May
18
2023
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Creating a One-Year Savings Plan

By | Budgeting & Goals, money | Comments Off on Creating a One-Year Savings Plan

A year may seem like a short period of time, but you can accomplish a lot, including developing a one-year savings plan that can help you hit some significant financial goals. A plan that lasts 365 days can give you, as an earner, the opportunity to save and feel a sense of accomplishment.

In other words, a year from today, you could be richer than you are now, or potentially have a better emergency fund. Or, if you are diligent, you may be on your way to funding a European vacation or finally redoing that dated bathroom.

Of course, creating a plan that will work for your unique situation does require a bit of upfront effort. That’s exactly what you’ll learn when you read on.

Decide What are You Saving For

Before you even glance at your budget, it’s important to get clear about exactly what you’re saving for. Creating a specific objective can give you the information you need to create a solid plan to make it happen — it might also help motivate you to stick to that plan once you’ve made it.

For a one-year saving plan, consider factors like your income and current cost of living to settle on something that will likely be achievable in just a year. For instance, maybe this year you want to stash cash for one of the following:

•   A vacation you’ve been dreaming of for years (pending pandemic complications, of course).

•   A down payment for a new car.

•   A down payment (or significant portion thereof) for a new home.

•   Long-awaited home improvements.

•   Putting extra money away for retirement.

You may be familiar with the idea of SMART goals — that objectives are most easily met when they’re Specific, Measurable, Achievable, Relevant and Time-bound.

In the world of one-year savings plans, that means coming up with a specific dollar figure for your goal and making sure it’s relevant enough to your life to keep you motivated.

You probably also want to consult your earnings and expenses to ensure that it’s a realistic goal; it’s going to be a lot harder to save up $5,000 if you’re making $30,000 than it is if you’re making $60,000. (You’ll learn more about budgeting and cuts in just a second.) Divide your total goal by 12 to see how much it would require you to set aside each month, which will give you better insight as to how achievable it really is.

Once you’ve got your goal worked out, write it down and post it in a prominent place in your home, like on your refrigerator. Studies have shown that you’re more likely to reach your financial goals if you take this simple action, so it’s worth picking up your pen!

How To Create a One-Year Saving Plan You’ll Stick To

Now that you’ve got a goal in mind, you still need to figure out how to turn it into a reality.
Here are some ideas on how you could do it..

Start with Your Existing Budget

You can’t make any big changes to your finances if you don’t know what they look like in the first place. And that means the first step toward revamping your budget is to take a closer look at how it looks right now.

If you don’t have a budget yet, take a month to track exactly where all your money is going. Be sure to include both regular, fixed expenses, like rent and insurance, as well as more flexible, discretionary spending like food and transportation. Be brutally honest. Tacking every cent of fixed vs. variable expenses will give you the best chance at figuring out how to spend less.

Which leads us to our next step…

Get Creative with Budget Cuts

There are really only two ways to save money: make more of it, or spend less of it. And while asking for a raise or starting a side-hustle might be smart moves, you only have so much leeway with your boss and time in your day. In other words, you likely have more control of how much you spend than how much you earn.

Since this is an elevated, short-term savings goal, you might be able to make more substantial cuts than you would if you were planning on implementing this savings strategy for the rest of your life. There are simple ways to cut down monthly expenses and save money daily. For instance, could living without streaming services be possible? Or could you quit dining out for one month and then vow not to buy any new clothes the next? A challenge like that can engage some people’s competitive spirit.

Even without these measures, how can you dial down your own living expenses? You might quit buying overpriced, pre-packaged convenience foods or find ways to get creative with ramen. Maybe you can start doing your own oil changes rather than taking the car in for service. Think of this as an opportunity to learn some new life skills while also stashing some extra cash!

Recommended: How to Save Money on Gas

Regardless of how you get there, your goal is to be able to set aside the monthly amount you’ll need to meet the one-year savings goal you wrote down and pinned to your bulletin board. So get out your calculator, and don’t be afraid to get creative.

Get up to $300 when you bank with SoFi.

No account or overdraft fees. No minimum balance.

Up to 4.20% APY on savings balances.

Up to 2-day-early paycheck.

Up to $2M of additional
FDIC insurance.


Make a Plan for Your Investments

No matter how much money you save, it won’t go as far as it could if you just stash it under your mattress. Figuring out where to put your savings is an important step in your planning.

Different kinds of savings accounts are used to help individuals save for different goals.

•   For example, a long-term goal like retirement may be best suited for an investment vehicle like a Roth IRA, which offers some tax advantages.

•   For shorter term goals like starting an emergency fund, an account that offers more flexibility and has less restrictions, like a high yield savings account, may be a better option.

Keep it Simple

Having a plan is one thing. Sticking to it is another. But if you keep a simple savings plan, you’ll stand a much better chance of actually making it work.

