Guide to Zero-Coupon Certificates of Deposit (CDs)

Guide to Zero-Coupon Certificates of Deposit (CDs)

A zero-coupon certificate of deposit or zero-coupon CD is a type of CD that’s purchased at a discount and pays out interest at maturity. Zero-coupon CDs can offer higher yields than standard CDs for investors who have the patience to wait until maturity to collect their original deposit and the interest earned.

Zero-coupon certificates of deposit are similar to bonds in that both are considered lower-risk, fixed-income instruments, but they serve different purposes in a portfolio. Understanding how a zero-coupon CD works can make it easier to decide if it’s a good investment for you.

What Is a Zero-Coupon CD?

To understand zero-coupon CDs, it’s important to know how a regular certificate of deposit works. A CD account, also referred to as a time-deposit or term-deposit account, is designed to hold money for a specified period of time. While the money is in the CD, it earns interest at a rate determined by the CD issuer — and the investor cannot add to the account or withdraw from it without penalty.

CDs are FDIC or NCUA insured when held at a member bank or credit union. That means deposits are insured up to $250,000.

CDs are some of the most common interest-bearing accounts banks offer, along with savings accounts and money market accounts (MMAs).

A zero-coupon certificate of deposit does not pay periodic interest. Instead, the interest is paid out at the end of the CD’s maturity term. This can allow the purchaser of the CD to potentially earn a higher rate of return because zero-coupon CDs are sold at a discount to face value, but the investor is paid the full face value at maturity.

By comparison, traditional certificates of deposit pay interest periodically. For example, you might open a CD at your bank with interest that compounds daily. Other CDs can compound monthly. Either way, you’d receive an interest payment in your CD account for each month that you hold it until it matures.

Once the CD matures, you’ll be able to withdraw the initial amount you deposited along with the compound interest. You could also roll the entire amount into a new CD if you’d prefer.

Remember: Withdrawing money from a CD early can trigger an early withdrawal penalty that’s typically equal to some of the interest earned.

How Do Zero-Coupon CDs Work?

Ordinarily when you buy a CD, you’d deposit an amount equal to or greater than the minimum deposit specified by the bank. You’d then earn interest on that amount for the entirety of the CD’s maturity term.

With zero-coupon CD accounts, though, you’re purchasing the CDs for less than their face value. But at the end of the CD’s term, you’d be paid out the full face value of the CD. The discount — and your interest earned — is the difference between what you pay for the CD and what you collect at maturity. So you can easily see at a glance how much you’ll earn from a zero-coupon CD investment.

In a sense, that’s similar to how the coupon rate of a bond works. A bond’s coupon is the annual interest rate that’s paid out, typically on a semiannual basis. The coupon rate is always tied to a bond’s face value. So a $1,000 bond with a 5.00% interest rate has a 5.00% coupon rate, meaning a $50 annual payout until it matures.

Real World Example of a Zero-Coupon CD

Here’s a simple example of how a zero-coupon CD works. Say your bank offers a zero-coupon certificate of deposit with a face value of $10,000. You have the opportunity to purchase the CD for $8,000, a discount of $2,000. The CD has a maturity term of five years.

You wouldn’t receive any interest payments from the CD until maturity. And since the CD has a set term, you wouldn’t be able to withdraw money from the account early. But assuming your CD is held at an FDIC- or NCUA-member institution, the risk of losing money is very low.

At the end of the five years, the bank pays you the full $10,000 face value of the CD. So you’ve essentially received $400 per year in interest income for the duration of the CD’s maturity term — or 5.00% per year. You can then use that money to purchase another zero-coupon CD or invest it any other way you’d like.

💡 Quick Tip: Typically, checking accounts don’t earn interest. However, some accounts do, and online banks are more likely than brick-and-mortar banks to offer you the best rates.

Tips When Investing in a Zero-Coupon CD

If you’re interested in zero-coupon CDs, there are a few things to consider to make sure they’re a good investment for you. Specifically, it’s important to look at:

•   What the CD is selling for (in other words, how big of a discount you’re getting to its face value)

•   How long you’ll have to hold the CD until it reaches maturity

•   The face value amount of the CD (and what the bank will pay you in full, once it matures)

It’s easy to be tempted by a zero-coupon certificate of deposit that offers a steep discount between the face value and the amount paid out at maturity. But consider what kind of trade-off you might be making in terms of how long you have to hold the CD.

If you don’t have the patience to wait out a longer maturity term, or you need the money in the shorter term, then the prospect of higher returns may hold less sway for you. Also, keep in mind what kind of liquidity you’re looking for. If you think you might need to withdraw savings for any reason before maturity, then a standard CD could be a better fit.

