Flight to quality, also known as flight to safety, is when investors shift their assets away from riskier investments — like stocks — into conservative securities – like bonds. This reaction often occurs during turbulent times in the economy or financial markets, and investors want to put their money into relatively safe assets.
Because flight to quality is a term that’s often thrown around in the financial media, investors need to know what it is and how it can potentially impact an investment portfolio. A flight to quality is a short-term trading strategy that might not be ideal for long-term investors. But it’s still important for investors to know how the broader trend may affect the financial markets.
What Causes Flight to Quality?
Economic uncertainty is why investors look to reorient their portfolios away from volatile investments to conservative ones. Moments of economic uncertainty that spook investors can arise for various reasons, including geopolitical conflict, a sudden collapse of a financial institution, or signs of an imminent recession.
A flight to quality usually refers to a widespread phenomenon where investors shift their portfolio asset allocation. This large-scale change in risk sentiment can generally be seen in declines in stock market indices and government bond yields, as investors sell risky stocks to put money into more stable bonds.
Though a flight to quality usually refers to a herd-like behavior of most investors during economic uncertainty, individual investors can make a similar move at any time, depending on their risk tolerance and specific financial situation.
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What Are the Effects of Flight to Quality?
During periods of flight to quality, investors tend to trade higher-risk investments for lower-risk ones. This shift commonly results in a decrease in the price of high-risk assets and boosts the price of lower-risk securities.
As mentioned above, investors can see one effect of a flight to quality in the price of major stock market indices and bond yields, as the market shifts money from the risky stocks to safer bonds.
But a flight to quality doesn’t mean that investors will necessarily shift out of one asset (stocks) into another (bonds). For example, investors worried about the economy might sell growth stocks in favor of more reliable value or blue-chip stocks, pushing the price of the growth stocks down and boosting the price of the blue chips.
💡 Recommended: Value vs. Growth Stocks
A flight to quality may also shift investment from emerging market stocks to domestic stocks or from corporate bonds to government bonds.
In addition to moving funds from stocks to bonds or other assets, investors may also move money into cash and cash-equivalent investments, like money market funds, certificates of deposit, and Treasury bills, during periods of economic uncertainty.
Real-World Example of Flight to Quality
A flight to quality occurred during the early stages of the COVID-19 pandemic and related economic shutdowns in 2020. Investors scrambled to figure out their portfolio positions in the face of an unprecedented global event, selling stocks and putting money into relatively safe assets.
The S&P 500 Index fell nearly 34% from a high on Feb. 19, 2020, to a low on Mar. 23, 2020, as investors sold off equities. But investors didn’t rush to put this money into high-grade corporate and government bonds, as many would have thought in a regular flight to quality. A record $109 billion flowed out of fixed-income mutual funds and exchange-traded funds (ETFs) during a single week in March 2020. Instead, investors moved capital into cash and cash-like assets during this volatile period in a desire for liquidity.
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The Takeaway
A widespread flight to quality that creates volatility in the financial markets can be scary for many investors. When you see decreases in a portfolio or 401(k), it can be tempting to follow the broader market trends and shift your asset allocation to safer investments. However, this is not always the best choice, especially for investors trying to build long-term wealth.
Flights to quality have happened in the past (such as during the early stages of the pandemic in 2020), and will, in all likelihood, happen again. But even if you don’t get caught up in it, it’s good to know what’s happening in the markets, and why.
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Key takeaways:
Debt-to-income (DTI) ratio is a personal finance metric representing the percentage of a person’s monthly income spent on debt payments.
Most lenders like to see a DTI of between 36 and 43 percent.
A low DTI will help you get approved for loans and qualify for better terms.
You likely know that having good credit will improve your chances of being approved for a loan. However, credit alone is certainly not the only factor lenders review when making loan decisions. The larger the loan amount, the more the lender will scrutinize the applicant, which is why applying for a mortgage can be such an intense and time-consuming adventure.
DTI ratio is a very important factor when a lender is deciding whether to approve someone for a large loan, especially a mortgage. Every lender has its own DTI requirements, but according to the CFPB, the general rule of thumb is that a person’s total debt payments should stay below 36 to 43 percent of that person’s monthly income.
How to calculate your debt-to-income ratio
Your debt-to-income ratio helps a lender decide whether you have enough room in your budget to cover a new loan payment. Here’s how to calculate debt-to-income ratio:
Step 1: Total all your monthly debts
The first step is to total all your monthly debt payments, including:
Mortgage loans (or rent)
Auto loans
Student loans
Personal loans
Minimum credit card payments
Alimony, child support and other financial judgments
Note: Don’t include other monthly expenses such as groceries, insurance, gas, etc.
Step 2: Calculate your gross monthly income
Next, calculate your gross monthly income. This is how much you make per year, before taxes and other deductions, divided by 12 months. Make sure to include the following sources of income:
Salaries and wages
Freelance earnings
Bonuses and tips
Alimony and child support
Social Security
Pensions
Investment income
Step 3: Divide your total debt by your gross monthly income
The final DTI is found by taking the total of all debt payments and dividing it by the gross monthly income. Here’s an example calculation:
A person’s monthly debt payments total $2,150. This includes $1,000 mortgage + $600 auto + $200 student loan + $350 credit cards.
The person has a salary of $90,000 which, divided by 12 months, equals $7,500 gross income per month.
Total debt of $2,150 divided by a monthly gross income of $7,500 equals a DTI of 29 percent.
Front-end vs. back-end DTI
Every lender is free to develop (within the confines of federal civil rights laws) its own lending standards and calculations to decide whether a person is a qualified loan applicant. Lenders can pick and choose which types of expenses to include in their DTI calculation. The two most common calculations for DTI are called front-end and back-end.
A front-end DTI calculation includes only housing-related expenses, such as the mortgage payment plus the monthly home insurance payment. So, it represents just the percent of monthly income used for housing expenses.
A back-end DTI calculation includes all monthly debt payments (mortgage, auto, credit card, etc.), like in the example above. This is the most commonly used DTI calculation as it provides the most holistic picture of a person’s debt situation.
What DTI do lenders look for?
Each lender has its own requirements for potential loan applicants, so there’s no way to confidently say what DTI number is needed to get a loan. Also, your debt-to-income ratio is just one factor that’ll be taken into consideration, along with your credit score, credit history, down payment size, presence of cosigners, cost of living in the area, type of mortgage and other factors.
In general, the lower your DTI, the better. Lenders love to see you have plenty of room in your monthly budget to absorb the new loan payment while still having money left over for monthly living expenses and emergencies.
Common DTI ranges are as follows:
A back-end DTI below 36 percent likely means you have a healthy and manageable debt load.
Lenders will often tolerate a DTI between 36 and 43 percent, as these are the most common DTI ranges in America.
Under the right circumstances, some lenders may consider a DTI of 44 to 49 percent.
If you have a back-end DTI of 50 percent or more, the chances of being approved for a loan are very slim. A DTI that high sets off alarm bells that you’re dangerously close to being unable to pay all your bills.
Does DTI affect credit score?
No, your DTI doesn’t impact your credit score. The credit reporting companies don’t keep a record of your income, so there’s no way for them to incorporate income into the scores they produce.
However, your credit health is heavily impacted by a similar but different calculation called the credit utilization ratio. This measurement is calculated by totaling all revolving credit balances (the amount you’ve actually spent using your credit cards) and dividing it by your credit limits (the maximum amount lenders will let you spend using the cards).
Example: Let’s say you have a credit card with a $3,000 balance and a $10,000 maximum. Divide the balance by the maximum, and you’ll have a credit utilization ratio of 30 percent on that card. Individuals suffering financial hardship often max out their cards, causing very high credit utilization ratios. This is something you want to avoid, if possible.
How to lower your DTI
Having a healthy DTI (generally below 36 percent) is important if you want to qualify for a loan, especially a mortgage. A healthy DTI also means you have a monthly budget that’s better prepared to cover living expenses and emergencies. In theory, lowering your DTI is a fairly straightforward concept: you need to increase your income or lower your debt (or both).
Increase your income
This option for improving your DTI is perhaps easier said than done. Increasing your income requires you to get a raise, get a new job or get a second job. If you find a way to increase your income, make sure it’s sustainable over the long term—are you really going to be able to work 70 hours a week for the next 30 years to afford that mortgage? Try to be realistic about your expectations for yourself.
Reduce your debt
Paying down your existing debt is the healthiest option for improving your DTI. Not only will your chances of being approved for a loan increase, but you’ll also enjoy having extra spending money in your monthly budget.
Identify the bad debt in your life and make a concerted effort to pay more than your minimum payment each month. Consider temporarily taking on a second job and using the extra money to pay off existing loans. Another excellent option is to reduce the interest rates on your existing loans by consolidating your debt.
