Starting salaries can vary greatly based on location or line of work, so there’s no one answer to the question, “What is a good entry level salary?” The size of the paycheck will differ based on where someone lives, the industry they work in, the hiring institution or company, and other hard-to-tabulate variables.
So, how might a job seeker figure out a good entry level salary before sitting down with the new boss or an HR representative to discuss pay? Here are some helpful resources to get a handle on entry level rates across the U.S., including tips for negotiating compensation.
Understanding Entry Level Salaries
Entry level salary information changes on a regular basis, but many job-focused websites offer insights into the going rates. For instance, ZipRecruiter, a well-known American employment marketplace, lists the average U.S. entry level salary by state. In summer 2023, wages in North Carolina are $13.44 per hour or $27,956 per year, whereas New York pays $16.79 per hour or $34,933 per year, on average.
Still, even state-by-state averages don’t show the whole picture. Although more than half of U.S. states have minimum wage requirements higher than the federal minimum wage, which remains set at $7.25 per hour, the amount an early-career new hire might expect can also vary by county and city within the same state.
Along with location, the industry one works in can play a big role in what kind of starting salary a new hire might expect. For instance, a data scientist at a tech company might be able to earn as much as $95,000 right out of the gate, while a newly minted journalist might expect something closer to $40,000.
One way to grasp what sort of salary that might be expected is targeted research on the specific industry, location, and even position and company. And if you’re in the early stages of college, you might want to align your eventual courses of studies with a high-paying entry level job.
Researching a Good Entry Level Salary
Recent grads wanting to understand if they’re being offered current market rates for a particular job (or location) can turn to the internet to research details. Some sites that might offer resources for those job seekers include:
• Payscale, for example, allows employees to create custom “pay reports” based on their job title, years of experience, and city.
• Salary.com offers a similar feature, allowing job seekers to search for positions by keyword and compare them accordingly.
• Glassdoor is another well-known web resource that publishes employee-generated information on salary by specific company and position. It also hosts reviews by current and former employees, which may help a job applicant learn more about what it’s actually like to work there.
After researching average pay by role, location, and company, job seekers might also want to mull over how to negotiate an acceptable offer.
So, what can a job seeker do if their dream job doesn’t (initially) come with a dreamy paycheck? Luckily, there are ways to negotiate a higher offer both initially and once you’ve proven yourself down the line.
Negotiating a salary can be scary, especially for a recent grad who’s not used to the salary tango. Nevertheless, negotiating an offer up front can have a significant effect on one’s paycheck (and, by extension, one’s long-term earnings).
When thinking of how to negotiate your starting salary, don’t forget about the benefits package, as well. In addition to higher pay, you may want to negotiate other benefits such as tuition reimbursement, a flexible schedule, or childcare expenses into your total compensation package.
Preparing to Negotiate
How might a new hire negotiate a higher-paid entry level salary? Well, having a well-researched entry level salary forecast in mind is one place to start.
Of course, it’s not likely that an early-career new hire can simply negotiate up to an experienced data scientist’s $95,000 salary if that’s not the norm for the role or location they’ve applied for. But, it’s still possible to make the case to hiring managers for why a higher rate is merited. When preparing to negotiate, remember to:
Highlight Your Skills
When asking for a higher starting salary, it could be helpful to give concrete examples of how your current skills might benefit the company. In these conversations, it may be possible to push an offer up a few percentage points (especially when the skills required are in high demand).
Practice Your Pitch
Rehearsing what you’ll say ahead of time can help you hone a confident delivery style. What’s more, it can help you be prepared for questions that come your way regarding why you deserve a higher pay.
Negotiate Other Benefits
On top of baseline salary, it’s also possible in some roles and industries to negotiate for other valuable forms of compensation — such as fitness stipends, work-from-home time, funding for continued education, and more.
Of course, negotiating a good entry level salary is not necessarily an easy undertaking. Interviewers may put candidates on the spot, asking if they’re considering other offers or if the position is their top choice.
In an already uncomfortable situation, some candidates may stumble or misspeak if they don’t know how to justify what they’re asking for.
One simple place to start is asking whether it’s possible to negotiate the offer in the first place. Candidates may also inquire about future career growth and promotion potential, which could lead to a bigger salary later down the road.
