Aug
17
2023

What Is the Ebitda Formula?

By | Growing Wealth, Investing, Terminology | Comments Off on What Is the Ebitda Formula?

EBITDA is an acronym that stands for earnings before interest, taxes, depreciation, and amortization. The EBITDA formula is a common way for companies to assess their performance. By looking at earnings without deducting taxes, interest, or other expenses, it’s easier to assess business results and compare them to other companies in the same industry.

The EBITDA formula can also be useful for investors. When investing in the stock market, it’s important to research companies before buying shares of their stock, and EBITDA is a basic measure of profitability that can help investors gauge an organization’s performance.

💡 Recommended: NOPAT vs EBITDA

What Is EBITDA, and How Is EBITDA calculated?

The EBITDA formula is a way of considering a company’s net income — without deducting costs like interest, taxes, depreciation, and amortization. The idea is to create a more apples-to-apples view of how different companies’ perform. Two similar companies in the same industry could have very different tax rates or different capital structures (which can impact debt, and therefore interest paid), making it hard to compare one to the other.

By not deducting certain expenses that aren’t related to performance, EBITDA helps level the playing field and help investors evaluate companies.

EBITDA is also relatively easy to calculate. The information can be found on a company’s balance sheet and income statement. Here’s a quick breakdown of each letter of the acronym, and why it matters in the EBITDA formula:

Earnings

Earnings are a company’s net income over a specific period of time like a fiscal year or a quarter. This number can be found on the company’s income statement; it’s essentially the bottom line, after subtracting all expenses from total revenue.

Interest

This refers to any interest that the company pays on loans and debts. In some cases interest might include interest income, in which case you’d use the total interest amount (interest income – interest paid). Interest is added back to total earnings in the EBITDA formula because the amount of interest paid depends on the types of loans and funding a company has. This number can muddy the waters, when trying to compare two companies that might have very different financing situations.

Taxes

Federal, state, and local taxes are also added back because tax rates depend on where a company is based geographically, and where they conduct business. Thus, taxes aren’t something that a company has much control over, so they aren’t an indicator of performance.

Depreciation & Amortization

Depreciation calculates the decreasing value of tangible physical assets or capital expenditures over time (e.g., equipment, vehicles, buildings, etc.). Amortization is a way to account for the expenses of non-tangible assets like intellectual property, like patents and copyrights.

Depreciation and amortization are added back to earnings because they are non-cash expenses. As such, they don’t necessarily reflect on a company’s overall performance or profitability.


💡 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.

EBITDA Formula and Calculation

EBITDA can be calculated simply by adding a company’s interest, taxes, depreciation, and amortization to net income. Another method is to add a company’s operating income — or Earnings Before Interest and Taxes (EBIT) to its non-cash expenses of depreciation and amortization.

Earnings, or net income, can be calculated as follows:

Net income = Revenue – Cost of Goods Sold – Expenses

How to calculate EBITDA

EBITDA = Net Income + Taxes + Interest Expense + Depreciation & Amortization

Or

EBITDA = Operating income (EBIT) + Depreciation & Amortization

For example, if a company has $4,500,000 in revenue and $500,000 in expenses, their operating income (EBIT) is $4,000,000.

If the company’s assets have depreciated by $100,000 and they have an amortization amount of $75,000, the calculation would be as follows:

EBITDA = $4,000,000 (EBIT) + $100,000 (D) + $75,000 (A)

EBITDA = $4,175,000

It’s possible for EBITDA to be negative if a company has significant losses within a particular quarter or year.

A more specific EBITDA formula is LTM EBITDA, or Last Twelve Months EBITDA, also called Trailing Twelve Months EBITDA (TTM). This calculation finds EBITDA for only the past year.

💡 Recommended: Comparing Operating Income vs EBITDA

How Does EBITDA Differ From Other Measurements of Income?

There are a number of different ways to view an organization’s income, each with their pros and cons. Depending on which lens you use, or which formula, one metric can provide insights into a company’s performance that another won’t. Here are a few common measurements of company income:

•   Cash Flow is an analysis of the amount of money coming into a business versus the amount of money going out. Because of timing issues with sales, you can be profitable without being cash flow positive and vice versa.

•   EBIT is also known as operating income, as discussed above. EBIT adds back the expenses related to interest and taxes, but keeps deductions for depreciation and amortization to give a clearer picture of a company’s earnings inclusive of actual operating costs.

•   EBT is another variation on EBIT. It allows for interest expenses, but eliminates the impact of taxes — since a company’s tax burden has nothing to do with its performance.

•   Net Income appears at the bottom of an income statement, after subtracting all business expenses (including interest, taxes, depreciation, and amortization) from total revenue.

•   Revenue is also called gross income. It specifically refers to the money a company earns from sales. As such, it’s really only a window into one aspect of the business’s performance.

Understanding company performance can be a complex endeavor, and it’s best to use a combination of metrics that are most meaningful for that company or industry.

Why Is EBITDA Important?

The EBITDA formula is useful because it provides a view of company profitability, without the impact of capital expenditures and financing. By using the EBITDA formula, analysts can compare companies within an industry and investors can quickly use a technical analysis to evaluate companies they might want to invest in.

In that way, EBITDA can also be a tool used by financial advisors to help their clients make investment decisions.

It’s also useful for business owners to calculate their EBITDA each year to see how their company is performing. This is especially important if they are looking to take out a loan or seek investment. Business owners can use the EBITDA formula to gain insight into operating performance, how their company stands in relation to others in the same industry, and the company’s ability to meet its obligations and grow.

