Editor’s Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.
Forex options, also called currency options, are contracts that give the purchaser the option to buy foreign currency from the exchange at a specific price on or before a specific date.
Like stock options, there are two different types of forex options: A call option gives the holder the right to buy currency at a specified price (the strike price), while the holder of a put option has the right to sell a currency at a predetermined price.
Those investing in foreign countries may use forex options as a way to hedge against unfavorable fluctuations of foreign currencies or to speculate on volatility.
What Is Forex Options Trading?
Like options in the stock market, currency options are a derivative instrument. In this case, the underlying asset is a foreign currency pair. Currencies (also known as FX or forex) are generally traded in pairs. One major currency pair, for example, is EUR/USD, which indicates the value of the euro against the U.S. dollar.
Foreign currency options are a way to invest in foreign currency markets without trading in the actual currencies themselves. š” Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.
How Forex Options Trading Works
If you understand how to trade options in the stock market, currency options work in a similar manner. Buying a currency call option gives you the right (but not the obligation) to purchase a particular foreign currency at a specified price (the strike price) at any time before its expiration date.
A currency put option works in a similar way, except that the buyer has the right (but not the obligation) to sell a currency at a given price before the expiration of the option.
You can also purchase combinations of both put and call options at different strike prices and/or different expiration dates, depending on how you think the market will move. You can always close out your position before the options expire. Owning options gives you exposure to movements in the exchange rate without having to actually purchase the currency.
Types of Forex Options Available
The most basic currency options come in two types: so-called āvanillaā calls and puts.
Vanilla Call and Put Options
A forex call option gives the holder the right (but not the obligation) to purchase a given currency at a specific price, any time on or before the optionās expiration date. You would generally buy a forex call option if you have a bullish outlook on a particular currency.
A forex put option works in the opposite manner. If you hold a put option, you have the right (but not the obligation) to sell a specific currency at a particular price before the options expire.
Purchasing a put option is something that you would do if you have a bearish outlook on the underlying currency.
SPOT Options
Another type of currency option is single payment options trading (SPOT). With a SPOT option, an investor and broker can set more detailed conditions for the option to pay out. These conditions are either met, or not. Because there are only two possible outcomes upon the option expiring, these options are sometimes called binary currency options.
Example of Trading Forex Options
If an investor expects the value of a currency will fall, they may choose to buy a put option to earn the right (but not the obligation) to sell the currency in question at a predetermined price during a set timeframe.
For example, if a U.S. investor expects the euro will fall in value against the U.S. dollar, they may buy a EUR/USD put option. Essentially, the option can help the option holder protect themselves against depreciation of a given currency. š” Quick Tip: Options can be a cost-efficient way to place certain trades, because you typically purchase options contracts, not the underlying security. That said, options trading can be risky, and best done by those who are not entirely new to investing.
Benefits and Risks of Forex Options Trading
Here are some of the pros and cons of trading forex options:
Benefits
Using forex options can be a cost effective way to potentially help hedge an investorsā portfolio against currency risk. For example, an investor who owns foreign stocks may consider investing in local currencies via options to reduce currency risk. Investors may want to weigh the optionās premium, as well as risk against possible outcomes.
Risks
Like any investment, trading currency options comes with a set of risks. Options are complex, high-risk instruments that require investors to understand how they work.
Currency values may fluctuate based on macroeconomic events, economic data, or political events. This means that FX options investors must bear in mind the risk profile of particular countries, as well as that of their own portfolio. Because currencies react to interest rates, trading currency options also bears interest rate risk. Traders who use leverage to potentially earn higher profits with less money, also risk losing more than their initial investment.
Benefits
Risks
Using forex options is a low-cost way to potentially hedge against adverse currency moves.
The price of currencies can be extremely volatile.
Using leverage, there is the potential for higher profits with less money invested.
Political risk as currency markets react to local governmentsā policies.
You have many different ways to trade depending on your market outlook.
Options may be less liquid than the currencies themselves.
The Takeaway
Trading forex options can be a way for you to invest in the foreign currency market without actually owning the currency itself. You can use call options, put options, or a combination based on how you think the market will perform.
Qualified investors who are ready to try their hand at options trading, despite the risks involved, might consider checking out SoFiās options trading platform. The platformās user-friendly design allows investors to trade through the mobile app or web platform, and get important metrics like breakeven percentage, maximum profit/loss, and more with the click of a button.
Plus, SoFi offers educational resources ā including a step-by-step in-app guide ā to help you learn more about options trading. Trading options involves high-risk strategies, and should be undertaken by experienced investors.
For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.
FAQ
What are some types of forex options?
The two kinds of forex options are call options and put options. A call option allows the holder to buy the specified currency at a given strike price, while a put option allows the holder to sell a given currency at a particular price. There are also SPOT, or binary currency options.
What is a forex call option?
A forex call option allows the holder to buy a specific currency at a specific price, on or before the expiration date.
How are forex options settled?
If you hold a currency option that is in the money at expiration, there are two possibilities for settlement. You can settle the option with cash or by a physical delivery of currency. If you are short an in-the-money option at expiration, you may need to deposit cash into your account to settle your account.
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Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (āSoFi Wealthā). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
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Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes. Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. 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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In a recent report by Goldman Sachs, a stark warning was issued about the state of office mortgages in the United States, describing them as āliving on borrowed time.ā This caution comes amidst a backdrop of mounting stress in commercial real estate loans, particularly those tied to office properties, which have emerged as a significant sore point. With delinquencies on the rise, the specter of financial instability continues to haunt the U.S. banking sector, further aggravated by an office market that has seen demand plummet for two consecutive years.
The situation has become increasingly dire, with delinquencies ticking upwards, reflecting the ongoing distress within the office real estate sector. According to Trepp, a leading research firm, about 6.63 percent of all commercial office mortgages were delinquent as of February, marking a 33 basis points increase from January. This rise mirrors the average monthly increase witnessed over the past 12 months, starkly contrasting with the 2.38 percent delinquency rate recorded a year prior. The upsurge in delinquencies underscores an ominous trend in the office market, plagued by declining demand and reaching a vacancy rate of 19.7 percent at the onset of 2024.