Comparing zero-coupon CD offerings at different banks can help you find one that fits your needs and goals. You may also consider other types of cash equivalents, such as money market funds or short-term government bonds if you’re looking for alternatives to zero-coupon CDs.

Recommended: How to Invest in CDs: A Beginner’s Guide

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Pros of Zero-Coupon CDs

Zero-coupon CDs have some features that could make them more attractive than other types of CDs. The main advantages of investing in zero coupon certificates of deposit include:

•   Higher return potential than regular CDs

•   Guaranteed returns, since you’re unable to withdraw money before maturity

•   Suited for longer-term goals

•   Can be federally insured

Zero-coupon CDs are lower-risk investments, which can make them more appealing than bonds. While bonds are considered lower-risk investments generally, if the bond issuer defaults, then you might walk away from your investment with nothing.

A zero-coupon certificate of deposit, on the other hand, does not carry this same default risk because your money is insured up to $250,000. There is, however, a risk that the CD issuer could “call” the CD before it matures (see more about this in the next section).

Cons of Zero-Coupon CDs

Every investment has features that may be sticking points for investors. If you’re wondering what the downsides of zero-coupon CDs are, here are a few things to consider:

•   No periodic interest payments

•   No liquidity, since you’re required to keep your money in the CD until maturity

•   Some zero-coupon CDs may be callable, which means the issuer can redeem them before maturity, and the investor won’t get the full face value

•   Taxes are due on the interest that accrues annually, even though the interest isn’t paid out until maturity

It may be helpful to talk to your financial advisor or a tax professional about the tax implications of zero-coupon CDs. It’s possible that the added “income” from these CDs that you have to report each year could increase your tax liability.

How to Collect Interest on Zero-Coupon CDs

Since zero-coupon CDs only pay out at interest at the end of the maturity term, all you have to do to collect the interest is wait until the CD matures. You can direct the bank that issued the CD to deposit the principal and interest into a savings account or another bank account. Or you can use the interest and principal to purchase new CDs.

It’s important to ask the bank what options you’ll have for collecting the interest when the CD matures to make sure renewal isn’t automatic. With regular CDs, banks may give you a window leading up to maturity in which you can specify what you’d like to do with the money in your account. If you don’t ask for the money to be out to you it may be rolled over to a new CD instead.

How to Value Zero-Coupon CDs

The face value of a zero-coupon CD is the amount that’s paid to you at maturity. Banks should specify what the face value of the CD is before you purchase it so you understand how much you’re going to get back later.

In terms of whether a specific zero-coupon CD is worth the money, it helps to look at how much of a discount you’re getting and what that equates to in terms of average interest earned during each year of maturity.

Purchasing a $10,000 zero-coupon CD for $8,000, for example, means you’re getting it at 20% below face value. Buying a $5,000 zero-coupon CD for $4,500, on the other hand, means you’re only getting a 10% discount.

Of course, you’ll also want to keep the maturity term in perspective when assessing what a zero-coupon CD is worth to you personally. Getting a 10% discount for a CD with a three-year maturity term, for example, may trump a 20% discount for a five-year CD, especially if you don’t want to tie up your money for that long.

The Takeaway

Investing in zero-coupon CDs could be a good fit if you’re looking for a lower-risk way to save money for a long-term financial goal, and you’d like a higher yield than most other cash equivalents.

Zero-coupon CDs are sold at a discount to face value, and while the investor doesn’t accrue interest payments annually, they get the full face value at maturity — which often adds up to a higher yield than many savings vehicles. And because the difference between the discount and the face value is clear, zero-coupon CDs are predictable investments (e.g. you buy a $5,000 CD for $4,000, but you collect $5,000 at maturity).

As with any investment, it’s important for investors to know the terms before they commit any funds. For example, zero-coupon CDs don’t pay periodic interest, but the account holder is expected to pay taxes on the amount of interest earned each year (even though they don’t collect it until they cash out or roll over the CD).

If you’re eager to earn a higher rate on your savings, you’ve got a lot of options to explore — including a high-yield bank account or a regular CD.

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 SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.60% APY on SoFi Checking and Savings.

FAQ

What is a coupon on a CD?

The coupon on a CD is its periodic interest payment. When a CD is zero coupon, that means it doesn’t pay out interest monthly or annually. Instead, the investor gets the full amount of interest earned paid out to them when the CD reaches maturity.

Is a certificate of deposit a zero-coupon bond?

Certificates of deposit and bonds are two different types of savings vehicles. While a CD can be zero-coupon the same way that a bond can, your money is not invested in the same way. CD accounts also don’t carry the same types of default risk that bonds can present.

Are CDs safer than bonds?

CDs can be safer than bonds since CDs don’t carry default risk. A bond is only as good as the entity that issues it. If the issuer defaults, then bond investors can lose money. CDs, on the other hand, are issued by banks and typically covered by FDIC insurance which generally makes them safer investments.