Learn more about financial topics with Lexington Law Firm
Understanding and improving your debt-to-income ratio can be a complex and confusing task. Lexington Law Firm is here to help you by providing a variety of articles related to various financial topics. We also offer a free credit assessment that’ll include your credit score and credit repair recommendations.
Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.
Welcome to the charming town of Chicopee where history meets modernity and community thrives in the Pioneer Valley of Western Massachusetts. With its rich industrial heritage, beautiful parks, and diverse neighborhoods, Chicopee offers something for everyone. So whether you’re searching for the perfect apartment in the heart of Chicopee or eyeing a cozy home in the tranquil outskirts, you’ve come to the right place.
In this Apartment Guide article, we’ll cut to the chase, breaking down the pros and cons of moving to Chicopee. Let’s get started and see what awaits in this picturesque town.
Pro: Educational opportunities
The Chicopee area is home to a range of educational institutions, including public schools, private academies, and vocational training centers, offering residents access to quality education at all levels. The Pioneer Valley’s commitment to academic excellence is evident in its well-regarded school system and the availability of adult education programs and lifelong learning opportunities. Additionally, Chicopee’s proximity to colleges and universities in the region provides residents with further educational resources and cultural enrichment. The University of Massachusetts and Amherst, Mt. Holyoke, Smith, and Hampshire Colleges are all within a roughly half-hour drive from Chicopee.
Con: Limited public transportation options
One of the challenges of living in Chicopee is the limited public transportation options within the city. While Chicopee is easily accessible by bus from Springfield, Boston, and other cities in Western Massachusetts, the inter-city public transportation network is not as extensive as in larger urban areas.
Pro: Access to outdoor recreation
Chicopee boasts an abundance of outdoor recreational opportunities, with numerous parks, hiking trails, and nature reserves within easy reach. Residents can enjoy activities such as hiking, biking, and picnicking at Chicopee Memorial State Park or take in the scenic beauty of the Connecticut River at the Chicopee RiverWalk. The city’s proximity to Mount Tom State Reservation also provides outdoor enthusiasts with opportunities for camping, fishing, and wildlife observation, making it an ideal location for nature lovers.
Con: Harsh winter weather
Chicopee experiences harsh winter weather conditions, including heavy snowfall and freezing temperatures. Snow removal and road maintenance efforts are generally effective for ensuring safe travel and accessibility, but the inclement weather can still impact daily routines and outdoor activities. Renters considering a move to Chicopee should ensure vehicles are equipped to travel safely in heavy snow.
Pro: Affordable cost of living
One of the most appealing aspects of living in Chicopee is its affordable cost of living compared to major cities like Boston and Hartford, CT. Housing options are diverse and reasonably priced, making it an attractive choice for those who are looking for a more budget-friendly living environment. Additionally, the overall cost of goods and services in Chicopee is lower than in many urban areas in New England, allowing residents to enjoy a comfortable lifestyle without breaking the bank.
Con: Limited entertainment options
Residents seeking a bustling nightlife, major concert venues, or extensive shopping districts may find the local entertainment scene to be more subdued in Chicopee. Luckily for renters who enjoy a big night out, nearby towns and cities such as Northampton, Easthampton, and Amherst offer an active nightlife scene due to the high population of students living in the area.
Pro: Convenient location
Located in the heart of the Pioneer Valley, Chicopee enjoys a convenient location with easy access to major highways and public transportation, making it a desirable place to live for commuters and travelers. The town’s proximity to Springfield and other neighboring towns provides residents with access to a wide range of employment, educational, and recreational opportunities, while still maintaining a distinct sense of community and identity.
Con: Economic development challenges
Chicopee faces economic development challenges, including revitalizing older commercial areas and attracting new businesses to the area. While efforts are underway to promote economic growth and investment, some residents may find limited job opportunities and career advancement prospects within the Chicopee economy, leading them to commute to nearby cities and towns for work.
Pro: Rich history and culture
Chicopee is home to several historic sites, including the Chicopee Falls Dam and the Ames Manufacturing Company, providing a glimpse into the area’s industrial past. Moving to the current day, the arts scene in Chicopee showcases local talent through art galleries, live music performances, and cultural events.
Con: Traffic congestion
As a growing city with a significant commuter population, Chicopee experiences traffic congestion during peak travel times, particularly along major roadways and intersections. The increasing volume of vehicles and limited infrastructure capacity can lead to delays and frustration for residents navigating the city’s transportation network, requiring them to plan their travel routes and schedules accordingly.
Pro: Strong community spirit
Chicopee is known for its strong sense of community, with residents actively participating in local events, volunteer opportunities, and neighborhood initiatives. The town’s close-knit neighborhoods foster a welcoming and inclusive atmosphere, where neighbors come together to support one another and celebrate the town’s culture and history. From community parades to farmers’ markets, Chicopee offers numerous opportunities for residents to engage with their fellow community members and build lasting connections.
The Bank of England has kept interest rates at a 16-year high for at least another month, as governor Andrew Bailey said Threadneedle Street would not bow to political pressure to cut rates.
The BoE’s Monetary Policy Committee (MPC), announced its latest decision at midday on Thursday, opting to keep the current rate of 5.25 per cent – set last August – in a blow to those hoping for the first reduction since 2020.
High interest rates have saddled homeowners with soaring mortgage repayment costs, and are used as a tool to help bring down inflation.
While the rate of Consumer Prices Index (CPI) inflation fell to 3.2 per cent in March, experts had suggested that two key economic indicators – pay growth and services sector inflation – have remained more stubborn.
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In positive news, the Bank improved its forecasts on Thursday to predict that CPI inflation would fall to 2.25 per cent next year and to 1.5 per cent in 2026, and said it expected the UK economy to grow by 0.5 per cent this year and 1 per cent in 2025 – slightly higher than previous predictions.
Key Points
Breaking: Bank of England holds interest rates at 5.25%
Governor Andrew Bailey says Bank will not bow to political pressure
Inflation will fall to 1.5 per cent within two years, Bank forecasts
Pay growth and services sector inflation remain stubborn
Voices: Improving the economy may limit a Tory wipeout, but it won’t save Rishi Sunak
16:02 , Andy Gregory
We’re pausing updates on the liveblog for this evening, thanks for following here.
You can read our latest reporting on the Bank of England’s announcement by clicking here, or else keep scrolling to catch up on the day’s events as we reported them.
Chancellor Jeremy Hunt said the Bank of England’s decision on rates was “finely balanced”.
Asked if he had been hoping rates would be cut ahead of the general election, Mr Hunt said: “I welcome the fact the Bank of England’s obviously thought about this very hard, they take this decision independently.
“And I would much rather that they waited until they’re absolutely sure inflation is on a downward trajectory than rush into a decision that they had to reverse at a later stage.
“What we want is sustainably low interest rates, and I think what’s encouraging is that the Bank of England governor, for the first time, has expressed real optimism that we’re on that path.”
Bank of England will not wait for US Federal Reserve to cut rates, says Bailey
14:59 , Andy Gregory
The Bank of England will not wait for the US Federal Reserve to move on interest rates before it decides to cut rates in the UK.
Andrew Bailey, governor of the Bank of England, said: “There is no law that the Fed has to go first. Moreover, we have a remit and a target that is related to domestic inflation in the UK.”
He added that the Bank will always “take the rest of the world into consideration”, but only in regard to how it affects domestic inflation.
“But there’s no law which says we can only move after the Fed moves. That is not something that ever gets discussed in the MPC.”
Bank of England ‘getting very close’ to first rate cut since 2020, says economist
14:41 , Andy Gregory
James Smith, ING developed markets economist, said: “The Bank of England is getting very close to its first rate cut. That much is clear from the latest policy statement which, while keeping rates on hold at 5.25%, has a distinctly more optimistic flair.
“It echoes recent comments from governor Andrew Bailey, who has been hammering home the message that the UK’s inflation outlook is quite different to the US.
“We’re still leaning slightly more towards an August start date for rate cuts, though it’s a close call. What isn’t in doubt is that the Bank is comfortable with moving ahead of the US Federal Reserve.”
Bank of England will not bow to political pressure to cut rates, says Bailey
14:22 , Andy Gregory
The Bank of England will not bow to increased pressure from politicians to cut interest rates, its governor has said.
Andrew Bailey said: “We are an independent central bank. We have a very clear remit. It’s our duty to exercise our duty at all times. When we are sitting in a room as the Monetary Policy Committee, we never discuss politics … It isn’t a consideration in that respect.”
It comes amid a period of heightened pressure from some MPs on the Bank to move faster on rate cuts in the run-up to a general election later this year.
When pressed on whether an upcoming election could influence how the Bank makes its decisions on rates, Mr Bailey added: “We will take the decisions at each meeting which are consistent with our remit. That’s our job and we will do our job.”