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Navigating Post-College Life, Financially and Beyond
Navigating life after college can be exciting and challenging. Trying to make ends meet on an entry level salary might be particularly tough, especially when on the hook to pay back student loans. More than 43 million borrowers have federal student loan debt, with the average balance being $37,388 per person.
A flexible and adaptable approach to finances and where one lives could make the transition to post-college life more manageable.
For instance, recent graduates who are in a position to choose a new place to live might opt to move to a city with a lower cost of living.
Learning how to make a budget can also go a long way toward covering common expenses — even when one’s starting salary leaves a few zeroes to be desired. That said, there’s only so much instant ramen to eat or cups of coffee to skip out on.
Refinance Student Loan Debt
For those feeling weighed down by student loans while earning an entry level salary, additional options exist. Those with outstanding federal student loans, for example, may qualify for income-driven repayment plans, loan forgiveness for public service, or student loan deferment.
Refinancing educational debt with a private lender is another option that could save money each month — or help the borrower pay off student loans faster.
Student loan refinancing may allow recent grads to make lower monthly payments toward their existing debt, freeing up some extra cash. (Note: You may pay more interest over the life of the loan if you refinance with an extended term.) Or, it could help a borrower to save money on interest paid on the loan as a whole, allowing them to pay off the debt total faster.
It’s important to note that refinancing with a private lender causes borrowers to forfeit certain guaranteed federal benefits, like income-driven repayment (IDR) and loan forgiveness.
SoFi refinances both federal and private student loans, offering no application fees and no prepayment penalties. Those who refinance their student loans through SoFi get access to a wide range of exclusive member benefits, including career coaching, a complimentary 30-min session with a SoFi Financial Planner, and more — at no additional cost.
Checking your student loan refinance rate won’t have an affect on your credit score and could be the first step toward saving thousands of dollars — or making more affordable monthly student loan payments.
See if you prequalify with SoFi in just two minutes.
SoFi Student Loan Refinance Terms and conditions apply. SoFi Refinance Student Loans are private loans. When you refinance federal loans with a SoFi loan, YOU FOREFEIT YOUR EILIGIBILITY FOR ALL FEDERAL LOAN BENEFITS, including all flexible federal repayment and forgiveness options that are or may become available to federal student loan borrowers including, but not limited to: Public Service Loan Forgiveness (PSLF), Income-Based Repayment, Income-Contingent Repayment, extended repayment plans, PAYE or SAVE. Lowest rates reserved for the most creditworthy borrowers. Learn more at SoFi.com/eligibility. SoFi Refinance Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).
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Most people know that paying bills on time is an important task. But it can also be tedious, time-consuming, and something you may want to put off till…later.
Regularly getting those bills paid on schedule can help you avoid doling out money on interest and fees.
It can also help maintain a solid credit score, which is something that could pay off in the future. It might help you snag the best interest rates when qualifying for loans or getting a credit card.
Figuring out how to organize those bills can have another benefit: I can reduce the time you spend on this to-do and also perhaps lower the stress of wondering if you’re on time with your payments or late.
Fortunately, organizing your bills isn’t hard. You might use an old-school accordion folder and a calculator to manage the process. Or you might decide to handle the whole process digitally.
Here are some smart ideas for how to organize those bills.
1. Setting Up a Bill-Paying Station
Do you have a convenient spot where you can open, organize, and pay your bills?
Consider setting up a dedicated desk or area, or (if space is tight) a box or roll-away cart. The goal is simply to keep everything in one place, instead of scattered around in your car, briefcase, purse, or on the kitchen counter.
It’s a good idea to stock your station with all the items you’ll need to get the job done. Depending on how you pay your bills, this might include: envelopes, stamps, pens, your checkbook, a calendar, a filing system for sorting paper bills as they arrive, and storing those you’ve paid.
Or, if you receive bills and account statements via email as many do today, consider setting up a separate virtual bill paying space. You might, for instance, set up an email account just for bills. This will ensure that you don’t overlook an electronic bill in the midst of the other emails you receive.
Or, you might use your current email and create a folder, with subfolders, for anything related to your finances. That way, you’ll know exactly where to look if you need to check on a bill or other financial correspondence.
