Electronic trading refers to the process of conducting trades in financial markets through an online broker-dealer using the internet. These trades can take place in the stock, bond, options, futures, or foreign exchange (FOREX) markets. Electronic trades can only be conducted during standard market hours: between 9:30 am and 4 pm Eastern Standard Time on weekdays. Traders can create orders after markets close, but the orders won’t be executed until the next trading day.
This represents a big change from the way the stock exchange worked prior to the internet, when traders would gather in one central place like The New York Stock Exchange (NYSE) and buy and sell stocks in person. With advances in digital technology, that’s no longer necessary, and the age of electronic trades now dominates.
Key Points
• Electronic trading enhances convenience and reduces costs, allowing easy access to financial markets.
• Investors should consider platform features, fees, and alignment with investment goals.
• Market, limit, and stop-loss orders help manage investments effectively.
• Tax implications include capital gains and losses from trading activities.
• Risks involve lack of guidance, quick market changes that investors are unable to keep up with, and accumulating fees.
How to Start Electronic Trading
Many investors today will only ever engage in online stock trading. Traders no longer need a personal broker whom they have to call on the phone each time they want to buy or sell a security.
Instead, investors can now open an online brokerage, create an account, and start placing trades. But choosing a platform is only step one in electronic stock trading. After that, you’ll need to decide what stocks to trade, what type of orders to use, what expenses will be involved (if any), and how trading might affect your tax liability.
Choose an Electronic Trading Platform
There are many electronic trading platforms to choose from. They are all similar in many ways, with general ease of use: Signing up and getting started can take less than an hour, with perhaps a few days of wait time involved for identity or “know your customer” verification.
Among the various platforms, there are slightly different features or different options as far as the user experience is concerned. Not too long ago, most platforms charged a commission fee for each buy or sell order executed, and there was a minimum amount of money needed to create a new account.
Recently, many brokerages have eliminated trading fees, and few still require account minimums, although there may be other costs associated with your investments. It’s important to understand what you’re being charged, because even small amounts add up over time and can reduce investment returns.
Research Stocks or ETFs
There are thousands upon thousands of securities to choose from, and many different types of markets and exchanges. When first starting out, it’s easy to get overwhelmed by all the choices.
Thankfully, online brokerages offer tools to help investors get started. There is also an abundance of free information online about investing. There are numerous sources that provide news and analysis on a daily basis to help investors learn and stay informed about new market opportunities.
It might be common to assume there are only two types of orders: a buy order and a sell order. In actuality, there are many different types of orders.
The type of order that likely comes to mind for most new investors is known as a market order. This is simply an order to buy or sell a security at whatever price it’s trading at right now.
Another type of buy order is a limit order. This is an order to buy at or below a specific price. The order can remain on the books for a day, sixty days, or until canceled, and will be filled whenever the security falls to the specified price.
This can help investors wait to buy a security at a cheaper price without having to monitor things. Limit orders also help protect against sudden spikes in price. If a market order is used just before a large price increase, an investor could pay more for a security than expected.
A stop-loss order can help traders limit losses. Like a limit order, a stop-loss gets triggered when a security falls to a specific price. But as you might have guessed, unlike a limit buy order, a stop-loss order will initiate a sell when triggered.
Buying securities usually doesn’t invoke any tax liability. But selling does generate a taxable event. Selling at a gain often requires an investor to pay capital gains tax, while selling at a loss could result in a capital loss, which investors can sometimes use to reduce their taxable income.
The subject of taxes and investing is long and involved. New investors might want to consider researching the tax implications of buying and selling securities on their own and consult with a tax professional.
The Risks of Online Trading
In addition to the convenience that electronic trading offers investors, it does come with some risks. The main caveat of online trading is that it gives investors the opportunity to try new strategies (like options trading) or explore new types of investments without the benefit of expert guidance.
All investments come with the risk of loss, meaning you can lose all the money you’ve invested, or more, in some cases. It’s important to balance the opportunities with the downsides when electing to explore new investments.
The Takeaway
The era of online or electronic trading is here to stay, thanks to its lower cost structure as well as the overall convenience and ease-of-use that online platforms provide for investors. Now investors can set up and manage a wide range of portfolios — from day trading to retirement — right from their own computers.
Electronic trading does have its limitations, though. Things move quickly, fees can add up, and sometimes there are investment options available that require more time and expertise, which may not be available through an online platform.
Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.
Opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.¹
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.
For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.
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.
¹Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease. See full terms and conditions.
Deflation is the opposite of inflation. It occurs when the prices consumers pay for goods and services go down. That means that consumers can purchase more with the same amount of money.