For instance, automating your finances by setting up recurring transfers can direct a portion of each paycheck into your savings account. This makes saving seamless — and ensures you don’t get stuck in that all-too-familiar situation at the end of the month where you accidentally spent what you intended to set aside.

And building in systemic cuts that you don’t have to think about (like ditching that monthly subscription box, for example) is a lot easier than poring over the coupon book every Sunday.

Recommended: Money Management and Setting Financial Goals

The Takeaway

Like any money goal, your one-year savings plan is going to take some grit to get to. But having the right tools at your disposal does make the process a whole lot less painful. Whether that means choosing one of the many budgets out there to find one that suits your style or using an app your financial institution provides, there are ways to enhance your money management.

A SoFi Checking and Savings Account offers you an easy birds’-eye view of your finances, and its Vaults feature allows you to set aside savings for specific goals and purposes.

Best of all, there are no account fees, you’ll benefit from a competitive annual percentage yield (APY), which can help your money grow faster.

SoFi: Helping you achieve your financial goals.

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

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

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

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

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

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

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

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

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May
18
2023
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4 Places to Store Short-Term Savings

By | Budgeting & Goals, money | Comments Off on 4 Places to Store Short-Term Savings

If you have a savings goal that’s coming up in the not too distant future — such as the downpayment on a home, a bathroom reno, or plumping up an emergency fund — you may want to consider some good short-term savings options.

There isn’t a hard and fast definition of short-term savings, but it’s typically considered to be money you want to use in five years or less.

While there are a number of options for short-term savings, one of the best places to start stashing cash for a short-term goal can be a savings account. They can offer safety (so you shouldn’t lose any money), liquidity (allowing you to access money when needed), and growth (meaning they are interest-bearing).

But some of these accounts offer more liquidity and higher interest than others. With a little reading and research, you can start socking your cash away in the right place — and start moving closer to those short-term savings goals.

Should You Invest Short-Term Savings?

Depending on your short-term savings goals, a savings account may be a wise move. One significant downside to any cash savings account is that they tend to have relatively low-interest rates.

You might however wonder: Should I invest this money in stocks or a mutual fund in order to meet my short-term goals more quickly?

Generally speaking, for short-term money, your goal is not necessarily to maximize returns. It is to control the risk — to keep it safe — so that the money is available when it’s needed.

While everyone’s risk tolerance is different, the downside to investing in the market is that you might lose money in the short term. Investment returns start to “smooth out,” or return their average yield, over longer periods. Shorter periods tend to be volatile and unpredictable — especially in the stock market.

To invest in the short-term would require complete flexibility — if the market were to fall steeply, it would likely be best to wait it out and avoid realizing losses. Suddenly, you’re on the market’s timeline, not your own.

Because of this, these investments may be inappropriate for an emergency fund, which needs to be accessible at all times. The same goes for those financial goals with a hard deadline (such as wanting to use this money as a down payment in two years).

That said, there’s a trade-off. Many of the options for short-term savings may not keep up with increasing prices or inflation and its impact on cost of living. For money that isn’t needed for many years to come, it can be a smart idea to consider investing to grow beyond inflation.

If you’d prefer to avoid risk with your short-term savings, here are options to consider.

Recommended: 5 Types of Savings You Should Consider Having

Option 1: Online Savings Account

Online-only savings accounts, also sometimes referred to as high-yield savings accounts, are an increasingly popular option for short-term savings. As their name implies, these banks or financial institutions only operate online. Here’s the scoop:

•   That means no brick-and-mortar locations and no chatting up a banker face-to-face with employees. The upside: When you compare accounts offered by traditional banks vs. online banks, the latter typically pass the savings onto their clients in the form of a higher annual percentage yield (APY).

•   A potentially higher rate of interest isn’t the only reason to use online-only savings accounts. The websites and mobile apps for online accounts essentially serve as storefronts, so online financial institutions often devote lots of resources to make sure they’re optimized and easy to navigate.

•   Additionally, many online-only institutions don’t have monthly account fees, which can be a real burden for those at the start of their savings journey. (For example, some traditional banks might charge a fee when you balance drops below the minimum.)

•   Banking online doesn’t mean you have to forgo the conveniences of your neighborhood bank. You can typically still do all of the important banking duties, such as depositing checks (via mobile deposit, or snapping a picture of the check on your phone), moving money back and forth between accounts, and speaking with a customer service rep.

In the past, most online savings accounts were required by the Federal Reserve to limit withdrawals to six times per month. These rules are evolving; post-pandemic, some banks dropped this rule. Before you sign up, you’ll want to understand the rules for accessing your money.

Also, while online banking is now considered mainstream, it’s always smart to do a little background research before you open an online account. You may want to check, for instance, to make sure an institution has Federal Deposit Insurance Corp (FDIC) coverage, a government-guaranteed program that protects your money.