What Makes a Good EBITDA?

EBITDA is a measure of a company’s performance, so higher EBITDA is better than lower EBITDA when comparing two or more organizations in the same sector. This is important, because companies that vary in size or operate in different sectors can, of course, also vary widely in their financial performance. So one way to determine whether a company has “good” EBIDTA is to compare it to others of a similar size in the same industry.

Here are two other ways to gauge whether a company’s EBIDTA is good or not.

The EBITDA Coverage Ratio

To add more helpful information to the EBITDA calculation, the EBITDA Coverage Ratio compares EBITDA to debt and lease payments.

The EBITDA coverage ratio calculates a company’s ability to pay off lease payments, debts, and other liabilities.

The calculation for the EBITDA coverage ratio is:

EBITDA Coverage Ratio = (EBITDA + Lease Payments) / (Interest Payments + Principal Payments + Lease Payments)

A ratio equal to or greater than 1 indicates that a company will have a better ability to pay off liabilities. If the ratio is lower, a company may not be able to pay off its debts. The higher the ratio, the more solvent a company is. The current average coverage ratio is 2.


💡 Quick Tip: Are self-directed brokerage accounts cost efficient? They can be, because they offer the convenience of being able to buy stocks online without using a traditional full-service broker (and the typical broker fees).

EBITDA Margins

Another EBITDA calculation investors can do to learn about a company’s performance is the EBITDA Margin calculation. This formula compares annual cash profits to sales. It’s a useful indicator to find out if a company’s EBITDA is ‘good’ or not. The EBITDA Margin calculation is:

EBITDA Margin = EBITDA / Total Revenue

The resulting number is a percentage that shows what portion of revenue was able to be converted into profit within a year. The higher this percentage is, the better a company is performing because it means their expenses aren’t eating into their profits. In general, an EBITDA margin of 60% or higher is considered a good number.

Downsides of the EBITDA Formula

Although the EBITDA formula is a useful tool for investors, it also has some drawbacks. For example: EBIDTA is considered a “non-GAAP” measure, meaning it doesn’t fall under generally accepted accounting principles (a set of rules issued by the Financial Accounting Standards Board and procedures commonly followed by many businesses). This also means that the way EBIDTA is calculated isn’t wholly standardized.

Thus, companies also may not include the same information in each report, and they aren’t required to record all information that may be relevant to the equation. For these reasons, it’s best to calculate EBITDA along with other types of evaluations, such as net income and debt payments.

Companies with a low net income may use the EBITDA formula to make themselves look better since the EBITDA number will likely be higher than their income.

Or, because EBITDA tends to obscure the impact of debt and capital investments, a company that’s spending heavily on development costs, or has incurred a lot of debt, may look more robust than it is.

Also, the formula doesn’t work well with certain types of companies, such as companies that have a need to constantly upgrade their equipment.

The Takeaway

Comparing companies you may want to invest in can take a lot of time and technical analysis. If you’re choosing your first stocks, the amount of information and choices can be overwhelming.

EBITDA is one measure of company performance that can be useful, because it takes net income and then removes certain factors that can be confounding: interest paid or earned; federal, state, and local taxes; the impact of capital depreciation and amortization.

For investors interested in learning more about specific companies and building a stock portfolio, opening an online brokerage account can be a good way to get started with investing.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.


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

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.

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

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

SOIN0823018

Read more
Jun
06
2023
notepad calculator piggy bank layout mobile

What Is Net Worth and Why Should You Know Yours?

By | Debt Payoff, Financial Independence, Growing Wealth, invest, Terminology | No Comments

A person’s net worth describes their total financial value, and is calculated by subtracting their liabilities from their assets. Though we generally discuss net worth in relation to very wealthy individuals, it can be important for people who aren’t billionaires to know their net worth as well.

A person’s net worth can be an important reference point in understanding one’s financial position. Net worth can be negative, especially early on in one’s careers. But net worth can help an individual figure out how much they need to save, how much spending they need to cut back on, or how much they’ve saved for retirement.

How to Calculate Net Worth

If you’re wondering how to calculate net worth, it’s actually a simple formula:

Assets – Liabilities = Net Worth

The hard part is usually determining a person’s assets and liabilities. And a person’s assets can go beyond what they have in their checking account. In fact, a person’s assets can include a whole host of things.

Assets

Assets basically boil down to how much money you have, as well as the value of things you own. In order to know one’s net worth, estimate the value of each asset below:

•   Money in savings accounts

•   Money in checking accounts

•   Money in investing or retirement accounts. Brokerage accounts or 401(k)s are in this bucket.

•   Physical cash

•   Value from insurance policies

•   Value from business ownership or stakes

•   Value of cars

•   Valuable personal goods, like jewelry or art

•   Value of real estate, including home

Calculating the value of a home can be a task in itself. It’s important to research the value of the homes around you, the size of your home, any deferred maintenance on the home, additional benefits like parking spots, backyard space, room count, etc. There are a number of home value calculators online, too.

Recommended: Understanding Property Valuations

There are other ways to think about assets:

•   Liquid Assets: Items like stocks, bonds, mutual funds, or ETFs that are easy to sell quickly and whose sale will not greatly affect their price.

•   Fixed Assets: These are items that would take a longer time to convert to cash. These assets are often deposited for extended periods of time in exchange for high interest accrual and thus cannot be cashed before their agreed-upon time frame is up.

•   Equity Assets: Equity assets include your shares in a company, either private or public.

