Jan
29
2024
How to Save for Retirement at 30

How to Save for Retirement at 30

By | invest, Investing, Preparing for Retirement | Comments Off on How to Save for Retirement at 30

One of the most important things you can do in your 30s is to start prioritizing retirement savings if you haven’t done so already.

Building retirement savings at 30 is not always an easy task, even if you’re earning a higher salary. Financial responsibilities often increase at this time, but it’s important to keep retirement in mind even as you hit other milestones such as buying a house or starting a family.

To save for retirement in your 30s, you’ll need to balance your daily spending with your long-term goals. The sooner you can begin saving for retirement the better.

Get a 1% IRA match on rollovers and contributions.

Double down on your retirement goals with a 1% match on every dollar you roll over and contribute to a SoFi IRA.1

1Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.

How to Start Saving for Retirement at 30

You can set yourself on a path to healthy retirement savings by using the following strategies. First up, putting money into a designated retirement plan.

1. Contribute to a 401(k)

Saving in tax-advantaged retirement accounts available through work, such as a 401(k), is one of the best things you can do to start saving for retirement. Your 401(k) allows you to contribute up to $23,000 a year in 2024, up from $22,500 a year in 2023. Contributions come directly from your paycheck with pre-tax dollars, which lowers your taxable income in the year you make them.

Regular, automatic contributions, coupled with the benefits of compounding returns, can help your savings grow even faster. Starting a 401(k) at 30 gives you several decades for your funds to grow over time.

Also, 401(k)s allow employers to contribute to your retirement, and many will offer matching funds as part of your compensation package. Aim to save at least as much as is required to receive your employer’s match. Work toward maxing out your 401(k) contributions, especially as your salary grows over time.

You can access the funds penalty-free once you reach age 59 ½, but you will owe taxes on the money at that time.


💡 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.

2. Open an IRA

An IRA is a retirement account, which anyone with earned income can open. If you don’t have a 401(k) at work, opening an IRA can give you access to a tax-advantaged account to save for retirement. Even if you already have a 401(k), opening an IRA can be a good way to save even more, though you won’t get to write off your contributions.

For 2024, contribution limits to IRAs are $7,000 per year, up for $6,500 in 2023.

IRAs come in two different types: traditional and Roth IRAs. If you don’t have a 401(k), you can make contributions to traditional IRAs with pre-tax dollars. Like a 401(k), money in these accounts grows tax-deferred, and you’ll pay the taxes on it when you make withdrawals in retirement.

If you meet certain income restrictions, you may be able to contribute to a Roth IRA instead. In that case, you’ll make the contributions with after-tax dollars, but your money will grow tax-free inside the account and you do not have to pay taxes when you make withdrawals.

Recommended: Traditional vs. Roth IRA: How to Choose the Right Plan

3. Plan Your Asset Allocation

Diversification is the act of spreading your money across different asset classes. To minimize risk from a decline from one type of asset, it typically makes sense to create a diversified portfolio, including a mix of asset classes, such as stocks, bonds and other assets.

Your asset allocation refers to the proportion of each asset class that you hold. Your asset allocations will reflect your goals, risk tolerance, and time horizon. Given the relatively long period until your retirement, you might consider a relatively aggressive portfolio consisting mostly of stocks in your retirement account.

Stocks typically provide the most potential for growth, but they also fluctuate more than some other asset classes. Since you have three decades or more before you retire, you have time to ride out the natural ups and downs of the market.

Bonds, which tend to be less volatile than stocks but also offer lower returns, may balance out the riskier equity allocation. As you approach retirement, you may consider rebalancing your asset allocation to include more conservative investments to help protect the income you will need to draw upon soon.

Target-date funds are a type of mutual fund that automatically readjusts your portfolio as you near your target date, often the year in which you wish to retire.

4. Diversify within Asset Classes

Just as a portfolio with different types of assets offers some downside protection, so too, does diversification within those asset classes. If you invest the entire stock portion of your portfolio shares in just one company and share prices in that company drop, the value of your entire portfolio drops as well.

Now imagine that you own shares in 500 different companies. When one stock fares poorly, it will have a relatively small effect on the rest of your portfolio. Diversification helps limit the negative effects that any asset class, sector, or company could have on your portfolio.

You can further diversify your portfolio by including companies from different sectors and of all sizes from different parts of the globe. This same idea is true for other asset classes. For example, you could hold a mix of government and corporate bonds, and the corporate bonds could represent companies from various sectors and locations.

One way to add diversification to your portfolio is by investing in mutual funds, exchange-traded funds (ETFs), and index funds that invest in a diversified basket of stocks. For example, if you buy shares in an ETF that tracks the S&P 500 index, you’ll be investing in the 500 stocks included in that index.

5. Don’t Cash Out your 401(k) if You Get a New Job

If you’re only in your 30s, it’s likely that you’ll change jobs a couple of times or more, over the course of your career. When you change jobs, you’ll have a number of options for what to do with the 401(k) you hold with your previous employer.

