SoFi

Have you ever wondered how much it costs to raise a child from birth to 18?

Are you sitting down?

Based on consumer surveys and other data, most estimates these days put the price of parenting just one child at $300,000 or more.

Your costs may vary significantly, of course, depending on where you live, your income, your marital status, and other factors. But it’s probably safe to say that raising a child to college age — and beyond — can deal a real wallop to the budget.

Read on for a breakdown of some of the costs prospective parents can expect.

How Much is the Cost of Raising a Child?

It’s hard to find an “official” calculation for the cost of raising a child.

For many years, parents and prospective parents could get an idea of the costs they faced from the Expenditures on Children by Families report published annually by the U.S. Department of Agriculture. But the USDA stopped updating the report in 2017, so the most recent information is for a child born in 2015.

Back then, the USDA estimated the cost of raising the younger of two children in a middle-income home with married parents would be approximately $233,610 in 2015 dollars.

Today, that number is a bit higher. A 2022 analysis conducted by the Brookings Institution found that parents can expect to spend at least $310,000 raising a child who was born in 2015. That’s for food, shelter, and other necessities, but not college, which for most students starts at age 18 or older.

Recommended: Free Credit Score Monitoring

What Are Some Average Costs for Raising a Child to 18?

In 2015, the USDA divided the major infant-through-high-school expenses into the following categories:

•   Housing 29% of income

•   Food 18% of income

•   Child care and education 16% of income

•   Transportation 15% of income

•   Health care 9% of income

•   Miscellaneous 7% of income

•   Clothing 6% of income

But remember, those are the USDA’s numbers for one child in an average household with two kids, and those percentages have likely shifted in the past few years. You might end up with a similar allocation, or, based on your own circumstances and priorities, one that’s far different.

Recommended: Should I Sell My House Now or Wait?

Factors That Can Influence the Cost of Raising a Child in 2023

How much you pay to raise your family may be largely influenced by where you decide to live. In 2022, a mortgage payment was 31% of the typical American household’s income, based on data gathered by Black Knight. But that percentage may look different if you reside in a city or town where housing costs are much cheaper or far more expensive than average.

Child-care costs may vary widely as well, depending on the age of your child and the type of care you choose. Unless you can get Nana and Grandpa involved, be prepared for a hefty bill: 51% of parents who responded to Care.com’s 2022 Cost of Care Survey said they spent more than 20% of their household income on child care every year.

And those costs may not go down when a child reaches school age if he or she attends private school. According to the Education Data Initiative, the average annual tuition among the nation’s 22,440 private K-12 schools was $12,350 in 2021.

Your miscellaneous costs may also be different if your child is involved in sports or other activities that require expensive equipment, camps, or lessons.

Add to that potential healthcare costs, which could depend on the type of insurance you have and your child’s individual needs.

How to Budget for Baby

Considering all the costs involved, it may make sense to start transitioning your budget long before a baby actually arrives. Here are some things to consider if you decide to adjust your household budget categories to fit your growing family:

Stick to Your Savings Goals

You’ve probably heard it a thousand times: A baby will change your life — and your priorities. Still, your own financial security can help determine your child’s future, so it can help to stick with your savings goals, like building an emergency fund (you may need that money more than ever once you have a child), putting money away for a mortgage down payment, and investing for retirement. Then, if you still have room in your budget, you might consider including a 529 education savings account or some other type of investment plan for your child.

Pay Down Debt

The last thing you’ll want to worry about when you have a new baby is old debt. Paying interest on credit cards and other debt can eat away at any extra money you’re hoping to save for or spend on your child. A debt reduction plan like the popular snowball and avalanche strategies can help you focus on methodically dumping your debt and getting it done ASAP.

Recommended: What is The Difference Between Transunion and Equifax?

Be Ready for First-Born Expenses

Just having a baby can be expensive. In 2022, the Peterson-KFF Health System Tracker estimated that the health costs associated with pregnancy, childbirth, and postpartum care for women enrolled in large group insurance plans came to almost $19,000 on average, and average out-of-pocket payments were almost $3,000. Then there’s the crib, car seat, clothes, formula, diapers, and other things you’ll need when you bring your baby home.

