What Is the Unrealized Capital Gains Tax Proposal?

As part of his 2025 fiscal year budget proposal, former President Joe Biden suggested an unrealized capital gains tax for wealthy individuals. Specifically, the tax would have required taxpayers with a net worth above $100 million to pay a 25% minimum tax on unrealized capital gains.

Former Vice President Kamala Harris initially supported the move, which was dubbed a “billionaire minimum tax.” During her unsuccessful presidential campaign, the unrealized capital gains tax proposal was not addressed. The concept earned both support and criticism, partly due to misinformation about which taxpayers would be affected. Learn the details here.

Key Points

•   The unrealized capital gains tax proposal targeted individuals with net worth over $100 million.

•   The proposed tax rate of 25% would have applied to unrealized gains, or increases in the value of an asset that has not yet been sold.

•   Unrealized gains are currently not taxable under existing laws.

•   The proposal aimed to ensure that ultra-wealthy individuals paid a fair share of taxes.

•   Critics argued the proposal could disrupt markets and discourage investment.

What Are Unrealized Gains?

Capital gains are the profits you realize from the sale of an asset. More simply, it’s the difference between what you paid for the asset and what you sell it for.

If you’re still not sure, here’s another way to phrase unrealized capital gains tax meaning:

Unrealized capital gains are profits you haven’t pocketed yet because you haven’t sold the underlying asset.

Why does that matter? Because realized gains are taxable; unrealized gains are not.

You don’t need to report unrealized capital gains to the Internal Revenue Service, or IRS. Reporting is only necessary once you sell the underlying assets for a profit. You can, however, use the value of the assets you own to calculate your net worth and map your financial planning strategy. An online budget planner is a great place to get started with developing your money blueprint.

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Recommended: How Much Do You Have to Make to File Taxes?

What Happens If Unrealized Gains Are Taxed?

If unrealized gains were taxed, the result might be a tax bill. That would have been the immediate impact for wealthy taxpayers who were subject to such a tax as it was proposed. If implemented, the tax would have targeted the top 0.01% of U.S. households who are in the very top tax bracket.

Someone subject to an unrealized capital gains tax might need to rethink their tax strategy. They might have to reconsider how they utilize various tax breaks, such as tax loss harvesting, to counterbalance any increases in what they owe.

Kamala Harris’s Unrealized Capital Gains Tax Proposal

While a “Kamala Harris unrealized capital gains tax” proposal made the rounds during the lead-up to the 2024 election, it was initially suggested by former President Biden. Vice President Harris signed off on the proposal, and it later became a discussion topic during her presidential campaign, although she did not publicly address it.

What are unrealized capital gains tax rates? The proposal would have imposed a 25% minimum income tax on unrealized capital gains for taxpayers with a net worth exceeding $100 million.

Other tax measures proposed during the Harris campaign included:

• Raising the long-term capital gains tax rate for realized gains and qualified dividends to 28% for individuals with taxable income above $1 million. (The top tax rate on these gains is currently 20%.)

• Increasing the top individual income tax to 39.6% on income above $400,000 for single filers and $450,000 for joint filers. (Currently the top tax rate is 37%.)

• Limiting like-kind 1031 exchanges to $500,000 in gains.

These types of taxes, as well as the unrealized capital gains tax, are designed to primarily impact high-income earners and wealthier taxpayers.

Assessing Tax Consequences

Taxing unrealized capital gains could have both positive and negative consequences for individuals and the economy as a whole. Hypothetically, the money generated through an unrealized capital gains tax would be used to fund the government budget, as are other taxes. Advocates of an unrealized capital gains tax suggest that it could help to redistribute wealth and ensure that the high net worth multimillionaires and billionaires pay their fair share.

Critics, on the other hand, have suggested that taxing unrealized capital gains would bring problems. Specifically, it could:

• Create administrative challenges for an already understaffed IRS

• Force taxpayers to sell their assets to cover the tax owed

• Disrupt capital markets

• Deplete the market value of real estate and other assets

• Discourage investments and innovation that help to drive the economy

During the 2024 election, there were questions raised about exactly whom the unrealized capital gains tax might affect. Claims that it would cost everyday Americans more in taxes made the rounds on social media. Those claims were proven false by a Penn Wharton Business Model analysis.

Recommended: Understanding Taxes on Investment Income

How Capital Gains Are Taxed Currently

Capital gains are subject to a different tax rate than income. Essentially, you’re taxed based on how long you own the asset before you sell. When tracking your money and net worth, keep the following in mind:

•  Assets held less than one year are subject to the short-term capital gains tax rate, which is the same as your ordinary income tax rate.
Assets held a year or longer are subject to the long-term capital gains tax rates, which are 0%, 15%, or 20%, based on your income.

•  The longer you hold assets, the longer you can defer paying taxes on capital gains under the current tax structure. That’s an incentive to use a buy-and-hold approach when making investments.

On the other hand, you could end up with a capital loss instead if you sell an asset for less than what you paid for it. Capital losses are deductible, up to certain limits. If you’re filing taxes for the first time with investment gains or losses, you may want to talk to a tax professional about how to minimize what you owe.

Recommended: How to Monitor Your Credit

Example of Tax Calculation of Unrealized Gains and Losses Currently

Calculating unrealized gains and losses on assets you own is fairly straightforward. You simply need to know what you paid for the asset and what it’s worth today. Here’s what the formula looks like:

Unrealized gain/loss = Current market value – purchase price

So assume you buy 1,000 shares of stock for $1 each. Today, those shares are worth $5 each. Your unrealized gains would be $4,000.

Now, assume you bought the same shares for $5 each but their value has dropped to $1 per share. Now, you have an unrealized loss of $4,000.

