Credit cards and personal information can (and do) get hacked or stolen. Because of this unfortunate reality, it’s important to know how to freeze your credit. A credit freeze can help prevent identity theft or obstruct bad actors from taking out new loans or accounts in a borrower’s name.
Freezing credit isn’t as scary as it might sound. In fact, once you know how to freeze (and unfreeze) your credit, it can be quite useful in the right situations.
What Is a Credit Freeze?
A credit freeze, also known as a security freeze, allows individuals to limit access to their individual credit report. By freezing their credit, the person makes it more difficult for an identity thief to open a new credit account or loan in their name. This is due to the fact that creditors generally review credit reports before okaying new lines of credit, known as a hard credit inquiry.
However, freezing one’s credit does not prevent a person from viewing their free annual credit report. Moreover, it won’t restrict a person from opening a new account in their own name. They’ll simply need to unfreeze their credit to do so (more on unfreezing later).
A credit freeze does not actually freeze all outstanding accounts, such as credit cards and loans. Instead, it simply limits others from viewing a person’s credit reports. Under a credit freeze, only a limited number of entities will still be able to view a person’s file, including creditors for accounts that individual already holds and certain government entities.
This means that credit bureaus can’t give out personal information about a borrower with a frozen account to new lenders, landlords, hiring managers, or credit card companies. Typically, this halts the lending, renting, and hiring process — as well as anyone attempting to steal a person’s identity and open a new account in their name.
Freezing Credit: What’s the Process?
If a person wants to freeze their credit, they need to reach out to at least the three major credit bureaus:
Typically, the agencies will ask for a Social Security number, birth date, and other information confirming a person’s identity prior to freezing their account. The bureaus will then give the person a password, which they may use to unfreeze their account. Make sure to store this information in a safe place.
Does Freezing Credit Cost Anything?
It costs nothing to freeze and unfreeze one’s credit. This is thanks to the Economic Growth, Regulatory Relief, and Consumer Protection Act, which mandates that credit bureaus must offer the service free of charge to everyone.
The credit bureaus must fulfill the request within one business day when a consumer requests a freeze through any method aside from mail. When consumers request to lift the freeze by phone or online, however, the credit bureaus must do so within one hour. This frees up the consumer to quickly do what they may need to do, whether that’s applying for a new apartment or one of the various types of personal loans.
Differences Between a Credit Lock and a Credit Freeze
A credit lock works in much the same way as a credit freeze, allowing consumers to protect their credit reports against bad actors. But, a credit lock can come with a bit more convenience, as borrowers can opt to open and close their locked credit via an app (rather than needing to reach out to each credit bureau with their password to unfreeze it).
While a credit freeze is complimentary thanks to the federal mandate, a credit lock may require paying a small fee. For example, Equifax offers credit locks for free, while TransUnion offers a free lock with its TrueIdentity product or as an add-on to other subscription services. Experian, meanwhile, only offers credit lock as part of a paid subscription.
Just as you’d crunch the savings numbers with a personal loan calculator, make sure to weigh the costs and benefits between these two options as well.
When to Consider a Credit Freeze
It’s really up to individual consumers and their own risk tolerance to decide when it’s time to freeze their credit report. That being said, if a person isn’t actively shopping for a personal loan or a new credit card, for instance, it may be a good idea to freeze their credit preemptively. This way, a consumer can feel a bit more confident that their credit information is in safe hands.
Another time to consider a credit freeze is when a borrower believes their data may have been breached, or if their Social Security number was recently disclosed, made public, or stolen.
How to Unfreeze Your Credit
Unfreezing credit is simple. All a consumer has to do is reach out to the credit bureaus by phone or online and plug in the password or PIN provided to them when they first froze their credit. Generally, it takes a few minutes for the account to become unfrozen.
A person can choose to unfreeze their report at one or all of the credit bureaus, but they will have to contact each individual credit bureau separately. They also need to go through the entire process again if they ever want to re-freeze their credit down the road.
Individuals can ask to unfreeze their credit for a specific amount of time, such as if they are applying for and hoping to get approved for a personal loan or need someone else to access their account temporarily. Then, the freeze should return automatically when that period ends.
Alternatives to Freezing Credit
While not overly complex, freezing and unfreezing one’s credit can be time-consuming. Additional options are available to consumers.
Setting Up Credit Monitoring
Those who aren’t interested in freezing their accounts might instead consider signing up for a credit monitoring service. While these services charge a fee, they’ll alert users to any and all activity on their credit report. So, any time someone requests information, the person would find out and could then confirm or deny the authenticity of the request.
