Tail risk is the danger of large investment gains or losses because of sudden and unforeseen events. The term “tail risk” refers to the tails on a bell curve: While the fat middle of the bell curve represents the most probable returns, the tails — both positive and negative — represents the least likely outcomes.
When looking at the bell curve that gives the phenomenon its name, investors sometimes also refer to tail risk as “left-tail risk,” as it refers to the very unlikely and very negative outcomes on the curve.
What Is Tail Risk?
Tail risk is defined by a concept called standard deviation. As a metric, standard deviation shows how widely the price of an asset fluctuates above and below its average. For a volatile stock, the standard deviation will be high, while the standard deviation for a stock with a steady value will be low.
Standard deviation is an important number that investors use to understand how historically volatile a stock is, as well as the level of volatility they can project for it in the future. That projection is based on the underlying assumption that the price changes of a stock will follow the pattern of what’s called normal distribution.
Normal distribution is a statistical term used to describe the probability of an event, and it shapes the bell curve. If you flip a coin 10,000 times, how often will it land on heads or tails? Each time, there is a 50% probability it will land on heads or tails, and the curve describes the likelihood that those 10,000 flips will come out 50/50. The fat middle of the curve says it will be close to 50/50, but there are extremely low probabilities at the low (or skinny) ends of the bell curve that it could be more like 80/20 heads or 80/20 tails.
That approach to probability predicts that a stock selling at a mean price of $45 with a $5 standard deviation is 95% certain to sell between $35 and $55 at the close of that day’s market.
“Tail risk” is used to describe the risk that an investment will fall or rise by more than three standard deviations from its mean price. To continue the example, the hypothetical stock $45 stock has entered the domain of tail risk if, at the end of the trading day, it is priced at $30 or below, or at $60 or above.
💡 Quick Tip: Before opening any investment account, consider what level of risk you are comfortable with. If you’re not sure, start with more conservative investments, and then adjust your portfolio as you learn more.
What are Fat Tail Risks?
Unpredictable events are ironically predictable, and happen in the markets on a regular basis. And those markets, such as the one following the onset of the pandemic in early 2020, exhibit much “fatter” tails. Another period characterized by having an extremely fat tail was the 2008 Financial Crisis.
They’re called “fat tails” because the outcomes that had been on the extremes were suddenly happening, instead of the ones previously considered probable. This condition is also called by the mathematical term leptokurtosis. As a general rule, because they deviate so wildly from the expected norm, fat tail events present great risk as well as great opportunities for investors.
Tail Risk Strategy
Financial models such as Harry Markowitz’s modern portfolio theory (MPT) or the Black-Scholes Merton option pricing model, employ the assumption that the returns of a given asset will remain between the mean and three standard deviations.
The assumptions made in these long-term market projections can help with planning. But they’re not realistic about how investors receive their market returns over the long term. Rather, the bulk of their returns, no matter how diversified their portfolio, are largely the result of positive tail events. The power of tail events over long periods is one reason that experts tell investors to stay in the markets during fat-tail periods of volatility, even if it is stressful at the time.
Why Investors Hedge Tail Risks
Left-tail events also have the potential to have an extremely negative impact on portfolios. That’s why many investors hedge their portfolios against these events — aiming to improve long-term results by reducing risk. But these strategies necessarily come with short-term costs.
Downside Protection
One strategy that’s designed to protect against tail risks involves taking short positions that counterbalance the rest of a portfolio, also known as buying downside protection. For example, if an investor is heavily invested in U.S. equities, they may consider investing in derivatives on the Chicago Board Options Exchange (CBOE) Volatility Index (VIX), which correlates to the inverse of the S&P 500 index. (Using short strategies is also one way to invest during a bear market.)
Another way to hedge by buying downside protection is to purchase out-of-the-money put options. When the assets connected to these put options go down, the put options become more valuable. Granted, buying those options costs money, but it can be a strategy to consider for investors who believe the markets are likely to be volatile for a while.
Tail Risk Parity
Tail risk parity is a way to structure a portfolio based on the expectations that events that have a negative impact on one asset class will likely be a boon to others. This requires looking at each asset class in terms of how it might fare in the event of a particular crisis, and then finding an asset class that would likely do well in that same circumstance, and then keeping them in balance within your portfolio.