Currently, unrealized capital gains don’t impact taxes in the U.S., and unrealized losses are not reported. In other words, it is not currently a tax filing mistake if you do not pay taxes on unrealized capital gains.

Recommended: What Is Income Tax Withholding and How Does It Work?

Example of Tax Calculation of Unrealized Gains and Losses After Proposed Unrealized Gains Tax

If an unrealized capital gains tax were to take hold, it would be difficult to calculate the amount an affected taxpayer might owe, since each tax situation is different.

Based on the proposal that was credited to Kamala Harris, you could assume that any unrealized gains a taxpayer had for the year would automatically be subject to a 25% minimum income tax. So if they bought 10,000 shares of stock in January for $500,000 and those same shares were worth $5 million in December, the 25% tax would apply to the increase in value (+$4.5 million).

That assumes two things:

• That they do not sell the shares, and

• Their net worth exceeds $100 million

Net worth is not static, and it can change as the value of someone’s assets changes. Someone might have an unrealized gain of significant value, but they might not be subject to the minimum tax as proposed if their net worth doesn’t cross the $100 million threshold prior to tax preparation season. That complication is yet another reason why an unrealized capital gains tax, if adopted, might be difficult to implement.

The Takeaway

During the 2024 presidential campaign, an unrealized capital gains tax proposal generated controversy, as there are advantages and disadvantages to making such a significant change to the tax code. As the topic of unrealized capital gains may make headlines in the future, it’s important to understand how buying and selling stocks or other assets for a gain or loss might affect your tax liability. This information can be a vital component of monitoring your finances.

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FAQ

Unrealized capital gains tax meaning?

An unrealized capital gains tax is a tax on gains from assets that you own but haven’t sold yet. Ordinarily, unrealized capital gains are not taxable; you’d owe tax only if you sell an asset for more than what you paid for it.

Does any country tax unrealized capital gains?

Denmark is one example of a country that taxes unrealized gains. Individuals who live in Denmark and own foreign properties are subject to an exit tax that applies to unrealized gains associated with increases in the property’s value. This tax on investment properties applies when the taxpayer departs from Denmark to live elsewhere. In 2024, the Denmark Tax Council proposed a 42% unrealized capital gains tax on crypto assets, which would take effect in 2026 if passed.

What is unrealized capital gains tax?

Unrealized capital gains tax is a charge for investment gains that’s assessed before an underlying asset is sold. Capital gains tax is typically assessed only when you sell an asset for more than the price you paid for it. Taxing unrealized gains would not rely on selling an asset to trigger taxes owed on it when it increases in value.

Which countries tax unrealized capital gains?

Denmark and Norway are two examples of countries that tax unrealized gains in the form of an exit tax. In Norway, unrealized gains on shares and ownership interests in Norwegian companies are taxed when you move to another country. The unrealized gains tax rate is 37.84%, though there are some exceptions to the rule.

How do you tax unrealized capital gains?

Taxing unrealized capital gains requires an assessment of an asset’s original purchase price or basis and its current fair market value. The unrealized capital gains tax proposal credited to Kamala Harris outlined a minimum 25% income tax on unrealized capital gains for individuals with a net worth exceeding $100 million. Other countries tax unrealized gains when you move to a different country and become a tax-paying resident there.

How does unrealized capital gains tax work?

Unrealized capital gains tax works by taxing the increase in value of assets you own but have yet to sell. Essentially, it’s a tax on paper profits, which can be problematic if you have assets with unstable or uncertain values.


About the author

Rebecca Lake

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.



photo credit: iStock/Jacob Wackerhausen

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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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Understanding Physician Mortgage Loans

Most physicians can expect to earn a good living once they complete their education and training. But by the time they graduate and start their first job, many new doctors are also likely to find themselves deep in student loan debt.

That debt may make it difficult for physicians to qualify for a conventional home mortgage — even though they have a promising financial future. That’s where home loans for doctors come in. Some lenders offer special mortgages called physician loans or doctor mortgage loans. These loans have terms designed to meet the unique needs of newcomers to this profession. Note: SoFi does not offer physician mortgages, but it does offer home mortgage loans with a low down payment for first-time homebuyers.

Read on for a look at how physician mortgages work, some pros and cons, and what it can take to qualify.

Key Points

•   Physician mortgage loans offer flexible terms, accommodating high student debt.

•   Loans often do not require a down payment or private mortgage insurance (PMI).

•   Debt-to-income (DTI) ratio requirements are more flexible, recognizing future income potential.

•   Interest rates are typically variable, starting lower and potentially adjusting.

•   Proof of a medical degree and employment is required for qualification.

What Are Physician Mortgage Loans?

Physician mortgage loans are private mortgages designed specifically to meet the needs of doctors, dentists, medical residents, and fellows. The terms and benefits of these home loans for medical doctors can vary from one lender to the next. But they generally offer more generous terms and/or looser qualifying requirements than conventional home loans. This can make borrowing easier for physicians who have a high income potential but may be struggling with student loan debt or haven’t been able to set aside enough for a down payment.

First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.

Questions? Call (888)-541-0398.


How Physician Mortgage Loans Differ from Traditional Loans

Doctor loans are a type of nonconforming loan, which means they aren’t backed by the federal government like FHA loans, and they aren’t bound by the same Fannie Mae and Freddie Mac standards as conventional loans. Here are a few important differences you can expect to find with this type of mortgage vs. a conventional loan:

Recommended: Different Types of Mortgage Loans

Low or No Down Payment

Most lenders require at least a 3% to 5% down payment for a conventional mortgage, with the lowest rates typically available to first-time homebuyers. Lenders who offer physician mortgages may not require any money down. (Or the down payment amount required may be very low.)

