Is Impact Investing Profitable?

Impact investing may be profitable, though it depends on several factors, including the type of impact investments and the specific goals and objectives of the investor.

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Q: How Does Impact Investing Work?

Impact investing is usually done by large institutional investors and private foundations, though individual investors can do it as well. These organizations invest in various areas, including affordable housing, clean water, and renewable energy.

May

2024

What Is Impact Investing?

By Michael Flannelly | Growing Wealth, invest, Investing, Terminology | No Comments

Impact investing is a strategy that seeks to create both financial return and positive social or environmental impact. Impact investments can be made in both publicly traded companies and private companies or funds, and can take the form of equity, debt, or other assets.

In recent years, many investors have become increasingly aware of potential adverse societal effects to which their investments may contribute. These can include effects on health, the environment, and human rights. As such, large firms and foundations have increasingly decided to put capital to work to minimize these negative effects. For investors, it helps to be aware of the growing trend of impact investing to determine whether it is a suitable wealth-building strategy for a portfolio.

How Does Impact Investing Work?

Impact investing is typically, but not always done by large institutional investors and private foundations, though individual investors can do it as well. These organizations invest in various areas, including affordable housing, clean water, and renewable energy. Impact investments in these areas can benefit both developed and emerging markets.

The term “impact investing” is relatively new, but the concept of investing for both financial return and social good is not. Impact investing began in the early 1900s, as numerous philanthropists created private foundations to support their causes.

The concept of impact investing has expanded to include a broader range of investors and investment vehicles. Impact investing may be practiced by individuals, foundations, endowments, pension funds, and other institutional investors.

The growth of impact investing has been fueled by several factors, including the rise of social media and the increasing availability of data and analytics. Impact investing is also being driven by the growing awareness of businesses and investors’ role in solving social and environmental problems. Individual investors can take this new knowledge and consider index funds that focus on various causes.

Characteristics of Impact Investments

As outlined by Global Impact Investing Network (GIIN), the following are considered characteristics of credible impact investments:

• Investor intentionality: An investor must intend to make a measurable positive impact with their investment. This requires a certain level of transparency about both financial and impact goals. The investor’s intent is one of the main differentiators between traditional investments and impact investments.

• Utilize data: Impact investments must use data and evidence to make informed decisions to achieve measurable benefits.

• Manage impact performance: Specific financial returns and impact goals must be established and managed.

• Contribute to the growth of the industry: The goal of impact investments is to further social, economic, or environmental causes. Impact investing toward these goals must be intentional and measured, not just guesswork.

Impact Investing vs Socially Responsible Investing

Impact investing is often associated with “socially responsible investing” (SRI). Both SRI and impact investing seek to generate positive social or environmental impact, but they differ in some ways.

SRI typically focuses on actively avoiding investments in companies involved in activities that are considered harmful to society, such as the manufacture of tobacco products or the production of weapons. SRI also typically focuses on promoting corporate policies considered socially responsible, such as environmental sustainability or gender diversity.

In contrast, impact investing focuses on making investments in companies or projects that are specifically designed to generate positive social or environmental impact.

Impact Investing vs ESG

The main difference between impact investing and ESG (environmental, social, and governance) is that impact investing is focused on investments that are expected to generate a positive social or environmental impact. In contrast, ESG considers a range of environmental, social, and governance factors in investing decisions.

Why Is Impact Investing Important?

While some investors may not think impact investing is important at all, others may think the exact opposite. For those investors, impact investing may be considered important for a few key reasons.

First, it allows investors to put their money into companies or projects that they believe will positively impact society or the environment. Second, impact investing can help attract more capital to social and environmental causes.

When more people invest in companies or projects that aim to make a difference, it can help to increase the amount of money and resources available to make positive change happen. Those investments, however, may not offer the best opportunities to generate returns. While there’s no way to know for sure how an investment will shake out over time, investors should familiarize themselves with the concept of opportunity costs.

Finally, impact investing can help create jobs and support businesses working to improve society or the environment. This can have a ripple effect, as these businesses often provide goods or services that benefit the community.

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Examples of Impact Investing

Impact investing is usually done by institutional investors, large asset managers, and private foundations. Some of the largest foundations and funds focused on impact investing include, but are not limited to:

• The Bill & Melinda Gates Foundation: This foundation has a $2.5 billion Strategic Investment Fund. This fund makes direct equity investments, provides low-interest loans, and utilizes other impact investing tools in promoting global health and U.S. education.

• The Ford Foundation: The foundation has committed to invest a portion of its endowment to address social problems while seeking a risk-adjusted market rate of financial return. Its mission-related investments are focused on affordable housing, financial inclusion, and other areas in the U.S. and across the Global South.

• The Reinvestment Fund: The Philadelphia-based nonprofit finances housing projects, access to health care, educational programs, and job initiatives. It operates primarily by assisting distressed towns and communities in the U.S.

Types of Impact Investments

There are various impact investment areas, including but not limited to microfinance, renewable energy, sustainable agriculture, and affordable housing.

Impact investments don’t have to be equity investments either; they come in many different investment vehicles, like bonds and alternative investments.

Evaluation Methods for Impact Investors

There are many ways to measure impact investments. The United Nations Sustainable Development Goals (SDGs) are a popular framework for measuring impact. The SDGs are a set of 17 goals that the United Nations adopted in 2015.