A particularly alarming development is the significant increase in commercial real estate loans scheduled to mature by the end of 2024. The total amount has surged 41 percent to over $900 billion, primarily fueled by ongoing extensions and modifications of existing debts. This uptick, noted by analysts at Goldman Sachs, signifies a potentially tumultuous period ahead for the banking sector, already reeling from the impact of higher interest rates and declining property values that have complicated refinancing efforts.
Regional banks have acutely felt the ripple effects of the commercial real estate loan challenges, which have seen their stock prices wobble in the wake of last yearās string of bank failures. Given their exposure to commercial real estate loans, these institutions are particularly vulnerable, a situation exacerbated by the current economic climate marked by high interest rates and a depreciation in property values.
Despite the grim outlook for office loans, the broader commercial real estate market shows signs of resilience. In its assessment, Goldman Sachs noted that the office sectorās distress is unlikely to spill over into other areas of the commercial property market. Retail delinquencies, for instance, have shown improvement, and the multifamily and industrial sectors remain relatively stable. Furthermore, banks today are in a more robust capital position than during the financial crises of 2008-09 and the 1980s, offering hope that the current challenges can be navigated with strategic foresight and prudent management.
The office mortgage crisis presents a daunting challenge to the U.S. banking sector, underscored by a confluence of increasing delinquencies, a glut of maturing loans, and a commercial office market in distress.
Embarking on a home renovation to transform your living space is an exciting endeavor. Home improvements are also an investment that can significantly increase the value of your property, so itās important to track expenses to be prepared for capital gains tax when you sell your home. Tracking home improvement costs can also help homeowners stick to a budget and ensure a greater return on investment.
Letās take a closer look at how to track home improvement costs, which upgrades qualify for tax purposes, and options for financing a home renovation.
First-time homebuyers can prequalify for a SoFi mortgage loan, with as little as 3% down.
Why Track Home Improvement Costs?
Amid all the work and logistics that goes into renovations, tracking home improvement costs might not feel like a high priority. However, having documented home improvement costs can help reduce potential capital gains tax when itās time to sell your home.
The IRS allows qualifying home improvement costs to be added to the original purchase price of the property, known as the cost basis, when calculating capital gains on a home sale. The basis is subtracted from the home sale price to determine if youāve realized a gain and subsequently owe tax. But by adding home improvement expenses to your cost basis, the profit from the sale thatās subject to taxes decreases ā lowering or even potentially exempting you from property gains tax.
Besides home improvements, other factors that affect property value, like location and the current housing market, could make a property sale subject to capital gains tax.
Hereās an example of how capital gains tax on a home sale works: A married couple that purchased a home for $200,000 in 2001 and sold it for $750,000 in 2024 would have a $550,000 realized gain. Assuming that the sellers made this home their main residence for two of the last five years, theyād be able to exclude $500,000 of the gain from taxes. The remaining $50,000 would be taxed at 0%, 15%, or 20% based on the sellersā income and how long they owned the property.
However, the sellers spent $70,000 on home improvements during their 23 years of homeownership, so the capital gains calculation would be revised to: $750,000 ā ($200,000 + $70,000) = $480,000. Tracking home improvement costs in this example exempted the sellers from needing to pay capital gains taxes.
Note that single filers may exclude only the first $250,000 of realized gains from the sale of their home. Eligibility for the exclusion also requires living in the home for at least two years out of the last five years leading up to the date of sale. Those who own vacation homes should note that the IRS has very specific rules about what constitutes a main residence. š” Quick Tip: A Home Equity Line of Credit (HELOC) brokered by SoFi lets you access up to $500,000 of your homeās equity (up to 90%) to pay for, well, just about anything. It could be a smart way to consolidate debts or find the funds for a big home project.
Qualifying vs Nonqualifying Improvements
The IRS sets guidelines that determine what home improvements can be added to your cost basis for calculating capital gains tax. Thus, not every dollar spent on sprucing up your homeās curb appeal or living space needs to be tracked for tax purposes. Generally, tracking costs is a good idea for any home improvements that increase your homeās value and fall outside general repair and upkeep to maintain the propertyās condition.
Qualifying Improvements
According to the IRS, improvements that add value to the home, prolong its useful life, or adapt it to new uses can qualify. This includes the following categories and home improvements:
ā¢ Home additions: Bedroom, bathroom, deck, garage, porch, or patio
ā¢ Home systems: HVAC systems, central humidifier, central vacuum, air/water filtration systems, wiring, security systems, law and sprinkler systems.
ā¢ Insulation: Attic, walls, floors, pipes, and ductwork
ā¢ Plumbing: Septic system, water heater, soft water system, filtration system
Itās also important to track any tax credits or subsidies received for energy-related home improvements, such as solar panels or a heat pump system, since these incentives must be subtracted from the cost basis.
Recommended: How to Find a Contractor for Home Renovations and Remodeling
Nonqualifying Expenses
Owning a home requires routine maintenance and occasional repairs ā think fixing a leaky pipe or mowing the lawn. And the longer you own your home, the greater the chance you reapproach past home improvements with a fresh design or modern technologies. The IRS considers regular maintenance and any home improvement thatās been later replaced as nonqualifying costs.
For instance, a homeowner could have installed wall-to-wall carpet and later swapped it out for hardwood floors. In this case, the hardwood floors would qualify, but not the carpeting.
Recommended: The Costs of Owning a Home
How to Track Your Costs
Developing a system for tracking home improvement costs depends in part on where you are in the process. Hereās how to get track home improvement costs before, during, and after a renovation project.
Before You Renovate
The average cost to renovate a house can vary from $20,000 to $80,000 based on the size of the home and type of improvements. Given this range in cost expectations, itās helpful to create an itemized budget that estimates the cost for each improvement. Itās hardly uncommon for renovations to take more time and money than expected, so consider budgeting an extra 10-20% for the unexpected.
Your itemized budget can be leveraged for tracking home improvement costs once the project starts. Simply plug in the completion date, cost, and description for each improvement, and keep receipts, to itemize the expense as itās incurred.
