Financial Topics Archives

Q: What is a Limit Order?

A limit order allows investors to buy or sell securities at a price they specify or better, providing some price protection on trades.

Dec

2023

What Is a Limit Order?

By Rebecca Lake | Growing Wealth, Investing, Terminology | No Comments

Table of Contents

What Is a Limit Order?
How Do Limit Orders Work?
Types of Limit Orders
How to Set a Limit Order
When a Trader Might Use a Limit Order
Pros and Cons of Using Limit Orders
Limit Orders vs Market Orders
Limit Orders vs Stop Orders
FAQ

What Is a Limit Order?

A limit order allows investors to buy or sell securities at a price they specify or better, providing some price protection on trades.

When you set a buy limit order, for example, the trade will only be executed at that price or lower. For sell limit orders, the order will be executed at the price you set or higher. By using certain types of orders, traders can potentially reduce their risk of losses and avoid unpredictable swings in the market.

How Do Limit Orders Work?

In the simplest terms, limit orders work as a sort of restriction that an investor can choose (to either buy or sell) with “limits” on a minimum or maximum price. An investor places an order to buy a stock at a minimum price, for instance, or places an order to sell at a maximum price, in an effort to maximize their returns.

There are two types of limit orders investors can execute: buy limit orders and limit sell orders. An important thing to know is that while a limit order specifies a desired price, it doesn’t guarantee the trade will occur at that price — or at all.

When you set a limit order, the trade will only be executed if and when the security meets the terms of the order — which may or may not happen, depending on the overall market conditions. So, when an investor sets a limit order, it’s possible to miss out on other investing opportunities.

Types of Limit Orders

As mentioned, there are two types of limit orders investors can execute: buy limit orders and limit sell orders.

What is a Limit Order to Buy?

For buy limit orders, you’re essentially setting a ceiling for the trade — i.e. the highest price you’d be willing to pay for each share.If a trader places a buy limit order, the intention is to buy shares of stock. The order will be triggered when the stock hits the limit price or lower.

For example, you may want to buy shares of XYZ stock at $15 each. You could place a buy limit order that would allow the trade to be carried out automatically if the stock reaches that purchase price or better.

What is a Limit Order to Sell?

For sell limit orders, you’re setting a price floor — i.e. the lowest amount you’d be willing to accept per share. If a trader places a limit order to sell, the order will be triggered when the stock hits the limit price or higher. So you could set a sell limit order to sell XYZ stock once its share price hits $20 or higher.

What is a Stop-Limit Order?

A stop-limit order is a combination of a stop order and a limit order. Stop-limit orders involve setting two prices. For example: A stock is currently priced at $30 and a trader believes it’s going to go up in value, so they set a buy stop order of $33.

When the stock hits $33, a market order to buy will be triggered. But with a stop-limit order, the trader can also set a limit price, meaning the highest price they’re willing to pay per share — say, $35 per share. Using a stop-limit order gives traders an additional level of control.

Stop-limit orders can also help traders make sure they sell stocks before they go down significantly in value. Let’s say a trader purchased stock XYZ at $40 per share, and now anticipates the price will drop. The trader doesn’t want to lose more than $5 per share, so they set a stop order for $35.

If the stock hits $35 — the stop price — the stock will be triggered to sell. However, the price could continue to drop before the trade is fully executed. To prevent selling at a much lower price than $35, the trader can set a limit order to only sell between $32 and $35.

How to Set a Limit Order

When placing a limit order with your brokerage firm, the broker or trading platform might ask for the following information:

• The stock or security

• Is it a buy or sell order

• Number of shares to buy or sell

• Stock order type (limit order, market order, or another type of order)

• Price

When setting up a limit order, the trader can set it to remain open indefinitely, (until the stock reaches the limit price), or they can set an expiration date.

Limit Order Example

Say a trader would like to purchase 100 shares of stock XYZ. The highest price they want to pay per share is $26.75. They would set up a limit buy order like this:

Buy 100 shares XYZ limit 26.75.

As noted above, the main upside of using limit orders is that traders get to name a desired price; they generally end up paying a price they expect; and they can set an order to execute a trade that can be executed even if they are doing other things.

In this way, setting limit orders can help traders seize opportunities they might otherwise miss because limit orders can stay open for months or in some cases indefinitely (the industry term is “good ‘til canceled,’ or GTC). The limit order will still execute the trade once the terms are met.

Get up to $1,000 in stock when you fund a new Active Invest account.*

Access stock trading, options, auto investing, IRAs, and more. Get started in just a few minutes.

*Customer must fund their Active Invest account with at least $10 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

When a Trader Might Use a Limit Order

There are several reasons why you might want to use a limit order.

• Price protection. When a stock is experiencing volatility, you may not want to risk placing a market order and getting a bad price. Although it’s unlikely that the price will change drastically within a few seconds or minutes after placing an order, it can happen, and setting a limit order can set a floor or a ceiling for the price you want.

• Convenience. Another occasion to use a limit order might be when you’re interested in buying or selling a stock but you don’t want to keep a constant eye on the price. By setting a limit order, you can walk away and wait for it to be executed. This might also be a good choice for longer-term positions, since in some cases traders can place a limit order with no expiration date.

• Volatility. Third, an investor may choose to set a limit order if they are buying or selling at the end of the market day or after the stock market has closed. Company or world news could be announced while the market is closed, which could affect the stock’s price when the market reopens. If the investor isn’t able to cancel a market order while the market is still closed, they may not be happy with the results of the trade. A limit order can help prevent that.

Limit orders can also be useful when the stock being traded doesn’t have a lot of liquidity. If there aren’t many people trading the stock, one order could affect the price. When entering a market order, that trade could cause the price to go up or down significantly, and a trader could end up with a different price than intended.

Pros and Cons of Using Limit Orders

Each type of order has pros and cons depending on the particular situation.

Pros of Limit Orders:

• The trader gets to name their price. One of the chief reasons traders rely on limit orders is to set baselines for profits and losses. They won’t end up paying a price they didn’t expect when they buy or get a price below their target when it’s time to sell.

• The trader can set the order and walk away. Day trading can be time consuming and it requires a significant amount of knowledge. Investors who use limit orders don’t have to continuously watch the market to get the price they want.