Intangible Assets, such as brand recognition for a company or any other intellectual property like patents, trademarks or even goodwill, are trickier to factor into your net worth due to the complexity of measuring their value.

Liabilities

Liabilities are debts. The following categories are what most often make up liabilities:

•   Auto loans

•   Student loans

•   Personal loans

•   Business loans (personally guaranteed)

•   Credit card balances

•   Mortgages

While liabilities are on the negative side of the net worth equation, it doesn’t necessarily have to symbolize something negative about your finances. For example, student loans or mortgage loans are typically seen as necessary loans that individuals take on as they reach milestones in life, like going to college, graduate school or buying a home.

Meanwhile, knowing one’s total liabilities can help with figuring out a plan to start paying off debt that has higher interest rates, like from credit card balances.


💡 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.

Median and Average Net Worth in US

An individual or household’s net worth isn’t set in stone, and it ebbs and flows all the time. For that reason, it can be difficult to nail down median or average net worth figures for both individuals and households in the U.S. You can find some numbers if you search for them, but they’re often several years old, and may not be accurate given the time lapse.

For instance, the Federal Reserve tracks median and average net worth data in the U.S., but generally, they do so using survey data that it publishes once every few years. So, while data from a few years ago may be fine, large-scale world events–such as a pandemic, natural disaster, recession, or similar–may have led to large changes in those numbers.

This is all something to keep in mind if you seek out average net worth numbers. It’s not that they’re inaccurate, it’s simply that the data may be hard to capture and synthesize in a reasonable amount of time.

Remember, too, that it’s important to keep abreast of your net worth because this number may fluctuate depending on factors such as stock values, interest rates, real estate trends, and other tides of the financial world. It’s important to have an idea of overall trends so you can generally understand your financial health and have an idea of your true wealth.


💡 Quick Tip: Distributing your money across a range of assets — also known as diversification — can be beneficial for long-term investors. When you put your eggs in many baskets, it may be beneficial if a single asset class goes down.

The Takeaway

True wealth can be an important factor in knowing when you might expect to retire. It’s a good idea to focus on your gains year over year, rather than the number you get at the end of the equation. If you’re concerned about your net worth or are hoping to increase it, especially for future retirement goals, then it might be helpful to consider investing.

There are a multitude of things that can have an effect on your net worth. And focusing strictly on your net worth probably shouldn’t be your focus. If you’re concerned about it, though, it may be worthwhile to talk to a financial professional.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.

Opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.¹


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

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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


¹Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease. See full terms and conditions.

SOIN0523016U

Read more
May
31
2023

What Is a Financial Crisis?

By | invest, Investing, Terminology | Comments Off on What Is a Financial Crisis?

A financial crisis is a situation in which the financial sector and economy of a country, or the world, is thrown into a state of temporary upheaval. A financial crisis can have several causes, whether stock market crashes, political instability, and even global pandemics.

Financial crises are also not a new phenomena, and the United States has experienced many in its history.

Financial Crisis Definition

During a financial crisis, asset prices drop rapidly, usually over the course of days or a few weeks. This drop is often accompanied by a stock market crash as investors panic and pull money from the market. It may also be associated with bank runs in which consumers withdraw assets for fear they will lose value if they remain in the bank. This type of downturn may signal the beginning of a recession.

Recessions are a general period of economic decline during which unemployment may rise, income and consumer spending may fall, and business failures may be up. (To stay up-to-date on the current financial crisis and possible recession visit SoFi’s Recession Help Center.)

Common Causes of Financial Crises

There are a number of situations that can cause a financial crisis, including the bursting of financial bubbles (such as the dotcom bubble), defaults on debt, and currency crises.

Stock market bubbles occur when stock prices rise precipitously, often driven by speculation and investors overvaluing stocks. As more people jump on the bandwagon and buy stocks, prices are driven higher, a cycle that is not based on the stock’s fundamental value. Eventually, the situation can become unsustainable, and the bubble bursts. Investors sell and prices drop quickly.

A failure to meet debt obligations can also lead to a financial crisis. For example, a country may be unable to pay off its debts. This may happen as a country starts to face higher interest rates from lenders worried that the country may not be able to pay back their bonds. As lenders require higher bond yields to offset the risk of taking on a country’s debt, it becomes more and more expensive for that country to refinance. Eventually, the country could default on its debt, which can cause the value of its currency to drop.

A currency crisis occurs when a country’s currency experiences sudden volatility as a result of factors such as central bank policies or speculation among investors. For example, a currency crisis may occur when a country’s central bank pegs its currency to another country’s floating currency (one whose value depends on supply and demand) and fails to maintain that peg.

Examples of Financial Crises

Financial crises date back hundreds of years, and perhaps the first was the South Sea Bubble of 1720. Here’s a look at a handful of other well-known financial crises that have happened in the United States and around the world:

America’s First Financial Crisis

The United States’ first financial crisis occurred in 1790. At that time, the U.S. had few banks, and Alexander Hamilton wanted to model the U.S. financial system after the systems that existed in Britain and Holland. He created the first central bank, known as The First Bank of the United States (BUS). To get the bank off its feet, the public could buy shares in the bank with a mixture of cash and government bonds.

Two problems arose: The demand for government bonds to buy shares led some investors to try and corner the bond market by borrowing widely to buy bonds, and the BUS quickly grew, becoming the nation’s largest lender. Investors, flush with credit, began to use their newfound cash to speculate in futures contracts and short sales markets.

In spring of 1792, the BUS ran low on hard currency and cut lending. The BUS’ leadership was forced to take on new debt to pay off old debt, and tightening credit, led U.S. markets on a downward spiral.

