How to Build a Capsule Wardrobe

Save more, spend smarter, and make your money go further

There are so many fashion trends that come and go; but what does that mean for your pockets? You’re left overspending, making impulse decisions, or buying items because others are doing the same thing. Remember, fashion is a personal experience. It’s unique to each one of us as we all express our personal style in different ways. The cost of living along with everyday essentials are on the rise; what are a few ways to remain stylish while making sure it’s budget friendly? Use the following tips to build a classic wardrobe that’s always on trend – no matter the occasion.

What is a capsule wardrobe?

A capsule wardrobe consists of a set of tops, bottoms, outerwear, shoes, and various accessories that are versatile and can be mixed based on occasion to create a multitude of looks. The focal point of a capsule wardrobe is to own more on quality pieces that can transcend through the various seasons.

Ranging from between 25 – 75 pieces (or more; just depends on your preference) the key is to be able to identify all your clothing items easily and severely cut down on the time it takes to decide what you’re going to wear from day-to-day. Your new wardrobe should be able to reflect you personally while also remaining super functional.

Step 1: Take an assessment of your closet

Before we get started with hitting our favorite stores or buying everything online; take note of what’s currently in your closet. Begin to create a few mounds of clothes – keep, purge, and repurpose piles. What are the items that no longer fit? What items don’t necessarily fit your personal style anymore?

Be honest with yourself during this exercise. For example, if the clothes fit but you haven’t worn them within the past six months, chances are you may not be in love with them like you thought during the initial purchase. Also consider gently used clothes that are still in good shape to donate or sell to a consignment shop. The funds made from items already in your closet can go toward new pieces for your capsule wardrobe! Consider your current lifestyle as well – are you self-employed, working a 9-5 or a stay-at-home parent? All of this will impact your personal decisions as it relates to clothing.

To streamline this process even further, take pictures of the items you’re going to keep and have them all in one album on your phone. This way, you’re able to track each piece you have before making any new purchases. We often believe we have nothing to wear when it’s time to get dressed – when we really are just unsure of what we have. Reprogram your mind to utilize what you already have versus spending out of impatience and frustration.

Step 2: Identify your personal style and experiment

Social media exposes us to so many people, their personal styles and fashion inspirations. When you take a step back from everyone else’s thoughts and opinions; who inspires you? Create a mood board with outfits that pique your interest, that are classic in nature and are flattering to your body type. Ask yourself the following questions:

  • Are these pieces something I’m going to love years from now?
  • Will I feel confident no matter the occasion?
  • Does this fit my work and personal lifestyle?
  • Am I committed to investing in quality items?

Answering these truthfully are a great baseline to tailoring your wardrobe for you – regardless of what’s ever changing on social media. Next is the fun part; begin experimenting with what’s in your closet! Make sure all your items are in one area in your closet or buy a fashion rack so you’re able to easily identify your growing capsule wardrobe. Using either of these methods should not only cut down your decision time when getting dressed, it gives you the opportunity to create multiple looks with the same pieces. The main goal is functionality – make sure it’s adaptable to your lifestyle and its’ demands.

Step 3: Spend wisely and fight the urge against fast fashion

Quality over quantity is the mantra to live by when wanting to build a capsule wardrobe. Think about it in this way – how can you remain timeless while also having a distinct personal style?

When you’re looking for items to add to your capsule, focus on durability and quality. There’s no point in buying a lot of clothes that can’t withstand a few cycles in the washing machine (lack of quality) or shopping for one specific event (non-functional pieces). Refer to the pictures that’ve been taken of your current items so they’re handy during any shopping trip. Don’t forget to leverage consignment shops or thrift stores during this process. Bulkier, yet timeless items such as trench coats or vests with neutral colors can often be found. If you find that shopping for each season initially is too difficult, begin offseason shopping. During the summer, fall and winter clothes can be reduced heavily in price; use these opportunities as a cost savings.

Step 4: Take your time and have fun!

Transitioning from your current wardrobe to a fully functional one isn’t easy. Don’t overwhelm yourself with trying to finalize each piece in your closet over a designated amount of time. Not only is that not realistic, but it’s also expensive (which partly defeats the purpose) and stressful. This should be a fun, experimental, yet intentional time.

Take note of the outfits you enjoy the most. What about them makes you confident? You’ll discover you love every item in your closet versus simply dealing with pieces to complete an outfit. Take a note of items that may be currently missing from your wardrobe that can be worn at least three ways.

Taking this into account, you’ll be able to add those items into your rotation easily. Every purchase should be strategic and purposeful. While others are chasing trends that change every season, you’ll be peaceful and empowered with a wardrobe distinctly curated by you and your wants.

Save more, spend smarter, and make your money go further

Marsha Barnes

Marsha Barnes is a finance guru with over 20 years of experience dedicates her efforts to empower women worldwide to become financially thriving. Financial competency and literacy are a passion of Marsha’s, providing practical information for clients increasing their overall confidence in their personal finances. More from Marsha Barnes

Source: mint.intuit.com

Stock Market Today: Stocks Finish Lower as Traders Mull Recession Odds

The potential for the U.S. to slip into recession was the topic du jour Monday as stocks kicked off the week with a wobbly, uneven session.

Over the weekend, former Goldman Sachs chief Lloyd Blankfein told CBS’ Face the Nation that recession was “a very, very high risk factor.” That opinion was met by a number of other calls Monday morning.

Wells Fargo Investment Institute, for instance, says “our conviction is that the chances of an outright recession in 2022 remain low” but believes odds are growing that 2023 could see an economic contraction. UBS strategists say the chances are different depending on where you look – their global economists say “hard data” points to a sub-1% chance of recession over the next 12 months, but the yield curve implies 32% odds.

“There’s no crystal ball to predict what’s next, but historical trends can come into play here. With the [S&P 500] closing 15% below its weekly record, there’s only been two times in the past 60-plus years that the market didn’t fall into bear territory after a similar drop,” adds Chris Larkin, Managing Director of Trading at E*Trade. “This doesn’t mean it’s bound to happen, but there is room for potential downside.”

Larkin says to keep an eye on major retail earnings this week – which will kick off in earnest with Walmart’s Tuesday report – to get a pulse check on the American consumer.

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Monday itself was a fairly quiet affair. Exxon Mobil (XOM, +2.4%) and Chevron (CVX, +3.1%) were among a number of plays from the energy sector (+2.7%) that popped after U.S. crude oil futures jumped another 3.4% to $114.20 per barrel.

Twitter (TWTR, -8.2%) shares dropped after Tesla (TSLA, -5.9%) CEO Elon Musk spent the weekend questioning how much of Twitter’s traffic comes from bots. Wedbush analyst Daniel Ives said the move feels more like a “‘dog ate the homework’ excuse to bail on the Twitter deal or talk down a lower price.” TWTR stock has now given up all its gains since Musk announced his stake in the social platform.

The major indexes finished an up-and-down session with mostly weak results. The Dow Jones Industrial Average managed to eke out a marginal gain to 32,223, but the S&P 500 declined 0.4% to 4,008, while the Nasdaq Composite retreated 1.2% to 11,662.

