The answer is yes – sort of. Unlike a fully taxable custodial brokerage account, which lets you invest on behalf of a minor, you can not open and fund a Roth IRA for your child. The key word being fund.
For example, with a taxable brokerage account, your newborn child’s grandma can set up an account in your child’s name and purchase any amount of stock she so chooses. But when it comes to a Roth IRA, your child needs to generate taxable earned income before you can help them set up an account, and most newborns don’t come with taxable income!
However, assuming your child does have taxable earned income, you can open a Custodial Roth IRA on his or her behalf.
No Roth IRA Age Limit
Most people fail to realize that no age restrictions exist when it comes to funding a Roth IRA.
Anyone, regardless of age, can contribute to a Roth IRA as long as they generate taxable earned income that falls within the Roth IRA income limits. To illustrate, let’s look at some extreme examples.
Let’s say you have a six-month old baby earning $10,000 per year modeling baby clothes for a national retailer. As long as you file an income tax return on behalf of your baby, your baby can make the maximum Roth IRA contribution of $5,000.
On the other end of spectrum, let’s say you’re 100 years old with a passion for power tools. You work part-time at Home Depot as a hobby and earn $14,000. You can make a $6,000 Roth IRA contribution, because anyone over 50 years old is allowed to make a $1,000 catch-up contribution.
Those are two extreme examples, but they drive home a key point – Roth IRA eligibility has nothing to do with age and everything to do with your ability to generate taxable earned income.
Earned Income
So, if you want to establish a Roth IRA for your child, they must have earned income. And their annual Roth IRA contributions can not exceed the amount of earned income they generate in any given year.
According to the IRS, earned income includes wages from a job, sales commissions, tips, and/or bonuses. Earned income does not include your child’s weekly allowance, gifts from grandparents, or investment income from a trust.
For example, let’s say your teenage son works part-time as a lifeguard. Over the course of the summmer, he generates $6,000 in after-tax income. Your son is eligible to make the maximum $5,000 contribution to his Roth IRA, but if he only earns $3,000, the maximum contribution he can make is $3,000.
Custodial Roth IRAs
With a Custodial Roth IRA, you oversee the management of your child’s Roth IRA until he or she reaches the age of majority (anywhere between ages 18 and 21 depending on the state in which you live). This means you have the power to determine how your child’s money is invested. You can initiate buy and sell orders for stocks, mutual funds, ETFs, etc. You can do anything on their behalf that you can do with your own Roth IRA, except – withdraw money.
Unlike your own Roth IRA (which allows you to withdraw your original contributions tax-free and penalty-free at anytime and for any reason), the Roth IRA withdrawal rules state that money can not be withdrawn from a Custodial Roth IRA under any circumstance until the owner (your child) reaches the age of majority. And that leads us to the next factor you need to consider…
They Own It, Not You!
While a Custodial Roth IRA gives your child an enormous head start in saving for retirement, it comes with a potential drawback. Your child owns it outright. And just like a taxable custodial brokerage account, once your child reaches the age of majority, they take over control of the account. At that point, they can withdraw every last penny if they choose, and this opens the door to the possibility they might squander their head start on retirement.
After all, thousands of dollars can be quite tempting to a young adult, especially if they haven’t fully matured. But keep in mind, this isn’t necessarily a bad thing. Your child can learn a valuable lesson from blowing a small fortune, and the earlier in life they learn this lesson, the better it will serve them in the long-run.
Giving Your Child A Head Start
Ask most people in their 40’s and 50’s which financial decision they most regret, and the overwhelming majority will tell you, “Not saving for retirement earlier in life.”
After all, it’s so much easier to save what you need for retirement if you start the process earlier. Why? The power of compound interest. And when it comes to compound interest, time is literally money.
To illustrate, let’s pretend two people are both saving $10,000 a year for retirement with a goal of retiring at age 65. Both manage to earn a 10% annual return, but Saver #1 starts at age 25 while Saver #2 starts at age 35.
At age 65, Saver #1 has $4,878,518.11, while Saver #2 has $1,819,434.25. That’s a $3,059,083.86 difference! Just to equal Saver #1’s retirement nest egg, Saver #2 needs to save an extra $18,596.93 per year – just because he started ten years later.
Now, pop open your Roth IRA calculator and imagine the possibilities if your child starts contributing to retirement at age 15. Your child will have an enormous head start financially, and they’ll have you to thank for encouraging them to save early!
This is an article from Britt at Your Roth IRA, the Web’s #1 resource for Roth IRA information.
By Mike PiperLeave a Comment – The content of this website often contains affiliate links and I may be compensated if you buy through those links (at no cost to you!). Learn more about how we make money. Last edited January 10, 2014.
When putting together a portfolio, the very first question you have to ask is what type of asset allocation you want to use — how much of your portfolio should be in stocks and how much in bonds?
And the answer to that question depends on how willing you are to take risk in your portfolio.
Risk Tolerance Questionnaires
The most common way of assessing an investor’s risk tolerance is to give them a multiple choice quiz called a risk tolerance questionnaire. Unfortunately, most such questionnaires leave much to be desired. You can get more useful information from a quiz in Cosmo.
The problem is that the questions are often designed in such a way that there’s only one reasonable answer. So rather than learning anything useful about yourself, you simply proceed through the quiz, picking the “right” answer each time as if you were taking a quiz in school.
For example, consider this question from a real-life risk tolerance questionnaire:
“Imagine you inherited $1 million-worth of a single stock from a long-lost aunt. Would you A) hold the stock, B) sell half of the stock and invest the money in more diversified holdings, or C) sell all of the stock and invest the money in more diversified holdings?”
If you choose C, you’re rated as a conservative investor. The problem, of course, is that everyone should choose C. Even super aggressive investors (who don’t want any low-risk investments like bonds or cash) would be better off selling the stock and investing the money in a diversified portfolio of stocks. In most cases, holding $1 million in a single stock doesn’t make you an aggressive investor. It makes you an idiot.
Using Real Life Experience
My best suggestion for determining your willingness to take risk is to keep a record of how you have actually responded to market declines in the past. For example, what did you do when the investment banks started failing in late 2008 and the market began to crash? How did you feel? What about a few months later, by which point the market had fallen by roughly 50%?
Did you panic and move everything to cash?
Were you sufficiently brave to hold on to your investments (but not brave enough to rebalance your portfolio back to your planned allocation, because doing so would have required selling bonds to buy more stocks)?
Did you rebalance exactly as planned?
