Preparing To Buy a House in 8 Simple Steps

In life there are some situations a person simply can’t prepare for, like locking the keys in a car full of groceries or having a head full of shampoo when the smoke alarm goes off. Luckily, purchasing a home doesn’t have to be one of those moments.

Buying a house is probably one of the biggest financial decisions many people will make in their lifetime, and the process can be lengthy and complex. From getting a bird’s-eye view of their overall financial picture to calculating housing costs and securing loan pre-approval, there are many actions for home buyers to take as they get ready to purchase a home.

With the right resources and a solid strategy, however, purchasing a house can be a smooth process.

8 Steps to Prepare for a Home Purchase

1. Determining Credit Score

A home buyer’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.

In a recent report from the National Association of Realtors , home buyers who had debt said it hindered their ability to set aside funds for a down payment by a median of four years.

Credit score can be influenced by a variety of factors, from payment history to amount of debt (a.k.a. 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.

By making on-time payments, limiting the number of new inquiries on their credit file, and working to pay down outstanding balances, home buyers could potentially boost their credit score and qualify for a lower mortgage rate.

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. The 2020 Q1 Federal Reserve Report on Household Debt and Credit found that the median credit score of newly originating borrowers increased to 773 in the first quarter for mortgages—up 14 points from 2019.

That’s not necessarily to say a credit score of 773 is a must for securing a mortgage, but the difference between a credit score in the 600 range and one in the 700 range could amount to about half a percent less interest on a mortgage loan and add up to a lot of money over time.

Credit scores can also affect the amount of the down payment itself. Many 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 home buyers have debt or not, checking credit reports is still a recommended first step to applying for a mortgage. Understanding the information on credit reports is invaluable in knowing whether time is needed to repair credit, which could potentially lead to a higher credit score and possibly lower 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, up-front 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 does not have a fixed rate—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 their services in creating the loan (typically amounting to 0.5% to 1% of the mortgage), real estate attorney fees, escrow fees, title insurance fees, home inspection and appraisal fees and recording fees, to name a few. To get an idea on how this can impact your budget, use this home affordability calculator to estimate total purchase cost.

Last year, the average closing costs for a single-family property were $5,749 including taxes, and $3,339 excluding taxes, according to a recent report from ClosingCorp .

In addition to closing costs, expenses that potential home buyers might want to consider are repairs and updates they might want to make to a home, new furniture, moving costs, or even commuting costs.

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, but 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 home buyers calculate how much they can feasibly afford and 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 the biggest financial goals many people will have in their lifetime. 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 average down payment on a house varies depending on the type of buyer, loan, location, and housing prices, but, according to Zillow’s 2019 Consumer Housing Trends Report , 56% of buyers put down less than the typical 20% down payment, 19% put down 20%, and 20% of home buyers put down more than 20%.

For first-time home buyers, 20% 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 retirement, or receiving assistance from state and local agencies.

For buyers who were 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 the 86% of home buyers 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 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.

5. Getting Pre-Approved for a Loan

While it might seem like a bit of a nuance, getting prequalified for a loan versus pre-approved for a loan are two different things.

When a buyer is prequalified for a loan, their mortgage lender estimates—but does not guarantee—the loan rate, based on finances provided by the buyer.

When a buyer is pre-approved, the lender conducts a thorough investigation into their finances that includes income verification, assets, and credit rating. This pre-approval gives a guarantee to the buyer that they will be able to obtain the loan and breaks down exactly what the bank is willing to lend.

Having a pre-approval letter in hand can help some buyers get ahead by appealing to the seller as a serious intention of purchase and a lender’s guarantee to back that purchase up.

6. Finding the Right Real Estate Agent

According to the National Association of Realtors 2020 Generational Trends Report :

•  89% of all buyers purchased their homes through a real estate agent.
•  The primary method most used to find that agent was referral.
•  All generations of buyers continued to utilize a real estate agent as their top resource for helping them buy a home.

While the internet and popular real estate search websites have made it easier for home buyers 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), home buyers 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.

Check out housing market
trends, hot neighborhoods,
and demographics by city.

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 home buyer 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 secured, the real estate agent has been signed, and the savings are set aside, the official house hunt can begin.

For 55% of buyers, the most difficult step in the home buying process was finding the right property. Some had to undergo a considerable process before making the final purchase, with most searching for 10 weeks and seeing a median of nine homes first.

With the help of a trusted real estate agent and a housing market with adequate inventory, most home buyers 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 home buyers might want to be prepared to go through the bidding process with a few properties before they get to that glorious final sale.

Home buyers might wish they could snap their fingers and move into their dream house as quickly and painlessly as possible. While that is not realistic, SoFi can help simplify the mortgage loan process.

Without any hidden fees or prepayment penalties, a SoFi home loan could be the right option for many homebuyers. For questions about buying a home, SoFi offers home loan resources, guides, and tips to steer future homeowners through the process. There are a lot of steps, but managing them can be easier with a helping hand.

Learn more about how SoFi home loans make the mortgage process as quick and painless as possible.



External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
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Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
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’swebsite .
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Terms, conditions, and state restrictions apply. SoFi Home Loans are not available in all states. See SoFi.com/eligibility for more information.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. A hard credit pull, which may impact your credit score, is required if you apply for a SoFi product after being pre-qualified.

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Source: sofi.com

Learn The Basics of Investment Funds

A common and effective strategy for beginner investors is to start investing with an investment fund. Investment funds let investors pool resources to buy into a collection of securities.

What is an Investment Fund?

It’s common to wonder, what is a fund? Broadly speaking, an investment fund is a collection of funds from different people that is used to buy securities. Investors get the advantages of investing as a group (purchasing power) and own a portion of their investments equal to the money they have contributed.

There are different types of investment funds, including mutual funds, exchange-traded funds (ETFs), and hedge funds. Typically, these funds are managed by a professional investment manager who allocates investors’ money based on the type of fund and the fund’s goal. For this service, investors are generally charged a small fee that is a percentage of their investment amount.

What is a Mutual Investment Fund?

Mutual funds are popular investment funds for a reason: they are an easy way to purchase diversified assets—from stocks and bonds to short-term debt—in one transaction.