With the system on the verge of collapse, Hamilton was forced to use public funds to buy back U.S. bonds and prop up the price of those bonds. Additionally, he had to direct money to failing lenders, and allowed banks with collateral to borrow as much as they wanted with a penalty rate of 7%. Not only was this America’s first financial crisis, it was also the first instance of a government bailout, setting a precedent for future financial crises.

The Stock Market Crash of 1929

Perhaps the granddaddy of financial crises, the 1929 stock market crash came at a time when stock speculation led to booming markets. At the same time, however, consumer prices were falling and some established businesses were struggling, creating tension within the economy.

The Federal Reserve raised interest rates, in an effort to slow the overheated markets. Unfortunately, the hike wasn’t big enough to slow the economy. It ended up further hurting already weakening businesses, and industrial production continued to fall.

The market crashed on October 28 and October 29, 1929. The 29th came to be known as Black Tuesday. By mid-November, the market was down 45%. By the next year, banks began to fail. Customers began withdrawing cash as fast as they could, causing bank runs.

The crisis devastated the economy, forcing businesses to close and causing many people to lose their life savings. It also sparked the Great Depression, the worst recession in U.S. history, and the Dow wouldn’t climb to its previous heights for 25 years.

The crash led to a number of financial reforms. The Glass-Steagall legislation separated regular banking, such as lending, from stock market operations. It also gave the government power to regulate banks at which customers used credit to invest.

The government also set up the Federal Deposit Insurance Commission (FDIC) to help prevent bank runs by protecting customer deposits. The creation of the FDIC helped stabilize the financial system, because individuals no longer felt they needed to withdraw their money from the bank at the slightest sign of economic trouble.

The 1973 OPEC Oil Crisis

In October 1973, the 12 countries that make up the Organization of Petroleum Exporting Countries (OPEC) agreed to stop exporting oil to the United States in retaliation for the U.S. decision to offer military aid to Israel. As a result of the embargo, the U.S. experienced gas shortages, and oil prices in the U.S. quadrupled.

Though the embargo ended in March of 1974, its destabilizing effects are largely blamed for the economic recession of 1973–1975. High gas prices meant American consumers had less money in their pockets to spend on other things, lowering demand and consumer confidence.

Other factors beyond the embargo, including wage-price controls and the Federal Reserve’s monetary policy, exacerbated the financial crisis. Wage-price controls forced businesses to keep wages high, keeping them from hiring new employees. In a series of monetary moves, the Federal Reserve quickly raised and lowered interest rates. Businesses unable to keep up with the changes protected themselves by keeping prices high, which contributed to inflation.

The period’s high unemployment, stagnant economic growth, and inflation came to be known as “stagflation.”

The Asian Financial Crisis of 1997–1998

The Asian financial crisis began in Thailand in July 1997. It spilled over to other East Asian nations and eventually had ripple effects in Latin American and Eastern Europe.

Before the crisis began, Thailand had pegged its currency to the U.S. dollar. After months of speculative pressure that depleted the country’s foreign exchange reserves, Thailand devalued its currency, allowing it to float on the open market. Malaysian, Indonesian and Singapore currencies were devalued as well, causing high inflation that spread to East Asian countries, including South Korea and Japan.

Growth fell sharply across Asia, investment rates fell, and some countries entered into recession.

The International Monetary Fund (IMF) stepped in, providing billions of dollars of loans to help stabilize weak Asian economies in Thailand, Indonesia, and South Korea.

In exchange for its loans, the IMF required new rules that led to better financial regulation and oversight. Countries that received the loans had to raise taxes, reduce public spending, and raise interest rates.

The Global Financial Crisis of 2007–2008

The origins of the global financial crisis of 2007 and 2008 are complicated. They started with government deregulation that allowed banks to use derivatives in hedge fund trading. To fuel this trading, the banks needed mortgages and began lending to subprime borrowers who had questionable credit. When interest rates on these mortgages reset higher, borrowers could no longer afford their payments.

At the same time, housing prices dropped as demand for homes fell, and borrowers who could no longer afford their payments were now unable to sell their homes to cover what they owed on their mortgage. The value of the derivatives collapsed and banks stopped lending to each other, resulting in a financial crisis and eventually the Great Recession.

As a result of the financial crisis, the government took over mortgage giants Fannie Mae and Freddie Mac, and bailed out investment banks on the verge of collapse. Additionally, Congress passed the Dodd-Frank Wall Street Reform Bill to prevent banks from taking on too much risk again in the future.

The European Sovereign Debt Crisis

The European Sovereign Debt Crisis followed swiftly on the heels of the global financial crisis in 2007 and 2008. The crisis largely began in Greece in 2009 as investors and governments around the globe realized that Greece might default on its national debt.

At that point the nation’s debt had reached 113% of its GDP. Debt levels within the European Union were supposed to be capped at 60%, and if the Greek economy slowed down it might have trouble paying off its debt. By 2010, the E.U. discovered irregularities in the Greek accounting system which meant that its budget deficits were higher than previously suspected. Bond rating agencies subsequently downgraded the country’s debt.

Investors were concerned that similar events might spread to other members of the E.U., including Ireland, Spain, Portugal and Italy, which all had similar levels of debt. In response to these concerns, investors in sovereign bonds from these countries demanded higher yields to make up for the increased risk they were taking on. That meant the cost of borrowing rose in these countries. And because rising yields lowers the price of existing bonds, eurozone banks that held these bonds began to lose money.