Option 2: Certificate of Deposit

A certificate of deposit (CD) is a savings account that holds a specific and fixed amount of money, and for a designated period of time, such as six months or three years. In exchange for the deposit, the bank pays a fixed rate of interest.

Generally, CDs with longer maturities offer higher interest rates. For example, a bank is typically going to be willing to pay more for a deposit that’s guaranteed for five years as compared to three months.
As a saver, you often get more rewards for the risk.

You may also want to keep in mind that the interest rate on a CD is locked in at the point of purchase, as opposed to the interest rate in a savings account (both traditional and online-only), which may fluctuate.
If you’re interested in locking in a certain rate, you may want to consider a CD. (Although be aware that you would be locking yourself into a lower rate, if rates rise.)

While savings accounts are designed to provide regular access to your money, CDs are not. Because CDs have a fixed timeframe, there may be a penalty to access the money before the period is over. And in exchange for the lock-up period, you may find that financial institutions pay slightly more interest than online-only savings accounts.

CDs can be a good option for people who don’t need to touch their short-term savings for a certain period of time. And they are typically FDIC-insured.

Option 3: Money Market Account

A money market account (MMA) is like a mix between a savings and a checking account.

These accounts, offered by banks and credit unions, can allow you to write checks (though you may be limited on how often) and may also have a debit card. (Savings accounts, whether online or at a traditional bank, typically do not allow for check-writing.

Returns on these accounts often beat those on traditional savings accounts. Depending on what’s happening in the economy overall, an MMA may be in line with that of an online-only bank account.

However, MMAs sometimes require higher minimum balances than other types of savings accounts. So, this might be a better option for those with more money to save.

MMAs are considered a safe choice since, like other types of savings accounts, they are typically covered by FDIC if held by a bank, and National Credit Union Administration (NCUA), if held by a credit union. (Although, it’s always a good idea to double-check insurance coverage to be sure.)

Keep in mind that MMAs differ from money market mutual funds, which are not FDIC- or NCUA-insured.

Option 4: Cash Management Account

A cash management account (CMA) is a cash account offered by a financial institution other than a bank or credit union. These accounts are designed to merge the services and features of checking, savings, and investment accounts, all into one offering.

While CMAs are typically offered by financial service providers that are not themselves technically classified as banks, they are still usually covered by FDIC deposit insurance like regular bank deposits — often through a partner bank.

Generally, CMAs function similarly to a traditional checking account, yet pay interest that is often higher than most savings accounts.

Some brokerage firms require a large minimum deposit to open a CMA, or may charge monthly fees for anyone under that minimum. Before opening a checking and savings account, it’s a good idea to ask about monthly fees and minimum balance requirements.

Also, since checking and savings account providers automatically “sweep” your unused cash into investments that pay dividends or interest (which maximizes the account’s profitability), you may want to make sure those sweep accounts are low-risk or FDIC-insured.

The Takeaway

Short-term savings is money that you likely will need in the not too-distant future, such as within two to five years.

There are a number of options for short-term savings, but some of the safest bets include online savings accounts and CDs, among others. These accounts tend to be low-risk, typically allow you to have access to your money when you need it, and can offer a higher return than a traditional savings or checking account.

If you’re saving for a large purchase (perhaps a wedding or a down payment on a home, consider signing up for a high yield bank account. SoFi’s Checks and Savings Account offers a competitive APY, charges no account fees, and let’s you spend and save in one convenient place.

Start working towards those short-terms savings goals today!

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

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

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

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

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

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

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

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

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May
18
2023
woman on laptop

Should I Spend My Year End Bonus?

By | Budgeting & Goals, money | Comments Off on Should I Spend My Year End Bonus?

Do you receive a year-end bonus? Lucky you! While you may be tempted to go on a shopping spree or take your gang out to a great dinner, hold on a second. Yes, you can use some for fun, but you might also want to put some of a year-end bonus toward your financial goals.

Smart bonus money moves may include paying down debt, helping to fund a short-term savings goal (such as a downpayment on a house or establishing an emergency fund), as well as investing the money to potentially achieve long-term growth.

There’s no one right formula for spending (or not spending) a bonus: Each person’s financial situation and future goals are entirely unique.

But here are some ideas for using your bonus — or any other cash infusion, in fact — that can help improve your financial wellness today and tomorrow.

Allocating Some Money to Fun

You worked hard all year. So it’s totally understandable if you want to put some of your bonus money simply towards a few wants vs. just needs.

With any financial decision, it typically doesn’t have to be all or nothing, and that includes your work bonus. In fact, taking a balanced approach to your money might actually help you to maintain the stamina that financial goals often require.

Although the exact split is ultimately up to you, to avoid overspending, you might want to consider putting roughly 90% of your bonus towards your financial goals, and devoting about 10% to “fun money.”