No Private Mortgage Insurance (PMI)

With a conventional loan, private mortgage insurance, which is meant to protect the lender in case of a default, is usually added to borrowers’ monthly payments until they reach 20% equity in their home. Though PMI rates vary, they typically range from 0.50% to 2% of the loan amount. But doctor loans don’t require PMI, even though the borrower may not make any down payment.

Flexible Debt-to-Income (DTI) Ratio Requirements

As part of their underwriting, lenders typically calculate a borrower’s DTI ratio (all monthly debt payments ÷ gross monthly income = DTI). For conventional mortgages, they usually require a DTI ratio below 45%, although some require the DTI to be below 36%. But lenders who provide physician loans may look at a borrower’s student loans (which they expect to be high) as separate from other debt and not include them in the DTI, or they may include the student loans but set a higher DTI limit.

You may want to keep in mind, though, that just because you can get a loan with a higher DTI ratio doesn’t mean you should. A home affordability calculator can help you see what might fit into your budget and a mortgage calculator can show you what your monthly payments would look like at different interest rates.

It might also be helpful to talk to a financial advisor about how much house you can really afford, and what the costs of homeownership could mean for your overall financial well-being.

Looser Employment and Salary Requirements

Proving that you have stable employment as well as an adequate income is usually part of qualifying for a conventional loan. (Lenders generally like to see at least two years of work history.) Employment requirements may vary with a doctor loan, but lenders who offer these types of mortgages typically understand that a new doctor could be working as an intern, resident, or fellow, and may not be earning as much starting out as they will take home even just a few years into their career. (Borrowers still can expect to provide paperwork that documents their salary and employment, however, along with their medical license.)

Recommended: Understanding Mortgage Basics

Benefits of Physician Mortgage Loans

If you’re eager to get into your own home once you wrap up medical school, a physician home loan may make that possible — and less expensive. Avoiding PMI on a new home could save you hundreds or even thousands of dollars a year, for example. And if you don’t have to make a down payment, you can use that money for other expenses.

Lenders also may offer higher loan amounts with a physician loan than with other loan types. And though some lenders offer doctor loans with fixed rates, most come with variable interest rates, so you can expect to start out with a lower, more affordable interest rate when you begin making payments. (That means you’ll have an adjustable rate after a fixed introductory period, so your monthly payments could change. But if the rate becomes unmanageable down the road, you can look at refinancing to a conventional loan with a more competitive mortgage rate.)

How to Qualify for a Physician Mortgage Loan

Though the underwriting requirements may be more relaxed for doctor loans, you should be prepared to provide the following:

•   Proof of identity (this might include your driver’s license, Social Security number, or other documentation)

•   Proof of employment and income (you may be able to use an employment contract if you don’t yet have a W-2, pay stubs, or similar documents)

•   Documentation of assets and debts

•   A contract for your home purchase, including the purchase price

•   Information about the type of home you’re purchasing (condo, single-family home, etc.)

•   Proof of a medical degree (M.D., D.O., D.D.S., etc.) that meets the lender’s requirements

Other parts of the mortgage process — from determining what you can afford to choosing mortgage terms to closing on the deal — will likely be similar to what you’d expect if you were applying for just about any type of loan.

The Takeaway

If you’re finally starting your career as a doctor and you’re wondering if student debt or minimal savings could keep you from reaching the goal of home ownership — despite your income potential — a physician home loan may be an option worth researching.

Because these special loans typically don’t require a down payment or private mortgage insurance payments, and the eligibility requirements are often less strict than for conventional loans, doctors may not have to wait until they’re on firmer financial footing to purchase a home.

Of course, you’ll want to compare all the pros and cons of a physician mortgage — or any home loan. Buying a home is a big decision, and you’ll likely want to balance your eagerness to reach this milestone with your ability to keep pace with your mortgage payments and your debt payments, as well as other expenses.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

SoFi Mortgages: simple, smart, and so affordable.

FAQ

What credit score do I need to get a physician mortgage loan?

A credit score of at least 700 or 720 may be required to get a physician loan, although some lenders may accept a lower credit score. Each lender has its own criteria.

Are physician mortgage loans available for residents and fellows?

Employment requirements may vary, but lenders who offer these types of loans typically understand that a new doctor could be working as an intern, resident, or fellow.

How do interest rates compare for physician mortgage loans vs. conventional loans?

Doctor’s mortgage loans generally come with a variable interest rate. After a fixed introductory period, your payments could go up or down, depending on several factors. With conventional mortgages, you may have a wider range of interest rate types to choose from.


Photo credit: iStock/nortonrsx

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


SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.



*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

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.

¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.

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How Does a HELOC Affect Your Credit Score?

If you own a home, a home equity line of credit (HELOC) lets you tap into your home equity to finance renovations or other expenses. Before borrowing against your home equity, it’s worth asking, how does a HELOC affect credit scores?

Taking out a new credit account has an impact on your credit score. But how a home equity line of credit affects credit scores depends on multiple factors, including your payment history and existing credit.

Here’s a look at how a HELOC could affect your credit score across the entire lifespan of the line of credit, from filing your application to closing a HELOC account — plus tips to maintain your credit score.

Key Points

•   Applying for a home equity line of credit (HELOC) can temporarily lower a credit score by up to five points due to a hard inquiry.

•   Opening a new HELOC may slightly decrease a credit score by reducing the average age of credit accounts.

•   Consistent, on-time payments on a HELOC can help improve a credit score over time.

•   To minimize negative impacts, keep credit utilization low, avoid multiple hard inquiries, and maintain a diverse credit mix.

•   A HELOC can enhance credit mix, which can have a positive effect.