One of the core fundamentals that led to the creation of mutual funds is providing smaller individual investors access to investments that might be more difficult to obtain or manage on their own. A retail investor with $1,000 probably wouldn’t be able to effectively recreate a portfolio that tracks the S&P 500, let alone rebalance it quarterly. Thanks to the creation of mutual funds, investors can pool all of their funds together into a collective fund to invest in the same markets by choosing from custom-packaged funds with specific focuses and inexpensive share prices.

Different Types of Mutual Funds

There are a number of different types of mutual funds, each of which offer something distinct to the investor.

Equity Funds

Also known as stock funds, equity funds are a type of mutual fund that invests in a specific asset class, principally in stocks. Equity fund managers seek to outperform the S&P 500 benchmark by actively investing in growth stocks and undervalued companies that may provide higher returns over a period of time than the fund’s benchmark.

Equity funds have higher potential returns but are also subject to higher volatility as well. It’s common for equity funds to be actively managed and thus typically charge higher operating fees. Funds with higher stock allocations are more popular with younger investors as they allow for growth potential over time.

While equity is a specific asset investment by itself, some mutual funds focus on more precise criteria:

Fund Size (Market Cap)

Some funds only include companies with a defined market cap (market value). Different tiers of company sizes can perform differently in different economic conditions and companies can be viewed as more or less risky based on their market cap. Fund sizes are categorized by the following:

•  Large-Cap (Over $10 billion)
•  Mid-Cap ($2 billion to $10 billion)
•  Small-Cap ($300 million to $2 billion)

Industry/Sector

Funds that focus specifically on a single industry such as technology, healthcare, energy, travel, and more. Owning shares in different sector mutual funds provides portfolio diversity and can potentially enhance returns if a particular industry experiences a tailwind.

Growth vs. Value

Some funds differ in their investment style, focusing on either value or growth. Growth stocks are expected to provide outsized returns, whereas value stocks are considered to be undervalued.

International/Emerging Markets

Domestic stocks are not the only equity investment options, as some funds focus exclusively on international and emerging markets. International and emerging market funds provide geographic diversity—exposure to companies operating in different countries and countries with growing markets .

Bond Funds

Like stock mutual funds, bond funds are a pool of investor funds that are invested in short- or -long-term bonds from issuers such as the US government, government agencies, corporations, and other specialized securities. Bond funds are a common type of fixed-income mutual funds where investors are paid a fixed amount on their initial investment.

Seeing as how bonds are frequently thought of as a safer investment than stocks and offer less growth, bond funds are popular among investors who are looking to preserve their wealth as opposed to aggressively growing it.

Index Funds

This type of fund is constructed to track or match the makeup and performance of a financial market index such as the Standard & Poor’s 500 Index (S&P 500). They provide broad market exposure, low operating expenses, and relatively low portfolio turnover. Unlike equity funds, an index fund’s holdings only change when the underlying index does.

Index fund investing has exploded in popularity in recent years due to it’s low costs, passive approach, and abundance of options to pick from. Investors may choose from a number of indices that focus on different sectors such as the S&P 500 (financial and consumer), Nasdaq 100 (technology), Russell 2000 (small-cap), and international indices .

Balanced Funds

Also known as asset allocation funds, these hybrid funds are a combination of investments in equity and fixed-income with a fixed ratio such as 80% stocks/20% bonds. Balanced funds offer diversity to different asset classes and consequently trade some growth potential to mitigate some risk. One example of a balanced fund is a target-date retirement fund which automatically rebalances the investments from higher-risk stocks to lower-risk bonds as the fund approaches the target retirement date.

Money Market Fund

This low-risk, fixed-income mutual fund invests in short-term, high-quality debt from federal, state, or local governments, or US corporations. Assets commonly held by money market funds include U.S. Treasuries and Certificates of Deposit. These funds are among the lowest-risk investments and make up 15% of the mutual fund market.

Alternative Funds

For those seeking true portfolio diversity beyond traditional stocks and bonds, it may be worth considering alternative investment funds. Alternative funds focus on other specific markets such as real estate, commodities, private equity, or others.

These asset classes generally make up a small percentage of one’s portfolio, if at all, and serve as a hedge to heavier-weighted allocations to traditional sectors. Rather than investing in companies of a particular index or market cap, alternative funds may be composed of natural gas drilling companies, real estate investment trusts (REITs), intellectual property rights, or more.

Benefits of a Mutual Investment Fund

While no two funds are the same, mutual funds are a popular choice for beginner and advanced investors alike for a variety of reasons.

Diversification

Mutual funds serve as an investment basket that contains many different assets, some with the same general focus and others with multiple focuses. Rather than being all-in on one particular investment, mutual funds offer diversity across multiple investments.

This allows investors to cast a wider net and benefit when one or multiple of their basket investments performs well. Conversely, when one investment in a mutual fund does poorly, the investor may rest assured knowing that a single loss is mitigated by also having other investments that hopefully offset other losses. Some types of funds offer greater diversification across different asset classes, such as stocks and bonds.

Performance

Mutual funds that aim to track indices or focus on growth stocks typically yield similar market performance compared to the benchmark index. S&P Global’s Year-End 2019 report (the most recent year-end report to date) showed that 89% of active managers failed to match the benchmark large-cap S&P 500’s performance, the same measure commonly obtained by a simple mutual fund buy-and-hold strategy.

Low Maintenance

Mutual funds are relatively easy to use and require little to no maintenance. They allow investing in multiple asset classes through one investment vehicle without having the investor sift through and make individual decisions. All of these decisions are provided by an active fund manager whose sole responsibility is to provide profitable returns for investors based on the fund’s general focus or target.

Mutual funds also provide a degree of functionality. One convenient feature is the ability to set a passive monthly investment amount and to automatically reinvest dividends. Many mutual funds pay investors dividends on an annual, quarterly, or even monthly basis. Dividends are calculated based on the underlying companies’ earnings and distributed to the fund which then passes them along to fund investors. Another renowned feature of mutual funds is the ability to reinvest dividends, thus compounding both mutual fund holdings and dividends in perpetuity.

High Liquidity

Mutual funds are transacted frequently. Investors are able to easily buy or redeem mutual fund shares daily at the market open. Shares in funds are relatively affordable as they typically have a low net asset value (NAV), allowing even novice investors to buy shares with a low starting amount. Compare this to ETFs which can be transacted repeatedly at any time during market hours, but the price can rise to seemingly out-of-reach levels for a beginner.

