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When it comes to the stock market, things can change—rapidly. Numerous factors impacting the value of individual stocks and the market as a whole can translate into being up one day, down the next. And try as they might, it can be near impossible for analysts to predict how the stock market will fare.

While the markets can be unpredictable, fluctuation is a sign that the stock market is working normally. As an investor, it’s important to get comfortable with the market’s volatility. Understanding how risk plays a role in investing can help inform the investing decisions you make for yourself.

What Is Investment Risk?

All investments come with risk. Unlike when you store your money in a savings account, investing has no guarantees that you’ll earn a return. When you invest, experiencing a financial loss is a possibility.

Different types of investments come with different levels of risk. Typically, as the risk increases, so do the potential returns. Understanding the types of risks associated with investing can be the key to informing your risk tolerance.

Types of Investment Risk

Just as there are a variety of investment vehicles, there are a number of different types of risk involved in investing. Here are a few common kinds:

Market Risk

Sometimes global economic trends, like a recession, or current events, like a natural disaster or political turmoil, can impact how the markets perform. Market risk refers to the potential for an investor to experience losses due to factors that are influencing the financial markets as a whole.

This type of risk is often referred to as systematic risk. The four most common types of market risk include interest rate, equity, commodity, and currency risk.

Interest rate risk reflects the market fluctuations that might occur after a change in interest rates is announced. Fixed-income investments, like bonds, are the investments that are most likely to be influenced by interest rate risk.

Equity risk refers specifically to the risk investors face from market volatility—the possibility that the value of shares will decrease.

Commodity risk comes from price fluctuations in commodities (raw materials) that impacts the users and producers of those same materials.

Currency risk is also known as exchange-rate risk. It stems from the price differences when comparing one currency to another. This type of risk is most relevant to investors who have assets in a foreign country or companies who have a lot of activities abroad.

Inflation Risk

Inflation measures the increase of the cost of goods over a set period of time and a rise in inflation means consumers have less purchasing power. Inflation risk is a concern for investors that have money saved in accounts with fixed interest rates, because the rate of inflation may outpace the fixed interest rate being earned.

Business Risk

When you buy a stock, you’re essentially buying a small share of the company. In order to make a possible return on your investment, the company you’ve invested in needs to remain in business. If a company goes out of business, common stockholders are likely the last to get paid, if at all.

Liquidity Risk

This type of risk reflects the concern that investors won’t find a market for their holdings when they ultimately do decide to sell their investments. This could prevent investors from buying and selling assets as desired; they may have to sell for a lower price, if they are able to sell at all.

This risk could also apply to investments with strict term limits like a certificate of deposit (CD). Account holders would typically face a penalty from withdrawing or liquidating this account before the specified time.

Horizon Risk

In investing, a time horizon is the amount of time you have until a specific financial goal.

A lengthy time horizon could potentially allow you to take on riskier investments, since if you do suffer a loss, your investments will have more time to rebound.

Horizon risk occurs when the time horizon of an investment is unexpectedly shortened—like, say, by an unexpected, expensive medical emergency.

On the other side of the spectrum, investors in or nearing retirement could face the risk of outliving their savings. This is referred to as longevity risk.

Concentration Risk

This type of risk can occur when an investor is invested in a limited number of assets or owns assets only in one category or asset class. If that one category experiences losses, so will a concentrated investment portfolio.

The Investment Risk Pyramid

Remember the food pyramid? Before MyPlate , the food pyramid was the gold standard of nutrition in the U.S. It recommended a hearty foundation of grains, followed by a smaller layer of fruits and veggies, followed by an even smaller layer of dairy, meats, beans, eggs, and nuts. At the very top, making up the smallest portion of the pyramid were fats, oils, and sweets.

The investment risk pyramid takes a similar approach, and could prove helpful if you’re looking for guidance as you’re evaluating the risks associated with different types of investments.

It may help you understand which investments pose the greatest risk, and can assist you in creating a portfolio that falls in line with your personal risk tolerance.

At the base of the pyramid are lower risk investments that have the potential to earn foreseeable returns. These investments create the foundation of a financial portfolio. Low risk investments typically include things like government bonds, CDs, money market accounts, and savings accounts.

