and tech fees)

• Textbooks

• Equipment and supplies (e.g., lab equipment)

When it comes to textbooks, equipment, and supplies, anything that is required by your school to complete coursework would be free from taxes. If you use the funding towards an extra-curricular activity, such as a club or intramural sport, however, the amount you spend would be considered taxable.

If the scholarship is used for a certificate or non-degree program, the entire amount is taxable whether or not funds are used for qualified education expenses.

It’s important to note that any scholarship funds leftover after paying for qualified education expenses would become taxable income.

Scholarships Considered Taxable Income

How are scholarships taxable? According to the IRS, scholarships used for expenses outside the scope of qualified education expenses must be reported in gross income — making them taxable.

Scholarship funds used for the following costs are considered taxable by the IRS:

• Room and board

• Travel

• Medical expenses

• Optional equipment (e.g., new computer)

But are scholarships taxable income in any other situations?

Scholarships that are awarded in exchange for services like teaching or research, often known as fellowships, are classified as taxable compensation in most cases. Students would have to pay taxes even if their fellowship money is used to pay for tuition and other qualified education expenses.

However, there are a few exceptions when education-related payments could be tax-exempt. Specifically, students do not have to pay taxes on funds received for required services through the following scholarship programs:

• National Health Service Corps Scholarship Program

• Armed Forces Health Professions Scholarship and Financial Assistance Program

• Student work-learning-service programs operated by a work college

Other forms of financial aid could be considered taxable income as well.

Earnings through the Federal Work-Study program are subject to federal and state payroll taxes. If you stay below 20 hours a week while enrolled full-time, you won’t have to pay FICA (taxes for Medicare and Social Security) taxes.

Even Pell Grants — a federal aid program for students with significant financial need — are taxable if they’re not used for qualified education expenses.

Making it Legal: Reporting Taxable Awards

If a college scholarship is considered taxable, the student would need to report the scholarship (or portion of the scholarship) on their tax return.

Some students may receive a W-2 form from the scholarship provider outlining the taxable amount. Otherwise, they may need to calculate and enter the amount on their own tax return.

The student would report any taxable amount of a scholarship, grant, or fellowship as follows:

• If filing Form 1040 or Form 1040-SR, you would include the taxable portion in the total amount reported on Line 1a of your tax return. If the taxable amount wasn’t reported on Form W-2, enter it on Line 8 of Schedule 1 (and attach the form).

• If filing Form 1040-NR, you would report the taxable amount on Line 8 and fill out and attach a Schedule 1.

If you have questions about whether or not any portion of your scholarship money is taxable and how to report those funds on your tax return, it’s a good idea to consult a tax professional for personalized guidance.

How Education Tax Credits Fit in

Students and their family members may be eligible to claim the American Opportunity Tax Credit (AOTC) or the Lifetime Learning Credit (LLC) if they paid for college and related costs in the past year. Take note that you can’t use both tax credits for the same student in the same year.

To claim either tax credit, you’ll need Form 1098-T from your college. This form shows any reportable transaction for an enrolled student.

To qualify for the AOTC or LLC, you could have paid educational expenses out of pocket or with student loans. Expenses that were paid for by tax-free scholarships are not eligible for a tax credit.

The AOTC and LLC differ in scope and eligibility, so it’s helpful to compare both to see which may apply and provide a greater tax return.

American Opportunity Tax Credit (AOTC)

The AOTC can be used for qualified education expenses — tuition, fees, textbooks, and necessary supplies — for a student’s first four years of college.

The maximum credit currently stands at $2,500 a year for eligible students. This is calculated as 100% of the first $2,000 in qualified education expenses paid for an eligible student plus 25% of the next $2,000 in qualified education expenses.

If the AOTC reduces your taxes to zero, it’s possible to have 40% of the remaining credit (up to $1,000) refunded.

Eligibility for the AOTC is based on the tax filer’s modified adjusted gross income (MAGI). If you’re filing separately, your MAGI must be $80,000 or less to qualify for the full AOTC credit. The threshold is $160,000 for married filing jointly.

It’s possible to receive a reduced AOTC amount if filing separately with MAGI between $80,000 and $90,000 or $160,000 and $180,000 for married filing jointly.