Active Management

Mutual funds are actively managed by a professional fund manager who’s responsible for operating the fund, whether it be to allocate investor money, rebalance the fund’s investments, or distribute dividends to investors.

While mutual funds tend to have relatively low fees, investors are subject to an annual fee, also known as an also known as an expense ratio, that is calculated as a percentage of each individual’s holdings in the fund and automatically paid to the fund manager for their services. Fund fees vary, so in some cases it may be helpful to compare funds based fees before investing.

Can I Lose money in a Mutual Fund?

With investing, there is no such thing as a sure thing. While it’s unlikely, it is possible to lose all your money in a mutual fund if the securities in the fund drop in value.

That said, some mutual funds aim to be conservative and designed to offer slow but incremental gains over time. As always, it’s prudent to research exactly what’s contained in a particular mutual fund before investing any capital. Ultimately, it’s every investor’s responsibility to determine their own risk tolerance and investing strategy that meets their personal needs.

The Takeaway

Investment funds are a practical and beginner-friendly way to start investing in financial markets. Even with beginner knowledge around what is a mutual investment fund, mutual funds have the propensity to provide a hands-off and a potentially low-cost way to start building wealth. Mutual funds offer options focusing on many asset classes, time horizons, and risk tolerances for investors of all ages and experience levels.

Short-term fluctuations may occur on a day-to-day basis, but investing in a long-term investment fund like a mutual fund is a popular strategy to build long-term wealth. For both experienced and first-time investors, the SoFi Invest® online trading app offers automated and active investing options that aim to work with most goals.

See which type of investment fund is right for you and start investing now with SoFi.


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).

2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.

3) Digital Assets—The Digital Assets platform is owned by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.

For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, http://www.sofi.com/legal.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected] Please read the prospectus carefully prior to investing. Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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Source: sofi.com

Is a Backdoor Roth IRA Right for You?

A Roth IRA is an individual retirement account that may provide investors with a tax-free income once they reach retirement. With a Roth IRA, investors save after-tax dollars, and their money grows tax-free. Roth IRAs also provide additional flexibility for withdrawals—once the account has been open for five years, contributions can be withdrawn at any time, for any reason.

But there’s a catch: Investors can only contribute to a Roth IRA if their income falls below a specific limit. If your contribution is for 2020, that maximum is $124,000 for a single person or $196,000 for a married couple filing jointly (based on modified adjusted gross income). Though, if you make slightly more than that, you may qualify to contribute a reduced amount.

Related: What Is a Roth IRA?

Want to contribute to a Roth IRA, but have an income that exceeds the limits? Good news: There’s another option. It’s called a backdoor Roth IRA.

What is a Backdoor Roth IRA?

If you aren’t eligible to contribute to a Roth IRA outright because you make too much, you can do so through what’s called a “backdoor Roth.” This process involves converting funds in a Traditional IRA into a Roth IRA.

The government allows you to do this as long as investors pay income taxes on any contributions deducted on taxes (and any profits made) when the investor converted the account. Unlike a standard Roth IRA, there is no income limit for doing the conversion, nor is there a ceiling to how much can be converted.

Related: Traditional Roth vs. Roth IRA: How to Choose the Right Plan

Is a Backdoor Roth Worth Doing?

It depends. Use SoFi’s IRA Contribution Calculator to make an informed decision.

High earners who don’t qualify to contribute under current Roth IRA rules may opt for this route. As with a typical Roth IRA, a backdoor Roth may be a good option when an investor expects their taxes to be lower today than in retirement. Investors who hope to avoid required minimum distributions (RMDs) when they reach age 72 might also consider doing a backdoor Roth.

But if someone is eligible to contribute to a Roth IRA, it may not make sense to bother with a backdoor conversion.

Another thing: A conversion can also move people into a higher tax bracket, so investors may consider waiting to do a conversion when their income is lower than usual.

Related: How Much Can You Put in an IRA This Year?

If an investor already has traditional IRAs, it may create a situation where the tax consequences outweigh the benefits. Say an investor has money deducted in any IRA account, including SEP or SIMPLE IRAs, the government will assume a Roth conversion represents a portion of all the balances. For example, if they contributed $5,000 to an IRA that didn’t deduct and another $5,000 to an account that did deduct. If they converted $5,000 to a Roth IRA, the government would consider $2,500 of the conversion taxable.

If an investor plans to use the converted funds within five years, a backdoor Roth may not be the best place to park their cash. That’s because withdrawals before five years are subject to income tax and a 10% penalty.

Related: Roth IRA 5-Year Rule Explained

How to Open a Backdoor Roth IRA

If an investor has no other Traditional IRAs, here’s how to make a backdoor Roth IRA happen with SoFi:

•  Open both a Traditional IRA and a Roth IRA with SoFi Invest®.
•  Make a non-deductible contribution to the Traditional IRA by the tax deadline (April 15, 2021 for tax year 2020). The maximum allowable yearly contribution is $6,000 (or $7,000 if you’re 50 or older).
•  SoFi will send you a form to transfer the money into your Roth IRA. Sign and return it.
•  If you choose an automated investing account, once the funds are in your Roth IRA, SoFi will invest them in the portfolio you’ve chosen.

Related: 3 Easy Steps to Starting A Retirement Fund

If you have any questions or want some help as you go through the process, schedule a complimentary appointment with one of our licensed financial advisors. SoFi Invest is all about empowering you and your financial future, and we’re here to help.

The Takeaway

A backdoor Roth IRA may be worth considering if tax-free income during retirement is part of an investor’s financial plan, and they make too much to contribute directly to a Roth. Roth IRAs are a good option for younger investors at low tax rates and people with a high disposable income looking to reduce tax bills on capital gains in retirement.

Learn more about your retirement account options with SoFi.


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).

2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.

3) Digital Assets—The Digital Assets platform is owned by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.

For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, http://www.sofi.com/legal.

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

How Much Can You Put in an IRA This Year?

If you have an IRA, or are considering opening one, you might be wondering how much you can contribute every year. How much you can contribute to an Individual Retirement Account (IRA) depends on your age, your income, the IRA type, and whether you also contribute to an employer-sponsored retirement plan.