Also worth noting: Warren Buffett’s Berkshire Hathaway will file its quarterly Form 13F soon. Check back here tonight as we examine what Buffett has been buying and selling. 

stock chart for 051622stock chart for 051622

Other news in the stock market today:

  • The small-cap Russell 2000 closed out the session with a 0.5% dip to 1,783.
  • Gold futures gained 0.3% to settle at $1,814 an ounce.
  • Bitcoin was off 1.6% to $29,551.92 (Bitcoin trades 24 hours a day; prices reported here are as of 4 p.m.)
  • JetBlue Airways (JBLU, -6.1%) ramped up its hostile takeover attempt of Spirit Airlines (SAVE, +13.5%) on Monday, urging SAVE shareholders to vote against a buyout offer from fellow low-cost air carrier Frontier Group Holdings (ULCC, +5.9%). JBLU last month offered to buy Spirit Airlines for $33 per share – a premium to the $21.50 per share ULCC offered in February – but SAVE’s board of directors rejected the bid citing concerns over regulatory approval. JBLU followed up in early May with an “enhanced superior proposal,” including paying a $200 million, or $1.80 per SAVE share, reverse break-up fee should regulators block the deal.
  • Warby Parker (WRBY) fell 5.3% after the eyeglass maker reported a loss of 30 cents per share in its first quarter. This was much wider than the per-share loss of 3 cents the company reported in the year-ago period and missed the consensus estimate for breakeven on a per-share basis. Revenue of $153.2 million also fell short of analysts’ expectations. WRBY did maintain its full-year revenue guidance of $650 million to $660 million. “We remain cautiously optimistic on shares as WRBY continues to show ability to grow the top line, open new stores, and is recession resistant as a lower cost option for non-discretionary spend,” says CFRA Research analyst Zachary Warring (Buy). “We see the company leveraging SG&A to become profitable in the second half of 2022.”

Check Out Europe’s Dividend Royalty

If you’re seeking out more stable opportunities amid an uncertain U.S. market … well, the rest of the world is admittedly looking pretty shaky, too. But that doesn’t mean there aren’t a few morsels worth a nibble. 

BCA Research notes that while there’s negative news around the globe, “European benchmarks already discount a significant portion of the negative news.” And looking ahead, inflation there is expected to peak over the summer “as the commodity impulse is decelerating” – that should help stagflation fears recede and help European shares.

Graham Secker, Morgan Stanley’s chief European and U.K. equity strategist, chimes in that his firm remains “overweight [European] stocks offering a high and secure dividend yield.”

We’ve previously highlighted our favorite European dividend stocks, which on the whole tend to produce higher yields than their U.S. counterparts.

But we’d also like to shine the spotlight on Europe’s twist on an American income club: the Dividend Aristocrats. The S&P Europe 350 Dividend Aristocrats have somewhat different qualifications than their U.S. brethren, but in general, they’ve proven their ability to provide stable and growing dividends over time.

Read on as we look at the European Dividend Aristocrats.

Source: kiplinger.com

What Is Inflation (Definition) – Causes & Effects of Rate on Prices & Interest

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Additional Resources

People have always grumbled that a dollar doesn’t go as far as it used to. But these days, that complaint is truer than ever. No matter where you go — the gas station, the grocery store, the movies — prices are higher than they were just a month or two ago.

What we’re seeing is the return of a familiar economic foe: inflation. Many Americans alive today have never seen price increases like these before. For the past three decades, inflation has never been above 4% per year. But as of March 2022, it’s at 8.5%, a level not seen since 1981.

Modest inflation, like what we had up through 2020, is normal and even healthy for an economy. But the rate of inflation we’re seeing now is neither normal nor healthy. It does more than just raise the cost of living. It can have a serious impact on the economy as a whole. 

Recent inflation-related news:


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  • In March 2022, the U.S. inflation rate hit a 40-year high of 8.5%. 
  • Prices for gasoline have increased nearly 50% over the past year.
  • Retail giant Amazon has added a 5% fuel and inflation surcharge for sellers.
  • The Federal Reserve is planning a series of interest rate hikes to cool the overheated economy.

What Is Inflation?

Inflation is more than just rising prices. Prices of specific things we buy, from a gallon of milk to a year of college tuition, rise and fall all the time. These price increases affect individual consumers’ lives, but they don’t have a big impact on the entire economy.

Inflation is a general increase in the prices of goods and services across the board. It drives up prices for everything you buy, from a haircut to a gallon of gas. Or, to put it another way, the purchasing power of every dollar in your pocket declines.

Most of the time, inflation doesn’t disrupt people’s lives too much, because prices rise for labor as well. If your household spending increases by 5% but your paycheck increases by 5% at the same time, you’re no worse off than before.

But when prices rise sharply, wages can’t always keep up. That makes it harder for consumers to make ends meet. It also drives them to change their spending behaviors in ways that often make the problem worse.


Causes of Inflation

Inflation depends on the twin forces of supply and demand. Supply is the amount of a particular good or service that’s available. Demand is the amount of that particular good or service that people want to buy. More demand drives prices up, while more supply drives them down. 

To see why, suppose you have 10 loaves of bread to sell. You have 10 buyers who want bread and are willing to pay $1 per loaf. So you can sell all 10 loaves at $1 each.

But if 10 more buyers suddenly enter the market, they will have to compete for your bread. To make sure they get some, they might be willing to pay as much as $2 per loaf. The higher demand has pushed the price up.

By contrast, if another seller shows up with 10 loaves of bread, the two of you will be competing for buyers. To sell your bread, you might have to lower the price to as little as $0.50 per loaf. The higher supply has pushed prices down.

Inflation results from demand outstripping supply. Economists often describe this as “too much money chasing too few goods.” There are several ways this kind of imbalance can happen.

Cost-Push Inflation

Cost-push inflation happens when it costs more to produce goods. To go back to the bread example, cost-push inflation might happen because a wheat shortage makes flour more expensive. It costs you more to make each loaf of bread, so you can’t afford to bake as much.

As a result, you bring only five loaves to the market. But there are still 10 customers who want to buy bread, so they must pay more to get their share. The higher cost of production drives down the supply and thus drives up the price.

In the real world, cost-push inflation can result from higher costs for anything that goes into making a product. This includes:

  • Raw Materials. The wheat that went into your bread is an example. Higher-cost wheat means higher-cost flour, which means higher-cost bread.
  • Transportation. In today’s global economy, materials and finished goods move around a lot. Transporting products requires fuel, which usually comes from oil. So whenever oil prices go up, the price of other goods rises as well. 
  • Labor. Another factor in production cost is labor. When schools closed during the COVID-19 pandemic, many parents had to stop working to care for their children. That created a worker shortage that drove prices up.

Demand-Pull Inflation

The opposite of cost-push inflation is demand-pull inflation. It occurs when consumers want to buy more than the market can supply, driving prices up.

Typically, demand-pull inflation results from economic growth. Rising wages and lower levels of unemployment put more money in people’s pockets, and people who have more money want to spend more. If the booming economy hasn’t produced enough goods and services to match this new demand, prices rise.

Other causes of demand-pull inflation include: 

  • Increased Money Supply. Another way people can end up with more money in their pockets is because the government has put more money in circulation. Governments often do this to stimulate a weak economy or to pay off past debts. But as the money supply increases, the purchasing power of each dollar shrinks. 
  • Rapid Population Growth. When the population grows rapidly, the demand for goods and services grows also. If the economy doesn’t produce more to compensate, prices rise. In Europe during the 1500s and 1600s, prices soared as the population grew so fast that agriculture couldn’t keep up with the new demand.
  • Panic Buying. Early in the COVID pandemic, consumers started buying extra groceries to fill their pantries in preparation for a lockdown. This led to shortages of many staple products, like milk and toilet paper. As a result, prices for those goods went up.
  • Pent-Up Demand. This occurs when people return to spending after a period of going without. This often happens in the wake of a recession. It also occurred as pandemic restrictions eased and people returned to enjoying movies, travel, and restaurant meals.

Built-In Inflation

When consumers expect prices to be higher in the future, they often respond by spending more now. If the purchasing power of their savings is only going to fall, it makes more sense to take that money out of the bank and use it on a major purchase, like a new car or a large appliance.

In this way, expectations of high inflation can themselves lead to inflation. This type of inflation is called built-in inflation because it builds on itself. 

When workers expect the cost of living to rise, they demand higher wages. But then they have more to spend, so they spend more, driving prices up. This, in turn, reinforces the belief that  prices will keep rising, leading to still higher wage demands. This cycle of rising wages and prices is called a wage-price spiral.