If you’re getting a $5,000 bonus (after taxes), for example, that means you would have $500 to spend treating yourself. The other $4,500 would then go towards putting a big dent in your money goals.

Recommended: Benefits of Automating Your Finances

Chipping Away at Debt

If you have debt — whether from a student loan, car loan, or credit card debt — a bonus can be a great way to start whittling away at whatever balance you have to contend with, or even wiping it out completely.

Doing this can help you avoid throwing more money away just on interest charges, and if you manage to wipe out debt completely, you’ll have one less financial responsibility to stress about every month.

How much of your recent influx of cash should be directed toward debt reduction is entirely personal, and will depend on your situation.

Some financial planners recommend that people with high-interest debt consider putting around half of their annual bonuses toward paying down that debt. But this decision will depend on your individual circumstances.

Since credit card debt typically costs the most in interest, that can be a great place to start. Many credit cards charge close to 20% interest or higher. So if your goal is to ultimately build wealth, it may be smart to minimize credit card balances or, even better, pay them off completely.

It would be unreasonable to expect that you could out-invest what you are paying out in credit card interest.
The same idea goes for any high-interest or emotionally stressful debt on your balance sheet.

Recommended: 5 Reasons to Switch Bank Accounts

Saving for a Short-Term Goal

If you haven’t yet started, or haven’t quite finished, creating an emergency fund, getting a bonus is a great time to beef up that financial cushion.

While many people don’t like to think about the possibility of their car breaking down, a medical emergency, or job loss, should one of these unexpected events occur, it could quickly put you in a difficult financial situation.

Without back-up, you can risk landing in debt should you experience a financial set-back.

How much to sock away for a rainy day is highly personal. But a common rule of thumb is to create an emergency fund that has enough money to cover three to six months of living expenses. You may need more or less, depending on your situation.

If you already have a decent cash cushion, you may next want to think about what large purchases you are hoping to make in the not-too-distant future, say, less than five years.

This could be a downpayment on a home, a renovation project, taking a special family vacation, buying a new car, or any financial step that requires a large infusion of cash.

Then consider using at least some of your bonus check to jump start these savings goals, or add to previously established ones.

It’s a good idea to put money you are saving for a short-term goal (whether it’s a downpayment or an emergency fund) in an account that is safe, earns interest, and will allow you to access it when you need it.

Some options include a savings account at a bank, an online savings account, a checking and savings account, or a certificate of deposit (CD). Keep in mind, though, that with a CD, you typically need to leave the money untouched for a certain period of time.

Get up to $300 when you bank with SoFi.

No account or overdraft fees. No minimum balance.

Up to 4.20% APY on savings balances.

Up to 2-day-early paycheck.

Up to $2M of additional
FDIC insurance.


Invest for the Future

Bonus money can also help you start investing in longer term goals, such as retirement or paying for a child’s education. Using bonus money to buy investments can help you create additional wealth over time.

For example, a lump sum of cash can work wonders in boosting your retirement savings. Even if you’re technically on track for retirement, adding more money to your IRA or 401(k) today can leave you with a larger income stream when you’re older. If you’re already contributing to these accounts, be aware of the annual limits.

You can contribute to your retirement using your bonus in a couple of ways. Many companies will automatically deduct from your bonus for your 401(k) at the same rate as usual.

You can also ask your company in advance if you can have a special withholding for your bonus. You may be able to fill out a form (or go onto the company portal) to designate up to 100 percent of your bonus to your 401(k).

If you can’t direct that money to your 401(k), and you’re eligible for an IRA, consider maxing that out instead.

Either one can help get you closer to a great retirement–and may also help you save significantly on taxes in the short term.

People who have kids may want to consider putting some bonus money toward starting, or adding to, a college savings account, such as a 529 plan (which in some states can offer tax benefits).

For financial goals outside of retirement, you may want to look into opening a brokerage account.

This is an investment account that allows you to buy and sell investments like stocks, bonds, and mutual funds. A taxable brokerage account does not offer the same tax incentives as a 401(k) or an IRA, but is much more flexible in terms of when the money can be accessed.

How much of your bonus you should put towards long-term investments is an individual decision that will depend on your current financial circumstances.

The Takeaway

No matter the size of your hard-earned bonus, it’s a good idea to think about how it can best serve you and your goals in both the short and long term. Some smart ways to use bonus money include getting ahead of high-interest debt, setting up or enlarging your emergency fund, saving up for a large purchase (such as a home), as well as beefing up retirement savings and other long-term investments.

You can mix and match smart spending and smart saving to fit your financial situation. One easy way to do this is to sign up for an online bank account from SoFi Checking and Savings. You’ll earn a competitive annual percentage yield, pay no account fees, and you’ll spend and save — all in one convenient place. Whether you’re saving for something specific or storing cash until you’re ready to invest, SoFi Checking and Savings can help you put that year-end bonus to good use.

