If you’re thinking about purchasing a home but you’re not really happy about the current mortgage rates, you’re not alone. According to Freddie Mac, home sales have slowed due to the 30-year fixed mortgage rate staying above 6.5% since May.
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Since the end of 2021, mortgage rates have made quite a leap. For example 30-year fixed-rate mortgages have increased from 3% to over 7.5% and 15-year fixed-rate mortgages have jumped from 2.3% to more than 6.7%. Even so, Dave Ramsey says the increase in mortgage rates shouldn’t deter you from shopping from a home.
Here’s why you shouldn’t wait for mortgage rates to go down to buy a house.
Why You Shouldn’t Wait for Mortgage Rates To Go Down
According to Ramsey’s blog, even though mortgage interest rates are high right now, if you’re financially ready to do so, you should go ahead and buy a house.
“Mortgage interest rates are high right now,” Ramsey said, “but we don’t know for sure whether they’ll go back down anytime soon — they may even keep going up if the Federal Reserve decides to raise the federal funds rate again.”
Ramsey also wrote that, no matter what, housing prices will keep increasing, as is normal, and the best course of action is to buy now and lock in your home’s price. Once interest rates decrease in a year or two, he wrote, you can refinance to a lower rate.
Additionally, Ramsey pointed out that because interest rates are high right now, fewer people are buying homes, which means you won’t have as much competition when you make offers.
Also: Grant Cardone Reveals 6 Cities He Would Buy Investment Property in Right Now (and Where He Would Avoid)
What If You Wait Until Mortgage Rates Go Down?
Matt Ricci, a home loan specialist with national lender Churchill Mortgage, said it’s reasonable to expect lower interest rates in the next 18-24 months.
“The United States will be in an election cycle,” he said, “so the economic climate will most likely favor lower interest rates.”
However, don’t get too excited. According to Ramsey, the drop in interest rates likely won’t be enough to make a significant difference.
“But even if mortgage rates do go down in 2024, odds are the drop won’t be drastic — it’s not like rates are going to quickly return to the 2% to 3% range we saw at the end of 2021,” Ramsey wrote. “The bottom’s not about to fall out here.
“For example, even though the National Association of Realtors believes rates will go down in 2024, they’re only predicting a half-percent drop — from 6.5% to 6% — by the end of the year. A lower rate is definitely nice, but that small of a drop isn’t worth waiting around for.”
Besides that, there are other issues to consider if you wait until mortgage rates decrease.
“While lower interest rates would certainly favor additional inventory,” Ricci said, “the ratio of renters in the market compared to homeowners — in combination with a major gap in new construction — will still favor a larger demand for housing than supply of housing for sale.”
Ricci also said that when rates come down, home prices could increase. “So, while you certainly would have a lower rate on a mortgage, you would also be spending and borrowing more.”
Are You Financially Ready To Buy a House?
Before you start the homebuying process, Ramsey recommends you check the following four boxes. If you can’t check all four, he recommends waiting until you can.
You don’t have any consumer debt. This includes student loans, credit card payments or car notes. This will ensure that you have more room in your budget.
You have at 3-6 months’ worth of typical expenses saved. Unexpected expenses happen and having a solid emergency fund will allow you to pay for them without using your credit cards or dipping into your retirement accounts.
You’ve saved a substantial down payment. If you’re a first-time homebuyer, you’ll need at least 5% to 10%, Ramsey wrote. Additionally, putting 20% down can allow you to forgo mandatory private mortgage insurance, which could save you hundreds of dollars per month.
You can afford the house payment. Your house payment, including principal, interest, homeowners insurance and HOA fees should not equal more than 25% of your take-home pay, according to Ramsey. If it is, you risk not being able to meet your other financial goals.
Ensuring you are financially ready to buy a house will help you avoid your home being a financial burden that you might regret.
More From GOBankingRates
This article originally appeared on GOBankingRates.com: Dave Ramsey: Why You Shouldn’t Wait for Mortgage Rates To Go Down To Buy a House
Buying a home can be a daunting task. However, there are programs in place for first-time homebuyers to make it a little easier.
One of the ways you can get a mortgage, even if you don’t have a big down payment or a perfect credit score, is the Federal Housing Administration (FHA) loan program.
Best FHA Lenders and Online Marketplaces
Here are some of the best FHA loan lenders, as well as marketplaces where you can easily compare your options.
loanDepot
You can live in any state and get access to an FHA mortgage through loanDepot.
This company is known for the fact that loan officers don’t get any sort of incentive to encourage you to take one action over another. This can provide you with peace of mind, knowing that the information you get will be best suited for your needs.
When you use loanDepot, though, you need to watch out for origination fees. You might have to pay between 1% and 5% of the home’s purchase price. Carefully consider terms from other lenders before moving forward.
Read our full review of loanDepot
LendingTree
One of the first places to look for an FHA mortgage is LendingTree, an online marketplace.
Rather than directly offering FHA mortgages to borrowers, LendingTree provides a platform where you can submit your information once, and then have various lenders compete for your business by offering you quotes.
When you fill out the form, make sure you indicate that you’re looking for an FHA loan. When you do that, you can get as many as five loan offers minutes after submitting your loan application.
With the information you get from LendingTree, you can have a pretty good idea of what you qualify for and what you can expect.
Read our full review of LendingTree
Quicken Loans
Over the years, Quicken Loans has become one of the most trusted lenders in the business.
In addition to offering conventional loans, you can also get an FHA loan through Quicken Loans. In fact, Quicken is the largest FHA lender in the country.
They state that you’ll need a credit score of at least 580, a debt-to-income ratio (DTI) of no more than 50%, and a steady employment history.
Quicken Loans has a completely online application process and uses technology to verify employment and income for the majority of applicants.
Even if you don’t end up with an FHA loan, Quicken Loans is very flexible and can help you find a loan that fits your needs.
New American Funding
Access to FHA loans is a hallmark of New American Funding, which offers several programs. With this company, you can even explore the possibility of an FHA renovation loan.
In addition to offering access to numerous programs, they also use manual underwriting, meaning that alternative credit data can be relied on. This can be useful if you have a lower credit score.
While you still have to meet FHA requirements, other underwriting requirements might be a little more flexible.
Read our full review of New American Funding
Flagstar Bank
In addition to allowing applicants to provide nontraditional trade lines for underwriting consideration, Flagstar Bank is also known for offering loan packages meant for professionals.
In many cases, there are specific needs associated with being a CPA, architect, doctor, or lawyer. This is a bank that offers professional loan packages that can meet those needs.
Flagstar’s flexibility can be a great asset. However, it’s also important to note that you might end up with a steep origination fee. Weigh that against the benefits and compare your Flagstar quote with other options.
Read our full review of Flagstar Bank
CitiMortgage
The mortgage arm of Citibank allows you access to the resources of one of the most recognized nationwide banks.
Not only can you access FHA loans through CitiMortgage, but you can also take advantage of other programs, particularly those that benefit military families.
However, you can’t complete the mortgage application online. It might not be a bad idea to get a few online FHA loan quotes and bring them with you when you meet with a CitiMortgage loan officer.
Read our full review of CitiMortgage
U.S. Bank
Another high-profile national bank, U.S. Bank offers several mortgage products. In addition to getting started online, you can also call a number and speak with a mortgage specialist — including someone near you.
U.S. Bank does not publish a public minimum credit score for FHA loans.
U.S. Bank prides itself on the ability to offer personal service so you can apply for your loan using what’s most comfortable for you.
Read our full review of U.S. Bank
Carrington Mortgage Services
It can be very difficult for borrowers with poor credit to take out a conventional mortgage. If your credit score is low due to financial mistakes in your past, then Carrington Mortgage Services may be a suitable option for you.
This mortgage lender is willing to lend to borrowers with credit scores as low as 500, which makes it a viable option for anyone who is struggling to rebuild their credit.
You will end up paying more money in interest, so if you have good credit, you may be able to find better mortgage rates elsewhere.
Interested FHA borrowers can speak with a Carrington loan officer to get started. The loan officer can walk you through the FHA loan application process and make sure you have everything you need to qualify for an FHA loan.
Read our full review of Carrington Mortgage Services
PennyMac
PennyMac is based in California and does have some brick-and-mortar locations, but the company is known for its superior online services. The company is considered one of the top five mortgage lenders in the U.S.
PennyMac offers various loan options, including FHA loans. You’ll get started by applying online, and then a loan officer will contact you over the phone.
Borrowers need to have a minimum credit score of 580 to qualify, so it’s a suitable option for anyone with less-than-ideal credit.
Read our full review of PennyMac
How do FHA loans work?
Understanding FHA loans can help you buy a home that you can afford. Here’s what you need to know about getting an FHA loan and the best FHA lenders.
FHA loans are backed and guaranteed by the federal government. The government doesn’t actually make the loans, though. Instead, FHA loans are actually originated by individual FHA loan lenders who are approved by the government. The Federal Housing Administration backs the loans, so lenders feel more comfortable with borrowers that might seem to present something of a higher risk.
FHA Loan Requirements
With an FHA loan, you can put down as little as 3.5% for a down payment if you have a minimum credit score of 580. Additionally, there are FHA loans available for those with even lower credit scores, as long as they put down 10% of the purchase price.
You apply for an FHA loan much as you would for any other mortgage loan. The FHA lender will still review your credit history, income information, and other factors. Ultimately, this determines whether you’re approved, how much you can borrow, and your interest rate. You’ll have to pay for private mortgage insurance during your FHA loan, though, so be aware of that added cost.
Before you choose a mortgage lender, though, it’s important to compare your options. Just as you can with any other loan quote, you can shop around and compare offers from different FHA mortgage lenders. Start by looking at the best lenders for FHA home loans. That way you have a better chance of receiving terms that work best for you.
