When you pay off your mortgage, you may have some paperwork and account switching (such as property taxes) to take care of. And you may look forward to greater cash flow.
But is paying off a mortgage always the right move? In some cases, a person who is about to pay off a mortgage may want to consider a couple of options that could make more sense for their particular financial situation.
Learn more about the payoff path and alternatives here.
Pros and Cons of Paying Off Your Mortgage
Paying off your mortgage is a fantastic milestone to reach, but it’s not without trade-offs. Here are a few considerations to help you make the best decision for your situation.
Pros of Paying Off a Mortgage
Cons of Paying Off a Mortgage
No monthly payment
May lose tax deduction
No more interest paid to the lender
Your cash is all tied up in your home’s equity
More cash in your pocket each month
If you pay extra to pay off your home, you may miss out on investment strategies
You’ll need less income in retirement
Lost opportunity costs for other uses for your money
Greatly reduced risk of foreclosure
No tax deduction for mortgage interest, if you’re among the few who still take the deduction
💡 Quick Tip: Thinking of using a mortgage broker? That person will try to help you save money by finding the best loan offers you are eligible for. But if you deal directly with an online mortgage lender, you won’t have to pay a mortgage broker’s commission, which is usually based on the mortgage amount.
What Happens When You Pay Off Your Mortgage?
Here’s how mortgage payoff works:
• To get the amount you need to pay off your mortgage, the first thing you need to do is request a mortgage payoff letter. If you pay the amount on your last statement, you won’t have the right amount. A mortgage payoff letter will include the appropriate fees and the amount of interest through the day you’re planning to pay the loan off.
• Know that the payoff letter is only good for a set amount of time, and make sure to get your payment in on time.
• Follow the instructions you’re given about where and how to submit the payment.
• Once you’ve sent the payoff amount, your mortgage lender is responsible for sending you and the county recorder documentation to release the mortgage and lien on your home.
• You should be sent any funds remaining in escrow.
• You will want to contact your insurance company about this change if your insurance was paid along with your mortgage payment and have the bills switched over to you directly.
• If your property taxes were paid as part of your mortgage, you will want to contact your local tax collector about shifting those bills to you as well.
What Documents Do You Get After Paying Off a Mortgage?
After paying off your mortgage, you should receive (or have access to) documents proving you paid off the mortgage and no longer have a lien attached to your home. These include:
• Satisfaction or release of mortgage. This document will be filed with the county recorder (or other applicable recording agency). It states that the mortgage has been satisfied and the lien released.
• A canceled promissory note. When you closed on your home, one of the documents you signed was called a promissory note. Now that the mortgage has been satisfied, you may receive this document back with a “canceled” or “paid in full,” though it’s also possible you may have to call and request the document.
• A statement on the paid-off loan balance. Your lender should send you a statement showing that your loan has been paid in full.
What Should You Do After Paying Off Your Mortgage?
After you pay off your mortgage, you’ll need to take care of a few housekeeping items (a couple are mentioned above).
• Close your escrow account. Since you’re no longer sending a mortgage payment to a mortgage servicer, you’ll need to take care of the items in your escrow account, primarily your taxes and homeowners insurance.
• Contact your county recorder’s office to double-check that the mortgage satisfaction paperwork has been filed. Once that has been filed, you will have a clear title on the property.
• Make plans for the extra money. Whether you want to make a bigger push in your retirement account, enlarge your emergency fund, or pay off other debts, you now likely have more cash to do it with. If you don’t make plans for the extra money, it might just evaporate.
Recommended: 2024 Home Loan Help Center
Is Prepaying a Good Idea?
Generally, paying off your mortgage early is a great idea. It reduces the principal, which in turn reduces the amount you’ll pay in interest over the life of your loan. Still, there are reasons that some homeowners consider not paying their mortgage off early.
Most lenders do not charge a prepayment penalty, but home loans signed before January 10, 2014, may include one. Nonconforming mortgage loans signed after that date may have a prepayment penalty that applies within the first three years of repayment. (The different types of mortgage loans include conforming and nonconforming conventional mortgages.)
The best way to find out if prepayment is subject to a penalty is to call your mortgage servicer. The terms of your mortgage paperwork should also outline whether or not you have a prepayment penalty.
Should You Refinance Instead?
Another option you may consider is refinancing your mortgage. There are several reasons you may want to refinance instead of paying off your mortgage.
Lower monthly payment. Getting a lower rate or different loan term may lower your monthly payment. Be sure to check out current rates, and use a calculator for mortgages to find out what a possible new payment would be.
Shorter mortgage term. Refinancing a 30-year mortgage to, say, a 15-year mortgage can keep you close to paying off your mortgage while also providing financial flexibility.
Spare cash. Whatever your need is — home renovations, college funding, paying off higher-interest debt — a cash-out refinance might be an option.
💡 Quick Tip: Compared to credit cards and other unsecured loans, you can usually get a lower interest rate with a cash-out refinance loan.
The Takeaway
What happens when you pay off your mortgage? After doing a jig in the living room, you’ll need to take care of a few housekeeping tasks and make plans for the extra money.
An option to consider: Would a refinance to a shorter term make more sense, or pulling cash out with a cash-out refi? It can be wise to review all your options as you move toward taking this major financial step.
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
Is paying off your mortgage a good idea?
The answer depends on an individual’s situation. If you have the money and you’d love to shed that monthly obligation for good, paying off a mortgage is a good idea. But if you’re worried about funding your retirement or losing opportunities to invest, paying off your mortgage may not be a good idea for you.
What do you do after you pay off your mortgage?
Ensure that you have received your canceled promissory note, and update your property tax and insurance billers on where to bill you. Since you no longer will have a mortgage servicing company, you must pay your insurance and property taxes yourself.
Is it better to pay off a mortgage before you retire?
Paying off a mortgage could give you more money to work with in retirement. But if your retirement accounts need a boost, most financial experts contend that allocating money there is a better idea than paying off your mortgage. Paying off a mortgage when you have low cash reserves can also put you at risk.
Does paying off your mortgage early affect your credit score?
Surprisingly, paying off your mortgage early won’t affect your credit score much. Your credit score has already taken into account the years of full, on-time payments you made each month.
Photo credit: iStock/katleho Seisa
*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.
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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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Portfolio beta refers to a popular metric that investors use to measure a portfolio’s risk, or its sensitivity to price swings in the broader market. While past performance does not indicate future returns, knowing a portfolio’s beta can help investors understand the price variability of their stocks, or how much their holdings may move if there’s stock volatility or big gains in a benchmark index like the S&P 500.
Investors often consider beta a measure of systematic risk, or risk that stems from the entire market and that investors can not diversify away. Macro events such as interest-rate or economic changes often fall into the category of systematic risk, while idiosyncratic, stock-specific risk includes events like a change in company management, new competitors, changed regulation, or product recalls.
Table of Contents
How to Calculate Beta of a Portfolio
The Beta of a portfolio formula requires relatively simple math, as long as investors know the Beta for each stock that they hold and the portion of your portfolio that each stock comprises.
Here are the steps you’d follow to calculate the Beta of a hypothetical portfolio:
1. Calculate the total value of each stock in the portfolio by multiplying the number of shares that you own of the stock by the price of its shares:
Stock ABB: 500 shares X $20 a share each = $10,000.
2. Figure out what proportion each stock in their portfolio represents by dividing the stock’s total value by the portfolio’s total value:
Stock ABB’s total value of $10,000/Portfolio’s total value of $80,000 = 0.125.
3. Multiply each stock’s fractional share by its Beta. This will calculate the stock’s weighted beta:
Stock ABB’s beta of 1.2 X its fractional portfolio of 0.125 = 0.15.
4. Add up the individual weighted betas.
Here is the whole hypothetical portfolio with a total beta of 1.22, benchmarked to the S&P 500. That means when the index moves 1%, this portfolio as a whole is 22% more risky than the index.
Stock
Value
Portfolio Share
Stock Beta
Weighted Beta
ABB
$10,000
0.125
1.20
0.15
CDD
$30,000
0.375
0.85
0.319
EFF
$15,000
0.1875
1.65
0.309
GHH
$25,000
0.3125
1.42
0.44375
Sum
1.22
4 Ways to Characterize Beta
Investors always measure a portfolio’s beta against a benchmark index, which they give a value of 1. Stocks that have a beta higher than one are more volatile than the overall market, and those with a beta of less than one are less volatile than the overall market.
Understanding beta is part of fundamental stock analysis. Once you know the beta of your portfolio, you can make changes in order to increase or decrease its risk based on your overall investment strategy by changing your asset allocation.
There are four ways to characterize beta:
High Beta
A high beta stock — one that tends to rise and fall along with the market often — has a value of greater than 1. So if a stock has a beta of 1.2 and is benchmarked to the S&P 500, it is 20% more volatile than the broader measure.
If the S&P 500 rises or falls 10%, then the stock would conversely rise or fall 12%. The same would be true for portfolio beta. While there’s more downside risk with high-beta stocks, they can also generate bigger returns when the market rallies – a principle of Modern Portfolio Theory.
Low Beta
A low beta stock with a beta of 0.5 would be half as volatile as the market. So if the S&P 500 moved 1%, the stock would post a 0.5% swing. Such a stock may have less volatility, but it also may have less potential to post large gains as well.
Still, investors often prefer lower volatility securities. Low beta investment strategies have shown strong risk-adjusted returns over time, too.
Negative Beta
Stocks or portfolios with a negative beta value inversely correlate with the rest of the market. So when the S&P 500 rises, shares of these companies would go down or vice versa.
Gold, for instance, often moves in the opposite direction as stocks, since investors tend to turn to the metal as a haven during stock volatility. Therefore, a portfolio of gold-mining companies could have a negative beta.
So-called defensive stocks like utility companies also sometimes have negative beta, as investors buy their shares when seeking assets less tied to the health of the economy. A downside to negative beta is that expected returns on negative beta securities tend to be weak – even less than the risk-free interest rate.
Zero Beta
A stock or portfolio can also have a beta of zero, which means it’s uncorrelated with the market. Some hedge funds seek a market-neutral strategy. Being market-neutral means attempting to perform completely indifferent to how an index like the S&P 500 behaves. 💡 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.
How to Calculate an Individual Stock’s Beta
For investors, calculating the beta of all their stock holdings can be time consuming, and typically, financial data or brokerage firms offer beta values for stocks.
But if you wanted to calculate beta for an individual stock, you’d divide a measure of a stock’s returns relative to the broader market over a given time frame by a measure of the market’s return by its mean, also over a specific time frame. Here is the formula:
Beta = covariance/variance
Covariance is a measure of a security’s returns relative to the market’s returns.
Variance is a measure of the market’s return relative to its mean or average.
Recommended: What Is Covariance and How Do You Calculate It?
Alpha vs Beta vs Smart Beta
Beta is one of the Option Greeks, terminology frequently used by traders to refer to characteristics of specific securities or derivatives in the market. Another commonly used Greek term is Alpha. While beta refers to an asset’s volatility relative to the broader market, Alpha is a measure of outperformance relative to the rest of the market.
Beta also comes up a lot in the exchange-traded fund or ETF industry. Smart Beta ETFs are funds that incorporate rules- or factor-based strategies.
What Impacts Beta?
A variety of factors impact an asset’s beta. In general, stocks seen as riskier than average typically feature higher betas. Stock-specific factors such as debt levels, aggressive management, bold projects, volatile cash flows, and even ESG factors can influence a stock’s idiosyncratic risk. Higher business risk, while stock-specific, can lead to a more volatile stock price than the overall market, hence a higher beta.
