Purchasing Power 101: Examining the Value of the US Dollar

Purchasing Power 101: Examining the Value of the US Dollar

Purchasing power is a concept used to express the amount of goods and services a consumer or business can buy with a given unit of currency. In the United States, purchasing power is directly linked to the value of the dollar.

Due to inflation, a dollar today typically won’t go as far as it did last year. And a dollar next year won’t buy the same things that it did this year. This fluctuation in US dollar purchasing power is constant, and goes unnoticed, except in times of extreme inflation.

How Does Purchasing Power Impact Investors?

Once you understand the purchasing power definition, you can start to understand its context for investing. The purchasing power of a dollar affects investors because it makes an impact on virtually every aspect of the broader economy. When the dollar buys less, it changes the shopping decisions of consumers, the hiring practices of employers, the strategic decisions of corporations, and the monetary policy of the Federal Reserve.

One way to track inflation and purchasing power of a dollar is the Consumer Price Index (CPI), a statistic compiled by the US Bureau of Labor Statistics (BLS), which reports the figure every month. The statistic measures the average of prices of a set of goods and services in sectors such as transportation, food, and healthcare. Economists consider it a valuable gauge of the ever-changing cost of living, though it does exclude some important spending categories, including real estate and education.

Investors, executives and policymakers use CPI as a lens through which to scrutinize other economic indicators, including sales numbers, revenues, earnings and so on. It also determines the payments made to the millions of people on Social Security, which gets adjusted for the cost of living every year, and retirees drawing a pension from the military or the Federal Civil Services.

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

Why Does the Value of the Dollar Change?

A number of factors drive the value of the US dollar, including large scale factors having to do with economic cycles, government politics and international relations. But the dollar has also experienced inflation for most of the last century.

Inflation rose after World War I amid increased demand for food and other raw materials, which raised prices of most consumer goods up until the Great Depression, in which the country experienced prolonged deflation.

That’s when President Franklin Roosevelt stepped in with a surprising policy decision: He banned private ownership of gold, and required people to sell their holdings to the government. That allowed the Federal Reserve to increase the money supply and stop deflation in its tracks.

Since 1933, through World War II, the Cold War, and a host of changing monetary and economic policies, the US dollar has seen various rates of inflation. It reached its peak during the late 1970s and early 1980s oil and gas shortages exacerbated existing inflation and led to a gas shortage, and an increase in the price of manufacturing and shipping of nearly every single consumer good.

Inflation rose at a more steady pace through the 1990s, falling to historically low levels in the past decade. One reason for the ongoing inflation is that the Federal Reserve continually increased the money supply via economic stimulus. The logic is simple supply and demand: If there are more dollars, then each one is worth less in terms of purchasing power.

In response to the Covid-19 pandemic and the ensuing lockdowns, the Federal Reserve injected trillions into the economy. That, along with other stimulus measures, has had many investors worried about the impact on the purchasing power of the dollar, and what that might mean for the broader economy. In 2022, inflation rose at the fastest pace in 40 years, making prices more expensive and resulting in many consumers having less money to spend.

What Purchasing Power Means for Investors

Generally, investors consider inflation a headwind for the markets, as it drives up the costs of materials and labor, boosts the cost of borrowing and tends to reduce consumer spending. That all tends to translate to lower earnings growth, which can depress stock prices.

But after decades of steady inflation, the markets have priced in a certain amount of shrinkage when it comes to the purchasing power of the dollar. Inflation has a great impact when it occurs suddenly and unexpectedly.

But inflation can have benefits for investors as well. During an economic upswing, inflation is a reliable side effect of prosperity, since economic booms produce higher profits, which drives up the markets. Historically, some experts say that the decades when the S&P 500 Index has delivered the highest returns have been when inflation has been between 2% to 3% annually.

Investors saving for long-term goals, such as retirement, must take declining purchasing power into account when determining how much they’ll need to reach those goals.

💡 Quick Tip: It’s smart to invest in a range of assets so that you’re not overly reliant on any one company or market to do well. For example, by investing in different sectors you can add diversification to your portfolio, which may help mitigate some risk factors over time.

How Does Inflation Influence Stocks?