Managed Futures Funds
Other investors who want to trim their exposure to tail risks may invest in managed futures funds. These funds buy long and short futures contracts in equity indexes, and can thrive during times of crisis in the markets.
The Takeaway
A tail risk is the risk that an event with a low likelihood of happening will happen. And it’s something that investors need to keep in mind. There are a few different ways to mitigate the impact of tail risk in an investment portfolio, but for long-term investors, it can be helpful to keep in mind that tail risk is responsible for most returns over time.
Tail risk and fat tails may seem like granular investing terms, but they do play a role in the markets, which means that every investor can benefit from learning about them, and how they can affect a portfolio.
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You just came into a cash windfall. You’re happy about this, but you aren’t exactly sure about what to do with it. Should you spend it? Save it? Invest it?
Depending on the amount of money you now have and your financial situation, the answers are going to differ. Here are some things you can do with a financial windfall to ensure that you are handling it in the smartest way possible.
What Is Considered a Windfall?
There is no one specific definition for what is a financial windfall. Typically, it means that you’ve received some unexpected money of a significant amount. For some people, a windfall could be a few hundred dollars; for others, it could be millions.
Whatever the amount, if it feels as if you have come into a considerable amount of money that you weren’t anticipating, it makes sense to develop a plan for how to use it.
3 Tips to Help You Make the Most of Your Money Windfall
If you are fortunate enough to have a windfall land in your lap, consider these points before you take action (whether spending, saving, investing, or donating). These steps can help you make the most of your money:
• Get professional advice: Depending on the size and source of your windfall, you might owe taxes on it and it might push you into a different tax bracket. Consulting with an accountant or financial planner may help you identify the implications.
• Go slow: Of course it’s exciting to have cash coming your way, but it’s wise to take some time and reflect on how the money would be best spent versus deciding “Dinner’s on me!” for you and your 10 best friends to celebrate. For instance, could your windfall lower or wipe out some debt? Could it be invested? Don’t let the adrenaline rush drive you to make too quick a decision. Take some time to clarify your goals.
• Think long-term: If you’ve received a sizable sum, it may be tempting to drop everything and quit your day job to travel or take on a passion project. Again, financial counseling could be wise before you do such things. What sounds like a major sum may not actually finance those things (or at least allow you to go all in on them), so look at the implications carefully before making a big life change.
Remember That Taxes May Be Due on Your Windfall
As briefly mentioned above, taxes may be due on your windfall. Talking with a certified public accountant or financial planner could be a wise move. Some food for thought:
• A large inheritance (more than $12.06 million as an individual in 2022) from a relative other than a spouse would trigger federal taxes owed.
• A gift of more than $16,000 will require you to pay federal taxes.
• A lottery win is taxed as ordinary income.
What to Do With a $500 Windfall
Let’s say the amount of money you received was $500. While it isn’t a ton of money, it still is significant enough that you should figure out what to do with it. Here are a few ideas for what to do with a small windfall.
1. Investing in Real Estate
Did you know that you can become a real estate investor with just $500? The real estate crowdfunding platform DiversyFund allows you to invest in real estate investment trusts (REITs) with a minimum of $500. Although there is risk involved in real estate investing and it might tie up your money before you see a return, this might be a good way to get your feet wet when it comes to real estate.
2. Meeting With a Financial Advisor
Hiring a financial advisor to help you learn how to plan for your financial future might be a good use of this money. Financial advisor charges vary: Some might charge hourly while others are commission-based. If this professional will be managing a portfolio for you, it is fairly common to be charged 1% of the portfolio value.
3. Buying a New Wardrobe
You could refresh your wardrobe with a little extra money. Wearing the right clothes could make you feel more comfortable and give you the confidence to go after your professional goals. Or you might splurge on some clothes you’ve been eying that give you a self-esteem boost.
4. Traveling Somewhere Cheap
You may be able to save on hotel rooms and plane tickets when sales are running. Or, you could always take a road trip somewhere locally for only $500. Since you’re on a tight budget, you may want to use credit card rewards to finance any additional cost of your trip.
5. Investing in a Certificate of Deposit
Another thing you can do with a $500 financial windfall is put it into a certificate of deposit, which is a savings account with a fixed interest rate as well as the maturity date. It’s a low-risk way to invest your money.
6. Getting Your Car Fixed
Have you been putting off car repairs because they’re too expensive? Now that you have $500, it might be time to put it towards your vehicle so it’s less likely to break down when you’re on the road.