Higher betas often appear in particular sectors. There are even investment fund strategies that play on beta – you can buy funds that exclusively own high beta or low beta stocks. A stock’s sector, industry, geographic location, and market cap size all impact a stock’s volatility and beta.
Cyclical and growth sectors like energy, industrials, information technology, and consumer discretionary often feature high betas. Utilities, consumer staples, real estate, and much of the healthcare sector typically have low beta.
Small caps and stocks domiciled in emerging-market economies also often have a higher beta (compared to the U.S. large-cap S&P 500). 💡 Quick Tip: Are self-directed brokerage accounts cost efficient? They can be, because they offer the convenience of being able to buy stocks online without using a traditional full-service broker (and the typical broker fees).
Important Things to Know About Beta
1. A stock’s beta may change over time. Because beta relies on historical price data, it is subject to change.
2. Beta is not a complete measure of risk. It can be a useful way for investors to estimate short-term risk but it’s less helpful when it comes to considering a long-term investment because the macroeconomic environment and company’s fundamentals may change. In some cases, beta is not the best measure of a stock or a portfolio’s risk.
3. Beta is an input when investors are using the Capital Asset Pricing Model (CAPM) — a way to measure the expected return of assets taking into account systematic risk. It’s a method that also looks at the cost of capital for investors.
4. The estimated beta of a stock will be less helpful for companies that do not trade as frequently. Thin liquidity for a stock may bias its beta value since there is less robust historical price data.
5. Beta does not offer a complete picture of a stock’s risk profile as it’s linked to systematic risk. Investors must also consider stock-specific risk when managing their portfolios.
The Takeaway
As discussed, beta is a popular metric that investors use to measure a portfolio’s risk, or its sensitivity to price swings in the broader market. Knowing stock holdings’ betas can be important information when you’re building your portfolios.
You can calculate their portfolio beta using simple math as long as you’re able to obtain the individual betas for your stock holdings. While beta is a helpful tool to try to gauge potential volatility in a portfolio, its reliance on historical data makes it limited in measuring the complete risk profile of an asset or portfolio.
Qualified investors who are ready to try their hand at options trading, despite the risks involved, might consider checking out SoFi’s options trading platform. The platform’s 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 — including a step-by-step in-app guide — 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 is a good beta for a portfolio?
In a general sense, a good beta for a portfolio would be 1. That’s only a general guideline or rule of thumb, however, as it means that a portfolio’s value is roughly as volatile as the market overall.
What does a beta of 1.3 mean?
A beta of 1.3 means that a portfolio’s value is 30% more volatile than the overall market, which means its value will swing more wildly than the market.
Why is market portfolio beta 1?
Beta measures a portfolio or asset’s sensitivity relative to the overall market. If a portfolio’s beta is 1, it is equally as volatile as the market, not more or less so.
How do I reduce my portfolio beta?
Perhaps the simplest way to reduce your overall portfolio’s beta is to replace higher-beta assets within the portfolio with assets that have lower associated beta.
Is it possible to have zero beta portfolio?
It is possible, and would amount to a zero-beta portfolio, which means the portfolio itself has no systemic risk whatsoever. In other words, this portfolio would have no relationship to the overall movements of the market, and likely have low returns.
What is the difference between stock beta and portfolio beta?
A stock beta is a measure of an individual stock’s volatility, while portfolio beta is a measure of an overall investment portfolio’s volatility.
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The concept of new vs. old wealth did not exist until fairly recently in human history; before that, most people could not have even imagined that they were one or the other kind of person simply because there was no such thing as cash!
Typically, old money is people with a lot of resources who are looking to pass on what they have in order to secure their future. New money, on the other hand, comprising mostly or exclusively by entrepreneurs starting from scratch.
The concept of old money vs new money has been around since the 1920s -yet many people have not given much thought to the concept.
Since most people feel like they will never belong in either group of people – old money or new money.
Are you interested in the concept of old money, but need to make it happen with new money? There are many reasons why you should give both styles of money a chance.
Over time, old money becomes new money.
A lot of people are fascinated with the idea of becoming independently wealthy quickly, right! But, what about those who want to become wealthy gradually? It takes time for old money to become new money.
There is a lot of discussions these days about the old and new money.
When you’re trying to make a big change in your life and start to build your own wealth, it can be difficult.
In order for the change to stick and grow into something more permanent, there are many steps that must take place. Lessons learned from old money.
If you are looking to improve your finances, then this post will help spark some inspiration!
What is Old Money?
The definition of “old money” is describing a social class of people we consider members of the upper class in society. This type of old money has been around for centuries and can be traced back to previous generations.
Old money is a wealth passed down from one family generation to another.
It is not “new,” and old money is a result of work that has made their first generations wealthy.
However, many people do not know about the qualities of old money because they may have been brought up as “old” money is only for a select few.
In today’s society, it is easy to identify someone as having old money because they are typically wealthy and have descended from many generations. You may look down on those who have old money for being “old-fashioned” or not “progressive” enough or just “trust fund” babies. This is a misconception.
Many of those with old money carry the wealth that has been given to them by their ancestors with dignity, insightfulness, and grace. Even when others lost everything due to greediness, they were able to withstand time periods of economic hardship.
Old Money tends to be more generous and kind than new money, which is often seen as selfish.
You can look at families such as the Vanderbilts or even the Rockefellers as old money passed down from generation to generation.
Even in Europe, the term “old money” associates with wealthy families. These families have been able to keep the wealth and power that they have passed down from generation to generation, as well as the pride of their heritage.
What is New Money?
New money is the self-made wealthy people in the world who have made it big.
New money is the recent abundance of money that has created their wealth.
It is new to them, and it took a lot of time for them to get where they are.
New money refers to self-made millionaires of the world, such as Jeff Bezos, Steve Jobs, and Mark Zuckerberg. They are rich because they were able to create a product or service that would go on to be one of the most popular products in their respective markets and quickly become successful.
Most of the new money is mainly found in occupations like technology, sports, and entertainment. These self-made millionaires of the world are entrepreneurs and innovators who have helped shape our society as we know it today.
Many of these people may have grown up poor or broke without extra money for anything. They did not have the support of old money to help them find success.
However, today, they can show that they have a lot of money.
What is the difference between old money and new money?
New money is made recently, whereas old money is made by previous generations in years prior.
Beyond that, there are some notable differences of old money vs new money behavior.
Chance to Make New Money
The biggest difference between new and old money is that new money has a lot of competition, which means there are many more opportunities to earn it.
You can make new money today.
You cannot change your heritage and family’s ability to pass down old money and wealth to you.
This is great for those with an entrepreneurial spirit. They can start to build wealth today.
Wealth Source
New money is self-made and old money is inherited.
Old and new money can be differentiated by who created the wealth.
You have old money if you inherited something from your parents or grandparents. Inheritance is when one person or business transfers part of its assets to another person at the time of death.
Earned wealth is the result of an individual’s effort and hard work, which is seen in the person’s bank account. Creating new money happens in your lifetime.
You are able to pass down that wealth and then, it becomes old money.
Tolerance for Risk
Old-money investors typically do not take on risks. So, they would not invest in something that has a 50-50 chance of working out. That’s why old money is safer than new money because it has a much lower risk factor.
Old-money investors typically invest in things they know will work out such as real estate, long-term investing, or other businesses.
New money takes on a lot of risks because you cannot rely on it as much as you would with old-money investments.
New money investors are starting from zero with nothing. They have much less to risk and the reward is much higher.
Social Perception
New money is not as elitist as old money.
People’s perception of old money is different from new money.
Old money has an attached stigma to the lifestyle they must maintain. In the United States, old wealth is more respected than recent wealth. This idea comes from the social perception of those who are wealthy for a long time and are able to maintain their status with ease.
People who come from lower-class societies often will have a hard time being accepted into high society. Thus, why old money and new money collide on many hot topics.
New money entrepreneurs may grow up poor and end up in a higher class than their parents. However, they may still be looked down on by those of Old Money because they grew through grit and ingenuity.
Differences in Spending Habits
The difference in spending habits between each group is not just limited to the amount of money they spend. Not only do different people have different tastes and needs, but there are also differences in how much people are willing to spend on certain items.
For example, there is a difference between people who buy luxury goods and those who don’t, but both groups could have the same amount of income.
There are many differences in spending habits between old money families and new money.
However, it is important to understand that they do not have a direct correlation with success or financial status.
For old money, they tend to be willing to spend money to uphold an appearance and a certain lifestyle. Yet, they are careful to make sure the family money can be passed on for generations.
Whereas, new money has wildly different spending habits. Some are frivolous with their money because they have waited so long for the opportunity and know they can always make it back again. Others are more hesitant to spend because they worked too hard to get where they are at today.
When does New Money become Old Money?
There is no clear line between old and new money, but the comparison still has value because there is still enough generational wealth to draw from.
The transition from new money to old money happens when the generational wealth is passed down.
The perception of old money was made in the early 1900s. In fact, old money is just wealth passed down and lasts another generation.
The hardest part for new money to become old money is teaching the younger generations how to manage their newfound wealth.
In addition, the common “new money” folks with net worth of over $2 million may not have the right advisors like the billionaires to properly transfer their wealth to future generations and start to build the old money way of life.
Do you know what 10 figures in money is?
Old Money vs New Money Examples
The easiest way to differentiate between old and new money is that old money is inherited from the older generation while new money is created by the current generation.
Old Money has the privilege of being passed down for generations, giving it a sense of stability and security.
New Money comes with its own set of challenges in terms of debt, lack of legacy, and lack of time-tested investment strategies for saving or spending.
New-Age millionaires are self-made wealthy families with new money, making up a large percentage of the wealthiest Americans. These people tend to be more frugal than old-money families who may have been successful for generations and acquired their wealth in the past without much effort. The current generation is acquiring its own lavish lifestyles rather than relying on inheritance. New money families are considered “new entrants” into an exclusive club for old money family members and can feel like they’re being left out due to their lack of legacy.
There are many reasons to give old money a chance, including the fact that it is more likely to be passed down than new money.
Old money is inherited while new money is created by the current generation. Old families are seen to be more educated and refined. In addition, they tend to spend less on luxuries because they know the next generation will have their hands full with managing their possessions.
Old Money is seen to be more classy than New Money.
Accordingly, Old Money families are considered a higher class, with roots going back centuries and attributed to industrialists from a previous era of wealth creation.
Why Take on an Old Money Mentality with New Money
There are many reasons why you should give “old money” a chance. Even if you were not born into inherited wealth, there are plenty of lessons to learn and pass along to your family.
Reason #1 – Financially Stable
First, the people who have old money are usually more financially stable and will be able to help out when times get tough.
They are taught how to be wise with money.
Learn if you embody one of the 32 habits of financially stable people.
Reason #2 – Life Experiences
Second, old money people are more knowledgeable and worldly than new money. They have a wealth of knowledge about the world and will be able to share it with you when hanging out with someone who is new money.
With old money, they have the resources to provide a higher level of education as well as travel to many countries.
However, you do not need money to do experience life to the fullest. One of the best ways to find immeasurable life experiences is to volunteer either locally or globally.
Reason #3 – Financial Safeguards
Third, old money people are more financial safeguards in place than new ones. So, they never worry about being broke or homeless due to the fact that they were born into wealth and their parents passed it down to them.