Recommended: 23 Tax Deductions for College Students and Other Young Adults

The Lifetime Learning Credit (LLC)

The LLC can apply to a broader range of expenses than the AOTC. It can be used to claim up to $2,000 for tuition and related educational expenses for undergraduate, graduate, or professional degree courses. Costs of non-degree programs that improve job skills are also eligible for the LLC.

This credit does not have a limit on the number of years it can be claimed on your tax return. However, the LLC has stricter income requirements.

For Tax Year 2022, the amount of your LLC is gradually reduced (phased out) if your MAGI is between $80,000 and $90,000 ($160,000 and $180,000 if you file a joint return).

You can’t claim the credit if your MAGI is $90,000 or more ($180,000 or more if you file a joint return).

Recommended: Can You Deduct Your Child’s Tuition from Taxes?

Don’t Forget Deductions

If you’re paying interest on a student loan, you may be eligible to deduct up to $2,500 of that interest with the student loan interest deduction. To be eligible, interest payments must be legally obligated and your filing status can’t be married filing separately.

There are also income requirements, which can vary annually, to factor in for the deduction calculation. For the tax year 2022, the filer’s MAGI must be less than $85,000 (or $170,000 if filing jointly) to be eligible for the full $2,500 deduction.

If your MAGI is between $70,000 and $85,000 (or $140,000 and $170,000 if filing jointly), you could qualify for a reduced deduction.


💡 Quick Tip: Need a private student loan to cover your school bills? Because approval for a private student loan is based on creditworthiness, a cosigner may help a student get loan approval and a lower rate.

The Takeaway

Scholarships, grants, and fellowships can help make college more affordable. Not only that, the funds you receive typically aren’t taxable.

A general rule is that your college scholarship is tax-free when it is used to pay for “qualified education expenses.” Exceptions include any part of the scholarship or grant you used to pay for supplemental things (not required for a course) or as payment for work or services you performed.

If scholarships, grants, other aid, and federal student loans are enough to cover the cost of your college education, you may want to consider applying for a private student loan. Loan limits vary by lender, but you can often get up to the total cost of attendance. Interest rates may be fixed or variable and are set by the lender. Generally, borrowers (or cosigners) who have strong credit qualify for the lowest rates.

Keep in mind, though, that private loans may not offer the borrower protections — like income-based repayment plans and deferment or forbearance — that automatically come with federal student loans.

If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.


Cover up to 100% of school-certified costs including tuition, books, supplies, room and board, and transportation with a private student loan from SoFi.

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Please borrow responsibly. SoFi Private Student loans are not a substitute for federal loans, grants, and work-study programs. We encourage you to evaluate all your federal student aid options before you consider any private loans, including ours. Read our FAQs.

Terms and Conditions Apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. SoFi Private Student loans are subject to program terms and restrictions, such as completion of a loan application and self-certification form, verification of application information, the student's at least half-time enrollment in a degree program at a SoFi-participating school, and, if applicable, a co-signer. In addition, borrowers must be U.S. citizens or other eligible status, be residing in the U.S., and must meet SoFi’s underwriting requirements, including verification of sufficient income to support your ability to repay. Minimum loan amount is $1,000. See SoFi.com/eligibility for more information. Lowest rates reserved for the most creditworthy borrowers. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change. This information is current as of 04/24/2024 and is subject to change. SoFi Private Student loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org).

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.


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

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The Importance of Setting Your Long-Term Financial Goals

By | Budgeting & Goals, Financial Independence | No Comments

What are your financial hopes and dreams for your future: to own a second home? Retire by age 50? Send your future kids to college without a single student loan?

Setting those goals for the faraway future is important. Not only can these aspirations help you visualize what you want to achieve, they can set you on the path to take control of your finances and start saving. Typically, these are things you want to achieve that are at least seven years ahead of you or perhaps much further out.

When you establish your goals, you can commit to them, save towards them, and watch your money grow.

The first step involves planning, and here’s where you’ll learn some smart moves to make. You’ll find out how to identify what you want to achieve and then start on the path to making those goals a reality.

Starting by Thinking Big

Setting goals can really fire a person up to achieve big things. Indeed, oft-cited psychological research by Edwin Locke and Gary Latham showed that subjects who were assigned specific, challenging goals were 90% more likely to succeed.