Recommended: How to Make a Budget in 5 Steps
Keep Detailed Records
Tracking home improvement costs goes beyond crunching the numbers. The IRS requires documentation to adjust the cost basis on a property. As improvements are made, catalog contractor and store receipts and take pictures before and after the work is done to document the improvements for your records. Store these records digitally in a secure and accessible location; the IRS recommends keeping records for three years after the tax return for the year in which you sell your home.
Catch Up After the Fact
Tracking home improvement costs after the work has been completed is doable, but it requires more effort. If your renovations required any building permits, your municipality should have records on file.
For other projects, start by searching your email for receipts and records can help find a paper trail and track down documentation. Reach out to contractors you worked with for copies of missing receipts or invoices. If you paid with a check or credit card, you can browse through your previous statements or contact the bank for assistance.
Consult a Tax Pro
Taxes are complicated. If you have any doubts about what improvements qualify, consult a tax professional for assistance. Homeowners who used their property as a home office or rented it for any duration could especially benefit from a tax pro. Any property depreciation that was claimed in previous tax years may need to be recaptured if the home sale price exceeds the cost basis.
Home Improvement Financing Options
Renovations and upgrades to your home can be expensive. Many homeowners use a combination of savings and financing to pay for home improvements.
ā¢ HELOC: A Home Equity Line Of Credit lets homeowners tap into their existing equity to fund a variety of expenses, such as home improvements. With a HELOC, you can take out what you need as you need it, rather than the full amount youāre approved for, which is often 75%-85% of your homeās value. You only pay interest on the amount you draw.
ā¢ Cash-out refinance: Some owners take out a new home loan that allows them to pay off their old mortgage but also provides them with a lump sum of cash that they can use for home repairs (or other expenses). How much cash you might be able to take will depend on the amount of equity you have in your home.
ā¢ Personal loan: An unsecured personal loan could be a good option for quick funding that doesnāt require using your home as collateral. The interest rate and whether you qualify are largely based on your credit score.
ā¢ Credit card: Financing a home improvement with a credit card can help earn cash back or rewards on your investment. However, these perks should be weighed against the risk of higher interest rates. If using a 0% interest credit card, crunch the numbers to ensure you can pay off the balance before the introductory offer expires. š” Quick Tip: You can use money you get with a cash-out refi for any purpose, including home renovations, consolidating other high-interest debts, funding a childās education, or buying another property.
The Takeaway
Tracking home improvement costs from the start can help stick to your project budget and lead to significant tax savings when it comes time to sell your property. A HELOC is one way to fund home improvements, and may be especially useful to borrowers who arenāt sure how much money they will need for home projects. If youāre unsure whether a home improvement qualifies under the IRS rules around capital gains tax on home sales, consult a tax professional.
SoFi now offers flexible HELOCs. Our HELOC options allow you to access up to 95% of your homeās value, or $500,000, at competitively low rates. And the application process is quick and convenient.
Unlock your homeās value with a home equity line of credit brokered by SoFi.
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SoFi Loan Products SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
SoFi Mortgages Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility for more information.
*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.
Ā²
To obtain a home equity loan, SoFi Bank (NMLS #696891) may assist you obtaining a loan from Spring EQ (NMLS #1464945).
All loan terms, fees, and rates may vary based upon individual financial and personal circumstances and state.
You may discuss with your loan officer whether a SoFi Mortgage or a home equity loan from Spring EQ is appropriate. Please note that the SoFi member discount does not apply to Home Equity Loans or Lines of Credit brokered through SoFi. Terms and conditions will apply. Before you apply for a SoFi Mortgage, please note that not all products are offered in all states, and all loans are subject to eligibility restrictions and limitations, including requirements related to loan applicantās credit, income, property, and loan amount. Minimum loan amount is $75,000. Lowest rates are reserved for the most creditworthy borrowers. Products, rates, benefits, terms, and conditions are subject to change without notice. Learn more at SoFi.com/eligibility-criteria.
SoFi Mortgages originated through SoFi Bank, N.A., NMLS #696891 (Member FDIC), (www.nmlsconsumeraccess.org). Equal Housing Lender. SoFi Bank, N.A. is currently NOT able to accept applications for refinance loans in NY.
In the event SoFi serves as broker to Spring EQ for your loan, SoFi will be paid a fee.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Millions of employees work from home at least part time. Theyāve carved out dedicated office space and plopped laptops on kitchen counters and in closets. They almost never can declare the home office tax deduction.
Millions of self-employed people have also created workspaces at home. If they use that part of their home exclusively and regularly for conducting business, and the home is the principal place of business, they may be able to deduct office-related business expenses.
Why the difference? The Tax Cuts and Jobs Act nearly doubled the standard deduction and eliminated many itemized deductions, including unreimbursed employee expenses, from 2018 to 2025.
Read on to learn whether or not you may qualify for the home office tax deduction.
What Is a Home Office Tax Deduction?
The home office tax deduction is available to self-employed people ā independent contractors, sole proprietors, members of a business partnership, freelancers, and gig workers who require an office ā who use part of their home, owned or rented, as a place of work regularly and exclusively.
āHomeā can be a house, condo, apartment, mobile home, boat, or similar property, and includes structures on the property like an unattached garage, studio, barn, or greenhouse.
Eligible taxpayers can take a simplified deduction of up to $1,500 or go the detailed route and deduct office furniture, homeowners or renters insurance, internet, utilities needed for the business, repairs, and maintenance that affect the office, home depreciation, rent, mortgage interest, and many other things from taxable income.
After all, reducing taxable income is particularly important for the highly taxed self-employed (viewed by the IRS as both employee and employer.)
An employee who also has a side gig ā like driving for Uber or dog walking ā can deduct certain expenses from their self-employment income if they run the business out of their home. š” Quick Tip: You deserve a more zen mortgage. Look for a mortgage lender whoās dedicated to closing your loan on time.
Am I Eligible for a Home Office Deduction?
People who receive a W-2 form from their employer almost never qualify.
In general, a self-employed person who receives one or more IRS 1099-NEC tax forms may take the home office tax deduction.
Both of these must apply:
ā¢ You use the business part of your home exclusively and regularly for business purposes.
ā¢ The business part of your home is your main place of business; the place where you deal with patients or customers in the normal course of your business; or a structure not attached to the home that you use in connection with your business.