One of these options is to cash out your 401(k). But this is typically not a great idea from a personal finance perspective. If you take a lump sum payment and you’re younger than 59 ½, you may not only owe income taxes on the withdrawal, but also a 10% early withdrawal penalty. What’s more, your money will no longer be working for you in a tax-advantaged account, potentially setting you back in your retirement savings goals.

A better option is to roll over your 401(k) into another tax-advantaged retirement account, such as your new employer’s plan, if they offer one, without paying income taxes. Or you can roll your 401(k) into an IRA without paying taxes. IRA accounts offer the added benefit of additional investment options, and they may have lower fees than your 401(k).

Recommended: How to Transfer Your 401(k) When Changing to a New Job

6. Protect Your Earnings with Disability Insurance

An injury or an illness that keeps you from going to work can hamper your retirement savings plan. However, disability insurance can help cover a portion of your lost income — usually between 50% and 70% — for a period of time.

Most employers offer some sort of short-term disability insurance, with a benefit period of three to six months. Some employers may offer long-term policies that cover periods of five, 10, or 20 years, or even through retirement age.

Check with your employer to see if you are covered by a disability policy and whether it provides enough coverage for your needs. If your employer’s plan falls short, or you don’t have access to one, you might consider purchasing a policy on your own.

The Takeaway

The earlier you can start saving for retirement the better. A long time horizon gives you the opportunity to take advantage of compounding growth for a longer period of time, which can help you increase the amount you’re able to save. Pay attention to the fees you’re paying on investments, which can eat away at returns over time.

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.

Photo credit: iStock/AJ_Watt

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.

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 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.

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Jan
29
2024
Why You Should Start Retirement Planning in Your 20s

Why You Should Start Retirement Planning in Your 20s

By | invest, Investing, Preparing for Retirement | Comments Off on Why You Should Start Retirement Planning in Your 20s

When you’re in your 20s, the last thing on your mind may be the end of your career and the retirement that comes after. But thinking about retirement now can ensure your financial security in the future.

The longer you have to save for retirement, the better. Here’s why you should start thinking about retirement planning and investing in your 20s.

Main Reason to Start Saving for Retirement Early

When you start investing in your 20s, even if you begin with just a small amount, you have more time to build your nest egg. Typically, having a long time horizon means you have time to weather the ups and downs of the markets.

What’s more — and this is critical — the earlier you start saving, by opening a savings vehicle such as a high-yield savings account or a money market account, for instance, the more time you’ll have to take advantage of compound interest, which can help boost your ability to save. Compound interest is the reason small amounts of money saved now can go further than much larger amounts of money saved later. The more time you have, the more returns compound interest can deliver.

Compound Interest Example

Imagine you are 25 with plans to retire at 65. That gives you 40 years to save. If you save $100 a month in a money market account with an average annual return of 6% compounded monthly, at age 60, you would have saved about $200,244.

Now, let’s imagine that you waited for 30 years, until age 55 to start saving. You put $1,000 a month into a money market account. With an average annual return of 6% compounding monthly, you’d only have about $165,698 by the time you’re ready to retire, far less than if you’d started saving smaller amounts earlier.

The lesson? The longer you wait to start saving for retirement, the more money you’ll have to save later to make up the difference. Depending on your financial situation, it could be difficult to find these extra funds when you’re older.

Though it may not sound fun in your 20s to start putting money toward retirement, it may actually be easier in the long run.

💡 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.

Get a 1% IRA match on rollovers and contributions.

Double down on your retirement goals with a 1% match on every dollar you roll over and contribute to a SoFi IRA.1

1Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.

How to Start Saving for Retirement in Your 20s

If you’re new to saving, starting a retirement fund requires a little bit of planning.

Step 1: Calculate how much you need to save

Set a goal. Consider your target retirement date and how long you’ll expect to be retired based on current life expectancy. What kind of lifestyle do you want to lead? And what do you expect your retirement expenses to be?

Step 2: Choose a savings vehicle

When it comes to where to put your savings, you have a number of options. For example, as of early August 2023, you could get around 4.5% APY on a high-yield savings account.

Many retirement savers also opt to use an investing account, such as a taxable brokerage account or tax-advantaged retirement savings account instead.

Keep in mind that investments in equities or other securities are riskier than savings accounts, but that allows for the possibility of better returns. Young investors may be better positioned than older investors to take on additional risk, since they have time to recover after a market decline. However, the amount of risk you’re willing to take on is an important consideration and a personal choice.

Step 3: Start investing

Once you’ve opened an account, your investment strategy depends on age, goals, time horizon and risk tolerance. For example, the longer you have before you retire, the more money you might consider investing in riskier assets such as stock, since you’ll have longer to ride out any rocky period in the market. As retirement approaches, you may want to re-allocate more of your portfolio to less risky assets, such as bonds.

Types of Retirement Plans

If you’re interested in opening a tax-advantaged retirement plan, there are three main account types to consider: 401(k)s and traditional IRAs, and Roth IRAs.