Inflation to fall before rising slightly before end of year, says Bank
14:04 , Andy Gregory
The Bank of England has predicted that lower oil and gas prices mean that inflation is likely to drop to around 2 per cent in the coming months before rising slightly before the end of the year.
Inflation could fall noticeably below target without rate cuts, says Bailey
13:52 , Andy Gregory
Here are more comments from Bank of England governor Andrew Bailey.
He told reporter: “It’s likely that we will need to cut bank rates over the coming quarters and make monetary policy somewhat less restrictive over the forecast period, possibly more so than currently priced into market rates.
“This will be consistent with ensuring that inflation does not fall noticeably below target at the end point of the forecast.”
Pound falls against the dollar
13:35 , Andy Gregory
The pound fell against the US dollar and euro after the Bank of England signalled growing support for an interest rate cut among policymakers.
Sterling fell 0.3 per cent to $1.246 and was 0.2 per cent lower at €1.161.
Financial markets more pessimistic than Bank of England, Bailey indicates
13:17 , Andy Gregory
Andrew Bailey has indicated that the financial markets are more pessimistic about the path for lowering interest rates than the Bank of England.
“With the progress we’ve made, to make sure inflation stays around the target, it is likely that we’ll need to cut bank rates in the coming quarters, possibly more so than is currently priced into markets,” he said.
The Bank governor said the committee has “no preconceptions” about how far and how fast it can lower interest rates, and it make a judgment based on the economic data it sees before each meeting.
Visualised: How have interest rates changed over time?
12:58 , Andy Gregory
The below graph shows how interest rates have changed over the past decade:
Bank has not ruled out cutting rates next month, says governor
12:49 , Andy Gregory
The Bank of England has not ruled out cutting rates at its next Monetary Policy Committee decision.
Andrew Bailey, governor of the Bank, said that upcoming economic data would be key to helping the MPC decide whether to cut rates on 20 June.
He said: “Before our next meeting in June, we will have two full sets of data – for inflation, activity and the labour market – that will help us in making that judgement afresh.
“But, let me be clear, a change in bank rate in June is neither ruled out nor a fait accompli.”
Full report: Bank of England holds base rate for ninth consecutive month
12:20 , Andy Gregory
The Bank of England has kept interest rates on hold at 5.25 per cent for the ninth month in a row.
My colleague Jane Dalton has more in this report:
Bank of England holds interest rates at 5.25% despite hopes of cut
Inflation will fall to 1.5 per cent within two years, Bank of England forecasts
12:14 , Andy Gregory
The Bank of England has projected that inflation will fall more than previously thought over the coming years – dropping below its 2 per cent target to 1.5 per cent in 2026.
Headline CPI inflation is expected to fall below the Bank’s 2 per cent target between April and June, but rise again to 2.6 per cent in the second half of this year as the impact of recent drops in energy prices fades.
In the longer term, the Bank dropped its projections for CPI inflation to 2.25 per cent for 2025 and 1.5 per cent in 2026, down 0.25 and 0.5 percentage points respectively on the Bank’s February estimates.
The projection came in the Bank’s May Monetary Policy Committee (MPC) report, which signalled optimism from recent falls in retail inflation. The report said persistently high interest rates had helped push headline inflation down.
Bailey signals optimism that Bank could soon cut rates
12:10 , Andy Gregory
Governor Andrew Bailey has signalled optimism that the Bank of England could soon cut rates.
The Bank’s Monetary Policy Committee voted by a majority of seven to two to keep rates unchanged – with members Dave Ramsden and Swati Dhingra voting to cut rates by 0.25 percentage points.
Mr Bailey said: “We’ve had encouraging news on inflation and we think it will fall close to our 2 per cent target in the next couple of months.
“We need to see more evidence that inflation will stay low before we can cut interest rates. I’m optimistic that things are moving in the right direction.”
The MPC indicated it is still looking for more progress on factors including services inflation and wage growth, which have remained persistently high at about 6 per cent, before cutting rates.
Bank of England expects economy to grow by 0.5% this year
12:08 , Andy Gregory
The Bank of England said it expects the UK economy to grow by 0.5 per cent this year and 1 per cent in 2025 – slightly higher than previous predictions.
Breaking: Bank of England holds rates at 5.25 per cent
12:01 , Andy Gregory
The Bank of England has opted to keep interest rates at a 16-year high of 5.25 per cent – confounding hopes of the first base rate cut since 2020.
We’ll bring you more updates here as we get them.
BoE chief unlikely to give clear signal on when interest rate cut could come, economist predicts
11:08 , Andy Gregory
Bank of England chief Andrew Bailey is unlikely to give a clear signal on exactly when the bank’s first interest rate cut since 2020 might come – but focus will be on what guidance he does give and if more than one member of the Bank’s Monetary Policy Committee votes for a cut this time around, according to Pimco economist Peder Beck-Friis.
“We know from history that policy meetings may create some volatility,” Mr Beck-Friis said.
“What is also interesting is that we have come from a few years where monetary policy has been very correlated globally … but as the pandemic shocks fade I think it is natural that we see some divergence,” he added – pointing to how Sweden and Switzerland had already cut rates while the US may need to wait longer.
Pound falls against US dollar
09:23 , Andy Gregory
The pound edged lower against the US dollar this morning ahead of the Bank of England’s policy meeting, with the central bank expected to hold rates steady but flag when it intends to lower the cost of borrowing.
According to LSEG data, money markets are pricing in an almost 95 per cent chance that the Bank will hold its benchmark interest rate at 5.25 per cent – the highest since 2008. But investors will be watching for signs of when the first interest rate cut in four years will come as inflation falls.
Markets now see a 56 per cent chance of such move in June – when the European Central Bank has already signalled it will reduce borrowing costs, and a greater chance of 72 per cent of a BoE rate cut in August.
London stocks waver ahead of Bank of England announcement
08:40 , Andy Gregory
London stocks wavered this morning as investors turned cautious ahead of the Bank of England’s interest rate decision – while energy shares gave a boost to the benchmark index.
As of 7:17am, the blue-chip FTSE 100 edged up 0.1 per cent at 8,357.85, hovering below its record high of 8,365.28 points. The mid-cap FTSE 250 edged lower by 0.1 per cent.
The pound slipped against the US dollar and the UK’s benchmark 10-year gilt yield was at 4.155 per cent ahead of the decision.
Investors avoided big bets ahead of Threadneedle Street’s interest rate decision due at 11am, where the central bank is widely expected to keep borrowing costs steady.
Bank of England to shed more light on its predictions for the economy today
06:00 , Maryam Zakir-Hussain
The Bank of England will shed more light on its predictions for the economy and the path of interest rates when it publishes the latest Monetary Policy Report alongside the rates decision today.
Meanwhile, the central bank in the US, the Federal Reserve, said on Wednesday it was keeping its key interest rate at the same level and noted a “lack of further progress” towards lowering inflation.
It means rates could stay higher for longer until there is firmer evidence of price rises easing, its chairman Jerome Powell suggested.
04:00 , Maryam Zakir-Hussain
Andrew Goodwin, chief UK economist for Oxford Economics, said: “The data published in mid-April for services inflation and private sector regular pay growth has likely extinguished any remaining hopes of a move in May.
“Though both measures have continued to fall, progress has been slightly slower than the MPC anticipated, and they are currently running marginally higher than the forecasts published in February’s Monetary Policy Report.”
He said it is likely to be a “close call” on whether the MPC decides to cut rates in June or August.
02:00 , Maryam Zakir-Hussain
Higher interest rates are used as a tool to control inflation, which has fallen sharply in recent months.
The latest official figures showed that Consumer Prices Index (CPI) inflation slowed to 3.2% in March, as it edges closer to the Bank’s 2% target.
But economists think the Bank’s policymakers will want to hold out until they are more convinced that inflationary pressures have eased.
Mapped: Which areas worst hit by mortgage rate hikes as homeowners ‘forced to move’
Thursday 9 May 2024 00:00 , Maryam Zakir-Hussain
Homeowners coming off fixed rate mortgages faced huge rises in their monthly payments, latest figures have revealed, with the costs severely biting into household disposable income.
With the Bank of England base rate rising to 5.25 per cent in the summer of last year, families faced soaring mortagage rates with the average two-year fixed rate reaching 6.9 per cent.
The new rates meant many homeowners, especially those with large mortgages still to pay, faced challenging increases in monthly payments.
Mapped: Areas worst hit by mortgage rate hikes as homeowners ‘forced to move’
Bank of England not yet ready to cut UK interest rates, experts say
Wednesday 8 May 2024 21:57 , Maryam Zakir-Hussain
UK borrowers eager for costs to come down may have to wait a little longer before interest rates take a dip.