Eurozone leaders agreed on a €750 billion rescue package that eventually reached €1 trillion by 2012.

Investing During a Financial Crisis

Investing during a recession or financial crisis may not sound like a good idea. Watching stock prices plummet can give even the most seasoned investor reason for pause. But keeping an investment plan on track during a crisis is critical to future success. In the face of a financial crisis, there are a few considerations to make.

First, watching a market fall may inspire panic, tempting investors to pull their money out of a stock. However, that may be exactly the wrong instinct. Bear markets are typically followed by a recovery, although not always immediately, and selling assets may mean that investors lock in losses and miss out on subsequent gains.

Second, some investors engage in a strategy that involves buying more stock when markets are down. Purchasing stock when prices are low during a bear market may provide the opportunity for increased profits as the market turns around, though there are no guarantees.

The Takeaway

A financial crisis can have many causes, but usually leads to falling stock market prices, and often, a recession. There have been many financial crises around the world over the years, and in all likelihood, there will be more in the future. Down markets can be a good opportunity for investors to stress-test their risk tolerance, or to embrace more conservative strategies.

If you have questions about building a portfolio, allocating your wealth or how market conditions will affect your financial situations, it can help to talk to a financial professional.

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

Opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.¹

Photo credit: iStock/South_agency

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

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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


¹Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease. See full terms and conditions.

SOIN0523027

Read more
Oct
28
2022
Liability vs Full Coverage Car Insurance: What They Cover

Liability vs Full Coverage Car Insurance: What They Cover

By | Insurance | Comments Off on Liability vs Full Coverage Car Insurance: What They Cover

Full coverage car insurance protects you against the most common causes of car damage and bodily injury: not just accidents but also theft, vandalism, fire, and more. Depending on the state you live in, it may also include Uninsured Motorist coverage, and Personal Injury Protection for yourself and your passengers. Liability, on the other hand, only offers financial protection against other drivers’ claims of injury and damage if you’re found at fault.

It can be hard to know how much insurance you need, and how to keep costs down. We’ll review the different types of policies available, pros and cons of each, and the average cost of full coverage vs. liability.

What Is Full Coverage Car Insurance?

Full coverage car insurance refers to a policy with the broadest protections available. Although specifics vary by policy, full coverage usually includes the following:

•   Liability: If you’re involved in an accident and found to be at fault, this type of insurance provides financial protection against other drivers’ claims of bodily injury and property damage.

•   Collision: Helps pay for damages to your own vehicle after an accident with another vehicle or an object like a guardrail.

•   Comprehensive: Protects you against theft or damage unrelated to an accident, such as fire or vandalism.

In some states, full coverage may also include the following:

•   Uninsured/underinsured motorist coverage (UM/UIM): Covers your losses if the other driver either doesn’t have insurance or not enough.

•   Personal injury protection (PIP): Covers medical expenses for yourself and passengers in your car if injuries occur. It may cover other costs, as well: lost wages, the cost of services that you can’t perform while injured, such as housekeeping, as well as funeral costs.

•   Medical payments (MedPay): This can cover medical expenses but doesn’t offer the fullness of coverage that’s available through PIP.

Check your state laws for specifics. This guide to car insurance terms can also be helpful.

Recommended: Should I Sell My House Now or Wait

Check your score with SoFi Relay

Track your credit score for free. Sign up and get $10.*

Recommended: Insurance Tips for First-Time Drivers

Average Cost of Full Coverage Car Insurance

The average full coverage car insurance cost in 2022 is $1,771 annually. Of course, many factors go into full coverage car insurance quotes, so your price will undoubtedly vary. The cost for a male teenage driver, for example, is $807 more each year on average.

A poor driving record will almost double your premiums. For more details, check out this look at how much insurance goes up after an accident.

Your deductible will also make a big difference in your premiums. In general, the lower the deductible, the higher the premium, and vice versa. So if you’re wondering how to lower your car insurance cost, consider choosing a higher deductible.

The cheapest full coverage car insurance is about $1,000 per year for an individual policy.

Recommended: What Credit Score is Needed to Buy a Car

Why Consider Getting Full Coverage Insurance?

You’ll have the broadest protections with a full coverage policy. Also, if you have a car loan, your lender may require you to have full coverage to protect their investment. The best way to determine how much coverage you need is to sit down for a personal insurance planning session.

Recommended: What is The Difference Between Transunion and Equifax

Pros and Cons of Full Coverage Car Insurance

There are advantages and disadvantages to paying for full coverage car insurance.

Pros of full coverage

•   Provides a broader range of protection:

◦   May cover medical expenses if you’re hurt in a collision

◦   May cover vandalism and theft

◦   Can protect you after an accident if the at-fault driver doesn’t have enough coverage

•   Typically meets all state insurance requirements.

•   Usually satisfies the requirements of your lender or lessor.

Cons of full coverage

•   Cost is higher than baseline liability insurance.

•   Doesn’t provide coverage for commercial driving purposes.

•   Won’t cover the cost of normal wear and tear.

What Full Coverage Insurance Doesn’t Cover

Although full coverage provides a significant amount of protection, it doesn’t cover every situation imaginable. It may or may not, for example, provide UM/UIM, PIP, or MedPay coverage. As noted above, full coverage also doesn’t account for standard wear and tear or maintenance needs on the vehicle — that’s up to you. Learn more about saving on car maintenance costs.

Because full coverage varies from company to company, it’s important to read your agreement carefully and understand what it does and doesn’t include.

What Is Liability Car Insurance?