There are many factors that cause deflation, which happens when the supply of goods and services is higher than the demand for them. While deflation can have some benefits to consumers, it’s often a sign of trouble for the overall economy.
Key Points
• Deflation, marked by falling prices, can lead to economic stagnation and business closures.
• Government interventions, including fiscal and monetary policies, help combat deflation and stabilize the economy.
• Deflation often follows financial crises and is influenced by consumer confidence, technology, and lower production costs.
• Negative impacts include reduced business revenues, increased unemployment, and decreased consumer demand.
• The Great Depression exemplifies how deflation caused business failures and unprecedented unemployment.
What Happens During Deflation?
In addition to knowing what inflation is, it’s important to understand how it impacts the economy. In a deflationary economy, prices gradually drop and consumers can purchase more with their money. In other words, the value of a dollar rises when deflation happens.
It’s important not to confuse deflation with disinflation. Disinflation is simply inflation decelerating. For example, the annual inflation rate may change from 5% to 3%. This variation still means that inflation is present, just at a lower rate. By contrast, deflation lowers prices. So, instead of prices increasing 3%, they may drop in value by 2%.
Although it may seem advantageous for consumer purchasing power to increase, it can accompany a recession. When prices drop, consumers may delay purchases on the assumption that they can buy something later for a lower price. However, when consumers put less money into the economy, it results in less money for the service or product creators.
The combination of these two factors can yield higher unemployment and interest rates. Historically, after the financial crises of 1890, 1893, 1907, and the early-1930s, the United States saw deflationary periods follow.
How Is Deflation Measured?
Economists measure deflation the same way they measure inflation, by first gathering price data on goods and services. The Bureau of Economic Analysis (BEA) and the Bureau of Labor Statistics (BLS) record and monitor this type of data in the United States. They collect pricing information that they then put into buckets reflecting the types of goods and services consumers generally use.
While these buckets do not include every product and service, they offer a sample of items and services consumed. In the United States, economists incorporate these prices into an indicator known as the Consumer Price Index (CPI).
Then, economists can compare the CPI to previous years to determine whether the economy is experiencing inflation or deflation. For example, if the prices decrease in a period compared to the year before, the economy is experiencing deflation. On the other hand, if prices increase compared to the previous year, the economy is experiencing inflation.
What Causes Deflation?
Deflation comes from a swing in supply and demand. Typically, when demand dwindles and supply increases, prices drop. Factors that may contribute to this shift include:
Rising Interest rates
When the economy is expanding, the Federal Reserve may increase interest rates. When rates go up, consumers are less likely to spend their money and may keep more in high-interest savings accounts to capitalize on the increase in rates.
Also, the cost of borrowing increases with the rise of interest rates, further discouraging consumers from spending on large items.
Decline in Consumer Confidence
When the country is experiencing economic turbulence, like a recession, consumers spend less money. Because consumers tend to worry about the direction of the economy, they may want to keep more of their money in savings to protect their financial well-being.
Innovations in Technology
Technological innovation and process efficiency ultimately help lower prices while increasing supply. Some companies’ increase in productivity may have a small impact on the economy. While other industries, such as oil, can have a drastic impact on the economy as a whole.
Lower Production Costs
When the cost to produce certain items, such as oil, decreases, manufacturers may increase production. If demand for the product stagnates or decreases, they may then end up with excess supply. To sell the product, companies may drop prices to encourage consumer purchases.
Why Does Deflation Matter?
Although falling prices may seem advantageous when you need to purchase something, it’s not always a good sign for the economy. Many economists prefer slow and unwavering inflation. When prices continue to rise, consumers have an incentive to make purchases sooner, which further boosts the economy.
One of the most significant impacts of deflation is that it can take a toll on business revenues. When prices fall, businesses can’t make as much money.
The drop in business profits makes it challenging for companies to support their employees, leading to layoffs or pay cuts. When incomes go down, consumers spend less money. So deflation can create a domino effect impacting the economy at many different levels, including lower wages, increased unemployment, and falling demand.
Deflation During The Great Depression
The Great Depression is a significant example of the potential economic impact of a deflationary period. While the 1929 stock market crash and recession set this economic disaster off, deflation heavily contributed to it. The rapid decrease in demand along with cautious money hoarding led to falling prices for goods and services. Many companies couldn’t recover and shut down. This caused record-high unemployment in the United States, peaking at 25%, and in several other countries as well.
During this time, the economy continued to experience the negative feedback loop associated with deflation: cash shortages, falling prices, economic stagnation, and business shutdowns. While the United States has seen small episodes of deflationary periods since the Great Depression, it hasn’t seen anything as substantial as this event.