Step-By-Step Guide to Applying for an FHA Loan
Applying for an FHA loan is not as intimidating as it may seem, especially if you break it down into manageable steps. Here’s a clear, concise, and practical guide to walk you through the process:
Identify your budget: It’s crucial to understand what you can afford before you start the loan process. Use online mortgage calculators to determine a comfortable monthly mortgage payment based on your income and current debt.
Check your credit score: Ensure your credit score is in the best shape possible, as it directly affects the interest rate you’ll be offered.
Choose an FHA-approved lender: Not all mortgage lenders are approved to offer FHA loans, so make sure the ones you’re considering are on the FHA’s approved lender list.
Get pre-approved: Pre-approval gives you a clear idea of the loan amount you might qualify for. It involves providing your lender with financial information, like your income, assets, and debts.
Find your home: Once pre-approved, you can start house hunting. Remember to stick to homes within your pre-approved budget.
Apply for the loan: After you’ve found your home and made an offer, you can officially apply for the loan.
Essential Documents for FHA Loan Application
Documentation is key to getting an FHA loan. While the specific documents required may vary slightly by lender, you will typically need the following:
Proof of employment and income: This could be W-2 statements, pay stubs, or tax returns.
Credit information: The lender will pull your credit report, but be prepared to provide any additional documentation they request.
Proof of assets: This includes bank statements, retirement accounts, and any investment accounts.
Residential history: You may need to provide your housing history for the past two years.
Appraisal report: An FHA-approved appraiser must evaluate the property you intend to buy.
Improving Your Credit Score and Debt-to-Income Ratio
While FHA loans are known for their lenient credit requirements, improving your credit score can help you secure better loan terms. Here are some ways to boost your score:
Pay all bills on time.
Reduce your credit card balances.
Avoid applying for new credit just before applying for a loan.
Your debt-to-income (DTI) ratio is another important factor. It’s the percentage of your gross monthly income that goes toward paying debts. A lower DTI is preferable as it indicates you have a good balance between debt and income. Ways to improve your DTI include:
Paying down existing debt.
Avoid taking on new debt.
Increasing your income, if possible.
How to Find the Best FHA Lender
To find the best FHA-approved lender, you will want to compare quotes from multiple lenders. Once you have at least three or four FHA loan quotes, it’s time to compare them. You want to make sure you’re comparing apples to apples, though. Some of the items that you need to watch for in a loan offer include:
Loan origination fees
Interest rate (including whether it’s fixed or adjustable)
FHA mortgage insurance
Required down payment
Length of loan term
Closing costs
Estimates for property tax and home insurance
Make sure the terms are roughly the same so you can make a good comparison. You might also want to see if your potential mortgage lenders are willing to run different scenarios if you’re willing to pay points.
Run the Numbers
You might need to run a few numbers on your own to determine which trade-offs are worth it. For example, one FHA mortgage lender might have no origination fees but charge a higher interest rate.
If interest rates are low enough, you might be better off working with an FHA mortgage lender that charges an origination fee.
Carefully consider these items, and look at the total cost of the loan. In the end, you want a loan that is likely to cost you the least amount of money, while still allowing you to afford your monthly payments.
Common FHA Loan Mistakes and How to Avoid Them
Navigating the world of FHA loans can be tricky, and it’s not uncommon to make a few missteps along the way. Here are some common mistakes borrowers make and tips on how to avoid them:
Mistake 1: Not Understanding the Costs Involved
While FHA loans are a great option for many homebuyers, they come with certain costs like upfront mortgage insurance and annual premiums.
Avoidance Tip: Ensure you fully understand all the costs associated with an FHA loan. Factor these costs into your budget to avoid unpleasant surprises down the line.
Mistake 2: Skipping the Pre-Approval Process
Some borrowers jump straight into the house hunting process without getting pre-approved for a loan, which can lead to disappointment if they can’t secure the necessary financing.
Avoidance Tip: Always get pre-approved before you start your home search. This will give you a clear understanding of what you can afford and make you a more attractive buyer to sellers.
Mistake 3: Not Shopping Around for Lenders
Many borrowers stick with their existing bank or the first lender they come across without comparing options.
Avoidance Tip: Take time to shop around. Different mortgage lenders may offer different interest rates, closing costs, and service levels. Comparing lenders can potentially save you thousands of dollars over the life of your loan.
Mistake 4: Overlooking FHA Loan Limits
FHA loan limits can vary by location and property type, and overlooking these limits can complicate the home buying process.
Avoidance Tip: Be sure to check the FHA loan limit for your specific location and the type of property you’re considering. Stay within these limits to ensure a smoother loan application process.
Mistake 5: Neglecting Your Credit Score
Even though FHA loans are known for lenient credit requirements, neglecting your credit score can lead to unfavorable loan terms.
Avoidance Tip: Regularly monitor your credit score. If possible, take steps to improve it before applying for a loan. A higher score can lead to better interest rates and more favorable terms.
Conclusion: Choosing the Right FHA Lender and Final Thoughts
Throughout the journey of homeownership, choosing the right FHA lender can make a significant difference. Your lender plays a pivotal role, not only in terms of offering competitive rates and costs but also providing guidance and support throughout the home buying process. It’s crucial to find a lender that is not only FHA-approved but also aligns with your financial needs and goals.
Keep in mind, FHA loans are an excellent tool for many aspiring homeowners, particularly first-time buyers and those with lower credit scores or a smaller down payment. However, it’s important to understand all aspects of these loans, from the costs involved to the loan limits and the application process.
Before you embark on your home buying journey, equip yourself with the right knowledge. Do your research, consider your options, and don’t hesitate to seek professional advice if you need it. Remember, it’s about finding the right fit for your situation – what works best for you may not work as well for someone else.
While the road to homeownership may seem daunting, it is one filled with opportunities. By avoiding common mistakes, improving your credit score, and choosing the right lender, you can navigate the process with confidence. Homeownership could be closer than you think. Here’s to your successful journey on the road to owning your dream home!
Ready to get started investing but not sure where to start? We’ve compiled a list of the best online stock brokers for beginners that we recommend for 2023.
Whether it is customer service, affordability, or platform versatility, each of these online brokers shines in its own way.
Be sure to compare the most important differentiators, such as trading costs and account minimums before you make your choice. As a beginner, you may also place more value on educational resources and customer support while you’re still learning the ropes.
6 Best Online Stock Brokers for Beginners
Robinhood
Robinhood is aptly named, offering commission-free stock and ETF (exchange-traded funds) trades. Not just some of the time—all the time.
On top of this, they don’t have an account minimum. If you want to get started trading, there’s no reason to wait. Robinhood also offers fractional shares.
Robinhood has a great mobile app team. It’s so good there’s no reason for you to ever hop on a PC. It takes new investors five minutes to set up and only an hour for them to activate your brokerage account.
By industry standards, that’s pretty fast. (Keep in mind this is a brokerage account, not a Twitter account you’re setting up.)
When you transfer $1,000 to Robinhood, it is available immediately for you to invest. If you upgrade to Robinhood Instant (a free upgrade), any proceeds you make from selling stocks or ETFs can be immediately used to buy stocks or ETFs elsewhere.
Read our full review of Robinhood.
Merrill Edge
Merrill Edge is a great option for beginning investors. You can open an account with $0 minimum investment. They also offer excellent customer service, strong education and research, and low fees.
You can get unlimited free online stock, ETF, and options trades with their Preferred Rewards program, or pay just $2.95 per trade with no trade or balance minimums.
Merrill Edge offers flexible tools with customizable features and the best part is they are there to guide you step-by-step.
They have dedicated advisors who will work with you one-on-one to help you build a comprehensive financial strategy.
Their advisors can give you recommendations based on your needs to help you grow and preserve your wealth.
If you prefer to meet with them in person, Merrill Edge has over 2,000 Bank of America locations where an advisor will be more than happy to work with you.
Charles Schwab
There are only a few online brokers out there where we can honestly say are well suited for both beginning and advanced investors, but Charles Schwab is one of them. It has the tools to satisfy anyone, no matter their level of expertise.
Are ETFs your thing? Charles Schwab offers over 200 commission-free ETFs. Are you an absolute beginner? Schwab objectively selects what it believes to be the best ETF in every category, so you don’t have to go down rabbit holes of information and research.
On top of this, if you are just starting to build your portfolio, Schwab also offers recommendations based on your chosen risk tolerance. Take the safe road and know that your money is in good hands.
If you need to speak with a representative, you may do so no matter the time of day, via phone or online chat. That said, Schwab is a full-service broker that has a pretty large brick and mortar presence. You can schedule an appointment to speak with a representative or attend invaluable workshops.
A downside to Schwab is that they do have an account minimum. While several online brokers we’ve discussed require no account minimums, Schwab does require that its investors maintain at least $1,000 with them.
If you don’t have that, you can have the minimum waived when you sign up for an automatic monthly deposit of $100.
Vanguard
Perhaps one of the best online stock brokers for low-cost investing, Vanguard is frequently utilized by buy-and-hold and retirement investors with high account balances.
Its expense ratios on index funds and ETFs are quite below the national average, so it is the go-to broker for long-term investors.
Retirement-minded investors can find many resources with Vanguard through its website. They list safe and healthy investment options that promise long-term growth.
It also gives helpful hints on where you should prioritize your time and energy if you’re just getting started.
They also have a sophisticated program that can estimate when you’ll be able to retire and can help calculate your monthly expenses (sudden or otherwise) once you do.
If you have some money to invest, you can save by choosing Vanguard. For brokerage accounts with at least $50,000, trades only cost $7 regardless of how big they are. When the brokerage account hits $500,000, trades only cost $2. When it surpasses a million dollars, many trades become free.
Want to make active trades? Keep looking.
If you’re an active trader and don’t have nearly that amount of money lying around, however, Vanguard isn’t the best stock broker. It doesn’t have any software to support its traders (meaning there aren’t any trading tools or platforms to utilize).
Furthermore, investors who frequently trade (say, more than 25 times a year) are penalized with fees (assuming, of course, they don’t have $1 million invested with Vanguard).
