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If you’re a homeowner considering a range of home improvements, you may not know if what you’re planning is a renovation or a remodel. Does it matter? Yes, because there are key differences.

A renovation is an update of an existing room or structure, while a remodel affects the design and purpose of an area. The more extensive work in a remodel will influence the cost and length of your project.

What Is a Renovation?

During a renovation, one or more rooms are updated and repaired. This might include new cabinets, flooring, and paint, for instance.

The bones of the room are typically left intact, though some structural issues may be fixed in a renovation, such as replacing rotting wood or swapping out window frames suffering from water damage.

A kitchen renovation might include replacing appliances, faucets, and knobs, while a bedroom reno might call for paint, new rugs, or new lighting.

Bathroom renovations often involve installing new tile, towel racks, and faucets.

Recommended: Home Improvement Cost Calculator

Advantages of a Renovation

Renovations are typically less costly than remodels, thanks to several factors.

You Can DIY

If you’re handy, you can slash some of the cost of hiring someone to undertake your renovation by doing some of the work yourself.

Because most renovations don’t require structural changes, you likely won’t need to hire licensed professionals to get it done. That means anything that you’re capable of — painting, wallpapering, floor sanding — you can do and pocket what it would have cost to hire help.

Just make sure you are skilled enough; hiring a professional to redo what you couldn’t complete may cost you money you didn’t plan on spending.

You May Get a Better Return on Investment

Since a renovation doesn’t call for major expenses like hiring licensed professionals or other construction-related outlays, in some cases the project offers more bang for the buck than a remodel does.

Renovation-related tweaks will still improve the look and feel of your home, and thus increase the value of your home, without the major expense a remodel entails.

You Can Expect Fewer Hidden Costs

When you’re renovating a room, your action plan is pretty cut and dried, and there aren’t likely to be surprises that require you to spend more than you planned.

Not so with a remodel, which, due to its scope, may result in additional costs to fix unforeseen problems such as hidden water damage, termites, or asbestos. These surprises can also lengthen the time of your project.

What Is a Remodel?

Remodels are typically more extensive than renovations. They include altering the function and sometimes the structure of an area of the house.

If your project calls for tearing down or adding walls, or changing the layout of a room, you’re planning a remodel.

Some examples of remodels: changing a powder room into a laundry room, knocking down a wall between a dining room and kitchen to create a great room, building an addition to your existing home, or expanding a closet into a dressing room.

Even if you’re not tearing down or adding walls, your project may be a remodel. This might include moving kitchen appliances around to improve room flow for a kitchen remodel, tearing out a tub and installing a walk-in shower in a bathroom, or turning a small guest bedroom into a home office.

Advantages of a Remodel

Many homeowners find there are pluses to a remodel as opposed to a renovation.

You Have the Opportunity to Customize Your Home

As homeowners grow with their home, they may find that their needs change.

Some may want an addition to accommodate an aging parent, while others may have expanded their families and need to convert a home office into a nursery or finish an attic and turn it into a bedroom. Empty-nesters may want to use one of their bedrooms as a study or gym.

A remodel affords them more options than a renovation does because they can make the necessary changes — however major — to achieve their needs.

You May Experience Hidden Benefits

Adding an island to a kitchen and removing a wall to create a larger space might mean more than increased room to prepare meals. You may find your family spends more time together in rooms that are spacious and inviting.

Similarly, retrofitting your heating and cooling system, adding under-floor heating, and replacing insulation might result in lower utility bills, freeing up money for hobbies or vacations.

Recommended: Guide to Buying, Selling, and Updating Your Home

Why a Remodel May Cost More Than a Renovation

All of that means remodels are costlier than renovations. Here’s why.

You May Need Permits

Thanks to the extensive nature of most remodels, many cities require homeowners to secure a permit before they begin work, especially if the project involves creating an addition to the home, or if new walls or new roofs are being installed. This is to ensure that building codes are followed.

If you need permits, you will want to factor in the time it takes to secure them into your timeline. Once the permits are approved, the project may begin. And once it is completed, it will likely need to be approved by a local inspector.

You May Need Professional Help

If your remodel requires electrical, duct, or plumbing work, you will likely need to hire a licensed professional to complete it.

You may also need a general contractor to hire and oversee these workers and others for larger remodels like adding a guest suite to the home or converting an attic to a home office with an en-suite bathroom.