You can accomplish this with new money as well.
You must create financial safeguards to make sure a sizable chunk of your wealth is making a passive income. Thus, providing for your needs as well as your heirs for many years to come.
This is where a strong financial plan of how to transfer assets to the next generation is needed.
Reason #4 – Giving Back
Fourth, old money people usually give back more frequently than new money. As such, you can find many places with old money names on the building.
Here are some examples of what old money and new money can do:
– Give opportunities for young entrepreneurs
– Help create jobs and is an important part of the economy
– Give people a voice who don’t have many opportunities.
-Create funding for social projects that are beneficial to society
Reason #5 – Transfer Inherited Wealth
Lastly, there is something special about being able to pass down generational wealth.
This is something that comes with a lot of responsibility as you must teach your heirs how to manage money wisely.
However, you can build a lasting legacy beyond your own life.
Ready to Build New Money Wealth?
Money in the 1920s is much different than today.
Old money is usually inherited wealth or obtained through family connections. As technology increases, new money is replaced old money. However, when you look at industries like real estate where there’s not a lot of room for new money, it may be a good idea to give old money habits a chance.
When you give old money a chance in life, you will learn how much time-tested wisdom there really is behind these worldly possessions and riches.
Just because you want old money or new money, it does not greedy or extravagant. It means you know the value of a dollar and want the best for your family.
Embrace one of the many important habits of those with a background of wealth.
But the truth is, nobody likes the idea of talking about money, especially when it involves inherited wealth. So, have discussions today about long-term money decisions.
At the end of the day, it is more important to appreciate family ties over material possessions since they will last longer than any other form of wealth.
Old money offers wisdom to help new money avoid making the same mistakes.
The old money vs new money style is here to stay.
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More importantly, did I answer the questions you have about this topic? Let me know in the comments if I can help in some other way!
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Options trading offers a complex yet potentially rewarding approach to the stock market, allowing investors to buy or sell assets at predetermined prices within specific time frames. Unlike direct stock purchases, these contracts grant the right without obligating the transaction, providing a strategic tool for managing investment risks and capitalizing on market predictions.
This guide will explore the fundamentals of options trading, including the differences between call and put options, the process of getting approved for trading, and strategies for minimizing risks while maximizing returns.
What is an option?
An option is a contract that grants you the option buyer, the right, but not the obligation, to buy or sell a particular asset at a set price on a particular date or within a select window of time.
It’s also classified as a derivative, with the associated value directly linked to the underlying asset. This price point is also known as the strike or exercise price, and the expiration date specifies when the contract terminates.
But how does this benefit investors? Well, it’s a cost-efficient way to manage risk because you’re only investing in the opportunity to purchase shares at another date, and not the stock itself. Options also allow you to sell your existing shares at a set price if the market tanks to limit your losses.
How does options trading work?
However, it’s a bit more complex than simply buying and selling shares. In essence, options traders are taking a gamble on the direction they think the stock price will go in. That way, they won’t have to buy or short the actual stock when they think the market is going to skyrocket or dip.
Furthermore, there’s a relatively extensive process to get approved as an options trader. You’ll also need to open a brokerage account and maintain a set amount of reserves to remain in good standing as an investor.
And should you decide not to exercise the option, you’re free to walk away with no strings attached. You can also rake in a little more cash by selling the option, or options contract, to an investor who’s interested.
Benefits of Trading Options
There are several benefits to trading options, including:
Flexibility: Options can be used to hedge against potential losses in other investments, or to generate income through the writing of options.
Leverage: Because options allow traders to control a large amount of underlying assets for a relatively small investment, they offer significant leverage.
Limited risk: The potential loss on an options trade is limited to the premium paid for the option.
Customization: Options can be customized to meet the specific needs and objectives of the trader.
Liquidity: Options are traded on organized exchanges, making it easy to buy and sell them.
Versatility: Options can be used in a variety of market conditions, including bearish, bullish, and neutral markets.
Types of Options
Still sold on the idea of trading options? There are two types to choose from:
Call Options: these are deposit rights to purchase the stock at a later date. If the call option is not exercised before the expiration date, you lose your investment in the option and the right to purchase the underlying stock at the strike price.
Put Options: these are premiums paid to hedge against the risk of a market downturn. They are similar to an insurance policy that protects your investment. If the price of the underlying stock plummets, you will still have your right to sell a set number of shares at the exercise price. But if the market stays intact or swings upward and you decide not to sell, your premium is lost.
You should also know that call and put holders are owners of options contracts. They absorb minimal risk as there’s no obligation to buy or sell, regardless of market performance. Instead, they are free to exercise the option when they see fit.
By contrast, call and put writers are sellers of options contracts. Unfortunately, they’re exposed to more risk because they must follow through on their promise to buy or sell if the holder exercises their option.
Options Pricing
Options pricing refers to the process of determining the value of an options contract. There are several factors that can impact the price of an options contract. These include the underlying asset’s price, the option’s strike price, the time remaining until the option’s expiration date, the option’s implied volatility, and the risk-free interest rate.
One of the most widely used methods for calculating the price of an option is the Black-Scholes model. This model takes into account the aforementioned factors to determine the theoretical value of an options contract. Other methods for pricing options include the binomial model and the Monte Carlo simulation.
Keep in mind that the price of an options contract can fluctuate significantly over time, and may be affected by a variety of market conditions. Therefore, options traders should carefully consider the potential risks and rewards of their trades and use appropriate risk management strategies.
Risks and Rewards of Options Trading
Options trading can be a complex and risky endeavor, but it can also provide the opportunity for significant profits. It’s essential for investors to understand the potential risks and rewards involved to make informed decisions and manage risk effectively.
One way to minimize risk when trading options is to use investment strategies like spreading. This involves buying and selling options at different strike prices and expiration dates to offset potential losses.
Another investment strategy is to use stop-loss orders. They allow you to set a certain price at which your trade will be automatically closed to prevent further losses.
Additionally, you should diversify your portfolio and not rely too heavily on options trading. That way, if one trade doesn’t work out, you won’t be left with all your eggs in one basket.
Investors can maximize their profits and minimize risks by understanding options trading and implementing risk management strategies.
Getting Started with Options Trading
Getting started with options trading requires more than a simple phone call to a broker or an online purchase. It demands a proactive approach and thoughtful preparation to set the stage for your trading activities.
Step 1: Select a Brokerage Firm
Like it or not, you’ll have to work with a brokerage firm to get screened and cleared to trade options. But don’t just settle for the first broker you find. Shop around and carefully analyze your options before making a decision. Remember, they’ll be evaluating your experience, so you should do the same.
Do a little research to determine if they’ll be a good fit. Pay attention to consumer reviews, services they offer, costs or commissions structure, account minimums, and educational resources they offer, just to name a few.
Furthermore, inquire about educational resources, including self-guided online courses and webinars, along with telephone, virtual, and live support designed to help you identify and understand the most strategic routes when trading options.
Finally, feel free to ask questions as they arise to ensure you have all the information you need to make a well-informed decision. The more access you have to support staff, the better.
Remember, it’s your hard-earned money that will be used to buy options, so you want to make sure you derive the greatest benefit in exchange for your investment.
Step 2: Get Screened
Once you’ve selected a brokerage firm, the next step is to get screened. This is a prerequisite to being assigned a trading level. Before screening can begin, the broker will want to get an understanding of your investment goals and which types of options you’re most interested in. They will also inquire about your trading experience and will request additional information about your finances.
Your information will be compiled by the broker and analyzed to determine the optimal trading level. Levels range from 1 to 5 and will dictate the types of transactions you’re able to engage in.
Furthermore, you’ll need to maintain a minimum balance of $2,000 in your account at all times, per industry requirements. Additionally, purchasing a call option may mandate a margin account or line of credit to serve as security. Check with the brokerage firm to confirm minimum reserves and additional details regarding margin accounts.
Step 3: Start Trading Options
Now that you’re in the clear, you have to use your knowledge and judgment to make some critical choices that can boost or dent your wallet. Some important considerations:
How you think the stock will perform – Anticipating an increase in price? A call option is best as it allows you to turn a profit if the price surpasses the strike price within the window of time allotted by the option, and. In this case, you will be in the money. But if the market price drops below the strike price, you’ll be out of the money.
By contrast, if you already own shares and are expecting a dip in the price, you would purchase a put option. You’ll be in the money if the market price drops below the strike price, and out of the money if the market price ends up exceeding the strike price.
The length of the option – Stock options are only valid for a set period of time. Some options last for several days or months, while others span several years.
Optimal strike price – It’s difficult to determine where the stock price will end up, so you’ll have to make an educated guess regarding the strike price before purchasing an option.
Thinking the price of a share currently trading for $50 will increase to $75? Let’s assume you purchase a call option with a strike price below $75. (You want a call option that leaves a little wiggle room to account for the cost of the option). If the share price exceeds the strike price, you will be in the money or turn a profit.
Now assume you owned these shares and expected the share price to drop to $25? By purchasing a put option with a strike price that is above $25 and accounts for the cost of the option, you’ll be in the money if the price does drop below this point.
Bottom Line
Options trading is a sophisticated tool for seasoned investors, offering strategic depth to portfolio management. However, it’s not the sole method to mitigate risk or seek returns. Stock trading presents a more accessible alternative, with its direct approach and fewer entry barriers.
While options can leverage market movements and offer protection, they demand a solid grasp of market intricacies. In contrast, stock trading provides a straightforward path to investment growth. Choosing between them depends on your risk tolerance, investment goals, and willingness to explore market complexities.
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 isn’t just an economic term; it’s 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 isn’t just a buzzword; it’s the driving force behind significant wealth accumulation.
Whether you’re just starting or looking to expand your portfolio, understanding the role appreciation plays can mean the difference between mediocrity and staggering success.
Now, let’s 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, you’re 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 asset’s journey from ‘worth X’ to ‘worth X and beyond’. 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 role—if more people want it and there’s 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 isn’t a given; it’s 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 fortress—it 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. It’s 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 won’t miss out when the next big appreciating asset comes knocking.
Top 5 Appreciating Assets You Must Own
#1 – Stocks with High Growth Potential
Stocks are the daredevils of the investment world, particularly those brimming with high growth potential. They’re 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 this—their growth over the decades has turned modest investments into fortunes.
Investing in high-growth potential stocks is like spotting a gem in the rough – 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 – ETFs to Streamline Investments for Optimal Performance
Exchange-Traded Funds (ETFs) are the investment world’s 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. They’re especially game-changing for those who prefer a “set and forget” 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.
They’re 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 – 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. It’s 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 – 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 it’s 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 – Your Own Business: Betting on Your Entrepreneurial Spirit
Your own business isn’t just a job, it’s 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 business’s value can significantly increase over time, making it a formidable asset in your net worth.
Owning a business is not just about the profits; it’s a journey of personal growth, resilience, and the triumph of turning passion into paychecks. It’s 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 it’s 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 investor’s 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 “digital gold” 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 strategies—a 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; they’re 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 aren’t just the treasures of lore—they’re 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 Capital’s Role in Shaping Future Wealth
Venture Capital (VC) is the financial catalyst that turns innovative startups into tomorrow’s 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 isn’t merely about capital gains; it’s 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 don’t 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; they’re 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 life—from 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 – 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 you’re effectively acting as the bank.
It’s 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. It’s 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.
It’s 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 you’re holding onto a depreciative asset, it’s 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.