Fidelity
With low $4.95 commissions per trade, Fidelity is one of the most affordable online stock brokers, considering what it offers to its customers.
Utilizing top-notch research from over 20 companies, Fidelity provides its investors with some of the best investment advice that money can buy.
It could be a lot of information to wade through, but after a few quick questions, Fidelity can match you up with providers that resonate with your personal investment style.
Though it’s not considered the best customer support in the industry, Fidelity still offers some pretty sharp service for its customers. Investors can meet with representatives in physical branch locations, as well as attend investor seminars throughout the year for free.
The seminars cover a wide array of topics, such as Social Security and technical analysis. Plus, if in person doesn’t appeal to you, you can still study and expand your knowledge via webinars.
Looking for a solid online broker? Fidelity is truly among the best.
It offers both online and mobile support, and if you are an active trader, you can even get real-time feeds displayed on your desktop. Each trading platform is intuitive and easy to use and provides tools to help you get a leg up on your competition.
For those interested, Fidelity also offers a premium tool called Wealth Lab Pro, which offers customizable strategies and 20 years of historical data.
Ally Invest
If you’re a seasoned investor, you may never have heard of Ally Invest, but its newness to the scene shouldn’t make you discredit it.
In 2016, Ally invest bought out TradeKing and has only recently emerged into the online brokerage game. That said, it’s quickly become very clear that everything that was great about TradeKing has only gotten better.
Ally offers automated portfolio management and forex trading. There is no account minimum, commissions on trades are $4.95.
Are you a frequent investor?
Ally Invest offers discounts to members who trade 30 or more times per quarter. At that point, the fee drops to $3.95.
Whether you use a PC or a smartphone, Ally has a great online stock trading platform for its users. Trade fast, get current, 24-hour quotes and data, make your own unique dashboard, and get a diverse set of trading tools at your disposal.
Here are some of our favorite helpful features:
Profit-and-loss calculator
Maxit Tax Manager, which informs you of any changes to your taxes based off of trades
Probability calculator to tell you of the likelihood of your desired targets for each share
Worried about trading from work? Don’t be. Ally Invest’s web platform doesn’t require you to download anything.
Simply log in and you are ready to trade. Considering everything they offer online, this is quite an achievement in and of itself.
Why Beginners Should Consider Online Stock Brokers
Diving into the world of stock trading can be both exciting and intimidating. As a beginner, you might have certain apprehensions, especially with traditional stock trading often being associated with experienced and wealthy individuals.
However, with the advent of online brokerages, the investment landscape has dramatically transformed, making it more accessible for everyone. So why should you, as a beginner, consider going the online route? Let’s break it down.
Leveling the Playing Field
Traditionally, stock trading was a complex system with many barriers to entry. It was time-consuming, requiring regular phone calls with brokers, and often demanded a substantial initial investment.
However, online stock trading platforms have simplified this process, allowing anyone with an internet connection to participate in the market. They’ve effectively democratized stock trading, enabling a broader demographic to engage in investment activities.
Cost-Effectiveness
Cost has been one of the biggest hurdles for beginners interested in stock trading. High brokerage fees were once a significant barrier to entry. Online stock brokers have dramatically reduced this burden by offering lower trading fees compared to their traditional counterparts.
Many even offer commission-free trades, which is especially beneficial for those who are just dipping their toes in the investment waters and may not have a significant amount to invest yet.
Flexibility and Control
With an online broker, you get the advantage of real-time trading from the comfort of your home, or anywhere else for that matter. You have more control over your trades, with the ability to review and modify your orders whenever you see fit. This flexibility can be a game-changer for beginners who are still learning the ropes and need the freedom to make adjustments as they see fit.
Access to Tools and Education
Most online brokers provide a wealth of resources to help you understand the stock market better. These resources often include educational articles, webinars, video tutorials, and even simulated trading environments. You can learn at your own pace, apply your knowledge in a risk-free environment, and then proceed with more confidence when you’re ready.
Busting the Myth: Stock Trading is Not Just for Experts
You might be thinking, “Sure, these benefits sound great, but isn’t stock trading still a field best left to the experts?” This is a common misconception, but it couldn’t be further from the truth. While knowledge and experience undoubtedly play a role in successful investing, the barrier to entry has significantly decreased with online brokerage accounts.
They’ve built platforms that cater to investors of all experience levels, with easy-to-use interfaces, educational content, and customer support to guide you through your investment journey. In fact, the rise of online trading has given birth to a new generation of investors who’ve started with little to no knowledge of the stock market.
Choosing Your Online Broker: Essential Criteria to Consider
Selecting an online broker as a beginner can seem daunting. However, by focusing on the right criteria, you can make a well-informed decision that suits your individual needs and goals. Here are the key factors you should consider when choosing your online stock broker.
User-Friendly Platform: Navigate with Ease
As a beginner, the last thing you want is to grapple with a complicated platform while trying to understand the intricacies of stock trading. Hence, a user-friendly interface is essential.
An intuitive platform will make navigation a breeze, allowing you to focus on your investment decisions rather than struggling with complex tools. Look for brokers that offer clear layouts, easy-to-find features, and streamlined processes for trading.
Educational Resources: Your First Step Towards Mastery
Education is paramount when you’re embarking on your investment journey. The best online brokers provide a variety of learning materials, including tutorials, webinars, articles, and even a glossary of trading terms.
These resources can help demystify complex financial concepts, making it easier for you to understand market trends and make informed decisions. Ensure the broker you choose places a strong emphasis on education and continuous learning.
Customer Support: Guidance When You Need It
No matter how user-friendly a platform is, you’re likely to encounter queries or issues that need resolution. This is where robust customer support comes in.
A good online broker should offer responsive, efficient, and friendly customer service, ready to assist you via multiple channels – be it phone, email, or live chat. Remember, as a beginner, having readily available support can be a significant confidence booster.
Fees and Commissions: The Impact on Your Investments
Even the smallest fees can add up over time and eat into your returns. So, it’s essential to understand the fee structure of any online broker you consider. This can include trading fees, account maintenance fees, withdrawal fees, and more. Many online brokers now offer commission-free trades, which can be particularly advantageous for beginners starting with a smaller investment.
Account Minimums: Barrier or Welcome Mat?
Some online brokers require you to deposit a minimum amount to start trading. This can be a hurdle for beginners who are looking to start small. Therefore, finding a broker with low or no account minimums can be a significant advantage when you’re just getting started. It allows you to dip your toes into investing without committing a substantial sum upfront.
Diverse Investment Options: The Power of Choice
While you might start with trading stocks, having a range of investment options can be beneficial as you grow and diversify your portfolio. Look for an online brokerage account that offers a variety of investment products, such as bonds, ETFs (exchange-traded funds), mutual funds, and more. Having these options at your disposal allows for more flexibility in your investment strategy.
Security: Safeguarding Your Investments
With the increasing number of cyber threats, security has never been more critical. You want to ensure that the online broker you choose uses top-tier encryption and security measures to protect your personal information and investments. This can include two-factor authentication, biometric recognition, and advanced encryption technologies.
Tips for Getting Started With Online Stock Trading
Stepping into the world of online stock trading can be thrilling. The possibility of seeing your money grow can be enticing, but it’s also crucial to approach this journey with a strategic and educated mindset. Here are some practical tips to get you started on the right foot.
Understand Your Investment Goals
Before you make your first trade, take some time to understand your investment goals. Are you saving for retirement, a down payment on a house, or your child’s college education? Having a clear idea of your goals will help you make informed decisions about the type of investments you want to make.
Start Small and Gradually Increase Your Investments
As a beginner, it’s wise to start small. You might be eager to dive in, but starting small allows you to get a feel for trading without risking too much. As you become more comfortable and experienced, you can gradually increase your investments.
Diversify Your Portfolio
Don’t put all your eggs in one basket. Diversification, or spreading your investments across a variety of assets, is a key strategy to manage risk. By diversifying your portfolio, you can protect yourself from significant losses if one of your investments underperforms.
Practice with a Demo Account
Many online brokers offer demo or “paper” trading accounts. These accounts allow you to practice trading with virtual money. It’s a great way to learn the ropes, try out different strategies, and understand the dynamics of the market without risking real money.
Keep Emotions in Check
Investing can be an emotional rollercoaster. The value of your investments can go up and down, but it’s crucial to stay calm and stick to your investment plan. Avoid making impulsive decisions based on short-term market fluctuations.
Develop a Disciplined Investment Strategy
Having a disciplined investment strategy means making thoughtful and researched decisions rather than chasing ‘hot’ tips or trends. This strategy involves regularly reviewing and adjusting your portfolio, reinvesting dividends, and not being swayed by market volatility.
Embrace Continuous Learning
The investment world is dynamic and ever-changing. Make an effort to learn continuously about different investment products, market trends, and trading strategies. Take advantage of the educational resources offered by your online broker.
Consult a Financial Advisor
While online stock trading can be done independently, consulting a financial advisor can be beneficial. They can provide personalized advice tailored to your financial goals and risk tolerance.
Frequently Asked Questions for Online Stock Trading Beginners
Here are some commonly asked questions that beginners often have when they’re starting out with online stock trading.
What is a brokerage account?
A brokerage account is an arrangement between an investor and a licensed brokerage firm that allows the investor to deposit funds with the firm and place investment orders through it. Essentially, it’s the account you use to make trades and hold your investments. The brokerage acts as the intermediary between you and the markets.
In a typical brokerage account, you can invest in a wide variety of securities, including stocks, bonds, mutual funds, and ETFs (exchange-traded sunds). There are also different types of brokerage accounts, like individual or joint accounts, retirement accounts, and education savings accounts, each serving different investment purposes and offering varying tax benefits.
Why should I consider online stock trading?
Online stock trading offers a host of benefits, including easy access to financial markets, lower transaction costs, real-time trading, a wealth of educational resources, and the ability to trade at your own pace and convenience.