Effects of Inflation

Inflation does more than just drive up the cost of living. It changes the economy in a variety of ways — some harmful, others helpful. The effects of inflation include:

  • Higher Wages. As prices rise with inflation, wages typically rise as well. This can create a wage-price spiral that drives inflation still higher.
  • Higher Interest Rates. When the dollar is declining in value, banks often respond by raising interest rates on loans. The Federal Reserve also typically raises interest rates to cool the economy and rein in inflation, as discussed below.
  • Cheaper Debt. Inflation is good for debtors because they can pay off their debts with cheaper dollars. This is most useful for loans with a fixed interest rate, such as fixed-rate mortgages and student loans.
  • More Consumption. Inflation encourages consumers to spend money because they know it will be worth less later. All this spending keeps the economy humming, but it can also drive prices even higher.
  • Lower Savings Rates. Just as inflation encourages spending, it discourages saving. Higher interest rates can counter this effect, but they often don’t rise enough to make a difference.
  • Less Valuable Benefits. High inflation is worse for people on a fixed income. They face higher prices without higher wages to make up for them. Benefits such as Social Security change each year to adjust for inflation, but higher benefits next year don’t help when prices are rising right now.
  • More Valuable Tangible Assets. Inflation reduces the purchasing power of the dollars you have in the bank. Tangible assets like real estate, however, gain in dollar value as prices rise.

Measuring Inflation

The most common measure of inflation is the Consumer Price Index, or CPI. The Bureau of Labor Statistics (BLS) determines the CPI based on the cost of an imaginary basket of goods and services. BLS workers painstakingly check prices on all these items each month and record how each price changes.

To calculate the annual rate of inflation, the BLS looks at how much all prices in its basket have changed since a year earlier. Then it “weights” the value of each item based on how much of it people buy. The weighted average of all items becomes the CPI.

The BLS then uses the CPI to calculate the annual rate of inflation. It divides this month’s CPI by the CPI from a year ago, then multiplies the result by 100. This shows how the purchasing power of a dollar has changed over the last year. The result is reported monthly.

Other measures of inflation include:

  • Personal Consumption Expenditures Price Index (PCE). This inflation measure is published by the Bureau of Economic Analysis. Like the CPI, it’s a measure of consumer costs, but it’s adjusted to account for changes in the products people buy. The Federal Reserve uses the PCE to guide its monetary policy, as discussed below. 
  • Producer Price Index (PPI). The PPI measures inflation from the seller’s perspective, not the buyer’s. It’s calculated by dividing the price sellers currently get for a basket of goods and services by its price in a base year, then multiplying the result by 100.

Historical Examples of Inflation

A little bit of inflation is normal. But sometimes inflation spirals out of control, with prices rising more than 50% per month. This is called hyperinflation, and it can be devastating for an economy.

Hyperinflation has occurred at various times and places throughout history. During the U.S. Civil War, both sides experienced soaring inflation. Other examples include Germany in the 1920s, Greece and Hungary after World War II, Yugoslavia and Peru in the 1990s, and Venezuela today. In most cases, the main cause was the government printing money to pay for debt. 

The last time the U.S. had prolonged, high rates of inflation was in the 1970s and early 1980s. The inflation rate was nowhere near hyperinflation levels, but it spiked above 10% twice. Eventually, the Fed hiked interest rates to double-digit levels to get it under control.

Although high inflation can be destructive, zero inflation isn’t a good thing, either. At that point, an economy is at risk of the opposite problem, deflation. 

When prices and wages fall across the board, consumers spend less. Sales of products and services fall, so companies cut back staff or go out of business. As a result, jobs are lost and spending drops still more, worsening the problem. The Great Depression was an example.


The Federal Reserve, or Fed, is the U.S. central bank — or more accurately, banks. It’s a group of 12 banks spread across the country under the control of a central board of governors. Its job is to keep the economy on track, reining in inflation while trying to avoid recessions. 

The Fed maintains this balance through monetary policy, or controlling the availability of money.

Its main tool for doing this is interest rates. When the economy is weak, the Fed lowers the federal funds rate. This makes it easier for people to borrow and spend. 

When the problem is inflation, it does the opposite, raising interest rates. This makes it more costly to borrow and more worthwhile to save. As a result, consumers spend less, slowing down the wage-price spiral.

The Fed has other tools for fighting inflation as well. One option is to change reserve requirements for banks, requiring them to hold more cash. That gives them less to lend out, which in turn reduces the amount consumers and businesses have to spend.

Finally, the Fed can reduce the money supply directly. The main way it does this is to increase the interest rate paid on government bonds. That encourages more people to buy bonds, which temporarily takes their money out of circulation and puts it in the hands of the government.


Inflation Frequently Asked Questions (FAQs)

If you keep seeing stories about inflation in the news, you may have some other questions about how it works. For instance, you may wonder:

What Is Hyperinflation?

Hyperinflation is more than just high inflation. It’s a wage-price spiral gone mad, sending prices soaring out of control. As noted above, the usual definition of hyperinflation is an inflation rate of at least 50% per month — more than 12,000% per year. However, some economists use the term to refer to an inflation rate of 1,000% or more per year.

What Is Disinflation?

Disinflation is a fall in the rate of inflation. This is what the Federal Reserve and other central banks try to achieve through their monetary policy, such as raising interest rates.

Disinflation is not the same as deflation, or falling prices. During a period of disinflation, prices are continuing to rise, but the rate at which they rise is slowing down.

What Is Transitory Inflation?

When the first signs of a post-COVID-19 inflation spike appeared, Federal Reserve chair Jerome Powell described it as “transitory.” By this, he meant that the rise in prices would be short-lived and would not do permanent damage to the economy. 

However, in November 2021, Powell declared it was “time to retire that word.” Based on the growth in prices, he had concluded that inflation was more of a long-term trend. The Federal Reserve responded by planning to fight inflation harder, buying more bonds and plotting out a series of interest rate hikes.

What Is Core Inflation?

Measuring inflation can be tricky because prices for some products fluctuate more than others. Food and energy prices, in particular, can shift a lot from month to month. Including these products in the CPI can lead to sharp, but temporary, spikes or dips in the inflation rate.

To adjust for this, the CPI and PCE have a separate “core” version that doesn’t include food or energy prices. This core inflation measure is more useful for predicting long-term trends. The  main versions of the CPI and PCE, known as the “headline” versions, give a more accurate picture of how prices are changing right now.

What Is the Consumer Price Index (CPI)?

As noted above, the Consumer Price Index, or CPI, is the main measure of inflation in the United States. The BLS calculates it based on how much prices have risen for an imaginary basket of goods and services that many Americans buy.


Final Word

A little inflation in an economy is normal. It can even be a good thing, because it’s a sign that consumers are spending and businesses are earning. The Fed generally considers an annual inflation rate of 2% to be healthy.

However, higher inflation can cause serious problems for an economy. It’s bad for savers whose nest eggs, including retirement savings, shrink in value. It’s even worse for seniors and others on fixed incomes whose purchasing power has fallen. And it often requires strong measures from the central bank to correct it — measures that risk driving the economy into a recession.

If you’re concerned about the effects of inflation, there are several ways to protect yourself. You can adjust your household budget, putting more dollars into the categories where prices are rising fastest. You can stock up on household basics now, before the purchasing power of your dollars falls too much. 

Finally, you can choose investments that do well during periods of inflation. Stock-based mutual funds and real estate investment trusts are both good choices. Just be careful with inflation hedges like gold and cryptocurrency, which carry risks of their own.

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Amy Livingston is a freelance writer who can actually answer yes to the question, “And from that you make a living?” She has written about personal finance and shopping strategies for a variety of publications, including ConsumerSearch.com, ShopSmart.com, and the Dollar Stretcher newsletter. She also maintains a personal blog, Ecofrugal Living, on ways to save money and live green at the same time.

Source: moneycrashers.com

What Is the MACD Indicator (Moving Average Convergence Divergence)?

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Additional Resources

Traders use a wide range of technical indicators to generate trading signals when making their moves in financial markets. These indicators help traders analyze price action to determine price trends, the momentum of those trends, the best time to buy, and the best time to sell financial assets. 

The moving average convergence divergence indicator (MACD indicator) is one of the most popular tools in a trader’s toolbox. 