There are two components to what liability auto insurance covers: bodily injury and property damage. If someone is at fault in an accident, their bodily injury coverage will pay for the medical expenses of injured parties. It may also cover lost income, legal fees, and/or funeral costs.

Property damage coverage helps pay for damage to the other person’s vehicle and to any other property that sustained damage during the accident, such as a fence, home, or bicycle.

Personal liability coverage is something different. It typically covers medical costs for someone injured on your property or because of your negligence. It may cover property damage costs, legal fees, and so forth.

Recommended: Does Net Worth Include Home Equity

Average Cost of Liability Insurance

On average, a liability insurance policy costs $716 in 2022. But again, many factors — including your age, gender, driving record, and type of deductible — can influence the price.

Why Consider Getting Liability Coverage Insurance?

Most states require liability car insurance, although the specifics vary from state to state. do not require it. In New Hampshire and Virginia, you can skip liability insurance if you can prove you can pay for costs out-of-pocket after an accident where you’re at fault.

Pros and Cons of Liability Coverage Car Insurance

While it may be tempting to pay for only liability coverage, you need to keep certain drawbacks in mind.

Pros of liability insurance

•   Costs less than full coverage car insurance.

•   Provides basic coverage in case of an accident.

•   Required by most states.

Cons of liability insurance

•   If an accident occurs, you could still be on the hook for many costs (more on this below).

•   Won’t cover theft or vandalism of your vehicle.

•   If you have a loan or lease, the lender/lessor may require full coverage.

What Liability Insurance Doesn’t Cover

If an accident occurs, liability insurance won’t cover damage to your vehicle. For that, you need collision coverage. Liability may or may not cover your personal injuries. And if you’re not at fault in the accident, it doesn’t cover the other driver’s medical bills or property damage costs.

Differences Between Liability and Full Coverage Insurance

When weighing liability vs. full coverage car insurance, here are a few things to consider:

•   Full coverage car insurance costs more, but it also offers significantly more protection.

•   Liability auto insurance is required in most states, but full coverage is not.

•   If you have a car loan or lease, the lender/lessor will likely require full coverage.

•   With liability insurance, there’s no deductible. With full coverage, deductibles range from $500 to $1,500.

When To Add Optional Coverage

Optional coverage to consider include:

•   Rental car reimbursement: If your car is in the shop or otherwise out of service for more than a day, this pays for a rental vehicle.

•   Gap insurance: This is intended for cars that have a loan or lease. If the vehicle is totalled and you owe more than the value of the car, gap insurance pays the difference.

•   New car replacement: As the name suggests, if a car is totaled, you get a new car that’s similar to your previous one.

Recommended: The Cheapest Way To Rent a Car

What Are the State Minimum Requirements for Full Coverage?

How to read this table: Alabama’s requirements for car insurance are 25/50/25. This means that the state requires $25,000 of bodily injury liability insurance per person, with $50,000 for all bodily injuries that take place within a single accident, and $25,000 in property damage per accident. Just keep in mind that this is the minimum amount of car insurance you need.

State

 Car Insurance Requirements

 Additional Requirements
Alabama 25/50/25
Alaska 50/100/25
Arizona 25/50/15
Arkansas 25/50/25
California 15/30/5
Colorado 25/50/15
Connecticut 25/50/25 The state also requires uninsured/underinsured motorist coverage of $25,000 per person and $50,000 per accident
Delaware 25/50/10 The state also requires personal injury protection (PIP)
Florida Property damage liability of $10,000 per accident and $10,000 PIP coverage
Georgia 25/50/25
Hawaii 20/40/10 and $10,000 PIP
Idaho 25/50/15
Illinois 25/50/20 Under state law, policies automatically include what’s required for uninsured motorist coverages
Indiana 25/50/25 This state also requires $50,000 in underinsured motorist coverage for bodily injuries
Iowa 20/40/15
Kansas 25/50/25 Along with uninsured/underinsured coverage ($25,000 per person/$50,000 per accident) and personal injury protection (PIP or no-fault)
Kentucky 25/50/25
Louisiana 15/30/25
Maine 50/100/25 Along with $50,000 uninsured coverage per person and $100,000 per accident, and $2,000 in medical payment coverage
Maryland 30/60/15
Massachusetts 20/40/5 and $8,000 PIP
Michigan 20/40/10
Minnesota 30/60/10 Along with $25,000 uninsured/underinsured coverage per person, $50,000 per accident, and $40,000 PIP
Mississippi 25/50/15
Missouri 25/50/25 Plus $25,000 uninsured coverage per person and $50,000 per accident
Montana 25/50/20
Nebraska 25/50/25 Plus $25,000 uninsured/underinsured coverage per person and $50,000 per accident
Nevada 25/50/20
New Jersey 15/30/5 Along with $15,000 PIP
New Mexico 25/50/10
New York 25/50/50 and $50,000 PIP
North Carolina 30/60/25 The state also has detailed specifics about required insurance coverage for uninsured/underinsured motorists
North Dakota 25/50/25
Ohio 25/50/25
Oklahoma 25/50/25
Oregon 25/50/20 Plus $25,000 uninsured coverage per person and $50,000 per accident, and $15,000 PIP
Pennsylvania 15/30/5 Plus $5,000 for medical payments
Rhode Island 25/50/25
South Carolina 25/50/25 Plus $25,000 uninsured coverage per person, $50,000 per accident, and $25,000 in property damage
South Dakota 25/50/25 Plus $25,000 uninsured coverage per person and $50,000 per accident
Tennessee 25/50/15
Texas 30/60/25
Utah 25/65/15
Vermont 25/50/10
Washington 25/50/10
Washington D.C. 25/50/10 $25,000 uninsured coverage per person, $50,000 per accident, and $5,000 property damage
West Virginia 25/50/25 Plus $25,000 uninsured coverage per person and $50,000 per accident, and $25,000 property damage
Wisconsin 25/50/10 Plus $25,000 uninsured coverage per person and $50,000 per accident