Or did you smell the deal of a lifetime and move every single dollar into stocks?
What you actually did and how you actually felt during a real life market crash gives you meaningful information about your willingness to take risk — far more useful information than you can get from a multiple choice quiz.
What About New Investors?
If you’re a new investor who hasn’t been through a bear market before, my suggestion is not to worry about it too much. When you’re first getting started, how much you invest is far more important than how you invest.
You probably won’t get your risk tolerance and asset allocation precisely right on the first try. But that’s OK. If the lesson you gain from your first bear market is that you under- or overestimated your risk tolerance, simply adjust your portfolio as needed and move on with your life, knowing that you’ve gained valuable information that will help you to better survive your next bear market.
Mike Piper is a CPA who blogs at Oblivious Investor, where he answers tax and investing questions such as, “Should I roll over my 401(k)?” and “Should I invest in index funds?“
When you look at Peerform reviews you first need to understand the difference between conventional loans and peer to peer loans. While traditional loans come from a bank and can take months to get done, P2P loans are done through a platform that connects investors and borrowers.
Peer-to-Peer lending sites are rapidly becoming preferred destinations for both borrowers and investors. Peerform is a newer member of the P2P Market and it provides opportunities for both borrowers and investors to get better rates than what they can get from banks or other traditional loan and investment sources.
About Peerform
Peerform was founded in 2010 by Wall Street executives with backgrounds in finance and technology. They started the platform because they realized that traditional lenders like banks seemed unwilling to provide loans for individual and small business owners.
The solution was to create a peer-to-peer lending platform that would bring both borrowers and loan investors together. This would also give investors an opportunity to earn much higher interest rates on their investments than what they could get through traditional bank investments like savings accounts, money market accounts, and certificates of deposit.
The platform is able to offer lower rates to borrowers, and higher rates to investors, because it lacks the physical infrastructure and employment base that banks have. The reduction in operating costs from running a technology driven online lending platform could be passed on both borrowers and investors.
Peerform is headquartered in New York City and has been featured in major media outlets, such as Time and The Street. Peerform is currently eligible to make loans to residents in the 36 following states: Alaska, Alabama, Arkansas, Arizona, California, Delaware, Florida, Georgia, Hawaii, Illinois, Kentucky, Louisiana, Massachusetts, Maryland, Michigan, Minnesota, Missouri, Mississippi, Montana, North Carolina, Nebraska, New Hampshire, New Jersey, New Mexico, Nevada, Ohio, Oregon, Pennsylvania, South Carolina, Tennessee, Texas, Utah, Virginia, Vermont, Washington, and Wisconsin.
Loans made on Peerform are underwritten by Cross River Bank, a federally insured New Jersey chartered bank and FDIC member.
Borrowing Through Peerform
The Peerform borrowing process is quick and simple, and you can use the loan proceeds for just about any purpose, including for business related needs.
Here are the highlights of the Peerform lending process:
Loan purpose. Peerform makes personal loans that can be used for a wide variety of purposes, including debt consolidation, credit card refinancing, home improvement, major purchases, car financing, business purposes, medical expenses, moving and relocation, wedding expenses, vacation, home buying, or other needs.
They also have a category referred to as a “green loan”. That’s where you take a personal loan and use it to purchase alternative energy equipment for your home. This typically can be something like solar panels for heat and hot water, or even the generation of electricity.
Loan amounts. Peerform will make loans that range in size $1,000 and $25,000.
Loan terms. All loans made through Peerform are for a term of 36 months. All loans are also fixed rate, installment loans that will be fully paid off at the end of the term. Peerform does not offer any other loan terms at this time.
Minimum borrower qualifications. In order to qualify for a loan with Peerform, you must have:
A minimum credit score of 600
No delinquencies, bankruptcies, tax liens, judgments, or non-medical related collections in the past 12 months
A minimum of one revolving account ever opened
A maximum debt-to-income ratio (DTI) of not more than 40% (not including mortgage debt)
A minimum of one open bank account
Although you don’t need to be employed, you do need to have an income which can be documented and verified. Also in regard to income, if you’re married, your spouse’s income cannot be used to qualify for the loan. Peerform provides personal loans, so you cannot include a cosigner for qualification purposes, nor make joint applications.
The loan application process. Peerform’s loan application uses a five step process:
Registration – This is an online registration that you can complete within a few minutes
Personal loan selection – After completing the online registration, the platform will review your information, and offer loan terms or alternatives.
Personal loan listing – After you have selected the loan terms that you want, your loan request is listed on the platform so that it can be evaluated by potential investors.
Verification – You will be asked to submit documentation that supports the information that you supplied in your registration form, or that will be needed to verify your identity.
The loan registration process will ask you to provide basic information, such as the loan amount you are requesting, the purpose of the loan, your credit score range, your full name, address, phone number, date of birth, email address, and annual salary and wages. You will then be asked to create a password.
Once you complete the registration form, you will be informed immediately if you qualify for a loan, and what the rate for that loan will be. Again, all loans are for a term of 36 months.
If you accept the offer, your loan request will be placed on the platform for investors to review and consider if they want to invest in it. You will also be taken through a step-by-step process to complete your application. Making application does not have any impact on your credit score.
Identity verification will involve you uploading copies of one of the following: your drivers license, military ID with photo, passport with photo, or US federal or state government ID. You will also be asked to verify your income. This will include two recent pay stubs, but they may also request recent tax returns and/or a copy of your bank statements.
Loan funding. In a best case scenario, your loan funds will be available shortly after the loan is put on the personal loan listing platform. However, all listed loans can remain on the platform for up to two weeks, which is known as the two-week listing period. You can track investor interest in your loan during the process.
But it is possible that your loan will not be fully funded within the two-week listing period. If it isn’t, you can either accept a lower loan amount (up to the amount funded), or you may need to reapply.
Interest rates and fees. Just like Lending club loans, interest rates with Peerfrom range between 7.12% APR and 29.99% APR. Rates are based on your Peerform Grade, and broken down into four alphabetic groups, each with its own rate range:
AAA, AA+, AA, A+ and A: 7.12% APR to 13.94% APR (credit score range: 700+)
BBB, BB+, BB, B+ and B: 14.86% APR to 19.44% APR (credit score range: 680 – 699)
CCC, CC+, CC, C+ and C: 20.87% APR to 26.92% APR (credit score range: 600 – 679)
DDD and DD+: 28.33% APR and 29..99% APR (credit score range: not indicated)
There are no application fees. There are however origination fees, typically 5.00% of the loan amount on all loans grades, except Peerform Grade loans AAA (1.00%), AA+ (2.00%) and AA (3.00%). The origination fee is deducted from your loan proceeds. For example, if your loan is $10,000, and the origination fee is 5.00%, you will receive net loan proceeds $9,500. The origination fee is payable only if the loan is issued.