How much money do I need to start online trading?
The amount needed to start online trading can vary greatly depending on the broker you choose. Some online brokers require minimum deposits, while others do not. It’s possible to start trading with a small amount, but remember that it’s crucial to only invest money that you can afford to lose.
What are the risks of online stock trading?
Like any investment, online stock trading comes with risks. The value of your investments can fluctuate based on market conditions, which can lead to losses. It’s also possible to lose money due to poor investment decisions. It’s important to educate yourself, develop a solid investment strategy, and consider diversifying your investments to manage these risks.
What is a stockbroker?
A stockbroker is a professional who executes buy and sell orders for stocks and other securities on behalf of clients. Online stock brokers offer platforms where you can conduct these transactions yourself.
How do online stock brokers make money?
Online stock brokers make money in several ways. Some charge commissions on trades, while others offer commission-free trades but may charge other types of fees, such as account maintenance fees or withdrawal fees. Some brokers also earn money from interest on cash in trading accounts or by lending out securities in margin accounts.
What is diversification?
Diversification is a risk management strategy that involves spreading your investments across various types of assets, such as stocks, bonds, ETFs, etc. The idea is to reduce risk by investing in different areas that would each react differently to the same event.
Is my money safe with online brokers?
Most reputable online brokers are members of the Financial Industry Regulatory Authority (FINRA) and the Securities Investor Protection Corporation (SIPC), which provide certain protections for investors. However, while these protections can safeguard your money if the brokerage fails, they do not protect against losses from trading.
Saving and investing both involve setting money aside for future expenses. However, there are key differences between the two.
Each has its own set of rewards and challenges. A balance of the two can lay the groundwork for financial prosperity and safeguard your wealth.
The Basics: Defining Saving and Investing
Saving: The Safety Net
What is a Savings Account?
A savings account represents the initial wealth-building step in most financial journeys. At its core, saving means putting money in a secure location, like a bank account. This ensures your money remains safe while also earning interest. High yield savings accounts, frequently found with online banks and credit unions, offer particularly appealing interest rates.
The Role of the FDIC
The safety of savings accounts, money market accounts, and CDs is often reinforced by the federal deposit insurance corporation (FDIC). This entity ensures that even if a financial institution faces challenges, your money remains protected up to the FDIC-defined limits.
Emergency Funds: Why Are They Important?
Life throws curveballs, making it essential to have an emergency fund—a financial buffer. This fund should ideally encompass three to six months’ worth of living expenses, ensuring you’re prepared for unexpected financial setbacks.
The Savings Trade-Off
While savings accounts offer peace of mind, they come with a compromise. The interest rates, especially in traditional savings accounts, often lag behind inflation. This dynamic means your diligently saved money might gradually lose purchasing power.
Investing: The Growth Engine
Dipping Into the Investment World
Investing means allocating money into assets with the hope of appreciating value. Whether it’s shares in the stock market, real estate properties, or units in mutual funds, the primary objective is growth.
Stock Market: A Historic Wealth Builder
The allure of the stock market lies in its historical track record. Over extended periods, it has typically provided returns surpassing those of standard or even high yield savings accounts. Diversifying investments, like putting money in mutual funds, can help harness these potential gains.
The Reality of Investment Risks
However, with potential reward comes inherent risk. Unlike the predictability of an FDIC-insured savings account, money put into the stock market or other investment vehicles isn’t guaranteed. It’s possible to see significant gains, but it’s equally possible to encounter losses.
When to Save vs. When to Invest: Making the Right Call
It’s vital to recognize that while both saving and investing are pillars of financial security, their roles vary according to your needs and circumstances. It’s important to know when to use each of these financial tools.
Immediate Needs and Short-Term Goals
Emergency fund: It’s always paramount to have savings set aside for unexpected expenses. Whether it’s a medical emergency, sudden job loss, or major car repair, an emergency fund acts as a financial buffer. Keeping this in an easily accessible savings account or money market account allows for quick withdrawal without penalties.
Upcoming purchases: If you’re planning major purchases within the next 1-3 years, such as a down payment for a house or a new car, the priority is preserving the principal. In such cases, a high yield savings account or a short-term CD might be more suitable than volatile investments.
Travel plans: Saving for a vacation in the next year? While it’s tempting to try to “grow” your vacation fund quickly through investments, the short timeframe means a higher risk of not having enough money when it’s time to book that trip. Opt for saving in this case.
Mid to Long-Term Objectives
Retirement: For goals that are more than a decade away, such as retirement, the potential returns from the stock market or mutual funds typically outweigh the risks. Even with market fluctuations, long-term investing often results in appreciable growth, especially if one starts investing early.
Children’s education: If you’re saving for your child’s college and they’re still in diapers, investing might offer the growth potential needed to meet rising education costs. 529 plans or other investment accounts might be apt choices.
Building wealth: If you’re aiming to increase your net worth over time and don’t have a specific goal in mind, investing is the route. It leverages the power of compound interest and potential market returns.
Debt Consideration
High-interest debts: If you’re carrying a significant credit card balance or other high-interest loans, focus on paying these down before considering investing. The interest on these debts often surpasses potential investment returns.
Personal Risk Tolerance
Emotional comfort: Your comfort with market fluctuations plays a role. If the thought of losing some of your investment keeps you up at night, even if it’s a generally recommended strategy, you might lean more towards saving or very conservative investments.
Strategies to Optimize Your Financial Balance
To establish and maintain an ideal equilibrium between saving and investing, it’s essential to employ strategic approaches that cater to evolving financial scenarios and goals. Here’s a deeper dive into methods that can help you optimize this balance.
Diversification: The Financial Safety Net
Spread your assets: Avoiding concentration in one type of investment can mitigate risks. By dividing your capital across varied assets, such as stocks, bonds, and real estate, you can potentially safeguard against significant losses in any single asset class.
Low cost index funds: These funds replicate the performance of a specific market index, like the S&P 500. Due to their broad exposure, they offer a balanced growth potential coupled with relatively lower risk. Plus, their typically lower fees mean more of your money stays invested.
Seek Professional Guidance: Navigate with Expertise
Why advisory services?: The financial landscape is vast and often intricate. For those unfamiliar or even those looking for a second opinion, brokerage services or financial advisors provide valuable insights. They help decode the complexities, ensuring your strategies align with your objectives.
Certified financial planners: CFPs undergo rigorous training and certification processes. They can offer comprehensive financial planning advice, ensuring your saving and investing strategies are cohesive and well-aligned with your broader financial goals.
Automate to Accumulate: Consistency is Key
The power of direct deposits: By automating transfers from your checking account to investment or savings vehicles, you ensure consistent contributions. Over time, this approach can substantially amplify your savings and investments.
Harness dollar-cost averaging: This strategy involves investing fixed amounts regularly, irrespective of market conditions. It can potentially reduce the impact of market volatility on your investment.
Review, Reflect, and Refine: Adaptability Matters
Changing tides: Life isn’t static, and neither is the financial world. Personal milestones, market shifts, or alterations in financial objectives can necessitate a change in strategy.
Scheduled check-ins: Dedicate time periodically (annually or semi-annually) to review your portfolios. Rebalancing, which involves realigning the proportions of your investments, can be essential to ensure they continue to match your risk tolerance and goals.
Common Myths and Pitfalls: Separating Fact from Fiction
While financial literacy has grown over the years, myths still abound. These misconceptions can hinder sound financial decision-making. Let’s demystify some of the most common myths and pitfalls in the realm of saving and investing.
Investing Equals Gambling: A Risky Misconception
Understanding the difference: Yes, both investing and gambling involve risk. However, investing is about making informed decisions based on research, market trends, and historical data. Gambling is more reliant on chance and often lacks a strategic foundation.
Strategic approach: Investors often utilize various tools, analyses, and professional advisory or brokerage services to make informed decisions. Over time, while there are market fluctuations, historically, the stock market has trended upwards.
Age Constraints: The Timeless Truth
Power of compound interest: Starting young has its perks. Even small investments can grow exponentially over time, thanks to compound interest. But it’s essential to note, it’s not just for the young.
Every moment counts: Older individuals can still benefit from investing, especially with more substantial amounts and a well-thought-out investment strategy. No matter your age, it’s about finding the right investment portfolio that aligns with your financial goals and risk tolerance.
Minimums and Barriers: Breaking the Monetary Myth
Modern investing landscape: The financial markets have become increasingly accessible. With advancements in technology and the emergence of online banks and brokerage platforms, the barriers to entry have significantly lowered.
Fractional shares & micro-Investing: Some platforms today allow individuals to invest with as little as a few dollars, purchasing fractional shares of stocks or ETFs. This democratization means that virtually anyone can participate in the financial markets, regardless of their initial investment size.
Avoiding paralysis: One of the pitfalls here is waiting for the “right amount” to start investing. This can lead to missed opportunities. Consistently investing, even smaller amounts, can be beneficial in the long run.
Safety Nets, Backups, and Financial Security: A Three-Pronged Approach
Achieving true financial security is akin to constructing a sturdy building. It’s not just about the facade or height but ensuring a robust foundation and safety mechanisms in place. Here’s an expanded view on establishing a comprehensive financial safety framework.
Building a Strong Foundation: The Indispensable Emergency Fund
Significance of the fund: Think of an emergency fund as your financial cushion. When unexpected expenses – like medical emergencies or sudden job losses – arise, this fund ensures you don’t have to dip into long-term investments or accrue high-interest debt.
FDIC insured banks and credit unions: Parking your emergency savings in institutions insured by the Federal Deposit Insurance Corporation or similar protections in credit unions offers an added layer of security. Such institutions guarantee the safety of your deposits up to a certain limit, ensuring your money is shielded against unforeseen institutional failures.