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2. Making a Master List of Monthly Bills
Creating a list of every single bill you pay can be another way to help ensure that nothing falls through the cracks. It can also help you see where your money goes and how much money you have left after paying bills (if any).
You can do this with pen and paper, type it up in a document, or create a spreadsheet that includes a column for each month (allowing you to simply check off each bill as it gets paid).
You might be able to list some things from memory, like your rent and car payments, car insurance, or phone. But you also may want to check your bank and credit card statements for bills you pay less frequently (annual subscriptions, quarterly membership fees, tax bills, etc.), and anything that’s on autopay.
For each bill, consider including: the vendor/service provider/lender, the account number, contact information, the bill’s due date, the date you think you should send/make the payment so it’s always on time.
For loan/credit card bills, you may want to also include the balance owed, and the minimum monthly payment.
You can use this list to make decisions about which bills you might want to set up by automating your finances and which you’ll pay manually.
And once it’s done, you can keep a copy on your bulletin board and/or in your files to use as a checklist.
Looking for other ideas on how to organize bills? There are two basic automatic bill payment options.
• One is setting up automatic debit payments with a merchant or service, which involves giving them your checking account or debit card number and authorizing them to withdraw money on a recurring basis to pay a bill.
• Another way is to authorize your bank or credit union’s bill pay service to send recurring payments to a company.
Either way you set it up, there are both pros and cons to using automatic payments, or autopay.
Here are the pros:
• Autopay can help simplify your finances, since you don’t have to write out checks or log on to various websites to pay online every month.
• It also ensures that it happens. The money is whisked out of your account before you have a chance to think about it or forget to think about it. Automating this process can help you save on interest and fees.
Here are the cons, because that out-of-sight-out-of-mind factor has a downside.
• Autopay can make it easier to forget that you’re still paying for a subscription service you don’t use anymore, for example, or you might not notice when a bill’s amount is incorrect.
• If you don’t have enough money in your account when an autopay bill goes through, you could end up overdrafting your account, which can lead to overdraft or NSF fees.
If you generally have plenty of money in your account and you regularly check your bank and credit card statements to make sure the charges are accurate, autopay might be a good fit.
But if your account balance fluctuates, or you’re likely to forget about small or infrequent charges if they’re paid automatically, you may want to use a different payment method (or at least for certain bills).
One other point: If many of your bills hit on the same day of the month, you might talk to some of your payees about whether you can change your bill due date. That could help you spread out payments over the month is a way that eases your financial pressure.
4. Putting a Bill Paying System in Place
Once you’ve decided which (if any) bills you’ll manage with automatic payments, you can move on to choosing a strategy for paying all your other bills, as well as keeping track of autopayments.
You can go as full-on techie as you like, or handle it with classic pencil and paper. The key is simply having a system.
Some options to think about:
Paying Bills Right Away
There’s no reason you have to wait for a specific day of the week or month to pay your bills. With this method, you would just open and pay bills as they arrive in the mail or online.
Setting up Reminders
Another option is to set up reminders for when you need to pay each bill. You can write the due dates down in a traditional planner/datebook or use a digital calendar that will send you email reminders or text alerts.
There are also bill reminder phone apps that will alert you when a bill needs to get paid.
In addition, some companies and service providers allow you to sign up for bill reminder emails or texts.
Paying Bills on a Specific Day
If you don’t want to (or can’t always) sit down immediately to write a check or get online to pay, you could make it a weekly, biweekly or monthly routine.
With this method, you would file any bills that arrive in a “to pay” folder or in-box. You might also consider opening them and organizing them by the due date.
If the due dates are all over the place or difficult to manage, you may be able to get the dates adjusted simply by calling or emailing the company or service provider. (For example, you could try to time bigger bills so they’re due just after your paydays.)
On whatever day you designate for paying bills, you may want to set aside 30 minutes to an hour to go through your folder or stack of bills, as well as open any bills that came by email.
It’s also a good idea to go through autopay notices to make sure you agree with the amounts charged.
Choosing the Best Way to Pay Manually
Many service providers and lenders offer customers several different methods for paying their bills.
Besides autopay, you might be able to use an app, a website, an automated phone system, deliver a payment in person, or send it in the mail.