The SDGs include goals such as “no poverty,” “zero hunger,” and “good health and well-being.” Each SDG has a specific target to be achieved by the year 2030.

Impact investors often seek to invest in companies or projects that will help achieve one or more of the SDGs. For example, an impact investor might invest in a company working on a new technology to improve water quality, contributing to the SDG goal of ensuring access to water and sanitation for all.

Another popular framework for measuring impact is the Impact Management Project (IMP). The IMP is a global initiative that seeks to develop standards for measuring and managing impact.

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How to Start an Impact Investment Portfolio

Though foundations and institutional investors are the heart of the impact investing world, individual investors can also make investments in companies and funds that may positively impact society. Here’s how to do it.

1. Decide what type of investment you want to make, whether that’s in a stock of a company, an exchange-traded fund (ETF) with an impact investing strategy, or bonds.

2. Next, research the different companies and funds, and find a diversified selection that fits your desires.

3. Finally, make your investment with a brokerage and monitor your portfolio to ensure that your investments have a positive impact.

In order to become an impact investor, it’s wise to consider both the financial potential of an investment, as well as its social, environmental, or economic impact.

Some investors have a higher risk tolerance than others, and some might be willing to take a lower profit in order to maximize the potential positive impact of their investments.

The Takeaway

Impact investing involves making investments with aims of improving certain outcomes in the world, which may come at the expense of potential returns. There is no one-size-fits-all answer to how to balance financial return and social or environmental impact. Impact investors must make investment decisions that are aligned with their values and objectives.

Not all impact investments are created equal. Some impact investments may have a higher financial return potential than others, but may also have a lower social or environmental impact. Similarly, some impact investments may have a higher social or ecological impact but may also have a lower financial return potential. Impact investors must consider both financial return and social or environmental impact when making investment decisions.

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

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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.

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If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.
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Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

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

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Apr

2024

How to Invest in Farmland

By Michael Flannelly | Growing Wealth, invest, Investing | Comments Off

Investing in farmland can take many forms, including buying related stocks, or even farmland REITs. That’s contrary to what many people might think: That investing in farmland or agriculture may involve owning farmland and operating a farm.

Many investors overlook this business sector when deciding where to put their money because they don’t see themselves toiling the land. But there are various options to invest in agriculture without being a farmer.

Why Invest in Farmland?

Investing in farmland or the agriculture sector is more than just owning some of that farmland and working the land. Agriculture can be an alternative investment that diversifies an investor’s portfolio. Investors can get exposure to agriculture and farming by investing in businesses involved in any part of the farming process, from the seeds in the ground to the distribution of products to grocery stores.

While there’s no guarantee that growth will occur in the space during the years ahead, it may be helpful for investors to get a feel for the soil, so to speak, before planting an investment.

4 Ways to Invest in Farmland

There are a handful of key ways to invest in farmland, including through stocks, exchange-traded funds (ETFs), and REITs.

1. Agriculture Stocks

Investors can put money into various publicly-traded companies that provide services in the farming industry. These agribusiness firms range from those involved in actual crop production — though many crop producers are privately held — to companies in the farming support businesses. The farming support businesses include companies that make fertilizer and seeds, manufacture farming equipment, and process and distribute crops.

Companies in the agriculture industry include, but are not limited to:

• Archer Daniels Midland Company (ADM) : A large food processing and commodities trading firm

• Deere & Company (DE) : Known as John Deere, this company manufactures agricultural machinery and heavy equipment

• Corteva, Inc. (CTVA) : An agricultural chemical, fertilizer, and seed company

• The Mosaic Company (MOS) : A large company that produces fertilizer and seeds

• AGCO Corporation (AGCO) : An industrial company that’s perhaps best known for selling tractors.

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2. Agriculture ETFs and Mutual Funds

Investors who don’t want to pick individual stocks to invest in can always look to mutual funds and exchange-traded funds (ETFs) that provide exposure to the agricultural industry. Agriculture-focused mutual funds and ETFs invest in a basket of farming stocks, commodities, and related assets, allowing investors to diversify farming exposure.

3. Farm REITs

Farm and agricultural real estate investment trusts (REITs) own farmland and lease it to tenants who do the actual farming. REITs that invest in farmland can be a good option for investors who want exposure to farmland without actually owning a farm.

This type of investment can provide investors with various benefits. For example, a REIT is a type of liquid asset, meaning an investor can quickly sell the investment on the stock market. In contrast, if an investor were actually to own farmland outright, trying to sell the land could be a drawn-out and complex process. Other benefits include regular dividend payments and geographical and crop diversification.

4. Commodities

Agricultural commodities are the products produced by farms, like corn, soybeans, and wheat. Usually, this is done by trading futures contracts, though large investors may actually purchase and sell the physical commodities.

Trading commodities can be a profitable, though risky, endeavor. Investors who trade commodities look to take advantage of the market’s volatility for short-term gains. Commodity trading can be risky, especially for a novice investor. ETFs with exposure to commodities may be better for investors with lower risk tolerance.

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Benefits and Risks of Investing in Agriculture

Investing in farmland and agriculture has its pros and cons. Here are some of the benefits and risks investors should consider.