In the middle of the pyramid are investments with moderate risk. These investments will be a little riskier than the base of the pyramid, but will hopefully lead to capital appreciation. Investments like high-income government bonds, real estate, equity mutual funds, and large and small cap stocks would fall into this category.

The riskiest investments are at the peak of the pyramid. Just like sweets, fats, and oils should make up a limited portion of your diet, these investments are generally recommended to only make up a relatively small portion of your overall investment portfolio.

Since these investments are so risky, some guidelines suggest only investing money that, if lost, won’t cause serious issues in your day-to-day life.

As you continue building your investment portfolio, it’s helpful to know that although the investment risk pyramid can be a useful tool, it’s just a guideline. Just as everyone’s dietary and nutritional needs are different, so are individual investment portfolios.Take it with a grain of salt.

Managing Risk

Here’s the thing about investing—risk is an unavoidable reality. While you won’t be able to eliminate risk completely, there are strategies to help you manage the investment risks your portfolio is subject to.

Understanding Your Financial Goals and Risk Tolerance

The first step in managing risk will be determining your risk tolerance—how much risk you are willing to take on as an investor. Your financial goals could help inform your risk tolerance. Consider asking yourself what you want to use your money for and then figuring out the timeline for when you’ll need it.

The amount of time you have to invest will likely influence the type of investments you make with your money.

For example, if you are saving for retirement in 40 years, you may be able to take on more risk than someone who plans to retire, in say, 10 years.

Try as we might, we can’t plan for everything and life can change quickly. As it does, it can be helpful to re-check your financial goals and re-assess your risk tolerance to see if any changes are necessary.

For example, if you’ve recently had a child, you may want to integrate a college fund into your financial plan. Or perhaps you and your partner have decided you want to upgrade to a bigger house before growing your family.

Diversifying Your Portfolio

With a diversified portfolio, your money isn’t concentrated into one specific area. Instead, it’s spread across different asset classes—like stocks, bonds, and real estate—the money isn’t concentrated in one specific area within each asset class.

While it can be tempting to concentrate your investments into areas you are most familiar with, limiting yourself to only a few industries or types of investments can be the financial equivalent of putting all of your eggs in one basket.

A diversified portfolio can provide some insulation to risk. If your portfolio is highly concentrated in one area and that sector takes a dip, it’s likely your portfolio will be impacted.

But if your portfolio is balanced across varied assets and classes, the impact of one underperforming section won’t be felt as dramatically. While a diversified portfolio won’t eliminate risk, it could help make your portfolio a little less vulnerable.

You could choose to diversify your portfolio through a series of thoughtful investments. As an alternative, you could also choose to invest in mutual funds or ETFs—exchange-traded funds.

When you buy shares in a mutual fund, you are automatically invested in each company that is included in the fund, which provides instant diversification. ETFs, on the other hand, bundle a group of securities together in one neat package and they can be a low-cost way to diversify your portfolio.

Monitoring Your Investments

It can be tempting to set it and forget it when it comes to investments. But keeping an eye on your portfolio is another step that could potentially help you manage risk. You won’t know there is an issue unless you monitor progress.

As the market fluctuates, your portfolio likely will, too. Consider setting a recurring time to monitor your holdings. It doesn’t have to be every day, but once a week or even once a month could be a good idea.

How have the assets been performing? Is your portfolio still in line with your current risk preferences? If not, consider taking the time to make adjustments so you’re comfortable with where your investments stand.

Regularly checking in with your investments will also allow you to monitor your progress and see if you’re still on track with your goals.

Asking for Help

Investing can be confusing. Sometimes all it takes a second set of (experienced) eyes to provide a bit of clarity. Don’t feel like you have to build your investment portfolio in a vacuum.

Consider speaking with a financial advisor who can assist you in creating a personalized financial plan that is designed to help you achieve your specific goals.

Know that financial advisors often charge fees for their services, but they can often provide valuable insight and advice. SoFi members have access to one-on-one advice with certified financial professionals, at absolutely no cost.

Becoming an Investor

Now that you understand how risk impacts investments and some of the ways to manage risk, you might be ready to build your investment portfolio. Investing can be a good way to grow your wealth in the long term. And the good news is it’s never too early or too late.