The two researchers went on to publish “A Theory of Goal Setting and Task Performance,” in which they discussed what they’d determined as the five key components of setting achievable goals:

•   Clarity

•   Challenge

•   Commitment

•   Complexity

•   Feedback

What do these mean for your financial goal setting? First, you must have clarity and specificity about exactly what you want to accomplish. It can be helpful to start by making two lists: What’s most financially stressful to you right now, and what you might consider a dream that you’d like to achieve.

While traditional long-term financial goals like saving for retirement or buying a home are worthwhile, they’re so universal that they might seem uninspiring.

Keep in mind that you can and will likely end up working towards those goals as well as some goals that feel personal. Some examples to contemplate:

•   “Start my own bakery business.”

•   “Travel across every continent, writing about it as I go.”

•   “Buy a property in the desert and build a home to rent as an Airbnb.”

•   “Start a scholarship fund for low-income high school students.”

•   “Pay for my parents’ retirement expenses, so they don’t have to worry.”

You probably have general ideas of what your long-term financial goals may be, but getting as specific as possible is what can help you the most. You could take time to do some self-reflection in order to establish your goals. Think, write, and revise.

What about your goals is motivating for you? Can you break your big goals down into smaller benchmarks that also motivate you? Do they feel challenging enough to be aspirational and inspiring? This process will help you set your long-term financial goals so you can then go about achieving them.

💡 Quick Tip: Make money easy. Enjoy the convenience of managing bills, deposits, and transfers from one online bank account with SoFi.

Breaking Your Goals Down

Next comes the harder part — making your commitment to your goals real and tangible. This is where the “complexity” component becomes important. How might you simplify the path you’ll take towards your future?

At this stage, you can take a look at the goals you’ve laid out and prioritize them. Which goals will have the biggest positive impact on your life? Which are most pressing?

Next, you can break down the goal into smaller, shorter-term goals. Any big to-do will likely seem overwhelming without a step-by-step plan in place.

As you prioritize and break down your various long-term goals, you might find it helpful to place dollar amounts on these components.

💡 Quick Tip: 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.

Examples of Financial Prioritization

Consider the goals “save for retirement” and “start my own bakery business.” Are you ready to tackle them? Begin with retirement:

•   Ask yourself if it might be important to first focus on any outstanding shorter-term debts. For instance, if you’re in credit card debt, develop a plan to get out from under it.

•   If you don’t have an emergency fund that covers at least three to six months’ worth of your expenses, you could commit to contributing towards it until it’s full. How much will you need to put away on a monthly basis?

•   Next, you could research retirement savings options. You might go through your employer or pursue a separate account on your own. What’s your goal amount of money for this fund? Break down what you’ll need to contribute to get there, month-by-month and year-by-year.

Next, think about starting your own business. To prioritize, you might think about and plan the following:

•   What do you need to learn? Can you do online research and consult your local library?

•   Cultivate a mentor. This can be as easy as finding someone who’s currently a small business owner and asking them out to coffee.

•   Research the dollars and cents. Do your research about the costs of opening and sustaining a bakery. What is required to establish this kind of business? You may be able to read up on business plans online. What fees and expenses are involved? What would a business loan vs. personal loan look like?

These steps can help you dig into your financial goal-setting process.

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Take Action and Be Accountable

Next, explore how you will hold yourself accountable to working towards the benchmarks you’ve identified. Once you’ve identified your goals, prioritized them, broken them down, and put dollar amounts on the pieces that require them, you might find it helpful to find an accountability buddy.

•   Buddy up. You could tell someone you trust (a friend or relative perhaps) about your goals, and set monthly or quarterly check-ins to review progress. Schedule those calls or meetings, and put them in your calendar to make sure they don’t get lost in the ether.

•   Talk to your partner. If you have a partner, be sure to discuss your goals with them — they can help you achieve them and support you as you move forward.

•   Automate your savings. This can help you get started by making the whole process seamless. Whether you are saving to get out of credit card debt as a first step or are growing a retirement fund, having money automatically whisked out of checking and into a savings vehicle can accelerate your progress.

•   Consult with a professional. As you work towards your long-term goals, you may want to meet with a financial professional or business advisor, depending on your needs. They can counsel you on the best way to achieve your long-term financial aspirations.

•   Understand that it’s not always a straight line to success. When you hit speed bumps along the road, you might benefit from reframing negative thoughts like “I’m never going to get there” or “I’m a failure” with less catastrophic ones, like “trial and error is crucial to getting anywhere.”