These vendors, while necessary, can be costly since you are paying for their time in addition to any materials.

You May Be Dealing With Construction

While it can be exciting to imagine what your home will look like after a remodel, getting there can be taxing. That’s because you may be living in a construction zone while the project is underway.

It can be difficult to have to eat multiple takeout meals because your kitchen is being worked on, or deal with dust from work being done in the next room over.

If their remodel is especially extensive, some homeowners find they need to rent a home nearby until the remodel has been completed.

Recommended: 15 Ways to Keep Inflation from Blowing Your Home Reno Budget

Paying for a Remodel or Renovation

Whether you’re undertaking a renovation or remodel, you’ll want to have a budget and a payment plan. Some renovations are small enough that homeowners can pay upfront.

Those tackling remodels and larger renovations might tap a home equity loan or home equity line of credit, in which the home is used as collateral.

A home equity loan lets you borrow a set amount of money based on your equity in the home. You start paying it back in regular payments immediately, and if you don’t or can’t, you risk foreclosure. If you have a relatively solid sense of what your remodel will cost and are sure you can afford the added monthly payments, this could be a good option.

A home equity loan of credit (HELOC) also draws on your home equity but offers more flexibility. Instead of getting a lump sum, you can access a revolving line of credit (up to a set maximum) and draw from that when you need it, paying interest only on what you’ve taken out. Usually the “draw period” (the time during which you can pull out funds) lasts for a number of years, which should cover even lengthy remodels. However, when the draw period is over, your payments of principal and interest will depend on what you’ve taken out, so they can be less predictable than home equity loan payments. And if you default, you could lose your home.

Recommended: Home Equity Loans vs Personal Loans for Home Improvement

The Takeaway

Undertaking home improvements can be exciting for homeowners. But before you embark on a project, know whether you’re looking at a renovation or a remodel, how much inconvenience you’re prepared to put up with, and what you are willing to pay.

SoFi now offers home equity loans. Access up to 85%, or $750,000, of your home’s equity. Enjoy lower interest rates than most other types of loans. Cover big purchases, fund home renovations, or consolidate high-interest debt. You can complete an application in minutes.

FAQ

What is the difference between a remodel and a renovation?

A renovation involves making minor updates and/or repairs to an area in your home. A remodel is larger in scope and can include making structural changes to your house, like taking down walls or adding new rooms. Typically, a remodel is more expensive than a renovation.

How much does it cost to remodel vs. renovate?

A remodel is typically more extensive than a renovation and generally requires professional help, so it’s a more expensive proposition, potentially costing thousands of dollars. A renovation is usually more limited in scope and may be largely cosmetic, meaning that if you’re handy, you may be able to do much of it yourself, which can keep the cost much lower

Is painting considered a renovation?

Yes, painting walls or cabinets in your house is generally thought of as a renovation, since it’s essentially cosmetic, rather than a structural change. Other common renovations include installing a smart or programmable thermostat, changing light fixtures, replacing cabinet hardware, and putting in a bathroom vanity or new faucets.

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

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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.

SOHL-Q225-208

Buying a home is probably one of the biggest financial commitments many people make in their life, and so it stands to reason that the process can be complex and lengthy. From figuring out how much you can afford to learning how mortgages work to getting preapproved to determining where exactly to live…it’s a lot!

But by learning about the usual flow before you begin hitting the open houses, you can be well-prepared to dive into homeownership. Below, the eight steps to follow that will help make purchasing a home a smooth process.

8 Steps to Prepare for a Home Purchase

Here are the moves that will help you get ready to buy your dream property:

1. Determining Credit Score

A homebuyer’s credit score can impact their ability to secure a mortgage loan with a desirable rate. It can also affect how much they’ll be required to pay as a down payment when it’s time to close.

Credit score can be influenced by a variety of factors, from payment history to amount of debt (aka credit utilization ratio) to age of credit accounts, mix of credit accounts, and new credit inquiries.

Payment history is the main factor that affects a person’s credit score, accounting for 35% of an overall FICO® score. Missing a payment on any credit account — from unpaid student loans to credit cards, auto loans, and mortgages — can negatively impact a person’s credit score.

On the other hand, positive habits can include making on-time payments, limiting the number of new inquiries on their credit file, and working to pay down outstanding balances.

Is There a Credit Score “Sweet Spot?”

Many buyers wonder whether there’s a desired credit score range or “sweet spot” to obtain a mortgage. Typically, a credit score of 740 or higher will get the best deals (meaning lowest rates).