• Traders may pay less in fees. Commissions can take a bite out of your profits, something many investors would prefer to keep to a minimum. When trading illiquid stocks, sometimes the bid-ask spread is enough to cover broker fees.

• Insulate against volatility. Volatility can cause you to make emotional decisions. Limit orders can give traders more control over their portfolio and ward off panic-buying or selling.

• Ride the gaps. Stock prices can fluctuate overnight due to after hours trading. It’s possible to benefit from price differences from one day to another when using limit orders.

For example, if a trader places a buy limit order for a stock at $3.50, but the order doesn’t get triggered while the market is open, the price could change overnight. If the market opens at $3.30 the next morning, they’ll get a better price, since the buy limit order gets triggered if the stock is at or below the specified price.

Cons of Limit Orders:

• The order may never be executed. There may not be enough supply or demand to fulfill the order even if it reaches the limit price, since there could be hundreds or even thousands of other traders wanting to buy or sell at the specified price.

• The stock may never reach the limit price. For example, if a stock is currently priced at $20, a trader might set a limit order to buy at $15. If the stock goes down to $16 and then back up to $20, the order won’t execute. In this case, they would miss out on potential gains.

• The market can change significantly. If a trader sets a shorter-term limit order they might miss out on a better price. For example, if a stock a trader owns is currently priced at $150, the trader may choose to set a sell limit order at $154 within four weeks. If the company then makes a big announcement about a new product after that period, and the stock’s price spikes to $170, the trader would miss out on selling at that higher price.

• It takes experience to understand the market and set limit orders. New investors can miss out on opportunities and experience unwanted losses, as with any type of investment.

Limit Order vs Market Order

Limit orders differ from market orders, which are, essentially, orders to buy a security immediately at its given price. These are the most common types of orders. So, while a market order is executed immediately regardless of terms, limit orders only execute under certain circumstances.

Limit orders can also be set for pre-market and after-hours trading sessions. Market orders, by contrast, are limited to standard trading hours (9:30am to 4pm ET).

Remember: Even though limit orders are geared to a specific price, that price isn’t guaranteed. First, limit orders are generally executed on a first-come-first-served basis. So there may be orders ahead of yours that eliminate the availability of shares at your limit price.

And it bears repeating again: There is also the potential for missed opportunities: The limit order you set could trigger a trade. But then the stock or other security might hit an even better price.

In other words, time is a factor. In today’s market, computer algorithms execute the majority of stock market trades. In this high-tech trading environment, it can be hard as an individual trader to know when to buy and sell. By using certain types of orders, like limit orders, traders can potentially limit their losses, lock in gains, and avoid swings in the market.

Though limit orders are commonly used as a part of day trading strategies, they can be useful for any investor who wants some price protection around their trades. For example, if you think a stock is currently undervalued, you could purchase it at the current market price, then set a sell limit order to automatically sell it when the price goes up. Again, the limit order can stay open until the security meets your desired price — or you cancel the order.

However, speculating in the market can be risky and having experience can be helpful when deciding how and when to set limit orders.

Limit Orders vs Stop Orders

There is another type of order that can come into play when you’re trying to control the price of a trade: a stop order. A stop order is similar to a limit order in that you set your desired price for a stock, say, and once the stock hits that price or goes past it, a market order is triggered to execute the purchase or sale.

The terms of a limit order are different in that a trade will be executed if the stock hits the specified price or better. So if you want to sell XYZ stock for $50 a share, a sell limit order will be triggered once the stock hits $50 or higher.

A stop order triggers a market order once XYZ stock hits $50, period. By the time the order is executed, the actual stock price could be higher or lower.

Thus with a stop order there’s also no guarantee that you’ll get the specified price. A market order is submitted once the stop price is hit, but in fast-moving markets the actual price you pay might end up being higher or lower.

Stop orders are generally used to exit a position and to minimize losses, whereas limit orders are used to capture gains. But two can also be used in conjunction with each other with something called a stop-limit order.

When to Consider a Market Order vs a Limit Order

If you’re trying to parse out when a market order or a limit order is the best tool to use, consider the following.

A trader might want to use a market order if:

• Executing the trade immediately is a priority

• The stock is highly liquid

• They’re only trading a small number of shares

• The stock has a narrow bid-ask spread (about a penny)

A trader might want to use a limit order if:

• They want to specify their price

• They are trading an illiquid stock

• They want to set a long-term trade (or even walk away for their lunch break and still have the trade execute)

• They feel a stock is currently over- or undervalued

• The stock has a large bid-ask spread

• They are trading a larger number of shares

Is a Limit Order Bad?

Limit orders are not necessarily good or bad. As mentioned, they can offer advantages to investors who understand how to use them.

For example, limit orders can offer more control and flexibility than using market orders. And they can work well in a number of different trading situations. If the stock being traded is highly volatile, for instance, a limit order can help traders retain control and avoid paying an unexpected price.

Each time a trader does research on a stock and decides to buy or sell shares, they also consider their goals and the current market conditions to decide whether to place a market or a limit order.

What Happens If a Limit Order Is Not Filled?

A limit order can only be filled if the stock’s price reaches the limit price or better. If this doesn’t happen, then the order is not executed and it expires according to the terms of the contract. An order can be good just for a single trading day, for a certain period of time, or in some cases it’s possible to leave the limit order open-ended using a GTC (good ‘til canceled) provision.

So if you placed a buy limit order, but the stock does not reach the specified price or lower, the purchase would not be completed and the order would expire within the specified time frame.

And if you’re using a sell limit order, but the security never reaches the specified sell price or higher, the shares would remain in your trading account and the order would expire.

Limit Orders and Price Gaps

Price gaps can occur when stocks close at one price then open at a different price on the next trading day. This can be attributed to after-market or pre-market trading that occurs after the regular market hours have ended. After-hours trading can impact stock price minimally or more substantially, depending on what’s spurring trades.

For example, say news of a large tech company’s planned merger with another tech giant leaks after hours. That could send the aftermarket trading markets into a frenzy, resulting in a radically different price for both company’s stocks when the market reopens. Pricing gaps don’t necessarily have to be wide but large pricing swings are possible with overnight trading.