Benefits

One of the significant benefits of agriculture investments is that people always need to eat, so there will usually be some demand support for businesses in the industry. Because of this, some investors view the sector as somewhat recession-proof (at least parts of it), and potentially, a good way to diversify a portfolio.

Another benefit is that farmland REITs and certain agriculture stocks can provide passive income through regular dividend payouts. Additionally, farmland investments can provide a hedge against rising inflation.

Risks

The agricultural and farming sector can be fickle, as it’s subject to various risk factors that can impact investments. Uncertainties stemming from weather to government policies to the global commodities markets can cause volatile swings in prices and income that affect investments in the sector.

Here are some risks facing agricultural investments:

• Production risk: Major weather events, crop diseases, and other factors can affect the quantity and quality of commodities produced.

• Market risk: The global markets for commodities can affect farming and agricultural business as prices can swing wildly, making crop production and agribusiness demand uncertain.

• Financial risk: Farms and related businesses often use debt to fund operations, so rising interest rates and credit tightening can hinder companies in the industry.

• Regulatory risk: Changes in taxes, regulations, subsidies, and other government actions can impact agricultural businesses and investments.

The Takeaway

Investors who want to invest in the agriculture sector don’t necessarily need to buy a farm. Several investment vehicles can fit their needs to get exposure to farming. Farmland REITs, agribusiness stocks, and farming and commodity ETFs can be options to build wealth in the farm business.

While investing in farmland may have some advantages, it has its risks, too – which investors should take note of before making any investments. If you’re interested in adding an alternative investment, like farmland, to your portfolio, it may be a good idea to speak with a financial professional for guidance.

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FAQ

Is farmland a good investment?

Farmland might be a good investment, as agricultural investments can help diversify a portfolio. Depending on what areas of the agriculture business you invest in, the assets can produce steady income and long-term capital gains. These investments do have risks, too, however.

Is farmland a risky investment?

Farmland can be a risky investment, as it faces risks from all sorts of directions – weather, government regulation, global commodities markets, and more.

Is farmland recession-proof?

A farmland investment might be called recession-proof, and that may be true to a degree as there’s likely always going to be a base level of demand for the sector’s products (people need to eat!). But like any other sector, a recession would likely lead to a significant downturn in the agricultural space.

How profitable is farmland?

How profitable farmland investments ultimately are depends on the whims of the markets, and numerous other factors, including the weather, global demand, and even consumer tastes.

Photo credit: iStock/PeopleImages

SoFi Invest®

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

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

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

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at https://sofi.app.link/investchat. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Fund Fees
If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.
SoFi Invest may waive all, or part of any of these fees, permanently or for a period of time, at its sole discretion for any reason. Fees are subject to change at any time. The current fee schedule will always be available in your Account Documents section of SoFi Invest.

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

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. This and other important information are contained in the Fund’s prospectus. For a current prospectus, please click the Prospectus link on the Fund’s respective page. The prospectus should be read carefully prior to investing.
Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. Alternative investments often employ leveraging and other speculative practices that increase an investor's risk of loss to include complete loss of investment, often charge high fees, and can be highly illiquid and volatile. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information. Registered and unregistered alternative investments are not subject to the same regulatory requirements as mutual funds.
Please note that Interval Funds are illiquid instruments, hence the ability to trade on your timeline may be restricted. Investors should review the fee schedule for Interval Funds via the prospectus.
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Apr

2024

Net Asset Value (NAV): What It Means, Formula, Example

By Michael Flannelly | Growing Wealth, invest, Investing | Comments Off

Net asset value (NAV) is an important metric for knowing how much each share of an investment fund, like a mutual fund or ETF, is worth. However, NAV alone cannot tell investors everything they need to know about potential investments.

Calculating NAV is helpful for fund valuation and pricing. Still, there are times when it is more beneficial to look at other aspects of a fund, like total return, to determine investment opportunities. Nonetheless, investors need to know how to calculate NAV, when it makes sense to use it, and why.

What Is Net Asset Value (NAV)?

Net asset value, or NAV, represents the value of an investment fund. NAV, most simply, is calculated by adding up what a fund owns (the assets) and subtracting what it owes (the liabilities).

NAV is typically used to represent the value of the fund per share, however, so the total above is usually divided by the number of outstanding shares. This makes it easier for investors to value and price the shares of a fund. Mutual funds, for example, use per-share NAV to determine their share price.

The NAV will also change daily because an investment fund’s assets and liabilities change daily based on market prices.The assets of an investment fund include the daily market value of the fund’s holdings, which are usually securities like stocks and bonds. The liabilities of a fund are usually debts owed to financial institutions and expenses, like salaries, operating costs, and other fees.

The Securities and Exchange Commission (SEC) requires that mutual funds calculate their NAV at least once each business day. Most mutual funds perform their calculations after the major U.S. securities exchanges close for the day.

NAV Formula

Net asset value, as mentioned above, is calculated by taking a company or investment fund’s total assets and subtracting its liabilities. This figure is usually divided by the fund’s number of outstanding shares because NAV is generally represented on a per-share basis. The formula looks like this:

NAV = (Total Value of Assets – Total Value of Liabilities) / Number of Shares Outstanding

How NAV Is Used for Investments

NAV can be used for investments, and by investors, in a number of ways, often depending on the specific type of asset an investor is analyzing. It can give investors insight into a fund’s performance, but doesn’t necessarily tell the whole story.