Credit scores can also affect the amount of the down payment itself. Some mortgage lenders require at least 20% of the house’s sale price be put down, but might offer more flexibility if the buyer’s credit score is in the higher range. A lower credit score, on the other hand, could call for a larger down payment.

Whether homebuyers have debt or not, checking credit reports is still a recommended first step to applying for a mortgage. Understanding the information on credit reports can be invaluable in knowing where you stand when qualifying for a mortgage loan rate.

2. Deciding How Much to Spend

Deciding how much to pay for a new home can be based on a variety of factors including expected and unexpected housing costs, upfront payments and closing costs, and how it all fits into the buyer’s overall budget.

Calculating Housing Costs

There are several housing costs for home purchasers to consider that might affect how much they can afford to offer for the house itself. The costs of ongoing fees like property taxes, homeowner’s insurance, and interest — if the loan isn’t a fixed-rate mortgage — can all lead to an increase in the monthly mortgage payment.

Closing costs are fees associated with the final real estate transaction that go above and beyond the price of the property itself. These costs might include an origination fee paid to the bank or lender for its services in creating the loan, real estate attorney fees, escrow fees, title insurance fees, home inspection and appraisal fees and recording fees, to name a few.

Typically, closing costs are between 2% and 5% of the loan’s amount. To get an idea on how this can impact your budget, use this home affordability calculator to estimate total purchase cost.

In addition to closing costs, expenses that potential homebuyers might want to consider are repairs and updates they might want to make to a home, new furniture, moving costs, or even commuting costs. If you are considering buying in a community with a homeowners association, factor those costs in as well.

Finally, unforeseen costs of a major life event like a layoff or the birth of a new child might not be the first expenses that come to mind. However, some buyers could find themselves making a potential home-buying mistake by not getting their finances in order to prepare for the unexpected.

Making a list of these estimated expenses can help homebuyers calculate how much they can feasibly afford. It can also help them create a budget that could help them avoid being overextended on housing costs, especially if they might be paying other debt or saving for other financial goals.

3. Saving for a Down Payment

Saving money for a house is one of life’s biggest financial goals. And how much they’re able to offer as a down payment can significantly impact the amount of their monthly mortgage payment.

A larger down payment can also be convincing to sellers who see it as evidence of solid finances, sometimes beating out other offers in a competitive housing market.

The typical down payment on a house varies depending on the type of buyer, loan, location, and housing prices. Most recently, the median down payment was 18%, although it was 9% for first-time buyers.

For first-time homebuyers, 18% or even 9% of the price of the home can seem like a daunting figure. Many buyers find that cutting spending on luxury or non-essential items and entertainment can help them save up the funds.

Other tactics could include getting gifts and loans from family members, applying for low down-payment mortgages, withdrawing funds from a retirement account, or receiving assistance from state and local agencies.

For buyers who are also sellers, proceeds from another property could also fund the down payment.

4. Shopping for a Mortgage Lender

There are many mortgage lenders competing for the business of homebuyers who finance their home purchases. These lenders offer a variety of mortgages to apply for, with a few of the most common being conventional/fixed rate, adjustable rate, FHA loans, and VA loans.

Buyers might not realize they can — and should — shop around for a lender before selecting one to work with. Different lenders offer different variations in interest rates, terms, and closing costs, so it can be helpful to conduct adequate research before landing on a particular lender.

Mortgage lenders must provide a home mortgage loan estimate within three business days of receiving a mortgage application. The form is standard — all lenders are required to use the same form, which makes it easier for the applicant to compare information from different lenders and make sure they are getting the best loan for their financial situation.

When comparing loan offers, don’t just look at the interest rate. Examine the annual percentage rate (APR), which factors in costs.

5. Getting Preapproved for a Loan

While it might seem like a bit of a nuance, getting prequalified for a loan vs. preapproved for a loan are two different things.

When a buyer is prequalified for a loan, their mortgage lender estimates the loan amount they are qualified for, based on financial information they provided.

When a buyer is preapproved, the lender conducts a thorough investigation into their finances that includes income verification, assets, and credit rating. Preapproval is not a guarantee but tells a buyer that a lender is likely to approve them for a certain amount, as long as they clear the underwriting process.

Having a preapproval letter in hand can help some buyers get ahead in a competitive home market. It shows the would-be owner’s intent to purchase and a lender’s guarantee to back that purchase up.