If you can adjust your budget to get ready for those upfront and monthly costs, you may have a better shot at keeping up with expected and unexpected bills later on.

Preparing for Changing Costs

Your budget is bound to evolve as your child gets older. The money you spend on diapers and formula in the first years will go toward buying new shoes, clothes, toys, team uniforms, and other expenses later on. (Maybe buying a car? Putting multiple kids through college? Paying for a wedding? Who knows?)

The good news is, these days, you can use a spending app to track exactly where your money is going and decide where you want it to go. So if your kiddo comes home from school one day and wants to switch from playing soccer to playing the piano, you can quickly rework your budget categories and see where you stand.

Can You Afford to Be a Parent?

Of course your beautiful baby will be worth every penny of the $300,000 (give or take) you’ll be spending over the next 18 years. Still, you may want to keep your financial readiness in mind as you think about when to have a baby.

Besides the basic costs, raising a child also can affect your finances if you decide to do in vitro fertilization (IVF), take an unpaid maternity leave, buy a more “reliable” car or a bigger home, or go part-time at work so you can be home after school.

Any planning you can do in advance and as you go to minimize the financial blow can benefit you and your child. (Not to mention the example it will set down the road, when you’re teaching your child about money management.)

Potential Opportunities to Save

Figuring out how to save money while raising kids isn’t easy. But there are some spending categories over which you can have some control, including:

Purchase Goods Secondhand

Kids grow out of everything so quickly. Borrowing some items from friends and family, or buying things secondhand, could be a big money-saver. If your sister wants to lend you her perfectly good (and safe) crib or car seat, let her! And don’t underestimate the quality and cuteness of the clothes you can find for little ones at yard sales, consignment shops, or online. There also may be bargains to be had when shopping for secondhand sports equipment and musical instruments.

Get Help with Child Care

There may be several ways you can save on child-care costs, including forming a co-op with other parents and taking turns watching each other’s children, or asking nearby family members to help out on a full- or part-time basis.

Embrace Meal Planning

When your kids get older, it may be tempting to stop for fast food on busy nights, especially if you don’t have any idea what you’re going to serve for dinner. By planning ahead, you may be able to reduce your grocery costs, the number of trips to the grocery store, and unplanned visits to the closest hamburger joint.

Cut Household Expenses

While you’re adjusting your budget for baby, think about little things you can do to cut down on spending and expenses. Could you adjust your thermostat to save a few bucks every winter and summer? Will you have time to watch all those cable channels and streaming services with a child in the house? Or can you clean the pool yourself, cut the grass, or wash your own car?

Find Free and Cheap Family Activities

Every activity you plan for your child doesn’t have to come with a big price tag. Going around the block with your kid in a stroller, wagon, or on the back of a bike can be the best kind of free fun. Want to see a movie? Check out the price of a matinee or other discounted screenings. Or buy a bottle of bubbles or a small swimming pool for a good time in the backyard.

The Takeaway

At $310,000, the estimated cost of raising a child from birth to 18 may be daunting. But if you plan in advance for those first major costs — and adjust your budget for changing priorities as your child grows — it may be easier to manage your finances during this exciting, expensive time in your life.

Using a money tracker app can be a good place to start. SoFi lets you know right where you stand, including what you spend and how to reach your financial goals.

FAQ

How much does it cost to raise a child in 2023?

Parents could expect to spend around $310,000 or more raising a child who was born in 2015, according to a 2022 analysis conducted by the Brookings Institution. Note that the cost of raising a child can vary significantly depending on where you live, your household income, your child’s health, and other factors — including if you’ll be paying for college, a wedding, or other big-ticket items.

How much do you spend on a child before they turn 18?

The cost of raising a child can vary from one household to the next, based on many factors. But it’s been estimated that the bill for an average U.S. family raising a child to 18 (without college) could be $310,000 or more.

How much money should you save for a baby?