Understanding HELOCs and Credit Scores

First, let’s start with a HELOC definition. A HELOC, or home equity line of credit, is a revolving line of credit that typically allows homeowners to borrow up to 90% of their home’s value, minus the outstanding mortgage principal. Borrowers can draw against their approved credit line as needed until the end of the draw period, which is usually 5 or 10 years, before having to repay the balance over another 10 to 25 years. That’s HELOCs explained, in a nutshell.

Meanwhile, your credit score is calculated based on how you manage debt payments, also known as credit. A variety of factors affect your credit score, including payment history, credit utilization, length of credit history, credit mix, and applications for new credit. Your credit score appears as a three-digit number. Credit score ranges run from 300 to 850, with scores of 670 or higher being considered good to excellent.

Impact of Applying for a HELOC on Your Credit

So how does a HELOC impact credit scores? Similar to other types of credit, applying for a HELOC involves a credit check, which is added to your credit report.

Hard Inquiries

When you apply for a HELOC, lenders will run a credit check to assess your creditworthiness. This involves requesting to review your credit report, which is known as a hard inquiry.

A record of any hard inquiry, sometimes referred to as a hard pull, is registered on the credit report. Having one hard inquiry could lower your FICO® Score by up to five points, but only for one year.

To avoid multiple hard credit pulls, you can check to see if lenders offer HELOC prequalification with a soft credit pull instead.

New Credit Accounts

Applying for a HELOC means opening a new credit account. This could decrease the average age of your credit accounts and ding your credit score by a few points.

Effects of Using a HELOC on Your Credit

Once you’ve been approved for a HELOC, how you begin using funds and managing payments can affect your credit. Let’s explore what goes into these HELOC credit score impacts.

Credit Utilization Ratio

Your credit utilization ratio is a calculation of how much of your credit you’re using. In other words, it’s the percentage of your credit limit you’re using on all your revolving credit accounts, such as credit cards, combined.

So does a HELOC affect your credit score and credit utilization ratio? While HELOCs operate like a revolving line of credit, they’re secured by a property. This means that it isn’t included in your credit utilization ratio as part of your FICO score.

Using funding from a HELOC to pay off high-interest debt like credit cards could lower your credit utilization ratio and boost your credit score. Maintaining a credit utilization ratio below 30% is recommended to qualify for financing or get mortgage preapproval.

Payment History

Payment history is the largest component of a credit score. Making consistent, on-time payments each month on a HELOC could help build your credit score over time. On the flip side, failing to stay current on payments could hurt your credit score and ultimately put your property at risk.

HELOCs are typically structured to have higher monthly payments after the draw period ends. Once the repayment period begins, you won’t have the ability to continue drawing funds. You can use a HELOC repayment calculator to see what your monthly payment would be based on how much you owe on a HELOC, your repayment term, and interest rate.

Credit Mix

Your credit mix refers to the number and types of credit accounts you have, including student loans, home loans, credit cards, and car loans. Demonstrating your ability to manage different types of debts can benefit your credit score.

Taking out a HELOC could improve your credit mix (and credit score) if you don’t have other types of revolving credit, especially for borrowers without much credit history.

Bottom line: The HELOC–credit score connection can be significant.

Recommended: FHA Loans

Closing a HELOC and Its Credit Implications

Paying off and closing a HELOC can have impacts on your credit. (Paying the balance off on a HELOC removes the lender’s lien on your home.) Here are some potential credit implications to consider when closing a HELOC.

Account Age

If you’ve been making payments on a HELOC for several years, closing the account could potentially lower the average age of your accounts. How much this impacts your credit score will depend on the age of your other accounts.

But if the account is in good standing with no late payments, it can still factor into your credit history for several years after closure.

Credit Availability

Closing a HELOC won’t affect your credit utilization for your FICO score. But if you don’t have other revolving lines of credit, it could reduce your credit mix, potentially putting a small dent in your credit score.

Strategies to Minimize Negative Credit Impact

Applying for a HELOC — or opening any new credit account — can initially lower your credit score by a few points. But there are several ways to reduce further damage to your credit score.

Timely Payments

As a reminder, your payment history is the largest component that goes into calculating your credit score. Continually making on-time payments each month can build up your credit. Conversely, paying less than the minimum or missing a monthly payment could harm your credit score.

Note that the interest on monthly payments could be eligible for a tax deduction, like mortgage interest, if used to make substantial improvements on your home. You’ll want to discuss this with your tax advisor.

Managing Credit Utilization

As you manage monthly HELOC payments, keep an eye on the balances for other revolving lines of credit, such as credit cards. Again, keeping a credit utilization ratio below 30% is considered beneficial for your credit score.

Monitoring Credit Reports

Periodically checking your credit report can help detect any instances of fraud or payment errors and inform strategies to improve your credit score. Requesting a credit report is free, and it’s a good idea to do so before applying for a new loan or credit card to understand how lenders will evaluate you as a borrower.

Recommended: Mortgage Rates

The Takeaway

How does a home equity line of credit affect credit scores? Applying for a HELOC involves a hard credit check, which can have some impact on your credit. However, making timely payments, keeping a strong credit mix, and maintaining a low credit utilization ratio can mitigate these effects and strengthen your credit over time.

SoFi now partners with Spring EQ to offer flexible HELOCs. Our HELOC options allow you to access up to 90% of your home’s value, or $500,000, at competitively lower rates. And the application process is quick and convenient.

Unlock your home’s value with a home equity line of credit from SoFi, brokered through Spring EQ.

FAQ

Does opening a HELOC significantly lower my credit score?

Opening a HELOC typically involves a hard credit check which can lower your credit score by several points. Whether this is significant will depend on what score you start with — if your credit score is teetering near an important benchmark, such as the 669-670 dividing line between “fair” and “good” credit, it may be an important effect. The hard credit check can stay on your credit report for 12 to 24 months.