Help your money work harder for you with SoFi.

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

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

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

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

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

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

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

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

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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May
18
2023
woman putting cash in jar

Getting Through Financial Hardship

By | Budgeting & Goals, Financial Independence, money | Comments Off on Getting Through Financial Hardship

Many people hit a period of financial hardship at some point in their lives. Maybe there’s a medical emergency and big bills, a job layoff, or a family member in serious need: These and other scenarios can put your money management in a precarious position.

Approximately 70% of Americans report feeling stressed about money, according to a CNBC/Momentive survey. This can be centered on anything from living paycheck to paycheck to worrying about saving for one’s (and one’s family’s) future.

Here, you’ll learn more about what happens when financial hardship hits and how to take steps to improve the situation, from applying for assistance to negotiating with lenders to discovering new sources of income.

What is Financial Hardship?

Everyone probably has their own definition of “economic hardship” that’s based on their own needs and wants. And the federal government has its own criteria for what counts as a “hardship” when it comes to taking an IRA distribution, looking for tax relief, or requesting a student loan deferment.

But generally, a financial hardship is when an individual or family finds they can no longer keep up with their bills or pay for the basic things they need to get by, such as food, shelter, clothing and medical care.

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Warning Signs

Sometimes financial difficulties can sneak up on a person, and catch them completely off guard. And sometimes, the warning signs have been there for a while, but were missed or ignored.

Identifying the root cause of financial distress can help give you a head start on working through your money issues. Here are some red flags that might signal a person is headed for financial distress:

Having Credit Card Balances At or Above the Credit Limit

While using credit cards may seem like a good way to get around a short-term lack of funds, the practice could lead to extra fees and a lower credit score. The percentage of available credit someone is using — known as a credit utilization ratio — can indicate to lenders how heavily they’re depending on credit cards to get by. And because it’s one of the major factors in determining a person’s overall FICO score (a credit score lenders use to determine whether to extend credit to a borrower), financial advisors typically recommend keeping card balances at or below 30% of the limit.

Juggling Which Bills Get Paid Each Month

It may be tempting to skip a payment from time to time, hoping to catch up eventually — but there can be short- and long-term consequences for juggling bills. Insurance coverage may be lost. There may be a late fee, or a bill could be turned over to a collection agency.

Utilities can also be shut off, and a deposit might be required to restart the account. Making late payments on a credit card could lead to a higher interest rate on the account. And late payments and defaults can hurt credit scores.

Only Making Minimum Payments on Their Credit Cards

It may be necessary to make minimum payments if times are especially tight, and there likely won’t be any short-term harm. But even if the cardholder stops making purchases, just the interest charged will keep the account balance growing, possibly extending the amount of time it takes to pay down that debt by months or years.

Often Paying Late Fees or Overdraft Fees

A one-time mistake may serve as an annoying reminder to be more cautious with money management, but if late fees, overdraft and non-sufficient funds fees, and overdraft protection transfers become a regular thing, they can add another layer of worry to a person’s financial burden. (Using alerts, automatic payments, and apps from your financial institution may offer a more effective method to track bills as well as deposits and withdrawals.)

Having a High Debt-to-Income Ratio

Lenders often use a person’s debt-to-income ratio — a personal finance measure that compares the amount of debt you have to your income—to determine if a borrower might have trouble making payments. If a person’s debt-to-income ratio is high, it could make it more difficult to borrow money, or to get a good interest rate on a loan.

Tapping Retirement Savings to Pay Monthly Bills

In certain cases, the IRS will allow an account holder to withdraw funds from a 401(k) or IRA to cover an immediate and heavy financial need (such as medical expenses, payment to avoid eviction or repair home damage) without paying the 10% early withdrawal penalty. But taxes will still have to be paid on those distributions. And taking that money now, instead of letting it grow through the power of compound interest, could have serious repercussions for the future.

Dealing with Financial Hardship

For those who’ve been struggling for a while, or who’ve had a sudden but substantial financial loss, it might feel as though they’ll never recover. But there are several options those who are experiencing financial trouble might consider taking to get back on track. Some they can do for themselves, while others might require getting financial hardship help from others. And while some might be temporary, others take a longer view. Here are a few:

Reducing Monthly Spending

Creating a monthly budget can help individuals and families prioritize and guide their spending decisions. This may involve prioritizing your monthly expenses, starting with the essentials and going down to the “nice to haves.” Once you’ve established which expenses are the most important, you may then be able to look for places to cut back or cut out of your budget altogether. Cutkacks may not feel fun, but they can help jump-start your recovery.