401(k)

A 401(k) is an employer sponsored retirement account that you invest in through your workplace, if your employer offers it. You make contributions to 401(k)s with pre-tax funds (meaning contributions lower your taxable income), usually deducted from your paycheck. Your 401(k) will typically offer a relatively small menu of investments from which you can choose.

Employers may also contribute to your 401(k) and often offer matching contributions. Consider saving enough money to at least meet your employer’s match, which is essentially free money and an important part of your total compensation.

Some companies also offer a Roth 401(k), which uses after-tax paycheck deferrals.

Individuals can contribute up to $23,000 in their 401(k) in 2024. Individuals can contribute up to $22,500 in their 401(k) in 2023. And those aged 50 and up can make an additional catch-up contribution of $7,500.

Money invested inside a 401(k) grows tax-deferred, and you’ll pay regular income tax on withdrawals that you make after age 59 ½. If you take out money before then, you could owe both income taxes and a 10% early withdrawal penalty.

You must begin making required minimum distributions (RMDs) from your account by age 73.

Learn more: What Is a 401(k)?

Traditional IRA

Traditional IRAs are not offered through employers. Anyone can open one as long as they have earned income. Depending on your income and access to other retirement savings accounts, you may be able to deduct contributions to a traditional IRA on your taxes.

As with 401(k) contributions, you’d owe taxes on traditional IRA withdrawals after age 59 ½ and may have to pay taxes and a penalty on early withdrawals.

In 2024, traditional IRA contribution limits are $7,000 a year or $8,000 for those aged 50 and up. In 2023, traditional IRA contribution limits are $6,500 a year or $7,500 for those aged 50 and up. Compared to 401(k)s, IRAs offer individuals the ability to invest in a much broader range of investments. These investments can then grow tax-deferred inside the account. Traditional IRAs are also subject to RMDs at age 73.

Roth IRA

Unlike 401(k)s and traditional IRAs, savings go into Roth IRAs with after-tax dollars and provide no immediate tax benefit. However, money inside the account grows tax-free and it isn’t subject to income tax when withdrawals are made after age 59 ½.

You can also withdraw your principal (but not the earnings) from a Roth at any time without a tax penalty as long as the Roth has been open for five tax years. The first tax year begins on January 1 of the year the first contribution was made and ends on the tax filing deadline of the next year, such as April 15. Any contribution made during that time counts as being made in the prior year. So, for instance if you made your first contribution on April 10, 2023, it counts as though it were made at the beginning of 2022. Therefore, your Roth would be considered open for five tax years in January 2027.

Roths are not subject to RMD rules. Contribution limits are the same as traditional IRAs.

Investing in Multiple Accounts

Individuals can have both a traditional and Roth IRA. But note the contribution limits apply to total contributions across both. So if you’re 25 and put $3,250 in a traditional IRA, you could only put up to $3,250 in your Roth as well in 2023.

You can also contribute to both a 401(k) and an IRA, however if you have access to a 401(k) at work you may not be able to deduct your IRA contributions.

Retirement Plan Strategies

The investment strategy you choose will depend largely on three things: your goals, time horizon and risk tolerance. These factors will help you determine your asset allocation, what types of assets you hold and in what proportion. Your retirement portfolio as a 20-something investor will likely look very different from a retirement portfolio of a 50-something investor.

For example, those with a high risk tolerance and long time horizon might hold a greater portion of stocks. This asset class is typically more volatile than bonds, but it also provides greater potential for growth.

The shorter a person’s time horizon and the less risk tolerance they have, the greater proportion of bonds they may want to include in their portfolio. Here’s a look at some portfolio strategies and the asset allocation that might accompany them:

Sample Portfolio Style

 Asset allocation
Aggressive 100% stocks
Moderately Aggressive 80% stocks, 20% bonds
Moderate 60% stocks, 40% bonds
Moderately Conservative 30% stocks, 70% bonds
Conservative 100% bonds

The Takeaway

Even if you don’t have a lot of room in your budget to start investing, putting away what you can as early as you can, can go a long way toward saving for retirement. As you start to earn more money, you can increase the amount of money that you’re saving over time.

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).

Help grow your nest egg with a SoFi IRA.

Photo credit: iStock/izusek

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.

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 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.

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Jan
18
2024
man on laptop and phone mobile

How to Fund an IRA

By | Growing Wealth, Investing, Preparing for Retirement | No Comments

Saving for retirement is important. But it can be challenging to put away money for the future when you have a lot of right-now financial commitments to take care of. Almost half of all American households report they have no retirement account savings, according to the Federal Reserve’s latest Survey of Consumer Finances.

However, it’s better to start with a small amount of savings than not to save at all. And the sooner you begin, the more time your savings will have to grow. One way to help kickstart retirement savings is with an IRA, a type of account designed specifically to help you save for retirement.

If you’re wondering how to fund an IRA, read on to find out about some potential methods that could help you contribute to an IRA.

Before You Start, Know Your Contribution Limits

First things first, it’s important to be aware that IRAs have contribution limits set by the IRS, and those limits often change annually. In 2024, you can contribute up to $7,000 in an IRA, or up to $8,000 if you’re 50 or older.