7. Buying Renter’s Insurance
If you’re a renter, your personal property is not covered under your landlord’s homeowners insurance policy. Your renter’s insurance policy, typically costing less than $500 per year, will cover the cost of your belongings should anything happen, as well as offer liability coverage if anyone gets injured on your property. How much does renters insurance cost? Prices will vary depending on where you live and the value of what you have to insure, but nationally the average cost is typically between $126 and $252.
8. Purchasing a Life Insurance Policy
Life insurance is designed to protect your family in the event that you pass away. The average cost of a life insurance policy is $26/month, so you could pay for the whole year upfront with just $500. Typically, life insurance rates increase as you age and your risk of dying increases. So it’s likely to be less expensive to purchase life insurance while you’re young, rather than waiting until you feel like you can afford it.
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9. Taking a Professional Development Class
While private colleges and universities may be pricier, you may be able to find a class online or at your local community college for less than $500. Finding something that is relevant to your career may even help you move up the ladder at your job.
What to Do With a $1,000 Windfall
Did you receive a $1,000 financial windfall? Here are some tips on what to do with windfall money of that amount.
10. Getting Started on Your Emergency Fund
Ideally, your emergency fund will be as robust as possible and include several months’ worth of expenses just in case you lose your job or otherwise face some financial hardships. However, if you don’t have anything saved up, then putting $1,000 into it is a great start. You will have a safety net at the very least.
11. Hiring an Estate Planning Lawyer
Another important thing you could do with a $1,000 cash windfall is meet with an estate planning lawyer to write your will, establish a trust, and determine your power of attorney. You may feel some peace knowing your family will be protected and your assets will go where you wish to distribute them.
12. Opening a 529 Plan
A 529 plan is a way to save for your child’s college education. With $1,000, you can get a nice head start on college savings and gain interest on your money at the same time. Plus, the money will be tax-deferred.
13. Doing Home Improvements
With $1,000, you could do some significant home improvements like replacing your curtains, put down a new kitchen floor, paint different rooms, or spruce up your backyard. If you do the work yourself, you may be able to stretch your financial windfall money even further.
14. Donating It
If there’s a nonprofit you always donate to, you could make a big difference by giving $1,000 to it. You could also write it off on your taxes if it’s a qualifying organization.
15. Opening a High-Yield Savings Account
A typical savings account tends to have low-interest rates. But a high-yield savings account could earn up to 25 times the interest of a regular savings account. Putting the $1,000 in your account and then setting up automatic transfers from your checking into your new savings account will help it continue to grow.
16. Opening an IRA
If you don’t have anything saved up for retirement and you suddenly get a $1,000 financial windfall, then it might be time to open up an IRA. It’s wise to speak with a financial advisor about the best type of account for your situation.
17. Investing in Your Side Hustle
To make money on your $1,000 financial windfall, you could start or invest in your own low-cost side hustle. For instance, perhaps you’re a freelance graphic designer on the side but you need to buy some software to be able to do more detailed work. Or maybe you need to purchase a domain name and hire a developer to create a business website. With this initial investment, you may be able to bring in much more money and improve your finances.
What to Do With a $5,000 Windfall
You just got a cash windfall of $5,000. Now what? Here are some ideas.
18. Saving Up for a Down Payment
In some instances, you could make a down payment on a home for only 3% to 5%. For instance, if you purchase a $100,000 home and you only need to put 5% down, you could use your financial windfall money as your $5,000 down payment.
19. Paying Off Credit Card Debt
The average American family has $7,951 worth of credit card debt. Even if you have more than that much debt, $5,000 could make a big difference.
20. Investing Via Robo-Advisors
Do you want to invest your $5,000 cash windfall, but you don’t know where to start? Robo advisors create a diversified investment portfolio based on your investment goals and the level of risk you’re willing to take.
21. Investing in Blue-Chip Stocks
If you’re willing to take some risk with investments, then blue-chip stocks could be good investments for you. These stocks are from well-established and financially stable companies that typically pay dividends to investors.
22. Investing in International Bonds
Bonds typically have a solid history of returns, although slightly lower than that of stocks. However, since US interest rates have been relatively low, it may be a good idea to look into international bonds for a better return rate. These can carry higher risk because of currency exchange rates, however, so it’s wise to choose carefully, based on the country where the bond is held. Having both stocks and bonds in a portfolio is a good way to achieve diversification in a balanced portfolio.