This could help stop any potential identity theft in its tracks. Still, it should be noted that this service cannot fully prevent theft, and the consumer may not know their identity was stolen until after the fact.
Requesting a Credit Report
For those interested in monitoring their credit for free, it’s possible to request a no-cost copy of one’s credit report each year from all of the major credit bureaus. The consumer might then review the report, in detail, to ensure they recognize all of the activity and accounts described.
If the consumer spots anything out of line, they can then take steps to flag and fix it.
Consolidating Credit Card Debt
Another way that some consumers choose to keep track of their credit is by consolidating credit card debt with a personal loan from a private lender. Taking out an unsecured personal loan with SoFi, for instance, could help substantially lower the amount a person pays each month to different credit card companies.
By consolidating credit card debt into a single personal loan — one of the common uses for personal loans — a borrower may be able to take advantage of a single fixed-rate debt rather than juggling several high-interest rate cards. Additionally, having a single loan to repay each month can make it easier to monitor payment activity.
Want to keep all of your debt in one easy to understand place? Learn more about consolidating credit card debt with a SoFi personal loan.
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.
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
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.
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.
Whether you are first taking the reins of your financial life or have been managing your money for years, you probably know that compound interest can be a powerful tool in growing your wealth. It can be among the reasons why the money you save today can grow much larger as time passes.
It’s pretty common to hear the advice that you should start saving as soon as possible, especially when it comes to stashing away cash for retirement. It can, however, be challenging to accomplish that with all the other expenses that crop up, from student loan debt to high housing costs to inflation hitting you hard at the supermarket.
But even if you can only save a little, you should start as soon as you can. Because the longer you save, the more time you have to watch compound interest work its magic. Here, you’ll learn all about this important financial force, including:
• What is compound interest?
• How does compound interest work?
• What are types of compound interest savings accounts?
• What are the pros and cons of compound interest?
What Is Compound Interest?
Compound interest is a method by which interest is added to money on deposit (the principal). To put it simply, compound interest is interest that is earned on the initial principal and the interest that accrues on it. So if you were to deposit, say, $200 in a savings account and it earned interest of $5 in its first month, the next month of compound interest would be accrued on $205, or the principal plus the interest earned.
Compound interest can allow individuals to build savings, as the initial investment and interest payments grow almost like a snowball rolling downhill, getting bigger and bigger.
When talking about interest and how it works, you are likely to hear the terms simple interest and compound interest. Comparing the two can be a good way to illuminate what compound interest is.
Simple vs Compound Interest: What’s the Difference?
Simple interest is when interest is paid strictly on the base amount. Let’s say you were to deposit $10,000 in a bank for one year at a rate of 5%. With simple interest, at the end of the year, you would have the $10,000 principal plus $500 in interest, for a total of $10,500.
With compound interest, however, your money would grow faster. If the interest were compounded daily, at the end of the year you would have $10,512.67, and a year later, you would have $11,051.63, while simple interest would yield a total of $11,000. While it may not sound like a huge difference early on, the results are amplified over time and with ongoing deposits.
Can be calculated at different intervals, including daily, monthly, quarterly, and annually
Interest rates typically are fixed, depending on the institution
Interest rates may vary, depending on the account type
Types of Compound Interest Savings Accounts
Remember, a good interest rate for a savings account is important, but so is the way that the interest accrues. If you are looking for what is known as a compound interest savings account, you will likely have an array of options. Among the different types of savings accounts that can accrue compound interest are:
• Standard savings accounts. These are your basic savings accounts that earn interest and may restrict the number of withdrawals you make per month.
• High-yield savings accounts. High-yield savings accounts typically pay a significantly higher interest rate than conventional accounts. You may often find them offered by online banks.
• Premium savings accounts. These typically have higher account minimum requirements to snag a higher interest rate and other services and features.
• Certificate of deposit (or CD) accounts. Certificates of deposit require you to keep your funds on deposit for a specific term and typically have a fixed interest rate, though there are exceptions to that rule.
• Money market accounts. These often combine features of a checking and savings account.
• IRA accounts, or Individual Retirement Accounts. IRA accounts allow you to save money for retirement in a way that is tax-advantaged.
Earn up to 4.00% APY with a high-yield savings account from SoFi.
No account or monthly fees. No minimum balance.
9x the national average savings account rate.
Up to $2M of additional FDIC insurance.
Sort savings into Vaults, auto save with Roundups.
The Compound Interest Formula
If you want to get technical, there’s a compounding interest formula you can use to calculate savings account interest:
A = P(1+r/n)nt
Let’s break this down. “A” is the final amount of money you’ll end up with. “P” is the principal, or original amount deposited. The “r” is the interest rate as a decimal, so 0.1 for 10%. The “n” is the number of times interest compounds each year, and “t” is the number of years you’re looking at.