There are two types of IRAs: traditional and Roth IRAs. Both have set contribution limits, as well as other guidelines. With an IRA, an investor typically has to find one that fits their needs. A report from 2019 reveals that only 36 percent of U.S. households owned an IRA.

Related: What Is an IRA?

According to the Internal Revenue Service, for tax years 2020 and 2021, investors can contribute a total of $6,000 into IRA accounts. (If you’re 50 or older, you can contribute $7,000.)

What Is an IRA?

An IRA stands for Individual Retirement Account. IRAs allow people to make tax-deferred investments that they can use in retirement. There are several different types of IRAs, including traditional IRAs and Roth IRAs. You can set up an IRA with a bank, insurance company, or other financial institution.

What types of IRAs are available?

Traditional IRA

A retirement investor’s contributions to a traditional IRA are typically tax-deductible. Investors won’t pay taxes on earnings with a traditional IRA. When investors reach retirement age, they’ll pay taxes on withdrawals because they’re taxed like income. It’s almost like paying yourself a salary in retirement and paying income taxes on those payments.

Related: How an IRA Works

Roth IRA

Contributions to a Roth IRA are made after taxes and aren’t tax-deductible. With a Roth IRA, earnings aren’t typically taxed, but investors won’t have to pay taxes on withdrawals from a Roth IRA when they reach retirement age and start using the funds in one of these accounts.

Sep IRA

A Sep IRA is a simplified employee pension IRA. These IRA accounts help small businesses or self-employed retirement investors make contributions to an IRA in the employee’s name.

Simple IRA

A SIMPLE IRA plan (Savings Incentive Match PLan for Employees) is an account that most resembles a traditional 401K. This savings incentive match plan for employees can be set up by small businesses that don’t have any other retirement plans. Like a 401(k), this IRA lets employees and employers contribute, but with lower costs and fewer administration fees than a typical 401(k).

Related: How to Open Your First IRA

How Much Can You Contribute to an IRA Each Year?

If you’re younger than 50, you can contribute a combined maximum of $6,000 annually to a traditional IRA or a Roth IRA.

After 50, you’re allowed to make “catch-up” contributions, so the cap goes up to $7,000 a year. Previously, you could not make contributions to a traditional IRA once you reached the age of 70.5. But starting in 2020, there is no age limit; there’s also no age limit for a Roth IRA.

Limits for Roth IRA and traditional IRA contributions for the tax year 2020 and 2021:

•  Under age 50: $6,000
•  Age 50 and older: $7,000

Related: What Is a Roth IRA?

However, there are a few exceptions to the retirement contribution limits. If you make less than the limit in taxable income, you can only contribute up to that amount. On the other end of the spectrum, if you make too much, you can’t contribute to a Roth IRA or may only be able to contribute a reduced amount.

If you’re younger than 50, you can contribute a maximum of $6,000 annually into any type of IRA.

For 2020, if you’re single, you can put in a reduced amount into a Roth IRA if you make between $122,000 and $137,000; above that, you can’t contribute anything.

Related: Traditional vs. Roth IRA: How to Choose the Right Plan

For a married person filing jointly, you can contribute a reduced amount into a Roth IRA if you make between $193,000 and $205,000. (The limits are based on modified adjusted gross income .)

If you already contribute to a 401k or another retirement plan at work, you can still contribute to an IRA.

However, you may not be able to deduct all of your traditional IRA contributions if you or your spouse participates in another retirement plan at work. Roth IRA contributions might be limited if your income exceeds a certain level.

Related: 3 Easy Steps to Starting a Retirement Fund

Still unsure which IRA account you can contribute to? Use SoFi’s IRA Calculator to help you make an informed decision.

How Do I Open an IRA?

Investors thinking about opening an online IRA may want to consider whether a Roth or a traditional IRA makes sense.
Roth IRAs have some limitations that might preclude investors from getting one.

Investors who make more than $206,000 in adjusted gross income a year filing taxes jointly or $139,000 a year filing single may not be eligible to open a Roth IRA.

Vital information needed to open an IRA includes a driver’s license or ID, Social Security number, banking info like routing numbers to fund the account, name, and address of employer, and beneficiary information. After that, investors choose an asset mix and investment type that makes sense for their goals.

Related: The 7 Most Common Questions About IRAs

How Do I Roll Over Funds into an IRA?

Some investors might be thinking about opening a traditional IRA because they have left a job where they had a retirement account and want to move those funds to a new account (or they want to open a Roth IRA and roll over a Roth 401k). Reasons for doing this include the new investment company offers more investment options or the employee seeks more control over the funds or wants to combine funds from another retirement account with the employer-sponsored account.

Generally, funds from this type of account can be rolled over into a new account within 60 days.
The advantage of rolling over one retirement to another account is that investors don’t lose those funds’ tax-deferred status. If investors don’t roll over the funds, they do become taxable.
There are three ways investors can rollover retirement funds into an IRA.

Related: IRA Rollover Rules

Direct rollover

An investor’s old retirement funds administrator, perhaps at a previous job, sends funds directly to the new to an IRA or new employer-sponsored retirement plan. The investor won’t pay taxes or a penalty on this transfer as long as the transferred funds are going to a similarly classified account (Roth to Roth or 401k to traditional IRA).

Trustee-to-trustee transfer

If an investor is getting funds from an IRA, they can ask the financial institution that administers the old IRA to send funds to the new IRA. The investor won’t pay taxes or a penalty on this transfer.

Late or 60-day rollover

The IRS gives people 60 days from the date they receive a distribution from an IRA or retirement plan to roll it over to another plan or IRA. If you roll over after the 60 days has passed, it’s considered “late,” and the distribution will be taxed—and you’ll have to pay a penalty if you are younger than 59.5 years.

Related: IRA Transfer vs. Rollover: What’s the Difference?

Can You Withdraw from an IRA Before Retirement?

It depends. With a Roth IRA, there are situations–like buying your first home, adoption costs, or paying for higher education–where you can withdraw your contributions with no penalties or taxes. For example, an investor can take out up to $10,000 from a traditional IRA—or in earnings from a Roth IRA—without penalties for expenses associated with buying a first home.

Investors can also withdraw funds penalty-free for qualifying medical or educational expenses. And once you hit the age of 59.5, distributions will always be penalty-free.