It’s a strategic financial dance — 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 don’t 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, it’s vital to practice saving diligently—consider 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. “Rare Portrait of George Washington Could Fetch $2.5 Million at Auction.” 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. “A $7.5-million find: Overlooked Getty estate sale map turns out to be 14th century treasure.” 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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More importantly, did I answer the questions you have about this topic? Let me know in the comments if I can help in some other way!
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Knowing your risk tolerance is an important factor in investing. Some investors are willing to take big risks with the potential for big rewards. Others prefer to minimize their losses, even if it means smaller returns.
Determining what type of risk taker you are by taking our risk tolerance quiz can help you decide how best to invest your money. The stock market can be volatile, and the assets and allocations you choose should be those that make you feel comfortable personally and financially — especially for the inevitable dips in the market.
What Investment Risk Tolerance Is
When it comes to investing, understanding risk tolerance involves the following three factors:
• Your risk capacity: This is your ability to handle risk financially — the amount of money you can afford to lose without impacting your financial security. How close you are to retirement and the financial obligations you have will affect your risk capacity.
• Your needs and wants: These are your goals for your finances and your lifestyle. For instance, maybe you want to retire soon or save up for a down payment on a new house.
• Your emotional risk IQ: This is about your personality and how you see risk. You might be a thrillseeker who likes to live on the edge. Or perhaps you prefer a sure and steady approach.
💡 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.
Risk Tolerance Quiz
Take the risk tolerance quiz below to find out, then read on to learn about the best investment strategies for your investing style.
What Your Risk Tolerance Means
Now that you know whether your investment style is conservative, moderate, or aggressive, you can dig a little deeper to understand what’s driving your specific risk tolerance.
First, of course, there are the goals you’re saving and investing for. Is it retirement? A down payment on a new house? Sending your kids to college? Where your money is going will make you more or less willing to take risks for the potential of higher returns.
Your time-frame is another major factor. If you plan to retire in a few years, you have less time to recover from possible losses, so you’ll likely take a conservative approach to investing. You need your money to be there so you’ll have income to live on in your golden years.
But if you’re a newbie investor in your 20s, you have decades ahead of you with plenty of time to recoup any losses. In that case, you may be more aggressive with your investments to try to maximize your returns. And if you fall someplace in the middle of these two groups, time-wise, you might favor a more moderate investing strategy that balances risk and reward.
Your income is also very important. If you expect your income to grow, you may feel freer to take risks. But if your income is uncertain — maybe you’re a freelancer, for instance — or you don’t anticipate your salary to grow, you might be much more cautious with your money.
Finally, there’s your temperament. If you invest in stocks, for example, are you going to be filled with anxiety every time the market dips? Or are you more or less unflustered by swings in the market?
Thinking about these different factors can give you some insights into your feelings about money.
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Finding Investments That Match Your Risk Tolerance
With this new knowledge in hand, you can invest your money in a way that makes sense for you and the amount of risk you feel comfortable with. These are some scenarios you might want to think about, depending on your investment style.
• Conservative: A conservative investor may opt for a portfolio that mainly consists of funds that tend to be stable and lower risk, such as money market funds and government bonds.
• Moderate: An investor who takes moderate risks might choose to balance their portfolio between riskier assets like stocks and more stable investments like money market funds and bonds.
• Aggressive: This type of investor will likely gravitate to assets with a high potential for return, but also a higher potential for volatility and loss, such as growth stocks and options trading.
Whatever your risk tolerance is, it’s wise to diversify your portfolio across different asset classes including stocks, bonds, and commodities.
The Takeaway
Each investor has a risk tolerance level depending on their individual circumstances. A risk tolerance quiz can help you evaluate how much risk you should take.
That said, it’s vital to know that all investments come with some degree of risk. A conservative investor will likely feel better with lower risk investments, while an aggressive investor will typically look for assets with high growth potential, despite the higher risk they pose.
Once you have investments that suit your style and temperament, the better you may feel about your investment strategy. Just be sure to check your investments regularly to make sure they’re on target to get you where you need to be to meet your financial goals.
Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
Invest with as little as $5 with a SoFi Active Investing account.
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Contrary to popular belief, starting an investment portfolio doesn’t require a large sum of money. In fact, with just $500 or less, you can easily kickstart your investment journey in the stock market.
12 Best Ways to Invest $500
If you’re looking for other ways to invest, but don’t have much cash, here are twelve of the best ways to invest $500 or less.
1. Micro-Investing
With micro-investing, even those with limited disposable income can join the game, starting with as little as $5. Ideal for college students or novice investors, there are a multitude of micro-investing apps available, many requiring an initial investment of $500 or less.
These user-friendly platforms offer a simple way to dip your toes into the investment world. Check out these five top micro-investing apps to start your journey today.
Robinhood
If you’re a beginner investor, Robinhood is an excellent choice. Unlike many other platforms, Robinhood has no minimum balance requirement and doesn’t charge any fees for trading.
It is also very easy to use the app. Additionally, Robinhood stands out among micro-investing platforms, offering the ability to trade in a wide range of assets, including full stocks, mutual funds, options, and cryptocurrencies.
To find out more, read our comprehensive review of Robinhood.
Stash
Stash accommodates the needs of a diverse range of investors. Upon signing up, you’ll take a quick survey to assess your risk tolerance, allowing you to determine the amount and frequency of your investments.
With Stash, you also have the power to select the industries and companies you want to invest in. For example, if you’re passionate about sustainability, you can easily choose to invest only in eco-friendly organizations.
Acorns
Investing made simple and affordable – that’s what Acorns offers. Signing up is a breeze, with no minimum balance required, and the low monthly fee of just $1
Once you’ve joined, simply connect your Acorns account to your credit or debit card. Every time you make a purchase, the app will round up the amount to the nearest dollar and automatically invest that change once it reaches $5.
Betterment
For those who want to be hands-on with their micro-investing, Betterment may be the answer. The platform takes care of the investing for you, while also giving you the option to work with a financial advisor and have a say in your investment portfolio.
Signing up is easy, with no minimum balance required for its basic plan. However, it’s important to note that Betterment charges a 0.25% monthly fee on your investments.
2. Exchange-Traded Funds (ETFs), Mutual Funds, or Index Funds
For those looking to invest $500, exchange-traded funds (ETFs), mutual funds, and index funds are all great options. ETFs offer a basket of securities that can be exchanged on the market, just like a stock. You can find plenty of online brokers that offer a wide selection of commission-free ETFs.
Mutual funds are managed by a professional broker and aim to beat a given stock market index, while index funds are designed to match the index and grow from there.
All three types of investments have low expense ratios, low fees and commissions, and offer broad, diversified exposure to the stock market.
See also: ETFs vs. Mutual Funds: What’s the Difference?
3. Buy Bitcoin
For some, investing in cryptocurrency may be too risky and volatile for their taste. However, Bitcoin has had an average growth of over 100% per year for the past 12 years! In fact, if you had invested $500 in Bitcoin five years ago, you’d have approximately $90,000 today.
If you’re interested in getting into crypto, Coinbase is a great place to start. They’ll give you $10 in free Bitcoin when you buy or sell $100 or more in crypto. Coinbase also offers ways for you to earn up to $32 worth of crypto for free.
See also: 5 Best Ways to Buy Bitcoin With a Bank Account
4. Open a Roth IRA
It’s never too late to start planning for retirement, and a Roth IRA might be the way to go. With this retirement savings plan, you contribute after-tax money to an investment account, which you can then withdraw tax-free when you reach retirement age.
However, there are a few things to keep in mind before opening a Roth IRA. An individual retirement account (IRA) is meant for long-term savings and withdrawing the money before you turn 59 and a half may result in penalties. If you anticipate needing to access the funds sooner, consider exploring alternative options.
5. Start an Online Business
If you’re looking for an unconventional way to invest your money, why not try starting an online business? Traditional brick-and-mortar businesses require a lot of capital to get up and running, but the same cannot be said for an online business.
You won’t need office space, a warehouse, or expensive equipment. In all likelihood, you won’t need to invest $500. It will cost much less than that. Here are some popular online business ideas:
Starting and monetizing a blog
Selling things on eBay or Craig’s List
Selling services like freelancing writing, editing, or graphic design
Opening an e-commerce store
Buying items and flipping them for profit
6. Use Robo-Advisors
Investing your money with a robo-advisor might be a smart choice. A robo-advisor is a user-friendly online investment platform that creates a tailored and diversified portfolio for you based on your answers to a questionnaire.
Although robo-advisors have limited services compared to working with a financial advisor and do not offer personalized advice, they have low fees and make investing with as little as $500 in the stock market accessible. Additionally, robo-advisors offer multiple investment options, including:
Roth IRAs
Traditional IRAs
Solo 401(k)s
Taxable accounts
7. Open a High-Interest Savings Account
If you’re still exploring your options and not ready to invest yet, consider opening a high-yield savings account. The best high-interest savings accounts currently pay about 3% to 5% in interest.
While the returns may not match the potential gains of the stock market, having a savings account serves as a solid backup plan and provides peace of mind for the future. Don’t let your funds go to waste – take advantage of this secure and profitable opportunity.
8. Open a High-Yield CD
A high-yield certificate of deposit (CD) is a low-risk investment option that offers a higher rate of return compared to traditional savings accounts. CDs work by allowing you to deposit a fixed amount of money for a set period of time, typically ranging from a few months to several years. In exchange for this commitment, the financial institution offering the CD agrees to pay you a higher rate of interest compared to traditional savings accounts.
Opening a high-yield CD with $500 or less is a straightforward process that can be done through a bank or credit union. You simply choose the term length and deposit amount that works best for you, and the institution takes care of the rest. As your money grows over time, you’ll earn a higher return on your investment compared to traditional savings accounts.
Just remember that CDs typically have early withdrawal penalties. So, make sure you’re comfortable with the term length and the amount you’re depositing before opening an account.
9. Invest in Real Estate Crowdfunding
Investing in real estate is not limited to traditional methods, even with just $500. A prime example is real estate crowdfunding via platforms like Fundrise.
Fundrise provides investment opportunities in both commercial and residential properties with a minimum investment of just $10. This eliminates the requirement for a large capital investment, making real estate investment accessible to a wider range of individuals.
Check out our in-depth Fundrise review.
10. Pay Down Your Debt
Reducing debt is a sound investment for securing your future, particularly concerning high-interest credit card debt. The Federal Reserve reveals that the average credit card interest rate can be as much as 15% or higher, with a low credit score only driving the APR to even more astronomical heights.
Think about it, if your APR is at its highest, you may be shelling out hundreds of dollars each month just in interest charges. But by focusing your efforts on paying down your debt, you stand to save yourself not just money, but countless headaches in the coming year. With the possibility of freeing up thousands of dollars, it’s an investment worth making.
11. Try Peer-to-Peer (P2P) Lending
Peer-to-peer lending offers a unique twist on conventional lending methods. Rather than seeking loans from traditional banks, borrowers turn to platforms such as Prosper, connecting with investors like yourself.
By participating in P2P lending, you have the opportunity to generate a steady monthly income by lending funds to individuals or businesses. The added bonus? The money you earn is deposited directly into your account, providing a convenient and hands-off approach to investing.
12. Invest in Your Financial Education
Investing in your financial literacy may be the most valuable investment you’ll ever make. For a nominal fee of just $5 to $15, you can access top-notch personal finance books or audiobooks that can transform your financial future.