If you’re ready to get started, consider an account with SoFi Invest®, which offers a variety of options so you can invest in line with your personal risk preferences and financial goals.

For those that like to be in the driver’s seat—there’s active investing. You can buy and sell stocks, creating a completely personalized portfolio without any fees.

Investors who prefer to take a less intensive approach can opt for an automated account. You won’t have to worry about tracking individual stock prices and making timely trades. The account will do most of the work for you, automatically rebalancing to stay in line with your specified risk preference.

And SoFi offers a range of exchange-traded funds. SoFi offers four different types of ETFs that are intelligently weighted and are automatically rebalanced, so they’re always at the forefront of growing industry.

Ready to start managing your investment risks? Learn more about ETF investing and how they can help you make the most of your investments.

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

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

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, LLC and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“SoFi Securities”).
Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
Advisory services are offered through SoFi Wealth LLC, an SEC-registered investment adviser. Information about SoFi Wealth’s advisory operations, services, and fees is set forth in SoFi Wealth’s current Form ADV Part 2 (Brochure), a copy of which is available upon request and at adviserinfo.sec.gov .

SOIN19143

As you begin to build your portfolio of investments, you will find that there are many ways to approach investing. Some require a significant amount of time and involvement, while others are more passive.

Before putting a significant amount of money into a portfolio, it’s important to figure out what your investment goals are and to learn about the many possible investment options.

One popular type of investment is called index investing, and as with any investing, there can be benefits, but there also may be risks. In this article we will go over what index investing is and how best to use this investing strategy.

An index fund is a mutual fund or exchange-traded fund which aims to mimic the overall performance of a particular market. The fund includes multiple stocks or bonds from the market and can be bought and sold like it’s a single investment.

There are index funds for the U.S. bond market, the U.S. stock market, international markets, and others. Index investing is the process of investing in these index funds.

Active investing typically involves in-depth research into each stock purchase, as well as regularly watching the market in order to time buys and sells. Passive investing strategies either aim to bring in passive income or to grow a portfolio over time without as much day-to-day involvement. Index investing is a passive strategy which looks to match the returns of the market it seeks to track.

Index investing started in the 1970s, when economist Paul Samuelson claimed that stockpilers should go out of business. Samuelson claimed that even the best money managers could not usually outperform the market average.

Instead of working with money managers, Samuelson suggested that someone should create a fund that simply tracked the stocks in the S&P 500.

Two years later, struggling firm Vanguard did just that. The fund was not widely accepted, and neither was the concept of index funds. Index investing has only become widely popular in the past two decades as data continues to reaffirm its merits.

Index investing has been gaining in popularity in recent years. Out of investments in mutual fund assets, the percentage allocated to index funds grew from 11 percent to 25 percent between 2006 and 2016. In 2017 investors withdrew $191 billion from U.S. stock funds and invested $198 billion into U.S. stock fund indexes.

Popular Indexes Include:

•  S&P 500 Index

•  Dow Jones Industrial Average

•  Russell 2000 Index

•  Wilshire 5000 Total Market Index

•  Bloomberg Barclays Aggregate Bond Index

Popular Index Funds Include:

•  Vanguard S&P 500

•  T. Rowe Price Equity Index 500

•  Fidelity ZERO Large Cap Index

•  SPDR S&P 500 ETF Trust

•  iShares Core S&P 500 ETF

•  Schwab S&P 500 Index Fund

The Pros of Index Investing

Can Be Easier to Manage

Although it may seem as though active investors have a better chance at seeing significant portfolio growth than index investors, this isn’t necessarily the case. Day trading and timing the market can be extremely difficult, and may result in huge losses or underperformance.

The average investor typically underperforms the stock market by 4-5%. Active investors may have one very successful year, but the same strategy may not work for them over time. A 2013 study showed that index investing outperformed other strategies up to 80-90% of the time. SoFi users can take advantage of index investing by setting up an auto investing strategy that will automatically rebalance and diversify portfolios.

Lower Cost of Entry for Multiple Stocks

If you only have a small amount of money to start investing and you choose to invest in individual stocks, you may only be able to invest in a few companies. With index investing, you gain access to a wide portfolio of stocks with the same amount of money.