Mutual Funds

Mutual funds are usually open-ended funds, meaning that investors buy and sell shares of the fund from the fund directly and not on an exchange like a stock. Because these funds don’t trade on an exchange for market prices, NAV is used to price the fund’s shares.

Mutual funds calculate their NAV per share daily, usually at the end of the business day, and that is the price an investor will pay to buy or sell shares in the fund. Every mutual fund company has its own cut-off time for buying and selling shares. After that time, investors buying or selling shares will get the fund’s NAV for the day after their transaction order is received.

💡 Recommended: Understanding the Different Types of Mutual Funds

ETFs

Exchange-traded funds (ETFs) and closed-end funds are similar to traditional mutual funds, but one big difference is that investors can buy and sell ETFs throughout the trading day for a market price and not the NAV per share. Investors can make buy and sell orders for traditional mutual funds once per day and only at their published NAVs.

ETFs are still required to calculate the fund’s NAV once per day, like a mutual fund. Additionally, an ETF’s NAV is calculated approximately every 15 seconds over each trading day and published on various financial websites.

Because ETFs tend to trade at a premium or a discount to their NAV, traders often compare market prices and NAV to take advantage of the differences and make investment decisions.

Example of Calculating Mutual Fund NAV

As an example of calculating mutual fund NAV, imagine that mutual fund XYZ has $100 million worth of investments in different securities, based on the day’s closing prices for each security, and $10 million in liabilities and expenses. The NAV for this fund would be $90 million. If the fund has 5 million shares outstanding, the NAV per share for mutual fund XYZ would be $18.

The NAV for mutual fund XYZ can be calculated using the above formula:

NAV = ($100,000,000 – $10,000,000) / 5,000,000 = $18

How to Interpret NAV Results

A fund’s NAV alone doesn’t tell investors much; a high NAV for one fund is not necessarily better than a low NAV in another fund. Similar to stock prices, a high stock price doesn’t necessarily mean the stock is a better investment than a stock with a lower price.

Looking at a fund’s NAV and comparing it to another fund does not provide investors insight into which fund is the better investment. It’s more important for investors to look at NAV alongside other factors, like the fund’s past performance, the allocation of securities within each fund, and how it performs compared to benchmark indices like the S&P 500 Index.

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Why Do NAVs Change?

A mutual fund’s NAV will likely change every trading day because the prices of securities in which the fund invests are likely to change every trading day, affecting the total assets in the fund. It’s also because the number of outstanding shares held by investors often changes daily, as new investors buy shares and existing investors sell.

Other factors can also impact a fund’s NAV. For example, the fund’s management fee and additional fees that add up to the fund’s total expense ratio will come out of the fund’s total assets, thus affecting NAV. In addition to management fees, expenses can include costs related to the administrative, compliance, distribution, management, marketing, shareholder services, and record-keeping of the fund. It’s common practice for mutual funds to assess this debit on the fund’s assets every trading day.

When NAV Isn’t Everything

If a mutual fund invests in dividend-paying stocks or fixed-income assets, these securities’ dividends and interest payments go to the investor. Additionally, a mutual fund may distribute realized capital gains to shareholders. These payouts reduce the fund’s assets and result in a lower NAV. Because these benefits lower a fund’s NAV, it shows that NAV may not be the only figure to pay attention to when analyzing the performance of a fund.

When analyzing the performance of mutual funds, it can make sense to look at metrics other than NAV alone, like investment yield and the funds’ total return. The total return considers capital gains and losses from all of the securities the fund invests in, as well as the dividends and interest earned by the fund, minus the fund’s expenses.

The Takeaway

Net asset value, or NAV, is a daily calculation that can track the value of a mutual fund, ETF, or money market fund. But while this figure can be helpful to gauge a fund’s performance, it isn’t the only metric that investors should consider. Total return, yield, and fees are also important figures when making mutual fund investing decisions.

Remember that NAV itself doesn’t tell an investor everything that they need to know, but is just one metric or data point that can be used along with an array of others to analyze funds.

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

FAQ

Is net asset value the same as price?

NAV and share price are two different things. Net asset value is the value of the investments within a fund, or the value of a portion of the fund. The share price of a fund, though it may be related, is different from that value.

Why is net asset value important?

Net asset value is important for investors because it describes the total equity or value of a fund. It can help determine the value a share of a fund has, and can help investors evaluate the overall value of an investment.

Is high NAV good or bad?

NAV on its own doesn’t tell investors a whole lot, so whether NAV is high may not be good or bad. What’s more important is how high a fund’s NAV is relative to other metrics, which may include its market price.

Is it good to invest when NAV is down?

If a fund’s NAV is down, that could be a sign that the fund’s performance is suffering. But it doesn’t necessarily mean that it’s a good time to invest in that fund, or a bad time to do so – other metrics must be considered along with NAV, at any given time, to determine whether an investor wants to alter their position.

What is an example of a NAV?

An example of NAV could be $18, and that would be calculated looking at a fund’s underlying securities. You’d need to rope in assets and liabilities, and calculate accordingly to find NAV. Again, $18 is just an example, as NAV could be any dollar figure as it relates to the fund’s assets and liabilities.