Take “Rich Dad Poor Dad” for example, available on Amazon for as low as $6.82 for the Kindle edition or $11.36 for the paperback. And if audiobooks are more your style, a month of Audible membership costs only $14.95.
You can expand your knowledge on real estate investing, stock investment strategies, and fundamental money management skills to help you get out of debt and attain financial independence.
And if reading isn’t your preferred method of learning, there are plenty of affordable online courses available. With so many options, it’s remarkable how much financial education you can gain for less than $500.
Frequently Asked Questions
What is the best way to invest $500?
The best way to invest $500 depends entirely on your personal financial status and objectives. If you’re just starting out investing, consider investing in a low-cost and diversified mutual fund or ETF. These investment vehicles offer the advantage of spreading your funds across a range of stocks and bonds, mitigating the risk associated with any single investment.
Other options to ponder include setting up a Roth IRA or investing in a high-yield savings account. The choice that works best for you ultimately hinges on your risk appetite, investment timeline, and financial aspirations.
Is it possible to invest $500 in stocks?
Absolutely! With just $500, you can venture into the world of stock investing. Micro-investing apps provide the opportunity for you to invest in individual stocks or opt for an ETF that follows a particular index.
It’s crucial to conduct thorough research and seek the guidance of a financial advisor to determine the best investment strategy that aligns with your unique circumstances.
Is it worth investing $500 in a robo-advisor?
Investing your $500 via a robo-advisor can be a wise decision. These digital platforms leverage algorithms to manage your investments, offering a more passive investment strategy.
Furthermore, robo-advisors tend to be more economical than human financial advisors, making them a fantastic choice for individuals seeking to initiate their investment journey.
What are the risks of investing $500?
Starting your investment journey with just $500 can be a smart move. However, it’s important to keep in mind the inherent dangers that come with investing.
Remember, no investment is entirely risk-free and there’s always a chance of losing your funds. To ensure you make an informed decision, conduct thorough research and consult a financial expert who can guide you towards the best option suited for you.
Bottom Line
We hope that this article has demonstrated to you that investing can be simple and accessible, even with a limited budget. You can start investing immediately with a modest amount of funds. If you’re not quite ready to invest, consider paying off high-interest credit card debt, increasing your income, and establishing an emergency fund.
The investing information provided on this page is for educational purposes only. NerdWallet, Inc. does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks, securities or other investments.
Welcome to NerdWallet’s Smart Money podcast, where we answer your real-world money questions. In this episode:
Learn investment and tax strategies to help you achieve financial security and prepare for a prosperous retirement.
How can you balance saving for emergencies and investing for the future? What strategies can you employ to maximize your tax benefits and build a secure financial future? NerdWallet’s Kim Palmer and Alana Benson discuss investment strategies and tax planning to help you understand how to navigate your financial journey effectively. They begin with a discussion of investment strategies, with tips and tricks on understanding different investment accounts like 401(k)s and IRAs, leveraging compound interest, and the importance of starting investments early. Then, Alana discusses tax planning and filing in-depth, covering the intricacies of different tax forms like W-4s and W-2s, the significance of estimated taxes for freelancers, and strategies for managing capital gains taxes.
Kim and Alana delve into retirement planning and the challenges of active versus passive investing. They provide a framework for prioritizing your finances, emphasizing the creation of an emergency fund, taking advantage of employer 401(k) matches, and understanding the role of asset allocation based on age and risk tolerance. Additionally, they tackle the decision-making process in personal finance, such as choosing between paying off debt and investing, and the pros and cons of having a financial advisor.
Check out this episode on your favorite podcast platform, including:
NerdWallet stories related to this episode:
Episode transcript
This transcript was generated from podcast audio by an AI tool.
Sean Pyles:
Hey listener, we’ve got a special episode in store for you today. Our investing and tax Nerds recently hosted a webinar going deep into how you can level up your investing and tax strategy. So we packaged that up into a podcast episode for you. The Nerds talk about what you need to know about different investing accounts, how to get help with your taxes and more. So here’s the webinar.
Kim Palmer:
Welcome everyone. I am Kim Palmer. I’m a personal finance writer at NerdWallet where we help people make smart decisions. One important note, we are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances. NerdWallet Inc is not an investment advisor or broker and does not provide personal financial advisory services. Today we are excited to talk to you about the basics of investing and taxes and we think we have some helpful info to share with you. You can always find more at nerdwallet.com or on the NerdWallet app. Our goal today is to kick off a helpful discussion about investing and tax information and tools. Alana Benson writes about investing topics including stocks, funds, and ethical investing. And now I will hand it over to Alana.
Alana Benson:
Thanks Kim. Hi everyone. Thank you for joining us today. So before we start, I just want to say a couple of things that often get forgotten when we’re talking about investing. So first, investing usually comes second to some other goals. If you’re having a hard time paying for necessities or you don’t have an emergency fund, it’s really important to focus on those things before we even start worrying about investing. Second, instead of scrimping, try to increase your income. So I didn’t start investing until I was in my late 20s, and that’s because one, I didn’t work at NerdWallet yet, so I literally didn’t know anything. And two, I was making around $25,000 a year, so I didn’t have much expendable income. And when you don’t have extra income, it’s really hard to prioritize investing and it just might not even be a good idea to do that.
When I started making more money, it was suddenly a lot more possible for me to invest for retirement. So if it’s possible for you and you want to be investing more, look for jobs that will pay you more or look into side hustles, but cutting back on your streaming services probably will not save you enough money for retirement. And finally, if you don’t have the money to invest now, that’s totally fine. Some people have serious money anxieties and others just don’t have the cash. Whatever your reason is, don’t stress too much about it. Just keep learning and when you’re able to, you can start investing. So why do we invest? What is the point of all this? And the answer is that it’s because we like money and that’s okay. There’s no shame in admitting it, I like money, most people like money. It’s because money isn’t just money. It’s not like Scrooge McDuck diving into pools of money and buying Maseratis. It’s not that.
It’s about not being stressed about your money all the time and it’s about being able to buy everything that you need and some stuff that you want comfortably without having money stress take up all of your energy. Money allows us to thrive instead of just survive and investing helps you make more money than you could ever possibly make just by working at a job. So okay, what actually is investing? This whole process is very strange. Okay. Investing is the process of money that you already have making additional money for you. And this works through what’s called compound interest. Compound interest means that your gains get a little bit bigger every year and that’s also why starting when you’re younger gives you a huge advantage and more money in the long run. So for example, you just start at that little number one in the box up there. Say you buy an investment for $100, if it goes up the average stock market return of 10%, it could then be worth $110, meaning that you’ve made $10.
Then that $10 that you earned also starts earning compound interest on top of the $100 you initially invested. That doesn’t sound like much of a profit, but imagine if you were doing it with way larger amounts of money over a way longer period of time. Now that 10% is an annualized rate, which means that you’re not going to get 10% every single year. In all likelihood, some years you’re going to finish up, some years you’ll finish down. But over the course of decades when you average all that out, you tend to get about 10%. The way you actually start investing is through an investing account. And there’s a couple of different types, but the type of investment account you have is actually really, really important because a lot of them have some pretty significant tax benefits that you want to take advantage of. So you’ve got your 401(k)s and these are offered through your employer. You add money to it and sometimes your employer matches it. So it’s basically free money. If you have a 401(k), you’ll likely choose your investments from a pre-selected list or a fund that will automatically adjust itself over time.
So this means 401(k)s are typically very hands off. IRAs on the other hand are investment accounts that you open up yourself. IRAs can be opened online through brokerages and actually at a lot of large banks, they also do that. So it’s likely you can open up an investment account just through your bank. Unlike with a 401(k), IRAs you’ll have to choose your own investments in those accounts. You may have heard about a thing called a Roth IRA or a Roth 401(k) and it’s good if you know the difference. So with a Roth, you pay taxes on your money now just like any other money that you earn and then the money you have invested inside that account grows tax-free and you can take it out tax-free in retirement. With a traditional IRA or 401(k), the money you contribute today is pre-tax.
So that is you get to deduct it from your income taxes this year. So it’s like a nice little treat this year, but then when you cash it out in retirement, you’ll owe income taxes on it. This is really, really important. I’ve seen a lot of people make this mistake. Your investment account is not an investment, so a Roth IRA, a 401(k), not an investment. So if you have a Roth IRA, that’s great, but that doesn’t mean you’re actually invested in anything. So you fund your investment account and then you buy investments from there. But I’ve heard of people opening a Roth IRA, putting in a bunch of money and then wondering why it didn’t grow over the last 10 years. So you have to purchase investments for your money to actually grow and if you don’t do it, you’ll miss out on all of those years of growth, so very important.
And there’s a couple different types of investments that you can choose from once you open and fund your investment account. So you’ve got stocks, I’m sure everyone’s heard of that, these are shares of ownership in companies and the way you make money from them is if they go up in value and some pay you a cut of the company’s profits on a regular basis. Then you’ve got bonds. This is when you loan money to companies or the government and they pay you interest. Funds, now these are very exciting because they’re basically just baskets of stocks and bonds that you buy all at once. So a fund is still a stock or bond based investment depending on the type of fund that you get. And there’s a lot of different kinds such as index funds or exchange traded funds and mutual funds, but they’re all collections of investments that you buy at one time.
And I think funds are pretty awesome because if you own a stock and that company goes out of business, you lose all of your money. But if you invest in a fund that covers 100 stocks and that same stock goes out of business, your investment is buoyed up by the other 99 companies. So again, all of these investments, stocks, bonds and funds, you buy them from your investment account and then you own them in there. All right, so let’s talk about the stock market, it’s this weird nebulous term that’s hard to understand. But the stock market is just where people buy and sell investments, but now people just trade investments online. So the stock market is made up of several what are called market indexes. Now these are basically just predetermined lists of companies and the performance of that overall list can tell us a lot about the health of the US economy.
So for example, the S&P 500, something you probably have all heard of, that’s just the list of 500 of the largest publicly traded companies in the US and it includes companies like Apple and Amazon. So when we say the stock market is down today, that means that on average most of those companies aren’t doing well. And you can’t invest in the literal stock market, but you can invest in funds that include all the same investments. So these are called index funds because they track a market index. So again, if you have an S&P 500 index fund, it should perform pretty closely to how the S&P 500 itself is actually performing. The S&P 500 goes up 10% a year on average and 6.5% after inflation. And this is just an average, so some years the market goes up more, some years it goes down less, but when done well, investing can potentially mean doubling your money every few years for doing basically nothing, which is my favorite way of earning money, by doing nothing. It’s great.
So let’s talk strategy. This is all about the way that you invest, when you put your money in and when you take your money out. So passive investing is where you buy that S&P 500 index fund and you keep adding money into it until you retire. It’s very boring, but it’s effective. So it can give you that 10% return on average over the long haul, but a lot of people want to make more than that 10%, and they do so by actively buying and selling stocks, crypto options and other high risk investments. They try to predict when they’ll be low, then they buy them and then they turn around and try to sell them when they’re high. So these people are called active traders or day traders. Only 20% of active traders make money over a six-month period. That is not a lot of people.
There have been a lot of studies over the years that show that active investing is a way less lucrative fashion than boring old passive investing with that index fund. Plus active investing is a lot more work, you have to do all kinds of research and you keep an eye on the markets and you can hypothetically earn more by actively trading versus passively earning the same amount as that historical return of 10%. But most people end up making less when they actually try it, and that’s because people are really bad at predicting things. And in order to make money on the overall stock market over the long term, you have to be really good at predicting things all the time. So maybe you make it big on one stock, but the odds of that happening again and again are very low. So let’s put all of this information together, the accounts, the actual investments and the strategy.