The Bank of England’s Monetary Policy Committee (MPC), which sets the level of UK interest rates, will announce its latest decision on Thursday.
However, economists are widely expecting the committee to keep rates at the current level of 5.25 per cent, which it has been held at since August last year.
Bank of England not yet ready to cut UK interest rates, experts say
Wednesday 8 May 2024 19:18 , Maryam Zakir-Hussain
Philip Shaw, chief economist at Investec, said: “This broad direction illustrates that collectively the committee is moving gradually towards a rate cut.
“It seems unlikely though to be ready to bite the bullet just yet and the Bank rate looks set to remain on hold at 5.25% for the sixth consecutive meeting.”
He added that it is possible that a second member of the MPC will switch to the “easing camp” and vote for a cut on Thursday.
‘Too early’ for economists to cut rates, economists predict
Wednesday 8 May 2024 17:30 , Maryam Zakir-Hussain
Economists think the Bank of England’s policymakers will want to hold out until they are more convinced that inflationary pressures have eased.
Laith Khalaf, head of investment analysis at AJ Bell, said: “It is almost certainly too early for the Bank of England to pull the trigger on a rate cut right now, especially against the backdrop of a more hawkish US central bank.”
The US Federal Reserve said last week it was keeping its key interest rate at the same level and noted a “lack of further progress” towards lowering inflation.
It means rates could stay higher for longer until there is firmer evidence of price rises easing, the Fed’s chairman Jerome Powell suggested.
Mr Khalaf said the Bank is also likely to be influenced by the European Central Bank, which is widely expected to cut rates in early June.
“The other important factor is more inflation readings for April and May, where CPI could get very close to, or possibly even hit, the Bank’s 2% target,” he added.
“The closer the inflation dial gets to 2%, the greater the pressure on the Bank of England to take its foot off the brake and cut rates.
“Markets currently think it’s a coin toss whether we get a UK rate cut in June, but this rises to a three in four chance priced in by August.”
The housing market has turned – so what does that mean for buyers and sellers waiting to make a move?
Wednesday 8 May 2024 16:29 , Maryam Zakir-Hussain
House prices are down and mortgage costs are up, writes James Moore. So how long will buyers and sellers need to wait before the market shows signs of life?
Britain’s housing market has turned hostile again, at least for sellers. The latest Nationwide index showed a surprise 0.4 per cent fall in April, the second month-on-month decline in a row.
A rival index produced by Halifax recorded a 1 per cent month-on-month fall in March, with the next update due next week. These indices can be volatile, but another fall would now be the betting favourite.
Read more here:
House prices are falling – but what does it mean for the future market?
Improving the economy may limit a Tory wipeout, but it won’t save Rishi Sunak
Wednesday 8 May 2024 15:47 , Maryam Zakir-Hussain
Thanks to the Liz Truss mini-Budget disaster, the Conservatives can no longer claim to be the party of economic competence, writes Andrew Grice. But an election campaign based on the economy is still their best hope of avoiding annihilation:
Improving the economy will not save Rishi Sunak
Pay growth and services sector inflation remain stubborn
Wednesday 8 May 2024 15:45 , Maryam Zakir-Hussain
Interest rates are used as a tool to help bring down UK inflation, which has fallen sharply from the highs hit in 2022 when energy costs spiked and the cost-of-living crisis was at its peak.
The rate of Consumer Prices Index (CPI) inflation fell to 3.2 per cent in March, according to the latest official figures.
But experts suggested that two key economic indicators for the Bank of England – pay growth and services sector inflation – have remained more stubborn.
Average wages continued to increase faster than the rate of inflation last month.
Bank of England not yet ready to cut UK interest rates, experts say
Wednesday 8 May 2024 15:43 , Maryam Zakir-Hussain
UK borrowers eager for costs to come down may have to wait a little longer before interest rates take a dip.
The Bank of England’s Monetary Policy Committee (MPC), which sets the level of UK interest rates, will announce its latest decision on Thursday.
However, economists are widely expecting the committee to keep rates at the current level of 5.25 per cent, which it has been held at since August last year.
This means that there could still be some time before the pressure of the cost of living begins to ease.
Bank of England not yet ready to cut UK interest rates, experts say
Are you curious about the real estate deal strategies I use to keep getting great deals in today’s market? Whether you’re an investor eyeing your next property flip or an eager homeowner searching for a bargain, the hunt for great deals is critical. In this comprehensive guide, I’ll cover the 6 strategies I use to get great deals and I’ll show you some recent examples.
Table of Contents
Video: Finding Real Estate Deals Strategies
Real Estate Deals Strategies Video
6 Strategies for Finding Deals
The MLS
Many believe that the Multiple Listing Service (MLS) is exclusively for seasoned investors. However, it’s a misconception. We’ve acquired numerous properties through the MLS, including one notable deal featuring a basement skatepark. Owner-occupants can leverage the MLS to their advantage, especially during exclusive bid periods like those for HUD homes.
The MLS is for real estate agents, but don’t let that stop you. You can either:
Work with an agent to help you find deals.
Use the consumer version of your local MLS. Most MLS systems have a consumer-facing version. For example, my local MLS is IRES, but they have a non-agent-facing version at coloproperty.com.
Wholesale Deals
Wholesalers offer a treasure trove of off-market properties ripe for investment. While these deals lack the scrutiny of inspections and appraisals, they demand quick action and thorough due diligence. Learn how to discern between lucrative opportunities and potential pitfalls when engaging with wholesalers.
For more, read my wholesaling article.
Networking
Networking isn’t just for job seekers; it’s a potent tool for real estate enthusiasts. By fostering relationships with industry professionals, from lenders to fellow investors, you can be made aware of deals. This one may be as simple as telling everyone you know that you’re in the market to buy real estate.
Our recent townhouse flip stemmed from a banking connection, underscoring the value of a solid network.
For more, check out my post about real estate investor associations and clubs.
Direct Marketing
Direct marketing entails proactive outreach to homeowners considering selling their properties. Postcards, bandit signs, and digital ads are just a few avenues for connecting with motivated sellers. While it requires persistence and patience, this approach can yield remarkable results, as evidenced by our success stories.
Read my article on direct marketing.
Auctions
Auction houses present a unique avenue for acquiring distressed properties at competitive prices. However, they come with inherent risks, such as limited visibility and stringent bidding conditions. Discover how we’ve navigated the complexities of auction purchases and capitalized on favorable market conditions.
Read my post about foreclosures and auctions.
Education and Resources
Above all, education is the most important. If you’re not actively studying, you may be throwing away lots of time and money.
Investing in comprehensive courses, like those offered on our platform, equips you with the knowledge and tools needed to thrive in the real estate arena. From deal-finding strategies to financing insights, these resources empower you to make informed decisions and navigate challenges effectively.
My Master the Deal course walks you through everything you need to know to start finding great real estate investment deals.
Special note: Master the Deal is on sale now! Use this link to get it for just $199 $29! https://learn.investfourmore.com/purchase?product_id=5460501&coupon_code=HP84987
Final Thoughts
There are countless opportunities abound for both investors and owner-occupants alike. By embracing a multifaceted approach to deal sourcing and leveraging available resources, you can open yourself to many more deals. Whether you’re scouring the MLS, cultivating relationships, or exploring alternative channels, persistence and diligence are key to achieving your real estate goals.
Remember, the next great deal could be just around the corner. Happy hunting!
The standard narrative of buying a house involves a real estate agent. The Realtor acts as your tour guide, guiding you not only through available homes, but also through the complicated process of becoming a homeowner.
However, some independent sellers prefer to sell their home without a real estate agent’s services. As a prospective buyer, you would interact with the homeowner instead of a Realtor.
This process, known as a sale by owner or FSBO sale, offers potential buyers the opportunity to bypass some traditional real estate transactions, which may save money on agent’s commission fees. FSBO sellers handle every aspect of the sale, including setting the listing price, marketing the house for sale, and negotiating the purchase price.
FSBO sales differ from a typical sale, as they require the home buyer to assume tasks that a real estate agent would usually handle. This includes finding FSBO listings, validating property details, and negotiating the sales price with the FSBO seller directly.
Key Takeaways
A For Sale By Owner (FSBO) transaction allows buyers to negotiate directly with sellers, potentially bypassing real estate agent commissions but requiring extra due diligence.
Buyers should secure mortgage preapproval, verify property details through CLUE reports and title checks, and consider hiring a real estate attorney or title company to manage legalities.
Closing a FSBO sale involves setting up an escrow account, preparing extensive paperwork, and understanding post-closing steps like utility setup and managing property taxes and insurance.
An Overview of the FSBO Process
A FSBO sale, where an owner sells their house without a real estate agent or a listing agent, differs from a typical sale. Understanding the intricacies of these real estate transactions can be vital to a smooth closing. FSBO sellers handle everything from setting the listing price, marketing, negotiating, and closing, offering more room for direct communication and price negotiation.