Also, index investing doesn’t necessarily require a wealth manager or advisor—you can do it on your own. The taxes and fees tend to be lower for index investing since you make fewer trades, but this is not always the case. Always be sure to look into additional fees and costs before you make an investment.

Portfolio Diversification

One of the key facets of smart investing is diversifying your portfolio. This means that rather than putting all of your money into a single investment, you divide it up into different investments.

By diversifying, you may lower your risk because if one of your investments loses value, you still have others. At the same time, if an investment significantly goes up in value, you still typically benefit.

Index funds give you access to a large number of stocks all within a single investment. For example, one share of an index fund based on the S&P 500 can give you exposure to up to 500 different companies for a relatively small amount of money.

Index Investing is Fairly Passive

Once you decide which index fund you plan to invest in and how much you will invest, there isn’t much more you need to do. Most index funds are also fairly liquid, meaning you can more easily buy and sell them when you choose to.

The Cons of Index Investing

Although there can be upsides to investing in index funds, there can also be downsides and risks to be aware of.

Index Funds Follow the Market

Studies have shown that investors don’t always understand what they’re investing in when it comes to index funds. 66 percent of investors think that index funds are less risky than other investments, and 61 percent believe that index funds help to minimize portfolio losses. However, index funds track with the market they follow, whether that’s the U.S. stock market or another market. If the market drops, so does the index fund.

Index Funds Don’t Directly Follow Indexes

Although index funds generally follow the trends of the market they track, the way they’re structured means that they don’t always directly track with the index. Since index funds don’t always contain every company that’s in a particular index, this means that when an index goes up or down in value, the index fund doesn’t necessarily act in exactly the same way. This is why it’s important to understand how specific index funds seek to track their underlying index.

Index Investing Is Best as a Long-Term Strategy

Since index funds generally track the market, they do tend to grow in value over time, but they are certainly not get-rich-quick schemes. Returns can be inconsistent and typically go through upward and downward cycles.

Some investors make the mistake of trying to time the market, meaning they try to buy high and sell low. Investing in index funds tends to work the best when you hold your money in the funds for a longer period of time or dollar-cost-average (e.g. invest consistently over time to take advantage of both high and low points).

Choosing an Index to Invest in

The name of a particular index fund may catch your eye, but it’s important to look at what’s inside an index fund before investing in it. Determine what your short and long term goals are and what markets you are interested in being a part of before you begin investing.

There are both traditional funds and niche funds to choose from. Traditional funds follow a larger market such as the S&P 500 or Russell 3000. Niche markets are more focused and may contain fewer stocks.

They may focus on a particular industry. Typically, a good way to start investing in index funds is to add one or more of the traditional funds first, then add niche funds if you feel strongly about their growth potential.

Index Funds Are Weighted

Depending on which index fund you invest in, it may be weighted. For example, the S&P 500 index is weighted based on market capitalization, meaning larger companies like Amazon and Facebook hold more weight than smaller ones.

If Facebook’s stock suddenly goes down, it may be enough to affect the entire index. Other indexes are price weighted, which means companies with a higher price per share will be weighted more heavily in the index. Another form of index weighing could be equal-weight or weights determined by other factors, such as a company’s earnings growth.

Less Flexibility

If you actively invest in individual stocks, you can usually choose exactly how many shares you want to buy in each company. But when you invest in index funds, you have less flexibility. If you’re interested in investing in a particular industry, there may not be an index fund focused solely on that.

How to Get Started With Index Investing

In order to invest in an index, investors typically purchase exchange-traded funds (ETFs) which seek to track the index. Some funds include all the assets in an index, while others only include particular assets.

Prior to investing in any particular index fund, be sure to look into the details of how the fund works. You can find information about what is contained in the fund, how it is weighted, its fees and quarterly earnings, and other details on the fund’s website, through your financial advisor, or EDGAR , the Electronic Data Gathering, Analysis, and Retrieval system that is overseen by the U.S. Securities and Exchange Commission.

Alternatives to Index Investing

Despite the fact that index investing has grown in popularity over the past two decades, some analysts are now bringing up additional downsides and alternatives which investors may want to consider.

The stock market includes companies from many different industries, some of which investors are moving away from investing in. Oil and gas companies, pesticide companies, and others which some people may consider harmful to the environment or human populations may be included in an index fund.