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

Apr

2024

Forex Options Trading: How it Works, Types, Examples

By Dan Miller | Growing Wealth, invest, Investing | Comments Off

Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.

Forex options, also called currency options, are contracts that give the purchaser the option to buy foreign currency from the exchange at a specific price on or before a specific date.

Like stock options, there are two different types of forex options: A call option gives the holder the right to buy currency at a specified price (the strike price), while the holder of a put option has the right to sell a currency at a predetermined price.

Those investing in foreign countries may use forex options as a way to hedge against unfavorable fluctuations of foreign currencies or to speculate on volatility.

What Is Forex Options Trading?

Like options in the stock market, currency options are a derivative instrument. In this case, the underlying asset is a foreign currency pair. Currencies (also known as FX or forex) are generally traded in pairs. One major currency pair, for example, is EUR/USD, which indicates the value of the euro against the U.S. dollar.

Foreign currency options are a way to invest in foreign currency markets without trading in the actual currencies themselves.

💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.

How Forex Options Trading Works

If you understand how to trade options in the stock market, currency options work in a similar manner. Buying a currency call option gives you the right (but not the obligation) to purchase a particular foreign currency at a specified price (the strike price) at any time before its expiration date.

A currency put option works in a similar way, except that the buyer has the right (but not the obligation) to sell a currency at a given price before the expiration of the option.

You can also purchase combinations of both put and call options at different strike prices and/or different expiration dates, depending on how you think the market will move. You can always close out your position before the options expire. Owning options gives you exposure to movements in the exchange rate without having to actually purchase the currency.

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Types of Forex Options Available

The most basic currency options come in two types: so-called ‘vanilla’ calls and puts.

Vanilla Call and Put Options

A forex call option gives the holder the right (but not the obligation) to purchase a given currency at a specific price, any time on or before the option’s expiration date. You would generally buy a forex call option if you have a bullish outlook on a particular currency.

A forex put option works in the opposite manner. If you hold a put option, you have the right (but not the obligation) to sell a specific currency at a particular price before the options expire.

Purchasing a put option is something that you would do if you have a bearish outlook on the underlying currency.

SPOT Options

Another type of currency option is single payment options trading (SPOT). With a SPOT option, an investor and broker can set more detailed conditions for the option to pay out. These conditions are either met, or not. Because there are only two possible outcomes upon the option expiring, these options are sometimes called binary currency options.

Example of Trading Forex Options

If an investor expects the value of a currency will fall, they may choose to buy a put option to earn the right (but not the obligation) to sell the currency in question at a predetermined price during a set timeframe.

For example, if a U.S. investor expects the euro will fall in value against the U.S. dollar, they may buy a EUR/USD put option. Essentially, the option can help the option holder protect themselves against depreciation of a given currency.

💡 Quick Tip: Options can be a cost-efficient way to place certain trades, because you typically purchase options contracts, not the underlying security. That said, options trading can be risky, and best done by those who are not entirely new to investing.

Benefits and Risks of Forex Options Trading

Here are some of the pros and cons of trading forex options:

Benefits

Using forex options can be a cost effective way to potentially help hedge an investors’ portfolio against currency risk. For example, an investor who owns foreign stocks may consider investing in local currencies via options to reduce currency risk. Investors may want to weigh the option’s premium, as well as risk against possible outcomes.

Risks

Like any investment, trading currency options comes with a set of risks. Options are complex, high-risk instruments that require investors to understand how they work.

Currency values may fluctuate based on macroeconomic events, economic data, or political events. This means that FX options investors must bear in mind the risk profile of particular countries, as well as that of their own portfolio. Because currencies react to interest rates, trading currency options also bears interest rate risk. Traders who use leverage to potentially earn higher profits with less money, also risk losing more than their initial investment.

Benefits	Risks
Using forex options is a low-cost way to potentially hedge against adverse currency moves.	The price of currencies can be extremely volatile.
Using leverage, there is the potential for higher profits with less money invested.	Political risk as currency markets react to local governments’ policies.
You have many different ways to trade depending on your market outlook.	Options may be less liquid than the currencies themselves.

The Takeaway

Trading forex options can be a way for you to invest in the foreign currency market without actually owning the currency itself. You can use call options, put options, or a combination based on how you think the market will perform.

Investors who are ready to try their hand at options trading despite the risks involved, might consider checking out SoFi’s options trading platform offered through SoFi Securities, LLC. The platform’s user-friendly design allows investors to buy put and call options through the mobile app or web platform, and get important metrics like breakeven percentage, maximum profit/loss, and more with the click of a button.

Plus, SoFi offers educational resources — including a step-by-step in-app guide — to help you learn more about options trading. Trading options involves high-risk strategies, and should be undertaken by experienced investors. Currently, investors can not sell options on SoFi Active Invest®.

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

FAQ

What are some types of forex options?

The two kinds of forex options are call options and put options. A call option allows the holder to buy the specified currency at a given strike price, while a put option allows the holder to sell a given currency at a particular price. There are also SPOT, or binary currency options.

What is a forex call option?

A forex call option allows the holder to buy a specific currency at a specific price, on or before the expiration date.

How are forex options settled?