How to Manage Deflation
So, what can the government do to help regulate inflation? For starters, the Federal Reserve can lower interest rates to stimulate financial institutions to lend money. The Fed may also purchase Treasury securities back to increase liquidity that may help financial institutions loan funds. Those initiatives can increase the circulation of the money in the economy and boost spending.
Another way to manage deflation is with changes in fiscal policy, such as lowering taxes or providing stimulus funds. Putting more money in consumers’ pockets encourages an increase in spending. This, in turn, creates a chain effect that may increase demand, increase prices, and move the economy out of a deflationary period.
The Takeaway
Deflation refers to a period that can be thought of as the opposite of inflation. It occurs when the prices consumers pay for goods and services go down, which means that consumers can purchase more with the same amount of money.
When the economy is experiencing some turbulence, some investors may choose to keep their money in savings. On the other hand, other investors may see falling prices as an opportunity to purchase securities at a discount, either to hold or to sell when the economy recovers. Like any other investment strategy, investors must base their investment decisions on their personal preferences since there are no guaranteed results.
Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.
Opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.¹
About the author
Ashley Kilroy
Ashley Kilroy is a seasoned personal finance writer with 15 years of experience simplifying complex concepts for individuals seeking financial security. Her expertise has shined through in well-known publications like Rolling Stone, Forbes, SmartAsset, and Money Talks News. Read full bio.
Photo credit: iStock/eclipse_images
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.
For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.
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.
¹Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease. See full terms and conditions.
Small-cap stocks are stocks in smaller companies, typically those worth between $250 million and $2 billion. Small-cap stocks often have high growth potential, which could make them an attractive investment. However, while these stocks may provide the opportunity to see higher returns over time, they also come with higher volatility and risk levels.
For investors considering adding small-cap stocks to their portfolios, it’s essential to understand how these stocks work and the advantages and disadvantages that come with this type of investment.
Key Points
• Small-cap stocks have a market capitalization of $250 million to $2 billion, offering significant growth potential.
• Higher risks and volatility are common due to less established business models and financial challenges.
• Limited analyst coverage can lead to undervaluation, presenting investment opportunities.
• Financial institutions may not heavily invest, affecting market liquidity and trading ease.
• Diversifying through mutual funds or ETFs can help mitigate risks and balance returns.
What Are Small-Cap Stocks?
Small-cap stocks are shares of companies with a market cap between $250 million and $2 billion, and are usually moderately young companies. Small-cap stocks typically have some growth potential, but they may not have a longstanding market history. Therefore, these stocks are considered to be riskier than mid-cap stocks or large cap stocks.
Understanding Market Capitalization
Market capitalization, or market cap, is a measure of an individual company’s value. The market cap represents the value of total outstanding shares. Investors can use this value to compare similar companies as well as consider future growth predictions.
To calculate a company’s market cap, multiply the total number of outstanding shares by the current share price. For example, let’s say a company has 15 million outstanding shares at a share price of $25 per share. Using this calculation, the company’s market cap would be $375 million.
Due to share price fluctuations, the market cap fluctuates over time. To find the number of outstanding shares, investors can review the “capital stock” numbers on a company’s balance sheet. This information is updated during the quarterly filings with the Securities and Exchange Commission (SEC).
Are Small-Cap Stocks a Good Investment?
Small-cap stocks may be a good investment as part of a diversified portfolio, but there are risks. The market cap of a company can give investors an idea of the risk and reward of purchasing individual stocks. Purchasing small-cap stocks may be riskier than buying stocks of larger companies because the companies are often still in growth mode. In addition, small-cap companies often have fewer resources than large-cap companies, and may have less access to liquidity.
Due to these factors, any market dip can negatively impact small-cap stocks. Conversely, smaller companies often have higher upside potential, and small-cap growth stocks may deliver higher returns than their peers. Still, investors who choose these investments may have to weather market volatility along the way to growth.
Pros of Investing in Small-Cap Stocks
There are several benefits to allocating some of your portfolio into small-cap stocks.
Growth Potential
When comparing large-cap stocks to small-cap stocks, small-cap stocks tend to have a higher growth potential over the long-term. For much of the stock market’s history, small-cap stocks had higher returns than large-cap stocks, and other asset classes.
This growth potential makes small-cap stocks an attractive investment choice for investors. They tend to perform particularly well after recessions, during periods of economic expansion.