The “n” in the formula above — how often interest gets compounded — makes a big difference. If interest is compounded monthly instead of yearly, for example, that can really change things.
Compound Interest Example
Here’s a hypothetical scenario in which $5,000 is deposited and receives a very healthy 10% interest rate that’s compounded annually. After the first year, the account would earn $500. But starting with the second year, the 10% interest would be calculated based on the new amount of $5,500, not just the original $5,000.
Future Value of $5,000 Deposit Compounded Yearly at 10%
Year
Investment
Interest Earned (10%)
New Balance
1
$5,000
$500
$5,500
2
$5,500
$550
$6,050
3
$6,050
$605
$6,650
4
$6,650
$665.50
$7,310.50
5
$7,310.50
$731.55
$8,042.05
6
$8,042.05
$804.21
$8,846.26
7
$8,846.26
$884.63
$9,730.89
8
$9,730.89
$973.09
$10,703.98
9
$10,703.98
$1,070.40
$11,774.38
10
$11,774.38
$1,177.44
$12,951.82
The numbers add up quickly. After 10 years, the account would be worth around $12,951.82. (If you want to see how this works for yourself, an online compound interest calculator can generate hypothetical results depending on the initial deposit, interest rate, additional contributions, and length of time.)
The Rule of 72
Another simple and helpful formula that might be used to estimate compound interest is known as the Rule of 72. This calculation can allow individuals to look at their rate of return, estimating how long it may take before they double their money (with a fixed rate).
For the Rule of 72, it’s possible to divide 72 by the fixed interest rate. In this sort of calculation, the interest rate percentage would be represented by a numeral — not as a decimal. Say an individual has $1,000 that they want to save at a 3% interest rate. To use the Rule of 72, they might divide 72 by the numeral three to find that it could take 24 years to double the principal at this rate.
The Rule of 72 could be a useful tool when deciding quickly between savings accounts or other financial products that offer different possible returns.
While saving early helps you take advantage of compound interest, so does saving regularly. Say after starting an emergency fund savings account with an initial deposit, you add money each year. That will give compounding interest the chance to grow your funds even further.
Getting results via compound interest doesn’t mean you need to have $5,000 to deposit today. Even small contributions can make a difference. The earlier you start saving and the more time you have, the more of a chance compound interest has to help build your wealth.
To illustrate, let’s revisit the equation above with a smaller hypothetical initial deposit. Let’s say $500 is contributed to a savings account today, compounded annually at 10%, and nothing else was done for 10 years. At the end of that time, the account would have:
A = 500 (1+0.1/1)(1*10)
A = 500 * 1.110
A = 500 * 2.5937424601
A = $1,296.87
But if you wait 40 years, you get a different answer:
A = 500 (1+0.1/1)(1*40)
A = 500 * 1.140
A = 500 * 45.2592555682
A = $22,629.63
That’s quite a jump! And all it took was time.
If you were also to add just $50 a month to that initial $500 contribution, you’d have around $10,860 in 10 years. And after 40 years? You’d have $288,185. Even adding small amounts, especially consistently over time, can pay off, depending on the rate of interest and how often it is compounded.
The pros and cons of compound interest can depend significantly on whether you are earning compound interest or paying it.
On the plus side:
• Compound interest can help your money on deposit grow more quickly, thanks to its “snowball effect” of your interest earning interest.
• The sooner you begin saving with compound interest, the longer you have to reap its benefits of helping your money increase.
However, there can be a downside to compound interest:
• If you are paying compound interest on some kind of debt, you may find it challenging to pay off what you owe since the interest can increase so swiftly.
Making the Most of Compound Interest
Compound interest, on its own, can boost savings. Yet, there are other ways individuals can make more out of this financial strategy.
Saving early and often really matters. Time is compound interest’s “special sauce.” Compounding interest grows exponentially over time. So, the longer an individual can leave their money untouched, the more potential it has to grow.
Try these tactics to increase the power of compound interest:
• Making additional contributions: Whenever they’re possible, extra contributions add to an individual’s principal (the money that accrues earnings), increasing the total savings on which they’ll gain interest and speeding up their potential financial goals.
Consider a person who tucks away $1,000 for 20 years at a 6% return (compounding annually). At the end of that period, they will have roughly $3,200. If the same person made an additional monthly contribution of $100, at the end of the period they could have over $47,000.
• Avoiding making withdrawals: Removing money from an account slows the effects of compounding interest, as it reduces the amount of money on which an individual could earn returns.