The tool is a momentum indicator built under the idea that momentum changes happen ahead of price changes. The idea is that traders can track and analyze the momentum of price movements to determine where the value of the asset is likely headed in the future. 


What Is the Moving Average Convergence Divergence (MACD) Indicator?

The MACD is a momentum oscillator that shows the relationship between two moving averages of a financial asset’s price. Those moving averages include the 26-day exponential moving average (EMA) and the 12-day EMA. Traders also use a signal line with this indicator which is plotted using a 9-day EMA of the MACD. Gerald Appel, founder of the Systems and Forecasts newsletter, developed the indicator in the late 1970s. 


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It’s important that you understand moving averages before going further, because they are the building blocks that form the MACD and the signals it generates. 

Moving averages reveal average prices over time. At the close of every trading session, the new closing price is added into the calculation and the oldest is removed, helping smooth the volatility of price movement in the trading chart.

The MACD uses exponential moving averages (EMAs). EMAs are time-weighted averages, meaning the newest data is given more importance than older data. This makes them more sensitive to the most recent price movements. 


What the MACD Measures

The MACD is a momentum oscillator, meaning it measures the veracity of price movements in the market. 

The concept behind the indicator is that price changes happen as a result of investor movements. When investor demand for an asset climbs, the price of that asset follows, and when demand declines, the price falls. 

Because all investors don’t make their moves at the same time, tracking the speed of price movements, or speeding and slowing of demand, indicates when reversals are likely to occur. Traders see these coming reversals as buy and sell signals. 


How to Calculate MACD

To calculate the MACD, subtract the long-term, 26-period EMA from the short-term, 12-period EMA:

MACD = 12-Day EMA – 26-Day EMA

Most charting platforms do this calculation for you and plot the results alongside an asset’s price chart.

Example Calculation

Let’s say ABC stock has a 12-Day EMA of $25.12 and a 26-Day EMA of $24.93. The moving average convergence divergence formula using the data in the example would look like this: 

MACD = $25.12 – $24.93 = $0.19 

The value of the MACD is plotted on the graph over time. Investors watch as the value increases and decreases, creating buy and sell signals. 

Signals are also created by comparing the movement of a signal line in relation to the MACD line. The signal line is calculated by taking a nine-day EMA of the MACD. 


How to Read the MACD

There are three important lines to watch when reading MACD data:

  1. MACD Line. The MACD line is plotted on the chart based on MACD values over time. When the MACD line crosses above zero, the trend is considered bullish, and the trend is bearish when the MACD line crosses below zero. 
  2. Signal Line. The signal line — the line created by taking a nine-day EMA of the MACD — is also plotted on the chart. Traders pay close attention to the relationship between the MACD line and the signal line, specifically looking for points at which the two lines cross for trading signals. 
  3. MACD Histogram. The MACD histogram is a visualization tool that helps traders measure the difference between the MACD line and the signal line. Investors read these two lines converging or diverging as buy and sell signals. 

Ways to Interpret the MACD

The MACD generates trading signals in multiple ways. Some of the most common ways to interpret the indicator include:

MACD Crossovers

MACD crossovers happen when the MACD line crosses over the signal line on a trading chart, generating signals to buy and sell the asset being analyzed. Here’s how they work:

  • Bullish Crossover. A bullish crossover happens when the MACD line crosses over the signal line. When this happens, it acts as a signal that the stock is headed for an uptrend. 
  • Bearish Crossover. A bearish crossover happens when the MACD line crosses below the signal line. When this occurs, it’s a signal that the stock price is headed for a downtrend. 

Crossovers can also happen without a signal line:

  • Bullish Crossover. When the MACD line crosses over zero, the move is considered to be bullish, signaling upward movement ahead. 
  • Bearish Crossover. When the MACD line crosses below zero, the move is considered bearish, signaling downward movement ahead. 

See the chart below for an example. The chart shows Apple’s daily stock price and the MACD over a six-month period ending April 7, 2022.

At the bottom of the image, you’ll notice a sub-chart with a red line, a black line, and a blue histogram. This section charts the MACD. The black line is the MACD line, and the red line is the signal line. 

Around November 15, 2021, a bullish crossover took place, preceding a sharp rise in Apple’s stock price. In mid-December, a bearish crossover took place, followed by significant downward movement. 

There are two more bullish crossovers and one more bearish crossover on the chart that occured in 2022. Take a moment to see if you can spot them. 

If you spotted the bullish crossovers in late January 2022 and mid-March 2022, and the bearish crossover in mid-February 2022, you’re on the right track. 

MACD Histogram

The MACD histogram is a series of bars plotted in the center of the MACD chart. The bars seem to grow above and fall below the zero line, creating easy-to-spot bullish and bearish signals. 

  • Bullish Histogram Signals. When the MACD line crosses above zero, a bar in the histogram will start a series of bars that climb above the zero line. This event indicates that momentum is moving in the upward direction and an uptrend is on the horizon. 
  • Bearish Histogram Signals. When the oscillator’s line crosses below zero, a bar in the histogram will start a series of bars that fall below the zero line. This event indicates that momentum is moving in the downward direction and signals a downtrend. 

Let’s refer again to Apple’s stock chart for an example:

You’ll notice a series of blue lines in the MACD section at the bottom of Apple’s stock chart. 

In mid-November, a series of blue bars emerged in an upward direction from the center of the chart, suggesting that prices would rise. In mid-December, the bars reversed direction, falling below the zero line, suggesting prices would decline. Following these events, Apple’s stock price did exactly what the signals suggested would happen. 

Bullish signals were also created in late January and mid-March of 2022, and another bearish signal can be spotted in mid-February 2022. Take a moment to study the chart and note how the price of Apple’s stock reacted following these events. 

MACD Divergences

Finally, MACD divergences are used to determine which direction an asset is likely to move in. A divergence takes place when the MACD doesn’t agree with the asset’s price movement. 

For example, if the asset closes the day at a higher high but the MACD moves lower, the move is known as a divergence. Here’s what divergences tell you:

  • Bullish Divergence. When a stock closes the day lower, but the MACD moves into the positive territory, this is known as a bullish divergence. The signal suggests that bearish momentum is slowing and buyers are flooding into the asset. As a result, the price of the asset should head in the upward direction. 
  • Bearish Divergence. When a stock closes the day at a new high, but the MACD moves into negative territory, it’s considered a bearish divergence. This move suggests bullish momentum is slowing and the bears are about to take control. As a result, declines are likely ahead. 

Let’s return to Apple’s stock chart to see what this looks like:

The MACD line started moving downward in mid-December. While the histogram showed bearish momentum, the price of Apple continued to move upward for a few trading sessions. As the divergence between the price of Apple and its MACD grew, a clear reversal began to emerge, leading up to dramatic declines in the price of the stock in the sessions to follow. 

Toward the end of the chart, there’s a bullish divergence, with Apple’s 50-day moving average moving downward while the histogram moved into positive territory. Can you spot it? When you do, you’ll see the stock made a strong move for the top shortly following the divergence. 


Relative Strength Index (RSI) vs. the MACD Indicator

The relative strength index (RSI) is a momentum indicator, just like the MACD. However, the two are calculated in different ways, which can lead to different results from time to time. 

The RSI is also an oscillator, but it’s centered around price gains or losses over time, focusing on extreme highs and extreme lows to determine if an asset is overbought or oversold. This differs from the MACD because it doesn’t use moving averages to determine momentum and momentum direction. 

No single momentum oscillator is perfect. Many traders use both the RSI and the MACD when making their trades, using one to verify the results of the other. 


Limitations of the MACD Indicator

The MACD indicator is an impressive tool, but like most other technical analysis tools, it’s not perfect. Some limitations to consider when taking advantage of the MACD include:

  • Failure to Signal. Although the indicator is great at showing when some reversals are likely to occur, it doesn’t catch them all. In some cases, momentum and price movements occur at just about the same time, and the MACD doesn’t have time to alert traders to the coming reversal before it’s already happened. 
  • False Positives. In some cases, momentum will shift directions for a short period and reverse quickly, while the price stays relatively flat. As a result, traders may act on a signal, and a reversal may not actually happen. 