Insurance: Your Financial Umbrella
Different types, singular purpose: The world of insurance is vast: health, life, disability, homeowners, renters, and more. Each type serves a unique purpose but shares a common goal: safeguarding you and your loved ones against financially detrimental events.
Preventive approach: Paying insurance premiums might feel like an added expense. However, in the face of adversities, insurance policies can prevent significant out-of-pocket expenses, ensuring financial stability.
Tax-Savvy Approaches: Maximize Your Returns
Taxable vs. tax-advantaged accounts: Recognizing the difference between these two is crucial. A standard brokerage account will have its earnings subject to taxes annually. In contrast, retirement accounts, like IRAs or 401(k)s, offer tax advantages, either deferring tax payments until withdrawal or eliminating them altogether, depending on the account type.
Compound and save: Over time, the money you save on taxes can compound, potentially leading to significantly larger returns. Being tax-smart is a key component of holistic financial planning.
Stay Liquid: Balancing Accessibility and Growth
Importance of liquidity: Investments tied up for the long term can offer excellent growth potential. However, it’s equally vital to have assets that can be quickly converted to cash for immediate needs, without penalties or a significant loss in value.
Ideal liquid venues: Savings accounts and money market accounts are perfect contenders for such liquid assets. They offer a blend of easy accessibility and modest growth, ensuring you’re not caught off-guard by short-term financial needs.
Bottom Line
Balancing saving vs. investing is an ongoing journey, not a one-time decision. As you navigate life’s ups and downs, your strategy will need tweaks and adjustments. However, with a solid foundation, informed choices, and a commitment to both saving and investing, you can optimize both risk and security, paving the way for a bright financial future.
Frequently Asked Questions
How much should I aim to save before I begin investing?
While it varies for each individual, many financial experts recommend building an emergency fund covering 3-6 months’ worth of living expenses before starting to invest aggressively.
Can I lose all my money if the stock market crashes?
While stock market downturns can lead to significant losses, diversified portfolios can mitigate this risk. It’s rare to lose all money unless invested in single, high-risk stocks.
Do I need a financial advisor, or can I start investing on my own?
You can certainly start on your own, especially with numerous online platforms and resources available. However, a financial advisor can offer personalized advice tailored to your goals and risk tolerance.
Is real estate a safer investment than the stock market?
Both real estate and stocks come with their risks and rewards. While real estate is tangible and can provide rental income, it requires more capital upfront and may not be as liquid as stocks. Diversifying investments across asset classes can help balance risk.
What’s the difference between a Roth IRA and a traditional IRA?
Both are retirement accounts, but they differ in tax treatments. With a Roth IRA, you contribute post-tax money, and withdrawals during retirement are tax-free. With a traditional IRA, contributions may be tax-deductible, but withdrawals during retirement are taxed.
How frequently should I review and adjust my investment portfolio?
While there’s no one-size-fits-all answer, many experts suggest reviewing your portfolio at least annually or whenever there are significant changes to your financial situation or goals.
Can I invest in stocks without going through a brokerage?
Yes, some companies offer Direct Stock Purchase Plans (DSPPs) that allow investors to purchase shares directly without a broker. However, using a brokerage can offer more options and tools for managing investments.
How can I protect myself against inflation eroding my savings?
Investing a portion of your savings can help. Stocks, bonds, and real estate have historically outpaced inflation over the long term. Additionally, consider high yield savings accounts or inflation-protected securities.
When most people think about what it’ll be like to buy their first home, they think about their ideal floor plan or how they want to decorate their home. But before you can even get to that point, you need to make it through the underwriting process.
During the underwriting process, your mortgage lender evaluates whether you’re a good candidate for a mortgage. Going through underwriting may sound intimidating, but knowing what to expect can make the entire process run more smoothly.
What is mortgage underwriting?
Mortgage underwriting is simply a method used by your lender to assess your eligibility for a mortgage loan. This evaluation is performed by reviewing your credit, conducting a comprehensive analysis of your finances, and appraising the property.
After this, the lender will determine if you’re a suitable candidate for the loan. The majority of this process occurs discreetly, but your participation is vital.
As the borrower, it’s your responsibility to furnish your lender with all the financial information they require. By being transparent and forthcoming with information, you facilitate the lender’s decision-making process and increase the chances of approval for your mortgage application.
What does a mortgage underwriter do?
A mortgage underwriter’s role is to evaluate risk and assess if you’re a suitable candidate for a mortgage loan. They analyze your financial information to determine the likelihood of you defaulting on your mortgage payments.
The underwriter focuses on four key areas in their assessment: credit, assets, income, and the home appraisal. Let’s take a look at what they consider in each area:
Credit: Your credit score is a major factor in the underwriting process. A high credit score indicates a strong track record of repaying debt and could increase your chances of getting approved for a mortgage. To qualify for a mortgage, you must have a minimum credit score of 620, but to secure the best interest rates, you should aim for a score of 740 or higher.
Income: Your lender will want to see evidence of a stable source of income to ensure that you can make your monthly mortgage payments. You can verify your income by providing W-2s, bank statements, tax returns, and if self-employed, business tax returns and profit and loss statements.
Assets: To mitigate the risk of default, your lender will consider all your assets, which can act as collateral. Relevant assets include savings, retirement accounts, stocks, and investment properties. A substantial number of assets also shows the lender that you have the means to cover your down payment and closing costs.
Appraisal: Before finalizing the mortgage, the lender will perform an appraisal of the property to ensure that you’re not overpaying. An appraisal protects both you and the lender by providing a fair assessment of the home’s value.
5 Steps of the Mortgage Underwriting Process
The underwriting process can feel pretty overwhelming when you’re in the beginning stages. Here is an overview of the five steps you’ll need to take to purchase your home.
1. Get preapproved for a mortgage
The first step in the home buying journey is securing preapproval for a mortgage. This crucial step should be taken before starting the search for a house. The preapproval process involves an evaluation of your financial information and a credit check by your lender.
Documents like bank statements, tax returns, and employment verification must be submitted to the lender. Upon preapproval, your lender will issue a letter indicating the amount you have been approved to borrow.
Getting preapproved is important as it gives a clear picture of your budget for the home purchase. Additionally, having a preapproval letter enhances the credibility of your offer and makes you a stronger candidate in the eyes of listing agents and sellers.
2. Get your home appraised
With preapproval for your mortgage in hand, it’s time to start your search for your dream home. Once you’ve found it, a home appraisal is the next step.
A professional appraiser will assess the value of the property based on its location, neighborhood, and features, ensuring that you don’t end up borrowing more than the home’s actual worth.
3. Perform a title search
Before purchasing a home, it’s essential to check for any existing claims, unpaid taxes, or liens. After the appraisal of the property, the title company will conduct a thorough search to ensure its clear legal standing.
Upon confirming that the property is free from any legal disputes, the title company will secure a title insurance policy. This insurance provides protection for the lender and verifies the home’s eligibility for purchase.
4. Find out whether you’ve been approved for a mortgage
Once your mortgage loan application has gone through underwriting, you’ll find out if you’ve been approved for a mortgage. Hopefully, your application is approved, and you’ll be all set to close on your home.
However, you could receive one of the following three decisions:
Approved with conditions: Your mortgage application may be approved on the condition that you provide additional information. For instance, you may need to provide more financial documents or further proof of employment.
Denied: The lender may reject your loan application. If this happens, you want to understand why so you can figure out your next steps. For instance, you might have been turned down because your debt-to-income ratio is too high. Or your credit score may have been too low. Knowing this information gives you tangible steps you can take to improve your finances and reapply in the future.
Suspended: Your loan application may get suspended if something is missing from your file. If this happens, the lender will let you know what information they need to continue the underwriting process.
5. Close on your home
Once your lender has cleared any loan contingencies and locked in your interest rate, you’re free to close on your home. Once you’ve closed on the mortgage and received the keys to your new home, the loan process is finished.
How long does the underwriting process take?
There really is no standard time frame to complete the underwriting process; it can take from a few days to a few weeks. The length of time depends on the type of home loan you’re applying for and any issues that arise along the way.
A lot of this will be outside your control, but there are steps you can take to make the experience easier. The best thing you can do is to respond quickly to any requests from your lender.
For instance, if they contact you and request additional bank statements, then try to provide that information as quickly as possible. The underwriting process cannot proceed without this documentation.
What can I do to ensure a smooth underwriting process?
To prepare for the mortgage underwriting process, it’s essential to compile all the required documents and verify the accuracy of your credit report. Additionally, ensure your income and work history are recent and correct and follow these guidelines:
Manage your debt level: Avoid incurring new debt or making significant financial changes that may impact your debt-to-income ratio during the loan processing period.
Stay connected with your lender: Respond promptly to any questions or requests for additional information during the underwriting process. Utilize online resources to stay organized and easily communicate with your mortgage loan officer.
Be transparent about your finances: Provide accurate and complete information about your income, credit history, and assets. If there are any discrepancies, include explanations for them to help the underwriter make a faster decision.
By keeping these tips in mind, you can make the mortgage underwriting process easier and increase your chances of becoming a homeowner.
Bottom Line
During the mortgage underwriting process, your lender assesses your financial information and decides whether you meet the criteria for a loan. For first-time homebuyers, this stage can be overwhelming, but there are steps you can take to simplify the process.
Take the time to carefully compare and choose your lender, opting for one that is willing to support you and provide you with the best terms possible. Additionally, collaborating with a well-informed real estate agent can make the journey smoother.
Don’t be discouraged if your credit score is lower than you’d like. There are many mortgage programs available that are designed to assist borrowers with bad credit. With these options, buying your first home can still be a possibility.
There are numerous ways to invest for college students, including using brokerage accounts, or even retirement accounts like individual retirement accounts (IRAs) or 401(k)s. But there are many other things that college students should take into account before or while investing, too.
For college students, it’s never too early to start investing your money. In fact, the earlier you start, the faster you may be able to meet long-term goals such as a graduate degree, buying a house, or even retirement.