Inflation impacts different types of stocks differently, and there are several strategies that investors can use to hedge against inflation. During periods of high inflation, growth stocks tend to underperform, simply because so much of their value is tied up in the expectation of future earnings, and inflation diminishes those expectations.

Value stocks, on the other hand, typically boast steadier earnings, and are valued in line with those earnings. As a result, value stocks, as a category, tend to hold up better during periods of high inflation.

Other investments to consider during periods of high inflation include dividend-paying utility stocks and REITs, gold and other commodities. And because periods of high inflation usually brings higher interest rates, it can be a good time to buy bonds, especially government bonds

The Takeaway

The value of the dollar, in terms of what it can buy, changes over time, but inflation isn’t always bad news for investors. Some stocks may perform better than others in an inflationary environment, and higher interest rates may be good news for bond investors and savers.

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


Invest with as little as $5 with a SoFi Active Investing account.

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SoFi Invest®

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

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


Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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

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What Is a Divestiture?

What Is a Divestiture?

A divestiture, also known as a divestment, involves the liquidation of a company’s assets, such as building or intellectual property, or a part of its business, such as a subsidiary. This can occur through several different means, including bankruptcy, exchange, sale, or foreclosure.

Divestitures can be partial or total, meaning some or all of the company could be spun off or otherwise divested, depending on the reason for the company getting rid of its assets. Corporate mergers and acquisitions are a common example of one type of divestiture.

What Are Reasons a Company Would Divest Itself?

Often a divestiture reflects a decision by management that one part of the business no longer helps it meet its operational goals. A divestiture can be an intelligent financial decision for a business in certain situations.

If one aspect of a business (e.g., a product line or a subsidiary) isn’t working, has become unprofitable, or is likely to soon consume more capital than it can create, then instead of letting that be a continued drain on resources, a company can divest.

This not only does away with the troublesome aspect of the company, but also frees up some money the company can put toward more productive endeavors, such as new research and development, marketing, or new product lines.

There are many other potential reasons for a company to divest itself of a particular aspect of its business as well. The growth of a rival may prove overwhelming and insurmountable, in which case divesting might make more sense than continuing to compete.

A company may choose to undergo a divestment of some sort, such as closing some store locations, in order to avoid bankruptcy, to take advantage of new opportunities, or because new market developments might make it difficult for part of the company to survive.

Companies also sometimes must divest some of their business because of a court order aimed at breaking up monopolies. This can happen when a court determines that a company has completely cornered the marketplace for its goods or services, preventing fair competition.

💡 Quick Tip: All investments come with some degree of risk — and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.

What Happens in a Divestiture?

When a divestiture involves the sale of part or all of a company, the process has four parts. The first two parts involve planning for the actual divestment transaction itself. Once management decides which part of the company to divest and who will be buying it, the divestment can begin.

1. Monitoring the Portfolio

When pursuing an active divestiture strategy, the company’s management team will review each business unit and try to evaluate its importance to the company’s overall business strategy. They’ll want to understand the performance of each part of the business, which part needs improvement, and if it might make sense to eliminate one part.

2. Identifying a Buyer

Once the business identifies some or all of the company as a potential divestment target, the team moves on to the next problem that logically follows: Who will buy it?

The goal is to find a buyer that will pay enough for the business to cover the estimated opportunity cost of not selling the business unit in question. If the buyer does not have the liquidity to make the purchase with cash, they might offer an equity deal or borrow money to cover the cost.

3. Executing the Divestiture

The divestiture involves many aspects of the business, including a change of management, company valuation, legal ownership, and deciding which employees will remain with the company and which ones will have to leave.

4. Managing the Financials

Once the sale closes, attention turns to managing the transition. The transaction appears on the company’s profit-and-loss statement. If the amount that the company receives for the asset it sells is higher than the book value, that difference appears as a gain. If it’s less the company will record it as a loss.

The company will typically share the net impact of the divestiture in its earnings report, following the transaction.

What Are The Different Types of Divestitures?

There are several different ways companies can define divest for themselves. A few of these options include:

•   An equity carve-out, when a company can choose to sell a portion of its subsidiaries through initial public offerings but still retain full control of them.

•   A split-up demerger, when a company splits in two, and the original parent company ceases to be.