Setting Yourself Up For Success

No matter what your long-term financial goals are, it’s the planning that helps make them possible.

Creating plans to achieve your long-term goals can help give your life structure and a deeper sense of purpose in all of your actions.

Using tools can help you get where you want to be. Shop around for a financial institution that can be a solid partner for you and offer you helpful ways to better manage your money and grow your wealth.

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 3.80% APY on SoFi Checking and Savings.

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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.


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

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Different Types of Insurance Deductibles

Different Types of Insurance Deductibles

By | Family Finances, Life & Career, Terminology | Comments Off on Different Types of Insurance Deductibles

Buying insurance coverage helps keep you protected from the full financial fallout of an accident or injury. But even with insurance, you’ll probably still be responsible for some costs when you file a claim.

An insurance deductible is the amount of money the insured party is responsible for at the time of loss or damage: it’s the cost you have to pay before the insurance company pays out its share.

Here’s what you need to know about the different types of insurance deductibles and other insurance-related costs you may face.

What Is a Deductible?

When you buy insurance, you’ll encounter several different costs depending on the type of coverage you’re purchasing. These may include monthly premiums, copays, out-of-pocket maximums, and possibly others.

The vast majority of insurance policies, whether they’re auto, health, or homeowners, carry a deductible. So what is a deductible, and how does it work?

The deductible is a sum of money you, as the insured party, are expected to pay toward a loss. Another way to think about it: It’s the amount the insurance company deducts from the total claim and asks you to pay.

For instance, say you get into a car accident in which you sustain $8,000 worth of damage and you have a $1,000 deductible. When you file your claim, you’ll pay $1,000 toward repairs and the insurance company will cover the remaining $7,000 (or up to whatever limits are laid out in your insurance contract).

Your deductible can be a fixed dollar amount or a percentage, depending on your individual plan and the kind of insurance policy you’re talking about. Homeowners insurance, for instance, is commonly offered with deductibles calculated as a percentage of the property’s total insured value.

It’s important to understand that your deductible is separate from your premium, which is the amount of money you pay each month in order to keep your insurance policy active.

Also remember that you may also be responsible for other insurance-related expenses, like copays or coinsurance, so always read the fine print carefully.


💡 Quick Tip: If you have a mortgage, a homeowners policy may be required by your lender. Surprisingly, unlike auto insurance, there is no legal mandate to carry insurance on your home.

Copay vs Deductible

With certain types of insurance — primarily health insurance products — you may be required to pay a copay each time you go to the doctor’s office or receive a covered service. This copay is separate from your deductible, and, generally, your copay doesn’t count toward your deductible amount.

As with other types of insurance, the health insurance deductible must be paid by the insured person before the insurance company begins its coverage. However, individual health plans may cover certain services, such as regular check-ups, even before the deductible is paid in full.

Here’s an example: Say you twist your ankle and visit your doctor, who orders an MRI. If your copay is $25, you’ll pay $25 at the office before or after you see your physician. If the total cost of the doctor’s care and imaging services is $1,000 and you have a $500 deductible, you may still be responsible for the full $500. Any copays you’ve paid along the way won’t be subtracted from your deductible.

Some plans may carry a coinsurance cost rather than a copay. The two are similar, but not identical. Coinsurance is an amount you pay when you receive a medical service, separate from your deductible. Unlike copays, which are charged at a fixed dollar amount, coinsurance is calculated as a percentage of the total cost of the service. Your plan might even include both copays and coinsurance.

All insurance policies are different, and your individual costs and experience may vary depending on the services you’ve received and the specific coverage you have. You can consult your insurance paperwork or contact your insurer for full details on what’s covered in your plan.

Out-of-Pocket Maximums

Health insurance policies in particular are subject to federally mandated out-of-pocket maximums. This is the highest total dollar amount you’ll have to pay toward covered healthcare over the course of a single year, including both deductibles and copays.

The out-of-pocket maximum does not include the amount you pay toward your monthly premium, however. Nor does it include out-of-network services or services that your plan expressly does not cover.

For 2023, the out-of-pocket maximum for a Marketplace plan can’t be more than $9,100 for an individual or $18,200 for a family. In 2024, that limit rises to $9,450 for an individual or $18,900 for a family. (The maximum is allowed to be lower, however, so consult your plan paperwork for full details.)

Do You Want a High or Low Deductible?