How does a HELOC affect my credit utilization ratio?

A HELOC typically does not affect your credit utilization ratio, as it’s secured with a property as collateral versus other revolving lines of credit, such as credit cards, which are unsecured.

Will closing a HELOC improve my credit score?

Closing a HELOC can have a negative effect on your credit score by reducing your credit mix and age of accounts. However, if you made on-time payments over the life of the loan, that will be reflected on your credit history for several years.

Can a HELOC help diversify my credit mix?

Yes, a HELOC can help diversify your credit mix and show lenders that you’re a responsible borrower. If you have installment credit like a mortgage, student loans, or personal loans, taking out a HELOC would provide a form of revolving credit to your credit mix.

How can I use a HELOC responsibly to maintain a good credit score?

Paying off higher-interest debt, such as personal loans or credit cards, and funding home improvements that may make it possible for you to deduct the interest paid on a HELOC, are examples of how to responsibly use a HELOC. Making monthly payments on time and in full is essential to safeguarding your credit score when taking out a HELOC.


Photo credit: iStock/kate_sept2004

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


SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.



*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

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


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


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.

¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
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All loan terms, fees, and rates may vary based upon your individual financial and personal circumstances and state.
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What Is Disposable Income?

Here’s the definition of disposable income: It’s the amount of money you have available to spend or save after your income taxes have been deducted.

You may also hear this sum of money called disposable earnings or disposable personal income (or DPI). Another interesting fact: Disposable income is carefully watched by economists because it is a valuable indicator of the economy’s health.

What’s more, as you may realize, disposable income is the basis of your own personal budget. It’s an indicator of your financial status as well as the foundation for deciding how to spend and save your cash.

Key Points

•   Disposable income refers to the money available for spending or saving after income taxes have been deducted.

•   It is an important indicator of an individual’s financial status and is used to determine how to allocate funds.

•   Disposable income is different from discretionary income, which takes into account essential expenses.

•   Calculating disposable income involves subtracting taxes and other mandatory deductions from gross earnings.

•   Budgeting disposable income involves tracking spending, setting goals, and allocating funds for basic living expenses, discretionary spending, and saving/investing.

What Is Disposable Income?

Simply put, the disposable income definition is money you have left over from your earnings after taxes and any other mandatory charges are deducted.

This money (which may also be referred to as expendable income) can then be spent or saved as you see fit. You will likely use it for your basic living expenses, or the needs in your daily life, such as housing, utilities, food, transportation, healthcare, and minimum debt payments.

You may also spend that money on the wants in life, such as dining out, entertainment, travel, and non-vital purchases, such as a cool new watch or mountain bike.

Your disposable income can also be allocated towards your goals, such as saving for your child’s college education, the down payment on a house, and/or retirement.

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Why Disposable Income Is Important

There are different types of income, and disposable income is usually defined as the amount of money you keep after federal, state, and local taxes and other mandatory deductions are subtracted from gross earnings. Consider these details:

•  Mandatory deductions include Social Security, state income tax, federal income tax, and state disability insurance.

•  Voluntary deductions, such as health benefit deductions, 401(k) contributions, deductions for other employer-sponsored benefits, as well as any assignments of support (such as child support) are excluded from the calculation. These costs are considered part of your disposable earnings.

•  Disposable income is an important number not just for consumers, but also the nation as a whole. The average disposable income of the country is used by analysts to measure consumer spending, payment ability, probable future savings, and the overall health of a nation’s economy.

•  International economists use national measures of disposable income to compare economies of different countries.

On an individual level, your disposable income is also a key economic indicator because this is the actual amount of money you have to spend or save.

For example, if your salary is $60,000, you don’t actually have $60,000 to spend over the course of the year. Federal, state, and possibly other local taxes will be deducted, as will Social Security and Medicare taxes.

What is left over is what you would have to spend on everything else in your life, such as housing, transportation, food, health insurance and other necessities.

Of course, that doesn’t mean you should spend all of your disposable income. Another thing to consider is disposable vs. discretionary income. This will tell you actually how much money you have to play with.

Recommended: What’s the Difference Between Income and Net Worth?

Disposable Income vs. Discretionary Income

Although they’re often confused with one another, disposable income is completely different from discretionary income.

While disposable income is your income minus only taxes, discretionary income takes into account the costs of both taxes and other essential expenses. Essential expenses include rent or mortgage payments, utilities, groceries, insurance, clothing, and more.

Discretionary income is what you can have leftover after the essentials are subtracted. This is what you can spend on nonessential or discretionary items.

Some costs that fall under the discretionary category are dining out, vacations, recreation, and luxury items, like jewelry. Although internet service and your cell phone may seem like necessities, these expenses are considered discretionary expenses.

Similarities

Both disposable and discretionary income are a way of looking at income after taxes.

However, discretionary income goes a step further and deducts essential expenses, such as housing and healthcare.

Differences

As you might expect, discretionary income is always less than disposable income. When you subtract discretionary income from disposable income, the amount that remains is how much you can put towards wants (fun spending) and savings.

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Calculating Disposable Income

Disposable income refers to the amount of earnings left over after mandatory federal, state and local deductions. But disposable income is not necessarily the same as your take-home pay.

Deductions from your paycheck may include additional items such as health insurance, retirement plan contributions, and health savings accounts. These deductions are voluntary, not mandatory.

To calculate your disposable earnings, you can simply subtract federal, state and local taxes, Medicare, and Social Security from your gross earnings. Be sure to include any passive income streams, such as rental income, or side hustle earnings (more on that in a moment), when doing the math for your gross income. The resulting amount is your disposable income.