For example, could you cut costs if you cooked meals yourself more often? Are you trying too hard to keep up with what friends and family are spending on clothes, vacations, and cars? Are there monthly bills that could be reduced (could you save money on streaming services, internet, and phone services; manicures and other beauty treatments; or even rent, insurance, or car payments)? It may help to start by tracking expenses for a month or so to get an idea of where money is going, and then sit down and map out a more realistic path for the future.

Creating a Debt Reduction Plan

Along with a budget, it also may be useful to come up with a plan for paying down credit card balances, student loans and other long-term debt. It’s important to always make the minimum payment on all these bills, if possible, but a personal debt reduction plan could help with prioritizing which bill any leftover money might go toward after all the household expenses are paid each month — or the money might come from a tax refund, bonus check from work, or a gift. Knocking down debts that include high amounts of interest can eventually free up more cash to put toward short- or long-term savings goals.

Looking for Ways to Earn Extra Income

Is there a way to turn a hobby, skill, or interest into some extra funds? Maybe a favorite local business could use some part-time help. Or, if a second job is out of the question, perhaps a side hustle with flexible hours is a possibility. Writers, artists, and designers, for example, may be able to turn their talents into a side business. Babysitting the neighbor’s kids or running errands for an older person are also options. And, of course, on-demand services like Uber and DoorDash are employing drivers, delivery persons, and other workers.

Considering a Loan to Consolidate Bills

Getting a personal loan for debt consolidation won’t make money problems go away completely—but it might make managing payments a little simpler. With just one monthly payment (instead of separate bills for every credit card or loan) it can be easier to keep tabs on how much is owed and when it’s due.

Because interest rates for personal loans are typically lower than the interest rates credit card companies offer (especially if a rate went up because of late payments), the payoff process for that debt could go faster and end up costing less. (Generally, lenders offer a lower interest rate to those who have a higher credit score, borrowers who are already behind on their bills may pay a higher interest rate or have more trouble getting a loan.)

Student loan borrowers also may want to look into consolidating and refinancing with a private lender to get one manageable payment and, possibly, save money on interest with a shorter term or a lower interest rate.

Refinancing may be a solution for working graduates who have high-interest, unsubsidized Direct Loans, Graduate PLUS loans, and/or private loans.

Federal loans carry some special benefits that private loans don’t offer, including public service forgiveness and economic hardship programs, so it’s important for borrowers to be clear on what they’re getting and what they might lose if they refinance.

Notifying and Negotiating

Ignoring credit card payments and other debts won’t make them disappear. Borrowers who can clearly see they’re headed for financial trouble may wish to notify their credit card company or lender and try to work out a more manageable payment arrangement. (There are debt settlement companies that will do the negotiating, but they charge a fee for their services.)

A credit card issuer may agree to a reduced, lump-sum payment or a repayment plan based on the borrower’s current income, or it may offer a hardship program with a lower interest rate, lower minimum payments, and/or reduced penalties and fees. The options available could depend on why a customer fell behind, or if they’ve had problems before.

Financial hardship assistance is sometimes offered by mortgage lenders. Because these lenders generally don’t want their borrowers to foreclose on their homes, it’s in their best interest to work with borrowers when they get in trouble. The lender may be willing to help the borrower get caught up by forgiving late payments, or they may change the interest rate of the loan or lower the payment.

If you have federal student loans and are experiencing financial hardship, you might qualify for a special repayment plan, such as pay-as-you-earn, or an income-based repayment plan.

It can also be helpful to reach out to service providers (such as water, electricity, internet) and let them know you are experiencing financial difficulties. Providers may be willing to work with you and you may be able to come to an agreement well before any shut-off actions go into effect. This can also save you from late fees, or going into collections.

Getting Financial Help

There are also a number of government programs designed specifically to help people overcome sudden financial hardships. Those who’ve lost a job may be entitled to unemployment benefits. If that job provided health insurance, you may want to look into COBRA to see if you can maintain affordable health insurance. Those who were injured at work may be entitled to workers’ compensation.

Also, some people facing financial hardship may qualify for state or federal benefits like Medicaid or Social Security Disability.

Though not free, a financial professional who specializes in planning, saving, and investing may be a worthwhile investment. He or she may be able to offer a fresh perspective and help create a path to financial freedom. There may also be free or low-cost debt counselors available via non-profit organizations.

Preparing for Current and Future Challenges

Once you’ve developed your personal plan for overcoming financial hardship, you can begin working on your goals of becoming more financially independent. If the cause of your hardship is temporary (you were out of work but quickly found a new job, for example), it may take just a few months to get back on your feet. If the problems are more difficult to overcome (you’ve lost income through a divorce, or you or a loved one has an ongoing medical condition that requires expensive treatment), the timeline could be much longer. Once you’ve put your plan in place, you may want to review it on a regular basis, and perhaps do some fine-tuning.

The Takeaway

Many people go through periods of financial hardship, and often for reasons that are beyond their control. But that doesn’t mean they are out of options. There are many simple and effective steps people can take. Cutting monthly expenses, consolidating debt, and getting outside assistance are moves that can help them get back on the right financial track.