No matter which option you choose, try to remember to always keep some sort of record of the payment in your files.
5. Keeping Good Records
In addition to checking off each paid bill on your master list, you may also want to create a system for managing your records after you’ve made your payments.
One option is to file paper copies of all your bills, noting on each how much you paid, when you paid, and how you paid (including any confirmation numbers for online or phone payments or check numbers for payments you mailed).
You might file these all together in a folder labeled for that month, or create separate folders for each account, with the most recently paid bill filed on top.
If any of these bills are needed for tax purposes, you may want to make a copy and file it with your yearly tax documents.
Another option is to scan each bill and file them digitally on your computer’s hard drive or in the cloud, using a folder for the year that has subfolders for each month.
You may also want to create a real or digital file with all your credit and debit card receipts until you have a chance to reconcile them with your statements. (It’s a good idea to hold onto any receipt, bill, or statement until you’re absolutely sure you won’t need it for taxes or some other purpose, such as an insurance claim.)
6. Designating a Family Bookkeeper
Here’s another way to go about organizing your bills. If one spouse or partner has a knack for organization and bookkeeping and the other is less inclined, you might want to have the “numbers” person take the lead on the household’s bill-paying duties. (Have you ever missed a payment because you each thought the other would take care of it?)
Another option is to sit down together to work through the bills. Or, you might decide to alternate from month to month.
No matter which approach you choose, consider setting up a regular time to sit down together and review the household budget, see how you stand, and make sure you both have access to account information, including passwords.
You also may want to consider setting up a separate account for paying household bills.
7. Using Budgeting Tools/Apps
Technology can step in and help you manage your bills, too. There are an array of ways to track your spending and paying. Your financial institution may offer digital tools for this, or you can download apps for this purpose, whether free or paid options.
You’ll likely find a variety of methods, from spreadsheets to virtual pen and paper or envelopes. You might want to experiment with a few and see which suits you best.
8. Using the Cash Envelope Method
There are a variety of budget techniques you might use. One popular one is the envelope method, which involves setting key budget categories, writing the name of each on an envelope, and putting the designated amount of cash for the month ahead into it.
Then you pay the bills from the appropriate envelope as needed. Once the money from an envelope is gone, it’s gone. You either have to forego spending in that category or else borrow from another envelope.
For those who prefer not to use cash, this program can be adapted to involve debit card payments or checks.
The Takeaway
Setting up a simple bill organization system can save you time, stress, as well as money, and can also make it easy to access records you need come tax time.
Smart ways to organize your bills include creating a master list of all your monthly bills, deciding when autopay makes sense (and when it might not), and creating a virtual or actual filing system to track and streamline the bill paying process.
The best way to manage your bills is with a system that makes sense for you. And you might have to try a few different methods to figure out what works best for your situation.
Another move that might help you get your finances organized is signing up for a Checking and Savings account with SoFi.
SoFi Checking and Savings lets you spend and save in one convenient place, and offers a feature called Vaults. With SoFi Vaults, you can easily separate your spending from your savings while still helping your money grow.
Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 3.80% APY on SoFi Checking and Savings.
FAQ
What bills are most important to pay?
While all bills are important to pay, basic living expenses (the things that keep you up and running, such as rent, utilities, and healthcare) and debt (student loan payments, for instance) can be priorities.
How do I organize my monthly expenses?
There are many ways to organize your monthly expenses, depending on your personal preferences and financial style. You might use an app or pencil and paper; you could try the envelope budgeting method or set up autopay. Many people try a couple of techniques before they land on one that suits them best.
How do you simplify bill payments?
Many people find that either using an app or automating their bills makes payment simpler. Your bank might offer a good app, or you can download one. And automating bill payments is something that vendors may set up for you or you can set up with your financial institution.
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When you refinance student loans, you pay off your existing loans with a new loan with new terms from a private lender. The primary benefit of refinancing is that you can save money over the life of the loan if you’re able to lower your interest rate.
While certain lenders will refinance federal and private loans together, you’ll lose access to federal benefits and protections if you refinance a federal loan, so it only makes sense if you don’t plan to use any federal programs.
So can you refinance student loans? Here’s what to know about who is eligible for refinancing, types of student loans that can be refinanced, and more.