The more you can put away before you have a baby, the better prepared you can be. Some things to focus on might include setting up or adding to your emergency fund, continuing to make contributions to your retirement plan, and, if you hope to move to a bigger home, coming up with the necessary down payment.

Photo credit: iStock/JohnnyGreig

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

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

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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.

SORL0223007

What is cost basis? Cost basis is the purchase price or original value of an asset or investment. It’s used to calculate capital gains and losses for tax filings.

Conservative investing describes a strategy that avoids risky investments. Blue chip stocks and other established investments are considered conservative.

It isn’t an easy thing to stop the cycle of living paycheck to paycheck. If it were, two-thirds of Americans wouldn’t be struggling to make ends meet every month.

And yet, according to a December 2022 survey by PYMNTS.com and LendingClub, about 64% of respondents reported they were living paycheck to paycheck at the end of last year.

What can you do if you want to beat those odds and get ahead of your bills? Read on for some steps that may help you achieve financial breathing room.

Ways to Stop Living Paycheck to Paycheck

Maybe it’s inflation eating up your paycheck these days. Or maybe it’s just… life.

Either way, there are likely adjustments you can make — both big and small — to get yourself to a better place financially. Here are a few basics to consider if you’re wondering how to stop living paycheck to paycheck:

Set a Budget

Admit it: You knew the b-word was coming.

Making a budget is the best way we know of to get a better handle on your spending and saving. It can show you where your hard-earned money is going every month — and help you nudge it in a different direction if you don’t like what you see.

Yes, it involves sitting down and doing math. But thanks to spending apps that can help you set up budget categories and monitor your money movements all in one place, the process isn’t nearly as tedious as it used to be.

You’ll probably have to tweak your budget from time to time — to deal with quarterly or seasonal bills, for example, or if costs go up. And if you’re a freelancer or seasonal worker, it can be tough to budget on a fluctuating income. But creating a comprehensive and realistic budget you can stick to through thick and thin can help you make your paycheck go further.

Focus on the Essentials

As you determine your personal budgeting categories, you’ll also be setting spending priorities. That starts with focusing on the essentials. Unless you’re still living with your parents rent-free, it can be a good idea to figure out the amount you’ll need for food, utilities, shelter, and transportation before anything else.

After that, you can play around a bit with what’s most important to you — your “needs” vs. “wants.” You may have to let go of a few things (sorry, Netflix) when you run out of money to spend.

No matter what happens, you’ll have a roof over your head and something to eat. The lights, heat, and water in your home will keep working. And you can get where you need to go.

Prepare for the Unexpected

If you’re worried that an unexpected bill could come along at any time and take a huge bite out of your finances, you aren’t alone. About 56% of Americans are unable to cover a $1,000 surprise bill with their savings, according to a 2022 survey by Bankrate.

Financial advisors typically recommend keeping at least three to six months’ worth of expenses stashed away in an emergency fund. If that amount is too daunting, you can start with a much smaller amount. Anything you can put away will help if you suddenly have to pay a medical, home, or car repair bill.

Get Out of Debt

If debt payments (credit cards, student loans, etc.) are a big part of your monthly budget, you may want to rethink your debt payoff strategy.

To truly dump your debt burden — and reclaim the money you’re paying in interest every month so you can save it or use it for other things — it can help to have a debt reduction plan. There are many options to choose from, including these popular strategies:

•   The snowball method: With this strategy you put any extra money you can toward paying off your smallest debt — while making the minimum payment on the others. When that balance is paid off, you can move on to the next smallest bill, and so on — slowly eliminating all your debts.

•   The avalanche method: The avalanche method focuses on high-interest debt. With this strategy, you would put any extra you can toward the credit card or loan with the highest interest rate. When that bill is paid off, you move on to the bill with the next highest interest rate, and so on.

If you’re using credit cards just to keep your head above water, you could end up drowning in debt — especially as interest rates are rising. Try to budget with your credit card wisely, instead of thinking of it as a life raft. Charge only what you can afford to pay off each month.

Increase Your Income

If your main income stream just isn’t enough — and a pay raise isn’t coming anytime soon — you may want to consider your options for earning extra cash.