The preferred loan repayment method by Peerform is by direct debits from your bank account. But you do have an option to pay by paper check. If you do, there is a $15 check processing fee for each check.
Late payments are assessed a fee of 5% of the monthly payment, subject to a $15 minimum per occurrence. There is also an unsuccessful payment fee in the event that your payment is refused. That fee is $15 per unsuccessful attempt, or a lesser amount as determined by state law.
There are no prepayment penalties in the event that you want to make a partial or full early payment on your loan.
Loan payments. You can repay your loan either by automatic draft from your bank account, or by mailing in monthly checks. However, Peerform does charge a fee of $15 per payment if you pay by check. There is no charge if you pay by automatic bank draft.
Site security. Peerform follows bank level security protocols, which includes encrypting and storing sensitive data in dedicated 24 hour maintain servers, which are protected with firewalls and housed in a secure facility. Servers are equipped with Secure Socket Layer (SSL) certificate technology to ensure encryption.
You also don’t need to concern yourself with the fact that investors will have access to your personal information. They will get only the information needed for investment purposes, but will not have access to any information that personally identifies you. In that way, you can apply for a loan anonymously, and not concern yourself that the information is available to someone who is either unintended or inconvenient, and certainly not for general public consumption.
Investing Through Peerform
If Peerform is a great place to get a loan, it’s also a rich source of investment opportunities.
Here is how investing through Peerform works:
Investor qualifications. In order to invest on Peerform, you must be an accredited investor. That’s an investor who is either high income or high net worth, or both, and who is generally recognized as a sophisticated investor who understands risk, knows how to invest into it, and is prepared to lose all of his or her investment (the temperament factor).
According to the US Securities and Exchange Commission, an accredited investor is defined as anyone who…
earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, OR
has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence).
.large-mobile-banner-2-multi-106border:none !important;display:block !important;float:none !important;line-height:0px;margin-bottom:15px !important;margin-left:auto !important;margin-right:auto !important;margin-top:15px !important;max-width:100% !important;min-height:250px;min-width:250px;padding:0;text-align:center !important;This differs from other P2P lenders. Prosper loan investors are allowed to start with as little as $25 to get started.
Investments offered. Peerform offers two types of investment products, whole loans and fractional loans. Whole loans are just what the name implies – you’re buying an entire loan. These investments are typically offered to institutions. Fractional loans are portions of loans, that are offered to individual investors.
These are not unlike investments on other P2P sites in which you can either invest in an entire loan, or in small pieces of many loans, commonly called notes.
All loans available for investment on Peerform are subject to analysis by the Peerform Loan Analyzer. The tool uses a highly advanced and dynamic algorithm for pricing loans. It uses empirical methods rather than filters (which are used on most P2P platforms) in order to better calculate consumer credit risk.
Custom portfolio. The portfolio enables you to diversify by customizing your investments to meet your needs. You can set investment goals, and the customization tool will outline how to invest your capital in order to reach your investment goals in the most concise way.
Fraud protection. Loan fraud is not uncommon and increases loan defaults, so Peerform takes extra steps to weed it out. In addition to requiring documentation to verify the borrower’s identity and income on the loan registration form, Peerform also uses both proprietary methods and commercially available licensed technologies and solutions to both detect and prevent fraud.
This includes third-party services such as Lexis Nexis for user identification, TransUnion for credit checks, and OFAC compliance.
Peerform also verifies that there is a variation of no more than 10% in the income stated by the borrower on the registration form, and that which is proven by the income documentation. If needed, IRS Form 4506T will be completed and sent to the IRS to verify the borrower’s income tax records. A small debit is taken from the borrower’s bank accounts, and verified by the borrower to make sure that the bank account is valid. The borrower’s phone number and email IP location are also verified.
Investment returns. Peerform offers rates of between 6.44% and 28.33% (net of origination fees). This rate range refers to returns before deducting for loan defaults, so your actual returns will be something less. .
Summary
Peerform is one of a growing number of P2P lending sites that also offers investment opportunities. The platform is using cutting edge technology to set the most accurate loan rates, which will also reduce the number of defaults that lowers the investment return on so many P2P lending sites.
Tap on the profile icon to edit your financial details.
Real estate investing can have many benefits, including cash flow, asset appreciation and tax breaks. However, it can also be a lot of work, which many people don’t have the time to do. But investing in real estate doesn’t have to involve managing properties in person. In fact, passive real estate investors own their properties from afar. Here’s what to know about passive real estate investing. You may want to consult with your financial advisor to understand if this is a good investment for you.
What Is Passive Real Estate Investing?
Passive real estate investing involves purchasing real estate investments without active involvement in their day-to-day management. This differs from active real estate investment, which may involve buying, selling and managing real estate investments, such as rental properties.
Active real estate investors often must commit a significant amount of time to their real estate investments. They might also be skilled in doing at least basic maintenance and repairs on their own.
Conversely, passive real estate investors take a hands-off approach. They typically aren’t involved in the daily management of the properties and may not have the skills to make repairs on investment properties. However, passive real estate investors often must pay fees to a property manager or pay investment fees.
Passive real estate investing can come in many forms, such as investing in real estate exchange-traded funds (ETFs) or buying shares in a real estate investment trust (REIT). Another way to passively invest in real estate is to purchase real estate properties directly and then hire a property manager to take care of their day-to-day management.
Benefits of Passive Real Estate Investing
Passive real estate investing can have many benefits that make it appealing to many investors. For instance, the time commitment is often much less than for active real estate investors. Passive real estate investors often outsource day-to-day management to a property manager, so they only need to monitor their investment periodically.
Passive real estate investing also offers diversification. Real estate investments typically have a low correlation with the stock market, allowing investors to reduce the overall volatility of their portfolios. In addition, the minimal time commitment allows passive real estate investors to invest in more properties in different regions, providing further diversification.
Passive real estate investing can also have less risk than active real estate investing. These investments are typically managed by a professional team with expertise in the real estate industry. These teams have the knowledge and experience to evaluate properties and make sound investment decisions on behalf of the investors. Owning multiple real estate investments can reduce one’s risk as well.