• Checking interest and return rates: The higher the rate of the return, the greater the impact it will have on your savings. You may want to consider this factor when choosing savings accounts (or other financial products). The average savings account offers relatively low interest rates — around 0.33% in mid-February of 2023. Looking for a high-yield savings account, where the interest rate can be many multiples of that (say, 13 times higher), can be a smart move.
Stock market investments may offer much higher returns as well, up to an average of 10% to 12%. But keep in mind that there’s always the risk that these investments will lose money, given market volatility.
The Takeaway
Compound interest vs. simple interest is a way to earn interest on your money’s principal as well as the interest itself. It can be a good way to accelerate your savings, especially long-term ones. Many different savings vehicles offer compounded interest; check to see the frequency as the shorter the compounding window (say, daily vs. quarterly), the more your money can grow.
Opening an online bank account with SoFi can be a good way to harness the power of compound interest.With a SoFi Checking and Savings account, you’ll also earn a competitive annual percentage yield (APY) and pay no account fees, all of which can help your money grow faster. Plus, you’ll enjoy the convenience of spending and saving in one convenient place.
Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.00% APY on SoFi Checking and Savings.
FAQ
How much do people typically make in compound interest?
There is no typical amount that people make in compound interest because there are several variables involved: the principal, the interest rate, how long the interest accrues for, and how often it is compounded. To check specific scenarios, you can use an online compound interest calculator.
Is it better to have simple or compound interest?
If you are depositing money and hoping to have it grow over time, earning compound interest vs. simple interest will help it grow faster. However, if you are paying interest on a debt, simple interest will accrue more gradually and therefore be easier to pay off.
Do all banks offer compound interest savings accounts?
Many banks offer savings accounts with compound interest. It can be worthwhile to check to see how often the interest is compounded: daily, monthly, quarterly, or annually. The more frequent the compounding, the faster your money will grow.
SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.
As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.
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.
If you find yourself struggling with debt, it’s important to understand what may happen to your debt so you can better work through the situation. Along the way, you may come across either a debt buyer or a debt collector. Both of these services are used by lenders, like banks, to move debts off of their liability balance sheets.
While these two services may sound similar, a debt buyer vs. collector performs different tasks. Debt buyers purchase past-due accounts from lenders, whereas debt collectors work on behalf of whoever owns the debt in an attempt to get the borrower to pay.
When and Why Do Companies Sell Your Debt?
A borrower will likely only ever deal with the company they’re borrowing from — so long as they make payments on their debt regularly and on time. However, if the borrower does not make timely payments, the debt may get sold to a third party, known as a debt buyer.
The lender will sell the debt in an effort to lower their liability. There’s no real timetable for when debt may be sold or go into collections — it can depend on the state you live in, the lender’s policies, and the type of debt it is. Debt collectors can then attempt to collect the debt from the debtor.
What Is a Debt Buyer?
Technically a type of debt collector, a debt buyer is a company that purchases past-due accounts from a business, such as a bank. They typically purchase the debt for a small percentage of what’s actually due to the original lender. The amount a debt buyer pays for debt can vary, but it’s often just cents on the dollar.
For example, a debt buyer may only pay $100 for a $1,000 debt from the original lender. This means that if the new debt buyer actually collects the debt they purchased, they will make a $900 profit. Debt buyers can typically purchase older debt for even lower amounts because it’s less likely to actually get collected.
Debt buyers don’t typically do this as a one-off purchase. Instead, they’re usually in the business of purchasing many delinquent debts at once to increase their odds of turning a profit. This strategy has the potential to be quite lucrative. If, for example, a debt buyer purchases 10 different $1,000 debts at $100 apiece, the buyer needs just one person to pay their debt to break even, and just two out of the 10 people to pay their debts to turn a profit.
What Is a Debt Collector?
Debt collectors are third-party companies that collect debts on behalf of other companies. They can attempt to collect debts on behalf of the original lenders, or they can attempt to collect debts for debt buyers.
Debt buying companies may also function as debt collection agencies to collect the debts they’ve purchased. But a debt-buying company can also assign debts to another third-party debt collecting company, paying it a portion of the profit they make when the debt is paid.
To get the debt paid, debt collectors will typically attempt to contact the original debtor through letters and phone calls, letting them know what’s owed and attempting to convince them to pay the debt. Collectors will often use the internet to find a person or even go as far as hiring a private investigator. Debt collectors also can look into a person’s other financial information, such as their bank or brokerage accounts, to assess if they’re theoretically able to repay their debts.