The Takeaway

Full coverage car insurance includes several different types of protection, which makes it popular with drivers who can afford it. Full coverage gives you liability protection (used when you’re at fault in an accident), collision (which pays for damage to your vehicle), and comprehensive (which protects against theft and non-accident-related damage). In some states, you’ll also get Uninsured Motorist coverage, Personal Injury Protection, and/or Medical Payment coverage. Liability coverage, on the other hand, only covers property damage and bodily injury in case you’re at fault in an accident. Auto insurance coverage requirements vary by state.

If you’re looking for affordable full coverage car insurance, we invite you to compare auto insurance quotes from top insurers. SoFi makes finding the right deal on car insurance easy.

Get a car insurance quote in just minutes.

FAQ

Is it worth having full coverage on a car?

If you have a loan or lease, you may be required to have full coverage. And you may want to get full coverage on a newer car to protect your investment even if you don’t have to. This can also be true of an older car that’s maintained its value.

What does full coverage come with?

It comes with liability insurance, collision coverage, and comprehensive insurance. It may come with additional coverages such as uninsured motorist coverage, personal injury protection, and/or medical payment coverage.

What are the benefits of full coverage?

This kind of policy provides you with a broad range of protections against not just accidents but fire, theft, vandalism, and other common threats. If you have a car loan or lease, full coverage may be required.

Photo credit: iStock/shapecharge

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

*Terms and conditions apply. This offer is only available to new SoFi users without existing SoFi accounts. It is non-transferable. One offer per person. To receive the rewards points offer, you must successfully complete setting up Credit Score Monitoring. Rewards points may only be redeemed towards active SoFi accounts, such as your SoFi Checking or Savings account, subject to program terms that may be found here: SoFi Member Rewards Terms and Conditions. SoFi reserves the right to modify or discontinue this offer at any time without notice.

Auto Insurance: Must have a valid driver’s license. Not available in all states.
Home and Renters Insurance: Insurance not available in all states.
Experian is a registered trademark of Experian.
SoFi Insurance Agency, LLC. (“”SoFi””) is compensated by Experian for each customer who purchases a policy through the SoFi-Experian partnership.

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.

SOPT0922003

Read more
Oct
24
2022
Guide to Credit Card Outstanding Balance

Guide to Credit Card Outstanding Balance

By | Credit, credit card, Debt Payoff | Comments Off on Guide to Credit Card Outstanding Balance

Your credit card statement can feel like information overload with all of its numbers and terminology. Understanding the definition of terms like outstanding balance, statement balance, and billing cycle can help you to navigate this monthly statement a little more easily.

So what is an outstanding balance, how is it different from a statement balance, and can it affect your credit score? Put simply, the outstanding balance on a credit card is what the amount of money you still owe to the credit card company is called. Knowing this figure is important to avoiding interest and potential effects on your credit.

What Is an Outstanding Balance on a Credit Card?

Outstanding balance is another way to express current balance. In fact, depending on your credit card issuer, your monthly statement and mobile app may use the term “current balance” instead of “outstanding balance.”

But what is an outstanding balance in credit card terminology? A credit card outstanding balance is simply the amount of money you have not paid to the credit card issuer — i.e., it’s what you still owe.

Your outstanding balance includes any purchases you have made on your credit card but have not yet paid off (from the current and previous billing cycles), but it also includes:

•   Interest earned on previous balances

•   Balance transfers (and any balance transfer fees)

•   Cash advances

•   Any other fees you may owe, like late fees or foreign transaction fees

Recommended: Closing a Credit Card with a Balance

Where to Find Your Outstanding Balance on a Credit Card

You can check your outstanding balance by calling your credit card issuer or accessing your account online or through the mobile app. Depending on the terminology the company uses, you may see the outstanding balance listed as your current balance or simply your credit card balance.

Recommended: Does Applying For a Credit Card Hurt Your Credit Score

Current Balance vs Outstanding Balance

Current balance is simply another term for outstanding balance. Depending on your credit card issuer, you might see one term or the other used. In some cases, it may simply be labeled “account balance” or “credit card balance.”

Recommended: How to Avoid Interest On a Credit Card

Statement Balance vs Outstanding Balance

So what’s the difference between a credit card statement balance and outstanding balance? Your credit card statement balance is the total amount owed after a billing cycle. It can include any purchases made during the billing cycle, plus any balance, interest, and fees carried over from the previous billing cycle.

Once issued, the statement balance amount does not change, even if you continue to swipe your card for more purchases during the grace period (this is the period between statement closing date and due date, during which you won’t earn interest on your unpaid statement balance). As long as you pay off the statement balance in full by the due date, you should not accrue any interest.

Your outstanding balance encompasses everything you owe at a specific moment in time. Sometimes your outstanding balance can be higher than your statement balance; sometimes it may be lower. Consider this example:

Your billing cycle ends, and you now have a statement balance of $1,000. In the next week, you spend $500 more with your credit card. Your statement balance remains $1,000, while your outstanding balance grows to $1,500. But as long as you pay that $1,000 statement balance by the due date, you will not incur any interest — and your statement balance will drop to $0 until the end of the next billing cycle.