Ready to get your finances organized? You also may find it easier to track expenses and stay on budget by separating your money into virtual buckets or “vaults.” SoFi Checking and Savings is an online account that features Vaults to allow members to set aside money for different financial goals, track their progress, as well as set up recurring monthly deposits. What’s more, a SoFi Checking and Savings account offers a competitive annual percentage yield (APY) and charges no account fees, plus you can spend and save in one convenient place.

SoFi: The smart and simple way to bank now.

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

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

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

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

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

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

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

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

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

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

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.

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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May
17
2023
Learn The Basics of Investment Funds: Man reading newspaper

Learn the Basics of Investment Funds

By | Growing Wealth, invest, Investing | Comments Off on Learn the Basics of Investment Funds

Investment funds are financial tools that effectively allow investors to pool their resources to buy into a collection of securities. It’s relatively common and easy for beginning investors to dip their toes in the market with investment funds for a variety of reasons.

But there are many types of investment funds, and the purported benefits of a specific fund may not be the right choice for each investor. With that in mind, it’s generally a good idea to have a deeper understanding of investment funds before buying into one.

What Is an Investment Fund?

Broadly speaking, an investment fund is a collection of funds from different people that is used to buy financial securities. Investors get the advantages of investing as a group (purchasing power) and own a portion, or percentage of their investments equal to the money they have contributed.

There are different types of investment funds, including mutual funds, exchange-traded funds (ETFs), and hedge funds. Typically, these funds are managed by a professional investment manager who allocates investors’ money based on the type of fund and the fund’s goal. For this service, investors are generally charged a small fee that is a percentage of their investment amount.

What Is a Mutual Fund?

Mutual funds are a popular type of investment fund for a reason: they are an easy way to purchase diversified assets — from stocks and bonds to short-term debt — in one transaction.

One of the fundamental ideas that led to the creation of mutual funds was to provide individual investors with access to investments that might be more difficult to obtain or manage on their own. A retail investor with $1,000 probably wouldn’t be able to effectively recreate a portfolio that tracks the S&P 500, let alone rebalance it quarterly.

But thanks to the creation of mutual funds, investors can pool all of their money together into a collective fund to invest in the same markets by choosing from custom-packaged funds with specific focuses and inexpensive share prices.

Different Types of Mutual Funds

There are a number of different types of mutual funds, each of which offer something distinct to the investor.

Equity Funds

Also known as stock funds, equity funds are a type of mutual fund that invests in a specific asset class, principally in stocks. Equity fund managers seek to outperform the S&P 500 benchmark by actively investing in growth stocks and undervalued companies that may provide higher returns over a period of time than the fund’s benchmark.

Equity funds have higher potential returns but are also subject to higher volatility as well. It’s common for equity funds to be actively managed and thus typically charge higher operating fees. Funds with higher stock allocations are more popular with younger investors as they allow for growth potential over time.

While equity is a specific asset investment by itself, some mutual funds focus on more precise criteria:

Fund Size (Market Cap)

Some funds only include companies with a defined market cap (market value). Different tiers of company sizes can perform differently in different economic conditions and companies can be viewed as more or less risky based on their market cap. Fund sizes are categorized by the following:

•   Large-Cap (Over $10 billion)

•   Mid-Cap ($2 billion to $10 billion)

•   Small-Cap ($300 million to $2 billion)

Industry/Sector

Funds that focus specifically on a single industry or sector such as technology, healthcare, energy, travel, and more. Owning shares in different sector mutual funds provides portfolio diversity and can potentially enhance returns if a particular industry experiences a tailwind.

Growth vs Value

Some funds differ in their investment style, focusing on either value or growth. Growth stocks are expected to provide outsized returns, whereas value stocks are considered to be undervalued.

International/Emerging Markets

Domestic stocks are not the only equity investment options, as some funds focus exclusively on international and emerging markets. International and emerging market funds provide geographic diversity — exposure to companies operating in different countries and countries with growing markets.

Bond Funds

Like stock mutual funds, bond funds are a pool of investor funds that are invested in short- or -long-term bonds from issuers such as the U.S. government, government agencies, corporations, and other specialized securities. Bond funds are a common type of fixed-income mutual funds where investors are paid a fixed amount on their initial investment.

Seeing as how bonds are frequently thought of as a safer investment than stocks and offer less growth, bond funds are popular among investors who are looking to preserve their wealth as opposed to aggressively growing it.

Index Funds

This type of fund is constructed to track or match the makeup and performance of a financial market index such as the S&P 500. They provide broad market exposure, low operating expenses, and relatively low portfolio turnover. Unlike equity funds, an index fund’s holdings only change when the underlying index does.