6. Finding the Right Real Estate Agent

While the internet and popular real estate search websites have made it easier for homebuyers to hunt for a house online, most buyers still solicit the help of a real estate agent to find the right home and negotiate the price and purchase.

Also, many realtors are experts in their particular housing market, so for buyers who are searching in a specific location, a real estate agent may be able to offer valuable insights that might not be revealed online.

7. Exploring Different Neighborhoods

By researching neighborhoods where they might want to purchase a property (both in-person and online), homebuyers can get a better sense of what living in their future community could look like.

Many real estate websites provide comparable listings to help determine a reasonable offer amount in a given neighborhood.

They may also highlight nearby school ratings, price and tax history, commute times, and neighborhood stats like home value fluctuations or predictions, and walkability ratings.

All of this information can help paint a picture of life in the area a homebuyer chooses to settle in. Doing a deep dive into a desired neighborhood can help inform a more realistic decision on where to buy a house.

8. Kicking off the House Hunt

Once the neighborhoods are whittled down, the loan is preapproved, the real estate agent has been signed, and the savings are set aside, the official house hunt can begin.

With the help of a trusted real estate agent and a housing market with adequate inventory, most homebuyers can begin to book showings, attend open houses, and formally put down an offer on a house they like.

In particularly “hot” markets, houses could receive several offers, so homebuyers might want to be prepared to go through the bidding process with a few properties before they get to that glorious final sale.

Are You Ready to Buy a Home Quiz

The Takeaway

A home may well be the biggest purchase you make and the biggest asset you ever own, so it makes sense to spend some time on the home-buying process. From checking out different mortgage options to getting preapproved for a loan to attending open houses, the process is a valuable one that brings you closer to your dream home.

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

FAQ

What is the 20% rule when buying a house?

The 20% rule typically refers to the idea that a homebuyer should make a 20% down payment. This percentage allows the buyer to avoid paying for private mortgage insurance (PMI) as part of their monthly mortgage payment. It’s hard to come up with that much cash upfront, especially for first-time buyers, and it’s not unusual to see buyers put down less. In fact, eligible first-time homebuyers can purchase with as little as 3% down with some lenders. And some government-backed loans require no down payment at all.

How large a down payment do I need for a $350,000 house?

If you want to put down 20% and avoid paying for private mortgage insurance, you will need to come up with a down payment of $70,000. This may be difficult for some buyers, and it is certainly possible to put down less. Eligible buyers may be able to put down just 3.5%, which on a $350,000 house would be $12,250. And if you buy with a government loan, you may be able to avoid a down payment altogether.

What do I do now if I want to buy a house next year?

Preparing to buy a house one year from now is primarily about strengthening your financial situation. Check your credit score and practice good credit hygiene: Pay your bills on time and clear up any blemishes on your credit report. Try to pay down debt and also to save some money for a down payment and the expenses that come with a home purchase. If you have a particular neighborhood or city in mind, begin to follow listings and local news in the area.

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

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

SOHL-Q225-058

Fractional reserve banking is an economic system that goes on behind the scenes at the institutions where you keep your money. It allows the bank to keep only a fraction of the money you deposit as cash for withdrawal.

The rest of the funds may be loaned out for other purposes. This allows the bank to make money and stay in business, and it can also help keep the economy humming along.

Here’s a closer look at fractional reserve banking, its history, and its pros and cons.

What Is Fractional Reserve Banking?

The system of banking used most widely around the world today is called Fractional Reserve Banking (FRB). In this system, only some of the money that exists in bank accounts is backed by physical cash that people can withdraw. Banks can then take the extra money and lend it out, which theoretically helps to expand the economy.

In simpler terms, if someone goes to the bank and deposits money into their account, the bank only holds on to a certain amount of that cash, and they lend the rest of that out to individuals and businesses. This encourages spending and investing and puts more money into the economy as a whole.

Fractional reserve banking is also one of the main ways that banks make money, as they can see earnings from the difference between any interest they pay to customers and the interest they charge borrowers for taking out loans.

💡 Quick Tip: Typically, checking accounts don’t earn interest. However, some accounts do, and online banks are more likely than brick-and-mortar banks to offer you the best rates.