Who Is Eligible for Student Loan Refinancing?
A borrower generally needs to meet specific credit score, income, and degree requirements to qualify for a student loan refinance. Ideally, a borrower will qualify at better terms than their existing loans, such as at a lower interest rate. As mentioned, the main goal of refinancing is to lower your interest rate so you can save money over the life of the loan.
The process of refinancing student loans involves shopping around for a lower interest rate and then filling out an application for a refinance. Once a refinance is approved, your new lender pays off your old lender. After you receive the new loan, you make payments to your new lender. Here are some of the common requirements to qualify for a student loan refinance.
Credit Score Requirement
Your credit score is a three-digit number that summarizes how well you pay back debt. For refinancing student loans, you’ll typically need to have a credit score in the high 600s to qualify.
You may need to raise your credit score before you apply for student loan refinancing. You may be able to raise your credit score by doing the following:
• Pay your bills on time
• Dispute errors on your credit report
• Keep your credit utilization rate — the amount you use on your revolving accounts such as credit cards — low compared to your total available credit
• Increase your credit limits
• Remove negative entries to your credit report (if old collection accounts show up on your credit report, request that they be removed)
Student loan lenders often require you to show proof of a certain level of income in order to qualify for a student loan refinance. They want to make sure you can repay your new loan.
They will want to know how your income compares against the amount of debt you have and they’ll calculate your debt-to-income (DTI) ratio to find out if you qualify. A DTI ratio compares the amount you owe each month to the amount of income you bring in—it’s your total monthly debt payments divided by your gross monthly income. It’s a good idea to shoot for a debt-to-income (DTI) of under 50%, though a lower DTI (such as under 35%) is even better.
Wondering “Can I refinance my student loans if I don’t have a high enough DTI ratio?”
To improve your DTI ratio, consider making more payments toward your debt, avoid taking on more debt, increase your income, and postpone making large purchases so you’re not using as much of your credit.
Degree Requirements
In most cases, you’ll have to have a degree or leave college in order to qualify for a refinance. Some lenders won’t allow a refinance if you attended a school that didn’t allow students to accept federal aid dollars.
What Types of Student Loans Can Be Refinanced?
Can you refinance private student loans? Can you refinance federal student loans? Yes, if you choose a lender that refinances both, but note that you can only refinance with a private lender — you cannot refinance federal loans and private student loans into a new federal loan. (When you combine several federal student loans into a single loan through the federal government, that’s federal student loan consolidation, which is different from refinancing and generally doesn’t save you money.)
Private Student Loans
Private student loans are issued by a credit union, bank, or online lender, not the federal government. They typically carry a higher interest rate compared to the interest rate on federal student loans.
You may be able to get a lower interest rate on your existing private student loans if you refinance. You may want to consider prequalifying for a loan, which means that a lender will do a soft credit check. Checking with several lenders can help you compare the interest rates among lenders. It might be a good idea to consider refinancing private student loans if you know you’ll get a lower interest rate. A student loan refinance calculator tool for comparing refinance rates can help.
Federal Student Loans
Federal student loans come directly from the federal government and specifically, from the U.S. Department of Education. Can you refinance federal student loans? Yes, but refinancing your federal student loans turns your student loans into private student loans—and you’ll lose access to federal benefits and protections.
When you refinance federal student loans, you lose access to federal loan programs like income-driven repayment, which sets your payments at an amount based on your family size and income. It could also mean that you might forgo loan forgiveness, which means you don’t have to pay back some or all of your loan. You should consider whether it makes sense for you to give up these federal loan programs before you refinance.
Why You Might Consider Refinancing Your Student Loans
If your main goal is finding a way to pay less on your student loans and you’re able to find a lower interest rate on your student loans, refinancing might make a lot of sense for you.
It can also be a good option if you’re interested in merging your student loans together to simplify your payments. And if you’re sure you won’t need to access federal benefits because you have a reliable income and job security, it may also be a better option than federal student loan consolidation, which usually doesn’t end up saving you money.
Despite the attraction of saving money with a possibly lower interest rate or merging several loans together, you might not want to lose out on federal student loan protections. You could lose out on temporary loan payment relief (deferment or forbearance) or loan forgiveness and discharge.