However, an FSBO transaction requires the buyer to take on tasks typically handled by a real estate agent. Unless you are working with a buyer’s agent, closing can be complex. You may be on your own for a home inspection. Getting an appraisal and negotiating a selling price will be up to you. Completing the title search and other tasks usually falls to the seller’s agent.
Prepare for the Purchase
Buying a home is exciting, but it’s also a venture that requires substantial financial planning and understanding. Preparing for the financial aspect of your purchase can increase your chances of a successful transaction and make the overall home buying experience less stressful.
Determining how much house you can afford is the first step. Getting pre-approved for a mortgage is essential. You’ll also need funds for a down payment and closing costs. Buying a FSBO home is similar to purchasing through a real estate agency.
Assess Your Credit Score
Your credit score is a key player in this process. It has a significant impact on your ability to secure a home loan, dictating your interest rates and loan terms. Before you start shopping for an FSBO house, check your credit score and, if necessary, take steps to improve it. This may involve paying down debts or correcting any errors on your credit report.
Secure Loan Preapproval
Once your credit is in check, securing preapproval for a home loan can give you a head start. This process involves a lender checking your financial history and assessing whether you’re a viable candidate for a loan.
Upon preapproval, you’ll know the maximum amount you can borrow, which helps you set a realistic budget for your house hunting. A mortgage broker, with their extensive knowledge and resources, can guide you through this process and help you choose the best loan for your needs.
Set Aside Savings
Additionally, it’s essential to have savings set aside for a down payment and closing costs. Down payments typically range from 3.5% to 20% of the home’s purchase price. Closing costs, on the other hand, usually amount to 2% to 5% of the loan amount. These costs can add up, so preparing for them can prevent financial surprises down the road.
Ensure a Mortgage Contingency
Lastly, when setting the terms of the purchase contract, ensure it includes a mortgage contingency. This clause protects you if your final home loan approval falls through, allowing you to back out of the deal without financial repercussions.
Research the Property
Buying an FSBO home requires thorough due diligence and understanding your local market’s dynamics.
Familiarize Yourself with the Market
Familiarize yourself with FSBO listings in your desired area. Assess the features of various properties, their listing prices, and how long they’ve been on the market. This exercise can help you gauge a fair price for the property you’re interested in.
Verify Property Details
In FSBO sales, buyers need to take extra care when verifying property details. These include, but are not limited to, ownership history, physical condition, and any past insurance claims related to the house for sale.
CLUE Report: A good starting point for property research is the Comprehensive Loss Underwriting Exchange, also known as CLUE. This database contains up to seven years of insurance claims history for properties. Requesting a CLUE report can provide insight into any past damages or issues that have led to insurance claims. This information helps when assessing the overall condition of the home and can play a role in price negotiations.
Check the Title: Another important element in property research is checking the home’s title. The title outlines the history of property ownership, and any issues, like liens or disputes, could complicate the transaction. You might want to consider hiring a title company or a real estate attorney to ensure a clear title, further securing your investment.
Conducting extensive research on the property not only aids in making an informed decision but can also arm you with valuable information during price negotiations.
Understand the Legalities
Buying a house is not just a financial commitment, it’s a legal one too. Understanding the legal aspects of real estate transactions can protect you from potential complications, particularly in a FSBO sale, where you might not have a real estate agent guiding you through the process.
Hire a Real Estate Attorney or a Title Company
In a traditional real estate transaction, a buyer’s agent handles the legal paperwork. However, in a FSBO sale, buyers often need to manage these tasks themselves. This is where a real estate attorney or a title company can help. These professionals can assist with the legal aspects of the transaction, including:
Ensuring the house is a separate legal entity operated correctly, free from liens, and without any outstanding claims.
Conducting title searches to confirm the legitimacy of the property’s ownership.
Assisting with the closing process, ensuring all necessary documents are correctly filled out and filed.
Review the Purchase Agreement
The purchase agreement is a binding legal contract between the buyer and the seller. It outlines the final purchase price, terms of the home sale, and any conditions that must be met before the sale can be finalized.
Given its importance, it’s recommended to have a lawyer review the purchase agreement before the buyer and seller sign it. This review can ensure that all the stipulations are in your best interest and that there are no potential loopholes that could cause problems later.
Pricing and Negotiations
FSBO sales often provide room for more negotiation when it comes to the home’s asking price. This flexibility can result in a lower purchase price, potentially saving you money.
Home Appraisal
A home appraisal can be an essential tool during these negotiations. An appraiser evaluates the property and provides an estimated market value. This estimate is based on various factors, including the home’s condition, location, and comparable homes in the area.
With an appraisal in hand, you have a foundation for negotiating the home’s price with the seller directly. It gives you a benchmark, helping to ensure you don’t pay more than the property is worth.
Handling a Low Appraisal
A FSBO transaction can become complicated if the appraisal is lower than the agreed-upon purchase price. In this scenario, you have a few options:
Request a price reduction: If the appraisal comes in lower than the agreed-upon price, you can ask the seller to reduce the price. They may be willing to do this to keep the sale on track.
Challenge the appraisal: If you believe the appraisal was inaccurate, you can challenge it. You’ll need to provide compelling evidence, such as recent sales of comparable homes that were not included in the original appraisal.
Handling these situations tactfully can keep your home purchase on track while ensuring you get a fair deal. Remember, every real estate transaction is unique, and dealing with these challenges may require professional guidance from a real estate attorney or a buyer’s agent.
Home Inspections
Investing in a home inspection is a prudent step in the homebuying process. A comprehensive inspection can reveal potential problems or necessary repairs that may not be immediately apparent. This is especially critical when buying a FSBO property, as there might not be a real estate agent involved to facilitate this step.
Choosing a Home Inspector
Finding a qualified and experienced home inspector is paramount. Look for inspectors who are certified by a national association and who have a good reputation in your local market. Your home inspector should evaluate the following:
Structural elements: walls, ceilings, floors, roof, and foundation.
Systems: plumbing, electrical, and HVAC.
Other components: insulation, ventilation, windows, and doors.
Outside: drainage, driveways, fences, sidewalks, and any potential safety hazards.
After the Home Inspection
Once the home inspection is complete, you will receive an inspection report outlining any identified issues. Depending on the findings, you may:
Request repairs: If the inspector identifies any issues, you can ask the seller to make necessary repairs before closing.
Renegotiate the asking price: If there are significant issues that the seller is not willing to fix, you might renegotiate the price to account for the repair costs.
Walk away: In the case of severe problems, such as foundational issues or extensive water damage, it might be in your best interest to walk away from the sale.
Securing Financing
Once you’ve agreed on a sales price and completed the home inspection, the next step is to finalize your home loan. This stage requires careful consideration as it can significantly impact your personal finance situation.
Compare Mortgage Options
Start by comparing different mortgage options. Each loan type has its advantages and drawbacks, and the best one for you depends on your individual circumstances. A mortgage broker can be a valuable resource during this process, helping you understand the nuances of each option and finding the best fit for your financial situation.
Review the Loan Estimate
Mortgage lenders are required to provide a loan estimate within three days of receiving your application. This document outlines the specifics of your loan, including:
Loan amount: The total amount that you’ll borrow.
Interest rate: The cost you’ll pay each year to borrow the money, expressed as a percentage.
Closing costs: The expenses you’ll need to pay to finalize your mortgage, which can include origination fees, appraisal fees, and title insurance.
It’s essential to review the loan estimate thoroughly and make sure you understand all the costs involved. If something seems off, don’t hesitate to ask your lender for clarification. After all, this is a significant financial commitment, and you want to be sure you’re making an informed decision.
Closing the Sale
Closing a FSBO sale involves several key steps that vary slightly from a typical sale involving real estate agents. However, the primary goal remains the same: to legally transfer ownership of the property from the seller to you, the buyer.
Setting Up an Escrow Account
In real estate transactions, an escrow account is used to safeguard the earnest money — the deposit you make to show the seller you’re serious about buying the house. This account is managed by a separate legal entity, such as a title company or escrow company, ensuring the funds are protected until the sale is finalized.
Preparing the Paperwork
The closing paperwork can be quite extensive and typically includes:
The deed: This transfers ownership from the seller to the buyer.
The bill of sale: This outlines the terms and conditions of the sale.
The affidavit of title (or seller’s affidavit): This document states the seller owns the property and there are no liens against it.
It’s best to have a real estate attorney or a title company prepare these documents to avoid any mistakes.
Title Insurance and Closing
Your lender may require you to purchase title insurance. This protects both you and the lender in case any undisclosed liens or ownership disputes arise after the sale.