Here are all the exceptions for early distributions:

•  Made to a beneficiary or estate on account of the IRA owner’s death
•  Made because you’re totally and permanently disabled
•  Made as part of a series of substantially equal periodic payments for your life (or life expectancy) or the joint lives (or joint life expectancies) of you and your designated beneficiary
•  Qualified first-time homebuyer distributions
•  Not in excess of your qualified higher education expenses
•  Not in excess of certain medical insurance premiums paid while unemployed
•  Not in excess of your unreimbursed medical expenses that are more than a certain percentage of your adjusted gross income
•  Due to an IRS levy of the IRA under section 6331 of the Code
•  A qualified reservist distribution
•  Excepted from the additional income tax by federal legislation relating to certain emergencies and disasters (see the Instructions for Form 5329 for more information), or
•  Not in excess of $5,000, and the distribution is a qualified birth or adoption distribution (see the Instructions for Form 5329 for more information)

Related: Should You Use Your Roth IRA to Buy Your First Home?

Are There Ways to Get Around IRA Contribution Limits?

Sometimes. There’s no limit to how much you can put into an IRA when you’re rolling over funds from a 401(k) or 403(b) account.

Some people also use what’s called a “backdoor Roth IRA” to get around the income limits to contribute to a Roth IRA. This involves contributing the maximum to a traditional IRA, then converting it into a Roth. (There’s no income limit for conversions.) Consult a tax professional to understand all the tax implications.

Is an IRA a Replacement for a 401(k)?

American workers have access to a 401(k) retirement plan through their employers. And, some investors might even be able to get additional 401(k) contributions in the form of an employer match. Investors who have access to a 401(k) and an IRA might be able to accelerate their retirement savings and put themselves in a better financial situation when they reach retirement age.

Related: Should You Open An IRA If You Already Have A 401(k)?

The Takeaway

The rules of IRAs can be complicated, but investing in one doesn’t need to be. SoFi Invest® is all about empowering you and your financial future. Prepare for retirement with a SoFi active or automated Roth or Traditional IRA from SoFi Invest.

Need tips on IRAs or saving for retirement in general? SoFi members can schedule a complimentary personal consultation with one of our credentialed financial advisors to answer their questions.

Looking to open a SoFi traditional or Roth IRA? Learn more about SoFi Invest today.



SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).

2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.

3) Digital Assets—The Digital Assets platform is owned by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.

For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, http://www.sofi.com/legal.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
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What is a 401(k) Profit Sharing Plan?

Like a traditional 401(k) plan, a 401(k) profit share plan is an employee benefit that can provide a vehicle for tax-free retirement savings. But the biggest difference between an employer-sponsored 401(k) and a 401(k) profit share plan is that in a profit share plan, employers have control over how much money—if any—they contribute to the employee’s account from year to year.

In other ways, the 401(k) profit-sharing plan works similarly to a traditional employer-sponsored 401(k). Under a 401(k) profit share plan, as with a regular 401(k) plan, an employee can allocate a portion of pre-tax income into a 401(k) account, up to a maximum of $19,500 per year (in 2020 and 2021).

At year’s end, employers can choose to contribute part of their profits to employee’s plans, tax-deferred. As with a traditional 401(k), maximum total contributions to an account must be the lesser of 100% of the employee’s salary or $58,000 a year per the IRS; that number jumps to $64,500 for older employees who are making catch-up contributions.

How Does 401(k) Profit Sharing Work?

There are several types of 401(k) profit-sharing setups employers can choose from. Each of these distributes funds in slightly different ways.

Pro-Rata Plans

In this common type of plan, all employees receive employer contributions at the same rate. In other words, the employer can make the decision to contribute 3% (or any percentage they choose) of an employees compensation as an employer contribution. The amount an employer can share is capped at 25% of total employee compensation paid to participants in the plan.

New Comparability 401(k) Profit Sharing

In this plan, employers can group employees when outlining a contribution plan. For example, executives could receive a certain percentage of their compensation as contribution, while other employees could receive a different percentage. This might be an option for a small business with several owners that wish to be compensated through a profit-sharing plan.

Age-Weighted Plans

This plan calculates percentage contributions based on retirement age. In other words, older employees will receive a greater percentage of their salary than younger employees, by birth date. This can be a way for employers to retain talent over time.

Integrated Profit Sharing

This type of plan uses Social Security (SS) taxable income levels to calculate the amount the employer shares with employees. Because Social Security benefits are only paid on compensation below a certain threshold, this method allows employers to make up for lost SS compensation to high earners, by giving them a larger cut of the profit sharing.

Pros and Cons of 401(k) Profit Sharing

There are benefits and drawbacks for both employers and employees who participate in a profit-sharing 401(k) plan.

Employer Pro: Flexibility of Employer Contributions

Flexibility with plan contribution amounts is one reason profit share plans are popular with employers. An employer can set aside a portion of their pre-tax earnings to share with employees at the end of the year. If the business doesn’t do well, they may not allocate any dollars. But if the business does do well, they can allow employees to benefit from the additional profits.

Employer Pro: Flexibility in Distributions

Profit sharing also gives employers flexibility in how they wish to distribute funds among employees, using the Pro-Rata, New Comparability, Age-Weighted, or Integrated profit sharing strategy.

Employer Pro: Lower Tax Liability

Another advantage of profit share plans is that they allow employers to lower tax liability during profitable years. A traditional employer contribution to a 401k does not have the flexibility of changing the contribution based on profits, so this strategy can help a company maintain financial liquidity during lean years and lower tax liability during profitable years.

Employee Pro: Larger Contribution Potential

Some employees might appreciate that their employer 401(k) contribution is tied to profits, as the compensation might feel like a more direct reflection of the hard work they and others put into the company. When the company succeeds, they feel the love in their contribution amounts.

Additionally, depending on the type of distribution strategy the employer utilizes, certain employees may find a profit-sharing 401(k) plan to be more lucrative than a traditional 401(k) plan. For example, an executive in a company that follows the New Compatibility approach might be pleased with the larger percentage of profits shared, versus more junior staffers.