Limit orders can help to downplay the potential for losses associated with pricing gaps. Placing a buy limit order or limit sell order may not close the gap entirely. But it could help to mitigate the losses you may experience when gaps in pricing exist. Whether the gap is moving up or down can determine what type of limit order to place and where to cap your limit price.

The Takeaway

Limit orders can be an effective and efficient way for investors to set price caps on their trades, and also give them some protection against market swings. Limit orders offer other advantages as well, including giving traders the ability to place longer- or shorter-term trades that will be executed even if they’re not continuously watching the market. This can potentially protect investors against losses and potentially lock in gains.

That said, limit orders are complicated because they don’t guarantee that the trade will be executed at the set price. The stock (or other security) could hit the limit price — and there might not be enough supply or demand to complete the trade. There is also the potential for some missed opportunities, if the price you set triggers a trade, and subsequently the stock or other security hits an even better price.

Investors can also consider combining a limit order with a stop order. A stop-limit order can provide even more protection against potential losses.

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.

FAQ

Can I specify the price for a limit order?

Yes, investors can specify the price for a limit order. In fact, the price typically is the limit in a limit order, representing either a price ceiling or a price floor.

How long does a limit order stay active?

Generally, a limit order will stay active indefinitely, unless an investor cancels it or specifies otherwise. That means that if the limit is never reached, the order will not execute, and the limit order will remain active until the limit is reached.

Can I cancel a limit order once it’s placed?

Investors can cancel standing limit orders as long as conditions haven’t arrived that’s led to the order being actively executed. The cancelation process will depend on the specific exchange an investor is using, however.

What happens if the market price doesn’t reach my limit price?

If the market price of a stock does not reach the limit price — either a price floor or price ceiling — then the limit order will not execute, and the limit order will remain active until it does.

Can I place a limit order outside of regular trading hours?

It’s possible to place limit orders outside of regular trading hours, depending on the rules of a given exchange, and market conditions dictate. The order itself, of course, won’t execute until the market opens, assuming that the limit is reached.

Are there any fees associated with limit orders?

There may or may not be fees associated with limit orders, and it’ll depend on the specific exchange or brokerage an investor is using. Note that some brokerages may charge higher fees for limit orders than market orders — but some may charge no fees at all.

Are limit orders guaranteed to be executed?

No, there is no guarantee that a limit order will be executed, as it will only execute if the limit price is reached. If the limit is not reached, the order will remain active but not execute.

SoFi Invest®
SoFi Invest refers to the two 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 and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA(www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of SoFi Digital Assets, LLC, please visit 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 pre-qualification for any loan product offered by SoFi Bank, N.A.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Claw Promotion: Customer must fund their Active Invest account with at least $10 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

SOIN0723102

Dec

2023

Traditional IRA Income and Contribution Limits

Traditional IRA Contribution Limits: A Detailed Guide for 2023-2024

By Austin Kilham | Growing Wealth, invest, Investing | Comments Off

A traditional IRA is a tax-advantaged investment account that helps individuals save for their retirement. The contributions a person makes may be fully or partially tax-deductible, and the money inside the account grows tax-deferred. Individuals are taxed at regular income tax rates when they make withdrawals after age 59 ½ .

There are limits, however, to how much one can contribute to a traditional IRA and who can deduct their contributions.

Here’s what you need to know about traditional IRA contribution limits.

Contribution Limits for Traditional IRAs 2023

Contributions to a traditional IRA are not limited by how much you earn each year, but the IRS does limit the amount of money you can contribute to your traditional IRA annually. Here’s a look at the traditional IRA contribution limits for 2023.

	2023 Traditional IRA Contribution Limits
For individuals under age 50	$6,500
For individuals 50 and older	$7,500

Contribution Limits for Traditional IRAs 2024

For 2024, the contribution limits for traditional IRAs are increasing by $500 from 2023:

	2024 Traditional IRA Contribution Limits
For individuals under age 50	$7,000
For individuals 50 and older	$8,000

One note: If an individual’s taxable income is less than the contribution limit, they may only contribute up to that amount. For example, if an individual earned $4,000 for the year, they can only contribute as much as $4,000 to their traditional IRA for that year.

💡 Quick Tip: All investments come with some degree of risk — and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.

Eligibility Criteria for Traditional IRA Contributions

There are some criteria regarding income eligibility that you should be aware of as you’re getting ready to make contributions to a traditional IRA.

Income Requirements and Eligibility Rules

Traditional IRAs have no income limit. In other words, no matter how much money you make, you can contribute to a traditional IRA. By contrast, Roth IRAs do have income limits.

However, contributions to traditional IRAs must be made with earned income paid to you by an employer or earned as the owner of a business. The following are IRS-approved sources of earned income:

• Wages, salaries, and tips from which federal income taxes are withheld

• Income from a job from which an employer did not withhold taxes, such as freelance work

• Self-employed income
Income that does not qualify as earned income includes:

• Interest and dividends

• Pensions or annuities

• Social Security benefits

• Unemployment benefits

• Alimony

• Child support

• Pay earned as an inmate in a prison

Age-Related Considerations and Limits

Individuals age 50 and older can make catch-up contributions to their traditional IRA. Catch-up contributions may allow older individuals to save more as they get closer to retirement. This could help them reach their retirement goals and cover typical retirement expenses.

For 2023 and 2024, the catch-up contributions for a traditional IRA are an additional $1,000 on top of the annual contribution limit. So for 2023, those 50 and up can make a total contribution of $7,500 to their traditional IRA, and in 2024, they can contribute a total of $8,000.

Tax Deductibility of Traditional IRA Contributions

While income doesn’t determine eligibility to contribute to a traditional IRA, it can have an impact on deductible contributions if an individual or their spouse has a retirement plan at work and their income exceeds a certain level.

Deductibility Based on Income Levels and Filing Status

This chart outlines traditional IRA contributions limits in 2023 and 2024 if you are covered by an employer-sponsored retirement plan.