IRAs also come with potential tax benefits, which vary depending on the type of IRA you have. With a traditional IRA, contributions may be tax-deductible. For instance, if you and your spouse don’t have access to an employer-sponsored retirement plan, you can deduct the full amount contributed to a traditional IRA on your tax return in the year you make the contribution, regardless of your income.

And, even if you or your spouse is covered by an employer-sponsored retirement plan, the IRS still allows you to deduct a portion of your contribution.

With a Roth IRA, the contributions are made with after-tax money, which means they are not tax deductible. You can only fund a Roth IRA in years when your income falls below a certain limit.

In 2024, if you’re married and filing jointly, you can contribute the full amount to your Roth IRA if your modified adjusted gross income (MAGI) is less than $230,000. If your MAGI is between $230,000 and $240,000, you can contribute a reduced amount, and your income is over $240,000, you can’t contribute to a Roth. Those who are single can contribute the full amount if their MAGI is below $146,000, or a reduced amount if it’s between $146,000 and $161,000. They cannot contribute at all if their MAGI is more than $161,000.

💡 Quick Tip: Did you know that opening a brokerage account typically doesn’t come with any setup costs? Often, the only requirement to open a brokerage account — aside from providing personal details — is making an initial deposit.

Get a 1% IRA match on rollovers and contributions.

Double down on your retirement goals with a 1% match on every dollar you roll over and contribute to a SoFi IRA.1

1Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.

6 Ways You Can Fund an IRA

After you decide which type of IRA is right for you, your next step is to contribute to it. Here are some suggestions for how to fund an IRA.

1. Use Your Tax Refund

If you expect to get a tax refund, consider using that money to open an IRA, or to contribute to your IRA if you already have one. If you don’t want to contribute the entire refund, you could contribute a portion of it. Minimum amounts to open an IRA vary by institution, so do a bit of research to find the right account for the amount of money you currently have.

2. Take Advantage of Tax Deductions

You may be able to get a bigger tax refund next year by deducting your contributions to a traditional IRA this year, as long as you are eligible for the deduction. You can then use the bigger refund to fund your IRA next year.

3. Contribute “New” Money

If you get a raise or a bonus at work, or if a relative gives you money for your birthday, consider contributing all or part of it to your IRA. Just be sure to stay below the annual IRA contribution limit throughout the course of the year.

4. Make Small Monthly Contributions

You can contribute to your IRA throughout the year so if you open an account with, say, $100 (as mentioned earlier, how much you need to open an IRA depends on the institution), you can then make a monthly contribution to the account. Even if you put only $50 a month into the account, by the end of the year you would have $600. Increase that monthly contribution to $100, and you’re up to $1,200.

5. Set Up Automatic Contributions

Automating your contributions will allow you to save for retirement without thinking about it. You can even set up your automatic contribution so that it comes out of your bank account on payday. That can make it easier to put away funds for retirement. After all, you won’t be tempted to spend money that you don’t actually see in your bank account.

6. Roll Over Your 401(k) When You Leave a Job

When you change jobs, you generally have three options for your old 401(k). You could leave it with your old employer, roll it over to your new 401(k) if that’s available to you, or rollover your 401(k) into an IRA account.

You may want to review the fees associated with your 401(k) in order to understand what you are paying by leaving it with your old plan or rolling it over into your new 401(k).

Possible benefits of rolling your old 401(k) over to an IRA may be things like lower fees, expanding your choice of investment options, or a managed solution that invests your money for you based on your goals and risk tolerance.

The Takeaway

If you haven’t started saving for retirement, or if you haven’t been saving enough, it’s not too late to begin. No matter what stage of your life you’re in, you can create a plan to help you achieve your retirement goals, which could include contributing to an IRA.

You can fund an IRA by using your tax refund, making contributions automatic, or contributing a bonus, raise, or monetary gift you receive. No matter how you choose to contribute, or how much you contribute, the important thing is to get started with retirement saving to help make your future more secure.

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).

FAQ

How can I put money into my IRA?

There are many different ways to fund an IRA. For instance, if you get a tax refund, you could contribute that money to your IRA. You can also contribute funds from a bonus or raise you might get at work, or from birthday or holiday money from a relative. In addition, you can set up automatic contributions so that a certain amount of money goes directly from your bank account to your IRA on payday. That way, you won’t be tempted to spend it.

Can I contribute to an IRA on my own?

Yes. As long as you have earned income, you can open and fund a traditional or Roth IRA. This is true even if you have a 401(k) at work. There is a limit to the amount you can contribute to an IRA, however, which is $7,000 (or $8,000 if you are 50 or older) in 2024.

What is the best way to fund a traditional IRA?

One of the best ways to fund a traditional IRA is to use your tax refund. This is “found” money, rather than money you’re taking out of your bank account, so if you contribute it to your IRA you likely won’t even miss it. Also,consider this: By making a contribution to your traditional IRA, you may be able to deduct it from your taxes, which means you might get an even bigger refund next time around. And then you can use that bigger refund to fund your IRA next year.