Employee Con: Inconsistent Contributions

While employers may consider the flexibility in contributions from year to year a positive, it’s possible that employees might find that same attribute of profit sharing 401(k) plans to be a negative. The unpredictability of profit share plans can be disconcerting to some employees who may have come from an employer who had a traditional, consistent match set up.

Employee/Employer Pro: Solo 401(k) Contributions

A profit share strategy can be one way solo business owners can maximize their retirement savings. Once a solo 401(k) is set up with profit sharing, a business owner can put up to $19,000 a year into the account, plus up to 25% of net earnings, up to a total of $58,000. This retirement savings vehicle also provides flexibility from year to year, depending on profits.

Withdrawals and Taxes on 401(k) Profit Share Plans

A 401(k) with a generous profit share plan can grow quite quickly. So what about when you’re ready to take out distributions? A 401(k) withdrawal will have penalties if you withdraw funds before you’re 59 ½ (barring certain circumstances laid out by the IRS) but the money will still be taxable income once you reach retirement age. Additionally, like traditional 401(k) plans, a profit-sharing 401(k) plan has required minimum distribution requirements (RMDs) once an account holder turns 72.

Investors who anticipate being in a high tax bracket during their retirement years may consider different strategies to lower their tax liability in the future. For some, this could include converting the 401(k) into a Roth IRA. This is sometimes called a “backdoor Roth IRA” because rolling over the 401(k) does not subject an investor to the income limitations that cap Roth contributions.

An investor would need to pay taxes on the money they convert into a Roth IRA, but distributions in retirement years would not be taxed the way they would have if they were kept in a 401(k). Any 401(k) owner who qualifies for a Roth IRA can do this, but the additional funds in a 401(k) profit share account can make these moves that much more impactful in the future.

The Takeaway

A 401(k) profit share plan allows employees to contribute pre-tax dollars to their retirement savings, as well as benefit from their employer’s profitability. But because profit share plans can take multiple forms, it’s important for employees to understand what their employer is offering. That way, employees can create a robust retirement savings strategy that works for them.

There are many retirement savings options besides an employer-sponsored 401(k) (profit-sharing or not), and some investors invest in a combination of different plans that suits their short-term and long-term needs. SoFi Invest® offers both Roth and traditional IRA accounts, both of which can help make saving for retirement easier.

Find out how to open an IRA with SoFi.


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).

2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.

3) Digital Assets—The Digital Assets platform is owned by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.

For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, http://www.sofi.com/legal.

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

Guide to Investing in Ethereum

Cryptocurrency may be the new kid on the block in terms of investing, but some cryptos are rapidly gaining value. And while Bitcoin may get the lion’s share of attention among cryptocurrencies, other alternative assets, like Ethereum, are hot on its heels. For aspiring crypto investors, one of the first questions that comes to mind is how to buy Ethereum.

Before learning how to invest in Ethereum, however, it’s important to get to know the history, attributes, and other details of this popular cryptocurrency. In this article, we’ll address:

•  What is Ethereum?
•  How to buy Ethereum
•  What Investors Should Keep in Mind

What is Ethereum?

Ethereum is a blockchain based platform used to make peer-to-peer transactions and to build applications. It may be easier to think of Ethereum as an application marketplace, rather than a currency. “Ether” is the platform’s native currency, and it can be bought and sold by investors, like Bitcoin or other cryptos.

Ethereum is often referred to as a cryptocurrency, similar to Bitcoin, Ripple, or other types of cryptocurrency on the market. But when comparing Ethereum versus Bitcoin, for example, it’s necessary to note that the underlying technology and utility of the two cryptos is quite different.

What is Ethereum, exactly? It was created with the goal of giving programmers and developers a way to build decentralized programs. That is, a way to create applications without getting involved with the middlemen who generally control access to the apps—like how Google or Apple have control over their respective app stores.

Some deem Ethereum as valuable for two key reasons. One, it has intrinsic value (people are willing to pay for it with cash, for example). And two, it’s an actual platform with a degree of utility—which many other cryptos cannot claim. Today, it’s used by hundreds, if not thousands, of businesses and industries.

How to buy Ethereum

Getting started buying or investing in Ethereum isn’t difficult. While Ethereum itself is something of a complicated asset, buying or investing in it is more straightforward—particularly for investors who already have cryptocurrency among their assets, too. Here is a simplified, step-by-step guide to investing in Ethereum.

1. Get a digital wallet

Anyone serious about Ethereum investing will want to get a digital wallet, which allows cryptocurrencies to be safely stored. Digital assets can be vulnerable to theft, so it’s important to make sure that assets can be kept safe. Some wallets are made by the coin developers themselves, others are made by a third-party developer.

2. Create an Account on an Exchange

Likewise, investors will need to find and create an account on a crypto exchange that allows them to buy and sell cryptocurrencies including Ethereum. Think of a crypto exchange as similar to a stock exchange. Crypto exchanges are either centralized, decentralized, or hybrid. Some investors find centralized exchanges useful because of third-party involvement that helps make sure transactions go through properly, and also allows for exchanging “fiat” currency (like US dollars) for cryptocurrency.

3. Fund your account

With a wallet and an exchange account, the next step is to have a medium to exchange for Ethereum. For most people, that simply means funding their account with good old dollars and cents (or fiat currency, in crypto parlance). The process is similar to funding a brokerage account in order to buy stocks or bonds. Fund an account, and the resources will be at hand with which to start making trades.

4. Start buying Ethereum

With a verified and funded account, investors should be ready to start buying Ethereum. While the specific steps to start buying or selling cryptocurrency will depend on the exchange, it’s generally similar to buying stocks through a brokerage.

No matter the exchange, investors will be in a position to start trading or buying Ethereum. Once the trades have settled and the transactions have been completed, remember to withdraw the assets into the aforementioned digital wallet for safekeeping.

Buying Ethereum: What Investors Should Keep in Mind

With the basics of buying Ethereum covered, it’s also important to discuss some of the other things investors should keep in mind. Most notably, that cryptocurrencies, and assets like Ethereum, are inherently risky investments.

While Ethereum, as a platform, is being used by a number of large companies, as an investment, it still has risks. It’s still an evolving platform, for one, and exists in the same gray area as others when it comes to cryptocurrency regulations. That is, there is none—so the government won’t be there to bail investors out if things go south.