Why You Should Start Investing Early
There are a number of reasons to start investing early. Chief among them is potential return. The average annual return offered by the S&P 500 — a market-capitalization-weighted index of the 500 largest companies in the U.S. – is around 10%.
That’s considerably more than you’re likely to generate from putting your money in a savings account – even a high-yield savings account. That means that while money in a savings account is accruing interest, it’s actually losing value at the same time. Investing may help you outpace inflation and give you an extra boost towards your long term goals. 💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.
3 Ways to Invest While in College
There are numerous ways for college students to invest their money, including the use of tax-advantaged retirement accounts, and traditional brokerage accounts.
IRA
Traditional and Roth IRAs are a type of retirement account that almost anyone can open up and start contributing to. There are rules regarding how much you can contribute every year, and when you can take withdrawals (depending on the type of IRA you open), but they can be relatively easy ways to kick-start a college students’ investment portfolio.
Brokerage Account
A brokerage account allows you to make investments through a brokerage firm by depositing funds with them. Your bank may already have brokerage options, or you may consider other outside firms.
A brokerage account allows students to buy and sell stocks, bonds, mutual funds, and other assets through a brokerage firm. Be aware that selling assets can trigger short-term or long-term capital gains taxes. Short-term taxes are charged at your regular income tax rate, and long-term rates are either 0%, 15%, or 20% depending on your tax bracket.
401(k)
A 401(k) is a type of retirement account offered through an employer, though there are some versions, such as Solo 401(k)s, you can open yourself. Like IRAs, there are annual contribution limits, and traditional and Roth 401(k)s to choose from.
The money you put in the account is tax deductible and it grows tax-free while it’s invested. That said, generally, you can’t withdraw money from the account until you reach age 59 ½, or you’ll be subject to a 10% early withdrawal penalty.
Steps to Start Investing as a College Student
For college students getting started investing, there are several steps that they can take to find their footing. It starts by giving some thought to your overall financial goals, determining what you can afford to invest, and then building your portfolio.
Set Clear Financial Goals
It’s important, before you make your first investment as a college student, to give some serious thought and consideration to your financial goals. Do you want to hit a total net worth or dollar amount by a certain age, for instance? Or, do you want to save up enough to buy a home or start a family?
These are the types of financial goals you should think about. Having clear financial goals in mind before you start investing can help guide your decision-making in regard to what types of investments you make.
Determine How Much Money You Can Set Aside
With your goals in mind, you’ll want to think about how much money you realistically can set aside to invest. Odds are, you won’t be able to invest your entire paycheck – there’s rent to pay and groceries to buy, after all. But if you can free up some additional money in your budget for investing, that should help you get your portfolio started. Again, think about how much you can realistically use for investment purposes.
Choose the Right Investment Account
Knowing how much you have to invest and some end-goals in mind, you’ll need to decide what type of investment account will best help you reach those goals. As discussed, this might be a retirement account like an IRA or 401(k), or a brokerage account, which will allow you to buy and sell stocks, or even day trade, if you’d like – though most financial professionals may caution against it.
Understand Types of Investments
You’ll also want to review and deepen your understanding of the various types of investments out there. That can include a variety of asset types such as stocks, bonds, cash, real estate, commodities, precious metals, and more. Not all types will be best for each and every investor – again, it depends on your goals.
Fund Your Investments
The rubber is finally starting to meet the road! You’ll finally want to actually fund your chosen account (be it a brokerage account, etc.) and make your initial investments. This marks the start of your investment portfolio.
Tips for Investing as a College Student
Investing as a college student may seem relatively easy – particularly to get started – but it never hurts to accept some guidance. Here are a few tips for investing as a college student.
Stay Diversified
A good rule of thumb for investors of all stripes is to try and stay diversified by investing in many types of assets and asset classes. The basic idea of portfolio diversification is that the fewer investments you expose yourself to, the more risk you take on should they perform poorly.
Imagine you invest in only one stock and that company folds — if that happens, you’ve lost your entire investment. However, if you invested in 100 different stocks, one company failing would affect you far less. Diversification, however, does not eliminate all risks, including the risk of loss.
One way to stay diversified is by investing in mutual funds or exchange traded funds, which bundle groups of stocks together, essentially doing the work of diversification for you.
Avoid Emotional Investing
The market experiences natural ups and downs. As these fluctuations occur, it’s important to try to avoid letting your emotions impact your investing.
When the market makes a big dip, you may feel the urge to sell investments. However, by doing so you’re actually locking in your losses. Examine what is motivating you to sell, as it’s usually a good idea to let reason prevail so you don’t miss out on any future upturn that may take place. 💡 Quick Tip: Did you know that opening a brokerage account typically doesn’t come with any setup costs? Often, the only requirement to open a brokerage account — aside from providing personal details — is making an initial deposit.
Timing the Market vs Time in the Market
When the market is doing well, you may find yourself tempted to get in on the action and end up buying investments that are too expensive. This type of buying and selling is known as timing the market. You may want to avoid checking the market multiple times a day to help keep your emotions in check and avoid the temptation to time the market.
It might help to think of investing as a long-term proposition. The longer you allow your investments to stay in the market, the more opportunity they have to ride out downturns — and the more opportunity you have to take advantage of an upswing.
Balancing Investing With Academic Responsibilities
As a college student, you should keep your studies in mind, first and foremost. Your academic responsibilities, in most cases, should probably take precedence over your investing activity – though you should keep an eye on your portfolio and learn as much as you can about the markets, too. Everyone is different, but the main point is to not ignore your studies in lieu of watching the market fluctuate.
Investing with SoFi Invest®
Investing as a college student isn’t necessarily difficult, and there are many ways to get started. But given that college students are often working with a limited budget, there may be constraints. Even so, it’s important for relatively young investors to take advantage of the time they have on their side, as the market tends to rise over the years.
College students can look at various retirement accounts, or even a simple brokerage account to get started investing. Investing involves risk, however, which is something students should keep in mind, too. It never hurts to consult with a financial professional, either.
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), and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
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.
SoFi Invest® The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results. Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below. 1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
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For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.
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“Two is better than one” is an old adage that translates to finances, too. Two incomes can go much further than one, especially between married couples.
People who say “I do” also have access to various tax breaks that can give them a financial edge when it comes to building wealth. For instance, married couples filing their taxes jointly get a standard deduction of $27,700 in 2023, while single filers get a $13,850 deduction.
How can married couples act on the many tax breaks they have access to and use them to build wealth? Two certified public accountants share a few strategies for couples to consider.
Strategy 1: Investing
When married couples get a tax deduction or tax credit, there’s an opportunity to invest that extra money. There are a string of ways to invest the money, but couples could benefit from investing in themselves, says Sheneya Wilson, a CPA and founder of Fola Financial in the Bronx in New York City. Couples may choose to use their tax savings to invest in courses that improve their skills, market value and salaries, she says.
Retirement accounts like 401(k)s, IRAs or regular brokerage accounts are also an option for couples. Investing those extra dollars from tax breaks means couples have more money that can potentially grow and enjoy the benefits of compound interest.
Wilson adds that married folks can also consider alternative investments, such as commodities, gold, silver, royalties or music catalogs.
Ultimately, couples can choose investments that align with their goals and legacy.
“The best investments are going to be in line with how that person wants to leave an influence on the world,” Wilson says.
Strategy 2: Real estate
Married couples who own a property may be able to sell it and exclude some of the real estate capital gains tax from their income. For married couples filing jointly, that means they can keep up to $500,000 of the profit tax-free. Single filers, on the other hand, are capped at $250,000.
“Now think about what you can do with around $500,000 of tax-free income,” says Williams. That extra money could go toward investing in another property, she adds.
Note that couples have to own the house, use it as their main home, live there for at least two of the five years before selling and meet other rules in order to qualify for the exclusion.
Strategy 3: 529 plans
529 plans — investing plans for education that allow tax-free growth and withdrawals — are another way couples can use tax breaks to build wealth, says Jasmine Young, a CPA and founder of Southern Heritage Financial Group in Atlanta.
“It could be your niece, your nephew, your cousin, it could be you, whoever’s gonna use the money for educational expenses,” Young says. ”That’s one way for you to reduce your tax liability and put the money somewhere that’s going to give you a resource to build generational wealth.”
Some states offer deductions or credits for 529 plan contributions. A perk for married couples is that in many states, joint filers can deduct double the amount than single filers, lowering their taxable income. The amount joint filers can deduct varies from state to state.
Another way married people can benefit from 529 plan tax benefits is with the federal gift tax exclusion. While 529 plans don’t have an annual contribution limit, contributions are considered “gifts” by the IRS, which means gifting over a certain amount could lead to extra paperwork at tax time. In 2023, those married filing jointly could gift $34,000 without needing to file a gift tax return versus $17,000 for single people.
Married couples who take advantage of this larger limit can save more annually for their kids or loved one’s kids and potentially help them grow wealth faster.
Another wealth-building strategy couples can potentially use beginning in 2024 is rolling unused funds in a 529 account into a Roth IRA account for the beneficiary. By rolling unused funds into a Roth IRA, the beneficiary — be it a child or family member — can get a head start on saving for retirement. There are several conditions account owners must meet to do this, so consult a financial advisor beforehand.
Strategy 4: Entrepreneurship
If one spouse is an entrepreneur, or a couple runs a joint venture, there’s an opportunity to write off business losses during tax season, Wilson says.
“If you are married, filing jointly and your spouse is investing in starting a business, there may be a net loss from that business venture on the joint tax return because that spouse was investing in maybe educational courses [to] start their business,” she says.
In 2023, married couples with their own business can take a loss of up to $524,000, compared with $262,000 for single filers. The dollars that may have gone to paying taxes can be funneled into growing an existing business, starting a new one, or paying down debt.
Couples curious about exploring more strategies they can implement may want to speak with a finance professional like a tax advisor or financial planner.
This article was written by NerdWallet and was originally published by The Associated Press.