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.

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.

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Jan
10
2024
man signing mortgage paperwork

How to Get a Mortgage

By | Budgeting & Goals, Home Ownership, mortgage | No Comments

Getting a mortgage can be one of the biggest financial undertakings a person can make. What’s more, it also unlocks the path to what is typically the biggest asset and wealth builder out there: a home of your own.

Whether you’re dreaming of a center hall Colonial or a cool, loft-style condo, the odds are, you will need a mortgage to make home ownership happen. But these days, with mortgage rates rising, snagging that home loan can require a little more knowledge and preparation.

This guide will help you get up to speed and ready your application. Read on to learn:

•   How to get a mortgage right now

•   What matters most to lenders

•   What are the typical mortgage requirements

•   What steps are needed to get a mortgage

What Mortgage Lenders Look At

A good first step to getting a mortgage is to understand how you will be evaluated by lenders so you can put your best foot (or financial profile) forward. Consider the following:

Your Credit Score

Your credit score is an important number: It tells lenders how well you have managed debt in the past. Ideally, you have a good history of paying your bills on time. If, however, you have been late with payments or have defaulted in the past, your credit score may be a red flag as you apply for a mortgage.

•   Typically, you will need a credit score of 620 or higher to qualify for a conventional home loan.

•   However, those with scores of 740 or higher may snag the best (meaning lower) rates.

•   If your score is at least 580, you may qualify for a government-backed loan (more on those below). Even those with a credit score of 500 to 579 may be eligible in some cases.
If you’d like to build your credit score, try these steps:

•   Get a free credit report (one per year) from www.annualcreditreport.com. It will include bill payment history, current debt, and other information lenders typically check on. If you see any errors, report them.

•   Be impeccable with payment deadlines. The timeliness of your payments is the largest contributing factor to your credit score, so optimizing this area can have a positive impact.

•   Manage any situations where you owe money. Unpaid bills that linger and go from 30 to 60 to 90 days (or more) late can bog down your credit score. Prioritize paying overdue bills.

Your credit score is important: The higher your score, the more reliable and creditworthy you appear.

Debt-to-Income Ratio

Another number that lenders will be interested in is your debt-to-income (DTI) ratio. This shows how the amount of debt you are carrying relates to your income. Here’s how DTI is calculated:

•   Total your monthly minimum debt payments, such as student loans, car loans, credit-card bills, current rent or mortgage and property taxes, and the like.

•   Divide that total debt number by your gross monthly income (that is, before taxes and other deductions are siphoned off).

•   The resulting number is your DTI.

The DTI figure that lenders look for may vary. Some lenders want to see 36%; others will be comfortable with up to 43%. Government-backed loans are likely to accept higher DTI’s than other lenders.

Why does DTI matter? Lenders want to see that you can handle the financial burden of a mortgage without struggling.

Income History

Lenders want to see signs of a positive, stable income. Ideally, you have been employed for at least two years and your income is steady, if not trending upward.

This tells lenders that you are a person they can count on to pay back the funds you borrow. If you have been out of work or have job-hopped recently, it might be wise to wait a bit before applying for a mortgage until you can show the income history that lenders want to see.

Assets

Lenders will likely want to see that you have some assets available, such as cash in the bank or other fairly accessible funds. This is where a healthy emergency fund and money saved for a down payment can be a real boost.

These kinds of savings can reassure a lender that you are ready to buy and, even if you were hit with a major expense or were laid off, you could still pay your monthly mortgage and stay current on your home loan.

Property Type

The kind of property you are planning to buy may make a difference to lenders as well. For instance, if you are seeking to buy a single-family home that will be your primary residence, you may look more attractive to lenders than someone who already has a primary home and is buying a ski condo they will rent out on Airbnb. The former could seem more motivated to stay current on their mortgage payments than the latter.


💡 Quick Tip: Don’t overpay for your mortgage. Get your dream home or investment property and a competitive rate with SoFi Mortgage Loans.

Get Familiar With the Required Mortgage Documents

Now that you know how lenders size you up for a loan, consider the documents that you will likely need to apply for a mortgage:

•   Proof of income: Get ready to break out those W-2s, 1099s, and tax returns. The lender will need solid proof of your recent income.

•   Credit documentation: You will likely sign a release allowing the lender to review your credit report to assess your history on that front.

•   Proof of assets and liabilities: You will probably need to share bank statements, investment account statements, and other documents to verify what assets you have. Your lender may want to see paperwork regarding any student or auto loans and other debts as well.

These forms allow a lender to consider your level of financial security and whether you are a good risk to offer a mortgage loan.

How to Get a Mortgage: 9 Steps

Now that you understand the paperwork you need and how lenders will look at your qualifications for a mortgage, consider the steps required to actually get the loan you need to buy a home.

1. Checking Your Credit

As mentioned above, it’s wise to check your credit score and review your credit report. If your number and record aren’t optimal, take the necessary steps to improve the situation, such as diligently paying bills on time, clearing up any errors on your record, and taking care of any debt that’s past due.