Cryptos and related assets also tend to be highly volatile investments. So, if investors don’t have much of a stomach for wild value fluctuations, that is something to consider before buying Ethereum.

Other risks to consider include the possibility of theft , and that Ethereum could “fork”.

Forks are an entire topic in and of themselves. But in short, there are hard and soft forks, and it means that a change in protocol has been made to a blockchain network. Effectively, it creates a new “chain,” meaning that all users need to upgrade to the latest software and protocols.

Basically, a fork is a change in the rules. And they can happen at any time , and can cause some issues for Ethereum users who are caught unaware.

Finally, investors will need to remember that they may owe taxes on their Ethereum holdings—the last thing anyone wants to do is draw the ire of Uncle Sam!

The Takeaway

Ethereum was created to give programmers and developers a way to create applications without going through third parties who control access to the apps. But while its origins may be different from Bitcoin or other cryptocurrency, its appeal to investors is much the same.

Is Ethereum a good investment? There’s no way to answer this question for any investment, Ethereum or otherwise. The answer depends on an individual investor’s goals and the asset’s performance over time.
If you’re ready to add Ethereum to your portfolio or get started building one, SoFi Invest® can help you get started.

Start investing in cryptocurrency with SoFi.



SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).

2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.

3) Digital Assets—The Digital Assets platform is owned by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.

For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, http://www.sofi.com/legal.

Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Source: sofi.com

What is Financial Therapy?

Financial therapy is a relatively new field that combines the emotional support of a psychologist with the money mindset of a financial planner.

Seeing a financial therapist can allow clients to begin to process their underlying feelings about money, while working out plans for retirement, savings, investments and other goals.

Financial therapists (sometimes referred to as financial psychologists) also work to lessen that stress that often comes with money concerns, and try to help their clients develop a more sustainable and healthy relationship to money.

Financial therapists can also help couples overcome differences in their approach to saving and spending, which can help mitigate money fights, and enable them to work together more as a team.

Read on to learn if you might benefit from this type of professional counseling, and, if so, how to find a financial therapist that is the right fit for you.

How Financial Therapy Works

According to the Financial Therapy Association (FTA) , financial therapy is a process informed by both therapeutic and financial expertise that helps people think, feel, and behave differently with money to improve overall well-being.

The profession sprang out of increasing evidence that money can be intrinsically tied to our hopes, frustrations, and fears, and also have a significant impact on our mental health.

According to a recent survey by the American Psychological Association , 72 percent of Americans reported feeling stressed about money at least some time in the prior month.

Money can also have a major impact on our relationships.

Indeed, research has shown that fighting about money is one of the top causes of conflict among couples, and one of the main reasons married couples land in divorce court.

And, while it might seem like bad habits and money arguments are things you can simply resolve on your own, the reality is that it’s often not that simple.

Many financial roadblocks, such as chronic overspending or constantly worrying about money, often aren’t exclusively financial. In many cases, psychological, relational and behavioral issues are also at play.

Financial therapy can help patients recognize problematic behaviors, and how various relationships and experiences may have led them to develop those behaviors as coping mechanisms or to form unrealistic or unhealthy beliefs.

Along with offering practical financial advice, a financial therapist can reduce the feelings of shame, anxiety, and fear related to money.

The reasons why financial therapy can help are the same as why traditional psychological therapy can help: It can lead people to understand that they can do something to improve their situation. That, in turn, can instigate changes and healthier behaviors.

Like conventional therapy, the number of sessions needed will vary, depending on the situation. A financial therapy relationship can last from a few months to longer.

Generally, a financial therapist’s work is “done” when you feel your finances are orderly and you have the skills to keep them that way in the future.

Financial Therapists vs. Financial Advisors

Financial advisors are professionals who help manage your money.

They are typically well-informed about their clients’ specific situations and can help with any number of money-related tasks, such as managing investments, brokering the purchase of stocks and funds, or creating a tax plan.

However, psychological therapy is not a financial advisor’s area of expertise, and if a person requires real emotional support or needs help breaking bad money habits, a licensed mental health professional, such as a financial therapist, should likely be involved.

A certified financial therapist (someone trained by the FTA) can work with you specifically on the emotional aspects of your relationship with money and provide support that gets to the root of deeper issues.

Due to the interdisciplinary nature of financial therapy, professionals that enroll in FTA education and certification include: psychologists, marriage and family therapists, social workers, financial planners, accountants, counselors, coaches, students and academics.

Do You Need a Financial Therapist?

If you’re considering whether a financial therapist could help you, you may want to think about your general relationship to money.

If you feel you have anxiety about money, or unhealthy behaviors and feelings when it comes to spending, budgeting, saving, or investing, you might benefit from exploring financial therapy.

Some red flags that you might benefit from a financial therapist include:

•  Chronically paying bills late.
•  Holding unhealthy spending habits (such as gambling or compulsive shopping).
•  Overworking oneself to hoard money.
•  Completely avoiding financial issues that need to be addressed.
•  Hiding finances from a partner.

Often, unhealthy saving, spending, or working habits are a symptom of other bad habits related to mental or physical health.

Keep in mind that it’s possible to have an unhealthy relationship with money even if your finances are good on paper.

Finding a Financial Therapist

Like choosing any therapist, you often need to shop around a bit to find the right fit—someone you feel you can relate to, trust, and you also feel understands you.

For those who may not have access to a financial therapy professional in their backyard, many offer services via video conferencing.

You can start your search with the Find A Financial Therapist tool on the FTA website, which features members and lists their credentials and specialties.

Your accountant or financial counselor might also be a good source of referrals.

As with choosing any other financial expert or mental health professional, it’s a good idea to speak with a few potential candidates.

In your initial conversations with candidates, you may want to discuss the therapist’s training and expertise, as well as your needs and situation.

Financial therapists have a wide variety of backgrounds, so it is important for consumers to learn as much as they can about that individual’s practice, expertise, and ability.

You may even want to ask them how they define financial therapy themselves because approaches and definitions vary from one professional to another.

It can also be a good idea to ask how long they have been providing financial therapy services, what their fees are, as well as if some or all of the fee may be covered by your medical insurance.

The Takeaway

Financial therapy merges finance with emotional support to help people cope with financial stress, learn to make better financial decisions, and develop better money habits.