23. Taking a Luxurious Vacation
With $5,000, you and your family could potentially vacation in a luxury resort. By looking for all-inclusive experiences, you could do much more with your money. Check out sites like Expedia, Costco Travel, and Booking.com for deals.
What to Do With a $10,000+ Windfall
If you received a cash windfall of $10,000 or more (lucky you!), here are some things you could do with it.
24. Opening a Money Market Account
With $10,000 could enable you to invest in a money market account, which typically earns a higher interest rate than a regular savings account.
25. Paying Off Student Loan Debt
The average student loan debt is more than $32,000. If you have a $10,000 financial windfall, you could put a nice dent in your student loan payments.
26. Trying Peer-to-Peer Lending
You could lend your financial windfall money to someone who is looking for a loan and have the opportunity to earn a much higher interest rate than you might receive on other types of investments.
27. Making Mortgage Payments
You could make a large principal-only payment toward your mortgage loan with a $10,000 cash windfall. Using an amortization calculator on the remaining balance of a fixed-rate loan will show you how much sooner you could pay off the loan.
28. Going to College
While $10,000 won’t cover a bachelor’s degree unless you also get grants or scholarships, you may be able to earn your associate’s degree at your local community college with your financial windfall money. This may also cover several classes at a university that could lead to career advancement.
29. Starting Your Business
Let’s say you want to do more than start a side hustle, and you’re ready to open a small business. With $10,000, you can get the ball rolling on your business without the need to borrow money. It could be a good idea to talk to a successful business owner in your industry who has the experience and can give you some guidance on how best to allocate your money.
30. Putting it in Your 401(k)
If you have a 401(k) through your employer, you could put your $10,000 into it. If your employer matches your contributions, the money could go even further.
31. Moving to a Different Home
Moving can be expensive, and a $10,000 financial windfall could be useful when it comes to covering moving costs. A move may make sense if you can find a place that’s more convenient to your work, restaurants, and entertainment and/or gives you and your family more space or offers additional amenities.
The Takeaway
Receiving a financial windfall of any amount is probably best handled with careful thought. You might pay down debt, take a vacation, invest the funds, or pursue higher education…or even do a little of each. Sometimes, the best thing to do is to set it aside while you take your time to make a decision about how best to spend it.
Earning interest on the money during a “thinking it over” period can be a good thing, too. A SoFi Checking and Savings Account can be a good place to park your money; it will earn a competitive annual percentage yield (APY) and you won’t pay any account fees. Those two features can help you money grow.
Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.20% APY on SoFi Checking and Savings.
FAQ
What amount of money is considered a windfall?
The amount of money that is considered a windfall will vary depending on your circumstances. If you are just starting out or earning a lower income, $500 might be cause for celebration. Typically, a windfall is considered $1,000 or more, and in some cases, it could be a major sum of six figures or more.
What to do with a $50,000 windfall?
There are many ways to use a $50,000 windfall. You could pay off high-interest debt, pump up your retirement account or savings for your children’s education, or you might invest it, whether in the stock market or your own business.
What can you do with a $100K windfall?
With a $100,000 windfall, you might pay off high-cost debt, stash money for future educational costs for yourself or your child, save for retirement, or invest the money or buy real estate with it.
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You’ve likely heard about the 1%: Those people who’s net worth is among the top 1% in the nation. Just how wealthy are these individuals? Recent data shows that while the median U.S. income is $70,000 a year or so, the 1% can earn up to $955,000, or just a hair under a million dollars a year.
If you are curious about what it takes to be among the 1% or have your sights firmly set on joining their ranks, read on. Here’s a closer look at how the wealthiest people in America got their plus some of their most effective strategies for financial success.
What Does it Mean to be in the Top 1%?
While many people might think “top 1%” and immediately imagine a CEO whose salary is in the tens of millions, the top 1% in terms of net worth aren’t necessarily the people who earn the most.
Net worth refers to the value of the assets a person owns (which includes checking and savings account balances, the value of securities such as stocks or bonds, real property value, the market value of automobiles, etc), minus the liabilities (or debt, like mortgages, loans, credit card balances) they owe.
A deeper view of the top 1% indicates that this wealth accumulation is spurred by more than one source: Income, investments, tax breaks that help the wealthiest keep more of their money, property, and more. All of these help make up the resources a household or individual has socked away as net worth.