On the closing day, you and the seller will sign all closing documents. The funds held in the escrow account, including your down payment and closing costs, will be appropriately distributed, and the property’s ownership is legally transferred to you.
Post-Closing Steps: What Comes Next?
After the exhilarating process of buying a house, there are a few additional steps to take post-closing.
Utility Setup and Address Change
Ensure utilities are set up in your name, including water, electricity, gas, and internet. You should also update your address for any subscriptions, credit cards, bank accounts, and identification documents.
Understand Property Taxes and Home Insurance
As a new homeowner, it’s important to understand your obligations regarding property taxes and home insurance. Familiarize yourself with due dates and payment procedures to avoid late fees or potential complications.
Dealing with Potential Problems
If any problems arise with the home past closing, consult your home inspection report before paying for repairs out of pocket. If you’ve received a home warranty as part of the sale (which is different from home insurance), it may cover some of these post-closing issues.
Remember, buying a FSBO home might be more complicated than a typical sale, but the potential benefits, such as saving on the agent’s commission, make it an attractive option for many home buyers. With careful planning, research, and professional guidance, you can manage the FSBO homebuying process with confidence.
Conclusion
Though a FSBO transaction can be intimidating, with research and preparation, potential buyers can make the process go smoothly. Buying a house for sale by owner can offer significant savings and more room for price negotiation, as you bypass the real estate agent’s commission.
However, you need to remain diligent and informed throughout the process. Understand the local market, conduct a thorough home inspection, and engage professionals like a real estate attorney or title companies for a smooth real estate transaction. The homebuying process may be a marathon rather than a sprint, but with patience and perseverance, you’ll cross the finish line to your new home.
A nest egg is a substantial amount of money that you save for a specific purpose. Savings accounts, investment accounts and working financial professionals can help you grow your nest egg.
A nest egg is a fund that you set aside for a specific purpose. Nest eggs can be large sums of cash that you store in a safe, retirement accounts like 401(k)s and IRAs, or investments like index funds and government bonds.
Nest eggs are one of the best investments for long-term financial goals. This fund shouldn’t be touched until months or years into the future. Below, we’ll further break down what a nest egg is, how it works, and how you can contribute to it over time. We’ll also share helpful financial tools like Credit.com’s 401(k) calculator.
Key Takeaways:
Cash, savings accounts, and investments can all be a part of your nest egg.
An FDIC-insured savings account protects up to $250,000 from losses.
Once you reach age 59 ½, you can withdraw funds from retirement plans, like your 401(k) and IRA, without penalties.
What Can You Use a Nest Egg For?
Funds that you place in a nest egg can serve various purposes later in life. Some of the most common reasons people utilize this savings tool include:
Family: A nest egg can cover costs if you have to go on unpaid family leave.
Education: Saved funds can help you pay for your children’s education or your post-graduate studies.
Rainy days: A nest egg can double as an emergency fund.
Early retirement: Some people save money to retire before age 59 1/2
Big purchases: Saving for a new car, a house, or a business expense.
Inheritance: Here, investors gather their funds for the sake of their beneficiaries.
Charity: The funds in your nest egg can help charities support numerous other people.
No matter your reason for building out your nest egg, knowing how to increase your funds is key.
How to Build a Nest Egg?
You’ll need to set money aside to successfully create a nest egg over time. Savings accounts are excellent tools for storing future funds—especially high-yield savings accounts, which can generate a significant amount of interest based on your initial deposit and subsequent contributions.
Effectively budgeting your funds is crucial to growing your nest egg, and you can do this in many different ways.
Set Clear and Realistic Goals
Creating savings milestones for yourself based on your current finances can help you steadily grow your nest egg over time. This process can be as simple as aiming to save $100 each month or as elaborate as saving to make a down payment on a home in 10 years.
Budget to Ensure Spending Aligns With Nest Egg Goals
Once you have a goal or series of goals in mind, you can adjust your spending habits to help you consistently meet those goals. For example, canceling subscriptions and eating out less can free up more funds to add to your nest egg.
The opposite is also true—once you know you’re regularly hitting your savings goals, you can treat yourself or donate extra funds with far less stress.
Leverage Savings Accounts With High Interest and Tax Advantages
High-yield savings accounts are excellent tools for safely storing funds and building interest long-term. These accounts protect up to $250,000 of your funds from losses via FDIC insurance.
A 401(k) and an IRA can help you save for retirement while offering distinct tax advantages on your funds. Employers offer 401(k)s, and they’ll match a percentage of the money you contribute to this fund. This is why financial experts encourage you to maximize your 401(k) contributions if possible.
IRAs are individual retirement accounts that you contribute to on your own. Traditional IRAs offer tax-deferred growth (meaning, tax payments aren’t due until later), while ROTH IRAs offer tax-free growth for any after-tax dollars you contribute.
Adopt Better Debt Management Strategies
Debt limits the amount of money you can add to your nest egg, so making repayments now can lead to increased funds in the future. The avalanche method and the snowball method are two popular strategies to pay off debt fast.
With the avalanche method, you pay off your debts with the highest interest rates first and work your way down. The snowball method calls for a different approach: you tackle your debts in order from the smallest to the largest amount.
Create a Diversified Investing Portfolio
When you diversify your investments, you create greater opportunities to build your wealth. For example, spreading your funds across a mixture of high-yield savings accounts, tax-advantaged accounts, stocks, bonds, and futures can potentially lead to a bigger return on investment than going all in on one type of account.
It’s important to manage your expectations when investing, as getting too ambitious can lead to big losses. It’s also pivotal to understand the risk involved with each account—stocks are more volatile than government bonds, for the most part.
How Much Should You Have in Your Nest Egg?
Everyone has different financial needs, so there’s no one-size-fits-all amount for nest eggs. Factors like your savings goal, location, and income all influence your unique needs. We recommend speaking with financial advisors to get the most accurate idea of your nest egg goal.
Even if you don’t yet have a specific goal in mind, you can always dedicate funds from each paycheck toward your nest egg. Using tools like a monthly budget template can help you get a better sense of your regular expenses and how much you can afford to save each month.
How Do You Protect a Nest Egg?
The methods for protecting a nest vary based on its form. FDIC insurance can protect a preset amount of the funds in your savings account in the event of a loss. For example, FDIC insurance protects up to $250,000 in a money market account,
Eliminating debts and increasing your financial knowledge will also help your nest egg in the long run. The fewer debts you have, the more money you can contribute to your savings goal—and knowledge will help you wisely allocate your funds.
To best protect your nest egg, watch out for get-rich-quick schemes that promise astronomical returns if you make an equally large investment. Lastly, set up alerts on your banking accounts to notify you about strange transactions.
Find Personal Finance Resources With Credit.com
Growing a nest egg is one of the more intuitive financial concepts out there, and it gets easier the more you know about money management. Check out Credit.com’s personal finance guide to deepen your understanding of methods for growing a nest egg and other investment strategies.
I started working with a client a couple years ago whose incoming portfolio was 20% Starbucks. That’s a lat(te) in one stock. I’ll see myself out.
For comparison, Starbucks comprises 0.20% of the S&P 500. The S&P 500 should only be a portion of an individual’s stock holdings, which are only a portion of an overall portfolio (with bonds, alternatives, real estate, whatever). 20% is way too much Starbucks.
When I started explaining this thought process, the client protested. “Jesse – there’s a Starbucks on every corner in America. Why would we sell it?”
This logic is very understandable. After all, there is a Starbucks on every corner in America. The premise is true. But this client’s conclusion—“Therefore, why sell Starbucks?!”—doesn’t follow his premise.
That’s the logical misstep we’ll dive into today. A “good company” doesn’t always make a “good investment.”
Lessons from History
My hometown pride, Kodak, was once one of the most visible companies in the world.
It would have been easy to sit there in 1985 and think,
“Kodak is everywhere. They own the global film market the same way GE owns consumer electronics and Sears owns department stores. Why would I ever diversify out of Kodak?”
A seemingly logical investor
Well…
That’s a share price going from ~$90 per share to zero in about 17 years. The stock market and economic history are littered with “good companies” going broke. It’s called “creative destruction” and is an essential part of a healthy economy.
But it’s terrible if you happen to own those specific stocks.
It’s Not About Popularity or Frequency
Investor Peter Lynch is known for many quips, perhaps none more famous than:
“Invest in what you know. Know what you own and know why you own it.”
Unfortunately, many investors interpret that quote as:
“Invest in what you’ve heard of, and own it because you’ve heard of it.”
…and what they’ve heard of, naturally, are popular consumer brands and companies with a “high frequency” in society e.g. those with many stores, many products, long histories, etc.
But what Lynch actually meant in his quote is: “The more familiar you are with a company, and the better you understand its business and competitive environment, the better your chances of finding a good ‘story’ that will actually come true.”