As the economy moves away from these industries, these types of companies may not perform as well, and as an investor you may not want to financially support them.

Some new index funds are being formed around the principles of sustainability and positive impact. You may also be interested in impact investing and other types of ETFs and mutual funds which focus on specific, positive industries.

Active stock portfolio management has been showing stronger performance over the past two years. This shift is partly due to the fact that certain industries are performing much stronger than others, and stock pickers can account for that as they build portfolios.

Investors in index funds may also see a downturn in coming years if the U.S. experiences a bear market.

Building Your Portfolio

Whether you’re interested in investing in index funds or in hand-selecting each stock, it’s important to keep track of your portfolio and current market trends.

Once you know what your investment goals are, SoFi Invest® can be a great tool to build your portfolio and track your finances. With SoFi Automated investing, you can easily add index fund ETFs to your portfolio, all on your phone.

The automated investments are pre-selected for you, so you simply need to decide which funds to invest in, and how much you want to invest. Or, if you prefer to hand-select each stock in your portfolio, you can use the SoFi Active Investing platform.

SoFi has a team of credentialed financial advisors available to answer your questions and help you reach your goals. The SoFi platform has no transaction fees, and you only need a $1 to get started.

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

Third Party Trademarks: Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.


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

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, LLC and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
SOIN19173

They make you laugh, and they make you cry. You worry about them when they’re out of sight, and even when they’re in plain view. You desperately hope they grow up strong, healthy, and ready to tackle life’s challenges.

After all, they are your pride and joy. Children make parents do some pretty selfless things, and one of the more beneficial thing you could do is plan for their financial future. But how do you do that with everything else you have to worry about in your life?

Fortunately, there are some fairly simple financial tools to help you meet your goals, whether you’re saving for a college education, a once-in-a-lifetime summer camp, or a down payment for their first home.

Depending on your situation, some options might be obvious good choices, while others come with caveats you might want to know about before investing.

With a little background knowledge, you could find an investment plan for your child’s future. An investment for a child could also provide a great education in financial responsibility.

Let’s look at some of the choices.

Custodial Accounts

A simple custodial savings account in your child’s name could be a good start as an investment for a child. When a baby is born, everybody from Grandma to Uncle Joe may want to contribute to the account. Unlike college savings plans , which require the funds be used for education, custodial accounts offer a lot of flexibility.

Savings can be used for almost anything—a European vacation, car for college, pre-college expenses—as long as it is for the benefit of the child. Just remember, any money in an investment account for a child is irrevocably in their name and for their benefit . You can’t take it back.

A custodial account could be a great vehicle for children to learn how to invest. In fact, if you’re wondering how to buy stock for a child to help them learn about money, a custodial account might be a great investment account for a child. You could pick a company they would be excited to follow, like Disney or McDonald’s, and let them watch over time.

Custodial accounts, also known as Uniform Gift to Minors Act (UGMA) and Uniform Transfers to Minors
Act (UTMA) accounts, don’t have a limit to how much you can invest. While contributions aren’t tax-deductible, there may be a tax advantage because it’s in the child’s name.

But that advantage might quickly turn into a disadvantage if unearned income from dividends, gains, or interest reaches a certain amount. Then the account is subject to the Kiddie Tax , which Congress enacted to prevent abuse of the financial vehicle by parents. With a custodial account, you can gift up to $15,000 in 2019 for each child; double that if you’re married and filing jointly. Above that you’re liable for the federal gift tax .

While you can use the money in the account to pay for various things your child needs, one caveat is that the child gets full control when they reach the age of majority, usually 18 or 21 years of age.

Custodial accounts might be good for modest, defined goals, such as paying for education, orthodontia, or academic camps, for example. If there is a sizable sum of money in the account, consider whether you want to transfer that amount, unregulated, to someone of such a young age. In that situation, one idea might be to have a lawyer draw up a trust to set up specific parameters you can live with.

If the thought of giving up control is too much for you, you could set up a guardian account in your name so you can decide how the money is spent. Essentially, it’s a way to earmark funds to give to your child down the road.