Losing out on federal student benefits may hurt you later on. Be sure to consider what you’ll do if you lose your job or have trouble making your student loan payments down the road.
Can You Refinance Student Loans While Still in School?
You may not be able to refinance your student loans while you’re still in school. However, your best bet is to ask your lender directly. Refinancing with a co-signer may help you improve your application and secure better terms.
If you decide you want to go for it, you can submit a formal application, which includes the lender looking into details like the ones listed above, like income degree requirements and personal details. At this point, a lender does a hard credit check. Once your old loan is closed, you’ll then make regular payments to your new lender.
Student Loan Refinancing With SoFi
Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.
With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.
FAQ
Can you refinance your student loans if you didn’t graduate?
Yes, you can refinance your student loans if you didn’t earn a degree, though it may be more difficult. Ask various lenders the same question: “Can I refinance my student loans?” and learn more about your refinancing options. If you have federal student loans, you can also look into other options to reduce your monthly repayment amount, such as extending your loan term (although you’ll end up paying more in interest over the life of the loan) or explore whether you might qualify for an income-driven repayment program or forgiveness. Contacting your loan servicer is a good place to start.
What credit score do you need to be able to refinance student loans?
Every lender is different and requires different requirements to be able to refinance. Your personal qualifications also matter. However, in general, it’s important to have a credit score in the high 600s in order to qualify for a refinance. Ask lenders for more information before you make a final decision. You may also want to use a calculator tool for comparing refinance rates.
Can both federal and private student loans be refinanced?
You’re asking good questions if you’re wondering, “Can I refinance federal student loans?” or “Can I refinance private student loans?” The quick answer is that yes, both federal and private student loans can be refinanced, but you must refinance both types into a private student loan, and you’ll lose access to federal benefits and protections if you refinance federal student loans.
Photo credit: iStock/Andrii Sedykh SoFi Student Loan Refinance Terms and conditions apply. SoFi Refinance Student Loans are private loans. When you refinance federal loans with a SoFi loan, YOU FOREFEIT YOUR EILIGIBILITY FOR ALL FEDERAL LOAN BENEFITS, including all flexible federal repayment and forgiveness options that are or may become available to federal student loan borrowers including, but not limited to: Public Service Loan Forgiveness (PSLF), Income-Based Repayment, Income-Contingent Repayment, extended repayment plans, PAYE or SAVE. Lowest rates reserved for the most creditworthy borrowers. Learn more at SoFi.com/eligibility. SoFi Refinance Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).
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A covered call ETF is an exchange-traded fund that provides investors with additional income by writing options on the securities the ETF holds. These actively-managed ETFs offer investors the benefits of writing call options on stocks, without them having to participate in the options market directly.
The upside is that investors take on less risk and potentially earn income in the form of options contract premiums on top of dividends. The downside is that potential upside profits will be capped because the call options will have to be exercised once the underlying security reaches a certain strike price (one of many options trading terms to know), at which point the shares will be called away from the shareholder.
Basics of the Covered Call Strategy
Covered calls involve buying shares of a stock and then writing call options contracts on some of those shares. A covered call could also be referred to as “call writing” or “writing a call option” on a security.
Other investors can then purchase the call option contract. They pay a small fee to the call writer, known as a premium, for doing so. The contract gives a buyer of the option the right, but not the obligation, to buy shares at a specific price on or before a specified date.
In the case of call options, when the share price of the underlying security rises above the strike price, an option holder can choose to exercise the option, at which point the stock will be called away from the person who wrote the call option.
The option holder then receives shares at a cost lower than current market value. Their profits will equal the difference between the option strike price and where the stock is currently trading minus the premium paid. The higher the stock price rises before the expiry date, the greater the profit for the person holding the call option.
Because the call option writer receives income on the deal in the form of a premium, they want the stock price to either stay flat, fall, or rise only slightly. If the stock rises beyond the strike price of the option, then they’ll receive the premium, but their shares will be called away. The option writer will have a gain or loss depending on the difference of the exercise price and the purchase price of the stock and the premium received.
On the other hand, if the stock doesn’t reach the strike price of the option, then the writer keeps both the premium and the shares. They’re then free to repeat the process as many times as they wish.