Risks of Passive Real Estate Investing
Passive real estate investing is not without its risks. For one, you have minimal control over investment decisions. This may not be an issue if the investment manager is highly experienced, but it could be a problem if the investment manager isn’t as knowledgeable.
These investments can also have a lack of transparency. For example, REITs can be complex investments with multiple projects and it isn’t always clear exactly how investors’ money is allocated. In addition, there can be inadequate regulation in the industry that leads to minimal disclosure of information.
There may also be volatility in the real estate market at times. We saw this with the Great Recession when the value of many homes collapsed. The real estate market can be overheated at times as well, leading to inflated prices. This volatility can have a serious impact on investments, both positive and negative.
How to Get Started with Passive Real Estate Investing
Passive real estate investing can be a great opportunity for investors but requires careful planning and due diligence. Before you get started, assess your financial goals. What are your financial goals, your risk tolerance and your desired returns? These questions will help determine which type of investment is the best choice to meet your needs.
Next, it’s time to find the right passive investing opportunity. As mentioned earlier, you can consider investments like REITs and real estate ETFs. You can also buy your own property and hire a property manager. Or you can consider crowdfunding platforms and private equity funds. Each of these has its own benefits and drawbacks and the questions you answered above will help you make the right choice.
However, you should also do your due diligence with each investment opportunity. That might involve researching the company’s past performance, reading customer reviews and assessing its risk and reward. You want it to be the right fit before you decide to invest.
The Bottom Line
Passive real estate has several benefits, such as a minimal time commitment, lower risk and diversification compared to active real estate investment. However, it can also have risks like lack of transparency, limited control and volatility. Do your due diligence before you invest and review the investment with a trusted financial advisor.
Tips for Investing in Real Estate
Real estate investing can be complex. If you want some help, perhaps speaking with a financial advisor could be beneficial. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
If you decide to become a passive real estate investor, there will be a lot to think about. In addition to various laws and regulations, you may have to finance your investment properties. In that case, you can still use SmartAsset’s mortgage calculator to estimate your monthly costs.
Save more, spend smarter, and make your money go further
Maybe you didn’t hit the mega-millions jackpot, but you’ve come into some extra cash. It might be tempting to go out and indulge, but there is probably a better way to spend that money.
In the second installment of this 3-part series, Jennifer Openshaw, America’s Chief Consumer Advocate, Wall Street Journal columnist and CEO of Family Financial Network, is back with advice on what to do with $10,000.
From building an investment portfolio to purchasing reliable transportation, see what she says about how to make sure your financial decisions have a positive impact on your long-term financial well-being.
If you are just catching up on the series, check out Jennifer’s infographic on what you should do with $1,000. The ideas range anywhere from tuning up your car to making a few minor home improvements — even getting certified in yoga instruction.
Click on “Launch Infographic” for an expanded view.
Save more, spend smarter, and make your money go further
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Last Updated on November 10, 2021 by Mark Ferguson
One of the hardest parts of getting your real estate license is completing the education needed for the licensing requirements. In most states, you can take online real estate classes or classes in a classroom with a real teacher. There are many pros and cons to both options, and the better option will depend on your goals and plans as a real estate agent. I obtained my real estate license in 2002, and have run a team that has sold over 200 homes in a year. Now I own a real estate brokerage and focus on real estate investing. I was able to get my license online and so have many of my agents, but my wife got hers in a classroom. This article will discuss whether it is better to take real estate classes online or in person.
Do different states have different requirements?
Every state has different rules and regulations for real estate agent licensing. Most rates require a certain amount of classes to get your real estate license before you can take the licensing exam. In Colorado you have to take 162 hours of education; other states are more and some much less. Some states are even thinking about making it a requirement that all real estate agents have at least a bachelor’s degree to get a real estate license.
Once you take the education portion of the real estate classes, you must also pass a test, take a background check, and then find a broker to work for. Taking classes is only a small portion of the process of becoming an agent, but it is important.
Which option takes less time?
One of the pros of taking classes online is you may be able to finish the classes sooner than the actual hourly requirement. Each class is given a certain amount of hourly credits and once you pass the class you get credit for those hours. It may take someone 2 hours instead of 4 hours to finish a section online if they are fast learners or readers. If you take classes in person, you have to be in a classroom for very close to the full hourly requirement. You also will have a set schedule with in-person classes, where online classes let you work whenever you have time.
I am able to breeze through my update classes which are supposed to take 4 hours in well less than an hour. It is important that you understand the material though. If you breeze through the material without absorbing it, it will be very tough to pass the test.
Which option is more exciting?
The downfall of taking real estate classes online is that they are extremely boring. It is tough for many people to stare at a computer screen for hours and absorb information. No matter how hard you try, it is really hard to make real estate license material exciting. You must have a very good attention span to spend the time it takes to study material online, learn it, and then be able to pass the exam. If you take real estate classes in person they will be much more exciting. You won’t be staring at a computer screen, you will be listening to a teacher, reading books and listening to guest speakers.
If you take real estate classes online you also have to be self-motivated. You have to find the time to sit down and put those hours in. In a classroom, you will have a set schedule and someone telling you when you need to be there. If you have a job and/or a family, then it makes it even tougher to find time to take online classes.
How important is a live teacher?
Taking real estate education in a classroom involves real people teaching you and learning with you. You will most likely learn much more from a real classroom because the teacher can explain many more things than a computer can. That teacher also should have some real-world experience in selling real estate and may even have connections in the real estate world.
When you become a real estate agent, one of the most important things is meeting people and networking. The sooner you can start networking, the better off you will be. Your teacher or teachers may have connections to help you find a broker, have insights on the best way to pass the test, and help you get started selling houses! Real estate classes don’t teach you how to sell, they teach you the laws, how not to get sued, and how to abide by the ethics standards.
Where will you learn more?
The in-person real estate classes are much more interesting than staring at a computer screen all day, but there are other advantages. I am a HUD broker and I taught one of my HUD classes to a local community college that offered a real estate licensing program. I taught aspiring agents all about HUD homes, things to watch out for, and how to make money selling them. An online class will not be teaching students about the best ways to sell HUD homes and will not have guest speakers.
The classroom may also bring in guest speakers and other agents who have succeeded in the business. An online class will not expose you to real estate agents making it in your area.
The teacher in a real class will be able to tell stories and relate the law and rules to real-world examples. Online classes may be able to give some real-world examples, but it is always better to hear stories straight from the people who experienced them.
Which option is easier to complete?