Filing Status	2023 Modified Adjusted Gross Income (MAGI)	2024 Modified Adjusted Gross Income (MAGI)	Deduction Amount
Single	$73,000 or less	$77,000 or less	Full deduction
	More then $73,000 and less than $83,000	More than $77,000 and less than $87,000	Partial deduction
	$83,000 or more	$87,000 or more	No deduction
Married filing jointly	$116,000 or less	$123,000 or less	Full deduction
	More than $116,000 but less than $136,000	More than $123,000 but less than $143,000	Partial deduction
	$136,000 or more	$143,000 or more	No deduction
Married filing separately	Less than $10,000	Less than $10,000	Partial deduction
Married filing separately	$10,000 or more	$10,000 or more	No deduction

Individuals who are not covered by an employer sponsored retirement plan but have a spouse who is, are also subject to a phase out for contribution deduction, as shown in the chart below.

Filing Status	2023 Modified Adjusted Gross Income (MAGI)	2024 Modified Adjusted Gross Income (MAGI)	Deduction Amount
Married filing jointly with a spouse covered by a workplace retirement plan	$218,000 or less	$230,000 or less	Full deduction
	More than $218,000 but less than $228,000	More than $230,000 but less than $240,000	Partial deduction
	$228,000 or more	$240,000 or more	No deduction
Married filing separately with a spouse covered by a workplace retirement plan	Less than $10,000	Less than $10,000	Partial deduction
	$10,000 or more	$10,000 or more	No deduction

Understanding MAGI and Its Impact on Deductibility

Individuals can still contribute to a traditional IRA if their modified adjusted gross income (MAGI) exceeds the limits for deductible contributions (as shown in the charts above). Though they will not get an immediate tax benefit, their contributions will still grow tax-deferred, which can help boost retirement savings.

💡 Quick Tip: How much does it cost to set up an IRA? Often there are no fees to open an IRA, but you typically pay investment costs for the securities in your portfolio.

Navigating Excess Contributions and Penalties

Mistakes happen: From time to time individuals may accidentally make excess contributions to their IRAs. For instance, they could either deposit more than the annual contribution limit or make a mistake while rolling over funds.

What Happens If You Contribute Too Much?

This error can be costly. Excess funds are taxed at 6% for each year they remain in the IRA. However, individuals can avoid this tax by withdrawing excess contributions by the due date of their individual tax return. They must also withdraw any income earned on the excess funds during that period. However you will need to report those earnings as income on your tax return. And you may have to pay a 10% penalty for early withdrawal of the earnings if you are under age 59 1/2.

Strategies to Avoid Excess Contributions

To avoid accidentally contributing too much to your traditional IRA, find out the contribution limits for the year in question and make sure you contribute no more than that amount.

It’s also important to be aware that the IRA contribution limit is a combined maximum for all the IRAs you may have, including Roth IRAs. So your contributions to a traditional IRA and a Roth IRA cannot exceed the overall yearly contribution limit, which is $6,500 in 2023 and $7,000 in 2024 for those under age 50.

Spousal IRAs and Contribution Rules

Individuals who don’t have earned income themselves, but have a spouse that does, can open an IRA called a spousal IRA. This type of IRA allows the spouse with income to contribute to it on behalf of the spouse without earned income.

Understanding Spousal IRA Contributions

A spousal IRA is a separate IRA for a spouse who doesn’t earn an income. It is not a joint account. It allows married couples who file jointly to each have their own separate IRAs and contribute the maximum allowed amount to each account.

Eligibility and Contribution Limits for Spouses

A couple is required to file a joint tax return to be eligible for spousal IRA contributions. The spouse with earned income must earn enough to cover the contributions in both accounts — their own and the spousal IRA.

Spousal IRAs also have the same income limits as traditional IRAs. You can find more information on spousal IRAs at irs.gov.

The Takeaway

Traditional IRAs can be an important part of retirement planning. And while they have contribution and income limits to prevent those who earn very high incomes from benefiting too much from tax-advantaged accounts, traditional IRAs can help individuals boost their retirement savings and reach their financial goals.

Invest with as little as $5 with a SoFi Active Investing account.

FAQ

Is there an income limit to contribute to a traditional IRA?

No, there is no income limit to contribute to a traditional IRA. Individuals, regardless of their income, can contribute $6,500 to a traditional IRA in 2023 (or $7,500 if they are age 50 or older), and $7,000 in 2024 (or $8,000 if they are 50 or older).

However, while income doesn’t determine eligibility to contribute to a traditional IRA, it can affect deductible contributions if you or your spouse has a retirement plan at work and your income exceeds a certain level.

What are the rules for a traditional IRA?

The rules for a traditional IRA include these: you must have earned income to contribute to a traditional IRA, and the amount you contribute annually must not be more than you earned for the year in question. Also, the contribution limits for a traditional IRA are $6,500 in 2023 ($7,500 for those age 50 and up), and $7,000 in 2024 (or $8,000 for those 50 and older).

Does contributing to a traditional IRA reduce taxable income?

Contributing to a traditional IRA may reduce your taxable income for the year. However, some or all of your contributions may be ineligible for tax deduction depending on your income and whether or not you or a spouse is covered by a retirement plan at work.

Can I max out a 401(k) and a traditional IRA in the same year?

Yes, you can max out a 401(k) and a traditional IRA in the same year. You can contribute up to $22,500 to a 401(k) in 2023 (or up to $30,000 for those age 50 and older), and you can also contribute up to $6,500 in a traditional IRA (or up to $7,500 for those 50 and older) in 2023.

Photo credit: iStock/PeopleImages

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SoFi Invest®
SoFi Invest refers to the two 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 and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA(www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of SoFi Digital Assets, LLC, please visit 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 pre-qualification for any loan product offered by SoFi Bank, N.A.

SOIN1023176

Dec

2023

Financial Health: What It Is and 7 Ways to Improve It

By Emma Diehl | Budgeting & Goals, Debt Payoff, Financial Independence, money | Comments Off

When you think about your health, your mind likely goes first to your physical health and then maybe your mental and emotional health. But there is another key component to your overall well-being, and that’s your financial health.

While you may never discuss it with your doctor —- and may go months or years ignoring it —- your financial wellness has a significant impact on your daily life, as well as your future. What’s more, having poor financial health can in turn affect your physical and mental health.