💡 Quick Tip: All investments come with some degree of risk — and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.
What Is a Covered Call ETF?
A covered call ETF is an actively-managed exchange-traded fund (ETF) that buys a set of stocks and writes call options on them — engaging in the call-writing process as much as possible in order to maximize returns for investors.
By investing in a covered call ETF, investors have the opportunity to benefit from covered calls without directly participating in the options market on their own. The fund takes care of the covered calls for them.
The ETF covered call strategy usually involves writing short-term (under two-month expiry) calls that are out-of-the-money (OTM), meaning the security’s price is below a call option’s strike price. Using shorter-term options allows investors to take advantage of rapid time decay.
Options like these also serve to create a balance between earning high amounts of premium payments while increasing the odds that the contracts will expire OTM (which, for covered call writers, is a positive outcome).
Writing options OTM serves to make sure that investors can benefit from some amount of the upward price potential of the underlying securities.
When to Buy a Covered Call ETF
It may be a good time to buy a covered call ETF when most of the securities held by the ETF are expected to trade sideways or go down slightly for some time. Beyond that, any time is a good time for investors who find the strategy appealing, want to take the chance of gaining extra income for their portfolios, and don’t mind missing out on outsized gains if the market rips higher.
Covered call ETFs might also be attractive to people nearing retirement, people who are generally more risk-averse, or anyone looking to add some additional income to their portfolio without having to learn how to write and trade options.
If an investor were considering ETFs vs. index funds, they might choose an ETF for the reason that the fund might employ creative strategies like covered calls, whereas index funds merely try to track an index.
When Not to Buy a Covered Call ETF
The one time when it may be advisable not to buy a covered call ETF might be when stocks are generally rising and making new record highs on a regular basis. This is a scenario where covered call ETFs would underperform the rest of the market.
If the underlying securities rise only slightly, and do not exceed the strike prices set for the covered calls, then these ETFs should also perform well. It’s only when stocks rise to the point that the shares get called away from the fund that the fund will almost certainly underperform compared to holding shares directly.
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Pros and Cons of a Covered Call ETF
The main benefits that come from taking advantage of an ETF covered call strategy are reduced risk and increased income.
Pros of a Covered Call ETF
Overall, a covered call ETF has largely the same risk profile as holding the underlying securities would. But some investors see these ETFs as less risky than holding individual stocks because the ETF should, in theory, do as well or slightly better than the market in most situations. (The one exception would be during extended, strong bull markets.)
But while covered call ETFs reduce the risk associated with owning a lot of shares while also providing additional income, hedging against downside risk would best be accomplished by using put options.
Cons of a Covered Call ETF
Covered call ETFs are actively managed, which means they tend to have higher expense ratios than passively managed ETFs that track an index. But the extra income may potentially offset that cost.
The Takeaway
A covered call ETF is an actively managed exchange-traded fund that offers investors the benefits of writing call options on stocks, without them having to participate directly in the options market. For investors looking for a simpler approach, this may be beneficial. Covered call ETFs also have two primary benefits in reduced risk and increased income.
That’s not to say that they don’t have downsides, too. Notably, they tend to be actively-managed, which generally means they have higher associated fees. Again, all of this should be taken into consideration before folding any type of security into an investment strategy.
Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.
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.
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Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.
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.
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at https://sofi.app.link/investchat. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes. Claw Promotion: Customer must fund their Active Invest account with at least $50 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.
Tail risk is the danger of large investment gains or losses because of sudden and unforeseen events. The term “tail risk” refers to the tails on a bell curve: While the fat middle of the bell curve represents the most probable returns, the tails — both positive and negative — represents the least likely outcomes.
When looking at the bell curve that gives the phenomenon its name, investors sometimes also refer to tail risk as “left-tail risk,” as it refers to the very unlikely and very negative outcomes on the curve.
What Is Tail Risk?
Tail risk is defined by a concept called standard deviation. As a metric, standard deviation shows how widely the price of an asset fluctuates above and below its average. For a volatile stock, the standard deviation will be high, while the standard deviation for a stock with a steady value will be low.
Standard deviation is an important number that investors use to understand how historically volatile a stock is, as well as the level of volatility they can project for it in the future. That projection is based on the underlying assumption that the price changes of a stock will follow the pattern of what’s called normal distribution.