In short, the indicator doesn’t catch all reversals, and some of the signals it does provide won’t come to fruition. 

Most indicators have their limitations, which is why it’s important for traders to have multiple tools in their toolboxes. 


Final Word

The MACD is an important piece of many successful traders’ trading strategies. The metric helps to determine when prices will rise and fall, but it isn’t perfect. Make sure you couple it with a few other technical indicators to get a full picture when making your moves in the market. 

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Joshua Rodriguez has worked in the finance and investing industry for more than a decade. In 2012, he decided he was ready to break free from the 9 to 5 rat race. By 2013, he became his own boss and hasn’t looked back since. Today, Joshua enjoys sharing his experience and expertise with up and comers to help enrich the financial lives of the masses rather than fuel the ongoing economic divide. When he’s not writing, helping up and comers in the freelance industry, and making his own investments and wise financial decisions, Joshua enjoys spending time with his wife, son, daughter, and eight large breed dogs. See what Joshua is up to by following his Twitter or contact him through his website, CNA Finance.

Source: moneycrashers.com

How Rising Inflation Affects Mortgage Interest Rates

While the inflation rate doesn’t directly impact mortgage rates, the two tend to move in tandem. Rising inflation can shrink purchasing power as prices of goods and services increase. Higher prices can then influence the Federal Reserve’s interest rate policy, affecting the cost of borrowing for lending products like mortgages.

Homebuyers looking for a home loan and homeowners who want to refinance a mortgage need to know that mortgage rates may rise as inflation increases. Therefore, understanding the difference between the inflation rate, interest rates, and what affects mortgage rates matters for all home finance consumers.

Inflation Rate vs Interest Rates

Inflation is a general increase in the overall price of goods and services over time.

The Federal Reserve, the central bank of the United States, tracks inflation rates and inflation trends using several key metrics, including the Consumer Price Index (CPI), to determine how to direct monetary policy. A target inflation rate of 2% is considered ideal for maintaining a stable economic environment over the long run.

When inflation is on the rise and the economy is in danger of overheating, the Federal Reserve may raise interest rates to cool things down.

Interest rates reflect the cost of using someone else’s money. Lenders charge interest to borrowers who take out loans and lines of credit as a premium for the right to use the lender’s money.

Higher rates can make borrowing more expensive while also providing more interest to savers. People borrowing less and saving more can have a cooling effect on the economy.

When the economy is slowing down too much, on the other hand, the Fed can lower interest rates to encourage borrowing and spending.

Recommended: Federal Reserve Interest Rates, Explained

What Affects Mortgage Rates?

Inflation rates don’t have a direct impact on mortgage rates. But there can be indirect effects because of how inflation influences the economy and the Federal Reserve’s monetary policy decisions. Again, this relationship between inflation and mortgage rates is related to how the Federal Reserve adjusts interest rates to cool off or jump-start the economy.

The Federal Reserve does not set mortgage rates, however. Instead, the central bank sets the federal funds rate target, the interest rate that banks lend money to one another overnight. As the Fed increases this short-term interest rate, it often pushes up long-term interest rates for U.S. Treasuries. Fixed-rate mortgages are tied to the 10-year U.S. Treasury Note yield, which are government-issued bonds that mature in a decade. When the 10-year Treasury yield increases, the 30-year mortgage rate tends to do the same.

Recommended: Understanding the Different Types of Mortgage Loans

So in terms of what affects mortgage rates, movement in the 10-year Treasury yield is the short answer. Higher yields can mean higher rates, while lower yields can lead to lower rates. But overall, inflation rates, interest rates, and the economic environment can work together to sway mortgage rates at any given time.

A simple way to see the relationship between inflation rates and mortgage rates is to look at how they’ve trended historically . If you track the average 30-year mortgage rate and the annual inflation rate since 1971, you’ll see that they often move in tandem.

They don’t always move perfectly in sync, but it’s typical to see rising mortgage rates paired with rising inflation rates.

Inflation Trends for 2022 and Beyond

In March 2022, the U.S. inflation rate hit 8.5%, as measured by the Consumer Price Index. This increase represents the largest 12-month increase since 1981 and moving well beyond the Federal Reserve’s 2% target inflation rate.

While prices for consumer goods and services were up across the board, the most significant increases were in the energy, shelter, and food categories.

Rising inflation rates in 2022 are thought to be driven by a combination of things, including:

•   Increased demand for goods and services

•   Shortages in the supply of goods and services

•   Higher commodity prices due to geopolitical conflicts

The coronavirus pandemic saw many people cut back on spending in 2020, leading to a surplus of savings. In addition to government stimulus, these savings created a pent-up demand for purchases once the economy got back on track. However, the supply chains have not been able to catch up to demand.

Supply chain disruptions and worker shortages are making it difficult for companies to meet consumer needs. This has resulted in rapidly rising inflation to levels not seen in decades.

In March 2022, the Fed started to raise interest rates to tame inflation and will likely continue to raise interest rates throughout the year. Many analysts believe that inflation is peaking and will steadily decline throughout 2022. However, there is still a lot of uncertainty surrounding the economy that makes forecasting price trends difficult.

Recommended: 7 Factors that Cause Inflation

Is Now a Good Time for a Mortgage or Refi?

There’s a link between inflation rates and mortgage rates. But what does all of this mean for homebuyers or homeowners?

Rising inflation and higher interest rates have caused mortgage rates to spike at the fastest pace in decades, though mortgage rates are still near historic lows. As the Fed continues to pursue interest rate hikes, it could lead to even higher mortgage rates. It simply means that if you’re interested in buying a home, it could make sense to do so sooner rather than later.

Buying a home now could help you lock in a better deal on a loan and get a reasonable mortgage rate, especially as home values increase.

The higher home values go, the more important a low-interest rate becomes, as the rate can directly affect how much home you can afford.

The same is true if you already own a home and are considering refinancing an existing mortgage. However, when refinancing a mortgage, the math gets a bit trickier. You might need to determine your break-even point — when the money you save on interest payments matches what you spend on closing costs for a refinanced mortgage (a refi).

To find the break-even point on a refi, divide the total loan costs by the monthly savings. If refinancing fees total $3,000 and you’ll save $250 a month, that’s 3,000 divided by 250, or 12. That means it’ll take 12 months to recoup the cost of refinancing.

If you refinance to a shorter-term mortgage, your savings can multiply beyond the break-even point.

If your current mortgage rate is above refinancing rates, it could make sense to shop around for refinancing options.

Keep in mind, of course, that the actual rate you pay for a purchase loan or refinance loan can also depend on things like your credit score, income, and debt-to-income ratio.

Recommended: How to Refinance Your Mortgage — Step-By-Step Guide

The Takeaway

Inflation appears to be here to stay, at least for the near term. Buying a home or refinancing when mortgage rates are lower could add up to a substantial cost difference over the life of your loan. From a savings perspective, it’s essential to understand what affects mortgage rates and the relationship between the inflation rate and interest rates.

SoFi offers fixed-rate mortgages and mortgage refinancing. Now might be a good time to find the best loan for your needs and budget.

It’s easy to check your rate with SoFi.


SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility for more information.

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External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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Source: sofi.com

Student Loan Interest Rates for June 2022

There’s no way around it — college is expensive. This means that for many students, taking out a loan is the only way to realistically cover these expenses. And, like most other loans, student loans accrue interest.

In this article, we’ll explore the current interest rates across the most common student loan products, including federal and private student loans.

When we discuss federal interest rates on student loans in this article, we’re referring to what the rates would be when the freeze is lifted.

Comparing Rates Between Federal, Private and Refinance Loans

Something you may notice is that, at the lowest end, private lenders seem to offer better interest rates than federal. It is important to note that these lowest interest rates are very difficult to get — your credit needs to be outstanding.