They’re Often Undervalued
Analysts usually spend less time analyzing small-cap stocks, so they get less attention from investors, which can lead to lower demand — and lower prices. Therefore, investors may be able to leverage the inefficiencies of the market for potentially better returns.
Specific regulations may not allow financial institutions such as hedge funds and mutual funds to heavily invest in small-cap stocks. Therefore, it’s unlikely that large investments from financial institutions will artificially increase the stock price.
Cons of Investing in Small-Cap Stocks
While small-cap stocks have their benefits, there are also several drawbacks that investors should consider.
High Risk
Investing in small-cap stocks tends to have significant risk for investors. Since they’re often younger companies, small-cap companies do not always have a time-tested business model. If the company’s management can not make appropriate adjustments to the business model, it may yield poor financial or operational results.
Also, because small-cap companies may lack the resources such as capital or access to financing that larger companies have, they may struggle to expand the business or fill in cash flow gaps, especially if the economic conditions tighten.
Research May Be Time-Consuming
Due to the limited availability of research and analysis done on small-cap stocks, investors may have to spend a significant amount of time researching each investment option.
Minimal Liquidity
Small-cap stocks tend to have less liquidity than large cap company stocks. Since there are fewer shares available, investors may not be able to purchase the stock. Conversely, investors may not be able to sell their shares at a reasonable price. The liquidity of small-cap stocks adds to the risk of investing in this type of stock.
How to Invest in Small-Cap Stocks
Investors can purchase small-cap stocks through a brokerage firm or an individual investment account. Since there’s often less public information available about small-cap stocks, investors must do their own due diligence in researching companies to understand their potential risks and returns.
Investors who don’t have the time or expertise to determine which individual small-cap stocks to buy can invest in small-cap companies by purchasing mutual funds or exchange-traded funds (ETFs) that track a broader range of small-cap indexes. Some funds may also have unique characteristics within them, such as growth- or value-oriented stocks.
Buying mutual funds and ETFs allow investors to pool funds with other investors to sell and buy buckets of market securities. This type of investing aims to mitigate risks by diversifying investments. Instead of investing in a single company, fund investors are purchasing shares in dozens or hundreds of companies. Investing in mutual funds and ETFs is more of a passive investment strategy that doesn’t require investors to make trades actively.
💡 Quick Tip: Are self directed brokerage accounts cost efficient? They can be, because they offer the convenience of being able to buy stocks online without using a traditional full-service broker (and the typical broker fees).
Diversifying With Small-Cap Stocks
Even though small-cap mutual funds and ETFs provide diversification within a specific asset class, investors can further reduce their risk exposure by expanding portfolio diversification into a broader mix of assets.
Depending on market conditions, different types of stocks may perform differently. The concept can apply to stocks of companies that vary in sizes. Depending on what the market is doing, small, medium, and large companies may either beat the market returns or underperform.
When diversifying a portfolio, investors may start by determining their investment goals, risk tolerance, and time horizon. Then, by assessing these factors, they can decide an appropriate asset allocation to determine the portfolio’s percentage that may include stocks. A typical example is a portfolio composed of 60% stocks and 40% bonds.
Investors use the same factors (time horizon, goals, and risk tolerance) to decide the mix of stocks that will go into the portfolio’s stock percentage portion. Then, as market fluctuations happen, allocations of the portfolio will perform inversely.
For instance, as small-cap stocks are rising, mid-cap stocks may fall. In this case, small-cap stock prices’ upward movement can offset the decrease in mid-cap stock prices, thus mitigating losses.
The Takeaway
Small-cap stocks are shares of companies with market caps ranging from $250 million to $2 billion. Although small-cap stocks have the potential for long-term growth, they tend to come with more risk. With this in mind, building a diversified portfolio with a broader range of investments can help minimize your risk exposure.
But, attempting to build an entire portfolio from scratch and keep it balanced can be time-consuming and a risky venture if you’re an average investor. Instead, many investors choose to get small-cap exposure by purchasing mutual funds and exchange-traded funds (ETFs), which mimic the returns of indices that track stocks meeting certain criteria.
Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.
Opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.¹
FAQ
What is a small-cap stock?
Small-cap stocks are shares of companies with market capitalizations between $250 million and $2 billion, making them relatively small.
What are some of the advantages to investing in small-cap stocks?
The primary advantages of investing in small-cap stocks are the potential for growth, share values tend to be relatively low, and share prices may not get pumped up due to large institutional investor activity.
What are the risks of investing in small-cap stocks?
Small-cap stocks tend to be riskier investments than some of their larger counterparts. They may take additional time to research and study, and they may also lack the same levels of liquidity as larger-cap stocks.