•   A partial sell-off, where a business sells one of its subsidiaries to another company. The funds from the sale then go toward newer, more productive activities.

•   A spin-off demerger, in which a company’s division becomes a separate business entity.

What Causes a Company to Divest?

A divestiture strategy can be part of an overall retrenchment strategy, when a company tries to reinvent itself by slimming down its activities and streamline its capital expenditures. When that happens, the company will divest those parts of the business that are not profitable, consuming too much time or energy, or no longer fit into the company’s big-picture goals.

Factors that could influence a company to adopt a divestiture strategy can be lumped into two broad groups:

External Developments

External developments include things outside the company, such as changing customer behavior, new competition, government policies and regulations, or the emergence of new disruptive technologies.

Internal Developments

Internal developments include situations arising from within the company, such as management problems, strategic errors, production inefficiencies, poor customer service, etc.

Divestiture Strategy Example

Imagine a fictitious company called ABC was the parent of a pharmaceutical company, a cosmetic company, and a clothing company. After some time and analysis, ABC’s management determines that the company’s financials have begun deteriorating and they need to make a change in the business.

Following the four-step process above, they begin by finding the weakest points of business. Eventually, they decide that the pharmaceutical branch of the company is under-performing and would also be the easiest for the company to divest. It makes more sense to stick to clothing and cosmetics.

After identifying a buyer (perhaps a larger pharmaceutical company or a promising startup looking to expand), the divestment transaction occurs. The employees who work in the pharmaceutical branch either lose their jobs, or they get roles working for the new owner of that part of the business. The cash infusion that ABC gets as a result of the sale of its pharmaceutical branch will go toward new marketing efforts and creating new product lines.

💡 Quick Tip: It’s smart to invest in a range of assets so that you’re not overly reliant on any one company or market to do well. For example, by investing in different sectors you can add diversification to your portfolio, which may help mitigate some risk factors over time.

The Takeaway

Divesting is essentially the opposite of investing. It involves a company selling off parts of its business. A divestiture can have some positive outcomes on the value of a company, and there are several business reasons that a company would choose to divest. Depending on the circumstances, this process could theoretically be either a positive or a negative for shareholders.

Investors could see news of a divestment as a sign that a company is struggling, leading them to sell the stock. While this initial reaction could be one likely outcome, the company could eventually wind up doing even better than before if it manages itself better as a leaner company. In either case, the divestiture is one factor that investors can use in their analysis of that company’s stock.

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

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


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SoFi Invest®

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

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

Claw Promotion: Customer must fund their Active Invest account with at least $50 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

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Popular Options Trading Terminology to Know

Trading stocks can help investors build wealth over time. But for investors interested in more advanced investment strategies, options trading might be worth looking into – but be warned, options trading is its own world, with its own jargon.

When an investor trades options, they aren’t trading individual shares of stock. Instead, they’re trading contracts to buy or sell stocks and other securities under specific conditions. Beyond this, there are a number of important options trading strategies investors commonly use when trading options. In order to effectively deal in options, an investor might also want to familiarize themselves with certain lingo.

First, Understand What You Are Trading

Before learning the trading terms, it helps to have a firm grasp of what options trading is and what it involves. In layman’s terms, when you’re trading options, you’re investing in an option to buy or sell a stock, rather than the stock itself.

Again, this is a form of derivative trading, and there are numerous options trading strategies that can be put to use, too. It’s not exactly the same as trading stocks, and is often more complicated. For that reason, investors should know what they’re getting into before trading options.

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

Options Trading Terms to Know

When it comes to options trading, these are some of the most important trading terms to understand.

Call Option

A call option is an options contract that gives the purchaser of the option the right to buy shares of a stock or another security at a fixed price. This price is called the “strike price.”

When an investor buys a call option, the option to buy is open for a set time period. The expiration date is the date when the call option is voided — though some options positions are automatically closed or exercised if they are in the money. Standard options contracts are no more than 90 days.

Put Option

A put option gives a purchaser the right to sell shares of a stock at the strike price by a specified day. When getting to know puts and calls definitions, it’s important to remember that each one has:

•   A strike price

•   An expiration date

Strike Price

With a call option or put option, the strike price is one of the most important trading terms to know.