Here’s how financial advisors suggest you prioritize your money when you’re starting to invest. So the first thing you want to do is you’re not actually going to invest at all. The first thing is that you’re going to have an emergency fund. So this is money that you won’t actually put in the stock market, and that’s because when your money is invested, its value can change day by day. So say you have $1,000 and you want to use it for an emergency fund, but you invest it, when you have to fix something on your car suddenly, you go to check your money and its value could be $600 instead of $1,000 and that’s not good. If you put it in a high yield savings account, you can access that money at any time without risking its value. Plus right now the interest rates are really high.
So your money could be earning 4 to 5% just by sitting there. So next, you want to get that 401(k) match if it’s available to you because it’s free money. After that, it’s a good idea to look into IRAs. Both IRAs and 401(k)s have what’s called a contribution limit, which is just the maximum amount of money you can put in each of them every year. If you’re able to max out an IRA, then it’s a good call to move back to your 401(k). And the reason you switch around like that is because of the way the tax benefit works. So it’s likely more beneficial to invest in an IRA over a 401(k) if you’ve already gotten your match, if you have to choose between the two. Then if you max out your 401(k), you can move to a standard brokerage account. And this is not a list of everything you have to be doing right now.
You might be thinking, “Whoa, maxing out an IRA is $6,500, I cannot afford that”, and that is totally fine. So I like to picture it as a waterfall. So when you fill up your emergency fund, then you can start working on getting that 401(k) match. Only after that bucket is full should you then move on to investing in an IRA and so on. And wherever you’re at in your bucket filling journey is okay. It’s just nice to know what to do next when you’re ready for it. So we already talked about what accounts to invest from and the investments you can buy, but then do you just start buying a bunch of index funds or stocks or bonds? How do you know how much of each investment to get? And that is all about risk tolerance. And to understand that we have to understand how risk works over time.
If you’re investing for retirement and you’re in your 20s now, that means you have a ton of time for your investments to grow and then drop dramatically and then rise back up. So financial advisors would say you can afford to take on a bit more risk, AKA invest in riskier investments, because you have time for your investments to bounce back. Now, if you’re investing for your retirement and you’re 65, you don’t want to risk all the money you’ve been investing for years and years because you’re going to actually need to use it to pay for stuff in retirement pretty soon, so you want to protect it. And figuring out how much of each investment you should have is a fancy term called asset allocation, but it just means how much of your portfolio is in which of these investments.
And age is just a number, but typically when you’re younger, you may be able to afford to take more risk because you have more time for the stock market highs and lows to even out. So stocks, and okay, remember index funds and mutual funds are often made up of stocks so those count too, but those tend to carry more risk than investments like bonds. And an example of a 20-year-old’s investment portfolio, which includes all of your accounts so your 401(k), your Roth IRA, all of that together, that could be 100% stocks. And that’s fairly risky, but those 20 year olds are not going to retire for a long time. Now, a 65-year-old might have way more bonds because they don’t want to risk all that money they’ve earned over time. And one thing some investors do to mitigate risk is to slowly shift their asset allocation from high risk investments to low risk investments over time.
And again, I’m not a financial advisor and this is not personalized investment advice, but how much of each investment it’s good to have will usually depend on how much risk you are willing to take. And an investment portfolio can be really simple or really complicated. So you could have that one S&P 500 index fund and you purchase it from a Roth IRA, and that’s just all you do. Just if you want to keep it really simple or you can make it more complicated. So maybe you explore several stock-based funds such as international stocks and healthcare stocks and technology stocks, and you could invest in those types through a fund. So instead of buying 30 technology stocks, you just have one technology stock fund, then a small slice in bonds, and then an even smaller slice is crypto or other high risk investments. Though financial advisors have varying opinions on the safety of crypto.
So keep in mind, this is just an example and not necessarily what you should do personally, but it is really helpful to look up asset allocation portfolios through an online brokerage and see what they recommend for your specific age and when you plan on retiring. You can also talk with a financial advisor who can help guide you through those decisions. And investing is great because it can help you earn wealth, which you could spend on a boat, but more than likely one of your biggest investing goals will be retirement. And the sad truth is that in some things like retirement, they just cost so much that you’ll probably never afford them just by putting money in a savings account. And that’s why we say we have to invest for retirement. And the truth is that most people just aren’t saving enough for retirement.
So you’ll probably have a lot of expenses and you have to pay for that in retirement and some of it’s necessary like food or housing or medical care and some of it is travel or bucket list stuff, but you may not be working anymore or at least not as much as you were. And once you factor in inflation, it’s likely that a dollar today will be worth way less when you’re in retirement. And saving for retirement has gotten even more difficult because you can’t necessarily afford to live on social security. Medicare doesn’t always pay for your health needs and pensions aren’t really as common as they used to be. And because of all this, it’s really important to start investing for retirement sooner rather than later.
And if you’re early in your career, it might seem silly to worry about retiring right now, but if you start investing sooner, you actually spend less on retirement than if you start investing later in life overall and that’s because of compound interest. So our retirement calculator shows that if you start putting away $100 per month, that could grow to nearly $400,000 in 35 years. And it’s always good to know how much you should be trying to invest. When you have a long-term goal in mind, you want to know what that number is. So a retirement calculator can be a big help to figure that out, including NerdWallet’s retirement calculator. No shame, I’m going to plug it, but some financial advisors recommend saving 15% of your pre-tax income for retirement. So okay, let’s break that down. What does that look like?
So if you make $100,000 a year, again just because easy math, that would be $15,000 annually that you’re trying to save for retirement. But if you had a 5% match on your 401(k), you’d already be saving $10,000 a year between the $5,000 you make and the $5,000 your employer puts in. And then if you contributed another $5,000 to your Roth IRA, you’d already meet your target goal of saving $15,000 a year for retirement. You should also think about how much you can make during those peak earning years. If you’re younger, what career are you looking to have? You can look up what those wages tend to look like on a site like Glassdoor or ask someone in your life who is in that career path, and maybe do that tactfully because you’re asking about money. But figuring out what you want to be when you grow up may not be something you want to think about right now.
But to be honest, I studied English in college and no one told me about my job prospects. I figured that I would have to write a super famous book or be a teacher and you don’t have to have everything figured out now, but it doesn’t hurt to see how much a potential field could earn and figure out what careers are open to you. And just keep in mind that relationship between your earnings and investing like we talked about in the beginning. And if you’re later in your career, it is harder to take advantage of compound interest, but some of those investment accounts have those catch up contributions that we talked about so you’re able to contribute more after a certain age. Thank you all so much for listening to me talk very fast for a long time, and now I will hand it back over to Kim to talk about taxes. Thanks so much.
Kim Palmer:
Great, thank you so much, Alana. That was great. Someone actually asked in a pre-submitted question, “Why do I have to pay taxes?” Well, here is why. Taxes are used to pay for a lot of different things like clean water, roads, schools, healthcare, and the military. And your tax return is due every year in mid-April to the IRS. We’ll talk a little bit later about what to do if you need an extension, but in general that is the deadline. But first, let’s back up a little bit. When you file taxes, there is so much paperwork. One really important one is the W-4. That is the document that your employer asks you to fill out when you start a new job. And it plays a really big role in telling your employer how much in taxes to take out of each paycheck. It asks you things like your filing status, dependents, how much tax to withhold, and if you get a really big tax bill or a big refund, then you might want to go back and revisit your W-4 just to make sure you’re withholding enough but not too much.
There’s also the W-2, which is a document that your employer sends you to summarize how much in total they took out of your paycheck the previous year, and you’ll need to reference all those numbers when you file your tax return. If you are self-employed or you work a side hustle, then taxes won’t be automatically withheld from your paycheck, and that means you might have to pay something called estimated taxes, which is typically four times a year. In January, you’ll get something called a 1099 form that outlines how much money any company paid you, and then you’ll use that information when you file your return. And then finally, the 1040 is the main form you use when you file taxes, and we’ll drop a link in the chat for more about that. Okay, so you have all of your forms set. How do you actually file your taxes?
You can do it yourself through the IRS. You can use an online tax prep software or you can use a tax professional like an accountant or a tax preparer. If you do it on your own, you can either use paper forms or get access to brand name tax prep software through an IRS service called Free File. But it’s important to know that only people who make below a certain income qualify for the Free File program. If you use tax software like TurboTax, H&R Block or NerdWallet Taxes powered by Column Tax, many of these providers use a Q&A style to help you do your taxes and some even offer paid upgrades that connect you directly to a tax professional. If your finances are really complicated and you want some extra help, then you can also work with a tax preparer such as a certified public accountant.
You do want to make sure to ask them lots of questions and check their credentials before you agree to share your financial information. And you also want to check to see if they have a prepared tax identification number, which is an ID that’s required for anyone who files tax returns for compensation. The US does not have a flat tax system, and that means that portions of your income can be taxed at different rates. There are currently seven tax rates for federal income taxes that run from 10% to 37%. And which tax rate applies to you depends on your income and your filing status. So you might hear people say, “I’m in the 12% bracket” or “I’m in the 22% bracket”, but being in a tax bracket doesn’t mean you pay that tax rate on everything you make. And in reality, people’s income can fall into several different tax brackets depending on how much they make.
Portions or chunks of your income are taxed at different rates and some of those different taxes are then added together. So for example, some of your income could be taxed at a rate of 10%, another chunk could be at 12%. The more you make, the higher the tax rate might be on some of your income. And depending on the state where you pay your income taxes, you might pay a flat rate or a progressive rate similar to the federal structure. A small handful of states have no state income tax. If you want to pay less, you can look for tax breaks. Tax credits and tax deductions are two tools that can help you potentially minimize your tax bill, but they do work in different ways. Tax deductions reduce your taxable income. As a simplified example, a $25,000 tax deduction on $100,000 of taxable income means that only $75,000 of that income will get taxed.
Tax credits directly reduce your tax bill by the value of their credit. So this means if you owe $2,000 in taxes and you’re eligible for a $1,000 tax credit, you’ll end up owing $1,000. Tax credits tend to be more valuable because they have the potential to pack a bigger punch, so you definitely want to try to take all the tax credits you qualify for, and you could even get money back if a credit is refundable. Common tax credits include the earned income tax credit, the child tax credit, the lifetime learning credit, and the American opportunity credit and savers credit.
All right, I alluded to this at the beginning, but what happens if you’re not going to be ready by mid-April? What do you do? If you know you won’t be able to file on time before tax day, you can file for a free extension with the IRS and that gives you until mid-October to file your return. But you want to make sure that at least 90% of what you think you’ll owe in April is covered by an estimated tax payment or your withholdings. Otherwise, the IRS can hit you with a penalty for late payment. The failure to pay penalty is really no joke. It’s 0.5% of your unpaid taxes each month your payment is late plus interest. If you file late and you did not file an extension, you could also get hit with a failure to file penalty, which is 5% of your unpaid taxes each month that your payment is late. There is some good-ish news, if you file late but you don’t owe anything, you won’t get penalized but that doesn’t mean you’re not still obligated to file.
If you don’t, the IRS could file a return on your behalf and you might miss out on a refund if you’re owed one. And if your tax bill is so high that you can’t pay it off, you do have options. You can set up a long-term or short-term payment plan with the IRS.