Regular and Exclusive Use
You must use a portion of the home for business needs on a regular basis. The real trick is to meet the IRS standard for the exclusive use of a home office. An at-home worker may spend nine hours a day, five days a week in a home office, yet is not supposed to take the home office deduction if the space is shared with a spouse or doubles as a gym or a childās homework spot.
There are two exceptions to the IRS exclusive-use rules for home businesses.
ā¢ Daycare providers. Individuals offering daycare from home likely qualify for the home office tax deduction. Part of the home is used as a daycare facility for children, people with physical or mental disabilities, or people who are 65 and older. (If you run a daycare, your business-use percentage must be reduced because the space is available for personal use part of the time.)
ā¢ Storage of business products. If a home-based businessperson uses a portion of the home to store inventory or product samples, itās OK to use that area for personal use as well. The home must be the only fixed location of the business or trade.
Principal Place of Business
Part of your home may qualify as your principal place of business āif you use it for the administrative or management activities of your trade or business and have no other fixed location where you conduct substantial administrative or management activities for that trade or business,ā the IRS says.
Can You Qualify for a Home Office Deduction as an Employee?
Employees may only take the deduction if they maintain a home office for the āconvenience of their employer,ā meaning the home office is a condition of employment, necessary for the employerās business to function, or needed to allow the employee to perform their duties.
Because your home must be your principal place of business in order to take the home office deduction, most employees who work part-time at home wonāt qualify.
Can I Run More Than One Business in the Same Space?
If you have more than one Schedule C business, you can claim the same home office space, but youāll have to split the expenses between the businesses. You cannot deduct the home office expenses multiple times.
How to Calculate the Home Office Tax Deduction
The deduction is most commonly based on square footage or the percentage of a home used as the home office.
The Simplified Method
If your office is 300 square feet or under, Uncle Sam allows you to deduct $5 per square foot, up to 300 square feet, for a maximum $1,500 tax deduction.
The Real Expense Method
The regular method looks at the percentage of the home used for business purposes. If your home office is 480 square feet and the home has 2,400 square feet, the percentage used for the home office tax deduction is 20%.
You may deduct 20% of indirect business expenses like utilities, cellphone, cable, homeowners or renters insurance, property tax, HOA fees, and cleaning service.
Direct expenses for the home office, such as painting, furniture, office supplies, and repairs, are 100% deductible. š” Quick Tip: A major home purchase may mean a jumbo loan, but it doesnāt have to mean a jumbo down payment. Apply for a jumbo mortgage with SoFi, and you could put as little as 10% down.
Things to Look Out for Before Applying for the Home Office Tax Deduction
If youāre an employee with side gigs or just self-employed, it might be a good idea to consult a tax pro when filing.
To avoid raising red flags, you may want to make sure your business expenses are reasonable, accurate, and well-documented. The IRS uses both automated and manual methods of examining self-employed workersā tax returns. And in 2020, the agency created a Fraud Enforcement Office, part of its Small Business/Self-Employed Division. Among the filers in its sights are self-employed people.
The IRS conducts audits by mail or in-person to review records. The interview may be at an IRS office or at the tax filerās home.
A final note: Taking all the deductions youāre entitled to and being informed about the different types of taxes is smart.
If youāre self-employed, you generally must pay a Social Security and Medicare tax of 15.3% of net earnings. Wage-earners pay 7.65% of gross income into Social Security and Medicare via payroll-tax withholding, matched by the employer.
So self-employed people often feel the burn at tax time. Itās smart to look for deductions and write off those home business expenses if youāre able to.
To shelter income and invest for retirement, you might want to set up a SEP IRA if youāre a self-employed professional with no employees.
Recommended: First-Time Homebuyers Guide
The Takeaway
If youāre an employee working remotely, the home office tax deduction is not for you, right now, anyway.
If youāre self-employed, the home office deduction could be helpful at tax time. To qualify for the home office deduction, you must use a portion of your house, apartment, or condominium (or any other type of home) for your business on a regular basis, and it generally must be the principal location of your business. This is something to keep in mind if youāre in the market for a new home, since writing off a portion of your home expenses could help offset some of the costs of homeownership.
Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% – 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It’s online, with access to one-on-one help.
SoFi Mortgages: simple, smart, and so affordable.
FAQ
How much can I get written off for my home office?
Using the simplified method of calculating the home office deduction, you can write off up to $1,500. Using the regular method, youāll need to determine the percentage of your home being used for business purposes. You may then be able to deduct that percentage of certain indirect expenses (like utilities, cellphone, cable, homeowners or renters insurance, property tax, HOA fees, and cleaning services). Direct expenses for the home office, such as painting, furniture, office supplies, and repairs, are generally 100% deductible.
Can I make a claim for a home office tax deduction without receipts?
The simplified method does not require detailed records of expenses. If using the regular method, you should be prepared to defend your deduction in the event of an IRS audit.
The IRS says the law requires you to keep all records you used to prepare your tax return for at least three years from the date the return was filed.
What qualifies as a home office deduction?
Things like insurance, utilities, repairs, maintenance, equipment, and rent may qualify as tax deductions.
Photo credit: iStock/Marija Zlatkovic
SoFi Mortgages Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility for more information.
SoFi Loan Products SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.
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.
[cd_ tax] 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.
Inside: Secure your financial future with insights into the top appreciating assets. Find the best appreciating assets and learn how to grow wealth with strategic investments.
Asset appreciation isnāt just an economic term; itās the fuel that powers wealth creation. Think of appreciating assets as the golden geese, steadily laying valuable eggs that grow in size over time.
This is a crucial concept that triumphs and what you own can become the cornerstone of your financial success.
Asset appreciation isnāt just a buzzword; itās the driving force behind significant wealth accumulation.
Whether youāre just starting or looking to expand your portfolio, understanding the role appreciation plays can mean the difference between mediocrity and staggering success.
Now, letās dig in and help move your net worth higher.
What Are Appreciating Assets?
Appreciating assets are the golden geese of the investment world. They are the powerful engines that drive your net worth higher over time.
When you invest in assets like real estate, stocks, and even fine art, youāre placing a bet on their future value.
Unlike the car that loses value the moment you drive it off the lot, these assets typically gain worth, supernova-style, expanding your financial universe with every passing year.