In a call option, the strike price is the price at which an investor may buy the underlying stock associated with the contract. In a put option, the strike price is the price at which they may sell the underlying stock.

The gap between the strike price and the actual price of a stock determines whether an investor is “in the money” or “out of the money.”

In the Money

When discussing stock movements, it’s typical to think in terms of whether a stock’s price is up, down, or flat. With options, on the other hand, there’s different language used to describe whether an investment is paying off or not, and it’s often described as “in the money” versus “out of the money.”

An option is in the money when the correlation between the strike price and the stock price is leaning in a buyer’s favor. Which way this movement needs to go depends on whether they have a call option or put option.

With a call option, a buyer is in the money if the strike price is below the stock’s actual price. Say, for example, you place a call option to purchase a stock at $50 per share but its actual price is $60 per share. You’d be up, or in the money, by $10 per share.

Put options are the opposite. An option buyer is in the money with a put option if the strike price is higher than the actual stock price.

Out of the Money

Being out of the money with call or put options means the option buyer doesn’t stand to reap any financial gain from exercising the option. Whether a call or put option is out of the money depends on the relationship between the strike price and the actual stock price.

A call option is out of the money when the strike price is above the actual stock price. A put option is out of the money when the strike price is below the actual stock price.

At the Money

Being “at the money” is another scenario an options buyer could run into with options trading.

In an at-the-money situation, the strike price and the stock’s actual price are the same. If the buyer of the option sells the option, they can make or lose money. If they exercise the option, they will lose money because of the premium paid.

Volatility Crush

When trading options, it’s important to understand stock volatility and how it can impact trading outcomes.

Volatility is a way to track up or down swings in a stock’s price across trading sessions. Implied volatility is a way of measuring or estimating which way a stock’s price might go in the future.

A volatility crush happens when there’s a sharp decline in a stock’s implied volatility that affects an option’s value. Specifically, this means a downward trend that can detract from a call or put option’s value.

Volatility crushes can happen after a major event that affects or could affect a stock’s price. For example, investors might see a volatility crush after a company releases its latest earnings report or announces a merger with a competitor.

Bid/Ask Price

When trading options, it’s helpful to know how bid and ask prices work.

The bid price is the highest price a buyer is willing to pay for an option. The ask price is the price a seller is willing to accept for an option. The difference between the bid price and ask price is known as the spread.

Holder and Writer

Other trading terms investors may hear associated with options are “holder” and “writer.” The person or entity buying an options contract may be referred to as the holder. The seller of an options contract can also be referred to as the writer of that contract.

An option is exercised when the buyer chooses to invoke their right to buy or sell the underlying security.

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

Pros and Cons of Options Trading

Options trading can offer both advantages and disadvantages for investors.

Pros of Options Trading

•   Lower entry point. Unless an investor is able to purchase fractional shares, purchasing individual stock shares with higher price points can get expensive. Investing in options, on the other hand, may be more accessible for investors with a limited amount of money to put into the market.

•   Downside protection for buyers. If the stock’s price isn’t moving in the direction a buyer anticipated, they don’t have to exercise their option to buy. This can limit losses.

•   Greater flexibility. An investor has control over exercising the option to capitalize on the stocks rise or fall accordingly. An investor could exercise an option to buy and keep the shares, or buy and then resell them. Or they could choose not to exercise their option at all.

Cons of Options Trading

Options trading can be risky for sellers. Trading stocks is risky, but trading options have the potential to be more so for investors on the selling end of a contract. An investor might end up being out of the money on an options contract — but even that doesn’t determine the extent of the loss. The risk comes from the selling of uncovered puts and calls.

The Takeaway

Trading options can be appealing to investors who think an asset’s price will go up or down, or who want to attempt to offset risk from assets that they own. But before an investor engages in options trading, it’s a good idea to get familiar with put and call definitions and other options trading terms.

Knowing the specific jargon and terminology used by options traders can help investors cut through the noise and make better decisions. Of course, if you’re uneasy or unfamiliar with options terminology, you’d probably be better off learning more before starting to make trades.