Having a high net worth isn’t just a matter of earning more. It can also mean saving more. Consider these numbers:
• The median household in the U.S. has $11,700 in savings.
• The top 1% of American households have a median savings of $1.1 million.
• The lowest 20% of income earners have no savings, as you might expect, as they may be living paycheck to paycheck.
These numbers indicate that not only do high-wealth households make more money, but they also know the value of keeping some of it in a secure location, where it’s likely insured and earning a high-yield interest rate.
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Is There a Formula for Becoming Part of the 1%?
There’s no one formula for joining the 1%, but several factors appear to play a role in the rise of many one-percenters. These include:
• Saving. Many people who save through traditional 401(k) retirement plans and other vehicles may receive a match from an employer. You might choose to save the minimum amount required to get that match, but saving more — the max allowed in a 401k and additional after-tax contributions — builds net worth faster.
• Starting early. The earlier you start saving and investing, the more you stand to gain due to compound earnings, which is when any returns you earn are reinvested to earn additional returns. This “interest on interest” can help your wealth snowball over time.
• Income consistency and growth. The more you earn and the more that grows over time, the more likely your household will be to enter the top 1% of wage earnings. There are some in-demand careers (like software engineers and data scientists) where average Big Tech salaries are in the range of $200,000 per year. But regardless of your particular job, staying consistently employed and saving is a path to building wealth versus leaving the work force or deciding to forego savings for a few years to, say, travel more.
• Frugality. You’ve heard that Warren Buffett wears outdated suits and lives in a house he paid $31,500 for in 1958. He’s worth approximately $113.3 billion. He also buys reduced-price cars, doesn’t spend big on expensive hobbies and he even clips coupons. Not all 1% are spending lavishly on yachts and third and fourth homes. If you want to be a part of the 1% and you didn’t invent the best thing since sliced bread, it may be helpful to stay motivated to save money vs. overspending.
• Family history/Luck. Having a head start can certainly help. However, research indicates that 79% of 1%-ers are self-made. Finding the right solution for a big problem at the right moment can lead to a big windfall in a new company, or, starting the next Facebook or Amazon is a little bit luck, a little bit skill.
Thomas Stanley, author of The Millionaire Next Door, identified the seven characteristics of people who become big accumulators of wealth—and thus have a chance to build the wealth it takes to be in the top 1%. These common traits include:
1. They live below their means. 2. They allocate their money, energy, and time in ways that contribute to building wealth. 3. They believe that financial independence itself is more important than appearing to have a high social status. 4. Their parents did not provide money for their basics in adulthood. 5. Their adult children are self-sufficient economically. 6. They understand how to target economic opportunities. 7. They choose the right occupation.
Not all of these are factors one can fully control—and not everyone has a knack for targeting economic opportunities. In addition, many people choose an occupation around a passion, not around wealth-building. That doesn’t mean you can’t get there—or get close.
The Takeaway
Being part of the 1% appears to take a combination of luck, talent, hard work, and determination. Being diligent about saving is also a key way to grow your net worth over time. The more you can sock away, the better off you will likely be in the future.
Looking to start saving? SoFi Checking and Savings is an online banking account where you can spend and save all in one account. You’ll earn a competitive annual percentage yield (APY) and pay no account fees, which can help your money grow faster
With SoFi Checking and Savings’s Vaults feature, you can set up recurring deposits to help you reach your savings goals faster.
Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.20% APY on SoFi Checking and Savings.
SoFi members with direct deposit activity can earn 4.20% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.
As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.20% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 10/31/2024. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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.
If you’re expecting a baby or just beginning to think about expanding your family, it’s an exciting time, full of new experiences and lots of love to be shared. Oh, and new responsibilities and expenses too.
From diapers to childcare, from toys to medical costs, there are myriad costs associated with parenthood. There are many ways you can plan and get on track for affording these costs. Here, you’ll learn some of the best techniques to make your money go further and pay for the expenses that go along with welcoming a baby.
The Costs of Having a Baby
The exact cost of having a baby varies depending on health insurance, state and local cost of living, level of prenatal care, and a number of other factors. But according to the most recent report from the U.S. Department of Agriculture (USDA), a middle-income family in 2022 could expect to spend between $15,438 to $17,375 per year per child.