After teaching my “Saving and Investing 101” class at the University of Rochester yesterday, two undergraduate students ask me personal investing questions:
“How should I invest the money in my Roth IRA?”
“My portfolio is currently in 7 stocks, all tech stocks. My dad thinks I should diversify. Should I? And how do I do that?”
I bet you’ve had similar questions before. Investing is a confusing topic.
Thankfully, many personal investing questions have a similar answer. So whenever anyone asks me for specific investing advice, I go over the following ideas.
It’s About *You*
Giving personalized investing advice can only occur after understanding the investor. One idea I shared with the class yesterday is:
“If 100 college students asked me how to invest their Roth IRAs, I know this: I would eventually tell most of them that a diversified stock portfolio is an ideal place to start. They’re young with long investing timelines, and the higher risk/reward aspect of stock investing makes sense for them.
But, some of those 100 students might need completely different advice based on their unique circumstances. Telling the whole group, “Invest in stocks,” would be a disservice to some individuals. That’s why personalized investing advice should come after – not before – understanding the individual investor.”
Goals, Timelines, Risk Tolerance
How, then, do we determine the specific investing advice for individual investors? How do we “understand” or “get to know” them?
You need to understand their goals and risk tolerance.
A financial goal is a combination of an amount of money and a timeline for a specific purpose. E.g. “I need $1.5M by 2035, because that’s when I want to retire.” The amount and timeline provide concrete numbers from which we can do objective math.
Risk tolerance is a bit harder to pin down. It’s personal and emotional. To unwrap someone’s risk tolerance, it helps to ask questions about their investing past (“Have you lived through bear markets or crashes – how did it make you feel?”). Short of that, running through hypotheticals can help (“If your account dropped 30%, but you knew it would likely recover in ~3 years or less, how would you feel?”). There are also many risk tolerance quizzes and questionnaires on the internet.
The goals and timelines lead to a math-based, objective investment recommendation. Short-timelined money should be invested in low-risk, low-reward assets, and long-timelined money in high-risk, high-reward assets. This is the basis of “bucketing your money.” If (or when) your goals change, your investment allocation should change too.
Risk tolerance adds a subjective, psychology-based aspect to an investment recommendation. Perhaps the math alone points an investor toward an 80% stock, 10% bond, 10% alternatives portfolio. But if they’re incredibly risk averse, that 80% stock allocation will turn their brain to mush when a bear market hits. (Not if a bear market hits; when.) A more conservative allocation would help their mental health.
How conservative? It’s impossible for me to say. It depends (!!!) on the person. There’s a balance between the math (can you hit your goals on time?) and the psychology (will you be able to sleep along the way?).
The crux of investing is not creating a Scrooge McDuck pile of gold.
Instead, investing is about maximizing the odds of achieving your financial goals while minimizing your sleepless nights.
Back to the Students…
How should the first student invest her Roth IRA?
Assuming her Roth IRA money is purely for retirement**, I think an 80-100% diversified stock allocation makes sense. A total market index fund would be a good choice.
**Most IRAs are. Withdrawals before age 59.5 are penalized. They are retirement accounts.
How should the second student diversify away from her 7 tech stocks?
This one is more nuanced. First, the money is not in an IRA. It might have a short-term timeline associated with it. She and I discussed this. The money is all long-term.
From there, the same idea of an 80-100% diversified stock allocation makes sense.
But! This student might enjoy the fact that she owns those 7 tech stocks. Similarly, I enjoy the fact that I own Berkshire Hathaway – it’s the only non-fund investment I own, the only single stock.
If her stock ownership is important to her, I think it’s reasonable for her to keep <10% of her portfolio in those 7 stocks. The remaining >90% of her investable assets should be diversified.
Different people. Different situations. Different advice.
Thank you for reading! If you enjoyed this article, join 7000+ 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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A personal loan is money borrowed from a lender that can be used for almost any purpose, from debt consolidation to home improvement projects.
Most people don’t have $5,000+ sitting in their bank accounts—that’s where personal loans come in. Just like a mortgage or auto loan, personal loans allow you to cover large purchases or expenses under the terms that you’ll pay off the loan over time, typically with interest.
If you’re considering taking out a personal loan, here’s all you need to know to ensure you’re making the right money moves to fund your future investment.
What Is a Personal Loan?
A personal loan is money borrowed from a bank, credit union, or other financial institution that can be used for virtually any personal expense. Like any other installment loan, personal loan borrowers are expected to pay the money back over a set period.
The typical amount you can take out for a personal loan can range anywhere from $1,000 to $50,000, depending on several factors. Interest rates are just as variable—they can be as low as 6% and as high as 36%, depending on your unique financial situation. The current average interest rate for personal loans is 11.04% as of May 2023.
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Why Would I Need a Personal Loan?
If you’re planning on making a big purchase, getting a better handle on your debt, or have run into some unexpected expenses, applying for a personal loan can help cover the costs. People usually take out personal loans for:
Debt consolidation
Unexpected medical expenses
Home remodeling
Emergency expenses
Vehicle repairs or financing
Moving expenses
Vacations
Wedding expenses
While you could technically use this type of loan for, well, anything, there are a few things you should avoid using a personal loan for, like:
College tuition: It’d make more financial sense to use a federal student loan vs. a personal loan to pay for college tuition. Federal student loans typically come with lower interest rates, plus most don’t require a credit check. You may even qualify for a subsidized loan or an income-driven repayment plan.
Home down payment: Most mortgage lenders won’t accept a personal loan as a down payment, and even if they did, the increase a personal loan could cause to your debt-to-income ratio might disqualify you from the loan anyway.
Starting a business: Taking out a personal loan to open a business won’t help you build business credit since the loan is in your name. Instead, consider applying for a business credit card to start building credit so you can apply for a business loan down the road.
Everyday expenses: If you’re strapped for cash now, taking out a personal loan to cover bills and other living expenses may just create a bigger problem in the long run since you’ll have to repay the loan amount plus interest. Consider re-budgeting or finding ways to increase your income instead.
Personal Loans vs. Lines of Credit vs. Payday Loans
Personal loans, personal lines of credit, and payday loans are all money-borrowing options that can help you manage your finances or cover a significant expense. However, they’re typically used for different purposes.
Personal loans vs. lines of credit: Personal loans are typically used to cover large purchases or expenses since all the money is available upfront. On the other hand, personal lines of credit allow the borrower to use the credit available as needed and pay it off on their own timeline, so they’re more ideal for smaller everyday purchases.
Personal loans vs. payday loans: Whereas personal loans allow you to borrow a large sum of money with a loan term typically spanning several years, payday loans offer borrowers a small amount of cash—typically around $500 or less—at a higher interest rate that has to be repaid within 2-4 weeks. Payday loans are best if you have an urgent expense and know you can repay the loan within the term offered.
Definition
What it’s best for
Personal loan
Supplies the borrower with a large sum of money upfront that must be paid back in fixed monthly payments throughout the loan term
Large purchases or expenses
Personal line of credit
Lets the borrower use credit as needed and pay it back on their own timeline with a variable interest rate
Building credit on everyday purchases
Payday loan
Gives the borrower a small sum of money—around $500 or less—at a high-interest rate that usually has to be repaid within 2-4 weeks
Quick cash for urgent needs, especially if the borrower does not qualify for a traditional loan
Types of Personal Loans
Before you apply for a loan, research the type of personal loan that will best serve your unique financial needs. Your credit history, credit score, and reason for needing the loan will determine which is best for you.
Here’s a quick breakdown of the seven most common types of personal loans:
Type of personal loan
Definition
Who it’s best for
Unsecured personal loans
Do not require any sort of collateral to qualify
Borrowers with excellent credit and a steady source of income
Credit-builder loans
Allow you to take out a small sum of money to demonstrate that you’re a reliable borrower by making regular on-time payments
Borrowers with low or no credit history looking to improve their credit score
Debt consolidation loans
Typically can be borrowed at a lower interest rate than most credit cards or other bills you plan to consolidate, saving you money on interest
Borrowers with multiple debt balances or balances with high interest rates
Co-signed and joint loans
Allow a co-signer to assume responsibility for a loan if the borrower does not qualify
Borrowers who do not qualify for a traditional loan or are hoping to be approved for a lower interest rate
Fixed-rate loans
Come with an interest rate that does not change over the repayment term, so the borrower pays the same amount every month
Borrowers who plan on paying off their loan over an extended period
Variable-rate loans
Come with a fluctuating interest rate that could increase or decrease monthly payments over time, but rates are sometimes lower vs. fixed-rate loans
Borrowers who only need to borrow funds for a short period
How Do Personal Loans Work?
You have to receive a personal loan through an authorized lender, typically a bank or credit union. Here’s how the personal loan process works:
You must first apply for a personal loan. The lender will decide if you qualify based on your creditworthiness, income, and the type of personal loan you’re interested in.
If you qualify for a loan, your lender will usually set a loan term to determine how long you have to pay the money back. This can range anywhere from months to years, depending on the lender and your needs. A fixed or variable interest rate—the cost of taking out the loan—will also be applied to your monthly payments.
If you qualify for a loan, you’ll be issued a lump sum deposited into your bank account. You’re free to do with the money as you wish, but you’re expected to make regular monthly payments until the loan is paid off.
How to Apply for a Personal Loan
Personal loans are a great tool for financing some of life’s most important—and unexpected—milestones. If you’re ready to apply for a personal loan, follow these steps:
Check your credit: Your credit history will be one of the biggest determinants of whether or not you’re approved for a loan, so it’s important you know where you stand. Most lenders will want to see a “good” credit score (620) or above to ensure you can be trusted to meet your loan terms.
Decide how much to borrow: You may qualify for a $50,000 loan, but before you sign on the dotted line, you need to know how much you can realistically afford to borrow. Carefully consider your current and future financial situation before jumping into any personal loan.