A downfall to a real estate class is finding a schedule that fits you. With an online class, you can take classes when you have time, but when you take in-person classes, you have to make their schedule work. If you already have a job that may be difficult to do, but I have found many schools offer night classes to help work around students’ schedules.
It is often easier for most people to make the online classes fit their schedules better. The online classes can be easier to complete as well because they may not take as much time. Remember, that easier is not always better.
How long it takes to complete real estate classes will depend on the student. If you are an extremely motivated individual who can handle hours at a time staring into a computer, then you might be able to finish online courses faster. If you are not motivated to take those online classes, it may be faster to take the in-person classes that have a set schedule. My wife went to school full-time for her license and finished up in about 6 weeks. One of my team members took his classes online and it took him about 6 months, but he also had a full-time job and a family. If you want to get your license quickly, taking classes in a classroom is most likely the fastest way to go.
What is your goal as an agent?
I mentioned early in this article that an agent’s goals will determine the best route for getting a license. If you want to make a career of real estate and jump in with both feet, take an in-person class. The exposure to people in the business will be worth it. You may even have a better chance of finding the right broker once you get your license.
If you want to be a part-time agent that only uses their license for their own investments, then it makes sense to take online classes. You may not need the connections and the personal help a real teacher will provide. However, don’t expect to be given guidance on how to get deals from a real estate class online. Real estate classes teach almost nothing about investing.
What are some online schools?
If you decide you want to take your real estate classes online, I know a couple of schools that offer licensing. My assistant took his classes at Real Estate Express, which also offers continuing education classes. Real Estate Express offers very affordable classes and great customer support.
Once you get your real estate license, there is much more you must do to become a successful real estate agent. In fact, before you even get your license you should be working on your business.
Conclusion
It is not easy to get a real estate license. The classes are long and boring, and the test is not a piece of cake. Once you get your license you must work hard to succeed as an agent. Choosing the right method of taking classes can help you succeed or fail as an agent.
Last Updated on November 10, 2021 by Mark Ferguson
One of the hardest parts of getting your real estate license is completing the education needed for the licensing requirements. In most states, you can take online real estate classes or classes in a classroom with a real teacher. There are many pros and cons to both options, and the better option will depend on your goals and plans as a real estate agent. I obtained my real estate license in 2002, and have run a team that has sold over 200 homes in a year. Now I own a real estate brokerage and focus on real estate investing. I was able to get my license online and so have many of my agents, but my wife got hers in a classroom. This article will discuss whether it is better to take real estate classes online or in person.
Do different states have different requirements?
Every state has different rules and regulations for real estate agent licensing. Most rates require a certain amount of classes to get your real estate license before you can take the licensing exam. In Colorado you have to take 162 hours of education; other states are more and some much less. Some states are even thinking about making it a requirement that all real estate agents have at least a bachelor’s degree to get a real estate license.
Once you take the education portion of the real estate classes, you must also pass a test, take a background check, and then find a broker to work for. Taking classes is only a small portion of the process of becoming an agent, but it is important.
Which option takes less time?
One of the pros of taking classes online is you may be able to finish the classes sooner than the actual hourly requirement. Each class is given a certain amount of hourly credits and once you pass the class you get credit for those hours. It may take someone 2 hours instead of 4 hours to finish a section online if they are fast learners or readers. If you take classes in person, you have to be in a classroom for very close to the full hourly requirement. You also will have a set schedule with in-person classes, where online classes let you work whenever you have time.
I am able to breeze through my update classes which are supposed to take 4 hours in well less than an hour. It is important that you understand the material though. If you breeze through the material without absorbing it, it will be very tough to pass the test.
Which option is more exciting?
The downfall of taking real estate classes online is that they are extremely boring. It is tough for many people to stare at a computer screen for hours and absorb information. No matter how hard you try, it is really hard to make real estate license material exciting. You must have a very good attention span to spend the time it takes to study material online, learn it, and then be able to pass the exam. If you take real estate classes in person they will be much more exciting. You won’t be staring at a computer screen, you will be listening to a teacher, reading books and listening to guest speakers.
If you take real estate classes online you also have to be self-motivated. You have to find the time to sit down and put those hours in. In a classroom, you will have a set schedule and someone telling you when you need to be there. If you have a job and/or a family, then it makes it even tougher to find time to take online classes.
How important is a live teacher?
Taking real estate education in a classroom involves real people teaching you and learning with you. You will most likely learn much more from a real classroom because the teacher can explain many more things than a computer can. That teacher also should have some real-world experience in selling real estate and may even have connections in the real estate world.
When you become a real estate agent, one of the most important things is meeting people and networking. The sooner you can start networking, the better off you will be. Your teacher or teachers may have connections to help you find a broker, have insights on the best way to pass the test, and help you get started selling houses! Real estate classes don’t teach you how to sell, they teach you the laws, how not to get sued, and how to abide by the ethics standards.
Where will you learn more?
The in-person real estate classes are much more interesting than staring at a computer screen all day, but there are other advantages. I am a HUD broker and I taught one of my HUD classes to a local community college that offered a real estate licensing program. I taught aspiring agents all about HUD homes, things to watch out for, and how to make money selling them. An online class will not be teaching students about the best ways to sell HUD homes and will not have guest speakers.
The classroom may also bring in guest speakers and other agents who have succeeded in the business. An online class will not expose you to real estate agents making it in your area.
The teacher in a real class will be able to tell stories and relate the law and rules to real-world examples. Online classes may be able to give some real-world examples, but it is always better to hear stories straight from the people who experienced them.
Which option is easier to complete?
A downfall to a real estate class is finding a schedule that fits you. With an online class, you can take classes when you have time, but when you take in-person classes, you have to make their schedule work. If you already have a job that may be difficult to do, but I have found many schools offer night classes to help work around students’ schedules.
It is often easier for most people to make the online classes fit their schedules better. The online classes can be easier to complete as well because they may not take as much time. Remember, that easier is not always better.
How long it takes to complete real estate classes will depend on the student. If you are an extremely motivated individual who can handle hours at a time staring into a computer, then you might be able to finish online courses faster. If you are not motivated to take those online classes, it may be faster to take the in-person classes that have a set schedule. My wife went to school full-time for her license and finished up in about 6 weeks. One of my team members took his classes online and it took him about 6 months, but he also had a full-time job and a family. If you want to get your license quickly, taking classes in a classroom is most likely the fastest way to go.
What is your goal as an agent?
I mentioned early in this article that an agent’s goals will determine the best route for getting a license. If you want to make a career of real estate and jump in with both feet, take an in-person class. The exposure to people in the business will be worth it. You may even have a better chance of finding the right broker once you get your license.