College Savings Accounts

A Coverdell education savings account or a 529 savings plan could be a worthy option for a child. They offer two ways to pay for educational costs, whether college or K–12 schooling. The Coverdell allows you to contribute up to $2,000 a year for education expenses. While contributions are not tax deductible, withdrawals are tax-free.

Coverdells have two areas where they might have a slight advantage over 529 accounts: You can select from a wide range of investments and the money you withdraw can be used for any qualifying education expenses, such as books, tutors, and equipment.

The 529 college savings plan tends to be a popular way to save for college. You can make larger contributions than you can with a Coverdell account, and any withdrawals for qualified education purposes are tax-free.

As of 2018, Congress allows withdrawals of up to $10,000 for K–12 tuition. Not all plans or states that sponsor 529 plans are in line with the new rules , so you might want to ask a tax expert or the manager of the plan about your options.

IRAs

Custodial (Traditional)

Custodial IRAs are another investment option for a child. They work just like a traditional IRA, so when your child has earned income from a first job, babysitting, or other work, they (or you) can contribute up to $5,500 annually . Starting early might be a way to teach them about the power of financial stewardship.

With a traditional custodial IRA, your child will pay ordinary income tax when they withdraw the money in retirement, and they must begin doing so at age 70½ . Contributions are also tax deductible, which probably won’t benefit them if their income is still low or they don’t meet the $12,000 standard deduction threshold requiring them to pay federal income tax.

Both traditional and Roth custodial IRAs convey to the child at the age of majority (18 to 20 years of age, depending on the state).

Roth

Just like traditional IRAs, contributions to a Roth IRA also grow tax-free over the years and have the same contribution limits—however, the Roth could be an investment possibility for your child if you value flexibility. Whether you’re saving for college or retirement, it might offer more advantages for your child over the decades than a traditional IRA.

While you still pay tax on each contribution, all withdrawals are tax-free , which could be a big benefit to your child, assuming they’ll be in a higher tax bracket at retirement. There is no required minimum distribution when they must start withdrawing.

One of the biggest advantages to a Roth is that your child could use the contributions for any reason besides retirement. But two special perks of the Roth include the ability to pay for certain higher education expenses and withdraw up to $10,000 to buy their first home. On the other hand, if withdrawn before retirement, earnings can be taxed and your child could be penalized in addition.

Growing Wealth for Your Children

When it’s time to get serious about saving—for college, retirement, or something else—you could set up an account with SoFi Invest®. It’s easy to open an investment account with SoFi, and you’ll have access to complimentary financial advisors and other benefits to help your family save for a bright future.

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

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, LLC and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
SOIN19042

As adults, we tend to bounce from one big financial quest to the next. We need money to buy a car, to go to college, to own a home, which usually means we have to keep asking for loans.

You’d expect it would get easier as you go, but sometimes it doesn’t, especially if you’ve made mistakes along the way. Unfortunately, your missteps could keep you from qualifying for a mortgage—the Mount Everest of money-borrowing pursuits. If you’ve buried yourself in credit card and other debt, it’s crucial to get clear before you can move forward.

Consolidating Credit Card Debt Before a Mortgage Approval

Your credit card debt and mortgage approval can sometimes go hand in hand. Mortgage lenders want to know that you can afford to pay back the loan they’re offering, so they’re going to be curious about what you already owe others. While every lender is different, they’ll typically look at what you earn every month versus what you’ll be paying for your home and other debt obligations. Our home buyer’s guide is an excellent resource for first-time home buyers or existing homeowners looking to brush up on the home buying process.

Even if you have a good credit score and a debt-to-income ratio of 43% or less, high credit card debt payments could still make it difficult for you to pay a mortgage.

Credit cards typically come with a high interest rate and as long as you don’t pay your balance off in full every payment cycle, interest can continuously compound.

Taking out a debt consolidation loan is a way to help break the debt cycle. While you’ll then have to take out a personal loan, the interest rate may be lower than your credit cards, and personal loans usually offer fixed interest rates.

Think of it as your borrowing base camp—a personal loan can help you catch your breath and get your finances in order before you move on in your quest for a mortgage.