Normal distribution is a statistical term used to describe the probability of an event, and it shapes the bell curve. If you flip a coin 10,000 times, how often will it land on heads or tails? Each time, there is a 50% probability it will land on heads or tails, and the curve describes the likelihood that those 10,000 flips will come out 50/50. The fat middle of the curve says it will be close to 50/50, but there are extremely low probabilities at the low (or skinny) ends of the bell curve that it could be more like 80/20 heads or 80/20 tails.
That approach to probability predicts that a stock selling at a mean price of $45 with a $5 standard deviation is 95% certain to sell between $35 and $55 at the close of that day’s market.
“Tail risk” is used to describe the risk that an investment will fall or rise by more than three standard deviations from its mean price. To continue the example, the hypothetical stock $45 stock has entered the domain of tail risk if, at the end of the trading day, it is priced at $30 or below, or at $60 or above.
💡 Quick Tip: Before opening any investment account, consider what level of risk you are comfortable with. If you’re not sure, start with more conservative investments, and then adjust your portfolio as you learn more.
What are Fat Tail Risks?
Unpredictable events are ironically predictable, and happen in the markets on a regular basis. And those markets, such as the one following the onset of the pandemic in early 2020, exhibit much “fatter” tails. Another period characterized by having an extremely fat tail was the 2008 Financial Crisis.
They’re called “fat tails” because the outcomes that had been on the extremes were suddenly happening, instead of the ones previously considered probable. This condition is also called by the mathematical term leptokurtosis. As a general rule, because they deviate so wildly from the expected norm, fat tail events present great risk as well as great opportunities for investors.
Tail Risk Strategy
Financial models such as Harry Markowitz’s modern portfolio theory (MPT) or the Black-Scholes Merton option pricing model, employ the assumption that the returns of a given asset will remain between the mean and three standard deviations.
The assumptions made in these long-term market projections can help with planning. But they’re not realistic about how investors receive their market returns over the long term. Rather, the bulk of their returns, no matter how diversified their portfolio, are largely the result of positive tail events. The power of tail events over long periods is one reason that experts tell investors to stay in the markets during fat-tail periods of volatility, even if it is stressful at the time.
Why Investors Hedge Tail Risks
Left-tail events also have the potential to have an extremely negative impact on portfolios. That’s why many investors hedge their portfolios against these events — aiming to improve long-term results by reducing risk. But these strategies necessarily come with short-term costs.
Downside Protection
One strategy that’s designed to protect against tail risks involves taking short positions that counterbalance the rest of a portfolio, also known as buying downside protection. For example, if an investor is heavily invested in U.S. equities, they may consider investing in derivatives on the Chicago Board Options Exchange (CBOE) Volatility Index (VIX), which correlates to the inverse of the S&P 500 index. (Using short strategies is also one way to invest during a bear market.)
Another way to hedge by buying downside protection is to purchase out-of-the-money put options. When the assets connected to these put options go down, the put options become more valuable. Granted, buying those options costs money, but it can be a strategy to consider for investors who believe the markets are likely to be volatile for a while.
Tail Risk Parity
Tail risk parity is a way to structure a portfolio based on the expectations that events that have a negative impact on one asset class will likely be a boon to others. This requires looking at each asset class in terms of how it might fare in the event of a particular crisis, and then finding an asset class that would likely do well in that same circumstance, and then keeping them in balance within your portfolio.
Managed Futures Funds
Other investors who want to trim their exposure to tail risks may invest in managed futures funds. These funds buy long and short futures contracts in equity indexes, and can thrive during times of crisis in the markets.
The Takeaway
A tail risk is the risk that an event with a low likelihood of happening will happen. And it’s something that investors need to keep in mind. There are a few different ways to mitigate the impact of tail risk in an investment portfolio, but for long-term investors, it can be helpful to keep in mind that tail risk is responsible for most returns over time.
Tail risk and fat tails may seem like granular investing terms, but they do play a role in the markets, which means that every investor can benefit from learning about them, and how they can affect a portfolio.
Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.
SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below:
Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
Claw Promotion: Customer must fund their Active Invest account with at least $50 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.