When shopping for insurance coverage, you’ll likely have a range of options to consider, including varying deductible costs. And when it comes to figuring out whether you want a high or low deductible, the answer is: It depends.

Generally speaking, the lower your deductible, the higher your premium will be and vice versa. This makes sense when you think about it. If you have a low deductible, the insurer will have to pay out a higher amount when you incur a loss. So in exchange for the promise of covering most of the costs when a claim is filed, the company expects you to pay more up front in the form of a higher premium.

While choosing a higher deductible can help you save money over time since your monthly premiums will be lower, it also means you’re assuming more risk. If something happens and costs are incurred, you’ll be responsible for a larger share of those expenses.

On the other hand, choosing a lower deductible means you’ll likely pay a higher premium each month. But you’ll also have less to worry about if you do need to file a claim, since the insurance company will cover more of the costs (assuming that all the damages and expenses are covered under your policy).

As with so many other financial matters, what’s right for you comes down to a number of factors, including your risk tolerance, budget, and even your lifestyle. If you participate in extreme sports, for instance, and are at risk for catastrophic injuries, you might want to pick a health insurance policy with a lower deductible and higher premiums.

Recommended: How Much Is Homeowners Insurance?

Zero-Deductible Insurance: Is It a Thing?

You may see ads for zero-deductible insurance policies and wonder if they’re too good to be true. While zero-deductible insurance policies do exist, they usually carry higher premiums than policies that do carry deductibles, and you may also be responsible for a one-time no-deductible fee or waiver.

Furthermore, some insurance coverages are required by state law to carry a minimum deductible, particularly when it comes to auto insurance.

Before you sign up for any kind of insurance coverage, be sure to read the contract thoroughly to ensure you understand what costs you’re responsible for.

Recommended: What Does Auto Insurance Cover?

Types of Deductibles

There are many different types of insurance policies with deductibles on the market. Common ones include:

•   Health insurance deductibles

•   Auto insurance deductibles

•   Homeowners insurance deductibles

•   Renters insurance deductibles

•   Life insurance deductibles

The deductible amount varies by type of insurance, company, and plan, among other factors.


💡 Quick Tip: Online insurance tools allow you to personalize your coverage for homeowners, renters, auto, and life insurance — all with zero paperwork.

The Takeaway

Purchasing insurance is an important — and sometimes legally mandated — step toward protecting yourself from the high costs of personal accidents, property damages, and medical bills. But most policies involve set costs, including deductibles. This is the portion of the claim the insured party is responsible for paying.

Whether you’re comparison shopping or switching from your current plan, it’s important to understand what your deductible will be. Having a full picture of all the costs involved can help you find coverage that fits your life and finances.

When the unexpected happens, it’s good to know you have a plan to protect your loved ones and your finances. SoFi has teamed up with some of the best insurance companies in the industry to provide members with fast, easy, and reliable insurance.

Find affordable auto, life, homeowners, and renters insurance with SoFi Protect.

Auto Insurance: Must have a valid driver’s license. Not available in all states.
Home and Renters Insurance: Insurance not available in all states.
Experian is a registered trademark of Experian.
SoFi Insurance Agency, LLC. (“”SoFi””) is compensated by Experian for each customer who purchases a policy through the SoFi-Experian partnership.

Coverage and pricing is subject to eligibility and underwriting criteria.
Ladder Insurance Services, LLC (CA license # OK22568; AR license # 3000140372) distributes term life insurance products issued by multiple insurers- for further details see ladderlife.com. All insurance products are governed by the terms set forth in the applicable insurance policy. Each insurer has financial responsibility for its own products.
Ladder, SoFi and SoFi Agency are separate, independent entities and are not responsible for the financial condition, business, or legal obligations of the other, SoFi Technologies, Inc. (SoFi) and SoFi Insurance Agency, LLC (SoFi Agency) do not issue, underwrite insurance or pay claims under LadderlifeTM policies. SoFi is compensated by Ladder for each issued term life policy.
Ladder offers coverage to people who are between the ages of 20 and 60 as of their nearest birthday. Your current age plus the term length cannot exceed 70 years.
All services from Ladder Insurance Services, LLC are their own. Once you reach Ladder, SoFi is not involved and has no control over the products or services involved. The Ladder service is limited to documents and does not provide legal advice. Individual circumstances are unique and using documents provided is not a substitute for obtaining legal advice.

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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