That might mean taking on a side hustle (something you can do when you’re not at your regular job), selling stuff you don’t use any more, or maybe renting out a room in your home. Whatever you choose, try to make it fun (or at least bearable), so you aren’t tempted to give up. And make sure the hours, effort, and money you put into the side gig (for supplies, uniforms, etc.) are worth it and you’re really getting ahead.

Recommended: Best Paying Online Side Jobs for Teachers

Increase Your Down Payment

A 20% down payment usually isn’t required to finance a home purchase, and most buyers put down less. (With a SoFi home loan, for example, first-time buyers may qualify for a 3% down payment.)

Your Realtor® and your lender can help you decide how much your down payment should be. But if you can scrape together more, you’ll borrow less, which means you can have lower monthly payments. You’ll also have more equity sooner, and you’ll pay back less interest over the life of the loan.

More Tips to Budget and Save Money

OK, now that we’ve covered the basics, let’s drill down to some other lifestyle changes that can help you spend less and save more:

See the Benefits of Owning Less

It’s tough to say no to buying new, or better, or more — especially when you can make online purchases with just a couple of clicks and use a credit card to pay. But embracing financial minimalism and the mantra that “less is more” can help you change your spending behavior.

Budgeting is a great way to focus on needs vs. wants, and tracking your spending with an app, or even going old-school and writing down every penny you spend in a notebook, can help you set priorities.

Sit Down and Do the Math

It’s easier to get where you want to be if you know where you are. So it can be helpful to pull out all the paperwork when you’re creating your household budget. That means sitting down with purchase receipts, bank and credit card statements, payroll info, etc., to figure out how much you’re spending every month, what you’re spending it on, and how much you actually have to spend.

Look for Things to Cut

This is the painful part. If you really want to stop living paycheck to paycheck, there’s a good chance you’re going to have to get rid of some of the things you love.

That might mean cutting back on concert or theater tickets (or just choosing cheaper seats). You might have to back off on the morning trips to Starbucks. Or cancel app subscription services. The good news is, you get to pick your priorities — as long as those things track with what you realistically have and want to spend each month.

Embrace a No-Spend Period

It’d be pretty difficult to not spend any money at all for a year — or even a week. (Although some people are trying as part of the “no-spend challenge” trend.)

But by challenging yourself to only spend on things you absolutely have to have for a pre-set period of time, you can really get a feel for what’s important to you. And of course, you save money.

You can go big or small. You can challenge yourself for a year, or a month, or a week. You can try to go without buying anything new, or limit yourself in a specific category: no spending on clothes, shoes, or jewelry; no movies (at the theater or streaming); or no eating at restaurants, for example. And you can post your progress on Twitter or Instagram — if that helps push you to keep going — or you can keep it all private in your diary.

Put Your Savings into a Separate Account

It may seem super convenient to put all your money into a checking account. But that can also make that money super easy to spend.

Funneling some of your funds into a separate savings account can help you keep your hands off your cash as you set up your emergency fund or save for other short- and long-term goals. And if you put the money into a high-yield online savings account, you typically can earn a higher interest rate than you would with a traditional checking account.

Don’t Be Afraid to Consider Drastic Changes

Some people need to make only a few minor changes to pull out of the paycheck-to-paycheck cycle. Others may need to get more radical. If you can’t get your spending under control, for example, you may need to cut up your credit cards. If you can’t afford your car payments or gas, it might make sense to take the bus or carpool to work. Or you may have to make some uncomfortable budget cuts — like going without cable or shopping at less expensive clothing stores.

When you’re thinking about what moves might help you get ahead, consider crunching the numbers first to see if the change really makes financial sense. Then, try to stay motivated by thinking about what you can do with the money you’ll save.

Avoid Lifestyle Creep

Is part of your problem caused by “lifestyle creep”? That’s when your personal cost of living increases, but so slowly you might not have noticed until you were scrambling to pay your bills.

Maybe you got a raise and thought you could afford to spend a bit more on the things you want. Or maybe your friends are earning more money than they used to — and keeping up socially is hurting you financially.