The History of Fractional Reserve Banking

The origins of fractional reserve banking aren’t entirely clear, but the system is generally believed to have been created during the Middle Ages. At that time, more and more people began storing their money in banks, and the banks wanted to be able to transfer coins between customer accounts, rather than storing the exact coins that were deposited until the future time when the customer wanted to withdraw them. This evolved into deposits being treated as a sort of IOU, and the system continued to develop from there.

Requirements of Fractional Reserve Banking

In the past, the Federal Reserve (aka “the Fed”) required banks of a certain size to have a set percentage of funds tied up in reserves. Prior to March 2020, large banks (whether traditional vs. online) with more than $124.2 million in assets were required to keep 10% in reserves, but smaller banks had different requirements. Banks with assets between $16.3 million and $124.2 million were required to hold 3% in reserves, and banks with under $16.3 million in assets were not required to hold any reserves.

These reserves could be held by the bank itself or put into an account at the Federal Reserve, known as a reserve balance.

However, in March 2020, the Federal Reserve Board lowered the reserve requirement to 0% across the board and replaced it with Interest on Reserve Balances (IORB) as an incentive for banks to maintain reserves, which banks continue to do. Typically, banks have enough money in reserve to accommodate everyday business, including all withdrawals.

The Fractional Reserve Multiplier Equation

Though it’s not relevant with today’s 0% reserve requirements, the multiplier equation has been used in the past to estimate the impacts of fractional reserve banking on the economy. This equation helps figure out how much money can potentially be created in the financial system from bank lending, which sets off a chain reaction of economic activity.

For example, let’s say you deposit $1,000 in a bank and the bank keeps $100 and lends out the remaining $900 to John who needs money to pay for a home repair. John pays the contractor, who then deposits that $900 in another bank, which then keeps $90 and lends out $810, and so on. This pattern continues, effectively multiplying the original deposit.

The fractional reserve multiplier equation is:

Initial Deposit x 1/Reserve Requirement

So if a bank has $500 million in total assets and it was required to hold 10% in reserves, that would be $50 million. Using the multiplier equation, the calculation would be:

$500 million x 1/10% = $5 billion

This means that $5 billion can potentially be created in the economy through the system of fractional reserve banking. This is different from printing new money and is simply an estimate of the impacts of FRB.

Recommended: Federal Reserve Interest Rates, Explained

Pros of Fractional Reserve Banking

There are both upsides and downsides to the fractional reserve banking system. Some of the pros are:

•   Banks can use most of the money that gets deposited to grant loans and earn interest on those loans.

•   Banks also earn interest on the reserves they hold.

•   The system helps grow the economy.

Most of the time the system works well. Banks make money on interest, money gets released into the economy, and much of the time that money helps borrowers to earn money as well. The idea is that borrowers invest money into their home, business, or other activities, which in turn helps them grow their wealth. They then pay the bank back for the loan and the cycle continues.

Recommended: The Difference Between a Checking and Savings Account

Cons of Fractional Reserve Banking

However, some of the cons of fractional reserve banking are:

•   Banks don’t keep 100% of deposits on hand, which can be a problem if there is a bank run. During the Great Depression, a significant number of banks had to close because too many people were trying to take cash out and the banks didn’t have enough. (These days, the government insures deposits of up to $250,000 per depositor, per institution and account ownership type, which means you can’t lose your money — up to the insured limit — in the rare event of bank failure.)

•   If the bank creates too much money and lends it out unwisely, it can lead to economic instability, inflation, and financial crises.

•   Banks can respond to higher reserve requirements by increasing interest rates on loans and paying lower annual percentage rates (APYs) on deposits.

The Takeaway

The fractional reserve banking system is an economic system that typically requires banks to keep a certain amount of cash on hand for withdrawals. The rest of the money may be loaned out and used for other purposes, which helps the bank earn money and the economy grow.

This is going on behind the scenes when you bank. Many people are interested in finding a bank that suits their financial and personal needs, however, with features such as a competitive interest rate and rewards.

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Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

What is fractional reserve banking in simple terms?

Fractional reserve banking is a system where banks are only required to keep a small portion of customer deposits in reserve — usually to meet withdrawal demands — and can lend out the rest. The money banks loan to individuals and businesses then gets deposited back into other banks, repeating the process, and creating more money in the economy.

How do banks create money from a $1,000 deposit?

When you deposit $1,000 in a bank, the bank may keep a fraction — say 10% or $100 — and lend out the remaining $900. That $900 might be spent and redeposited in another bank, which then keeps $90 and lends out $810, and so on. This cycle continues, essentially multiplying your original deposit. Through this process, known as the money multiplier effect, banks create money by expanding the money supply beyond the original deposit.