But what exactly is financial health? How do you measure it? And, more importantly, how do you achieve it? Read on to learn all about financial health, from how to assess it to how to improve it.

Understanding Financial Health

Financial health is defined as the current state of your monetary situation, such as your credit, debt, savings, investments, and income. Being financially healthy means you can meet your monthly financial obligations, are on track to achieve your financial goals, and have enough cash in the bank to be able to absorb a financial setback.

Indications of Financial Health

Below are six signs that your finances are in good health:

• You make enough money to cover your monthly expenses

• You pay all of your bills on time

• You have no debt or have debt that is manageable and being repaid on schedule

• You’re saving enough to meet your short- and long-term goals

• Your credit score is strong enough to help you qualify for whatever loans you might need at low rates

• You feel comfortable with your financial situation

💡 Quick Tip: Want to save more, spend smarter? Let your bank manage the basics. It’s surprisingly easy, and secure, when you open an online bank account.

Metrics and Measurements

There are several core components of financial health. Here’s a look at how to measure the current state of your finances and discover areas where you may need improvement.

• Your debt-to-income ratio: Carrying too much debt can be harmful to your financial health. Lenders use a calculation called debt-to-income ratio (DTI) that compares a person’s monthly debt payments to their monthly gross income to determine how manageable someone’s debt load is. Lower is generally better. Lenders often like to see DTI ratios of 36% or less.

• Your credit score: Having a strong credit score is an indicator of good financial health. Factors that impact your score include amounts you owe on your debt accounts, repayment history, your credit mix, and the length of credit history. FICO® Scores range from 300 to 850. Having a score above 700 is generally considered good credit, while above 800 is considered excellent.

• Your emergency fund: A key measure of financial health is having enough cash in the bank to weather unexpected setbacks like a medical emergency, car breakdown, or job loss. Experts generally agree that you should have an emergency fund with three to six months’ worth of living expenses saved.

• Your retirement savings: Because there are so many variables, it’s hard to know exactly how much you need to save for retirement. One rule of thumb is to aim to save at least 1x your salary by 30, 3x by 40, 6x by 50, 8x by 60, and 10x by 67. Check how your savings compares to ideal retirement savings by age to know if you’re on track or if you need to catch up.

Improving Financial Health

You might feel that achieving optimal financial health is a long way off. Don’t get discouraged. The good news is that implementing just a few good financial habits — such as tracking your spending and saving at least something each month -– can boost your financial well-being right away, and even more so over time.

Below are seven practical tips to help you move forward.

Get up to $300 when you bank with SoFi.

Open a SoFi Checking and Savings Account with direct deposit and get up to a $300 cash bonus. Plus, get up to 4.60% APY on your cash!

1. Get on a Budget

When it comes to money in and money out each month, many of us leave it to chance — and hope that the numbers work out. Taking some time to actually crunch the numbers and set up a monthly budget, however, can help ensure that you are living within your means, spending in line with your priorities, and working towards your future goals.

A simple way to get started is to collect the last few months of financial statements and calculate the average amount coming in (after taxes) each month, and average amount going out each month. Subtract the latter from the former and see what you get. If you’re spending more than you are bringing in, or it’s so close there is little left over for saving, you may want to take a closer look at your spending.

There are many different types of budget but one simple guideline you might consider is the 50/30/20 budget. With the approach, you divide your monthly take-home income into three categories: 50% goes to needs (essentials), 30% goes to wants (nonessentials), and 20% to savings and debt repayment (beyond the minimum payment).

2. Track Your Spending

Keeping tabs on how much you are spending each month, and on what, is crucial to financial wellness. Indeed, tracking spending can be both eye-opening and motivating. You might notice, for example, that you’re spending more than you think for certain things, or that your spending is out of line with your priorities. You might also spot some immediate areas for improvement.

One easy way to track spending is to put a budgeting app on your phone (many are free for the basic service). Budgeting apps typically connect with your financial accounts (including bank accounts, credit cards, and investment accounts), track spending, and categorize expenses so you can pinpoint exactly where your money is going.

3. Create a Plan for Debt

Credit cards and similar high-interest consumer loans can drag down your financial health by making it harder to meet your monthly expenses — and even harder to save for future goals. Paying off high-interest debt is an important investment in your financial future.

If you have multiple balances racking up high interest charges, here are two popular strategies that can help you whittle them down to zero.

The snowball method: With the snowball method, you list your debts by size then put an extra monthly payment towards the loan with the smallest balance, while continuing to pay the minimum on the others. Once the smallest debt is paid, you put your extra payment towards the next smallest balance, and so on.

The avalanche method: Using the avalanche method, you list your debts in order of interest rate then focus extra payments towards the debt with the highest interest rate, while continuing to pay the minimum on the others. Once that debt is paid off, you put your extra payments to the debt with the next-highest interest rate, and so on.

4. Look for Ways to Cut Expenses

Trimming back your expenses helps you increase your disposable income, giving you more money to put toward your goals. It also makes it easier to stick with your budget and avoid going into debt.

You might comb through your expenses to look for some easy ways to cut back. While you may assume your “needs” costs are fixed, it may be possible to shop around for a better price on certain monthly essentials, like insurance or a phone plan. Or, maybe you don’t need to drive to work but could spend less by taking public transportation or carpooling with a coworker.

It’s often even easier to find places to cut back in your nonessential sending. For example, you might decide to get take-out less often and cook more nights a week, get rid of streaming services you rarely watch, and/or jog outside instead of going to a gym. Every dollar you save is one more you can put towards saving and debt repayment.

5. Automate Saving

Tackling financial health can feel overwhelming, and it’s not likely something you want to be thinking about all the time. Fortunately, it’s easy to put one of the best financial health-boosters — saving at least something each month — on autopilot.

There are two ways to do this: One is to have a portion of your direct deposit go right into a savings account. The other is to set up a recurring transfer from your checking to your savings on the same day each month (ideally, right after you get paid). You can’t spend what you don’t see. And, chances are, you won’t even miss it.

To help your savings grow faster, consider putting this money in an online savings account. Since online institutions generally have lower overhead than traditional brick-and-mortar banks, they tend to offer better rates and low (or no) fees.