Recommended: Home Affordability Calculator

Using a Personal Loan To Consolidate Debt

Let’s get into more detail about how it all works:

You’ll combine the credit card debt into one manageable bill with a single payment due date. That means you’ll no longer have to worry about multiple payment due dates (or what will happen to the interest rates attached to those accounts if you don’t make your payments on time).

You may also qualify for a lower interest rate. The average interest rate on credit cards hovers around 16%, which is pretty hefty. Or maybe you accepted a higher rate on a new card a while ago when you needed it to build your credit and never got the rate adjusted. If you have a good credit record, a consistent job history, and a solid income, you may be able to bring your interest rate down with a personal loan.

Those high interest rates might be the very reason you got into trouble in the first place. Perhaps you aren’t an over-spender or maybe you just got into the habit of paying the minimum on your credit cards each month, figuring you’d catch up “someday.”

And it wasn’t until you started thinking about purchasing a home that you realized you’re on thin ice. With a lower interest rate and just one bill, you could help set yourself up for success with a better chance of staying on top of your debt.

Having the balance of one or more of your credit cards near the credit limit may negatively affect your credit score. Credit utilization is one of five major factors that help determine your credit score (along with payment history, the age of the credit, credit mix, and the number of recent credit inquiries).

Credit utilization is a comparison between the amount of credit you have available to you (your account limits) and what you’re actually using (your balances). If your credit utilization is high, a lender might see you as more of a risk, and the ratio can impact up to 30% of your credit score . Paying off your credit cards —and keeping them paid off—may help you boost your credit score.

Being on firmer footing with debt also could boost your savings sense. You’re probably going to want to get home-loan-ready one careful step at a time, and knowing you’re doing something about your debt might inspire you to make other savvy moves, like spending less and saving more.

If you reduce your monthly debt payments with a consolidation loan, you could put that extra money toward the down payment you’ll need for your new home. And putting down more up front will ultimately mean you own more of your house—and have a smaller mortgage.

Using a personal loan to lower the amount you’re required to pay on your debt each month may help improve that statistic lenders lean so hard on: the debt-to-income ratio.

Lenders may conclude that those with higher debt-to-income could have more difficulty paying their mortgage. You may seem like a safer bet in the eyes of a lender with a lower debt-to-income ratio.

Understandably, they just don’t want the risk, so why give them an excuse to turn you down? Your consolidation loan won’t magically make your debt disappear, but by paying regularly on your personal loan, you can get a better grip on your debt load and eventually improve your credit profile.

You might find you don’t even need those credit cards anymore—at least not as many or not so often. Maybe when you were starting out on your own, you used credit to get by when times were tight. Now that you’re earning more money and your finances are more in order, that’s hopefully not true anymore.

You might find yourself chopping up some of those extra cards. After all, if your personal loan comes with a lower monthly payment, you’ll likely have more cash in your pocket to pay for the small stuff.

Other Options For Knocking Down Debt

If you think you have the resources and discipline to knock down your credit card balances on your own within six months or so, you probably don’t need to bother with a loan.

Or you might want to look into using a balance transfer card—that is, if you think you can focus on paying it off within the required timeline to take advantage of the low interest rate…and you can resist the temptation to keep charging.

But, if it feels as though your debt is becoming a slippery slope, and consolidation would help you set up a new and better payment structure for getting rid of it, you may want to consider a personal loan.

Consolidating debt before buying a home can be a wise first step. And if all goes as planned, when you’re ready to purchase that home, you could decide to apply for a mortgage loan through SoFi.

The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .
The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
SoFi Mortgages are not available in all states. Products and terms may vary from those advertised on this site. See SoFi.com/eligibility-criteria#eligibility-mortgage for details.

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We’re reading a lot about cryptocurrency being here to stay, but for many of us, it’s still not a regular part of our everyday financial lives. Why is that? Could be lack of education among investors, and the general lack of current, regular commercial use of cryptocurrency. However, if acquiring the right financial knowledge is a roadblock, let’s move that out of the way right now and do some schooling on cryptocurrency trading for beginners.

The Basics of Cryptocurrency

Cryptocurrency is digital currency (used exclusively online) that acts as a direct financial exchange between users without the involvement of a bank or other third parties. Think of it as an alternative currency to traditional forms of payment, like cash, checks, and credit cards.