How to calculate disposable income

Some of the finer points to note:

•  You may want to keep in mind, however, that taxes deducted from your paycheck are an estimate. If you have a history of getting a large refund or having a large amount of taxes due, it may be worth reviewing your withholdings through your employer.

This could help you adjust the withholdings so it is closer to the actual expected tax that will be calculated when you file. You can then plan accordingly.

•  Even if you’re a contractor or freelancer, or if you made additional income from side gigs along with your salary, you can still calculate your disposable income.

This requires subtracting your quarterly tax payments and any additional taxes you will owe from your overall income. You can then determine your monthly after-tax income.

Setting aside money to pay taxes can also help you budget with your disposable income.

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Disposable Income Budgeting

Calculating your disposable income is a key first step in preparing a budget. You need to know how much you have to spend in order to plan your monthly spending and saving.

A personal budget puts you in control of your disposable income and helps you make financial decisions. It forces you to take a closer look at how you’re spending your money.

Here are a few ideas that could be helpful when developing a budget based on disposable income.

Tracking Spending

Disposable income is what’s coming into your account every month. It’s a good idea to also determine what is going out each month.

To do this, you can gather up bank and credit card statements, as well as receipts, from the past three months or so, and then list all of your monthly spending (both essential and discretionary/nonessential).

To make this list more accurate, you may want to actually track your spending for a month. You can do this with a phone app (your bank’s app may include this function), by carrying a small notebook and jotting down everything you buy, or by saving all of your receipts and logging it later.

This can be an eye-opening exercise. Many of us have no idea how much we’re spending on the little things, like morning coffees, and how much they can add up to at the end of the month.

Once you see your spending laid out in black and white, you may find some easy ways to cut back, such as getting rid of subscriptions and streaming services that you rarely use, brewing coffee at home, cooking more and getting less take-out, or getting rid of a pricy gym membership and working out at home.

Setting Goals And Spending Targets

Tracking income and spending can provide a great starting point for setting financial goals and spending targets.

•  Goals are things that a person aims for in the short- or long-term — like paying off student loans or buying a new car.

•  Spending targets are how much you want to spend each month in general categories in order to have money left over to put towards your savings goals.

Since essential spending often can’t be adjusted, spending targets are typically for discretionary income.

One option for budgeting disposable income is the 50/30/20 plan. This suggests spending about 50% on necessities, 30% on discretionary items, and then putting aside 20% for savings and other long-term goals.

Use the 50/30/20 budget calculator below to see how your budget would fall into those three categories.


These percentages are general guidelines, however, and can be adjusted as needed based on individual circumstances. For example, if you live in a competitive housing area, rent may take up a larger portion of your expenses, and you may have to bump up necessity spending to 60% and decrease fun money to 20% instead.

Or, if you are saving for something in the near term, like a car or a wedding, you may want to temporarily bump up the savings category, and pull back unnecessary spending for a few months.

3 Uses for Your Disposable Income

Once you have calculated your disposable income, you can consider the ways you might divide it up:

Basic Living Expenses

Some of your disposable income will go towards necessities, such as:

•  Housing

•  Utilities

•  Food

•  Healthcare

•  Transportation

•  Insurance

•  Minimum debt payments.

Discretionary Spending

Next, there are the wants in life. These are things that are not vital for survival but can certainly make things more enjoyable:

•  Eating out

•  Entertainment, such as streaming platforms, movies, concerts, and books

•  Clothing that isn’t essential (like winter boots)

•  Electronics, like the latest mobile phone

•  Travel

•  Gifts.

Saving and Investing

In addition to the spending outlined above, you will likely want to save money or invest it for your short-term and/or long-term goals. These may include:

•  Your emergency fund

•  The down payment for a house

•  A college fund for children

•  Money to start your own business

•  A new car

•  Retirement.

Recommended: Get a personalized estimate for your emergency fund by using our emergency fund calculator.

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Disposable income is a key concept in budgeting, as it refers to the income that’s left over after you pay taxes. Knowing how much disposable income you have is the foundation for putting together a simple budget that allows for necessary expenses, having fun, while also saving for the future. Finding the right banking partner is another important element of planning for tomorrow.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.


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FAQ

What does disposable income mean?

Disposable income (or what may be known as disposable earnings) is the money you have left after taxes and other mandatory deductions are taken out of your income.

What is an example of disposable income?

An example of disposable income would be a $100,000 gross salary, minus $30,000 in taxes and $15,300 in Social Security and Medicare deductions. The remaining $54,700 is disposable income.

What is the difference between disposable income and discretionary income?

Disposable income refers to earnings minus taxes and mandatory deductions, such as Social Security and Medicare. Discretionary income is a subset of disposable income. It is the money left once you have paid for essentials, such as housing, utilities, food, and healthcare. The money that is left can be used for non-essential spending and for saving.



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Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning 3.80% APY, we encourage you to check your APY Details page the day after your Eligible Direct Deposit arrives. If your APY is not showing as 3.80%, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning 3.80% APY from the date you contact SoFi for the rest of the current 30-day Evaluation Period. You will also be eligible for 3.80% APY on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

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Swing Trading Explained

What Is Swing Trading?

Short-term price fluctuations in the market are known as swings, and swing trading aims to capitalize on these price movements, whether up or down.

The swings typically occur within a range, from a couple of days to a couple of weeks. Traders may try to capture a part of a larger price trend: for example, if a price dips, but a rebound is expected.

While day traders typically stay in a position only for minutes or hours, swing traders typically invest for a few days or weeks. Swing trading can be profitable, but it’s higher risk, and it’s important to bear in mind the potential costs and tax implications of this strategy.

Key Points

•   Swings in the market are short-term price fluctuations that typically occur over a couple of days or a couple of weeks.

•   Swing traders aim to capitalize on these price movements, whether up or down.