I know that was a whole lot of information and taxes can seem scary, but we break down lots of popular tax questions and terms on nerdwallet.com. We have some time to address some pre-submitted questions from the audience ranging from about Roth IRAs to the pros and cons of having a financial advisor. And I do want to give a reminder here as we answer these questions that we are not tax or investing advisors. We are writers who focus on these fields and what we say is not investing or tax advice. So with that said, let’s dive into these questions. A question that came to us in an email was: how do you choose between paying off credit card debt and investing in saving for emergencies?
I really love this question because I think it speaks to some of the biggest challenges of personal finance, navigating these choices. And the answer is it’s really up to you. Many financial advisors say that the first step is to create a starter emergency fund, and you can read more in our article that we’ll link to, Should I Pay Off Debt Or Save? And you’ll see most people think about saving $500 to $1,000 first and then after that to consider contributing enough to a workplace retirement plan if they have access to one, and then contributing 3% to 5% of income to an IRA or a Roth IRA. And then financial advisors say people can consider focusing on paying off high interest debt and amp up investing efforts once they have paid that off. And now Alana, I’ll turn over to you. Perhaps you can answer the questions about Roth IRAs.
Alana Benson:
Absolutely. So a couple folks were wondering, before we went over everything, what a Roth IRA is and how does it work and when is it worth it to open one? So we already covered this a little bit, but again, it’s an individual retirement account and it lets you contribute money that you’ve already paid taxes on. So think about when you get your paycheck. That money has already had taxes taken out of it. So once you hit age 59 and a half and you have held the Roth IRA for at least five years, you can withdraw your contributions and any earnings, which is a fancy word for money that you earn from investing, without paying taxes again. And whether it’s worth it is up to you, especially if you’re trying to decide between a Roth IRA and a traditional IRA because it’s about when you pay those taxes and if you have a traditional IRA, you do get that tax break right now.
So that’s a personal decision. But you can also take out money tax-free from your Roth IRA later in life. So if that’s something that you are really trying to parse out, it might be good to talk to a financial advisor because they can help you with that question. We had two other questions. The first one is: how do you calculate how much money to put in your Roth IRA if you make over the maximum amount? So we didn’t actually cover this, so Roth IRAs do have income limits, but there is something called a Backdoor Roth that lets you contribute money first to a traditional IRA, pay taxes on it and then roll that money into a Roth IRA. And then our last question is: what are the pros and cons of having a financial advisor and how do you find one?
This is such a good question. The pros and cons really depend on your situation. The catchall term ‘financial advisor’ is used to describe a wide variety of people and services, including investment managers, financial consultants, financial planners. First and foremost, you always want to verify a financial professional because financial advisor doesn’t require people to be vetted. Certain things like a certified financial planner or a CFP, those actually have a very high level of education and have a certification that you can verify online. So anyone that you are talking about money with, you want to make sure that you are vetting them. And some of these people can just talk to you about your finances and some of them can actually manage your investments for you if you want that. Financial advisors, depending on the kind that you choose, can be pretty expensive. A robo-advisor is like an AI version of a financial advisor.
You just set up an account for one and then they charge you a pretty modest fee. And based on your age and your risk tolerance, it will manage your investments for you. An online financial advisor can offer more services and you can actually talk to a human being, but those do tend to cost a little bit more. And then you could go to an in-person financial advisor, depending on their credentials, that might cost even more, but sometimes it’s really nice to talk to somebody that you know and you can grow that relationship with them over time.
Kim Palmer:
Great. Thank you, Alana. And I think, actually, I can squeeze in one more question that we received. How do taxes work with investment accounts? How much do we set aside so we aren’t surprised by a tax bill? Which is a great question. If you’re selling stocks from a brokerage investment account, then you should be aware of three words, capital gains taxes. Those are the taxes you’ll pay when you sell assets for profit. Assets that you have owned for more than a year are subject to long-term capital gains tax, and the capital gains tax rate is 0%, 15% or 20% on most assets. Capital gains taxes on assets held for a year or less are subject to short-term capital gains. If you regularly trade stocks or other investments, you might be subject to short-term capital gains.
Those profits are taxed as ordinary income based on your tax brackets, which we went over before. Your final tax bill depends on a number of different factors. If you don’t want to be surprised, estimate what you’ll owe using tools such as a tax calculator or IRS worksheets. If needed, consider setting aside enough to cover the tax bill or paying estimated taxes and as always, your specific situation will differ and we are not tax professionals. We hope that you enjoyed this webinar and learned something today. If you’d like to get even more clarity on your finances and continue learning with NerdWallet, consider signing up for an account with us at nerdwallet.com. Thank you so much for joining us.
Sean Pyles: And that’s all we have for this episode. To send the Nerds your money questions, call or text us on the Nerd hotline at 901-730-6373. That’s 901-730-NERD. You can also email us at [email protected]. Here’s our brief disclaimer. We are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances. This webinar episode was produced by Alikay Wood, Sheri Gordon, and me. We had editing help from Liz Weston, Sara Brink mixed our audio, and a big thank you to NerdWallet’s editors for all their help. And with that said, until next time, turn the Nerds.
Looking for a real estate side hustle? Whether you are looking for passive income ideas or if you are looking for a part-time job (or more!), there are many different real estate side hustles. I have done a few different real estate side gigs, and I know many people who have side hustles in this…
Looking for a real estate side hustle?
Whether you are looking for passive income ideas or if you are looking for a part-time job (or more!), there are many different real estate side hustles.
I have done a few different real estate side gigs, and I know many people who have side hustles in this area as well. To get started in real estate, you don’t have to spend a lot of money – there are several real estate side gigs that can be started even if you are brand new or are on a budget.
Key Takeaways
Real estate side hustles have a range of options from income generating assets to freelance opportunities to office jobs.
You can supplement your income with both short-term and long-term real estate strategies.
Finding the right fit depends on your availability, investment capacity, and financial goals.
Best Real Estate Side Hustles
Here’s a quick summary of some of the different best real estate side hustles:
House hacking: Buy a property, live in one unit, and rent out the rest.
REIT investing: An easy way to start investing in real estate with less capital.
Airbnb rentals: Rent out a spare room or an entire property on a short-term basis.
Property management: If you’re organized and good with people, managing properties for others could be a perfect fit.
Long-term rentals: Becoming a landlord can generate steady cash flow.
Fix and flip: Buy properties that need work, renovate them, and sell them for a profit.
Below, you will read the full list and learn more about each one.
1. House flipping
Flipping houses can be a good real estate side hustle if you like real estate and enjoy fixing things up.
When you flip houses, you’re basically buying homes, making them better with repairs and upgrades, and then selling them to make more money.
The first thing to do for a successful house flip is to find a property that can be made better, such as by looking for homes in neighborhoods that are getting better or have room to grow. Think about things like where it is, what the market is like, and the condition of the property.
Before putting money into anything, it’s important to carefully look at the finances. You’ll want to figure out how much it will cost to buy, fix, and keep the property, and think about things like the cost of materials, paying workers, getting a loan, and the costs while you’re fixing things.
To flip a house well, you need to make smart changes that make the property better, without spending too much, by concentrating on important areas like the kitchen and bathrooms, and fixing any big problems with the structure or safety.
Recommended reading: 10 Best Books on Flipping Houses To Make Money
2. Investing in REITs
Real Estate Investment Trusts (REITs) are companies that own, operate, or finance income-generating real estate. They are a way for you to invest in real estate without directly managing or owning properties.
An REIT is like a company that owns and takes care of real estate that makes money. They sell shares of this company to people, kind of like how stocks work.
When you invest in REITs, you can earn money from the real estate world without actually owning any property. So, if you don’t want to deal with being a landlord, this could be a good option. It’s way less work than owning property and handling it yourself.
You can even spread out your money and invest in different kinds of properties with REITs, like houses, offices, factories, and stores.
3. Getting a roommate
Getting a roommate in your home, whether that be a full-time roommate or renting out an extra room in your home short-term on Airbnb, can be a great real estate side hustle that doesn’t require very much work from you.
The earnings you can make from having a roommate depend on things like:
Where your home is (an expensive area? rural?)
The space you are renting to a roommate (for example, do they get their own bathroom? private entrance available?)
To find a roommate, you can share about it on your own Facebook page, put up an ad on sites like Craigslist, or make a rental listing on Airbnb. There are lots of places where you can let people know you’re looking for a roommate.
I have had many roommates in the past when I was younger and had a home with spare bedrooms. I would rent them out to long-term renters and people that we personally knew (such as friends and my sister).
Recommended reading: Tips For Renting A Room In Your House.
4. Airbnbs and vacation rentals
Turning your property into an Airbnb or other short-term rental can be a way to generate extra income. This is when you rent out your space, whether a full house, an apartment, or just a room, to travelers for short stays.
Before starting your Airbnb side hustle, be sure to:
Check local laws: Make sure short-term rentals are permitted in your area. There are many areas nowadays that are more strict when it comes to short-term rentals.
Understand the financials: Calculate potential earnings against expenses like mortgage, utilities, and maintenance.
Set up your space: Furnish and decorate to create a welcoming environment.
Market your rental: Use high-quality photos and create listings on rental platforms like Airbnb and Vrbo.
The amount you can earn can vary, with some hosts making around $5,000 to $10,000 a month or more, but this depends on factors such as location, rental type, and occupancy rates. Always plan for occupancy ebbs and flows – it’s part of the short-term rental business.
5. Real estate photography
If you’ve ever looked at a house listing and thought that the pictures looked awful, then this may be the real estate side hustle for you.
Real estate agents many times hire out for the photography side of selling a house, as they know and understand how important good pictures are.
Real estate photography is all about taking pictures of houses and spaces to grab the attention of people who might want to buy them. Real estate photographers might take pictures of the outside of a house, the backyard, the living room, attic, bathroom, and more.
You can start with the equipment you likely already have, like your smartphone, which can work well because phones these days have great cameras.
How you show a property can really impact a client’s chance of selling it. Your photos are not just pictures; they’re an important part of how the property gets advertised.
As you continue with this real estate side hustle, you might think about getting better equipment (like a real camera!), but for now, practice paying attention to details and getting better at taking pictures.
If you’re thinking about doing something extra to earn money in real estate, photography could be a great choice.
Recommended reading: 18 Ways You Can Get Paid To Take Pictures
6. Real estate drone photography
Drone pilots sell real estate photography services to help real estate agents showcase the properties they are selling.
When property listings include pictures from various angles and heights, it gives a different perspective compared to regular photos. This helps show aspects of real estate that traditional pictures might miss.
When you sell property photography services using your drone, you’re providing a valuable service to real estate companies that want to stand out in a crowded housing market.
Homes are increasingly being sold using drone photos, and it’s understandable because they can showcase the surroundings of a home. Also, potential home buyers can see the entire property and house through a drone picture, giving them a better understanding of what the home includes.
Recommended reading: How To Make Money With A Drone
7. Long-term rentals
A long-term rental is when you rent out a property for a long amount of time, usually six months to a year or even longer. An example would be renting out an apartment or house to a family to live in full-time.
Long-term rentals are different from short-term rentals like vacation homes or Airbnb listings. They are meant for people or families looking for a longer place to live.
A benefit of long-term rentals is the reliable and steady income they can give you. When you rent your property to tenants for an extended period, you set up a regular cash flow of rental payments. This stability can be especially nice for people who are looking for a dependable source of passive income.
Plus, it’s usually less work than a short-term rental, because you don’t have to clean the home every few days or find new people to rent out to.