Recommended: Tips for Using a Credit Card Responsibly

Remaining Balance vs Outstanding Balance

Remaining balance refers to whatever amount is still due after you’ve made your monthly credit card payment. For example, if your statement balance is $500 but you only pay $300, your remaining balance is $200. This, along with the interest it accrues, becomes a part of your outstanding balance.

You can avoid accruing interest on a remaining balance by paying off your statement balance in full each month rather than only the credit card minimum payment.

Recommended: When Are Credit Card Payments Due

What Is an Average Outstanding Balance?

The typical amount of an outstanding balance can vary widely from person to person — it all depends on how much you use your credit card, what your credit limit is, and whether you carry a balance. That being said, your average outstanding balance is simply the amount you owe on a credit card, averaged over a certain period of time.

The average outstanding balance formula for a statement period would be the total of your balance for each day of the statement period, divided by the number of days in the cycle. This can be helpful to know given most credit card issuers calculate interest on a daily basis, based on your average daily account balance.

Recommended: What is the Average Credit Card Limit

Paying Your Credit Card Outstanding Balance: What to Know

The nuances of credit card balances can be tough to nail down, but understanding how they work — particularly outstanding balances — may help you avoid interest and impacts to your credit score.

Here’s the short version:

•   Paying the minimum balance due each month will help you avoid late fees and negative marks for late payments on your credit report.

•   Paying the statement balance in full by the due date will keep you from accruing interest.

•   Paying down the outstanding balance, or current balance, even outside of your normal payment cycle, can reduce your overall credit utilization, which influences your credit score.

How Interest Contributes to Outstanding Balances

When you make purchases with your credit card throughout a billing cycle, the card issuer has lent you money to cover the expenses. And if you don’t pay the lender the statement balance in full by the specified due date, any remaining balance will become part of your outstanding balance — and it will start accruing interest.

The best way to avoid paying credit card interest is to pay your statement balance in full by each due date.

Recommended: Tips for Using a Credit Card Responsibly

How an Outstanding Balance Affects Your Credit Score

When you carry over unpaid balances, you’ll do more than earn interest that you have to pay. You’ll also increase your overall credit utilization, which is the amount of your total available credit you’re using. That’s because your outstanding balance counts toward your credit limit.

For example, if your credit limit is $5,000 and your outstanding balance is $2,500, you’ve utilized 50% of your credit limit. In general, creditors prefer to see a credit utilization of 30% or lower. This signals to them that you can responsibly pay back your debts.

In fact, credit utilization is the second most important factor affecting your FICO credit score. It accounts for 30% of your overall credit score. Thus, carrying a high outstanding balance regularly can adversely affect your credit score.

For this reason, experts typically recommend paying off your full statement balance every month if you’re able. And if you make a large payment on your credit card during a billing cycle that increases your outstanding balance tremendously, you may want to pay it off early to reduce your credit utilization — or else you chance a drop in your credit score.

Recommended: What Happens If You Overpay Your Credit Card?

The Takeaway

Credit cards can be confusing, especially when you’re new to the terminology. But once you understand how your statement and outstanding balances work and can responsibly make payments in full and on time, credit cards can be a great tool for boosting your credit score.

Enjoy unlimited cash back rewards with fewer restrictions.

FAQ

Does outstanding balance mean past due?

Having an outstanding balance does not necessarily mean it’s past due. Your credit card requires a minimum monthly payment; if you have satisfied that payment, you do not need to immediately pay your outstanding balance. But keep in mind that you generally need to pay the full statement balance each month to avoid accruing interest.

How do I clear the outstanding balance on my credit card?

To clear the outstanding balance on a credit card, you can make a payment equal to the amount. This should bring the balance down to zero. However, you do not always have to pay your outstanding, or current, balance to avoid interest. Paying your monthly statement balance in full should keep you from accruing interest, even if your outstanding balance is higher.

Why is my outstanding balance negative?

Your credit card outstanding balance can go negative if you pay off the card and then receive a credit for a returned item or claim cash-back rewards from your purchases. If you want, you can request a check from the credit card issuer in the amount of the negative balance. Or, you can apply the negative balance on a credit card toward future purchases on the credit card.

Photo credit: iStock/SARINYAPINNGAM


1See Rewards Details at SoFi.com/card/rewards.

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

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

SoFi Credit Cards are issued by SoFi Bank, N.A. pursuant to license by Mastercard® International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

SOCC1022002

Read more
Close modal

See what SoFi can do for you and your finances.

Select a product below and get your rate in just minutes.

Student Loan
Refinancing

Personal
Loans

Online
Investments

Other

Terms and conditions apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or other eligible status, be residing in the U.S., and meet SoFi's underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates reserved for the most creditworthy borrowers. If approved, your actual rate will be within the range of rates at the time of application and will depend on a variety of factors, including term of loan, evaluation of your creditworthiness, income, and other factors. If SoFi is unable to offer you a loan but matches you for a loan with a participating bank, then your rate may be outside the range of rates listed above. Rates and Terms are subject to change at any time without notice. SoFi Personal Loans can be used for any lawful personal, family, or household purposes and may not be used for post-secondary education expenses. Minimum loan amount is $5,000. The average of SoFi Personal Loans funded in 2023 was around $33K. Information current as of 2/26/24. SoFi Personal Loans originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org). See SoFi.com/legal for state-specific license details. See SoFi.com/eligibility for details and state restrictions.

✝ To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

©2026 Social Finance, LLC All rights reserved.
TLS 1.2 Encrypted
Equal Housing Lender