If you want to be a part-time agent that only uses their license for their own investments, then it makes sense to take online classes. You may not need the connections and the personal help a real teacher will provide. However, don’t expect to be given guidance on how to get deals from a real estate class online. Real estate classes teach almost nothing about investing.
What are some online schools?
If you decide you want to take your real estate classes online, I know a couple of schools that offer licensing. My assistant took his classes at Real Estate Express, which also offers continuing education classes. Real Estate Express offers very affordable classes and great customer support.
Once you get your real estate license, there is much more you must do to become a successful real estate agent. In fact, before you even get your license you should be working on your business.
Conclusion
It is not easy to get a real estate license. The classes are long and boring, and the test is not a piece of cake. Once you get your license you must work hard to succeed as an agent. Choosing the right method of taking classes can help you succeed or fail as an agent.
After paying your bills and covering necessary expenses each month, you may have money left over. While it’s tempting to splurge, it’s usually better to use that extra money to make extra payments on outstanding debt or invest.
If you have a large student loan balance, you may want to put all extra funds into paying off those loans. However, investing could be a better option to explore when you can reasonably expect a return that’s higher than your student loan interest rate.
Key takeaway
If you have a high interest rate on your student loans, putting more toward your loans may be a good idea. But if you’re in a loan forgiveness program or have a low interest rate, consider investing.
When to pay off student loans
Paying off student loans before investing can take some time, but for many borrowers, it can relieve a lot of stress and free up more cash for other goals, including investing. It can also make your life feel a little less complicated. You should consider paying off your student loans if you have high interest rates, you have an unpredictable cash flow or you’re looking to remove debt from your finances.
Pros:
You’ll save money in interest.
You’ll become debt-free sooner.
Your debt-to-income ratio (DTI) will improve, making it easier to qualify for a mortgage.
Cons:
It can take several years to pay off your student loans, even with extra payments.
It’s unnecessary if you’re working toward loan forgiveness or repayment assistance.
You won’t be able to maximize the student loan interest deduction.
Best for:
People whose top priority is to be debt-free.
Borrowers with high-interest student loans (8 percent or higher).
Borrowers who have private student loans with a variable interest rate.
People hoping to purchase a home but who can’t because of a high DTI.
When to invest
Investing sooner rather than later can help set you up for a successful retirement as you take advantage of the power of compound interest. While investing never offers a guaranteed return, if your research shows that the rate of return for your investments will likely be higher than the interest rate for your loans, it could be a good idea to start investing.
Pros:
You can often get a better rate of return than most student loan interest rates.
Investing sooner will help you avoid having to work longer in your older years.
With certain investment accounts, you can take withdrawals if you need the money in the future.
Cons:
You may still struggle with your monthly payments.
Investing won’t help improve your DTI.
Investing can be extremely risky.
Best for:
Borrowers with a low interest rate on their student loans.
Borrowers who are enrolled in a student loan forgiveness plan.
People who already have investing knowledge.
Pay off student loans or invest: Factors to consider
Cecil Staton, president and wealth advisor at Arch Financial Planning, says that when it comes to choosing between paying off your loans and investing, it’s more a question of “opportunity cost.”
“Do you expect a higher rate of return than the interest rate charged to your student loans?” Staton says. “If so, it could make sense to invest. If not, aggressive repayment strategies may be in your best interest, and you may delay investing. Ultimately, a balance between the two usually makes sense.”
Here’s what to think about when deciding between paying off your student loans and investing.
Personal priorities
Start by thinking about your overall financial picture. You need to consider your other debts, savings goals and personal priorities. Here are some other goals you might decide to prioritize:
Save for emergencies: Before you pay off student loans or invest, save at least one month’s worth of expenses. Over time, try to build up to six months’ worth of expenses.
Save for retirement: If your employer offers a 401(k) match, take advantage of it. Explore other opportunities outside of a 401(k) to start contributing to retirement accounts and saving for your retirement.
Pay off high-interest debt: Credit card balances, personal loans and other types of debt might have high interest rates. Paying these off first can give you a higher return than investments or student loan debt.
Tackle big life goals: If you’re looking to have kids or save for a house down payment, you might decide to make minimum payments on your debt and hold off on investing for now. This gives you space in your budget to save for those bigger financial milestones.
A final personal priority to think about is whether becoming debt-free is a top goal for you. If so, you may want to hold off on investing and put all excess funds toward paying off your student loans early.
Interest rates
Depending on when you borrowed the money and whether you have federal or private student loans, interest rates can range anywhere from 1 percent to 13 percent. Paying down your debt is like a guaranteed return on the money, so if your student loan interest rate is 5 percent, then you’re getting a 5 percent return.
Compare this rate of return to your expected investing return. Stocks can generally offer a long-term rate of return of over 9 percent a year. If you’re investing for the short term, however, returns can be volatile.
If your student loan interest rate is lower than what you can realistically expect to earn investing, then it could make sense to prioritize investing over paying down student loans early.
Tax deductions
When you’re paying off student loans, you might be able to deduct interest payments you make on that debt. Eligible borrowers can lower their taxable income by up to $2,500, which helps offset the cost of student loans over time.
At the same time, you can also deduct contributions made to a 401(k) or traditional individual retirement account. Think about which tax break is more important to you.
Forgiveness programs
If you have federal student loans, you might be able to get student loan forgiveness, which eventually cancels all or some of your student loan debt. If you plan to take advantage of student loan forgiveness, then it doesn’t make sense to put extra payments toward the debt. You could instead put the extra money toward investing and grow your money over time.
But look closely at the loan forgiveness details to ensure that you will meet the qualifications. This may affect your decision to enroll in one of these programs or to start investing now.
The bottom line
Deciding whether to pay off student loans or invest depends on your financial priorities and which option gives you a better return. If the rate of return in investing is higher than your student loan interest, then making minimum payments on your student loans and putting any extra cash toward investing may be a good choice. Conversely, if your student loan interest is higher than any possible return on investment, then focusing on getting out of debt faster may be the better path.
A good return on investment is generally considered to be about 7% per year, based on the average historic return of the S&P 500 index, and adjusting for inflation. But of course what one investor considers a good return might not be ideal for someone else.
And while getting a “good” return on your investments is important, it’s equally important to know that the average return of the U.S. stock market is just that: an average of the market’s performance, typically going back to the 1920s. On a year-by-year basis, investors can expect returns that might be higher or lower — and they also have to face the potential for outright losses.