2. Figuring Out Your Home-Buying Budget

As you contemplate buying a home, develop a budget. You want to be sure that you have an adequate down payment and can afford your monthly mortgage payment. But don’t overlook these costs that need to be part of your budget:

•   Closing costs and related expenses

•   Funds to make any repairs/renovations required

•   Moving expenses

•   Home insurance premium

•   Property taxes

•   Utilities (especially important if you are moving from a rental where your landlord paid some of these costs to your own home)

•   Maintenance and upkeep costs (landscaping, HVAC service, etc.)

These expenses should be tallied and accounted for; you don’t want to wind up with your heating bill becoming a reason to use your emergency fund.

3. Saving for the Down Payment and Closing Costs

One important element of your home-buying budget is the down payment plus closing costs. Here’s how much you are probably going to need to set aside:

•   Down payments for a conventional loan have traditionally been 20% of a home’s cost, but there is some flexibility. A recent survey by the National Association of Realtors found that first-time homebuyers typically put down 8% on a home purchase.

•   Keep in mind that if you put down less than 20%, you will likely have to pay private mortgage insurance (PMI), since your lender may want extra protection in case you default on your loan.

•   Some loans are available with as little as 3% down or even (for government-backed ones) zero money down.

•   Closing costs will likely amount to 3% to 6% of the loan amount. They include fees for processing your loan, home appraisal, title search, and other activities.

4. Choosing the Right Mortgage Option

It’s worth reviewing some of the different loans that you may qualify for.

•   Conventional vs. government-backed loans. Conventional loans typically have stricter income, credit score, and other qualifying factors, while government-backed loans may be easier to obtain. Government-backed loans may have lower (or even no) down payment requirements. Examples of these government loans are FHA, VA, and USDA loans.

•   Type of rate: For some borrowers, a fixed-rate loan, with its never-varying monthly payment, may be best. For others, an adjustable-rate one that fluctuates may be more appealing. The payments tend to start out low, which can be attractive for those who may sell their home within a few years’ time. You may also look into mortgage points, which involve paying more upfront to shave down your rate over the life of the loan.

•   Mortgage loan term: Many loans last 30 years, but there are other options, such as 10, 15, or 20 years. The shorter the term, the higher your payment is likely to be.


💡 Quick Tip: Backed by the Federal Housing Administration (FHA), FHA loans provide those with a fair credit score the opportunity to buy a home. They’re a great option for first-time homebuyers.1

5. Comparing Mortgage Lenders

Next, it’s wise to review different mortgage lenders and see what kind of rates and terms are quoted. For example, your own bank may offer mortgages and could give you a good rate in an effort to keep your business with them. Or you might look into online lenders, where the process can be more streamlined and the rates possibly better than traditional options.

You might also decide to work with a mortgage broker to get help learning about your alternatives.

6. Getting Pre-Approved for a Mortgage

For this stage, you will begin your actual interaction with a lender. The goal is a preapproval letter, which can help you as you go home shopping and bid on properties. While not a guarantee of a mortgage, it shows you are serious about buying and are on the path to securing your funding, and it reflects that the lender found you qualified for a mortgage.

You can expect the lender to do a credit check, verify your income and assets, and consider your DTI. If all goes well, the lender will provide you with a preapproval letter, and you can shop for a home in the designated price range.

It can be wise to get preapproved by more than one lender. This can help you evaluate different offers and broaden your options when it’s time to apply for a loan.

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

7. Making an Offer on a Home

With your pre-approval letter done, you are ready to go home shopping. As you tour properties and make offers, you are on your way to getting to an accepted offer. When that happens (a big moment!), you will hopefully be on the path to home ownership. If contract negotiations and the inspection goes well, you will likely move along to the next step.

8. Applying for a Mortgage

Next, it’s time for the full-fledged mortgage application. Expect to submit the following, and possibly more:

•   Two years’ worth of W-2 forms or other income verification

•   A month’s worth of pay stubs

•   Two years’ worth of federal tax returns

•   Proof of other income sources

•   Recent bank statements and documentation of possibly recent sources of deposits

•   Documentation of funds/gifts of money to be used as your down payment

•   ID and Social Security number

•   Details on debt such as student loans and car payments

9. Closing on a Home

As you wait for your closing date, a home appraisal, loan underwriting, title searches, and more are happening. If things progress smoothly, you will be ready to close on your home. You also may wish to bring your real estate agent and/or attorney with you to this meeting. They can help explain everything — especially valuable if you are a first-time homebuyer.

You will gather to sign all your forms, submit your down payment and closing costs (or provide proof of wire transfer), and become a homeowner. Congratulations!

The Takeaway

The path to home ownership can be a long and winding road but worth it as you gain what could be your biggest financial asset. By preparing to present a credit-worthy file and following the steps needed to apply for a home mortgage, you can be on your way to owning your dream house.

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

SoFi Mortgages: simple, smart, and so affordable.

FAQ

How do you improve your chances of getting approved for a mortgage loan?