It’s also important to remember that, although fixed interest rates appear to have a higher range in the tables below, your interest rate by definition can change. So, while you may qualify for a lower interest rate on a variable-rate loan, it’s entirely possible that this rate will eventually go up and become higher than you would have gotten with the fixed-rate loan. This is simply the tradeoff (and risk) of variable interest rates.

Federal Loan Interest Rates at a Glance

Loan Type Borrower Fixed Interest Rate Loan Fee
Direct Subsidized and Direct Unsubsidized Loans Undergrad students 3.73% 1.057%
Direct Unsubsidized Loans Graduate or professional students 5.28% 1.057%
Direct PLUS Loans Parents and graduate or professional students 6.28% 4.228%

Federal rates increased across the board for the 2021-2022 school year by nearly a whole percentage point. That’s unfortunate, but they are still lower than they have been for years, and generally much lower than an equivalent private student loan.

Federal loans come in two basic types: subsidized and unsubsidized. The primary difference is around when the interest starts accruing:

  • Subsidized student loan: Interest is paid by the Education Department as long as you’re enrolled at least half-time in college.
  • Unsubsidized student loan: Interest begins to accrue as soon as the loan is dispersed.

There are some other differences, but they’re relatively minor compared to this.

The last thing to cover with federal loans is the loan fee (also known as the origination fee). This fee is calculated as a percentage of the total loan amount and then deducted automatically from each disbursement. In practice, this means you’ll receive a smaller loan than the amount you actually borrowed.

Private Loan Interest Rates at a Glance

Loan Type Interest Rates
Fixed rate 3.34% to 14.99%
Variable rate 1.04% to 11.99%

The wide variation in interest rate ranges is due to two factors: different lenders offering different rates, and the fact that the rate you’ll get is impacted by your credit and other factors.

As mentioned above, fixed interest rates tend to have higher rates on paper, but you don’t have to worry about that rate increasing on you, which is a very real possibility with variable-rate loans.

Loan Refinance Interest Rates at a Glance

Loan Type Interest Rates
Fixed rate 2.59% to 9.15%
Variable rate 1.88% to 8.9%

If your credit is good, it’s possible to refinance your existing student loan to get a lower interest rate. This is not always possible, but it can be an option worth exploring. These refinanced interest rates can themselves be lower than “normal” private rates, so it can be an option worth exploring.

How Student Loan Interest Rates Are Determined

Although federal and private loans are technically different, they often follow similar trends. In other words, when federal student loan interest rates go up, private rates are likely to do the same. Likewise for when they go down. Let’s look at what actually goes into determining federal and private interest rates.

Federal Student Loan Interest Rates

These student loan interest rates are set each year by Congress, based on the high yield of the 10-year Treasury note auction in May. The new rate applies to loans disbursed from July 1 to June 30 of the following year.

Federal student loan rates are always fixed. This means that they won’t change during the life of the loan — whatever interest rate you get when you take out the loan is what you’ll keep until it’s paid off (it changes with student loan refinancing).

Private Student Loan Interest Rates

These loans are funded by banks, credit unions, and other private lenders. As such, interest rates vary between the different lenders, and it’s worth shopping around whenever possible.

Private lenders usually offer both fixed-rate and variable-rate loans. Fixed-rate means that your interest rate remains the same over the life of the loan. It can neither increase nor decrease.

A variable interest rate, on the other hand, means that your interest rate can fluctuate with the market. Sometimes you can get lucky and have it go down for a period of time. However, the risk with variable-rate loans is that the interest rate goes up significantly and you end up paying much more than anticipated.

It’s important to keep this in mind when selecting a loan. It may be worthwhile to take a slightly higher fixed interest rate rather than assume the risks of a variable rate.

The Impact of COVID-19 on Student Loans

The interest rate cuts in 2020 had a major ripple effect on student loan interest rates. Despite the slowly recovering economy, interest rates remain lower than they’ve been in years, for federal student loans and private fixed-rate and variable interest rate loans. This is excellent news for student loan borrowers, and we hope to see these rates remain low in the coming year.

Currently, all federal student loan debt is frozen until Sept. 1, 2022. This means that rates are set to zero and no payments are due until that date. This loan repayment freeze originally began in March 2020  at the outset of the pandemic and has been extended six times at this point.

The Pros and Cons of Federal Student Loans vs. Private Student Loans

Let’s explore the pros and cons of the two major classes of student loans — federal and private. Neither is perfect, as we’ll see. Rather, each is suited to particular situations and types of borrowers.

Federal Student Loans


Pros

  • Flexible repayment plans. Federal loans are eligible for income-based repayment plans and loan forgiveness. These can be a huge help if you find yourself in a tough financial spot.
  • Much lower requirements. It’s almost always much easier to qualify for a federal loan than it is a private student loan, particularly if you want a good interest rate.
  • More affordable overall. Most of the time you’ll end up paying less on federal student loans than on a private student loan.


Cons

  • Origination fees. Federal student loans are subject to small origination fees, which aren’t part of a private student loan. This means your loan disbursements are usually going to be smaller.
  • Borrowing limits for undergraduates. This means some students may actually need to take out a small private loan in addition to the federal loan to cover their full college costs.
  • Can’t choose your loan servicer. Federal student loans are turned over to a loan servicer to handle the payments and administration of that loan. Some of them have sketchy reputations

Private Student Loans


Pros

  • Larger loans. If you know that you’ll need a certain amount of money, and it’s more than federal loans can offer, it might make more sense to simply go private.
  • Potentially lower rates. A private loan may have lower rates, particularly with student loan refinancing. That said, you’ll need an excellent credit score to get these lowest rates.
  • No origination fees. Private student loans don’t have the origination fees that come with federal student loans.


Cons

  • More difficult to qualify for. Private loans have stricter requirements, particularly around credit histories. Federal student loans are almost always easier to qualify for.
  • Generally higher interest rates. Unless your credit is outstanding, you’ll almost always get a better interest rate with a federal student loan.
  • Less flexibility in repayment options. Some private lenders are willing to work with borrowers on this, but there’s no law or regulation forcing them to, and thus, no guarantee.

Frequently Asked Questions (FAQs) About Student Loan Interest Rates

If you still have questions about student loan interest rates, don’t worry — we’ve got answers. Here are some of the most common questions.

What is the Interest Rate on Student Loans Right Now?

Student loan interest rates range from a low of 1.04% to a high of almost 15%. The rates depend on whether you’re looking at federal or private, which type of loan, which private lender you go with, your credit history, and more. 

That said, here’s the quick bullet list:

  • Federal direct for undergraduate students: 3.34%
  • Federal unsubsidized for grad students: 5.28%
  • Federal Direct PLUS for parents and graduate students: 6.28%
  • Private fixed-rate loans: 3.34% to 14.99%
  • Private variable-rate loans: 1.04% to 11.99%

Will Student Loan Interest Rates Go Up in 2022?

This is a hard question to answer. They are expected to remain fairly low for the foreseeable future, but this can always change. For the 2021-2022 school year, federal rates did increase, but they are still a good bit lower than they were prior to the pandemic.

Are Student Loan Rates Dropping?

Rates increased for the 2021-2022 school year, but remain lower than they were prior to the COVID-19 pandemic. So while they didn’t drop this year, they have dropped significantly compared to a few years ago.

What’s the Difference Between a Subsidized and Unsubsidized Federal Student Loan

A subsidized federal student loan is one in which interest is paid by the U.S. Department of Education Department while you’re enrolled at least half-time in college. An unsubsidized loan, on the other hand, begins accruing interest immediately on disbursement, even if you’re still enrolled in school.

Subsidized student loans have a six-month grace period after graduating. During this time, no payments are due, and the Education Department continues to pay the interest on the loan.

An unsubsidized loan, on the other hand, begins accruing interest immediately on disbursement, even if you’re still enrolled in school. The student is responsible for this interest. Unsubsidized loans still have a six-month grace period after graduation, but interest continues to accrue during this time. The interest then capitalizes, which means it gets added to the original loan amount.

When Do Student Loan Interest Rates Start?