In addition, the S&P 500 is a barometer of the equity markets, and it only reflects the performance of the 500 biggest companies in the U.S. Most investors will hold other types of securities in addition to equities, which can affect their overall portfolio return.
What Is the Historical Average Stock Market Return?
Dating back to the late 1920s, the S&P 500 index has returned, on average, around 10% per year. Adjusted for inflation that’s roughly 7% per year.
Here’s how much a 7% return on investment can earn an individual after 10 years. If an individual starts out by putting in $1,000 into an investment with a 7% average annual return, they would see their money grow to $1,967 after a decade, assuming little or no volatility (which is unlikely in real life).
It’s important for investors to have realistic expectations about what type of return they’ll see.
For financial planning purposes however, investors interested in buying stocks should keep in mind that that doesn’t mean the stock market will consistently earn them 7% each year. In fact, S&P 500 share prices have swung violently throughout the years. For instance, the benchmark tumbled 38% in 2008, then completely reversed course the following March to end 2009 up 23%.
Factors such as economic growth, corporate performance, interest rates, and share valuations can affect stock returns. Thus, it can be difficult to say X% or Y% is a good return, as the investing climate varies from year to year.
A better approach is to think about your hoped-for portfolio return in light of a certain goal (e.g. retirement), and focus on the investment strategy that might help you achieve that return.
Why Your Money Loses Value If You Don’t Invest it
It’s helpful to consider what happens to the value of your money if you simply hang on to cash.
Keeping cash can feel like a safer alternative to investing, so it may seem like a good idea to deposit your money into a savings account — the modern day equivalent of stuffing cash under your mattress. But cash slowly loses value over time due to inflation; that is, the cost of goods and services increases with time, meaning that cash has less purchasing power. Inflation can also impact your investments.
Interest rates are important, too. Putting money in a savings account that earns interest at a rate that is lower than the inflation rate guarantees that money will lose value over time.
This is why, despite the risks, investing money is often considered a better alternative to simply saving it. The inflation risk is lower.
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What Is a Good Rate of Return for Various Investments?
As noted above, determining a good rate of return will also depend on the specific investments you hold, and your asset allocation. You can always calculate the expected rate of return for various securities.
CDs
Certificates of deposit (CDs) may be considered a relatively safe investment because they offer a fixed rate of return in return for keeping your money on deposit for a specific period of time. That means there’s relatively little risk — but because investors also agree to tie their money up for a predetermined period of time CDs are also considered illiquid. There is generally a penalty for withdrawing your money before the CD matures.
Generally, the longer money is invested in a CD, the higher the return. Many CDs require a minimum deposit amount, and larger deposits (i.e. for jumbo CDs) tend to be associated with higher interest rates.
It’s the low-risk nature of CDs that also means that they earn a lower rate of return than other investments, usually only a few percentage points per year. But they can be a good choice for investors with short-term goals who need a relatively low-risk investment vehicle while saving for a short-term goal.
Here are the weekly national rates compiled by the Federal Deposit Insurance Corporation (FDIC) as of April 17, 2023:
Non-Jumbo Deposits
National Avg. Annual Percentage Yield
1 month
0.24%
3 month
0.78%
6 month
1.03%
12 month
1.54%
24 month
1.43%
36 month
1.34%
48 month
1.29%
60 month
1.37%
Bonds
Purchasing a bond is basically the same as loaning your money to the bond-issuer, like a government or business. Similar to a CD, a bond is a way of locking up a certain amount of money for a fixed period of time.
Here’s how it works: A bond is purchased for a fixed period of time (the duration), investors receive interest payments over that time, and when the bond matures, the investor receives their initial investment back.
Generally, investors earn higher interest payments when bond issuers are riskier. An example may be a company that’s struggling to stay in business. But interest payments may be lower when the borrower is trustworthy, like the U.S. government, which has never defaulted on its Treasuries.
Stocks
Stocks can be purchased in a number of ways. But the important thing to know is that a stock’s potential return will depend on the specific stock, when it’s purchased, and the risk associated with it. Again, the general idea with stocks is that the riskier the stock, the higher the potential return.
This doesn’t necessarily mean you can put money into the market today and assume you’ll earn a large return on it in the next year. But based on historical precedent, your investment may bear fruit over the long-term. Because the market on average has gone up over time, bringing stock values up with it, but stock investors have to know how to handle a downturn.
As mentioned, the stock market averages a return of roughly 7% per year, adjusted for inflation.
Real Estate
Returns on real estate investing vary widely. It mostly depends on the type of real estate — if you’re purchasing a single house versus a real estate investment trust (REIT), for instance — and where the real estate is located.
As with other investments, it all comes down to risk. The riskier the investment, the higher the chance of greater returns and greater losses. Investors often debate the merit of investing in real estate versus investing in the market.
Likely Return on Investment Assets
For investors who have a high risk tolerance (they’re willing to take big risks to potentially earn high returns), some investments are better than others. For example, investing in a CD isn’t going to reap a high return on investment. So for those who are looking for higher returns, riskier investments are the way to go.
Remember the Principles of Good Investing
Investors focused on seeing huge returns over the short-term may set themselves up for disappointment. Instead, remembering basic tenets of responsible investing can best prep an investor for long-term success.
First up: diversification. It can be a good idea to invest in a wide variety of assets — stocks, bonds, real estate, etc., and a wide variety of investments within those subgroups. That’s because each type of asset tends to react differently to world events and market forces. Due to that, a diverse portfolio can be a less risky portfolio.
Time is another important factor when investing. Investing early may result in larger returns in the long-term. That’s largely because of compound interest, which is when interest is earned on an initial investment, along with the returns already accumulated by that investment. Compound interest adds to your returns.
Investing with SoFi
While every investor wants a “good return” on their investments, there isn’t one way to achieve a good return — and different investments have different rates of return, and different risk levels. Investing in CDs tends to deliver lower returns, while stocks (which are more volatile) may deliver higher returns but at much greater risk.
Your own investing strategy and asset allocation will have an influence on the potential returns of your portfolio over time.
Ready to invest in your goals? It’s easy to get started when you open an Active Invest account with SoFi invest. You can invest in stocks, exchange-traded funds (ETFs), and more. SoFi doesn’t charge commissions, and other fees apply (full fee disclosure here). Members can access complimentary financial advice from a professional.
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Save more, spend smarter, and make your money go further
Personal finance and investing gurus are fond of an old Chinese proverb: “The best time to plant a tree was 20 years ago. The second best time is now.” Chances are you’ve heard it before.