How do assets appreciate in value?
Appreciation, at its core, is an assetās journey from āworth Xā to āworth X and beyondā. But how does this magical wealth-building happen?
Several factors can give assets a financial boost.
For starters, the traditional law of supply and demand plays a huge roleāif more people want it and thereās not enough to go around, the value goes up.
Toss in the influence of interest rates, economic growth, and geopolitical stability, and you have a mix that can push asset value into new echelons.
Even inflation can be a friend to assets, increasing their nominal value over time.
Remember, appreciation isnāt a given; itās a hopeful trajectory bolstered by market forces and wise decision-making. You want to hop onto the appreciation train with assets that offer the promise of increasing in value, not just for now, but well into the future.
How to increase net worth with appreciating assets
Increasing your net worth with appreciating assets is like laying bricks for a financial fortressāit requires strategy, patience, and a mix of assets that have a history or strong potential for growth.
Start by assessing your current holdings and considering where you can diversify with assets that shine in appreciation prospects. Itās a game of balance, where you mix higher-risk, high-reward options with stable, gradual growers.
Make a habit of routinely re-evaluating your assets, keeping in mind economic trends and your personal goals. Sometimes, this may mean letting go of underperformers in favor of assets with brighter horizons.
Consider leveraging tax-advantaged accounts and investment strategies to maximize your wealth growth.
Most importantly, ensure liquidity so you can capitalize on new opportunities. Having liquid assets means you wonāt miss out when the next big appreciating asset comes knocking.
Top 5 Appreciating Assets You Must Own
#1 ā Stocks with High Growth Potential
Stocks are the daredevils of the investment world, particularly those brimming with high growth potential. Theyāre the kind that can catapult your net worth to the stratosphere if chosen wisely.
Tech giants like Nvidia, Microsoft, Google, Amazon, and Meta are testament to thisātheir growth over the decades has turned modest investments into fortunes.
Investing in high-growth potential stocks is like spotting a gem in the rough ā if you spot the right ones, your financial prospects could shine brightly. You must learn how to invest in stocks for beginners.
Personally, I cannot stress how important it is to learn how to invest in the stock market as I can attest this is how you quickly grow your net worth.
Best For: Investors with a higher risk tolerance who are aiming for greater returns or dividend stocks and have the patience to weather market fluctuations.
#2 ā ETFs to Streamline Investments for Optimal Performance
Exchange-Traded Funds (ETFs) are the investment worldās multitaskers, pooling the potential of various assets for optimum performance. By offering a diversified portfolio within a single share, they allow investors to spread their risk while reaping the growth benefits of different markets and sectors.
ETFs provide an easy and efficient way to diversify investments, reducing risk while still offering growth opportunities. Theyāre especially game-changing for those who prefer a āset and forgetā strategy, as many ETFs are designed to passively track indexes or sectors. Many track the S&P, so you can easily invest in the overall market.
Theyāre cost-effective, often having lower fees than traditional mutual funds, and are accessible to investors with varying levels of experience.
Best For: Both beginners and experienced investors looking for a blend of simplicity, cost efficiency, and diversification in their investment strategy.
#3 ā Real Estate: A Staple in Appreciating Assets
Real estate has long stood as a bulwark in the investment community, a reliable appreciator that doubles as both a tangible asset and a potential home. Itās a market marked by stability and a historical uptrend in value, making it a classic choice for those seeking long-term wealth growth.
Owning property is synonymous with the very concept of asset growth, with the power to withstand economic ebbs and flows. Location continues to be the drumbeat to its rise in value ā a prime spot can transform a simple parcel into a gold mine.
Plus it is a tangible asset that provides utility and can serve as a hedge against inflation.
Whether itās through REITs, crowdfunding platforms like Fundrise, or direct ownership, real estate can anchor your investment strategy on solid ground.
Best For: Investors seeking a tangible asset with a dual aim of long-term capital appreciation and passive rental property income. Ideal for those ready to manage properties or hire management, and for those who can handle the responsibilities of ownership.
#4 ā Your Own Business: Betting on Your Entrepreneurial Spirit
Your own business isnāt just a job, itās a reflection of your passion and an opportunity to control your financial destiny. When successfully executed, a business can become one of the most valuable appreciating assets, offering unparalleled autonomy and potentially substantial economic rewards.
Starting a business can lead to exponential wealth growth as the company expands and becomes profitable.
Your businessās value can significantly increase over time, making it a formidable asset in your net worth.
Owning a business is not just about the profits; itās a journey of personal growth, resilience, and the triumph of turning passion into paychecks. Itās a path that can lead to great wealth, especially when one approaches it with clear strategy and unquenchable enthusiasm.
Best For: Individuals with entrepreneurial spirit, a viable business idea, and the readiness to invest time and capital into a long-term venture. Suitable for those who are tenacious and willing to face the challenges of entrepreneurship head-on.
#5- Self-Investment: The Ultimate Asset with Infinite Returns
Investing in yourself is like planting a seed that grows into a sturdy, towering tree, sheltering your financial future.
This investment can unlock doors to better opportunities, higher incomes, and greater job satisfaction. Whether itās through education, health, or personal development, the returns on self-investment can be limitless.
Personal development often correlates with higher levels of personal and financial success.
Remember, when you invest in yourself, you become capable of crafting a life that not only brings in wealth but also contentment and a deeper sense of success.
Best For: Any individual seeking to enhance their career trajectory, entrepreneurship potential, or personal satisfaction. This approach is ideal for those who are committed to lifelong learning and self-improvement.
Other Examples of Appreciating Assets You Can Own
The Role of Bonds in a Diverse Securities
Bonds, those steadfast soldiers of the investment world, offer a buffer of safety amid the high-flying volatility of other assets. In a diversified portfolio, bonds contribute stability and predictable income, making them an essential element for many investorās strategies.
They provide a fixed income stream with less volatility than stocks, acting as a cushion in economic downturns.
Bonds can offer a balance in investment holdings, mitigating risk and providing steady returns. Just make sure the returns are higher than an interest-bearing money market account.
Best For: Investors seeking to balance their portfolio with a lower-risk asset or those nearing retirement who prioritize income and stability over high growth.