About the author
Ashley Kilroy
Ashley Kilroy is a seasoned personal finance writer with 15 years of experience simplifying complex concepts for individuals seeking financial security. Her expertise has shined through in well-known publications like Rolling Stone, Forbes, SmartAsset, and Money Talks News. Read full bio.
Photo credit: iStock/Erikona
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.
For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.
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.
¹Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease. See full terms and conditions.
Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®
Does living on a budget sound like a bummer, all about scrimping and saving? It shouldn’t! A budget is really just a way to evaluate and keep better track of what money you have coming in and going out each month.
Having insight into the big picture of your personal finances can make it much easier to figure out where you may need to make tweaks so you can reach your personal and financial goals.
Rather than feeling restrictive, living with a budget can actually make your life easier and less stressful, while also helping you prepare for the future.
Here are some ideas to help get you going.
Key Points
• Track income and expenses to understand financial flows and manage money effectively.
• Categorize spending into necessities, wants, and savings, using the 50/30/20 rule for balanced budgeting.
• Reduce nonessential expenses by cutting costs and negotiating bills with service providers.
• Use cash instead of cards whenever possible to better control spending and avoid debt.
• Increase income through side gigs, freelance work, and selling things you no longer need.
1. Determining What’s Coming In
The first step for creating a budget is to figure out how much money you are earning after taxes every month.
This might be easy for salaried W2 workers who automatically get their taxes taken out of every paycheck. You can simply look at what is coming into your bank account each month. It can be a bit trickier for 1099 freelancers who only see how much they are taxed at the end of the year.
For freelancers, there is a simple solution though: Using how much you made the previous year and what taxes you paid, you can then pay estimated quarterly taxes to the IRS. This can help give you a more accurate picture of how much you are earning on a monthly basis.
2. Listing Spending Categories
Next, you’ll want to figure out how much you’re spending each month.
This involves going through one month’s worth of expenses and dividing everything up into categories, then figuring how much you spend on each. You can do this by hand, make a budget in Excel, or use a budgeting app (your financial institution may even offer a free one).
Spending categories typically include necessities, such as rent/mortgage, transportation (like car expenses or public transportation costs), food, cell phone, healthcare/insurance, life insurance, childcare, and any debts (credit cards/ loans).
You’ll also need to list nonessential spending, such as cable television, streaming services, concert and movie tickets, restaurants, clothing, etc.
It’s also important to include monthly contributions to a retirement plan and personal savings in your list of expense categories.
If you don’t currently have an emergency fund in place (that could cover at least three to six months of living expenses just in case), consider putting it on the spending list, so you can start putting some money towards it each month. (Putting it in a high-yield savings account can be a wise move to help it grow. You might even automate your finances and have a small sum deducted right after payday and put into the account)
3. Seeing Where You Stand
Once you have a sense of your monthly earnings and spending, it’s time to see how your numbers line up with general budgeting guidelines. One budgeting method to consider is the 50/30/20 model, which looks like this:
• 50% of money goes towards necessities such as a home, car, cell phone, and utility bills.
• 30% goes towards your wants, such as entertainment and dining out.
• 20% goes towards your savings goals, such as a retirement plan, a downpayment on a home, emergency fund, or investments.
By looking at your income versus your expenses, it will be easy to see what, if any, changes need to be made.
4. Making Adjustments
There are many ways to adjust how much you’re spending in order to reach certain personal finance goals.
The easiest way to change your spending habits is to trim some of your nonessential expenditures. For example, perhaps internet and cable television costs $120 a month, and if cable is cut out, it would result in a savings of $130 a month.
Sticking to a budget may also require looking at the bigger picture and finding places for more significant savings. “Along with reducing small indulgences, cutting your rent can be an effective way to free up more cash in your budget,” says Brian Walsh, CFP® and Head of Advice & Planning at SoFi. This is especially true if your rent is eating up 50% or more of your monthly income. Or, you might want to consider trading in an expensive car lease for an older, pre-owned vehicle.
5. Negotiating With Credit Card Companies and Service Providers
If debt and bills are too high, then it’s going to be much harder to budget and save up money for the future.
One way to cut back is to negotiate with credit card companies and service providers. Credit card companies want their money back, so when cardholders call and say they can pay if some adjustments are made, they may be willing to help. You might ask if you can get your monthly payment or interest rate reduced, or if it’s possible to remove late fees.
Cardholders can ask for their monthly payment to be lowered, see if their interest rate can be lowered, and/or ask if it’s possible to remove late fees.