It’s a profound quote, and trees are a great metaphor for growing your investment portfolio. If you water the tree daily – and have patience – you can expect to reap the rewards in due time. Whether you start investing in college or after you turn 40, the important thing is planting the seed.
The problem is, this proverb actually undersells the importance of starting as soon as possible from an investing perspective.
While a tree grows to maturity at a sustained rate and only reaches a certain height, investments actually grow larger the earlier you start. If investments are trees, then the seed you planted today may grow as tall as a mighty redwood, while the one you plant in 20 years becomes a pine. In other words, the growth potential of your portfolio is directly tied to the amount of time you give it to grow.
This is thanks to something called compound interest, where the interest your account accrues is compounded on itself. Here’s everything you need to know about compound interest – how it can help you, how it can hurt you and how to maximize its benefits.
Keep reading for a comprehensive look at compounding interest, or skip to the section you’d like to learn more about using the navigation links below.
What is Compound Interest?
There are two ways to accrue interest: simple and compound. Simple interest is when you earn interest only on the principal. So, if you have $1,000 invested at 5% interest, you’ll earn $50 every year.
Compound interest is earned on the principal and the interest in your account. Let’s look at a hypothetical example. Pretend you have $5,000 in a retirement account, earning 7% interest each year. The first year that your account is open, you earn $350 in interest, which brings your total to $5,350. The following year, interest is calculated based on that $5,350 total, not the original $5,000. You earn $374 in interest and now have a total of $5,724.
Even if you never deposit anything but the original $5,000, you’ll have $38,061.28 in 30 years. That’s a $33,061.28 profit.
Compound interest rewards people who invest over long periods of time, not necessarily those who can afford to invest the most. It’s specifically helpful for young people who start investing early.
A 25-year-old who invests $200 a month with 7% interest will have $226,705.89 in 30 years. If they wait 10 years to start investing, they’ll have to more than double their savings rate to reach the same total.
Use our compound interest calculator to see how much of a difference it can make.
Pros and Cons of Compound Interest
Compound interest is your best friend when you’re investing or saving for a long-term goal, but it’s your worst enemy if you have debt that’s not being paid off.
Here’s an example: A borrower with $30,000 in student loans defers their loans for a year while they look for a job. During that year, interest continues to accrue on those loans. Once they’re ready to resume making payments, they discover their $30,000 balance has grown to $45,000 because of compound interest.
To slow down the negative effects of compound interest, you should pay off your debt as quickly as possible. You can also refinance your loans to a lower interest rate. When you borrow money, compounding interest works against you and benefits the lenders. The interest rate a lender charges is the trade-off for taking on the risk of lending money and giving out loans. However, it makes it very important for you, the borrower, to pay off your loans on time and keep tabs on your interest rate.
If you have credit card debt, you may want to consider transferring your balance to a card with 0% APR to avoid interest while you pay off the balance. Otherwise, you’ll accrue interest that makes it more expensive for you to carry debt month to month.
Calculating Compound Interest
To calculate compound interest, you’ll need to use the formula below:
Compound Interest = Amount of Principle and Interest in Future (or Future Value) less Present Value
= [P (1 + i)n] – P
= P [(1 + i)n – 1]
P = principal, i = nominal annual interest rate in percentage, and n = number of compounding terms.
Compound Interest Investments
Some banks only calculate interest on a monthly basis, while others do it every day. More frequent compounding is better when you’re trying to maximize interest, so find out how frequently your bank calculates interest. You might have to call or poke around the fine print to determine their compounding schedule.
Next, find the highest interest rates possible while also minimizing risk. If you have a savings account with $10,000, choose a high-yield savings account. Aim for 2% interest or higher. A $5,000 savings account with 2% interest will be worth $7,459.04 in 20 years, but only worth $5,204.05 in a savings account with .2% interest. Using an investment calculator can give you a better idea of how interest will impact your return.
Compounding interest investment accounts can help both grow your money and secure your future. But it’s important to start early. And before you start investing in stocks, it’s important not to get ahead of yourself. Do your research and familiarize yourself with different investment options. Make sure you’re only investing money after you’ve topped off your emergency fund. It’s also important to ensure that you’re current on all your loan payments. Otherwise, any investment gains might be negated by snowballing debts.
If you’re saving for retirement, invest in low-fee index funds. Fees of 1% or more will drag down your profit and cut into your compound interest. Index funds will follow the market’s course and provide a solid rate of return. Avoid investing in individual stocks, as their volatility can be problematic.
Compound interest works best if you start saving as soon as possible, even if it’s just $25 a month. A 22-year-old who saves $25 a month at 7% interest for five years will have $1,795.80. When she gets a raise after those five years and can afford to put away $100 a month, she’ll have $294,213.07 when she retires at age 67. If she hadn’t started investing until after her raise, she’d only have $264,689.70.
Even though she only contributed $1,500 during those first five years, her portfolio is worth nearly $30,000 more. For most people, that’s enough to retire a full year earlier, and all it cost her was a monthly contribution of $25. Even someone earning an entry-level salary can afford that.
The same principle applies to debt. Even if you defer your student loans, keep making payments on them as much as you can afford to. Taking time off will only delay your debt payoff and increase how much you pay in interest.
Always compare rates before taking out a loan and get at least three quotes. Each percentage point matters when you’re borrowing money, especially for long-term debt like a mortgage. You can also limit compound interest by borrowing money for as little time as possible.
A 30-year $200,000 mortgage at 4.85% interest will cost $379,940 in total. A borrower who takes out the same loan for 15 years will only pay $269,910. That’s a difference of $110,000, which is more than half the total mortgage principal.
Takeaways: The Power of Compounding Interest and Growing Your Wealth
Compound interest can help you grow your wealth and secure a more stable financial future. Even if you can’t afford a large principal or large ongoing additions to your investment, you can still extract value from small investments with compounding interest. The key is to start as early as possible and do adequate research to ensure that you’re making investment decisions that make sense with your overall financial goals and situation. With these tips, you’ll be on your way to stabilizing your financial foundation and making your money work for you.
For more information on compounding interest, you can check out dolv.gov for more resources.
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Zina Kumok is a freelance writer specializing in personal finance. A former reporter, she has covered murder trials, the Final Four and everything in between. She has been featured in Lifehacker, DailyWorth and Time. Read about how she paid off $28,000 worth of student loans in three years at Conscious Coins. More from Zina Kumok