You can improve your chances of getting approved for a mortgage by checking on your credit score (and improving it, if necessary), showing a debt-to-income ratio of ideally 36% or lower, and having two years’ of a steady job history.

How do I begin a mortgage?

The first step in getting ready to apply for a mortgage can involve checking up on your financial profile to see how it will look to potential lenders and optimizing it. You can then research different kinds of loans and their requirements and get pre-approved by one or more lenders to see what you qualify for. When you have found a home and are ready to apply for your mortgage, you’ll gather the credentials you’ll need (such as proof of income and assets, tax returns, and ID) and fill out your application.

What is the lowest income to qualify for a mortgage?

There is no one set income required to qualify for a mortgage. Much will depend on how much you want to borrow versus your income, how much debt you are carrying, and your credit score. For those who have a lower income, there are government-backed loans that may be suitable; it can be worthwhile to look into FHA, USDA, and VA loans to see what you might qualify for.

What credit score is needed to get a mortgage?

Typically, a credit score of at least 620 is required for a conventional loan, and the higher your score (say, in the 700s or higher still), the more loan options and lower rates you may find. For those with a credit score of at least 580, there are government-backed loan products available.

¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

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

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

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.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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.

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.

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Dec
26
2023
Consumer Price Index (CPI): What Is CPI?

The Consumer Price Index (CPI): A Comprehensive Guide

By | Growing Wealth, invest, Investing, Terminology | Comments Off on The Consumer Price Index (CPI): A Comprehensive Guide

The Consumer Price Index (CPI) is a monthly measure of how the aggregate costs of consumer goods and services in the United States are changing. Economists use CPI to help them understand whether the economy is in a period of inflation or deflation, and individuals can use it to get a sense of where prices might be headed.

What Is the Consumer Price Index (CPI)?

The CPI measures the change of the weighted-average prices paid by urban consumers for select goods and services, according to the Bureau of Labor Statistics (BLS). In other words, the metric tracks the rise and fall of prices over a given period of time.

Definition and Significance

As mentioned, “CPI” is short for Consumer Price Index, and it’s an often-cited economic indicator.

The BLS produces indexes that cover two populations: CPI-U covers all urban consumers, representing more than 90% of the population. And CPI-W represents urban wage earners and clerical workers, representing approximately 30% of the population. The CPI excludes people who live in rural areas, the military, and imprisoned people.


💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.

How the CPI Works

cpi year over year change 2020-2024

The CPI tracks prices for a basket of goods and services people commonly buy in eight major categories, including:

•   Food and beverage

•   Recreation

•   Apparel

•   Transportation

•   Housing

•   Medical care

•   Education and communication

•   Various services

CPI Formulas

Each month, the BLS contacts retailers, service providers, and rental spaces across the country gathering prices for about 80,000 items. It uses this data to calculate CPI using the following formula:

CPI = Cost of the Market Basket in a Given Year/Cost of the Market Basket in the Base Year.

The result is multiplied by 100 to express CPI as a percentage. The BLS uses the years 1982-1984 as its base year. It set the index level during this period at 100.

Annual CPI Calculation

Here’s an example of the annual CPI calculation, and comparing two different years to get a gist of the differences.

Imagine the cost of a hypothetical basket of goods in 1984.

Sweatshirt

 1 dozen eggs

 Movie ticket
Price in 1984 $10 $1.50 $5
Quantity 2 6 10
Total Cost $20 $9 $50

When you total the price of these goods you get $79. Using the CPI formula above you take $79/$79 x 100 = 100%. This is where the 1984 base rate of 100 comes from.

Now let’s consider the same basket of goods in 2023.

Sweatshirt

 1 dozen eggs

 Movie ticket
Price in 2023 $24 $3 $15
Quantity 2 6 10
Total Cost $48 $18 $150

When you total the prices of these goods you get $216. Now, when you plug this into the CPI formula you get $216/$79 x 100 = 273%. You can now tell that from 1984 to 2023 prices for this particular basket of goods have risen by 173%.

Diverse Categories Within CPI

The CPI tracks more than 200 categories of items, and within each category it samples hundreds of specific items at various businesses which serve to represent the thousands of items available to consumers. In addition to these categories, CPI includes government-charged user fees like water, sewages, tolls, and auto registration fees. It also factors in taxes associated with the price of goods such as sales tax and excise tax. However, it does not include Social Security taxes or income taxes that aren’t directly related to the purchasing of goods and services.

The CPI also does not include the purchase of investments, like stocks and bonds.

The Consumer Price Index (CPI) in Practice

The CPI can be used in a variety of ways, but perhaps most prominently, in economic policy.

Usage in Economic Policy

The CPI is the most common way to measure inflation, the economic trend of rising prices over time, or deflation, the trend of falling prices. The federal government — or the Federal Reserve, more specifically — sets a target inflation rate of 2% annually, and the CPI can help the government understand whether or not its monetary policy is effective in meeting this target.

Recommended: What Is Deflation and Why Does It Matter?