However, a debt collector typically cannot seize paychecks. The only way a collector may be able to seize a paycheck or garnish wages is if there is a court order, known as a judgment, requiring the debtor to pay. For this to happen, the debt collector must first take the debtor to court within the debt’s statute of limitations and win the judgment. Still, there could be other negative consequences, such as collectors reporting a debtor to credit agencies, which could affect their credit score for some time to come.
Debt collectors often get a bad reputation for using aggressive tactics. The federal government introduced the Fair Debt Collection Practices Act to protect people from predatory practices. The law dictates certain reasonable limitations under which a debt collector can contact the debtor. If the collection company violates the law, the debtor could bring a lawsuit against it for damages.
How to Avoid Collections and Pay Off Debt
Paying off all debt on time is the best way to avoid encountering either a debt buyer or a debt collector. But if you’ve found yourself in debt, don’t despair. Rather, take a bit of time to plot out the best method of repayment for your financial situation, which could entail getting into the nitty gritty of your spending or crunching the numbers with a personal loan calculator.
Here are some of the different strategies to pay off debt you might consider:
• Creating a monthly budget: This can help to track spending and identify potential areas to cut back in order to pay off debts faster. After sitting down and looking through your monthly expenditures, you might be surprised how much fat there is to trim. Then, put all of that extra cash toward paying down your debts.
• Using the snowball or avalanche method: The snowball method focuses on paying off your debts in order of smallest to largest balances, while continuing to pay the minimum due on each debt. With the avalanche method, you’d target the debt with the highest interest rate first while continuing to make minimum payments on other debt balances. In both methods, after the first debt is paid off, the amount that was going toward that debt is put toward the second debt on the list, and so on, thus helping to pay down each consecutive balance as fast as possible.
• Consolidating your debts: Another option to try is consolidating debts with a debt consolidation loan, which is one of the types of personal loan. Typically, a debt consolidation loan offers lower interest rates than credit card interest rates, which can make those debts more affordable and easier to pay off. This is why debt consolidation is among the common uses for personal loans. Plus, with a debt consolidation loan, you’ll just have one monthly payment to stay on top of.
A debt buyer vs. collector plays a different role when it comes to debt, but they are both parties you might encounter if you’re way past due on payments. Debt buyers purchase debt from lenders, often for pennies on the dollar. Meanwhile, debt collectors can take a number of steps in an effort to collect owed debt on a company’s behalf, including reporting that debt to the credit bureaus.
As such, it’s worth taking steps to avoid this situation, whether that’s the debt avalanche method or consolidating your debt with a personal loan. SoFi personal loans offer low fixed rates and no fee options, and make it possible to get out of credit card debt by having a payment end date. Personal loans can be used to pay off credit cards or other high-interest debt. Best of all, it takes just 1 minute to apply.
Want to avoid debt collection? A personal loan with SoFi may help.
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.
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
Investing can seem intimidating, especially for beginners who are just starting out. But building an investment portfolio is one of the best ways to grow your wealth over time.
Before you start pondering what you want to invest in and build an investment portfolio, think this through: Why am I investing? In the end, most of what matters is achieving your financial goals. And what are you saving for? By answering these questions, you can match your goals with your investment strategy — which is important if you want to give yourself a shot at your desired financial outcome.
The Basics: What Is an Investment Portfolio?
An investment portfolio is a collection of investments, such as stocks, bonds, mutual funds, exchange-traded funds (ETFs), real estate, and other assets. An investment portfolio aims to achieve specific investment goals, such as generating income, building wealth, or preserving capital, while managing market risk and volatility.
A well-diversified investment portfolio can help investors achieve their financial objectives over the long term.
Building a balanced investment portfolio matters for several reasons. As noted above, a balanced, diversified portfolio can help manage the risk and volatility of the financial markets. Many people avoid building an investment portfolio because they fear the swings of the market and the potential to lose money. But by diversifying investments across different asset classes and sectors, the impact of any one investment on the overall portfolio is reduced. This beginner investment strategy can help protect the portfolio from significant losses due to the poor performance of any one investment.
Additionally, a balanced portfolio can help investors achieve their long-term investment objectives. By including a mix of different types of investments, investors can benefit from the potential returns of different asset classes while minimizing risk. For example, building a portfolio made up of relatively risky, high-growth stocks and stable government bonds may allow you to benefit from long-term price growth from the stocks while also generating stable returns from the bonds.
What Is Your Risk Tolerance?
When it comes to braving risk, everyone is different. And in life, there are no guarantees. So where does that leave you? Take your risk temperature and see which type of investing you can live (and grow) with. Below are two general strategies many investors follow depending on their risk tolerance.