How much money are banks required to have on hand?

Historically, banks have been required to keep a certain percentage of customer deposits in reserve, known as the reserve requirement. This percentage is set by the Federal Reserve (aka “the Fed”) and was generally around 10%, meaning banks had to keep $100 on hand for every $1,000 in deposits. However, in March 2020, the Fed reduced the reserve requirement to 0%.

While banks don’t currently have a specific minimum requirement, they still maintain reserves for operational needs and to comply with other regulations.

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Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

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SOBNK-Q225-042

FOMO trading, or the “fear of missing out” when trading, applies to the anxiety of potentially passing up a profitable investment that an investor may experience. “FOMO” is a term commonly used to describe other anxiety-inducing situations as well.

For investors who visualize a scenario where a stock rises sharply in value but goes unpurchased, the fear of missing out may cause them to make investing decisions that aren’t fully thought-through or in line with their investing strategy. Making emotional, knee-jerk decisions when investing can derail your overall strategy, too. That’s why it can be important to try and avoid it the best you can.

What Is FOMO Trading?

FOMO trading happens when an investor allows their fear of missing out to drive their investing decisions, to the exclusion of other insights and instincts. This can trigger errors, creating problems in an otherwise well-managed investment portfolio.

For example, an impatient trader may rush to buy a hot stock even if it doesn’t fit into their investment strategy, or if the stock risks could jeopardize the portfolio’s stability.

Yet, buying any investment without proper research, risk assessment, or a planned exit strategy if the stock goes down, is the opposite of effective stock market investing.

Understanding Behavioral Finance

Sociologists use the term “behavioral finance” to describe the overall need to abandon rational thought and follow a herd to mitigate any FOMO anxieties. With behavioral finance, emotional and sociological influences replace scrutiny and logical thinking, which can significantly alter investment outcomes.

The fact that so many stock market rumors are stoked on social media, and that there are so many investors who rely on social media for investment ideas, only adds more pressure to give in to your anxieties, and buy a stock or other investment that may not necessarily fit in with your investing strategy.

Ways to Avoid FOMO Trading

How can an investor fight off FOMO tendencies and remain a stable and steadfast investor? It’s not easy given the pressure to trade frequently these days, but these tips may help.

Invest With a Plan in Mind

Investors who trade according to a well-thought-out plan or investing strategy — and not with a FOMO mindset — are likely to be more prepared for better investment outcomes. By doing research, learning how to value a stock, and establishing your own tolerance for risk, you may be less likely to make rash or emotional decisions regarding your investments.

Stay Calm in Highly Volatile Markets

Many impulse trades come at a time when markets move fast. When investing in a volatile market, it’s especially important to trade with strategy in mind, rather than with your feelings.

Be Sensible About Trading

A single stock market trade rarely makes or breaks an investment portfolio. If you do hear about a can’t-miss stock and are anxious to pull the trigger and buy that stock, it can help to keep it in perspective: there’s always another market opportunity down the road. In other words, keep the big picture in mind.

Avoid Investing Money You Can’t Afford to Lose

The old adage of “never play with money you can’t afford to lose” is very much in play with FOMO investing. It’s never wise to chase a stock with large amounts of money your portfolio can’t afford to be without. In nearly all cases, if an investment’s risk is too high, and the potential impact to your portfolio is too acute, then it may be best to wait things out.

Don’t Mistake Social Media Advice for a Sound Investment Strategy

Social media captures a great deal of attention from market investors. But these platforms may be loaded with touts, short-sellers, penny stock promoters, and other investment shills who have their best interest in mind, rather than yours. As a rule, social media touts always talk up their gains but rarely mention their losses. Remember that maxim when you’re under the temptation of a FOMO trade.

The Takeaway

FOMO trading is a type of behavioral finance in which an investor lets emotions like the fear of missing out replace logical, strategic thinking. FOMO trading often happens on a whim without much thought, which can significantly impact investment outcomes.That’s why it’s important to have a cogent strategy in place, and to keep your goals in mind when making investing decisions.

While it can be difficult to completely separate your emotions from your investing activities, keeping your strategy top of mind can help direct your decision-making process. Again: It’s not easy, but with some practice and experience in the markets, learning to skip investing trends might become a bit easier.

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