It may also be possible to lower monthly bills for internet, cable, streaming services, medical bills, and car insurance. For instance, if you see a promotion going on for cable and internet, you can always ask your cable company if they can apply that promotional rate to your account.
You can also use a car insurance quote comparison tool to find a lower car insurance rate, or call up a hospital to negotiate a medical bill.
6. Taking on a Side Gig
Once you set up a living budget, it may seem clear that additional income could be a big help. If you have the time and energy, you might take on a low-cost side hustle to bring in more money. Some ideas include:
• Selling things on eBay, Craigslist, or Facebook Marketplace
• Having a garage sale
• Creating an Etsy store and selling homemade goods
• Driving for a rideshare or food delivery service
• Giving music lessons
• Renting out a room on Airbnb
• Walking dogs
• Cleaning houses
• Babysitting
• Handling social media for small businesses
• Selling writing, photography, or videography services to clients
Setting aside additional income for necessary expenses and future goals, and not spending all of the money on immediate wants, can be a big help when it comes to living on a budget.
It’s easy to spend money when only using credit cards and debit cards. Whenever possible, consider using cash, as it makes it easier to see the impact of your spending. You might be less likely to go into debt since money doesn’t seem invisible anymore. Taking out enough cash at the beginning of the week to cover your daily expenses could help you stick with your budget.
The Takeaway
Living on a budget doesn’t have to feel onerous and restrictive. In fact, the process of setting up a budget and sticking to it every month, can eventually free you from financial burdens and help you reach your life goals.
Getting started involves listing everything that is coming in and everything that is going out each month. The next step involves figuring out where you stand, and what you can do to get closer to your personal and financial goals. This may involve cutting back in some areas and also finding some ways to boost your income.
Keep at it and soon you will be in control of your finances, rather than the other way around. The right banking partner can also help you track your income and spending and stay on top of your budget.
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy 3.30% APY on SoFi Checking and Savings with eligible direct deposit.
FAQ
What is the 50-30-20 budget rule?
The 50-30-20 budget rule is a simple financial guideline that divides your income into three categories: 50% for essential expenses (like rent and groceries), 30% for discretionary spending (like entertainment and dining out), and 20% for savings and debt repayment. This rule helps maintain a balanced budget, ensuring you cover necessities, enjoy life, and save for the future, promoting financial stability and peace of mind.
What are the 4 A’s of budgeting?
The 4 A’s of budgeting are: Accounting, Analysis, Allocation, and Adjustment.
• Accounting: Track your income and expenses to understand your financial inflows and outflows.
• Analysis: Review your financial data to identify patterns and areas for improvement.
• Allocation: Distribute your funds to different categories based on your priorities and financial goals.
• Adjustment: Regularly update your budget to reflect changes in your financial situation and ensure you stay on track.
These steps help you create and maintain a practical, effective budget.
How to survive on $1,000 a month?
Surviving on $1,000 a month requires strict budgeting and prioritizing needs over wants. Start by covering essential expenses like rent, utilities, and groceries. If necessary, look for ways to lower some of these fixed costs, like taking on a roommate or moving to a cheaper area. You may also need to reduce nonessential spending (like dining out and subscriptions), use public transportation, and shop secondhand whenever possible. Consider side gigs or freelance work to supplement your income.
About the author
Kylie Ora Lobell
Kylie Ora Lobell is a personal finance writer who covers topics such as credit cards, loans, investing, and budgeting. She has worked for major brands such as Mastercard and Visa, and her work has been featured by MoneyGeek, Slickdeals, TaxAct, and LegalZoom. Read full bio.
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With the average cost of tuition at a private college close to $40,000 per year, it’s no surprise that many students will take out student loans to pay for their education. These student loans come in all shapes and sizes: federal or private, subsidized or unsubsidized, cosigned or not.
Most federal student loans do not require a credit check and can be borrowed without a cosigner. While the majority of students who take out private loans have a cosigner to guarantee the loan, that’s not an option for everyone. A cosigner — generally a family member or close friend — is someone who guarantees they will pay back your student loan if, for some reason, you can’t.
If you don’t have enough established credit to qualify for a private student loan on your own, turning to a cosigner may help you get approved at a better interest rate. However, not everyone has someone to cosign their student loans. Luckily, there are plenty of ways to potentially qualify for both private and federal student loans without a cosigner. Here’s what you need to know.
Key Points
• Many students need to take out loans due to rising tuition costs, with options including federal loans that do not require a cosigner.
• Obtaining a private student loan without a cosigner is possible, but typically requires a solid credit history and may result in higher interest rates.
• Federal student loans offer various funding options without the need for a cosigner, although loan limits may restrict the total amount available.