Cryptocurrencies: The Digital Gold of Tomorrow?
Cryptocurrencies have emerged as the mavericks of appreciating assets, offering a wild ride with the allure of high-stakes jackpot payouts. As the ādigital goldā of the modern era, they encapsulate the spirit of decentralization and technological innovation.
While their volatility can stir up investor heartbeats, their dramatic price appreciation stories make them impossible to ignore for those seeking the thrill of potentially explosive gains.
Even as the cryptocurrency markets continue to ebb and flow, they offer a unique proposition in wealth growth strategiesāa high-risk, high-reward horizon that has many gazing toward the future with wallets in hand.
Best For: Tech-savvy investors with a high risk tolerance, seeking to diversify with a modern asset class that has considerable growth potential.
Fine Art and Collectibles: Value Beyond Beauty
Fine art and collectibles are not just a feast for the eyes; theyāre also a banquet for your investment portfolio.
These assets bring value that transcends their aesthetic appeal, becoming cherished as cultural treasures and financial boons alike. With the intrinsic charm of rarity and historical significance, art pieces and collectibles can appreciate substantially over time, especially when curated with an expert eye.
For instance, this rare portrait of George Washington is expected to fetch $2.5 million at an upcoming auction.1
Best For: Connoisseurs with a passion for the arts or history, and investors looking for long-term, value-holding assets that also serve as cultural and personal investments. Ideal for those with substantial capital ready to navigate the less liquid markets.
Precious Metals: Why Gold and Silver Remain Attractive
Gold and silver arenāt just the treasures of loreātheyāre enduring staples for those looking to fortify their wealth. Their allure lies in their history, intrinsic value, and the stability they can provide when economic tides turn tumultuous. Gold and silver are known for their resilience during economic downturns and inflationary periods. As such, learn how to invest in precious metals.
They are tangible, finite resources with universal value, often resulting in consistent demand.
Best For: Investors looking to hedge risks or seeking a stable store of wealth.
Prospects of Private Equity in Upcoming Markets
Private Equity (PE) forms the backbone for the next wave of market disruptors and innovators. Investing in private companies, especially in emerging markets, can yield substantial capital appreciation as these businesses grow and mature, sometimes well before they hit the public sphere.
This has significant potential for appreciation as companies scale up their operations and increase their market footprint.
Best For: Sophisticated investors with a high-risk tolerance and a long investment horizon. They typically have a significant amount of capital to invest and are looking for opportunities outside of public markets to achieve potential high returns.
Venture Capitalās Role in Shaping Future Wealth
Venture Capital (VC) is the financial catalyst that turns innovative startups into tomorrowās industry leaders. By injecting capital into early-stage companies, VC not only generates the potential for staggering returns but also plays a critical role in shaping future markets and consumer trends.
It plays a critical role in shaping the business landscape of tomorrow by investing in innovation today. With its penchant for high-risk ventures, VC remains an appealing asset class for those with a futuristic vision who are keen to be part of the next big thing.
Venture capital isnāt merely about capital gains; itās an embrace of progress, a stake in the evolution of industries, and a partnership with the brightest minds of a generation.
Best For: Investors who have a deep understanding of emerging markets and technologies, a high-risk tolerance, and the patience for long-term investment. Also ideal for those who wish to actively participate in the entrepreneurial process and impact the future direction of new businesses.
The Thriving Market for Vintage Automotive Collectibles
Vintage automotive collectibles are revving up the collectibles market with a roar.
Car enthusiasts and investors alike recognize that certain classic models donāt just retain their charm; they accelerate in value over time. The emotional connection, the engineering legacy, and the nostalgia factor turn these vehicles into appreciating assets with a personal touch.
Plus they offer a tangible investment that can be appreciated both visually and through the driving experience.
Best For: Auto enthusiasts who appreciate the craftsmanship of vintage models and are prepared for the hands-on involvement required. Most may see them as a collectible rather than an investment.
Sports Memorabilia as Lucrative Investments
Sports memorabilia takes you on a trip down memory lane, connecting you to pivotal moments and legends of the past. This nostalgia mixed with exclusivity propels their value, making them sought-after assets in the realm of investing.
The emotional and sentimental value tied to sports icons and historical moments can drive considerable investment interest and demand.
Best For: Sports fans who want to combine their passion with investment potential and like to show off their memorabilia.
Land: The Original Real Estate Investment
Land is the progenitor of all real estate investments, offering a blank canvas for potential development or holding value as a scarce resource. With an appeal that has stood the test of time, land remains one of the most fundamental appreciating assets in the investment portfolio.
It is a finite resource; theyāre not making any more of it, so demand can only go up as supply remains constant.
Increases in development, population growth, and changes in land zoning can significantly enhance land value over time.
Best For: Investors seeking to hedge against inflation and looking at long-term growth prospects. Land is best for those who have the capital to invest without the need for immediate returns and can wait for the right opportunity to maximize their profits.
Commodities: A Staple in Diverse Investment Portfolios
Commodities offer a slice of the global economic pie, essential for their role in everyday lifeāfrom the grain in your breakfast cereal to the petroleum powering your car. As tangible assets, commodities can provide a buffer against inflation and diversify investment portfolios. A similar case could be made for trading currencies.
Commodities, including metals, energy, and agricultural products, often increase in value with inflation and global demand. They provide an investment route less correlated with the stock market, adding portfolio diversification.
Best For: Diversification seekers and those comfortable dealing with market fluctuations who understand global economic trends. Ideal for investors who wish to hedge against inflation and have an interest in tangible or sector-specific assets.
Navigating the High-Yield Savings Landscape
High-yield savings accounts have emerged as essential vehicles for preserving and modestly growing wealth.
In 2022-2024, with interest rates eclipsing their traditional counterparts, these accounts are more relevant than ever for savvy savers seeking to keep pace with inflation. They provide a safe haven for emergency funds or short-term financial goals while offering better returns than a typical savings account.
They provide a low-risk option to grow savings with the added convenience of liquidity. Just like certificates of deposit or CDs.
Best For: Individuals aiming for a secure, accessible place to save money with a better yield than traditional banking products. Especially well-suited for those starting to build their emergency funds or setting aside cash for near-term expenses.