•   Swing trading is distinct from day trading, which takes place during an even shorter time frame — minutes or hours.

•   Swing trading can be profitable for experienced traders, but it’s extremely high risk.

•   Would-be swing traders also need to bear in mind the fees and tax implications of this strategy.

How Swing Trading Works

Swing trading can be a fairly involved process, and traders employ different types of analysis and tools to try and gauge where the market is heading. But for simplicity’s sake, you may want to think of it as a method to capture short-to-medium term movements in share prices.

Investors are, in effect, trying to capture the “swing” in prices up or down. It avoids some day trading risks, but allows investors to take a more active hand in the markets than a buy-and-hold strategy.

With that in mind, swing trading basically works like this: An investor uses an online brokerage (or a traditional one) to buy a stock, anticipating that its price will appreciate over a three-week period. The stock’s value does go up, and after three weeks, the investor sells their shares, generating a profit.

Conversely, an investor may want to take a short position on a stock, betting that the price will fall.

Either way there are no guarantees, and swing trading can be risky if the stocks the investor holds move in the opposite direction.

Generally, a swing trader uses a mix of technical and fundamental analysis tools to identify short- and mid-term trends in the market. They can go both long and short in market positions, and use stocks, exchange-traded funds (ETFs), and other securities that exhibit pricing volatility.

It is possible for a swing trader to hold a position for longer than a few weeks, though a position held for a month or more may actually be classified as trend trading.

Cost and Tax Implications

A swing trading strategy is somewhere in between a day-trading strategy and trend-trading strategy. They have some methods in common but may also differ in some ways — so it’s important to know exactly which you plan to utilize, especially because these shorter-term strategies have different cost and tax factors to consider.

Frequent trades typically generate higher trading fees than buy-and-hold strategies, as well as higher taxes. Unless you qualify as a full-time trader, your short-term gains can be taxed as income, rather than the more favorable capital gains rate (which kicks in when you hold a security for at least a year).

Recommended: Stock Trading Basics

Day Trading vs Swing Trading

Like day traders, swing traders aim to capture the volatility of the market by capitalizing on the movements of different securities.

Along with day traders and trend traders, swing traders are active investors who tend to analyze volatility charts and price trends to predict what a stock’s price is most likely to do next. This is using technical analysis to research stocks — a process that can seem complicated, but is essentially trying to see if price charts can give clues on future direction.

The goal, then, is to identify patterns with meaning and accurately extrapolate this information for the future. The strategy of a day trader and a swing trader may start to diverge in the attention they pay to a stock’s underlying fundamentals — the overall health of the company behind the stock.

Day traders aren’t particularly interested in whether a company stock is a “good” or “bad” investment — they are simply looking for short-term price volatility. But because swing traders spend more time in the market, they may also consider the general trajectory of a company’s growth.

Pros and Cons of Swing Trading

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Pros:

•   May be profitable

•   Strategy can be used with a range of securities

•   Strategy is flexible, can help traders avoid unwanted price movements

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Cons:

•   Expenses & taxes can be high

•   Time intensive

•   Best for experienced traders

Pros of Swing Trading

To understand the benefits of swing trading, it helps to understand the benefits of long-term investing — which may actually be the more suitable strategy for some investors.

The idea behind buy-and-hold strategies is quite simply that stock markets tend to move up over long periods of time, or have a positive average annual return. Also, unlike trading, it is not zero-sum, meaning that all participants can potentially profit by simply remaining invested for the maximum amount of time possible.

1. Time and Effort

Further, long-term investing may require less time and effort. Dips in the market can provide the opportunity to buy in, but methodical and regular investing is generally regarded higher than any version of attempting to short-term time the market.

Swing trading exists on the other end of the time-and-effort continuum, although it generally requires much less effort and attention than day trading. Whereas day traders must keep a minute-by-minute watch on the market throughout the trading days, swing trading does not require that the investor’s eyes be glued to the screen.

Nonetheless, swing trading requires a more consistent time commitment — and an awareness of external events that can impact prices — than buy-and-hold strategies.

2. Income

Compared to long-term investing, which comes into play with retirement accounts like a 401(k), traditional IRA or Roth IRA, swing trading may create more opportunity for an investor to generate income.

Most long-term investors intend to keep their money invested — including profits — for as long as possible. Swing traders are using the short-term swings in the market to generate profit that could be used as income, and they tend to be more comfortable with the risks this strategy typically entails.

3. Avoidance of Dips

Finally, it may be possible for swing traders to avoid some downside. Long-term investors remain invested through all market scenarios, which includes downturns or bear markets. Because swing traders are participating in the market only when they see opportunity, it may be possible to avoid the biggest dips.

That said, markets are highly unpredictable, so it’s also possible to get caught in a sudden downturn.

Cons of Swing Trading

Though there is certainly the potential to generate a profit via swing trading, there’s also a substantial risk of losing money — and even going into debt.

1. Expenses & Taxes

It can be quite expensive to swing trade, as noted above. Although brokerage or stock broker commissions won’t be quite as high as they would be for day traders, they can be substantial.

Also, because the gains on swing trades are typically short-term (less than a year), swing investors would likely be taxed at higher capital gains rates.

In order to profit, traders will need to out-earn what they are spending to engage in swing trading strategies. That requires being right more often than not, and doing so at a margin that outpaces any losses.

2. Time Intensive

Swing trading might not be as time-consuming or as stressful as day trading, but it can certainly be both. Many swing traders are researching and trading every day, if not many times a day. What can start as a hobby can easily morph into another job, so keep the time commitment in mind.

3. Requires Expertise

Within the investing community, there is significant debate as to whether the stock market can be timed on any sort of regular or consistent basis.