Index fund investing has exploded in popularity in recent years due to its low costs, passive approach, and abundance of options to pick from. Investors may choose from a number of indices that focus on different sectors such as the S&P 500 (financial and consumer), Nasdaq 100 (technology), Russell 2000 (small-cap), and international indices.

Balanced Funds

Also known as asset allocation funds, these hybrid funds are a combination of investments in equity and fixed-income with a fixed ratio, such as 80% stocks and20% bonds. Balanced funds offer diversity to different asset classes and consequently trade some growth potential in an attempt to mitigate some risk.

One example of a balanced fund is a target-date retirement fund which automatically rebalances the investments from higher-risk stocks to lower-risk bonds as the fund approaches the target retirement date.

Money Market Fund

This low-risk, fixed-income mutual fund invests in short-term, high-quality debt from federal, state, or local governments, or U.S. corporations. Assets commonly held by money market funds include U.S. Treasuries and Certificates of Deposit. These funds are usually among the lowest-risk types of investments.

Alternative Funds

For those seeking true portfolio diversity beyond traditional stocks and bonds, it may be worth considering alternative investment funds. Alternative funds focus on other specific markets, such as real estate, commodities, private equity, or others.

These asset classes generally make up a small percentage of one’s portfolio, if at all, and serve as a hedge to heavier-weighted allocations to traditional sectors. Rather than investing in companies of a particular index or market cap, alternative funds may be composed of shares of natural gas drilling companies, real estate investment trusts (REITs), intellectual property rights, or more.

Benefits of a Investing in Mutual Funds

While no two funds are the same, mutual funds are a popular choice for investors of all types for a variety of reasons.

Diversification

Mutual funds serve as a sort of investment basket that contains many different assets, some with the same general focus and others with multiple focuses. Rather than being all-in on one particular investment, mutual funds offer diversity across multiple investments.

This allows investors to cast a wider net and benefit when one or multiple of their basket investments performs well. Conversely, when one investment in a mutual fund does poorly, the loss may be mitigated by also having other investments that are performing comparatively well. Some types of funds offer greater diversification across different asset classes, such as stocks and bonds.

Performance

Mutual funds that aim to track indices or focus on growth stocks typically yield similar market performance compared to the benchmark index. This is more or less the same goal of a buy-and-hold strategy, as fund performance often, but not always, mirrors the tracked index.

Low Maintenance

Mutual funds are relatively easy to use and require little to no maintenance. They allow investing in multiple asset classes through one investment vehicle without having the investor sift through and make individual decisions. All of these decisions are usually provided by an active fund manager whose responsibility is to provide profitable returns for investors based on the fund’s general focus or target.

Mutual funds also provide a degree of functionality. One convenient feature is the ability to set a passive monthly investment amount and to automatically reinvest dividends. Many mutual funds pay investors dividends on an annual, quarterly, or even monthly basis. Dividends are calculated based on the underlying companies’ earnings and distributed to the fund which then passes them along to fund investors. Another feature of mutual funds is the ability to reinvest dividends, thus compounding both mutual fund holdings and dividends in perpetuity.

High Liquidity

Mutual funds are transacted frequently. Investors are able to easily buy or redeem mutual fund shares daily at the market open. Shares in funds tend to be relatively affordable as they typically have a low net asset value (NAV), allowing even novice investors to buy shares with a low starting amount. Compare this to ETFs which can be transacted repeatedly at any time during market hours, but the price can rise to seemingly out-of-reach levels for a beginner.

Active Management

Mutual funds are usually actively-managed by a professional fund manager who’s responsible for operating the fund, whether it be to allocate investor money, rebalance the fund’s investments, or distribute dividends to investors.

While mutual funds tend to have relatively low fees, investors are subject to an annual fee, also known as an also known as an expense ratio, that is calculated as a percentage of each individual’s holdings in the fund and automatically paid to the fund manager for their services. Fund fees vary, so in some cases it may be helpful to compare funds based fees before investing.

Can I Lose Money in a Mutual Fund?

With investing, there is no such thing as a sure thing. So, yes, you can lose money in a mutual fund. It is possible to lose all of your money in a mutual fund if the securities in the fund drop in value.

That said, some mutual funds aim to be conservative and designed to offer slow but incremental gains over time. As always, it’s prudent to research exactly what’s contained in a particular mutual fund before investing any capital. Ultimately, it’s every investor’s responsibility to determine their own risk tolerance and investing strategy that meets their personal needs.

The Takeaway

Investment funds are a practical and beginner-friendly way to start investing in financial markets. Even with beginner knowledge concerning what is a mutual investment fund, mutual funds have the propensity to provide a hands-off and a potentially low-cost way to start building wealth. But again, your mileage may vary, as not all funds are alike.

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

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

SoFi Invest®

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

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

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


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

Probability of Member receiving $1,000 is a probability of 0.028%.

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