If you’re overshooting your budget every month and can’t figure out why, it may be time to reexamine your priorities and focus on the larger goals (saving for a house or college for your kids) that could slip away if you can’t get a handle on your spending.

Set Financial Goals

When you’re just winging it financially from month to month and year to year, it can be much harder to live within your means. Setting short- and long-term goals — whether it’s to reduce your debt, build your emergency fund, or save for a new car or home — can motivate you to stay on track.

When you’re setting your goals:

•   Think about what you hope to accomplish and how it would make your life better. (Be specific.)

•   Give yourself a timeline. (Be realistic.)

•   Try to make your goals measurable. (Baby steps are OK!)

Be Patient and Stay Positive

Getting your finances on track can be a little like dieting. You’re bound to slip up from time to time. And getting to your goals may take longer than you planned.

You may even be tempted to give up completely.

But if you stick with your plan, you can improve your financial health — and feel better about yourself and your future.

Recommended: Ways to Reward Yourself Without Breaking Your Budget

Track Your Spending with an Eye Toward Saving

If your goal is to save more, you’ll have to spend less. And one way to get the ball rolling is to track your spending for at least 30 days to see where your money is going.

Once you spot the things you can change, you can start cutting back on current and future spending, and catch up on old debts. Then you can move more and more money to savings — and get closer and closer to your goals.

It may help to choose a budget strategy that focuses on saving, such as the 70-20-10 budget rule, which divides after-tax income into three basic categories: 70% to monthly spending, 20% to savings and debt repayment, and 10% to donations (or to more saving and investing).

The Takeaway

Living paycheck to paycheck is like treading water: You may not be drowning in debt (yet), but you also aren’t getting any closer to your goals.

Instead of waiting for someone or something to come and help (Publishers Clearinghouse? Powerball®? Your Great Aunt Martha?), you can take a deep breath, get a better grip on your budget, and do what it takes to save yourself.

SoFi has some great tools available to help you through the process, including a money tracker app that can help you set goals, track your spending, monitor your credit score, and link all your accounts on one mobile dashboard. With SoFi, you can see how you’re doing all in one place and all for free.

FAQ

What is the 70-20-10 rule for money?

The 70-20-10 rule is a budgeting strategy that focuses on both spending and saving.

What is considered not living paycheck to paycheck?

If you aren’t living paycheck to paycheck, you’re living comfortably within or below your means, you’re putting savings away for future goals, and you have an emergency account set up so unexpected bills don’t send you spiraling.

What’s the best way to stop living paycheck to paycheck?

A good first step toward ending the paycheck-to-paycheck cycle is to find out where your money is going every month, and to set up a budget that prioritizes smart spending and saving.

Photo credit: iStock/jacoblund

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

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

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.

SORL0223008

A common way to invest money is by buying stocks. But with so many choices of stocks to consider, investors may find themselves comparing one option to another — yet still feeling uncertain about what’s the best decision.

So, what’s the best way to compare a variety of stock buying options? One commonly used method is a ratio called the return on equity, also known as the “return on net worth.” By knowing how to calculate return on equity, you’ll have a helpful metric to turn to when determining how stocks stack up.

The Return on Equity Formula

The formula for return on equity is a fairly straightforward calculation that can provide a key comparative metric to investors. Here it is:

Return on Equity = Net Income/Average Shareholder Equity

The ratio helps to determine how well a particular company is managing contributions from their stockholders. The higher the number, the more efficiently the company’s management is likely generating growth from the money invested.

Investors can then compare the result for one company to the ratio of another company, and so forth.

How to Use the ROE Formula

Calculating return on equity requires two pieces of information: net income and shareholder equity. Once this information is at hand, divide net income by the shareholder’s equity — and the result is the return on investment ratio.

So, how can you find those numbers?

Net income, also called “net earnings” or the company’s “bottom line,” is a figure that’s included on a company’s income statement, also called a P&L statement or profit and loss statement.

Publicly traded companies are legally required to distribute income statements in their annual financial reports to shareholders. Many companies may choose to also include financial statements on their websites and may otherwise distribute this information. So, when calculating return on investment, the net income figure can usually be found through one of these methods.