💡 Quick Tip: Want a simple way to save more everyday? When you turn on Roundups, all of your debit card purchases are automatically rounded up to the next dollar and deposited into your online savings account.

Build Your Emergency Fund

Without an emergency cash cushion, an unexpected expense (like a car repair or large medical bill) or loss of income can quickly derail your finances. You may be forced to rack up expensive credit card debt. This can put you in a debt spiral that can be difficult to get out of, and take a long-term toll on your financial health.

Even if you do have an emergency fund, it’s wise to periodically check in to make sure it’s sufficient. A good rule of thumb is to keep at least three- to six-months’ worth of living expenses in the bank. (If you’re self-employed or work seasonally, you may want to aim for six- to 12-months worth of expenses.) Ideally you want to keep this money in a savings account that earns a competitive rate but allows you to easily access your money when you need it.

Invest More of Your Income

If you’re putting just a small percentage of your paycheck into your 401(k), or other retirement fund, consider stepping it by 1% or 2% right now. While 1% is a small percentage of your annual earnings today, after 20 or 30 years it can make a big difference in your account balance when you retire. That’s because the longer you give your money a chance to grow, the better.

You might also ask your employer to automatically increase your contribution by a set percentage each year. As your income increases, those extra percentage points of income likely won’t be missed — but they’ll have a big impact on your retirement savings. Your future self will thank you.

The Takeaway

Just as with your physical health, establishing and maintaining good habits is key to achieving good financial health.

Some habits that can significantly boost financial wellness include setting up a simple budget, tracking spending, automating savings, building an emergency cash reserve, paying down expensive debt, and investing more of your earnings.

No matter what your income or current state of financial health, putting some smart money habits into place now can go a long way toward boosting your financial security, reducing stress, and building wealth over time.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

Better banking is here with up to 4.60% APY on SoFi Checking and Savings.

SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet..

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2023 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOBK1023034

Dec

2023

Understanding the Coupon Rate of a Bond

By Rebecca Lake | Growing Wealth, invest, Investing | Comments Off

A bond’s coupon rate represents the annual interest rate paid by the issuer, as determined by current market interest rates and based on the bond’s face value. Bond issuers typically pay coupon rates on a semiannual basis.

The coupon rate of a bond can tell an investor how much interest they can expect to collect on a yearly basis. The bond coupon rate is not the same as the bond yield, which investors who buy bonds on the secondary market use to estimate the total rate of return at maturity.

Investment-quality bonds can help with diversification in a portfolio while providing a consistent stream of interest income. Understanding the coupon rate and what it means is important when choosing bonds for your portfolio.

What Is the Coupon Rate?

Bonds represent a debt where the bond issuer borrows money from investors and agrees to pay interest at regular intervals in exchange for the use of their capital. Both governments and non-government entities, like corporations, may issue bonds to raise capital to fund various endeavors.

The coupon rate of a bond is usually a fixed interest rate, typically paid out twice per year. That said, there are some variable-rate bonds, as well as zero-coupon bonds (more on those below). Investors often use the term “coupon rate” when discussing fixed-income securities, including bonds and notes.

Recommended: How Bonds Work

The Role of Coupon Rates in Bond Investments

Investors can buy individual bonds, bond funds, or bond options, which are derivatives similar to stock options.

The coupon interest rate tells you what percentage of the bond’s face value, or par value, you’ll receive yearly. The rate won’t change during the life of the bond, which is why some bonds are worth more than others on the secondary market.

Coupon rates are typically lower for investment-grade bonds and higher for junk bonds, due to their higher risk.

Example of a Bond’s Coupon Rate

Assume you purchase a bond with a face value of $1,000. The bond has a coupon rate of 4%. This means that for each year you hold the bond until maturity, you’d receive $40, regardless of what you paid for the bond.

If you buy a bond on the secondary market, the story changes somewhat. That’s because bonds trade either at a premium to the par value (higher than the face value), or at a discount to par (lower than the face value). Because the coupon rate of the bond stays the same until maturity, it may represent a higher or lower percentage of the par value — this is called the yield.

History of the Term Coupon

Bond holders used to get literal coupons as a way of collecting their interest payments. This is no longer the case, as interest is paid on a set schedule to the investor directly.

💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.

Calculating the Coupon Rate

The bond coupon rate formula is fairly simple:

Bond coupon rate = Total annual coupon payment/Face or par value of the bond x 100

To apply the coupon rate formula you’d need to know the face or par value of the bond and the annual interest or coupon payment. To find this payment, you’d multiply the amount of interest paid by the number of periodic payments made for the year. You’d then divide that by the par value and divide the result by 100.

Recommended: How to Buy Bonds: A Guide for Beginners

Step-by-Step Calculation of the Coupon Rate

Say you have a bond with a face value of $1,000, which pays $25 in interest to you twice per year.

• To find the annual coupon payment you’d multiply $25 by two to get $50.

• You’d then divide the $50 annual coupon payment by the $1,000 par value of the bond. 50 / 1000 = 0.05

• Then multiply the result by 100 (0.05 x 100) to find that your bond has a coupon rate of 5%.

The Impact of Market Interest Rates on Coupon Rates

How is the coupon rate determined? This is where current market interest rates come into play.

How Interest Rate Fluctuations Affect Bonds

Interest rates can influence coupon rates. An interest rate is the rate a lender charges a borrower. Individual lenders determine interest rates, often based on movements in an underlying benchmark rate. When discussing bond coupon rates and interest rates, it’s typically in the context of changes to the federal funds rate. This is the rate at which commercial banks lend to one another overnight.

Movements in the federal funds rate directly influence other types of interest rates, including coupon rates and bond prices on the secondary market.

When interest rates rise, based on changes to the federal funds rate, that can cause bond prices to fall. When interest rates decline, bond prices typically rise. When bond prices change that doesn’t impact the coupon rate, which stays the same. But a bond’s price is an important consideration for investors who trade on the secondary market because it impacts the yield to maturity.

Strategies for Investors in a Changing Rate Environment

Bond prices can move up or down based on the coupon rate, relative to movements in interest rates.