If you frequently feel stressed and/or overwhelmed when you think about money–or you simply avoid thinking about money as much as possible–you might be able to benefit from at least a few sessions of financial therapy.

While it might seem like hiring a financial therapist is another expense that could complicate an already difficult financial situation, it might be better to view it as investment in your emotional and financial wellness, one that could help you build financial stability and wealth in the future.

Another way to get–and stay–on top of your finances (that you do on your own) is to open a SoFi Money® cash management account.

SoFi Money can help simplify your financial life by allowing you to earn competitive interest, spend and save–all in one account.

And SoFi Money makes it easy to track your weekly spending and saving in your dashboard within the app.

Check out everything a SoFi Money cash management account has to offer today!



SoFi Money®
SoFi Money is a cash management account, which is a brokerage product, offered by SoFi Securities LLC, member FINRA / SIPC .
Neither SoFi nor its affiliates is a bank.
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External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Source: sofi.com

What Is Earnings Per Share & How to Calculate It

Knowing a stock’s earnings per share can be a valuable portfolio benchmarking tool. Think of EPS as GPS for where a public company is on the value map, based on how profitable it has been.

What is earnings per share? It’s a ratio arrived at by taking a company’s quarterly or annual net income and dividing it by the number of its outstanding shares of stock.

Knowing an investment’s EPS gives investors—and portfolio managers—a good indicator of a stock’s performance over a specific period of time and its potential share price performance in the near future.

What is Earnings Per Share?

The starting point for any conversation about the EPS ratio is the earnings report companies issue to regulators, shareholders, and potential investors.

Publicly traded companies must, by law, report their earnings quarterly and annually. Earnings represent the net income a company generates (after taxes and after expenses are deducted), along with an estimate of what profits or losses can be expected going forward.

Typically, investment analysts, money managers and investors look at earnings as a major component of a company’s profit potential, with earnings per share a particularly useful measurement tool when gauging a company’s financial prospects.

While a company’s earnings call represents a publicly traded company’s revenues, minus operating expenses, earnings per share is different.

EPS indicates a firm’s earnings for investors, divided by the company’s number of remaining shares. Earnings per share is perhaps most optimal when comparing EPS rates of publicly traded firms operating in the same industry.

evaluate a company’s stock price going forward.

Even a moderate increase in EPS may indicate that a company’s profit potential is on the upside, and investors may take that as a sign to buy the company’s stock.

Conversely, a small decrease in a company’s EPS from quarter to quarter may trigger a red flag among investors, who could view a downward EPS trend as a larger profit issue and shy away from buying the company’s stock.

Basically, the higher the EPS, the more attractive that company’s stock is to investors. But the higher a stock’s EPS, the more expensive it’s likely to be.

Once investors have an accurate EPS figure, they can decide if a stock is priced fairly and make an appropriate investment decision.

Earnings Per Share Ratio Considerations

Investors should prepare to dig deeper and examine what factors influence EPS figures. These factors are at the top of that list:

•  EPS numbers can rise or fall significantly based on earnings’ rise or fall, or as the number of company shares rises or falls.
•  A company’s earnings may rise because sales are surging faster than expenses, or if company managers succeed in curbing operations costs. Additionally, investors may get a “false read” on EPS if too many company expenses are shed from the EPS calculation.
•  A company’s number of outstanding shares may fall if a company engages in significant stock share buybacks. Correspondingly, shares outstanding may jump when a firm issues new stock shares.
•  A company’s profit margins are also a big influencer on EPS. A company that is losing money usually has a negative EPS number. (Then again, that may send a wrong signal to investors. The company could be on the path to profits, and that trend may not show up in an EPS calculation.)
•  A price to earnings ratio is another highly useful metric to evaluate a stock’s share growth potential. Investors can find a P/E ratio through a proper calculation of EPS (“P” is the price per share; “E” refers to EPS), though it’s easy to look up a P/E ratio on any site that aggregates stock information.

EPS can be reported for each quarter or fiscal year, or it can be projected into the future with a forward EPS.

How to Calculate Earnings Per Share

The most common way to accurately gauge an EPS figure is through an end-of-period calculation. Here’s a snapshot of how it works.

With Preferred Dividends

Investors can calculate EPS by subtracting a stock’s total preferred dividends from the company’s net income. Then divide that number by the end-of-period stock shares that are outstanding.

Basic EPS = (net income – preferred dividends) / weighted average number of common shares outstanding

For example, ABC Co. generates a net income of $2 million in a quarter. Simultaneously, the company rolls out $275,000 in preferred dividends and has 12 million outstanding shares of stock. In that calculation, knowing that shares of common stock are equal in value, the company’s earnings per share is $0.14.

(2,000,000 – 275,000) ÷ 12,000,000= 0.14

Without Preferred Dividends

For smaller publicly traded companies with no preferred dividends, the EPS calculation is more straightforward.

Basic EPS = net income / weighted average number of common shares outstanding

Let’s say DEF Corp. has generated a net income of $50,000 for the year. As the company has no preferred shares outstanding and has 5,000 weighted average shares on an annual basis, its earnings per share is $10.

50,000 ÷ 5,000= 10

In any EPS calculation, preferred dividends must be pared off from net income. That’s because earnings per share is primarily designed to calculate the net income for holders of common stock.

Additionally, in most EPS end-of-period calculations, a company is mostly likely to calculate EPS for end-of-year financial statements. That’s because companies may issue new stock or buy back existing shares of company stock.

In those instances, a weighted average of common stock shares is required for an accurate EPS assessment. (A weighted average of a company’s outstanding shares can provide more clarity because a fixed number at any given time may provide a false EPS outcome, as share prices can be volatile and change quickly on a day-to-day basis.)

The most commonly used EPS share model calculation is the “trailing 12 months” formula, which tracks a company’s earnings per share by totaling its EPS for the previous four quarters.

The Takeaway

Earnings trends, up or down, make earnings per share one of the most valuable metrics for assessing investments. Four or five years of positive EPS activity is considered an indicator that a company’s long-term financial prospects are robust and that its share growth should continue to rise.

A careful EPS calculation can help clarify a short- or long-term view of a company’s financial and share price potential, allowing an investor to make choices based on data and not assumptions.

Ready to put those stock-picking skills to use? Get started with SoFi Invest® today.



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Source: sofi.com