Recommended reading: How This 34 Year Old Owns 7 Rental Homes
8. Buy and hold for long-term wealth
If you want to grow wealth through real estate, the buy-and-hold strategy is a way to achieve lasting growth. This means buying a property and keeping it for an extended period, benefiting from both its increasing value over time and the rental income it makes you over the years.
Some positives to think about with a buy-and-hold real estate side hustle include:
Appreciation: Over time, real estate often increases in value.
Rental income: It can provide a steady cash flow each month.
Tax advantages: Possible deductions can reduce your taxable income.
The buy-and-hold strategy requires patience and a willingness to handle market changes. It’s a long-term approach, not a quick one, but if you stay persistent, you can create an investment portfolio for future financial stability.
9. Notary services for real estate
If you want to get more into the real estate world without becoming an agent or broker, becoming a notary public can be a way to make extra money.
Many documents, including deeds, mortgages, and power of attorney, require notarization to be legally binding.
With a notarization license, you can provide an important service required for different real estate transactions.
Notaries are important because they help make sure that the people signing documents are who they claim to be to prevent fraud.
10. Rental arbitrage
Rental arbitrage is a way to make extra money in real estate without owning a property. You rent a place for a long time and then sublease it as a short-term rental using platforms like Airbnb.
Here’s how to get started:
Check local laws: You’ll want to make sure your city or state allows for short-term rentals.
Make sure the rental allows for you to do this: Not every rental will be okay with you renting it out. You will want to read your rental contract carefully.
Do market research: Understand the demand for short-term rentals in your target area, such as by looking for locations with high tourist traffic or business conferences.
Potential Benefits
Considerations
+ Strong cash flow potential
– Initial setup and furnishing cost
+ Low startup costs compared to buying
– Dependence on short-term rental market stability
Making money in rental arbitrage comes from the difference between the cost of the long-term lease and the income from short-term rentals. The bigger the gap, the more potential for profit. But remember to factor in the expenses of running the rentals, like cleaning and maintenance costs.
11. House hacking
House hacking is a strategic approach to real estate where you purchase a property with multiple units and live in one unit while renting out the others. This is a side hustle because it can help offset your living expenses through the rental income.
House hacking can be an easy starting point if you want to dip your toes into real estate investing with the added perk of reducing your personal living expenses.
Back when we were living in a traditional house, we house hacked for a little while and had a few different roommates live with us. The monthly rent we collected allowed us to lower our house payments and put more money in savings.
We house hacked with our first house, and it was really great for us. Being able to set more money aside even helped me get ready to quit my job to become a full-time blogger.
If you are looking for a good book on the subject of house hacking, then I recommend reading The House Hacking Strategy: How to Use Your Home to Achieve Financial Freedom by Craig Curelop.
Recommended reading: What Is House Hacking & How To Live For Free
12. Real estate agent
A real estate agent is a person who helps people, like you and me, find real estate to buy or sell. They usually earn their income through a commission, which is a percentage of the property’s sale price.
To become a real estate agent and start this real estate career, you only need a high school diploma and a professional license. As of 2021, the median pay, according to the U.S. Bureau of Labor Statistics, is $23.45 per hour, or $48,770 per year.
And, there are tons of real estate agents who make a lot more money than this.
13. Crowdfunding and peer-to-peer lending
If you want to learn how to make extra money in real estate, then crowdfunding and peer-to-peer lending are areas to look into.
Crowdfunding platforms allow you to invest in real estate deals with a smaller amount of money compared to purchasing property outright. This can provide you with passive income through rental returns or potential property value appreciation.
Peer-to-peer lending platforms enable you to lend money directly to borrowers. You can potentially earn higher returns compared to traditional savings accounts, but there is always the risk of a borrower not repaying the loan.
Both crowdfunding and peer-to-peer lending utilize technology to connect investors with individuals seeking funding.
14. Bird dogging
Bird dogging in real estate can be a side hustle where you help find potentially profitable properties for investors. Your skill in spotting undervalued or distressed properties is important.
Here’s what you usually need to do:
Conduct market research to locate properties that are flying under the radar.
Build a network with local real estate investors who are looking for deals.
Learn to use the Multiple Listing Service (MLS) to spot opportunities.
Typically, you’ll be on the lookout for foreclosures, bank-owned properties, and distressed homes due for a quick sale.
As a bird dog, your compensation usually comes from a referral fee after the investor decides to move forward with your find. Importantly, to perform this role, you don’t necessarily need any initial capital, just the time and skill to identify promising investment opportunities.
15. General contractor
General contractors handle the day-to-day activities on construction sites, overseeing tasks from residential remodels to constructing new homes.
This is typically more of a full-time job, but this can sometimes be done as a real estate side hustle.
As a general contractor, you can choose projects that match your schedule and interests, providing flexibility. Despite the responsibilities, this role allows you to play a central role in turning plans into actual buildings, giving you the potential to make extra money.
16. Flip raw land
Getting involved in raw land flipping is when a person finds and buys undeveloped land to sell later at a profit.
The main benefits include a lower initial investment and less complexity compared to traditional real estate investments, as it doesn’t involve renovation or improvements. There are no buildings, instead it may be a lot or acres of land.
Here’s a step-by-step guide on how to start:
Find raw land – Research areas with potential growth or upcoming developments that could boost land value.
Due diligence – Perform thorough checks on land titles, zoning laws, and road access to avoid legal issues.
Pricing strategy – Your selling price should be attractive enough for buyers yet ensure you make a reasonable profit margin.
Sell and negotiate – Use online platforms to reach potential buyers and negotiate the best deal.
17. Rent out your storage space
If you have unused land or space in your home, renting it out for storage space can be an easy way to make passive income.
People have a lot of stuff, and they will pay you to store their stuff in your unused spaces.
You can sell storage solutions for vehicles, boats, personal belongings, and more. You can rent out your parking space, closet, basement, attic storage, and more.
A site where you can list your storage space is called Neighbor and you can earn $100 to $400+ each month. This depends on the demand in your area and the type of storage space you are renting out.
Recommended reading: Neighbor Review: Make Money Renting Your Storage Space
18. Property manager
A property manager side hustle can be a great way to make extra money.
A property manager is a real estate professional who finds and oversees tenants, collects rent, and handles repairs and maintenance activities. It’s a side hustle that property owners pay for because they may not have the time or skills to effectively manage their own property.
Property managers can manage long-term rentals like apartments, short-term rentals like Airbnbs, and even commercial spaces as well.
I have a friend who is a property manager on the side of his full-time construction job – he manages many different types of properties, from second homes to vacation rentals to someone simply being out of town. He checks on their properties to make sure that everything is running smoothly.
19. Home stager
If you’re passionate about real estate and design, starting a side hustle as a home stager could be profitable for you. As a home stager, your job is to improve the appearance of a home before it’s listed for sale.
This often results in faster sales and higher prices, making your service valuable to sellers.
You can start by staging homes for friends or family, if possible, to build a portfolio. Before and after photos are powerful tools to showcase your work.
You can even provide consultations to homeowners who prefer to do the actual staging themselves. In such cases, your design style can be a more budget-friendly option for a do-it-yourself homeowner.
20. Home inspector
We recently bought a house, and our home inspector was actually a home inspector on the side – this was his real estate side hustle! I think he was a city inspector (or something similar) full-time, so he was very knowledgeable in the area.
Home inspection as a side job can be a strategic move if you’re interested in real estate. This job allows for flexibility since you can set your hours, such as by completing home inspections on the weekends or before or after your day job.
You’ll need to invest in proper training and get licensed, which is a process that can be completed relatively quickly.
The responsibilities of a home inspector include:
Inspecting homes for possible problems, like a leak or bad wiring.
Creating and delivering reports based on what you find during the inspection.
21. Real estate appraiser
Real estate appraisers determine the fair market value of a property, and this process is important in transactions, such as home sales and refinances.
Appraisers assess property values by taking notes on unique characteristics and comparing them with similar properties that have sold recently.
They then prepare reports, detailing findings and providing a valuation that banks and other institutions depend on for loans.
22. Real estate wholesaler
Real estate wholesalers are middlemen who find properties under market value, contract them with the seller, and then sell the contract to a buyer, often an investor. Their profit comes from the difference between the contracted price with the seller and the amount the buyer pays.
Here is a quick summary of what a wholesale real estate side hustle is:
Find a distressed property – Search for properties that can be bought below market value.
Evaluate the property – Determine the After Repair Value (ARV) and estimate repair costs.
Secure under contract – Enter into a contract with the seller, giving you the right to purchase.
Find a buyer – Locate an investor interested in buying the contract.
Assign the contract – Transfer your purchasing rights to the investor for a fee.
By becoming skilled at finding good deals and building connections with trustworthy investors, real estate wholesaling can become a profitable real estate side hustle.
23. Start a real estate blog
Starting a real estate blog (or even a real estate YouTube channel or social media account!) can be a good way to make extra money without having to spend a lot of money.
With a real estate blog, you can write about local market insights, home buying and home selling tips, property investment strategies, home improvement and DIY projects, and more.
I have been a blogger for years, and I really love it. I am able to create my own schedule, decide how I make money online, travel whenever I want, and more. And, it all started on the side of my day job – so I definitely think that a real estate blog can be started as a side hustle.
Learn more at How To Start A Blog FREE Course.
Frequently Asked Questions
Below are answers to common questions about real estate side hustles.
Can real estate be a side hustle? Is real estate a good side hustle?
Yes, real estate can be a lucrative side hustle. Many people do real estate activities on a part-time basis, which can include short-term rentals, getting a roommate, and more, with lower time commitments.
Is real estate worth it as a side hustle?
Real estate as a side hustle can be worth it if you are looking for more income streams and have an interest in the housing market or real estate. As you probably noticed above, there are many different kinds of side hustles, so the amount of money you can earn or the amount of time you will spend will just depend on the gig you choose.
How can realtors make extra money?
Realtors can make extra money by managing rental properties, taking part in real estate crowdfunding, selling real estate photography services, and more.
Is real estate a good side hustle for teachers?
Yes, real estate can be a good side hustle for teachers. There are many options that may work for a teacher.
For example, some teachers work as real estate agents on the side. This is possible because you can handle listing and selling homes during weekends, breaks, evenings, and over the summer. However, keep in mind that selling homes might pose challenges, as clients may require your full attention during the day, which could clash with your teaching commitments.
You can find more ideas at 36 Best Side Jobs for Teachers To Make Extra Money.
Which licenses might be required to pursue a side hustle in the real estate field?
Depending on the side hustle, certain licenses like a real estate license may be required. For example, to become a real estate agent or home inspector, you’ll need a specific license. However, if you’re looking into just getting a roommate, then you may not need a license. It all just depends on the real estate side gig you are interested in.
How to make money in real estate without ever buying any property?
As you learned above, you don’t need to personally buy or own real estate in order to make money in real estate. You can invest in REITs, become a notary for real estate transactions, include affiliate marketing for real estate products on a blog, and more.
Real Estate Side Hustles – Summary
I hope you enjoyed this article about real estate side hustles.
Picking the right side hustle gig in real estate might feel overwhelming because there are many choices.
Some people might like jobs where you have to do more, like fixing up houses or taking care of Airbnb rentals. Others might prefer making money without doing much, like through REITs or renting out a spare room.
Whatever you’re into or however much money you have to invest, there are probably real estate side business ideas that fit with what you have and what you want to achieve.
What do you think is the best real estate side hustle?