Peer-to-Peer Lending ā A Trend to Watch for Asset Growth
Peer-to-peer (P2P) lending shakes up traditional banking by directly connecting borrowers with investors through online platforms. This asset class is gaining traction, providing a novel way to potentially generate higher returns compared to traditional fixed-income investments.
P2P lending platforms offer higher returns on investment over standard savings, as youāre effectively acting as the bank.
Itās a cutting-edge way to diversify your investment portfolio beyond traditional stocks and bonds.
Best For: Investors looking for alternative income streams and who are comfortable with the risk associated with lending money.
Intellectual Property and Patents: An Overlooked Avenue for Wealth Creation
Owning the rights to an invention or unique creation can lead to a wealth of opportunities, with patents often being a gold mine for inventors and savvy investors alike.
Patents, in particular, hold the promise of a decade-long fruitful life, offering the potential for significant monetary returns through licensing or sales.
Best For: Inventors, entrepreneurs, and investors who are versed in industries where innovations are rapidly commercialized. Itās well-suited for those able to navigate the intricacies of patent law and capable of investing in the enforcement and marketing of their IP.
Alternative Investments: Unique Opportunities for Accredited Investors
Accredited investors have the advantage of accessing a broader range of alternative investments that may not be available to the general public, offering potentially higher returns and portfolio diversification. These can include private equity, hedge funds, and exclusive real estate deals.
Itās crucial, however, for accredited investors to conduct thorough due diligence and assess their risk tolerance when allocating a portion of their portfolio to these alternative assets.
Best For: Seasoned investors looking for diversification and higher risk-reward ratios and qualify as an accredited investor.
Luxury Goods: When Opulence Equals Investment
Luxury goods are not only symbols of status and opulence but can also solidify your investment game. High-end watches, designer handbags, and exclusive jewelry collections often see their value climb, defying the usual wear-and-tear depreciation.
They resonate with collectors and enthusiasts, transforming personal indulgence into a viable investment strategy.
Best For: Investors with a penchant for the finer things in life and enthusiasts looking to blend personal enjoyment with financial gain.
Secrets of the Antique Trade: Seeking Out Hidden
The antique trade is akin to a treasure hunt, where seasoned savvy meets the thrill of discovery. Unearthing hidden gems within flea markets, estate sales, and auction houses not only provides a historical connection but can also reveal investment diamonds in the rough.
Antiques carry the potential for significant bottom line appreciation due to factors like rarity, provenance, and desirability among collectors.
Like finding this antiquated nautical map at an estate sale and now listed for $7.5 million. 2
Best For: Collectors with a passion for history and an eye for value.
What If You Have A Depreciative Asset?
If youāre holding onto a depreciative asset, itās like grasping a melting ice cube: time can whittle away its value.
Consider selling to repurpose the capital into something that appreciates, upgrading to a more efficient model, or simply using it fully before its value dips too low. Each depreciative asset requires a tailored strategy, balancing between cutting losses and extracting maximum utility.
Itās a strategic financial dance ā knowing when to hold on and when to let go of depreciative assets can ensure they serve your bottom line more than they hurt it.
FAQs
Appreciating assets are financial powerhouses that grow your wealth over time. They combat inflation and can provide additional income streams.
By increasing in value, they enhance your net worth, creating a more robust financial foundation for your future endeavors.
Appreciating assets are typically categorized based on their nature and the way they generate value. Common categories include tangible assets like real estate and collectibles, financial assets like stocks and bonds, and intangible assets like patents and copyrights.
The assets that donāt often depreciate include real estate, precious metals like gold and silver, and certain collectibles such as fine art or vintage cars. These assets maintain value or appreciate over time, resistant to the typical wear and tear or technological obsolescence that affects other assets.
Which Asset that Has Appreciation in Value Interests You
In conclusion, adding appreciating assets to your portfolio is a strategic move towards achieving financial security and building long-term wealth.
These assets combat inflation by potentially increasing in value over time, providing an opportunity to earn returns that exceed the average inflation rate.
However, these assets are not considered to be part of your liquid net worth. With all appreciating assets, you must consider the potential taxes on your various investments.
To facilitate this wealth-building strategy, itās vital to practice saving diligentlyāconsider automating your savings, cutting unnecessary expenses, and increasing income streams. By consistently setting aside funds, you can gradually invest in diverse appreciating assets such as stocks, real estate, or retirement accounts.
This is how you start forming a life consistent with financial freedom.
Source
Barrons. āRare Portrait of George Washington Could Fetch $2.5 Million at Auction.ā https://www.barrons.com/articles/rare-portrait-of-george-washington-could-fetch-2-5-million-at-auction-e2f19134. Accessed February 20, 2024.
Los Angeles Times. āA $7.5-million find: Overlooked Getty estate sale map turns out to be 14th century treasure.ā https://www.latimes.com/california/story/2023-10-25/map-dealer-discovers-14th-century-portolan-chart-getty-estate-sale. Accessed February 20, 2024.
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I donāt usually dive into odd niche topics like this, but I just spent 12 hours car shopping over the weekend. Thatās a lot of test drives and awkward conversations with over-enthusiastic salespeople. Sorry, Clayton, I canāt picture myself driving this car off the lot todayā¦why do you ask?
Long story short, Iāve compared tons of cars recently. Hybrids, as you might know, are always more expensive than their all-gas counterparts. Butā¦arenāt hybrids cheaper to operate? Which meansā¦could they save us money in the long run?! This got my finance brain whirring to life.
I wrote an article in 2020 and updated it in 2023 that covers the real, total cost of car ownership. The cost of car ownership can be broken down into 6 main categories:
Purchase/Depreciation
Financing
Maintenance and Repair
Fuel
Registration/Inspection
Insurance
Financing rates, registration costs, and inspection costs are universal for all cars. Thereās no difference between a traditional gas car and a hybrid on those axes.
But we know (or at least suspect) purchase costs, maintenance, fuel, and insurance costs will vary between hybrids and all-gas cars.