If you hold a currency option that is in the money at expiration, there are two possibilities for settlement. You can settle the option with cash or by a physical delivery of currency. If you are short an in-the-money option at expiration, you may need to deposit cash into your account to settle your account.

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Apr

2024

How to Save for Retirement

By Pam O’Brien | Budgeting & Goals, invest, Preparing for Retirement | No Comments

Between paying for your regular expenses including groceries, rent or mortgage, student loans, and bills, it can seem nearly impossible to find a few dollars left over for saving for retirement — especially when that might be decades away. However, building up a nest egg isn’t just important, it’s urgent. The sooner you start, the more financially secure you should be by the time retirement rolls around.

So, how to save for retirement? Finding a solid retirement plan to suit your needs may be easier than you think. Here are 10 ways to save for retirement to help make those golden years feel, well, golden.

This article is part of SoFi’s Retirement Planning Guide, our coverage of all the steps you need to create a successful retirement plan.

Assess Your Retirement Goals and Needs

When it comes to saving for retirement, first do an inventory of your current financial situation. This includes your income, savings, and investments, as well as your expenses and debts. That way you’ll know how much you have now.

Next, figure out what you want your retirement to look like. Are you wondering how to retire early? Do you plan to travel? Move to a different location? Pursue hobbies like tennis, golf, or biking? Go back to school? Start a business?

You may not be able to answer these questions quickly or easily, but it’s important to think about them to determine your retirement goals. Deciding what you want your lifestyle to look like is key because it will affect how much money you’ll need for retirement saving.

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Determine How Much You’ll Need to Retire

Now the big question: How much money will it take for you to retire comfortably? You may also be wondering, when can I retire? There are several retirement savings formulas that can help you estimate the amount of your nest egg. And there are various calculators that can help generate an estimate as well.

While using a ballpark figure may not sound scientific, it’s a good exercise that can help lay the foundation for the amount you want to save. And it may inspire you to save more, or rethink your investment strategy thus far.

As an example, you can use the following basic formula to gauge the amount you might need to save, assuming your retirement expenses are similar to your present ones. Start with your current annual income, subtract your estimated annual Social Security benefits, and divide by 0.04.

Example

Let’s say your income today is $100,000, and you went on the Social Security website using your MySSA account (the digital dashboard for benefits) to find out what your monthly benefits are likely to be when you retire: $2,000 per month, or $24,000 per year.

$100,000 – $24,000 = $76,000 / 0.04 = $1.9 million

That’s the target amount of retirement savings you would need, theoretically, to cover your expenses based on current levels. Bear in mind, however, that you may not need to replace 100% of your current income, as your expenses in retirement could be lower. And you may even be contemplating working after retirement. But this is one way to start doing the math.

10 Ways to Save For Retirement

So, how to save money for retirement? Consider the following 10 options part of your retirement savings toolkit.

1. Leverage the Power of Time

Giving your money as much time to grow as you possibly can is one of the most important ways to boost retirement savings. The reason: Compounding returns.

Let’s say you invest $500 in a mutual fund in your retirement account, and in a year the fund gained 5%. Now you would have $525 (minus any investment or account fees). While there are no guarantees that the money would continue to gain 5% every year — investments can also lose money — historically, the average stock market return of the S&P 500 is about 10% per year.

That might mean 0% one year, 10% another year, 3% the year after, and so on. But over time your principal would likely continue to grow, and the earnings on that principal would also grow. That’s compound growth.

2. Create and Stick to a Budget

Another important step in saving for retirement is to create a budget and stick to it. Calculating your own monthly budget can be simple — just follow these steps.

• Gather your documents. Gather up all your bills including credit cards, loans, mortgage or rent, so that you can document every penny coming out of your pocket each month.

• List all of your income. Find your pay stubs and add up any extra cash you make on the side using your after-tax take-home pay.

• List all of your current savings. From here, you can see how far you have to go until you reach your retirement goals.

• Calculate your retirement spending. Decide how much money you need to live comfortably in retirement so that you can establish a retirement budget. If you’re unsure of what your ideal retirement number is, plug your numbers into the formula mentioned above, or use a retirement calculator to get a better idea of what your retirement budget will be.

• Adjust accordingly. Every few months take a look at your budget and make sure you’re staying on track. If a new bill comes up, an expensive life event occurs, or if you gain new income, adjust your budgets and keep saving what you can.

3. Take Advantage of Employer-Sponsored Retirement Plans

Preparing for retirement should begin the moment you start your first job — or any job that offers a company retirement plan. There are many advantages to contributing to a 401(k) program (if you work at a for-profit company) or a 403(b) plan (if you work for a nonprofit), or a 457(b) plan (if you work for the government).

In many cases, your employer can automatically deduct your contributions from your paycheck, so you don’t have to think about it. This can help you save more, effortlessly. And in some cases your employer may offer a matching contribution: e.g. up to 3% of the amount you save.

Starting a 401(k) savings program early in life can really add up in the future thanks to compound growth over time. In addition, starting earlier can help your portfolio weather changes in the market.

On the other hand, if you happen to start your retirement savings plan later in life, you can always take advantage of catch-up contributions that go beyond the 2024 annual contribution limit of $23,000 and 2023 annual contribution limit of $22,500. Individuals 50 and older are allowed to contribute an additional $7,500 a year to a 401(k), to help them save a bit more before hitting retirement age.