For couples who conceived naturally, without the added costs of fertility treatments or adoption, that first expense might include a trip to the pharmacy for a pregnancy test. From there, they grow to include prenatal care for mom and baby and an ever-expanding checklist of purchases, to-dos, and decisions—all within the next nine months or so.
Here’s a look at some of the common expenses that can crop up, from pregnancy through baby’s first birthday.
Before Birth
Parents-to-be may find that some of the biggest costs of having a baby happen before the baby is born. Prenatal care, for example, can begin within weeks of conception. It can bring associated diagnostic tests. Regardless of health insurance, extra services like 3D ultrasounds may not be covered.
A typical parent-to-be might also have a shopping list that includes a car seat, stroller, crib, diapers and wipes, more diapers and wipes, a changing table, clothes, toys, a baby monitor, bottles, and more diapers and wipes.
Depending on mom’s preference for breastfeeding or formula feeding, the list might also include a breast pump and related supplies or formula (or sometimes both).
During Birth
When it comes time to welcome your new bundle, the average cost is reported, on average, to be around $18,865. Natural, vaginal births are usually the most affordable, with costs increasing alongside complications or procedures like c-sections, and actual costs swing widely by state.
After Birth
Once mom and baby leave the hospital, they start to create a new normal for two. For mom, it can include postpartum doctor visits to monitor healing or remove stitches, and for baby it can include regular, frequent checkups, starting within three to five days of birth
If both parents decide at some point to return to work, the cost of daycare might be the next large, recurring expense. Combined with groceries, bills, and other aspects of pre-baby life that still go on, the thought of managing it all might feel overwhelming.
Here are some ways it’s possible to cut corners, get creative, and save money.
More and more employers are offering paid maternity (and paternity) leave, but beyond 12 weeks of unpaid leave offered by the Family and Medical Leave Act (FMLA), receiving pay while caring for a newborn isn’t guaranteed.
For many Americans, that means saving up for a baby is more important than ever. Some people take out adoption loans to help cover costs for a new baby.
Facing a heap of new expenses while at the same time losing income may be a scary thought, and getting through it could require a heart-to-heart between partners and a lot of teamwork. But here are some strategies that may help budget for a baby.
1. Starting a Stockpile ASAP
One way to save early and often is to think of those nine months between the start of a pregnancy and the due date as time to stock up and save. Consider the financial difference between adding one box of diapers or wipes to a regular grocery trip vs. waiting until the baby arrives.
Adding items to your inventory a bit at a time—especially when they’re on sale—could be a lot easier on the wallet than an emergency trip when they’re needed ASAP. The same strategy could be used for cash, too. Every day, week, or month, parents could set aside as much as possible in an emergency fund. Having a specific account dedicated to baby’s needs could mean that the regular budget for paying bills and other grownup expenses isn’t as heavily affected.
Get up to $300 when you bank with SoFi.
No account or overdraft fees. No minimum balance.
Up to 4.20% APY on savings balances.
Up to 2-day-early paycheck.
Up to $2M of additional FDIC insurance.
2. Cutting Extra Costs
If a new, baby-friendly budget is in the works, parents might want to consider ways to cut costs — starting with areas that are the least painful. Take fees, for example. Eliminating credit-card fees, ATM withdrawal fees, or late-payment penalties are some of the easiest ways to improve cash flow. If bills tend to be incurring late fees, automatic drafts or reminders are potential ways to help make sure they’re on time.
Some other, not-so-painful ways to cut costs might include looking at where unused subscriptions can be canceled and valued ones can be lessened but still exist. For instance, there are ways to save on streaming services, and you might also look into new ways to shop. Consignment and second-hand stores are often filled with gently used baby items, from outgrown clothes to books, which can yield savings.
A health savings account (HSA) is usually offered alongside a high-deductible health plan (HDHP), and when used how it’s intended could bring new parents some significant perks: Money that’s placed into the account is pre-tax (and can include employer contributions), and it can be used to cover out-of-pocket medical expenses, such as office copays. If the HSA provider issues funds via debit card, it’s one easy way to keep health expenses entirely separate from the day-to-day budget.
But it’s not just doctor’s visits that are covered by HSA funds. Depending on individual plans, some can also be used to pay for health memberships, chiropractic treatments, breast pumps, and other items not covered by regular health insurance.
And, although HSAs are traditionally offered through employer health plans, freelancers and other self-employed workers may be eligible to open an account, too.