• Students unable to secure a loan without a cosigner can consider alternatives such as attending a community college or exploring grants and scholarships.
• Building credit early and checking eligibility through soft credit inquiries can help increase the chances of qualifying for loans without a cosigner.
Purpose of Adding a Cosigner
There are two main reasons why adding a cosigner to a private student loan may make sense — one is to improve your chances of being approved for a loan and the other is to potentially help secure a more competitive interest rate.
If you’re applying for student loans, you may not have a long credit history yet. To lenders, a lack of credit history can be seen as risky because you haven’t proved how well you can manage your financial obligations. You might need a cosigner to convince a lender to give you a student loan, since having a cosigner with more financial security or a better credit history reduces risk to the lender.
A cosigner with a strong credit history may also help you get approved for a loan with a lower interest rate, which could help reduce the amount of money you pay in interest over the life of the loan.
A cosigner will need to share their financial information with the lender, so it’s a good idea to make sure that your cosigner has plenty of time to get their documents in order and discuss loan applications with you.
You’ll submit your financial information and, if you’re a dependent student, your parents’ information, too. Depending on your financial need, you’ll then be offered a combination of federal student loans — including Subsidized and Unsubsidized Direct or PLUS Loans — and work-study programs.
Federal student loans typically do not require a cosigner, nor a credit check, and they often have competitive interest rates. Direct PLUS Loans , which are primarily offered to parents and graduate or professional students, however, do require a credit check.
You’ll want to keep in mind that there are limits on how much you can take out in federal loans. For example, dependent students whose parents are unable to obtain PLUS Loans cannot take out more than $9,500 as a first-year undergrad. And, no more than $3,500 of this amount may be in subsidized loans. Because of these limits, students may look for additional sources of funding.
Can You Get a Private Student Loan Without a Cosigner?
Yes, it is possible to get a private student loan without a cosigner, but you will likely need to have an established credit history or be willing to pay a higher interest rate.
To qualify for a private student loan, which are available from banks, credit unions, and online lenders, you generally have to be age 18 or older, a U.S. resident, and enrolled in school at least part time. Additionally, certain lenders may only approve loans if you are enrolled at schools that meet their criteria, which can vary from lender to lender.
You also typically must meet certain credit requirements. This often includes at least two years of established credit history, a good credit score (670-739), and a certain minimum amount of income.
Some private lenders will provide student loans without a cosigner even if you have a limited credit history or income. However, you will almost definitely pay a higher interest rate.
Pros of Having a Cosigner on a Private Student Loan
Having a cosigner on a private student loan can help you qualify for a loan you might not otherwise be able to get. In addition, it can help you get approved for a larger loan amount, as well as lower rates and fees.
You’ll also want to keep in mind that having a cosigner is not necessarily a permanent situation. Some lenders will release a cosigner from a loan after the primary borrower meets certain requirements, like a certain number of payments and a credit check.
You also may consider refinancing your loan once you’re out of school, which will then be a way to have the loan in your own name. It can be a good idea to talk through what your cosigner expects and anticipates for the life of the loan, so that you’re both on the same page.
What is the Minimum Credit Score for a Student Loan?
If you apply for a federal student loan, your credit score won’t be a factor, since a credit check is not even part of the application process. However, private student loans often require a credit score of at least 670 to get a loan without a cosigner.
The exact qualification criteria will vary from lender to lender but, generally, the higher your credit score, the more likely you are to qualify and obtain a competitive interest rate for a private student loan.
Before you apply for a private student loan, you may want to get copies of your credit reports (available free at AnnualCreditReport.com) and check your credit score to get a sense of where you may stand in the eyes of a lender. You also can check your credit report for any errors, which could bring down your score.
Who Is Eligible for Student Loans That Don’t Require Cosigners?
Federal student loans don’t require a cosigner. There are also some private student loans that don’t require a cosigner, though you typically need to meet certain credit and income requirements.
You may be able to check your private student loan eligibility before you apply for a loan without a cosigner. This triggers a soft credit check. A soft credit check does not affect your credit score, but can give you an approximate idea of whether or not you’ll be approved for a loan and what the interest rate on the loan may be.
Keep in mind, though, that your loan won’t be finalized until you apply for the loan. At this point, a hard credit check will be performed and final approval decisions will come through. But checking loan eligibility is one way to know whether or not a lender may consider your application without a cosigner.
Options If You Can’t Get a Student Loan Without a Cosigner?