If you have a 403(b) retirement plan, it’s similar to a 401(k) in terms of the contribution limit and automatic deductions from your paycheck. Your employer may or may not match your contributions. However, the range of investment options you have to choose from may be more limited than those offered in a 401(k).

With a 457(b) plan, the contribution limit is similar to that of a 403(b). But employers don’t have to provide matching contributions for a 457(b) plan, and again, the investment options may be narrower than the options in a 401(k).

4. Add an Individual Retirement Account (IRA) to the Mix

Another strategy for how to save for retirement, especially if you’re one of the many freelancers or contract workers in the American workforce, is to open an IRA account.

Like a 401(k), an IRA allows you to put away money for your retirement. However, for 2024 the maximum contribution you can put into your IRA caps at $7,000 ($8,000 for those 50 and older). For 2023 the maximum contribution you can put into your IRA caps at $6,500 ($7,500 for those 50 and older).

Both the traditional IRA and 401(k) offer tax-deductible contributions. Roth IRAs are another option: With a Roth IRA, your contributions are taxed, which means your withdrawals in retirement will be tax free.

You control your IRA, not a larger company, so you can decide which financial institution you want to go with, how much you want to contribute each month, how to invest your money, and if you want to go Roth or traditional.

For those who can afford to invest money in both an IRA and a 401(k), and who meet the necessary criteria, that’s also an option that can boost retirement savings.

5. Deal With Debt

Should you save for retirement or pay off debt? And, more specifically, if you’re dealing with student loans, you may be wondering, should I save for retirement or pay off student loans? That is a financial conundrum for modern times. A good solution to this problem is to do both.

Just as it can be helpful to create a budget and stick to it, it can be helpful to create a loan repayment plan as well. Add those payments to your monthly budgeting expenses and if you still have dollars left over after accounting for all your bills, start socking that away for retirement.

If your student loan debt feels out of control, as it does for many Americans, you may want to look into student loan refinancing. By refinancing your student loan, you could significantly lower your interest rate and potentially pay off your debt faster. Once the loan is paid off, you will be able to reallocate that money to save for retirement.

6. Add Income With a Side Hustle

Working a side gig in your spare time can seriously pay off in the future, especially when you consider that the average side hustle can bring in several hundred dollars a month, according to one survey.

There are several things to consider when thinking of adding an extra job to your résumé, including evaluating what you’re willing to give up in order to make time for more work. But, if you can put your skills to use — such as copy editing, photography, design, or consulting — you can think about this as less of a side hustle and more of a way to hone your client list.

A side hustle should be one way to save for retirement that you’ll enjoy doing. And it could help if you find yourself dealing with a higher cost of living and retirement at some point.

7. Consider Putting Your Money in the Market

There’s no one best way to save for retirement — sometimes a multi-pronged approach can work best. If you already have a budget and an emergency savings account, and you’re maxing out your contributions to your 401(k), 403(b), 457, or IRA, then investing in the market could be another way to diversify your portfolio and potentially help build your nest egg. For instance, historically, stocks have been proven to be one of the best ways to help build wealth.

Putting your money in the market means you’ll have a variety of options to choose from. There are stocks, of course, but also mutual funds, exchange-traded funds, and even real estate investment trusts (REITs), which pool investor assets to purchase or finance a portfolio of properties.

However, investing in any of these assets, and in the market in general, comes with risk. So you’ll want to keep that in mind as you choose what to invest in. Consider what your risk tolerance is, how much you’re investing, when you’ll need the money, and how you might diversify your portfolio. Carefully weighing your priorities, needs, and comfort level, can help you make informed selections.

Once you have your asset allocation, be sure to evaluate it, and possibly rebalance it, to stay in line with your goals each year.

8. Automate Your Savings

Setting up automated savings accounts takes the thought and effort out of saving your money because it happens automatically. It could also help you hit your financial goals faster, because you don’t have to decide to save (or agonize over giving in to a spending temptation) and then do the manual work of putting the money into an account. It just happens like clockwork.

Enrolling in a 401(k), 403(b), or 457 at work is one way to automate savings for retirement. Another way to do it is to set up direct deposit for your paychecks. You could even choose to have a portion of your pay deposited into a high-interest savings account to help increase your returns.

9. Downsize and Cut Costs

To help save more and spend less, pull out that monthly budget you created. When you look at your current bills vs. income, how much is left over for retirement savings? Are there areas you can be spending less, such as getting rid of an expensive gym membership or streaming service, dialing back your takeout habit, or shopping a bit less?

This is when you need to be very honest with yourself and decide what you’re willing to give up to help you hit that target retirement number. Finding little ways to save for retirement can have a big impact down the road.

10. Take Advantage of Catch-Up Contributions

If you’re getting closer to retirement and you haven’t started saving yet, it’s not too late! In fact, the government allows catch-up contributions for those age 50 and older.
A catch-up contribution is a contribution to a retirement savings account that is made beyond the regular contribution maximum. Catch-up contributions can be made on either a pre-tax or after-tax basis.

For 2023 and 2024, catch-up contributions of up to $7,500 are permitted on a 401(k), 403(b), or 457(b).

💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.