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

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


SoFi Invest®

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

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

Claw Promotion: Customer must fund their Active Invest account with at least $50 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

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Borrowing From Your 401k: Pros and Cons

Borrowing From Your 401(k): Pros and Cons

A 401(k) loan allows you to borrow money from your retirement savings and pay it back to yourself over time, with interest. While this type of loan can provide quick access to cash at a relatively low cost, it comes with some downsides. Read on to learn how 401(k) loans work, when it may be appropriate to borrow from your 401(k), and when you might want to consider an alternative source of funding.

What Is a 401(k) Loan & How Does It Work?

A 401(k) loan is a provision that allows participants in a 401(k) plan to borrow money from their own retirement savings. Here are some key points to understand about 401(k) loans.

Limits on How Much You Can Borrow

The Internal Revenue Service (IRS) sets limits on the maximum amount that can be borrowed from a 401(k) plan. Typically, you can borrow up to 50% of your account balance or $50,000, whichever is less, within a 12-month period.

Spousal Permission

Some plans require borrowers to get the signed consent of their spouse before a 401(k) loan can be approved.

You Repay the Loan With Interest

Unlike a withdrawal, a 401(k) loan requires repayment. Typically, you repay the loan (plus interest) via regular payroll deductions, over a specified period, usually five years. These payments go into your own 401(k) account.

Should You Borrow from Your 401(k)?

It depends. In some cases, getting a 401(k) can make sense, while in others, it may not. Here’s a closer look.

When to Consider a 401(k) Loan

•  In an emergency If you’re facing a genuine financial emergency, such as medical expenses or imminent foreclosure, a 401(k) loan may provide a timely solution. It can help you address immediate needs without relying on more expensive forms of borrowing.

•  You have expensive debt If you have high-interest credit card debt, borrowing from your 401(k) at a lower interest rate can potentially save you money and help you pay off your debt more efficiently.

When to Avoid a 401(k) Loan

•  You want to preserve your long-term financial health Depending on the plan, you may not be able to contribute to your 401(k) for the duration of your loan. This can take away from your future financial security (you may also miss out on employee matches). In addition, money removed from your 401(k) will not be able to grow and will not benefit from the effects of compound interest.

•  You may change jobs in the next several years If you anticipate leaving your current employer in the near future, taking a 401(k) loan can have adverse consequences. Unpaid loan balances may become due upon separation, leading to potential tax implications and penalties.

How Is a 401(k) Loan Different From an Early Withdrawal?

When you withdraw money from your 401(k), these distributions typically count as taxable income. And, if you’re under the age of 59½, you typically also have to pay a 10% penalty on the amount withdrawn.

You may be able to avoid a withdrawal penalty, if you have a heavy and immediate financial need, such as:

•  Medical care expenses for you, your spouse, or children

•  Costs directly related to the purchase of your principal residence (excluding mortgage payments).

•  College tuition and related educational fees for the next 12 months for you, your spouse, or children.

•  Payments necessary to prevent eviction from your home or foreclosure

•  Funeral expenses

•  Certain expenses to repair damage to your principal residence

While the above scenarios can help you avoid a penalty, income taxes will still be due on the withdrawal. Also keep in mind that an early withdrawal involves permanently taking funds out of your retirement account, depleting your nest egg.

With a 401(k) loan, on the other hand, you borrow money from your retirement account and are obligated to repay it over a specified period. The loan, plus interest, is returned to your 401(k) account. During the term of the loan, however, the money you borrow won’t enjoy any growth.

Recommended: Can I Use My 401(k) to Buy a House?

Pros and Cons of Borrowing From Your 401(k)

Given the potential long-term cost of borrowing money from a bank — or taking out a high-interest payday loan or credit card advance — borrowing from your 401(k) can offer some real advantages. Just be sure to weigh the pros against the cons.

Pros

•  Efficiency You can often obtain the funds you need more quickly when you borrow from your 401(k) versus other types of loans.

•  No credit check There is no credit check or other underwriting process to qualify you as a borrower because you’re withdrawing your own money. Also, the loan is not listed on your credit report, so your credit won’t take a hit if you default.

•  Low fees Typically, the cost to borrow money from your 401(k) is limited to a small loan origination fee. There are no early repayment penalties if you pay off the loan early.

•  You pay interest to yourself With a 401(k) loan, you repay yourself, so interest is not lost to a lender.