In the short term, stock prices do not necessarily move on fundamental factors that can be researched. Predicting future price moves is nothing more than just that: trying to predict the future. Short of having a crystal ball, this is supremely difficult, if not impossible, to do, and is best suited to experienced investors.

Swing Trading Example

Here’s a relatively simple example of a swing trade in action.

An investor finds a stock or other security that they think will go up in value in the coming days or weeks. Let’s say they’ve done a fair bit of analysis on the stock that’s led them to conclude that a price increase is likely.

Going Long

The investor opens up a position by purchasing 100 shares of the stock at a price of $10 per share. Obviously, the investor is assuming some risk that the price will go down, not up, and that they could lose money.

But after a week, the stock’s value has gone up $1, and they decide to close their position and sell the 100 shares. They’ve capitalized on the “swing” in value, and turned a $100 profit.

Of course, the trade may not pan out in the way the investor had hoped. For example:

•   The stock could rise by $0.50 instead of $1, which might not offer the investor the profit she or he was looking for.

•   The stock could lose value, and the investor is faced with the choice of selling at a loss, or holding onto the stock to see if it regains its value (which entails more risk exposure).

Going Short

Swing traders can also take advantage of price drops and short a stock that they think is overvalued. They borrow 100 shares of stock from their brokerage and sell the shares for $10 per share for a total of $1,000 (plus any applicable brokerage fees).

If their prediction is correct, and the price falls to $9 per share, the investor can buy back 100 shares at $9 per share for $900, return the borrowed shares, and pocket the leftover $100 as profit ($1,000 – $900 = $100).

If they’re wrong, the investor misses the mark, and the price rises to $11 per share. Now the investor has to buy back 100 shares for $11 per share for a total of $1,100, for a loss of $100 ($1,000 – $1,100 = -$100), not including fees.

Swing Trading Strategies

Each investor will want to research their own preferred swing trading strategy, as there is not one single method. It might help to designate a specific set of rules.

Channel Trading

One such strategy is channel trading. Channel traders assume that each stock is going to trade within a certain range of volatility, called a channel.

In addition to accounting for the ups and downs of short-term volatility, channels tend to move in a general trajectory. Channels can trend in flat, ascending, or descending directions, or a combination of these directions.

When picking stocks for a swing trading strategy using channels, you might buy a stock at the lower range of its price channel, called the support level. This is considered an opportune time to buy.

When a stock is trading at higher prices within the channel, called the resistance level, swing traders tend to believe that it is a good time to sell or short a stock.

MACD

Another method used by swing traders is moving average convergence/divergence, or “MACD.” The MACD indicator looks to identify momentum by subtracting a 26-period exponential moving average from the 12-period exponential moving average, or EMA.

Traders are seeking a shift in acceleration that may indicate that it is time to make a move.

Other Strategies

This is not a complete list of the types of technical analysis that traders may integrate into their strategies.

Additionally, traders may look at fundamental indicators such as SEC filings and special announcements, or watch industry trends, regulation, etc., that may affect the price of a stock. Trading around earnings season may also present an opportunity to capitalize on a swing in value.

Similarly, they may watch the news or reap information from online sources to get a sense of general investor sentiment. Traders can use multiple swing trading methods simultaneously or independently from one another.

Swing Trading vs Day Trading

Traders or investors may be weighing whether they should learn swing trading versus day trading. Although the two may have some similarities, day trading is much more fast-paced, with trades occurring within minutes or hours to take advantage of very fast movements in the market.

Swing trading, conversely, gives investors a bit more time to take everything in, think about their next moves, and make a decision. It’s a middle ground between day trading and a longer-term investing strategy. It allows investors to utilize some active investing strategies, but doesn’t require them to monitor the markets minute by minute to make sure they don’t lose money.

Swing Trading vs Long-Term Investing

Long-term investing tends to be a lower risk strategy in general. Investors are basically betting that the market will trend higher over the long term, which is typically true, barring any large-scale downturns. But this strategy doesn’t give investors the opportunity to really trade based on market fluctuations.

Swing trading does, albeit not as much as day trading. If you want to get a taste for trading, and put some analysis tools and different strategies to work, then it may be worth it to learn swing trading.

Is Swing Trading Right for You?

Whether swing trading is a smart investing strategy for any individual will come down to the individual’s goals and preferences. It’s good to think about a few key things: How much you’re willing to risk by investing, how much time you have to invest, and how much risk you’re actually able to handle on a psychological or emotional level — i.e., your risk tolerance.

If your risk tolerance is relatively low, swing trading may not be right for you, and you may want to stick with a longer-term strategy. Similarly, if you don’t have much to invest, you may be better off buying and holding, effectively lowering how much you’re putting at risk.

The Takeaway

Swing traders invest for days or weeks, and then exit their positions in an effort to generate a quick profit from a security’s short-term price movements. That differentiates them from day traders or long-term investors, who may be working on different timelines to likewise reap market rewards.

There are also different methods and strategies that swing traders can use. There is no one surefire method, but it might be best to find a strategy and stick with it if they want to give swing trading an honest try. Be aware, though, that it carries some serious risks — like all stock trading.

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).


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FAQ

Is swing trading actually profitable?

Swing trading can be profitable, but there is no guarantee that it will be. Like day trading or any other type of investing, swing trading involves risk, though it can generate a profit for some traders.

Is swing trading good for beginners?

Many financial professionals would likely steer beginning investors to a buy-and-hold strategy, given the risks associated with swing or day trading. However, investors looking to feel out day trading may opt for swing trading first, as they’ll likely use similar tools or strategies, albeit at a slower pace.

How much do swing traders make?

It’s possible that the average swing trader doesn’t make any money at all, and instead, loses money. It depends on their skill level, experience, market conditions, and a bit of luck.


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