You can’t just “know” Starbucks because you enjoy its coffee or because you see it on every corner. You must “know” its business fundamentals, competitors, potential future paths, etc. The market does not care about popularity or frequency alone. It only cares about popularity and frequency insofar as those factors positively or negatively affect the objective fundamentals of the business.
Past vs. Future
Riffing off the previous stanza, concepts like “popularity” and “frequency” are both hallmarks of a company’s past. The stores you see, the brand’s standing in our culture, and the company’s heretofore investment returns are all a function of what the company has done in the past.
But the stock market is forward-looking. The thousands of investors who buy and sell stocks and determine their daily prices don’t care about the past. They are, quite literally, trying to predict a company’s future. They are pricing in that anticipated future into today’s fair value.
Quite understandably, most investors don’t do this. They either shape their opinions based on the past (popularity, frequency, past investment returns, etc.) or they react to current-day news. These are both mistakes.
The intelligent investor thinks about the future. But any statement akin to, “Company ABC will be great in the future,” is a challenging statement to make accurately.
Wonderful Company? Fair Price?
Nothing against Peter Lynch, but most of you know I’m a fan of Uncle Warren, who is famous for saying:
“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
Even if Starbucks is one of Buffett’s “wonderful companies,” is it trading at a “fair price”? Most people – including many investment professionals – are terrible at determining what a “fair price” truly is. Price is a defining feature of any investment!
I frequently use the “Honda Civic” example to explain this idea.
Is a Honda Civic a fair car? Sure. A good to great car? Quite possibly! Would you be happy owning a new Honda Civic? Many of you would say, “Sure, why not?”
But would you pay $100,000 for that new Honda Civic? No way.
It’s not enough to say, “Starbucks is a good company. Perhaps a great company.” That’s challenging enough on its own. But we must go further and ask ourselves if Starbucks is trading for a “fair price.” And quite simply, most of us are terrible at determining what “fair price” truly means – at least when it comes to stocks.
Needles
I’m biased, but I’m a big fan of this article I wrote in May 2023. I won’t rehash it too much here, but I encourage you to read it right now.
Most stocks perform worse than simple Treasury bonds
Only ~4% of stocks (or 1 in 25) account for all historical stock market outperformance over bonds
Anytime your odds are 1 in 25, you should think hard about your actions.
Sizing and Allocation
Play along with me. Let’s assume, for the sake of argument, the client was correct. Because Starbucks is everywhere, it must be a good stock to own, and it’s trading at a good price.
If that’s true, does it necessitate Starbucks should comprise 20% of our portfolio? Put another way: are there only ~5 good companies in America?
Any way you cut the biscotti, a 20% position is severely overweight. In financial planning, we want to reduce our range of potential outcomes. That’s why we diversify. Having 20% of your money tied to one single stock leads to a wide range of potential outcomes.
Closing the Cafe
For what it’s worth, the client did listen to our counsel and has been divesting out of Starbucks (as tax efficiently as possible). This past week’s ~17% drop in Starbucks’ stock price hurts, but not as much as it would have two years ago.
I’m sure there are more reasons not to own a few single stocks, not to own Starbucks specifically, and not to have too many eggs in any basket. What do you think? If I’ve missed some low-hanging fruit (salad) in terms of my reasoning, please leave me a Comment below!
Thank you for reading! If you enjoyed this article, join 8000+ subscribers who read my 2-minute weekly email, where I send you links to the smartest financial content I find online every week.
-Jesse
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Americans are in limbo about where the housing market could go next, but they are resolute about the conditions for buying right now.
Nearly 80% of Americans think it’s a bad time to buy a house, according to the Fannie Mae Home Purchase Sentiment Index (HPSI), a survey gauging homebuying and selling confidence. The index stayed flat in April compared to the previous month as consumers adjust to elevated mortgage rates that show little promise of easing. The average rate on a 30-year loan stood at 7.22% last week. Consumer confidence is still up 8% year over year.
In addition, fewer Americans believe mortgage rates will decline over the next 12 months, sidelining buyers awaiting affordability improvement.
“Housing sentiment increased from November through February, driven largely by consumer belief that mortgage rates would move lower,” said Doug Duncan, Fannie Mae senior vice president and chief economist. “However, recent data showing stickier-than-expected inflation, rising mortgage rates, and continued home price appreciation appear to have given consumers pause regarding the market’s direction.”
A closer look at mortgage rates
Waning expectations of a rate drop are becoming a common trend.
In the latest survey, only about 1 in 4 Americans believed rates would drop over the next 12 months, a decline from nearly 1 in 3 a month prior. In comparison, at the beginning of the year, almost 40% of survey respondents said they expected rates to fall.
“[Strong economic and job market data] will keep mortgage rates at elevated levels for the near future, sidelining some prospective buyers from entering the housing market,” said Edward Seiler, Mortgage Bankers Association’s (MBA) associate vice president.
With rates hovering around 7% for a 30-year loan over the last few months, monthly mortgage costs have risen. The national median payment rose past $2,200 in March from $2,184 in February, according to the MBA. Payments could become even more expensive going forward as average 30-year loan rates surpassed 7% over the last three weeks, with no signs of falling.
Read more: Mortgage rates top 7% — is this a good time to buy a house?
Home sellers remain optimistic
Contrasting homebuyers’ woes, an increasing number of Americans think now is a good time to sell. The share of survey respondents confident in selling reached nearly 70% in April, up from 60% at the beginning of the year and 62% in the same month last year.
Home sellers’ growing optimism could be attributed to the continual growth in home prices nationwide. The latest national housing price index gained 6.4% in February, according to the S&P CoreLogic Case-Shiller US National Home Price.
“As interest rates go up, people’s purchasing power goes down, and thus, so should home prices. But that hasn’t happened in this latest correction cycle,” Jon Grauman, founder of Grauman Rosenfeld, a real estate firm in Los Angeles, told Yahoo Finance.
Consumers are braced for high prices — more than 40% of Fannie Mae’s survey participants expect home prices to increase over the next 12 months, compared to 37% earlier this year.
“We think consumers’ generally improved sense of home-selling conditions bodes well for listings and housing activity, particularly for the segment of the population who may need to move for lifestyle reasons and have already begun adjusting their financial expectations to the current mortgage rate and price environment,” Duncan said.
Correction: A previous version of this article listed the incorrect firm name for Grauman Rosenfeld. We regret the error.
Rebecca Chen is a reporter for Yahoo Finance and previously worked as an investment tax certified public accountant (CPA).
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Treasury securities are like the rock-solid foundation of the financial world. In essence, they are IOUs that the U.S. government offers to investors in order to borrow money. There are various types, each with unique characteristics, including Treasury bonds, bills, and notes.
Since they are seen as extremely safe investments, those seeking financial stability frequently choose them. Let’s examine Treasury securities in more detail and see why they are important.
What Are Treasury Securities?
In essence, Treasury securities are loans made by investors to the United States government. Treasury bonds, Treasury bills, and Treasury notes are the three primary varieties. Purchasing one of these securities is equivalent to making a fixed-term loan to the government that may last anywhere from a few days to thirty years.
The government agrees to reimburse you for your initial investment (the principal) plus interest in exchange. The Treasury yield, which is this interest rate, is used as a standard by which other interest rates in the economy are measured. Because they are backed by the full faith and credit of the United States government, Treasury securities are typically considered to be among the safest investments available.
What Are Treasury Bonds?
The United States government issues Treasury bonds, which are long-term debt instruments with maturities of ten years or longer. Purchasing a Treasury bond is akin to making a fixed-term loan to the government, typically for a duration of 20 or 30 years. In exchange, you get interest payments from the government every six months until the bond matures, at which time you are paid the bond’s whole face value.
Since the U.S. government backs Treasury bonds with its full faith and credit, they are among the safest investments available. Additionally, they are quite liquid, making it simple to buy and sell them on the open market. Investors looking for a dependable means of capital preservation and a consistent income source frequently utilize Treasury bonds.
Difference from US Savings Bonds
The U.S. government issues both Treasury bonds and U.S. Savings Bonds, but there are a few significant distinctions between the two.
U.S. Savings Bonds normally have shorter periods, typically between 20 and 30 years, while Treasury bonds typically have longer maturities, ranging from 10 to 30 years. Interest on Treasury bonds is paid semi-annually, whereas interest on U.S. Savings Bonds is paid monthly and compounded semi-annually.
Another difference is that U.S. Savings Bonds are offered at a discount to face value and earn a fixed rate of interest over time, whereas Treasury bonds are sold at face value and pay a fixed interest rate.
While U.S. Savings Bonds are frequently bought by individuals as a means of saving for short- or medium-term financial goals, such as retirement or schooling expenses, Treasury bonds are typically purchased by institutional investors and individuals seeking long-term investment possibilities. Both kinds of bonds are offered by the U.S. government and are low-risk investment options, but they have different uses and meet various demands from investors.