Cons

•  Borrowing limits Typically, you are only able to borrow up to 50% of your vested account balance or $50,000 — whichever is less.

•  Loss of growth When you borrow from your 401(k), you specify the investment account(s) from which you want to borrow money, and those investments are liquidated for the duration of the loan. Therefore, you lose any positive earnings that would have been produced by those investments for the duration of the loan.

•  Default penalties If you don’t or can’t repay the money you borrowed on time, the remaining balance would be treated as a 401(k) disbursement under IRS rules. This means you’ll owe taxes on the balance and, if you’re younger than 59 1 ⁄ 2, you will likely also have to pay a 10% penalty.

•  Leaving your job If you leave your current job, you may have to repay your loan in full in a very short time frame. If you’re unable to do that, you will face the default penalties outlined above.

Alternatives to Borrowing From Your 401(k)

Because withdrawing or borrowing from your 401(k) comes with some drawbacks, here’s a look at some other ways to access cash for a large or emergency expense.

Emergency fund Establishing and maintaining an emergency fund (ideally, with at least three to six months’ worth of living expenses) can provide a financial safety net for unexpected expenses. Having a dedicated fund can reduce the need to tap into your retirement savings.

Home equity loans or lines of credit If you own a home, leveraging the equity through a home equity loan or line of credit can provide a cost-effective method of accessing extra cash. Just keep in mind that these loans are secured by your home — should you run into trouble repaying the loan, you could potentially lose your home.

Negotiating with creditors In cases of financial hardship, it can be worth reaching out to your creditors and explaining your situation. They might be willing to reduce your interest rates, offer a payment plan, or find another way to make your debt more manageable.

Personal Loans Personal loans are available from online lenders, local banks and credit unions and can be used for virtually any purpose. These loans are typically unsecured (meaning no collateral is required) and come with fixed interest rates and set terms. Depending on your lender, you may be able to get funding within a day or so.

The Takeaway

Borrowing from your 401(k) can provide short-term financial relief but there are some downsides to consider, such as borrowing limits, loss of growth, and penalties for defaulting. It’s a good idea to carefully weigh the pros and cons before you take out a 401(k) loan. You may also want to consider alternatives, such as using non-retirement savings, taking out a home equity loan or line of credit, or getting a personal loan.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.


SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.


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



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.

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Angel Investors: What They Are and How to Find Them

An angel investor is typically a high-net-worth individual or a group of wealthy individuals who invest their money in a venture at an early stage in return for an equity share.

There are several ways a new small business might try to secure money for expansion or growth, from friends to bank lenders to joining a startup accelerator program. Angel investors are another option that can provide a capital infusion, but there are trade offs when accepting funds in exchange for a stake in a new company.

What Is an Angel Investor?

If you’ve ever watched the show Shark Tank, you’ve seen one type of angel investor in action. On the show, a group of wealthy investors listen to pitches from entrepreneurs who are looking for funding for their small business or startup. In exchange for funding, these investors generally ask for an ownership share in the business.

Angel investors can also be personal friends or colleagues of the entrepreneur. Typically they’re wealthy enough to provide a significant amount of money, despite the risks the startup could fail.

Recommended: What Is Active Investing?

That said, angel investors typically invest in startups that have the potential to grow and have minimal downside risk in the long term. An angel investor may provide a one-time investment in a company, or they may provide ongoing support. They may also be called private investors, seed investors, or just “angels,” for short.


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Who Can Be an Angel Investor?

Angel investors were once required to be accredited investors, which demanded, among other things, that they have a net worth of $1 million in assets, not including personal residences — or yearly income greater than $200,000 alone, or $300,000 for a household for the previous two years. (Anyone who holds a Series 7, Series 65, or Series 82 in good standing also qualifies).

This was meant to limit angel investing — which is a risky practice — to those who ostensibly had enough assets to safely dabble in it. In recent years, however, anyone can be an angel investor.

Ways to Become an Angel Investor With Less Cash

Angel investing is undoubtedly risky — businesses fail all the time. However, lately it is possible to get involved in angel investing without putting tens of thousands of dollars on the line. (A smaller investment won’t reduce the risk, but it may potentially reduce an investor’s total loss.) These crowdfunding platforms enable smaller investors to dip their toes in the water:

•   WeFunder is an equity crowdfunding site that allows you to invest as little as $100 in startups and small businesses. The site encourages investors to invest in companies and products they love and believe in. Although the investment is smaller than might be typical, the site still describes these investments as risky and advises that people don’t invest money they can’t afford to lose.