4. Getting Creative
A newborn’s essentials list may be significantly shorter than mom and dad’s: They need diapers, clothes, food, a safe place to travel and sleep, and parent cuddles — that’s about it. The rest? The fancy diaper bag, the 100-in-1 stroller, the matching outfits, even shoes before the baby leans to walk, can be more like nice-to-haves.
To save money on needs vs. wants, parents could consider putting “gift” items on a baby-shower registry — if they’re purchased, great! No unnecessary strain on the budget.
5. Putting Your Savings to Work
One way to afford a baby is to make your money work harder for. For instance, pay attention to where you keep your savings. When comparing traditional vs. online banks, you may see that online ones can offer a better deal. Since these institutions don’t have brick-and-mortar locations to staff and maintain, their operating budget may be lower. They can pass those savings on to their clients in the form of higher annual percentage yields (APYs) and lower or no fees.
The Takeaway
One way to make your savings work hard for you is to open an online bank account with SoFi Checking and Savings®️. There are no account fees and a competitive APY to help your money grow faster. Plus you’ll spend and save in one convenient place, which can make life easier for busy parents.
Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.20% APY on SoFi Checking and Savings.
SoFi members with direct deposit activity can earn 4.20% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.
As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.20% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 10/31/2024. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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.
If you’re a fan of the show Cheers, the Boston Red Sox, or even baked beans, a Boston vacation gives you the chance to go right to the source. But after having a beer at the bar and attending a baseball game, there are still plenty of things to do in Boston, aka Beantown.
Boston is a highly-walkable city, and each neighborhood has its own personality, like the “secret garden” vibe with row houses in Bay Village, or Charlestown, with its Irish roots. Plus, there are wonderful historical sites, museums, and gardens to explore, as well as great food of all kinds.
Here, you’ll learn about some of the top not-to-be-missed attractions, as well as ways to make sure your trip is as enjoyable and affordable as possible.
Best Times to Go to Boston
If you’re planning your Boston trip, you’re probably wondering when to go. June until October offers great weather, though summer travel can be more crowded. Aim for late September or October to catch the fall leaves and cooler weather.
If you want to plan your Boston vacation around major events, here are a few to consider:
• January/February: Chinese New Year
• March: Saint Patrick’s Day Parade
• April: Boston Marathon
• June: Dragon Boat Festival
• August: Saint Anthony’s Feast
• September: Oktoberfest
• December: First Night.
If you are planning on traveling during in-demand and potentially pricier times, consider using credit card miles vs. cash back that you may have earned on your rewards card.
Bad Times to Go to Boston
Depending on how much you plan to be outside on your Boston vacation, you might avoid visiting in the winter months, when you may have to battle cold weather and snow. (And if you’re traveling with pets to this incredibly pet-friendly city, those icy months may not be a good time for your four-legged friend either.).
Average Cost of a Boston Vacation
As you build your budget for your Boston trip, it can help to know how much you’ll spend on airfare, hotel, food, and renting a car (though public transportation can get you around town well).
For a couple, the average price for one week in Boston is $4,255. Hotels can cost $131 to $484 a night, and vacation rentals run $280 to $610 per night.
Even if you don’t have four grand lying around right now, there are options for book now pay later travel that allow you to pay for your travels over time.
And remember: using a credit card that lets you earn points when you book travel gives you credit card rewards you can redeem for other travel expenses.
10 Fun Must-Dos in Boston
You’ll be spoiled for choice when it comes to fun things to do in Boston. No matter if you’re a sports fan, a foodie, a shopaholic, or history lover, there’s something for everyone. Here are the best things to do in Boston, based on top ratings online as well as recommendations from people who’ve been there and done that in Boston..
1. Catch a game at Fenway Park
If you’re a Red Sox fan, this is already on your list of must-dos. Fenway Park has been hosting baseball lovers since 1912. You can catch a game in-season (don’t forget to cover the price of tickets when growing your travel fund), or take a ballpark tour to learn about the unique history of this landmark. mlb.com/redsox/ballpark
2. Follow the Freedom Trail
This 2.5-mile stretch tells the story of early America, with museums, churches, meeting houses, burying grounds, parks, a ship, and historic markers to explore. You can walk the trail yourself or take a guided tour. thefreedomtrail.org/
3. Stroll Through the Boston Common and the Public Garden
Enjoy a beautiful day by strolling through these two Boston icons. The Boston Common was created in 1634, and was America’s first public park. The Public Garden was the first botanical garden in the country, founded in 1839. Choose your spot for a picnic and people-watching (a great free thing to do in Boston), or take a swan boat on the pond.