Federal student loan rates are set each spring and go into effect July 1, running until June 30 of the following year. At that point, the new interest rate will take effect.

What is Student Loan Refinancing?

Student loan refinancing is a way to decrease the amount of interest paid on your loan. Essentially, when you refinance, the new lender pays off your existing loan and gives you a new one with new terms.  

Not everyone can refinance — there are fairly strict rules to evaluate your credit and income to determine eligibility. Additionally, you generally reset the length of your loan term when you refinance, so it can sometimes end up costing you more money. 

Finally, while you can refinance a federal loan, you lose the extra benefits they come with, including income-based repayment options.

What is Income-based Repayment?

This is a special repayment option available to federal borrowers that lets you tailor your monthly payments to your income. These plans are typically based on a percentage of your monthly disposable income. This can be quite a bit lower than you’d otherwise pay. The tradeoff is that it can take much longer to pay off the loan. 

Additionally, loans on these repayment plans are automatically forgiven after 20-25 years of payments.

Penny Hoarder contributor Dave Schafer has been writing professionally for nearly a decade, covering topics ranging from personal finance to software and consumer tech.

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Source: thepennyhoarder.com

Stochastic Oscillator – Meaning, Formula & What This Indicator Measures

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Developed by George Lane in the late 1950s, the stochastic oscillator is a technical analysis tool that has become a staple for short-term traders. The tool is a momentum oscillator, which measures price changes over time to tell you the momentum of a move. High momentum trends are likely to continue, and decreasing momentum points to a reversal on the horizon . 

The stochastic oscillator generates buy and sell signals based on patterns in price movements and a historic reaction to those patterns. 

But what exactly is the stochastic oscillator, and how can you use it to become a more successful trader?


What Is the Stochastic Oscillator?

The stochastic oscillator is a technical indicator that compares the most recent closing price of a financial asset to a high-low range of prices over a period of time, generally 14 days. This comparison helps to determine if the asset is experiencing overbought or oversold conditions. 


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At its core, the tool is a momentum indicator, pointing to both the direction and vigor of price movements. The general idea is that if the asset is trending up, the current price will be closer to the highest high for the period, generating a high reading; when it’s trending down, the current price will be closer to the lowest low, generating a low reading. 

Moreover, Lane theorized that momentum changes before price changes, meaning that signals from this momentum oscillator should happen prior to major price movements. It’s used to determine the strength of current trends, find trend reversals, and help determine the best time to buy and sell assets. 


How to Calculate the Stochastic Oscillator

This indicator is popular among traders and is widely available on most trading charts. So, there’s a strong chance you’ll never have to calculate the oscillator readings on your own. Nonetheless, it’s best to know the inner workings of the tools you use.  

In most cases, the stochastic oscillator uses a 14-day time frame, but you can adjust the time frame to fit your needs.

Here’s how to calculate this indicator:

Stochastic Oscillator Formula

The formula for the stochastic oscillator is as follows:

((C – LP) ÷ (HP – LP)) x 100 = K

The following key applies when using the formula above:

  • C – Most recent closing price
  • LP – Lowest price in the data set
  • HP – Highest price in the data set
  • K – Oscillator reading

Traders who use the stochastic oscillator use two trendlines. The K-line is a plot of the readings of the oscillator, also known as the fast stochastic or the signal line. The D-line, or slow oscillator, is the three-day simple moving average (SMA) of the oscillator’s reading. 

Signals are generated based on the reading of the oscillator and crossovers between the signal line and the D-line. 

Example Calculation

Let’s say ABC stock closed at $100 today. Over the past 14 days, the stock has traded between a low of $95 and a high of $109. The formula to determine the oscillator reading for this example is:

(($100 – $95) ÷ ($109 – $95)) x 100 = 35.71


How to Read the Stochastic Oscillator

Assets are considered overbought when the oscillator reading is 80 or above and oversold when the reading is 20 or below. Overbought assets may have unjustifiably high prices and can be due for a pullback, whereas oversold assets may be priced below their true value and ripe for a rebound.

The oscillator is range-bound, meaning that its reading will always fall between zero and 100. Traders read the indicator at a glance, knowing the closer the number is to zero, the more oversold it is, and the closer it is to 100, the more overbought it is. 

Traders also read the indicator by plotting two trendlines on the financial asset’s chart: the signal line (oscillator reading) and the D-line (three-day SMA of the oscillator). Traders then analyze the relationship between the two lines to determine buy and sell signals. 


Trading Strategies Using the Stochastic Indicator

Traders commonly use three strategies when employing the stochastic indicator in their trading plan. Those strategies include:

Overbought/Oversold Strategy

The overbought/oversold strategy is the most simple strategy to follow using this indicator. All you’ll need to do is look at the reading with the following in mind:

  • 80 or Above: Sell Signal. Stochastic readings at 80 or above suggest the asset being analyzed is overbought, which means the price is likely nearing resistance and a bearish reversal may be on the horizon. 
  • 20 or Below: Buy Signal. Stochastic readings of 20 or below suggest the asset being analyzed is at oversold levels. This means the price of the asset is nearing support and a bullish reversal may be coming. 

When using the overbought/oversold strategy, the signals are most accurate when both the fast and slow readings of the oscillator are above 80 or below 20. 

Let’s look at Apple’s stock chart with stochastics from the beginning of April 2022 (below). The oscillator appears as a sub-chart below the main stock chart:

In the stochastics chart at the bottom of the image, the signal line is represented in black and the baseline is red. Both readings in this chart are over 80, suggesting the stock is overbought and likely to make a bearish reversal.  

Stochastic Crossover Strategy

The stochastic crossover strategy is a bit more involved than the overbought/oversold strategy, but it’s a great way to verify signals from the other stochastic strategies. The crossover strategy uses both the K-line and the D-line plotted on a financial asset’s chart. 

Once the lines are plotted, traders look for crossovers, or points where the faster-moving K-line crosses over the slower-moving D-line. When the crossover is in the upward direction, it acts as a buy signal, suggesting recent prices are increasing. When the crossover is in the downward direction, it acts as a sell signal, suggesting recent prices are decreasing. 

Let’s look again at Apple’s chart, with the sub-chart below the main chart showing the red and black lines plotting the stochastic oscillator:

Note that the fast Stochastic (K) is plotted in black and the slow stochastic (D) is plotted in red. Each time the black line crosses above the red line, it acts as a buy signal, suggesting prices are likely to head up moving forward. When the black line crosses below the red line, it’s a sell signal, suggesting Apple’s stock will fall ahead. 

Stochastic Bull/Bear Strategy

The bull/bear strategy uses the divergence between price action and the movement of the stochastic oscillator to determine when reversals might take place. 

For example, if a stock is trending down and mints a new low, but the stochastic oscillator reads a higher low, the divergence could mean the downtrend is coming to an end and the bulls will take control soon. This is known as a bullish divergence. 

On the other hand, when a price is on the uptrend and hits new highs, but the stochastic oscillator produces a lower high, a bearish divergence is taking place, suggesting declines could be ahead. 


The Relative Strength Index (RSI) vs. the Stochastic Oscillator

The relative strength index (RSI) and stochastic oscillator are both momentum oscillators, made to generate the same types of signals. The difference is the underlying data and methodology the two use. 

The stochastic oscillator is based on the relationship between the most recent closing price and the recent range of prices.

The RSI, by contrast, measures the velocity (or speed) of price movements rather than the relationship between recent prices and the closing price of an asset. 

Because these indicators are based on different points of data, they are often used in conjunction with one another before a trade is made, each helping to verify the signals of the other. 


Stochastic Oscillator Limitations

As a technical indicator, the stochastic oscillator has proven its worth time and time again, but it’s not perfect. The biggest limitation to the indicator is the potential for false signals, where the indicator suggests a move is coming that doesn’t come to fruition. 

Due to the potential for false signals, it’s important to use the stochastic indicator in conjunction with other technical indicators when making your trades. 


Stochastic Oscillator FAQs

Technical indicators are complex topics that often lead to questions. Some of the most common questions surrounding the stochastic oscillator are answered below:

What Do K and D Mean?