•   SeedInvest is an equity crowdfunding site that allows users to get started with $1,000. The company vets all startups on the platform and offers a variety of investment opportunities. The site notes that early-stage investors should expect to hold their investments for at least five years, and that there is no guarantee on returns.

Recommended: Tips for Investing in Tech Stocks

What Are the Pros of Using Angel Investors?

There are a number of benefits to using angel investors to help finance a venture.

Less risk

If you take out a loan to finance your business, you’ll still be expected to pay it back, whether or not your venture is a success. Angel investors generally understand the risk of investing in a startup business, and may not expect any return on capital if the business goes south.

Expertise

If angel investors also happen to be experts in your business, they can offer advice and guidance based on their years of experience.

Credibility

Angel investors are often well-known in their field, and if they invest in your idea, it can boost your reputation and status to have them on board.

They’re Willing to Take a Leap

Unlike a bank, which may need more concrete proof that you’re onto something big, an angel investor might be more willing to gamble on your great idea.

Better Chance of Success

Companies with angel investor interest stand a greater chance of survival than those with less angel investor interest, according to findings from the National Bureau of Economic Research. Having angel investment doesn’t mitigate the risk of starting a business, but it’s possible that having angel investors on board can provide some oversight or accountability that might be beneficial.

What Are the Cons of Angel Investors?

There are also some potential disadvantages to having angel investors.

Loss of Full Ownership

Angel investors often provide funding in return for a share of the business, so involving angel investors means giving up some of your control. It also means that if the business succeeds, they’ll share in the proceeds.

They May Add Pressure

Angel investors aren’t giving you money out of kindness and good will. They may be aggressive investors who expect to see a high return on their investment. If they’re sinking money into your venture, it may feel there’s more riding on your success or failure.

Funding May Be Slow

Finding angel investors can take time, and the process of securing backers — and for the cash to find its way to your venture — can take even longer.

It’s a Competitive Market

Even if you have a brilliant idea, there’s no guarantee that you’ll be able to find backers for it. Although there were 334,680 active angel investors in 2021, only 64,480 entrepreneurial ventures received angel funding, according to an analysis by the University of New Hampshire Center for Venture Research.


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Where to Find Angel Investors

Startups looking for early-stage investors can look in several places.

Friends and family

Most commonly, startups get much of their initial investment from friends and family who believe in their idea and want to support the venture.

High-Net-Worth Individuals

Networking within your business community may allow you to make connections with people who’d be interested in helping to back your idea. It can be helpful to join local business, trade, and community organizations. Attend meetings and trade fairs, and have your elevator pitch well-honed.

Angel Funding Groups

There are a number of sites that seek to match entrepreneurs with angel investors, including:

Angel Capital Association : A collective of accredited angel investors

Golden Seeds : A group whose members focus on women-led ventures

Angel Investment Network : A network that seeks to connect entrepreneurs with business angels

Crowdfunding sites

While traditional angel groups seek to match entrepreneurs with accredited investors, crowdfunding sites allow lots of smaller investors to pitch in to move your venture along. (Picture a GoFundMe for your business idea.) These include SeedInvest, LocalStake, WeFunder, and Fundable.

You’ll likely have to apply to have your idea or business vetted by the site before they’ll present your project to their members.

The Takeaway

Angel investors are typically high-net-worth individual or group backers that support startup and early-stage business ventures. But lately, opportunities have opened up for individuals of all types to invest in companies that have recently launched.

For entrepreneurs, an angel investor can be an enormous help, both in terms of financing their dream as well as providing guidance if they have relevant business experience. On the flip side, some entrepreneurs may find there is added pressure to deliver when an angel investor is backing their startup.

Whether you’re interested in finding an angel investor for your own startup idea, or thinking of becoming one, there are a number of risks associated with this type of business. Consider the pros and cons in light of your own financial goals, as there are many different paths forward.

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

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


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

Claw Promotion: Customer must fund their Active Invest account with at least $50 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

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