If you can’t get a student loan without a cosigner and you don’t have someone who can be your cosigner, don’t panic. There are other potential paths forward depending on your goals and your circumstances:
• Take a gap year. Some students take a year off to build credit, grow their income, and reapply once they feel their finances are on more secure footing.
• Consider a less expensive school. Some students who can’t get a cosigner decide to go to a community college and take core credit courses. Once they feel their finances are more secure, they transfer to their intended school to finish their degree.
• Rethink your education priorities. If you can’t get a cosigner and are having trouble shouldering loans on your loan, you may recalibrate your educational goals and consider different degree programs or institutions that may have a less expensive price tag. It can be helpful to talk to people who work in your future career field — they may have thoughts on how you can save money on education or may have tips for alternate paths toward the job you want.
• Talk with your financial aid office. Chances are, your financial aid office has seen similar situations and may have ideas. They may also be able to connect you with other funding opportunities, as well as students who have independently financed their education.
Other Ways to Help Finance Your Education
Besides taking out federal student loans or private student loans without a cosigner, there are a few other options to help finance your education.
Grants and Scholarships
There are many grants and scholarships available, including need-based grants and merit-based grants (grants available for students who reach a certain level of academic excellence) that you do not need to repay.
You can search for scholarships online to see if there are any you might qualify for. You might also ask your high school’s college counselor or selected college’s financial aid office for information on any scholarships or grants you may be eligible for.
Working While in School
You might also consider working while you’re in school. Some students find they can manage a job alongside their studies, while others find that it’s challenging to find a balance.
There is no “right” way to pay for your education. Some students may take a year or more off to save up for school, and then focus full-time on school. Talking to graduates can help you see different pathways and that there is no “one size fits all” when it comes to financing an education.
The Takeaway
Applying for a private student loan with a cosigner can help a potential borrower secure a more competitive interest rate or preferable loan terms. This is because the cosigner provides additional security for the lender — if the primary borrower runs into any issues repaying the loan, the cosigner is responsible.
Federal student loans, aside from Direct PLUS Loans, do not require a credit check or cosigner. If you find that your federal loans aren’t going to cover your education, a private student loan may help. And, some private lenders will offer student loans without a cosigner. Just keep in mind that private student loans lack the borrower protections offered by federal student loans.
If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.
Cover up to 100% of school-certified costs including tuition, books, supplies, room and board, and transportation with a private student loan from SoFi.
FAQ
Is it possible to get a private student loan without a cosigner?
Yes, it is possible, but it can be more difficult. Lenders typically require proof of good credit and sufficient income. Students without a strong financial profile may have trouble qualifying or may face higher interest rates.
How can students improve their chances of qualifying for a private student loan without a cosigner?
Students can build credit by paying bills on time, maintaining low credit card balances, and possibly working part-time to show income. A higher credit score and steady income improve the odds of loan approval.
Are there alternatives to private loans if you can’t get one without a cosigner?
Yes. Students should first maximize federal student aid, including grants, scholarships, and federal loans, which don’t require a cosigner. Some schools also offer institutional loans or payment plans that can help bridge funding gaps.
SoFi Private Student Loans Please borrow responsibly. SoFi Private Student loans are not a substitute for federal loans, grants, and work-study programs. We encourage you to evaluate all your federal student aid options before you consider any private loans, including ours. Read our FAQs.
Terms and conditions apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. SoFi Private Student loans are subject to program terms and restrictions, such as completion of a loan application and self-certification form, verification of application information, the student's at least half-time enrollment in a degree program at a SoFi-participating school, and, if applicable, a co-signer. In addition, borrowers must be U.S. citizens or other eligible status, be residing in the U.S., Puerto Rico, U.S. Virgin Islands, or American Samoa, and must meet SoFi’s underwriting requirements, including verification of sufficient income to support your ability to repay. Minimum loan amount is $1,000. See SoFi.com/eligibility for more information. Lowest rates reserved for the most creditworthy borrowers. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change. This information is current as of 4/22/2025 and is subject to change. SoFi Private Student loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).
SoFi Student Loan Refinance Terms and conditions apply. SoFi Refinance Student Loans are private loans. When you refinance federal loans with a SoFi loan, YOU FORFEIT YOUR ELIGIBILITY FOR ALL FEDERAL LOAN BENEFITS, including all flexible federal repayment and forgiveness options that are or may become available to federal student loan borrowers including, but not limited to: Public Service Loan Forgiveness (PSLF), Income-Based Repayment, Income-Contingent Repayment, extended repayment plans, PAYE or SAVE. Lowest rates reserved for the most creditworthy borrowers. Learn more at SoFi.com/eligibility. SoFi Refinance Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).
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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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.
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