Reverse Engineering Net Income

Net income is calculated by taking the amount of a company’s sales and then subtracting what’s called the “cost of goods sold” from the figure.

Cost of goods sold, in turn, is calculated by determining the direct costs of making products, which includes the cost of materials used and direct labor costs. It does not include indirect costs, such as marketing.

Subtract the costs of goods sold from the sales total — and then also subtract operating expenses, administrative expenses, taxes, depreciation, and so forth. What’s left is a company’s net income.

Reverse Engineering Stockholder Equity

This can also be called “shareholder equity.” Information can be found on a company’s balance sheet, and the formula for shareholders’ equity is as follows: total assets minus total liabilities = SE. In other words, it’s what a company owns minus what it owes.

As another way to look at this, if all of a company’s assets (buildings, equipment, investments, and so forth) were liquidated into cash and all debts were paid off, what remained would be shareholder equity.

How to Use Return on Equity Ratios to Invest

Here’s an example of how you can make use of return on equity ratios when investing. If a company has $5 million in net income, with shareholder equity of $15 million, then return on equity can be calculated in this way: $5,000,000/$15,000,000 = 33.3%.

Using this figure as a benchmark, an investor can then compare the desirability of buying stocks from this company versus those available from another company.

When calculating the ROE ratio, an investor gains visibility into a moment in time. Investors may choose to do that before buying or selling shares — or they may track the performance of a stock over a period of time. Some investors like to see the return on equity calculation rise by 10% or more each year, as a reflection of the S&P performance.

In general, when ROE rises, it means the company is generating profit without needing as much capital — meaning without needing as much influx of cash. It demonstrates that the company is efficiently using the capital invested in the business by shareholders. When the ratio goes down, it is generally a sign of a problem.

This, however, is not universally true. There are times when return on equity artificially goes up. This can happen if a company buys back shares of its own stock or if the company has a significant amount of debt. So, although ROE is a key metric for investors to use when deciding if a particular stock is a worthwhile investment for them, it’s not a stand-alone metric.

Here are a few additional factors to consider. Because some industries as a whole typically have higher ROE ratios than others, comparisons between companies are more meaningful when done between two companies of the same industry.

Plus, in general, the more risks taken in investment choices, the higher the potential for return, as well as for loss. So, some investors with a higher tolerance for risk may choose to buy shares of stock in companies that don’t look as desirable if they have reason to believe that there is enough potential for significant financial rewards.

What Else to Consider with ROE

When buying shares of stock, an investor is buying ownership shares of the company. So, when the company does well, the stockholders typically benefit. When all goes south, the stockholders usually lose out.

This means that, when an investor knows a reasonable amount of information about the company and the industry it’s in, as well as its financial structure, better investment choices can typically be made. Other factors that influence the investor during the decision-making process include the economy, customer profiles of a business, and more.

To glean these types of insights, savvy investors often look at financial reports and figures, in addition to return on equity, when choosing how and where to invest.

Experienced investors will often take their time reviewing documents of companies that interest them, such as the financial reports that the Securities and Exchange Commission (SEC) requires public companies to file. These need to be filed quarterly, and they can provide insights into the companies’ financial performances.

Here is an overview of important information that can be found in the different types of financial documents:

•   Income statement: This document provides an overview of a company’s revenue (cash coming in), expenses of significance (cash going out), and the bottom line (the difference between what’s coming in and what’s going out). Consider what trends exist.

•   Balance sheet: Look at the company’s debt (how much they owe). Is the amount going up or down? In what ways? Consider what can be learned about the company’s financial performance from this review.

•   Cash flow statement: What did the company actually get paid in a particular quarter? This is different from what’s owed (accounts receivable) and instead focuses on when the cash arrives to the company. Does the company have steady cash flow?

Investors typically look at a company’s after-tax income (its “earnings”), which can be found in quarterly and annual financial statements. In addition to looking at the company’s current earnings, it can make sense to review its history to see how much earnings have fluctuated and whether there’s a pattern to these fluctuations. Overall, good earnings indicate a company is profitable and may be a good investment to consider.