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What Are Treasury Notes?
The United States government issues medium-term debt securities called Treasury notes, which have maturities of two to ten years. Essentially, investors who buy Treasury notes are making a fixed-term loan to the government. Until the note matures and the investor obtains the full face value of the note, the government pays them interest every six months in exchange.
Since they are backed by the full faith and credit of the United States government, Treasury notes are thought to be less risky than many other investment options. Investors seeking a compromise between the short-term flexibility of Treasury bills and the long-term stability of Treasury bonds frequently choose them.
In addition to the ease of buying and selling on the open market, Treasury notes are extremely liquid, which makes them a preferred option for investors looking to combine flexibility and security in their investment portfolios.
The Significance of the 10-year Treasury Yield
In the financial world, the 10-year Treasury yield is very important since it is a key benchmark for other interest rates throughout the economy. The yield on a 10-year Treasury bond is the annual return that an investor can expect. As such, it reflects investor sentiment regarding future economic conditions, inflation expectations, and monetary policy outlook.
Variations in the yield on the 10-year Treasury note have the potential to impact not only corporate borrowing rates but also mortgage rates, vehicle loan rates, and consumer borrowing costs.
Additionally, it has an impact on the value of other financial assets since investors weigh their future returns against the comparatively safe yields of Treasury securities when valuing stocks and bonds. As a crucial indicator of general market mood and economic conditions, central banks and policymakers regularly monitor movements in the 10-year Treasury yield to assess the state of the economy and modify monetary policies accordingly.
What Are Treasury Bills?
The U.S. government issues Treasury bills, sometimes known as T-bills, which are short-term debt securities with maturities of one year or less.
In essence, investors who buy Treasury bills are making a short-term loan to the government. Treasury bills don’t pay interest on a regular basis like Treasury bonds and notes do. Rather, they are offered to investors at a price below face value, with the entire face amount due upon the bill’s maturity.
Since they are guaranteed by the full faith and credit of the United States government, Treasury bills tend to be considered some of the least-risky investments on the market. Because of their high liquidity and minimal risk, investors frequently utilize them as a short-term cash management tool or as a means of preserving capital.
Treasury notes are an essential part of the economy since they act as a base for a variety of financial transactions and as a benchmark for short-term interest rates.
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Who Should Invest in Treasury Securities?
Investors can benefit from investing in Treasury securities because of their consistent yields and low relative risk. Treasury securities are attractive to people who value capital preservation over large returns, particularly those who are approaching retirement or want to protect their resources. Treasury securities are a popular choice among conservative investors and those with low risk tolerance.
To comply with regulations and reduce risk, institutional investors like banks, insurance firms, and pension funds also set aside a percentage of their portfolio allocation for Treasury securities. Treasury securities are crucial components of diverse investment portfolios and a key part of any investor’s financial plan who is looking for a dependable and safe choice.
Pros and Cons of Treasury Investments
There are both benefits and downsides to Treasury Investments:
Benefits of Treasury Investments
• Low Relative Risk: Because they are backed by the full faith and credit of the United States government, Treasury securities tend to be less risky than other investment types.
• Guaranteed Yield: They give investors a steady source of income with a guaranteed rate of return – or, as close to a guarantee as an investor is likely going to find.
• Treasury securities are highly liquid, which allows investors flexibility as they can be quickly bought and sold on the secondary market.
Drawbacks of Treasury Investments
• Low Yield: Treasury securities usually have lower yields when compared to alternative investment options like equities or corporate bonds.
• Interest Rate Risk: Interest rate fluctuations can have an impact on Treasury securities. The value of current Treasury securities may decline if interest rates rise.
• Inflation Risk: Although Treasury securities are generally low risk, they might not yield enough returns in the long run to beat inflation, which might reduce one’s purchasing power.
• Market Risk: While unlikely, there’s a chance that shifts in investor sentiment or market disruptions could have an impact on the price of Treasury securities.
How Can You Invest in Treasuries?
Individuals can invest in Treasuries with relative ease and accessibility. Investors can buy Treasury securities straight from the U.S. Department of Treasury via website, TreasuryDirect.gov.
Investors can also purchase them via a financial institution, bank, or broker. Mutual funds and exchange-traded funds (ETFs) that contain Treasury securities in their portfolios are another way for people to indirectly invest in Treasury securities.
Through TreasuryDirect.gov
Bonds, bills, and notes issued by the U.S. government can be directly purchased by individuals by using TreasuryDirect.gov. Without going via a broker or other financial middleman, investors can purchase, manage, and redeem Treasury securities using this online platform.
Treasury auctions, in which the public is offered newly issued securities, can be attended by investors via TreasuryDirect.gov. Investors can enter these auctions with competitive or non-competitive bids to buy Treasury securities at fixed yields or interest rates.
Non-competitive bids accept the yield that is decided by the auction, whereas competitive bids indicate the desired yield. Investors can interact directly with the U.S. Treasury Department to purchase Treasury assets through an open and easily accessible process, giving them more power over their financial choices.
Through a Broker or Bank
An additional way for investors to obtain these assets is by buying Treasury securities through a bank or broker. Treasury securities can be purchased and held alongside other financial products by investors through the investment services provided by numerous banks and brokerage firms. Financial experts can assist in customizing investing plans to meet the specific needs and objectives of each investor.
Purchasing through a bank or broker may provide access to a greater selection of investment options, including Treasury bills, notes, and bonds with different maturities and yields. Although there can be commissions or transaction costs associated with this approach, investors benefit from the ease of having all of their investment accounts combined into one location.
Purchasing Treasury securities via a bank or broker provides investors with ease, flexibility, and individualized assistance in creating a diverse investment portfolio.
ETFs and Mutual Funds
Investors can buy Treasury Securities in a convenient way through ETFs and mutual funds that hold bonds, bills, and notes. Investors can benefit from professional management and experience choosing and overseeing Treasury securities within the fund’s portfolio by making an investment in these funds.
Mutual funds and ETFs provide liquidity, enabling investors to buy and sell shares on the open market at any time. Investors can easily modify their exposure to Treasury securities in response to shifting market conditions or investing goals.
Mutual funds and ETFs often have lower expense ratios than actively managed funds, so investing in Treasury securities using this method can be an affordable way to access a diverse portfolio of Treasury securities.
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How Are Treasury Bonds, Bill, and Notes Taxed?
Since they are subject to unique tax laws, investors looking for tax-efficient investment options may find Treasury bonds, bills, and notes appealing. State and local income taxes are not applicable to interest income collected on Treasury securities, but it is subject to federal income tax.
Taxation applies to any capital gains upon the selling of Treasury securities. An investor will have a capital gain that is liable to capital gains tax if they sell a Treasury asset for more money than they paid for it.
On the other hand, the investor can experience a capital loss if they sell the investment for less than what they paid for it. This loss can be applied to offset capital gains and lower their taxable income.
What Are Other Types of Treasury Securities?
The U.S. Treasury offers a variety of securities in addition to Treasury bonds, bills, and notes. By basing the principal value of Treasury Inflation-Protected Securities (TIPS) on fluctuations in the Consumer Price Index (CPI), TIPS offer protection against inflation.
By guaranteeing a rate of return, this helps investors maintain their purchasing power over time. Investors are protected against interest rate risk by Floating Rate Notes (FRNs), which have variable interest rates that fluctuate based on changes in market interest rates.
The U.S. Treasury issues savings bonds such as Series I and Series EE that provide people with a convenient and secure long-term means of saving money. Series EE Savings Bonds pay a set rate of interest for a maximum of 30 years, while Series I Savings Bonds protect against inflation.
The Takeaway
Treasury securities give investors a range of choices to achieve their financial objectives, including long-term savings, inflation protection, and income generation. In the ever-changing world of financial markets, investors can protect capital, reduce risk, and reach their goals through Treasury bonds, bills, notes, and other securities like TIPS and savings bonds.
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FAQ
What is the meaning of Treasury Security?
The U.S. Department of the Treasury issues debt obligations known as Treasury securities, which include Treasury bills, notes, and bonds. Because they are backed by the full faith and credit of the United States government, Treasury securities are among the safest investments.
What is an example of Treasury securities?
Treasury Bills, Treasury Notes, Treasury Bonds, Treasury Inflation-Protected Securities (TIPS), and Floating Rate Notes (FRNs) are the five categories of marketable securities offered by the U.S. Treasury.
Are Treasury securities risky?
Because the U.S. government completely backs Treasury bonds, there is very little chance that they would default, making them a popular choice for investors looking to avoid risk. Investors need to be aware that interest rate risk exists even with U.S. government bonds.
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