K is the reading for the oscillator that acts as the signal line when plotted on a trading chart. D is the abbreviation used to describe a three-day moving average of K. Traders plot both K and D on trading charts and analyze the relationship between the two trendlines to generate buy and sell signals. 

What Is a Slow Stochastic Oscillator?

The slow stochastic oscillator is known as the D-line and is another term for the three-day moving average of the oscillator’s reading. The slow stochastic is used for two reasons:

  1. Generate Signals. The K-trendline crossing above or below the D-trendline generates buy or sell signals. 
  2. Verify Signals. Traders using the overbought/oversold strategy focus primarily on the K-reading in the oscillator. But they can also use the slow stochastic (D-line) to verify whether the asset is in overbought or oversold territory because it moves more slowly than the fast stochastic (K-line).

What Are the Two Lines in the Stochastic RSI?

The Stochastic RSI, or StochRSI, applies the formula for the stochastic oscillator to RSI data, combining the two methods to determine the strength of a trend. As with the traditional stochastic oscillator, the two most-used trend lines in the Stochastic RSI are K (the signal line) and D (the baseline). 


Final Word

The stochastic oscillator has become one of the most widely used technical analysis tools in financial markets. Whether you’re trading stocks, forex, cryptocurrency, or any other asset, paying attention to the stochastic reading and crossovers has the potential to generate compelling buy and sell signals. 

However, like any other financial tool, the oscillator isn’t perfect. Traders should consider using it in conjunction with other technical indicators when researching opportunities. 

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Joshua Rodriguez has worked in the finance and investing industry for more than a decade. In 2012, he decided he was ready to break free from the 9 to 5 rat race. By 2013, he became his own boss and hasn’t looked back since. Today, Joshua enjoys sharing his experience and expertise with up and comers to help enrich the financial lives of the masses rather than fuel the ongoing economic divide. When he’s not writing, helping up and comers in the freelance industry, and making his own investments and wise financial decisions, Joshua enjoys spending time with his wife, son, daughter, and eight large breed dogs. See what Joshua is up to by following his Twitter or contact him through his website, CNA Finance.

Source: moneycrashers.com

Stock Market Today: Stocks Try to Find Their Legs Ahead of CPI Report

Wall Street searched for stability Tuesday, with a couple of the major indexes able to muster some gains ahead of a vital inflation reading tomorrow.

The 10-year Treasury note, after touching 3.2% yesterday, pulled back below the 3% threshold to as low as 2.94%. This retreat in interest rates removed some pressure from growthier stocks (which had been pummeled Monday), with technology (+1.5%) firms leading the session’s relief rally. Semiconductor stocks such as Nvidia (NVDA, +3.8%), Broadcom (AVGO, +3.3%) and NXP Semiconductor (NXPI, +3.2%) were among the day’s notable risers.

It wasn’t all roses, though. Investors continued to punish once-hot companies showing any signs of weakness.

For instance, artificial-intelligence lending-platform maker Upstart Holdings (UPST) plunged 56.4% to trade around all-time lows. While it beat Street estimates for first-quarter earnings, the company reduced full-year revenue forecasts to $1.25 billion from $1.4 billion previously.

Work-from-home darling Peloton Interactive (PTON, -8.7%) continued its fall from grace after reporting a 15% year-over-year decline in sales, a $757 million net loss and a dwindling cash pile that CEO Barry McCarthy said left the company “thinly capitalized.”

Even AMC Entertainment (AMC, -5.4%) was knocked lower despite a pretty encouraging report in which Batman and Spider-Man films helped the theater company to report a narrower-than-expected quarterly loss.

Still, the major indexes showed some strength. The Nasdaq Composite rebounded 1.0% to 11,737, while the S&P 500 improved 0.3% to 4,001. The Dow Jones Industrial Average brought up the rear, declining 0.3% to 32,160.

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“Markets are clearly confused about what the Fed will do this year and just how aggressive it will get. That can be seen in the volatility in expectations for where the Fed funds rate will be at the end of 2022, as seen in Fed funds futures,” says Invesco Chief Global Market Strategist Kristina Hooper. “And it is reflected in stock market volatility, with the VIX above 30.”

The big story to watch tomorrow is the Bureau of Labor Statistics’ consumer price index (CPI) report for April. BlackRock, for one, expects 8.1% headline CPI growth and 6.0% core growth following 8.5% and 6.5% increases in March.

“A weaker-than-expected CPI report later this week could help turn the tide and see investors embrace risk assets once again,” says Brian Price, head of investment management for independent broker-dealer Commonwealth Financial Network.

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Other news in the stock market today:

  • The small-cap Russell 2000 slipped marginally to 1,761.
  • U.S. crude futures slipped below the $100 per-barrel mark, ending the day down 3.2% at $99.76 per barrel. 
  • Gold futures fell 0.9% to settle at $1,841 an ounce.
  • Bitcoin clawed out a 0.5% gain to $31,315.54. (Bitcoin trades 24 hours a day; prices reported here are as of 4 p.m.)
  • Groupon (GRPN) slid 12.5% after the e-commerce marketplace swung to an adjusted loss of 80 cents per share in its first quarter, compared to a per-share profit of 25 cents in Q1 2021. GRPN also said revenue slid 41% year-over-year to $153.3 million, while global units sold slumped 29% to 12.7 million. The company gave soft current-quarter and full-year revenue guidance, as well. “The underperformance was driven by a weaker rebound in local following omicron impacts in January and February,” says Credit Suisse analyst Stephen Ju, who maintained a Neutral (Hold) rating on GRPN. “As merchants found themselves in a high demand/low capacity environment, they were not incentivized to leverage discounting. Furthermore, April local billings continue to trend at Q1 2022 (as a percentage of 2019) levels and latest trends suggest an elongated recovery path.”
  • Vroom’s (VRM) narrower-than-expected first-quarter loss sent shares up 32.4% today. In its first quarter, the online used auto dealer reported a per-share loss of 71 cents per share vs. a consensus estimate for a loss of $1.07 per share. Revenue of $923.8 million also came in higher than analysts had expected. VRM also announced a new business realignment plan for long-term growth that it anticipates will result in up to $165 million in cost savings through the rest of 2022. “Vroom is shifting to survival mode, understandably, swapping out more aggressive growth plans for a leaner, and potentially more profitable business model,” says Baird Equity Research analyst Colin Sebastian (Outperform). “Given the current market environment, and challenges in scaling up an ‘asset light’ online sales platform, we think this pivot makes sense.”

Stick to (Most Of) Your Guns

“More than anything, volatility is a test of investor mettle.” So says Ross Mayfield, investment strategy analyst at research firm Baird, who notes that while we’re often told volatility is the price to pay in the stock market’s long-term gains, this glosses over the fact that volatility can take many forms.

“March 2020 featured a gut-wrenching drop, but also a relatively quick rebound. On the other end of the spectrum, markets are occasionally plagued by periods of high volatility that churn sideways relentlessly,” he says. “Each is challenging in its own way; holding through a big drop requires a steel stomach, but longer periods of frustrating volatility require real fortitude.”

While staying the course isn’t easy, you can at least make it less difficult on yourself by homing in on higher-quality investments with a longer-term focus. Stock investors might look to the Dow Jones’ top-rated components; fund investors should stick to well-managed products, such as these Vanguard funds commonly found in 401(k) plans.

But remember: Keeping a calm head doesn’t mean you shouldn’t ever sell in a downturn – on the contrary, the only thing worse than suffering losses in the first place is holding on to weak positions that will slather you in more red ink down the road. 

With that in mind, we’ve taken a look at some of Wall Street’s least favorite names at the moment. Remember: Sell calls are typically rare among the analyst community, so the fact that the pros are calling for more downside in these names, rather than saying to buy the dips, is noteworthy.

Check out Wall Street analysts’ list of stocks to sell right now.

Kyle Woodley was long NVDA as of this writing.

Source: kiplinger.com