Another figure to consider reviewing is a company’s operating margins (also known as its “return on sales”). This indicates how much a company actually makes for each dollar of its sales. This calculation involves taking the company’s operating profit and dividing it by net sales. Higher margins are typically better and may indicate good financial management.

Now, here are other financial ratios to consider, besides the return on equity ratio:

•   Price-to-earnings ratio: This allows investors to compare stock prices between companies offering shares. To calculate this ratio, take the market price of a share of stock and divide that number by the amount of earnings that a company is paying per share. This ratio allows investors to see how many years a company may need to generate enough value for a stock buy-back.

•   Price-to-sales ratio: This can be a good metric to use when reviewing a company that hasn’t made much of a profit yet — or one that’s made no profit at all, so far. To calculate this, take the value of the company’s outstanding stock in dollars and divide that number by the company’s revenue. The resulting figure, ideally, should be as close to one as possible. If the number is even lower, this is an outstanding sign.

•   Earnings per share: This metric helps investors to know how much money they might receive if the company liquidates. So, if this number is consistently going up, this may entice more people to buy shares because this at least suggests they’d get more for their investment dollars if liquidation happened.

Earnings per share can be calculated by taking the company’s net income and subtracting a certain type of dividends (preferred stock), and then taking that figure and dividing it by the number of outstanding common stock shares. Preferred stocks don’t have voting rights attached to them like common stocks do, but they receive a preferential status when earnings are paid out.

•   Debt-to-equity: Investors use this metric to try to determine the degree that a company is using debt to pay for its operations. To calculate this figure, take the company’s total liabilities and then divide that number by the total shareholder equity. A high ratio indicates that the company is borrowing to a significant degree.

•   Debt-to-asset ratio: Investors may decide to compare debts to assets of a company — and then compare the resulting ratio with other similar companies to determine how significant a debt load a company has. It may be wise to calculate this within the context of a particular industry.

What Is a Good Rate of Return?

First, consider that, when cash is kept under the mattress at home, the rate of return is zero percent. And, when factoring in inflation, this means the person is actually losing money over time. Keeping money in a checking account can amount to virtually the same thing.

There is no guaranteed return on investment in stocks. That’s because of variations in the market, varying degrees of risk taken by investors, and so forth. There are, however, historical precedents that indicate how stock ownership over the long haul can often allow the investor to weather economic fluctuations for an ultimately positive result. And, when looking at the average annual return on investments for stocks since 1926, that number has been 10%.

A topic mentioned in this post is risk tolerance. This is the amount of risk that a particular investor is comfortable taking — here’s a quiz to help investors determine their risk tolerances. By knowing your risk tolerance, you’ll have a better idea of what’s a “good” rate of return based on the level of risk you’re taking, knowing that higher risk can net higher returns.

Things to consider when determining how much risk to take include:

•   Financial factors: How much could a person afford to lose without it having a negative impact on their financial security? When people are young, they typically have much more time to recover from a big market loss, so they may decide it’s okay to be more aggressive. People closer to retirement age, though, may decide to be more protective of their assets. It’s important to review current financial obligations, from mortgage payments to college tuition, to make an informed decision, as well.

•   Emotional risk: Some people feel energized when taking risks while others feel stressed. A person’s emotional responses to risk taking can play a key role in their risk tolerance when investing.

The Takeaway

Even the most experienced investors can become frustrated when choosing which stocks to buy. By knowing how to calculate return on equity, investors can have a comparative metric to turn to that can help them evaluate and compare different companies.

To use return on equity effectively, however, you’ll need to know where to find the revenant numbers and what to look out for. Also remember the ROE isn’t the only metric to consider — you’ll also want to take into consideration information found in financial documents, other financial ratios, your own risks tolerance, and more.

And if you’re feeling overwhelmed, consider an online investing platform like SoFi’s to make your investing experience easier. SoFi members can benefit from personalized advice, access to SoFi events, and much more.

SoFi Invest®