When interest rates are higher than the bond’s coupon rate, that bond’s price may fall in order to offset a less attractive yield. If interest rates drop below the bond’s coupon rate, the bond’s price may rise if it becomes a more attractive investment opportunity.

When comparing coupon rates and bond prices, it’s important to understand the relationship between the bond’s face value and what it trades for on the secondary market. If a bond is trading at a price above its face value, that means it’s trading at a premium to par. Conversely, if a bond is trading at a price below its face value, that means it’s trading at a discount to par.

An investor who purchases a bond with the intent to hold it until it reaches maturity does not need to worry about bond price movements. Their end goal is to collect the annual interest payments and recover their principal on the assigned maturity date, making it a relatively safe investment as long as the issuer fulfills their obligation.

Investors looking to buy bonds and resell them before they mature, however, may pay attention to which way bond prices are moving relative to the coupon rate to determine whether selling would yield a profit or loss.

Understanding Coupon Rate vs. Yield

Coupon rate tells investors how much interest a bond will pay yearly until maturity. But there are other metrics for evaluating bonds, including yield to maturity and interest rates. Understanding the differences in what they measure matters when determining whether bond investments are a good fit and what rate of return to expect.

Coupon Rate vs. Yield to Maturity

A bond’s yield to maturity or current yield reflects the interest rate earned by an investor who purchases a bond at market price and holds on to it until it reaches maturity. A bond’s maturity date represents the date at which the bond issuer agrees to repay the investor’s principal investment. Longer maturity dates may present greater risk, as they leave more room for the bond issuer to run into complications that could make it difficult to repay the principal.

When evaluating yield to maturity of a bond, you’re looking at the discount rate at which the sum of all future cash flows is equal to the price of the bond. Yield to maturity can be quoted as an annual rate that’s different from the bond coupon rate. In figuring yield to maturity, there’s an assumption that the bond issuer will make coupon and principal payments to investors on time.

The coupon rate is the annual interest earned while yield to maturity reflects the total rate of return produced by the bond when all interest and principal payments are made.

Coupon Rate vs Interest Rate

While coupon rate and interest rate seem similar, they are distinct. The coupon rate is set by the issuer of the bond, and the amount paid to the bondholder is tied to the face value.

But the prevailing interest rate set by the government is what determines the coupon rate. If the central bank, i.e. the Federal Reserve, sets the interest rate at 6%, that will influence what lenders are willing to accept in the form of the coupon rate.

Also, the price of a bond on the secondary market hinges on the coupon rate. A higher-coupon bond is more desirable than a lower-coupon bond, so its price will be higher.

💡 Quick Tip: It’s smart to invest in a range of assets so that you’re not overly reliant on any one company or market to do well. For example, by investing in different sectors you can add diversification to your portfolio, which may help mitigate some risk factors over time.

Variable-Rate and Zero-Coupon Bonds

Not all coupon rates are fixed. Investors can also consider whether buying variable-rate bonds or zero-coupon bonds might make sense.

Fixed vs. Variable Coupon Rates and Investment Impact

Although bonds typically offer fixed-income payments, some bonds do offer coupon rates that adjust periodically. For that reason these bonds are sometimes called floating-rate or adjustable-rate bonds.

In these cases, the coupon rate adjusts according to a formula that’s linked to an interest rate index such as the SOFR (Secured Overnight Financing Rate), the new benchmark in the U.S. that has largely replaced the LIBOR (London Interbank Offered Rate).

Although these are income-producing bonds, and there is always the possibility that they could offer a higher yield under the right conditions, they are not technically fixed-income instruments, which is something for investors to bear in mind. In addition they come with the risk of default.

Zero-Coupon Bonds Explained

Some bonds, called zero-coupon bonds, don’t pay interest at all during the life of the bond. The upside of choosing zero bonds is that by forgoing annual interest payments, it’s possible to purchase the bonds at a deep discount to par value. This means that when the bond matures, the issuer pays the investor more than the purchase price.

Zero-coupon bonds typically have longer maturity dates, which may make them suitable when investing for long-term goals. This type of bond may experience more price fluctuations compared to other types of bonds sold on the secondary market. Investors may still have to pay taxes on the imputed interest generated by the bond, though it’s possible to avoid that by investing in zero-coupon municipal bonds or other tax-exempt zero-coupon bond options.

The Takeaway

Investing in bonds can help you create a well-rounded portfolio alongside stocks, and other securities, which is why knowing the coupon rate of a bond is important. The coupon rate is the interest rate paid by the issuer, and it’s fixed for the life of the bond — which makes it possible to create a predictable income stream, whether you buy the bond at issuance or on the secondary market.

As you get closer to retirement, bonds can be an important part of your income and risk management strategy, whether you’re investing through an IRA, a 401(k), or a brokerage account.

Invest with as little as $5 with a SoFi Active Investing account.

Photo credit: iStock/Inside Creative House

SoFi Invest®
SoFi Invest refers to the two 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 and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA(www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of SoFi Digital Assets, LLC, please visit 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 pre-qualification for any loan product offered by SoFi Bank, N.A.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOIN1023143

Dec

2023

7 Tips for Acing a Video Interview

By David Wolinsky | Life & Career, Student Loans, student_loan | Comments Off

Whether you recently graduated school or are just seeking a new job, work interviews are increasingly conducted online, via video. This can be especially true as more companies take on remote hires and millions are working from home.

With this rapid rise in digital job interviews, you may wonder, What are some ways to ace a video interview? Do I need a fancy lighting set-up? What should I wear?

To help you make a good impression, read on for seven video interview tips, from practicing ahead of time to tweaking your background. They can help you make a great impression.

Get the Details Right

Video interviews could lead to a rewarding job. So it can be a smart first step to confirm the logistics of the video interview in advance to make sure there’s not a last-minute panic. Some questions to wrangle could include:

• Will you get a calendar invite or event link for the interview?

• What time zone will the interviewer be calling in from?

• Which video conferencing platform will be used?

• Will you need to download software to be able join the interview?
Knowing the answers to logistics can help bring more confidence to the video interview.

💡 Quick Tip: Often, the main goal of refinancing is to lower the interest rate on your student loans — federal and/or private — by taking out one loan with a new rate to replace your existing loans. Refinancing makes sense if you qualify for a lower rate and you don’t plan to use federal repayment programs or protections.