The Federal Reserve’s Utilization

The Federal Reserve may look at the CPI to gauge whether or not to raise interest rates, which may cool or heat up the economy, accordingly, by increasing the cost of borrowing. As borrowing costs go up, demand for goods or services tends to fall, lowering prices, and putting downward pressure on the CPI.

Implications for Other Government Agencies

Economists also use CPI as a measure of cost of living, the amount of money you need to cover basic expenses, such as housing, food, and health care. This is important because the government may make cost-of-living adjustments to programs such as Social Security benefits. As the cost of living rises, benefit amounts may be adjusted higher to keep up with the rising costs of goods.

Employers may also look at the cost of living to help them set competitive salaries and determine when to raise wages for employees.

Recommended: Cost of Living by State

CPI’s Influence on Market Sectors

The CPI can also have an influence on market sectors, like the housing markets, financial markets, and even labor markets. As noted, a lot of it is top-down — depending on how the Federal Reserve reads the CPI and decides to change interest rates, if at all.

Raising rates can temper demand in the housing market, as a mortgage can become more expensive. It can also slow down sales for all sorts of businesses, which is reflected in earnings reports and finally, in the stock market. That can then spill into the labor market, and potentially raise unemployment as companies look to cut costs.

All told, the CPI’s influence can run deep in an economy.

CPI Versus Other Economic Indicators

The CPI is only one of many economic indicators, as mentioned. Others include unemployment, and the Producer Price Index (PPI).

CPI vs Unemployment: Understanding the Relationship

As noted, there tends to be a relationship between the CPI and unemployment rate, as the Fed targets 2% inflation, and full employment. As such, it can decide to make changes to monetary policy to try and restore balance or at least get closer to its goals.

CPI vs PPI (Producer Price Index)

The Producer Price Index or PPI measures the average change over time in the selling prices received by domestic producers of goods and services. In simpler terms, this metric measures wholesale prices for the sectors of the economy that produce goods. Like the CPI, the PPI can help analysts estimate inflation, as higher prices will show up on the wholesale level first before they get passed on to consumers at the retail level.

Analyzing and Critiquing the CPI Methodology

The CPI is a useful measure in many ways, but it does have some limitations. First, it doesn’t apply to all populations in the United States. CPI considers urban populations alone, so it is not necessarily representative of the costs for those who live outside of those areas.

Also, the CPI calculation does not take into account all of the goods and services available to consumers or new technologies not yet considered consumer staples. What’s more, the metric does not provide any contact into what’s causing prices to move up and down, such as social or environmental trends.

CPI’s Broader Impact and Usage

CPI reports are issued monthly by the BLS, and are available to anyone who wants to access them online. They give a broad breakdown of the previous month, and compare price changes year-over-year, and month-over-month.

Breaking Down the Monthly CPI Report

The standard CPI report has an introduction that discusses the changes over the previous month, followed by a table that outlines changes in specific price categories over the past year and several months. It further breaks down food, energy, and “all items less food and energy,” providing additional insight for each category.

Anticipating the Next CPI Report

The BLS publishes the date and time of the upcoming CPI report on its website, typically the second week of the month, at 8:30am ET.

Contemporary Relevance of CPI

In recent years, many people have kept a closely-trained eye on the CPI and CPI reports due to increased costs following the pandemic in 2020. While there were a variety of reasons as to why prices increased, that bout of inflation — the first serious case of inflation since the 1980s — caught many people off guard, and strained consumers’ budgets.

It also led to the Fed increasing interest rates. Inflation, or the increase in the CPI over the past couple of years, peaked at more than 9% during the summer of 2022, and as of late 2023, was back down to around 3.1%.

Educational Resources and Further Reading on CPI

There are numerous resources and places to learn more about the CPI, especially after all the attention it has garnered in recent years.

Learning More About CPI

A simple internet search will net a cornucopia of results, loaded with information and insight into the CPI. You’re also likely to find opinion pieces and other media discussing the CPI’s shortcomings or strengths — it can be a good idea to consider everything, and formulate your own opinion.

But in terms of learning more about the CPI itself, the BLS publishes a handbook discussing the concepts and methods it uses, which can also be helpful if you’re hoping to bolster your CPI IQ.

CPI-Related Statistics and Where to Find Them

The BLS publishes the CPI, and a whole host of data and statistics related to it. With that in mind, it can be a great place to start when hunting down CPI-related data. There are multiple other sources that utilize the BLS’ data to compile charts, graphs, and more, but typically, it’s all sourced back to the BLS.

The Bottom Line: Why the CPI Matters to Everyone

Rising inflation decreases the value of individuals’ cash savings over time. Investing in stocks, bonds and other investments that offer inflation-beating returns may help consumers protect the value of their savings. Understanding CPI, and how it’s moving, can help you devise a strategy for your investment portfolio.

The CPI can be a deep topic, especially when you consider how it intersects and relates to other elements of the economy, such as unemployment and interest rates. And again, the more an investor understands about the underlying machinations of the economy, the more knowledge they’ll have to power their decisions in the market.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

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

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Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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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