Common Retirement Savings Mistakes to Avoid

These are some of the biggest retirement pitfalls to watch out for.

• Not having a retirement plan in place. Neglecting to make any kind of plan means you’ll likely be unprepared for retirement and won’t have enough money for your golden years.

• Failing to take advantage of employer-sponsored plans. If you haven’t enrolled in one of these plans, you’re potentially leaving free money on the table. Sign up for a 401(k), 403(b), or 457(b) to tap into employer-matching contributions, when available.

• Underestimating how much money you’ll need for retirement. Financial specialists typically advise having enough savings to last you for 25 to 30 years after you retire.

• Accumulating too much debt. Try to avoid taking on too much debt as you get closer to retirement. And work on paying down the debt you do have so you won’t be saddled with it when you retire.

• Taking Social Security too early. It’s possible to file for Social Security at age 62, but the longer you wait (up until age 70), the higher your benefit will be — approximately 32% higher, in fact.

The Takeaway

It’s never too early to start planning for retirement. And there are many ways to start saving, and set up a system so that you’re saving steadily over time. You can contribute to a retirement plan that your employer offers; you can set up your own retirement plan (e.g. an IRA); and you can choose your own investments.

The most important thing to remember is that you have more control than you think. While your retirement vision may change over time, starting to save and invest your nest egg now will give you a head start.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Easily manage your retirement savings with a SoFi IRA.

FAQ

What is the fastest way to save for retirement?

Take a two-pronged approach: First, invest as much as you can in your employer-sponsored retirement account like a 401(k). You’ll likely get some matching contributions from your employer, as well as tax advantages. You can invest up to $23,000 in a 401(k) in 2024 and $22,500 in a 401(k) in 2023, plus an extra $7,500 if you are 50 or older.

Second, if you qualify you can also set up and invest in a Roth IRA. You can contribute $7,000 in a Roth IRA in 2024 and $6,500 in a Roth IRA in 2023 ($7,500 if you’re 50 or older).

Having these two accounts could really help you start building up your retirement savings.

How much do I need to save for retirement?

To estimate how much you need to save for retirement, use this retirement savings formula: Start with your current income, subtract your estimated Social Security benefits, and divide by 0.04. That’s the approximate amount of total retirement savings you’ll need, based on your current income and expenses. You can try other calculators or formulas that might indicate that you’ll need less in retirement. It all depends.

Financial professionals typically advise having enough savings for 25 to 30 years’ worth of retirement.

How do I save for retirement without a 401(k)?

If you don’t have a 401(k), you can set up another type of tax-advantaged account for retirement, such as a traditional IRA and/or a Roth IRA. With a traditional IRA, the money grows tax free and is taxed when you withdraw it during retirement.

A Roth IRA, on the other hand, doesn’t provide a tax break upfront, but the funds you withdraw after age 59 ½ are tax free, as long as you’ve had the Roth IRA account for at least five years. You can contribute up to $7,000 to both types of IRAs for 2024 and $6,500 to both types of IRAs for 2023 ($7,500 if you’re 50 or older).

What is the average monthly income for a person who is retired?

The average monthly retirement income for a person who is retired, adjusted for inflation, is $4,381, according to a 2022 U.S. Census report.

How do taxes affect retirement income?

You will need to pay taxes on any withdrawals you make from tax-deferred investments like a 401(k) or traditional IRA. You will also have to pay federal taxes on a pension, if you have one. At the state level, some states tax pensions and some don’t. Additionally, you might have to pay tax on a portion of your Social Security benefits, depending on your overall income.

How can I supplement my income in retirement?

In addition to any retirement plans and pensions you have plus Social Security, you can supplement your retirement income with such strategies as: making investments generally considered to be safe, like investing in CDs (certificate of deposit), getting a part-time job or starting a small business, or renting out any additional property you might own, such as a vacation cabin, to make some extra money.

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.

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

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How Does Impact Investing Work?

Characteristics of Impact Investments

Impact Investing vs Socially Responsible Investing

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Why Is Impact Investing Important?

Examples of Impact Investing

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Evaluation Methods for Impact Investors

How to Start an Impact Investment Portfolio

The Takeaway

How to Invest in Farmland

Why Invest in Farmland?

4 Ways to Invest in Farmland

1. Agriculture Stocks

2. Agriculture ETFs and Mutual Funds

3. Farm REITs

4. Commodities

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Benefits and Risks of Investing in Agriculture

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Net Asset Value (NAV): What It Means, Formula, Example

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FAQ

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Is high NAV good or bad?

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Forex Options Trading: How it Works, Types, Examples

What Is Forex Options Trading?

How Forex Options Trading Works

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Types of Forex Options Available

Vanilla Call and Put Options

SPOT Options

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Benefits

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FAQ

What are some types of forex options?

What is a forex call option?

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How to Save for Retirement

Assess Your Retirement Goals and Needs

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Determine How Much You’ll Need to Retire

10 Ways to Save For Retirement

1. Leverage the Power of Time

2. Create and Stick to a Budget

3. Take Advantage of Employer-Sponsored Retirement Plans

4. Add an Individual Retirement Account (IRA) to the Mix

5. Deal With Debt

6. Add Income With a Side Hustle

7. Consider Putting Your Money in the Market

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