The information used within the system is kept safe through the use of encryption techniques . These methods scramble the info to make the activity secret and difficult for outsiders to access.

When you and others use a cryptocurrency system, everyone and everything remain anonymous. Each exchange that takes place is woven into a group called “blocks” (hence the term blockchain), which again is coded (encrypted) in order to keep it private and secure.

The basic unit of value of cryptocurrency is expressed as a “token,” which is used exclusively by members of the group involved in the blockchain. Every time a transaction happens, a “miner” updates the blockchain (more about this later).

Cryptocurrency is not created by any bank system or government agency, which means it’s in a universe of its own. Also, it isn’t regulated to the same degree as other financial products, like banking and investments. At least not yet.

Many people find this freedom to be a very cool vehicle to ride. Its popularity is growing in an organic way too; this makes it hard to predict where it’s going and where it will end up.

Cryptocurrency can be bought and sold on special exchanges ; the most commonly known cryptocurrency is bitcoin. SoFi also allows users to buy and sell cryptocurrency.

Recommended: A Beginner’s Guide to Cryptocurrency

The Future of Cryptocurrency

Of course, not everybody is on board with cryptocurrency being a given for the future. Although there are have been more than 2,000 cryptocurrencies on the market, more than 800 of them are now no longer operational.

Another fact to note: the U.S. Securities and Exchange Commission (SEC) has denied more than a dozen applications for permission to list bitcoin exchange-traded funds (EFFs). The reason, though, could be to your benefit as an investor: the need to minimize risks of fraud and manipulation, and to increase investor protection.

“We’ve seen some thefts around digital assets that make you scratch your head,” SEC Chairman Jay Clayton said at CoinDesk’s Consensus Invest conference. “We care that the assets underlying that ETF have good custody and that they’re not going to disappear.”

That said, are you a believer? Are you thinking about taking a leap, or at least getting in on the ground floor, before the anticipated mad mainstream rush?

Let’s break down the details of cryptocurrency trading for beginners:

It’s in the Wallet?

Offline, cryptocurrencies are stored in “wallets.” A wallet is a software program that stores both private and public keys that allow you to send and receive digital currencies and keep an eye on your coin.

Hot wallets give you easier access, but they can also more easily be hacked. Cold wallets are harder to open. If you plan on holding on to your investment for a long time, you may want to opt for the cold wallet. If you need to dip into your coin more than occasionally, consider the hot wallet.

There are a number of wallet providers , and you’ll want to do some due diligence before choosing one.

Learn to Chill

Cryptocurrency is still a relatively new technology, which means it can act like a newborn: crying jags, not understanding how things work, crawling and stumbling, and behaving irrationally.

You’ll need to get used to huge price swings, instability when least expected, rollercoaster performance reports, and general anxiety on your part. Be sure you can take it.

Tune Out The Naysayers

Cryptocurrency trading for beginners means getting involved in a new idea. When that happens, get ready for the know-it-alls and Negative Nellies to tell you what’s what. You’re going to hear that cryptocurrency is overhyped, just a fad, or a wicked scam.

Of course, you’re going to do your due diligence and make up your own mind with educated decisions, so let don’t let them rattle you. Also, what may be true and unfortunate for one cryptocurrency may not be the same for another.

Get Professional Insights

Here’s the thing: Maybe cryptocurrency isn’t for you right now. The fact is, cryptocurrencies aren’t endorsed or guaranteed by any government—and they are volatile and involve a high degree of risk.

Not only that, but consumer protection and securities laws don’t regulate cryptocurrencies in the same way that they regulate traditional investment products. If you instead want to learn more about traditional investment products, now’s the time to check out SoFi Invest®.

With SoFi Invest, you’ll get access to financial planning and personalized advice, all based on how you want to invest and what your future goals are. All you need to do is make an appointment to chat with one of our SoFi Invest Advisors.—there is no obligation and no cost.

We’ll work with you to make sense of an investment strategy and help you map out a plan (and stick with it).

With an automated investing account with SoFi, we’ll invest in thousands of assets, actively managing them, which can help you get a clearer vision of your future path. To avoid veering off the road, we’ll automatically rebalance your investments as needed, so that they stay on track.

The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including
FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments.
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member
FINRA / SIPC .
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