A Bird in the Handā¦
Aesop wrote in 600 BC that āa bird in the hand is worth two in the bush.ā Or, in modern terms, āIād rather have a dollar in my hand today than two dollars in 20 years.ā
Money today is worth more than money in the future. This is called discounting. And weāve used this idea before to analyze mortgage costs.
Weāre faced with a similar problem today.
When we buy a hybrid car, we spend more on the purchase price today. But, ostensibly, we save operating costs each year we own the vehicle. However, those future savings are worth less than the extra dollars spent today.
Do we save enough on long-term operating costs to compensate for the differences in sticker price and depreciation? Thatās the question!
To answer it, we need to:
Understand the differences in costs between gas cars and hybrids (sticker cost, depreciation, fuel costs, insurance costs, maintenance costs).
Determine an appropriate discount rate for this analysis and apply it.
An Appropriate Discount Rate
As of 2022, the average age of all cars on American roads is 12.5 years. That said, the average car owner has their vehicle for 8 years before (most often) selling it or (less often) it breaks down completely.
Therefore, a happy medium duration for todayās analysis is 10 years. Weāre going to look at the differences between hybrids and gas cars over a 10-year life.
How much less valuable is a dollar in 2034 than a dollar today?
Warren Buffett uses U.S. Treasury bond rates as his discount rate. Iām inclined to agree with him. Itās āthe risk-free rate.ā In any analysis, we can ask ourselves, āWould I rather pursue [this risky option], or simply invest my money in U.S. Treasury bonds for a decade or two?ā Good enough for Warren, good enough for me.
As of February 2024, the 10-year Treasury rate is 4.3%. The table below shows how to apply that discount rate to future savings.
Example: I could take $74.47 today, invest it in a 4.3% annual interest bond, and Iād have $100.00 in seven years. Thus, if a hybrid car saves me $100 in 2031, itās precisely the same as having $74.47 in my pocket today in 2024. A bird in the handā¦
How Much Does a Hybrid Save Us?
We need an example of two cars to analyze. Since Kelly and I are currently active car market participants (weāre soon to have a āBaby on Boardāā¦by the way, whatās the deal with those stickers?), Iāve been researching the Kia Sorento. Letās dig into the details of the all-gas Sorento vs. the hybrid Sorento.
All these details Iām about to share with you are shown mathematically in this spreadsheet. Please feel free to make a copy and play around yourself.
To make a copy of a Google Sheet: File ā> Make a Copy
Sticker Price and Depreciation Rate
The gas Sorento starts at $31,990. The hybrid Sorento starts at $36,990.
According to iSeeCars, both vehicles will depreciate 53% in their first 5 years.
Gas Expenses
To calculate estimated gas expenses, we need to understand:
how far we drive
our miles-per-gallon efficiency of the cars
and the cost of gas
Depending on your source, the average American drives between 13,000 and 15,000 miles per year. Weāll use 14,000 miles per year for this article.
The Kia Sorento hybrid gets 35 miles per gallon (weāre looking at the all-wheel drive model, thanks to snowy Rochester winters). The all-gas Sorento gets 24 miles per gallon.
Average American gas prices are currently $3.27 per gallon.
We combine those numbers to find out:
The Sorento Hybrid incurs $1308 of gas expenses per year.
The all-gas Sorento incurs $1907 of gas expenses per year
Insurance Costs
The average āfull coverageā auto policy costs $2000. Your miles may vary (#carjoke).
Insurance is very personal in that nature. Your driving history and desired coverage level significantly affect the insurance premium.
Nevertheless, weāll use $2000 per year for the all-gas Sorento. Hybrid insurance costs, on average, 7% more than all-gas models; the Sorento Hybrid will cost $2140 per year.
Maintenance
Most sources cite that hybrid maintenance costs are lower than all-gas engines, as hybrids use regenerative braking (fewer brake replacements), donāt use alternators or starters, and tend to have simpler transmissions.
Unfortunately, I cannot find any sources that provide hard numbers to support this claim! If you find something, please let me know.
Therefore, Iām using an average figure of $600 per year for repairs and maintenance and biasing those dollars towards the end of the carsā lives. Newer cars break down less and are covered by various levels of warranty.
All-In Costs: Hybrid vs. All Gas
Over our 10-year analysis period, the Kia Sorento Hybrid would cost us $55,662(depreciation + gas + insurance + maintenance), as measured in 2024 dollars.
The all-gas model would cost us $56,491.
Pretty darn close, but itās a slight nod to the hybrid model. Category-by-category, the results are:
The hybrid costs $3000 more in depreciation costs.
The hybrid saves $4997 in gasoline costs.
The hybrid costs $1167 more in insurance.
And while Iām focusing only on dollars and cents here, thereās an environmental argument too. I wonāt dive into the details. But you should probably place a value on environmental costs and benefits (albeit a difficult value to define in dollars and cents).
Of course, this is a perfect example of āaverage pilot syndrome.ā Averages are useful in theory but rarely in practice. You must re-run this analysis for your unique scenario. The first questions that come to mind are:
Which specific model are you looking into? It might not be the Kia Sorento.
What are the miles per gallon ratios of the all-gas and hybrid models?
What are insurance rates like? Not only for your preferred car, but for you?
What are the typical maintenance costs of your desired car?
How does your car depreciate over time?
Should you adjust the discount rate? (PS ā you can play around with the spreadsheet yourself, and youāll see that the discount rate does not change the outcome significantly in this case.)
Was It Worth It?
Weāve covered a lot of conjecture and āwhat ifā questions, made some assumptions, and created a spreadsheet. Is it all worth it?
First, I think Iām directionally accurate. Will the real world play out as Iāve modeled here? Of course not. For all I know, an asteroid will blast our car into smithereens on its first night in the garage (itāll be a new kind of hybrid; half shrapnel, half vapor). But I think I have a better factual understanding now than I did before. I hope you agree.
This was ~2 hours of work (mainly on the writing, not the math) to optimize an $800 decision. And because Iāve discounted those future dollars, thatās $800 as measured today. Not bad! For some hybrids, this is likely to be a multi-thousand dollar difference. Nice!
Time to unplug, fill up, and peel out.
Thank you for reading! If you enjoyed this article, join 7500+ subscribers who read my 2-minute weekly email, where I send you links to the smartest financial content I find online every week.
-Jesse
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