Aggressive Investing
An aggressive investment strategy is for investors who want to take risks to grow their money as much as possible. High risk sometimes means big losses (but not always). The idea here is to “go for it.” Find investments that feel like they have a lot of potential to generate significant gains.
Your stock picks can ride the rollercoaster, and if you opt for an aggressive investing strategy when you’re young and just starting out, you can watch them take the ride without you doing much hand-wringing.
If it doesn’t work out, you can own the loss and move on. Downturns happen. So do bull markets. And when you’re young, you can likely afford to take risks.
Conservative Investing
Conservative investing is for investors who are leery of losing a lot of their money. It may be better suited for older investors because the closer you get to your ultimate goal, the less room you will have for big drawdowns in your portfolio should the market sell off.
You can prioritize lower-risk investments as you inch closer to retirement. Research investments with more stable and conservative returns. Lower-risk investments can include fixed-income (bonds) and money-market accounts.
These investments may not have the same return-generating potential as high-risk stocks, but often the most important goal is to not lose money.
Choosing a Goal for Your Portfolio
Long- and short-term goals depend on where you are in life. Your relationship with money and investing may change as you get older and your circumstances evolve. As this happens, it’s best to understand your goals and figure out how to meet them ahead of time.
If you’re still a beginner investing in your 20s, you’re in luck. Time is on your side, and when building an investment portfolio, you have that time to make mistakes (and correct them).
You can also potentially afford to take more risks because you’ll have more time to work on reversing losses or at least shrugging them off and moving on.
If you’re older and closer to retirement age, you can reconfigure your investments so that your risks are lower and your investments become more conservative, predictable, and less prone to significant drops in value.
As you go through life, consider creating short and long-term goal timelines. If you keep them flexible, you can always change them as needed. But of course, you’d want to check on them regularly and the big financial picture they’re helping you create.
Short Term: Starting an Emergency Fund
Before you do any serious investing, making sure you have enough money stashed away for emergencies is a good idea. Loss of income, unplanned moves, health situations, auto repairs, and all of those other surprises can tap you on the shoulder at the worst possible time — and that’s when your emergency fund comes in.
It may make sense to keep your emergency money in liquid assets for short-term expenses. Liquidity helps ensure you can get your money if and when you need it. Try to take only a few risks with emergency money because you may not have time to recover if the market experiences a severe downturn.
Long Term: Starting a Retirement Fund
Think about what age you would want to retire and how much money you would need to live on yearly. You can use a retirement calculator to get a better idea.
One of the most frequently recommended strategies for long-term retirement savings is opening a 401(k), an IRA, or both. The benefit of this type of investment account is that they have tax advantages.
Another benefit of 401(k)s and IRAs is that they help you build an investment portfolio over decades: the long term.
Prioritizing Diversification
As mentioned above, portfolio diversification means keeping your money in more than one place: think stocks, bonds, and real estate. And once you diversify into those asset classes, you’ll need to drill down and diversify again within each sector.
Understanding Systematic Risk
Big things happen, like economic uncertainty, geopolitical conflicts, and pandemics. These incidents will affect almost all businesses, industries, and economies. There are not many places to hide during these events, so they’ll likely affect your investments too.
One smart way to fight this: diversify. Spread out. High-quality bonds, like U.S. Treasuries, tend to do well in these environments and have offset some of the negative performances that stocks usually suffer during these times.
It might also be helpful to calculate your portfolio’s beta, the systemic risk that can’t be diversified away. This can be done by measuring your portfolio’s sensitivity to broader market swings.
Understanding Idiosyncratic Risk
Smaller things happen. For instance, a scandal could rock a business, or a tech disruption could make a particular business suddenly obsolete. This risk is more micro than macro; it may occur in a specific company or industry.
As a result, a stock’s value could fall, along with the strength of your investment portfolio. The best way to fight this: diversify. Spread out. If you only invest in three companies and one goes under, that’s a big risk. If you invest in 20 companies and one goes under, not so much.
Owning many different assets that act differently in various environments can help smooth your investment journey, reduce your risk, and hopefully allow you to stick with your strategy and reach your goals.
4 Steps Towards Building an Investment Portfolio
Here are four steps toward building an investment portfolio:
1. Set Your Goals
The first step to building an investment portfolio is determining your investment goals. Are you investing to build wealth for retirement, to save for a down payment on a home, or another reason? Your investment goals will determine your investment strategy.
2. What Sort of Account Do You Want?
Investors can choose several kinds of investment accounts to build wealth. The type of investment accounts that investors should open depends on their investment goals and the investments they plan to make. Here are some common investment accounts that investors may consider:
• Individual brokerage account: This is a standard brokerage account that allows investors to buy and sell stocks, bonds, mutual funds, ETFs, and other securities. This account is ideal for investors who want to manage their own investments and have the flexibility to buy and sell securities as they wish.