Pro tip: Try our loan payment calculator to easily estimate monthly payments for different personal loan options.
Know your consumer rights: According to the Truth in Lending Act, lenders must disclose the APR finance charges, principal amount, and any fees and penalties associated with a loan offer. If you come across a lender that refuses to share this information, you’ll want to look for a different lender.
Gather essential documents: In addition to your credit report, potential lenders may also want to see the following documents to speed up the application process.
Proof of your annual income
Your debt-to-income ratio
Your Social Security number
Recurring monthly debt (like your house payment)
Employer information
Your cosigners financial information (if applicable)
Research loan options: Personal loan requirements and terms vary by the type of loan and lender, so you’ll want to research before applying. Details that may sway your decision include the loan amount, APR, monthly payments, loan term, secured or unsecured, and more. Ask lenders for this information in advance before applying for a personal loan.
Submit your application: Once you’ve settled on a loan that meets all your requirements, fill out your application, read it carefully for typos or errors, and submit it to your potential lender. You’ll likely know whether your application was approved within a day or two whether your application was approved.
How to Qualify for a Personal Loan
Each lender is different, so minimum requirements for personal loans vary. However, if you’re hoping to qualify for a large unsecured personal loan with a competitive interest rate, here are a few general requirements most lenders will want to see:
A minimum credit score of 620
A positive and established credit history
A debt-to-income ratio less than 36%
A steady income with proof of employment
Again, these requirements vary from lender to lender. In some cases, you may qualify for a loan with no credit at all. Some lenders even prioritize things like education and work history when evaluating applicants. Inquire with potential lenders before you apply for a personal loan to better understand what you need to qualify.
Personal Loan Alternatives
If credit history, high interest rates, or substantial fees are preventing you from applying for a personal loan, there are money-borrow alternatives that may be a better fit, like:
Home equity loans: Home equity loans or lines of credit (HELOC) are secured by the equity a borrower has built in their home. Because this is a type of secured loan, interest rates tend to be lower compared to an unsecured personal loan. The repayment terms are also longer than most personal loans, sometimes up to 20 years.
Credit Cards: Credit cards allow borrowers to use credit and pay it back as they go, offering more flexibility than personal loans. Many credit cards also offer rewards like cash back or airline miles for money spent.
Personal lines of credit: Like credit cards, personal lines of credit allow you to borrow money and pay it back as you go. However, personal lines of credit have a set draw period—once the period is over, you won’t be able to tap your line of credit and will need to pay back your balance. Interest rates for personal lines of credit are typically lower than credit cards, so they’re ideal for large ongoing projects.
Retirement loan: If you’re looking for more relaxed loan requirements, you may be able to borrow from your employer-sponsored retirement plan in the form of a 401(k) loan. This is a great alternative for borrowers with less-than-stellar credit, but keep in mind that you’ll be restricted to your current retirement accounts, and you may have to repay the loan early if you leave your current job before the loan term ends, often with penalties.
FAQs
Still weighing your personal financing options? We answered some of the most frequently asked questions about personal loans to help with your decision.
Will a Personal Loan Affect Your Credit Score?
Applying for a personal loan may cause a light dip in your credit score because lenders will run a hard inquiry on your credit. While a hard inquiry shouldn’t affect your credit score too much, it’s important to narrow down your options before applying to avoid multiple hard inquiries from multiple potential lenders.
It’s also wise to wait to apply for a personal loan if you’ve just opened another line of credit, which could cause an even bigger drop in your score.
Do You Need a Down Payment for a Personal Loan?
You do not need a down payment for a personal loan. However, In the case of a secured loan, you’ll need collateral, such as a car or money in a savings account.
Can You Use a Personal Loan for Whatever You Want?
A personal loan can be used for just about any purpose. Some lenders may want to know what the money will be used for, but others just want to be certain you’ll be able to pay it back. However, a better financing option may be available if you plan on using your loan for things like tuition or daily expenses. Research your options before applying for a personal loan.
How Big of a Loan Can I Get With a 700 Credit Score?
You’ll likely be able to borrow higher limits with a 700 credit score or higher, but other factors, including your income, employment status, and the type of loan you’re applying for will also impact how big of a loan you qualify for.
How Often Can You Apply for a Personal Loan?
There is no limit to how often you can apply for a personal loan. You can have multiple personal loans open at once, but remember that too much existing debt may lead lenders to disqualify you from taking out more loans or opening new lines of credit.
Researching personal loans can be daunting, especially if you’ve run into sudden unexpected expenses. The best loan for you will depend on your unique financial situation. Check out the personal loans at Credit.com to quickly compare options and see potential APR, terms, and maximum loan amounts.
While tax planning is a year-round task, real estate agents can take some specific actions before the New Year to significantly cut their taxable income. Use these seven strategies to avoid overpaying taxes, save money, and better manage your business.
1. Identify business deductions
Every business has ordinary and necessary costs, such as office equipment, marketing, accounting, and insurance, that are tax-deductible. If you don’t flag them throughout the year, take the time to identify them now so you’ll have less work to do later.
Run reports to double-check that you’ve categorized costs correctly and adjust if needed. Note that tax-deductible business expenses can change from year to year. So, familiarize yourself with the list of allowable deductions in Publication 535, Business Expenses.
2. Claim the home office deduction
In addition to deductible business expenses, you can claim the home office deduction if you primarily run your business from a dedicated home office. Many entrepreneurs don’t realize that even if you have a day job and run a part-time business from home, you qualify to claim the deduction whether you’re a homeowner or renter.
Your home office doesn’t have to be the only place you work or meet customers to qualify for the deduction. For instance, you might also work at a coffee shop, co-working space, and meet clients in their homes.
Direct expenses for your office area, such as flooring, furniture, window treatments, or an additional phone line, are 100% deductible. However, exterior improvements, such as landscaping or installing a pool, typically aren’t deductible.
You may also deduct a portion of expenses for your home, such as rent, mortgage interest, property taxes, insurance, cleaning, and utilities, known as indirect office expenses. They’re partially deductible based on your home office size and calculation method.
The standard method requires you to calculate the size of your office as a percentage of your home and apply it to your expenses. For example, if your office is 10% of your home, you can attribute 10% of qualifying expenses (such as your homeowners insurance and power bill) to business use.
Or, you might choose the simplified method, which allows you to claim $5 per square foot of your office area, up to 300 square feet. It eliminates having to keep detailed records but won’t give you the largest deduction if your office exceeds 300 square feet.
If you’re eligible to claim the home office deduction, it’s a terrific way to make certain personal expenses partially deductible. Use Form 8829, Expenses for Business Use of Your Home, to determine the allowable costs and enter them on Schedule C, Profit or Loss From Business, when you file taxes. See Publication 587, Business Use of Your Home,for more details.
3. Claim business vehicle use
Most real estate professionals use their personal vehicle for business, allowing you to deduct expenses based on mileage. That means keeping detailed records to allocate business versus personal miles driven. However, if your vehicle is used exclusively for business, you can deduct all its costs.
Your deduction depends on your chosen calculation method, using actual expenses or a standard mileage rate. Generally, the more expensive your vehicle is to operate, the higher your deduction will be using the actual cost method.
For 2023, the rate for business use is 65.5 cents per mile. For instance, if you drove 1,000 miles annually for business purposes, your vehicle deduction would be $655 (1,000 x $0.655). You may come out ahead for more economical cars using the standard mileage deduction.
Check out Publication 463, Travel, Entertainment, Gift, and Car Expenses, for more information on vehicle deductions.
4. Contribute to a retirement account
If you haven’t opened a retirement account, such as an IRA, SEP-IRA, or solo 401(k), don’t miss the opportunity to cut taxes and start building wealth before year-end. The benefit depends on how much you contribute and your account type.
For 2023, the maximum IRA contribution is $6,500 or $7,500 if you’re over 50. If you contribute $6,500 to a traditional IRA by your tax filing deadline (mid-April or mid-October if you file an extension), you reduce your taxable income by that amount.
Self-employed retirement accounts, such as a SEP-IRA and solo 401(k), allow contributions of up to 25% of your net business earnings up to $66,000. That gives you a much larger potential tax deduction.
5. Max out a health savings account (HSA)
If you have a high deductible, HSA-qualified health plan purchased on your own or through your or a spouse’s employer, you can open an HSA. Like a traditional IRA, HSA contributions made by your tax filing deadline are deductible for the current year.
What’s terrific about an HSA is that your funds can be invested for tax-free growth. Plus, when you spend it on qualified healthcare costs, your withdrawals are entirely tax-free. That significantly cuts the long list of medical expenses you’ll find in Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans.
6. Buy business equipment
If you’ve been considering buying equipment for your business, such as a computer, machinery, or vehicle, consider doing it before the end of the year. In some cases, you may be able to deduct the entire cost this year instead of depreciating it over several years.
Review Publication 946, How to Depreciate Property, and consult with a certified tax accountant if you purchased business assets or are considering them.
7. Time your business income and expenses
Timing your income and expenses involves legitimately moving them from one year to another to pay the least in taxes. For instance, if you defer business income until January, you reduce earnings in the current year.
To reduce your taxable income, you might accelerate or prepay certain business expenses before the New Year–such as real estate continuing education, memberships, and auto insurance. If you mail payments or make credit card charges in the current year, you can deduct them.
A wise strategy for cutting taxes before the year-end is getting guidance from a certified tax professional. Their advice can pay off in the long run if it helps you get organized and reduce your taxable income for the year. It’s up to you (and your tax pro) to make smart moves now to avoid potential tax mistakes and save as much money as possible.
Laura Adams is the author and host of the Money Girl podcast.
This content should not be considered accounting or legal advice. You should consult your local tax or legal professional in your state for appropriate strategies.
This column does not necessarily reflect the opinion of RealTrends’ editorial department and its owners.
To contact the author of this story: Laura Adams at [email protected]
To contact the editor responsible for this story: Tracey Velt at [email protected]