boston.gov/parks/public-garden
4. Get Educated About Harvard University
You don’t have to go to Harvard to go to Harvard! You can take a tour while you’re on your Boston vacation of this nearly 400-year-old institute of higher learning. There are several different tours, including those on the history of the university, a tour of the campus’ art galleries, a tour of Arnold Arboretum, and more. harvard.edu/visit/tours/
5. Tour the Boston Opera House
For a beautiful slice of Boston history, as well as the chance to watch a theatrical production, plan to visit the Boston Opera House. Additionally, you can take a tour of this nearly 100-year-old landmark and discover the intricate details of the opulent architecture, but you also can go behind the scenes of a modern production. bostonoperahouse.com/
6. Dine out in the North End (Little Italy)
If a trip to Italy isn’t in your near future, you can pretend you’re there in Boston’s North End neighborhood. Italian immigrants arrived in this quarter in the 1860s, and since then, Italian restaurants and businesses have sprung up, bringing European vibes to the city.
Save room for a cappuccino and something sweet, or plan to have lunch or dinner to enjoy authentic pizza or pasta at one of the many Italian eateries. (If you swipe a travel credit card as you dine, you can rack up more points to use on when on a trip.) meetboston.com/plan/boston-neighborhoods/north-end/
7. Have a Pint at a Boston Brewery
While the Samuel Adams Boston Brewery (samadamsbostonbrewery.com/) is the most well-known brewery in the city (and worth a visit), it’s far from the only one. Plan your day to include beer hotspots like Aeronaut Brewing Company, Harpoon Brewery, and Cambridge Brewing Company.
8. Visit the Boston Tea Party Ships & Museum
It’s hard to get far in Boston without running into a little history. The Boston Tea Party is an interactive experience that puts you in the middle of one of the most famous events in American history. It can be a fun thing to do in Boston with kids.
And after exploring the museum you can, of course, enjoy a cup of tea to commemorate the occasion! Tickets typically start at $25 for kids, $36 for adults. Looking online for coupons can be a way that families can afford to travel.
bostonteapartyship.com/
9. Enjoy the Art and Ambience at the Isabella Stewart Gardner Museum
Called a “millionaire Bohemienne,” Isabella Stewart Gardner made a name for herself in Boston’s elite and intellectual circles, and she opened an art museum at the turn of the 20th century. Heavily influenced by her travels to Venice, the museum now houses Isabella’s private collection, as well as modern additions. The museum is typically open daily except Wednesdays, and adult admission is usually $20. Also, there is a $10 million reward if you have any information about 13 works of art that were stolen 30 years ago! gardnermuseum.org/
10. Sign up for a Secret Food Tour
Want to know where the locals eat in Boston? Take a Secret Food Tour to find out. Accompanied by a Boston guide, you’ll discover hidden gems that are off the tourist path. You’ll get to try clam chowder, lobster rolls, and cannoli, among other delicacies. After all, let’s be honest: one of the top things to do in Boston is eat! The price of the tours will vary, but a three-plus hour eat-a-thon might cost $89 per person. secretfoodtours.com/boston/
The Takeaway
Boston is a vibrant city that was fundamental in the building of America. With history around every corner (not to mention something tasty to eat), you’ll find plenty to love about this city.
Whether you want to travel more or get a better ROI for your travel dollar, SoFi can help. SoFi Travel is a new service exclusively for SoFi members that lets you budget, plan, and book your next trip in a convenient one-stop shop. SoFi takes the guessing game out of how much you can afford for that honeymoon, family vacation, or quick getaway — and we help you save too.
SoFi Travel can take you farther.
FAQ
What should I eat in Boston?
Boston is known for several unique dishes, including baked beans, lobster rolls, Boston cream pie, and clam chowder.
What historical things should I see in Boston?
Founded in 1630, Boston has been the home to major historical events like the Boston Tea Party, which has its own interactive experience and museum. Also not to miss are the Freedom Trail, Paul Revere House, Harvard University, and Boston Public Library.
How many days should I spend in Boston?
Depending on how many sights you want to see on your Boston vacation, three to five days is the ideal amount of time.
Photo credit: iStock/Sean Pavone
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.