• Retirement accounts: These different retirement plans, such as 401(k)s, IRAs, and Roth IRAs, offer tax advantages and are specifically designed for retirement savings. They have contribution limits and may restrict when and how withdrawals can be made.
• Automated investing accounts: These accounts, also known as robo advisors, use algorithms to manage investments based on an investor’s goals and risk tolerance.
Once you have set your investment goals, the next step is to determine your investments based on your risk tolerance. As discussed above, risk tolerance refers to the amount of risk you are willing to take with your investments. If you are comfortable with higher levels of risk, you may be able to invest in more aggressive assets, such as stocks or commodities. If you are risk-averse, you may prefer more conservative investments, such as bonds or certificates of deposit (CDs).
The next step in building an investment portfolio is to choose your asset allocation. This involves deciding what percentage of your portfolio you want to allocate to different investments, such as stocks, bonds, and real estate.
Once you have built your investment portfolio, it is important to monitor it regularly and make necessary adjustments. This may include rebalancing your portfolio to ensure it remains diversified and aligned with your investment goals and risk tolerance.
Paying Off Debt First
Student loans and credit card debt may stand in the way of pumping money into your investment portfolio. Do what you can to pay off most or all of your debt, especially high-interest debt.
Get an aggressive repayment plan going. Also, remember it can be wise to pay yourself first (by that, we mean to keep a steady flow of cash flowing into your short and long-term investments before you pay anything else).
Investing in the Stock Market
Building an investment portfolio is a process that depends on where a person is in their life as well as their financial goals. Every individual should consider long-term and short-term investments and the importance of portfolio diversification when building an investment portfolio and investing in the stock market.
These are big decisions to make. And sometimes you may need help. That’s where SoFi comes in. With a SoFi Invest® online brokerage account, you can trade stocks, ETFs, fractional shares, and more with no commissions for as little as $5. And you can get access to educational resources to help learn more about the investing process.
Take a step toward reaching your financial goals with SoFi Invest.
FAQ
How much money do you need to start building an investment portfolio?
The amount of money needed to start building an investment portfolio can vary depending on the type of investments chosen, but it is possible to start with a small amount, such as a few hundred or thousand dollars. Some online brokers and investment platforms have no minimum requirement, making it possible for investors to start with very little money.
Can beginners create their own stock portfolios?
Beginners can create their own stock portfolios. Access to online brokers and trading platforms makes it easier for beginners to buy and sell stocks and build their own portfolios.
What should be included in investment portfolios?
Experts recommended that investment portfolios should be diversified with a mix of different types of investments, such as stocks, bonds, mutual funds, ETFs, and cash, depending on the investor’s goals, risk tolerance, and time horizon. Regular monitoring and rebalancing are important to keep the portfolio aligned with the investor’s objectives.
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Some people may have emergency savings to dip into or family or friends who can help them out if the unexpected happens. But for those who can’t access such resources, help may come in the form of a hardship loan, a type of loan offered to help people get through financial challenges, such as unemployment or medical debt.
Taking out a hardship loan can offer the cushion needed until a person’s financial prospects brighten. There are a variety of hardship loans to consider, from personal loans to home equity borrowing, and each has its own application requirements.
What Is a Hardship Loan?
A hardship loan doesn’t have an official definition, but many personal finance institutions may offer their own version of hardship loans. At its core, a hardship loan is a loan that can help you get through unexpected financial challenges like unemployment, medical bills, or caregiving responsibilities.
What Can You Use a Hardship Loan For?
As one of the types of personal loans, a hardship loan typically works much like any standard personal loan. The borrower receives a lump sum of money to use as they need, with few limitations. Potential uses could include:
• Rent or mortgage payments
• Past-due bills
• Everyday expenses like groceries and transportation
• Medical needs
A hardship loan could overwhelm already strained finances, however. Debt in any form will have to be repaid eventually, with interest, even in the case of hardship loans.
Hardship Borrowing Options
When you’re experiencing financial difficulties, you may feel the need to make a quick decision. But assessing your options can help you find the best solution for your needs and financial circumstances. Here are some options you may consider when looking for financing during times of hardship.
Personal Loans
A personal loan allows you to borrow a lump sum of money, typically at a fixed interest rate, that you’ll then repay in installments over a set amount of time. Unlike a credit card, which is revolving debt, a personal loan has a set end date. This allows you to know exactly how much interest you’ll pay over the life of the loan (a personal loan calculator can always help with that determination, too).