Dress for the Video Interview

Whether you are applying for an on-premises, fully remote, or part-time remote job, certain interview expectations stay the same — namely, presenting yourself with professionalism and dressing for the job. Even when (especially when) you’re interviewing from home.

Even if you’re applying for a fully remote job and you’d likely wear a hoodie and leggings every day, this is a moment to look professional. Business casual is a good bet, and remember the adage to dress for the job you want, not the role you have. Going a notch more formal is typically better than too relaxed.

Do check out how you look on camera in your interview outfit in advance. A shirt that looks fine in real life could wind up looking odd when cropped on camera.

Now, the seven tips to help you ace a video interview as you move forward with job applications.

1. Practice to Make Perfect

Different companies or organizations may use different platforms to host the interview — from Zoom to Google Hangouts to other programs. Don’t worry: You don’t need to become a pro at all the expert features. Still, it’s a good idea to become comfortable with:

• Dialing into scheduled calls

• Checking the audio and the camera

• Understanding what the interviewer can see

• Ensuring the WiFi signal is strong enough for the video interview and doesn’t lead to lag.

If you’re scheduled for a video job interview via a program you’ve never used, it’s advisable to download and try it out well before the actual call. Opening up an unfamiliar program just before the interview only to realize it’s not compatible with your technology might not create a positive first impression. Also make sure you double-check that you have all logins or passwords for the call.

2. Set the Surroundings

Here’s the next video interview tip: Generally, it’s a good idea to do a test call on the planned video-interview platform. This could help you assess how you and your surroundings appear via video. You may even want an extra set of eyes and ears: Ask a friend or family member to do a “mock” call to ensure the audio and visuals are clear.

When prepping for a video interview, put yourself in the position of whoever will be interviewing you. Some questions to chew on:

• What can the interviewer see of your space? Are you too far from or close to the camera?

• Are you easily visible or is more light needed? Or is the setting too bright and full of glare?

• Are there any distractions in the camera frame? Are you able to make eye contact as you talk, or are you looking sideways into the camera?

Some digital platforms allow users to record sessions. So, interviewees may want to record themselves talking and then watch and listen. You could run through the main things you want to say in the real video interview. Talking aloud on camera can help some people to become more aware of their own body language and improve it, if needed.

These steps can be a good way to finetune your online interviewing skills and hopefully get you on your way to accepting a job offer.

3. Take Brief Notes Beforehand

With job interviews, researching the company beforehand could give you ideas of how to connect previous work experience with the brand’s values or role’s responsibilities. One of the benefits of a video interview is that you can make these research notes quite literal.

Write out key points on a big piece of paper near your computer. Or, jot down a couple of accomplishments (say, an in-demand internship) on a sticky note next to your camera. It’s likely that the employer conducting the video interview will have no idea you’re looking at those pre-prepared notes. Just make sure you keep your notes short, so you can naturally weave in key points while maintaining good eye contact with your interviewer.

💡 Quick Tip: It might be beneficial to look for a refinancing lender that offers extras. SoFi members, for instance, can qualify for rate discounts and have access to career services, financial advisors, networking events, and more — at no extra cost.

4. Minimize Off-Screen Distractions

Another important online video tip is to keep your on-screen image distraction-free. It’s worth remembering that the only person the interviewer wants to interact with is you…not your adorable pets, lovely roommates, or kid sister. You ask the folks you share a living space with to keep quiet or stay in their rooms during your interview. Plan ahead so the conversation isn’t distractingly interrupted by unexpected visitors. (If your dog does somehow come bounding in and sits on your lap, own the situation, apologize, and remedy it as quickly and calmly as you can.)

And, on this topic, it’s a smart idea to turn off notifications for texts and emails during the interview time slot. Otherwise, a funny group chat could make your phone blow up with the distracting sound of alerts flooding in.

Also, as part of how to prepare for a video interview, check your background. Not everyone has a camera-ready home office. Do you have a messy shelf behind your head? Or your roommate’s horror-movie poster hanging there? Style your space so it doesn’t distract your interviewer from you and all you can offer a company.

5. Show up Early

Just as with an in-person interview, it’s wise to show up early. This can communicate that, yes, you’re punctual, but also that you are organized, dependable, and eager for the job.

Also remember that with video calls, there can be issues. Perhaps your passcode doesn’t work, or your video camera won’t turn on (despite having tested it the day before). If you aim to be online and logged in early, you can troubleshoot as needed. Just keep your posture and demeanor professional while you are in any digital waiting rooms before the call starts.

6. Go Outside for a Breather

It’s hard to feel energetic and friendly if you’re cooped inside all day. A good way to minimize nerves is to get fresh air. Don’t just open up a window. Take a quick walk around the block to get a jolt of sunlight and catch a breeze. They can help reset the mind. It can also be a great idea to do these between video interviews, if you have more than one scheduled on a given day.

7. Remember to Be Yourself

After preparing for the logistics of video job interviews, it can be easy to forget one simple thing: Be yourself. While a strong WiFi signal and well-lit space won’t hurt your chances during a video interview, it’s helpful to recall that interviews are conversations between two or more people. You’re not being grilled on a TV news report. Sure, you want to be prepared, but also relax, and share who you are.

Ways to help communicate across the digital divide: Aim to make good eye contact, have your voice show energy, and try out a signal to show that you are done speaking and ready for the next question. A nod might work well in this case.

Getting to Work

How to prepare for a video interview and ace it is just one part of navigating life after college. Being ready for a video interview is just one new way to get noticed these days.

On top of looking for a full-time or better-paying job, some grads also want to find ways to reduce their outstanding debt balances. That can include long-term bills, like student loan repayments. Some borrowers decide to refinance their student loans with a private lender.

Refinancing student loans could reduce monthly bill payments, though it’s important to note that you may pay more interest over the life of the loan if you refinance with an extended term. In addition, if you refinance federal student loans, you will forfeit certain federal benefits and protections. If you are curious to learn more about refinancing student loans, it can be a good idea to research different offers.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.

SoFi Student Loan Refinance
If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOSL1123007