The common uses for personal loans are wide-ranging. In addition to using a personal loan to help cover current expenses, you could also use personal loans to consolidate high-interest debt that you may have incurred, whether due to hardship or other reasons.
Typically, personal loan interest rates are lower than credit card interest rates, making them an attractive alternative to credit cards. When it comes to getting your personal loan approved, expect lenders to look at your credit history, credit score, and other factors.
Credit Cards
Some people also may use credit cards to cover hardship expenses. While this strategy can help in the moment, it can lead to larger bills over time.
For instance, a credit card that offers a 0% annual percentage rate (APR) could allow you to minimize interest charges throughout the promotional period. However, you’ll need to ensure the balance is paid in full before the introductory period ends. Otherwise, you could start racking up interest charges quickly, adding to your financial challenges.
Peer-to-Peer Lending
Peer-to-peer (P2P) lending is becoming more common as people seek out nontraditional financing. P2P loans are generally managed through a lending platform that matches applicants with investors.
While it may offer more flexibility than a traditional loan, a P2P lending platform still looks at an applicant’s overall financial picture — including their credit score — during the approval process. Like a traditional loan, a P2P’s loan terms and interest rates will vary depending on an applicant’s creditworthiness.
Generally, lenders in the P2P space will report accounts to credit bureaus just as traditional lenders do. So making regular, on-time payments can have a positive effect on your credit score. And, conversely, making late payments or failing to make payments at all can have a negative effect on your credit score.
If you own your home, you may consider borrowing against your home’s value. You could do this in the form of a home equity loan, a home equity line of credit (HELOC), or by refinancing your mortgage through a cash-out refinancing option.
With a home equity loan, you’ll pay back the amount borrowed (with interest) over an agreed-upon period of time. While a home equity loan is offered in a lump sum, a HELOC is a revolving line of credit that can allow you to withdraw what you need. However, HELOCs often have variable interest rates, which can make it challenging to plan for repayment.
With a cash-out refinance, on the other hand, you’d refinance your current mortgage for more than what you currently owe, allowing you to get a bit of extra cash to use as you need. This process replaces your old mortgage with a new one.
In all of the options outlined above, if you can’t pay back the loan or follow the agreed-upon terms, there’s the potential that you may lose your house.
401(k) Hardship Withdrawal
It also may be possible to withdraw funds from your retirement plan. Under normal circumstances, a penalty typically is incurred for early withdrawal. There’s a chance the penalty will get waived due to certain types of financial hardship, but exceptions are limited.
Additionally, making a hardship withdrawal from your retirement account means a missed opportunity for these funds to grow. This could potentially put your retirement goals at a disadvantage or later require you to come up with an alternative catch-up savings strategy. In other words, really pause to think it through before using your 401(k) to pay down debt or put toward current expenses.
Alternative Options
While you can use personal loans for a variety of financial needs, there may be other options to consider depending on your situation. For example, if you’re a single parent, you might consider seeking out loans for single moms or dads who have sole financial responsibility for their household. Here are some other options you might explore:
• Employer-sponsored hardship programs: If you’re facing financial hardship, ask your employer if they have an employee assistance program (EAP). Financial assistance might be offered to help employees who have emergency medical bills, who have experienced extensive home damage due to fire or flood, or who have experienced a death in the family. Employees will likely have to meet specific qualifications to receive EAP funds.
• Borrowing from friends and relatives: Asking for an informal loan from a friend or family member is certainly an option for getting through financial hardship, although not one that should be considered lightly. Having clear communication about each party’s expectations and responsibilities can go a long way to keeping a relationship intact. Consider having a written loan agreement that outlines details about the loan, such as the amount, interest rate (even if it’s nominal), and when repayment is expected.
• Community-based resources: There may be specific grants within your community available for people with emergency financial needs. Organizations like 211.org help individuals find the assistance they need. Community-based social services organizations also may be able to make referrals to other organizations as needed.
• Government programs: Federal and state governments list resources on their websites for individuals seeking financial hardship assistance. Depending on your circumstances, you may be eligible for certain government programs that could help reduce expenses for food, childcare, utilities, housing, prescription medication, and others.
The Takeaway
Researching all of your options for financial relief is a wise move. You might find help from government or community resources, your employer, or a friend or family member. Or, you might consider options such as a financial hardship loan, a home equity loan, or a P2P loan.
If you’re looking for financial help in the form of a hardship loan, a SoFi personal loan could be a good option for your unique financial situation. SoFi personal loans offer competitive, fixed rates and a variety of terms. Checking your rate won’t affect your credit score*, and it takes just one minute.
See if a personal loan from SoFi is right for you
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*Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
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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