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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 recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit 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, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

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How to Invest in Wind Energy

How to Invest in Wind Energy

Investing in wind energy involves putting money into companies or funds focused on some aspect of the wind energy industry. Individuals can invest in the wind energy industry directly by investing in companies that operate wind farms or indirectly by putting money into companies that manufacture wind turbines or components.

Wind energy is one of the cornerstones of the renewable energy industry, providing a cost-effective source of electricity generation. As more attention is paid to the effects of climate change and the need to reduce dependence on fossil fuels, many investors are turning to wind energy investments.

What Are Wind Energy Investments?

Wind energy investments are financial stakes in companies and projects focused on generating electricity through wind power. Wind turbines, sometimes called windmills, harness this power by collecting the energy created by wind and converting it into electricity. Wind energy is often divided into two market segments, distributed wind and utility-scale wind.

💡 Quick Tip: How to manage potential risk factors in a self-directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

Distributed Wind Market Segment

The distributed wind market is usually made up of smaller-scale projects, where wind turbines are used to generate electricity for homes, businesses, and even entire communities.

Utility-scale Market Segment

Utility-scale wind energy, in contrast, consists of turbines that generate more than 100 kilowatts of energy. The power generated by utility-scale wind projects is added to the electrical grid. Companies involved in utility-scale wind energy draw the most interest from individual investors.

Utility-scale wind energy projects can be land-based, where a group of wind turbines is grouped in a wind farm on land. Offshore wind farms built off the coast are another type of utility-scale wind energy, taking advantage of powerful ocean winds to generate large amounts of energy.

Individuals can invest in the wind energy industry by putting money into companies involved in some portion of the wind energy industry or, more rarely, by investing in specific wind energy projects.

Increased Popularity

Wind energy investments, and other socially responsible investments, have grown in popularity in recent years as the focus on the need for sustainable energy grows. Because they rely on wind power rather than fossil fuels, these investments and projects cut down on emissions and pollution.

Further, wind energy is becoming more common because of declining costs, technological improvements, and government tax incentives. In the United States, wind power supplied more than 20% of all electricity to 12 states as of 2022, and in 2023, U.S. wind generation totaled more than 425,000 gigawatt hours of power.

3 Ways to Invest in Wind Energy

Investors can invest in wind energy by putting money into the stocks and bonds of companies in the wind energy industry. Mutual funds and exchange-traded funds (ETFs) with wind energy or renewable energy-focused strategies are also potential investment vehicles for those interested in adding wind energy to their portfolio.

Regardless of the type of investment, investors need to remember that many companies and funds are diversified, meaning that they may be involved in sectors other than wind energy. For investors that want to invest in purely wind energy companies or funds, it’s essential to do research into potential investments.

💡 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.

1. Stocks

Investors can put money into various publicly-traded companies involved in some aspect of the wind energy industry. These companies may include wind farm operators, which own and operate wind turbines to produce energy for customers and end-users, and manufacturers of turbines and other components of wind farms. Some utility companies may also be an option for wind energy investors.

Some companies involved in the wind energy industry include:

•   Orsted : The Denmark-based power company is the largest developer of offshore wind power in the world.

•   Vestas Wind Systems : The Denmark-based company is one of the world’s largest manufacturers of wind turbines

•   GE Vernova : The US-based company that was spun-off from GE’s main business in 2024, specializing in energy equipment manufacturing.

•   NextEra Energy : The American energy company has 119 wind farms in operation

•   Alliant Energy : The American energy company owns and operates wind farms across Wisconsin and Iowa

2. Mutual Funds and ETFs

Investors who don’t want to pick individual stocks to invest in can always look to mutual funds and exchange-traded funds (ETFs) that provide exposure to wind energy companies and investments. A growing number of index funds invest in a basket of companies involved in the wind energy industry.

These funds allow investors to diversify their holdings by investing in one security. However, not all wind energy funds follow the same criteria and may focus on different aspects of wind energy. These funds may also have holdings in traditional energy and utility companies that only are partially involved in the wind energy industry.

3. Bonds

The bonds of corporations involved in wind energy business practices can be a good option for investors interested in fixed-income securities. Green and climate bonds are bonds issued by companies to finance various environmentally-friendly projects and business operations.

Additionally, government bonds used to fund wind energy projects can be an option for fixed-income investors. These bonds may come with tax incentives, making them a more attractive investment than traditional bonds.

💡 Recommended: How to Buy Bonds: A Guide for Beginners

Benefits and Risks of Investing in Wind Energy

The trend of investing in renewable energy sources like wind energy is rising as the public becomes more aware of the environmental and economic benefits of doing so. However, before investing in this sector, there are benefits and risks to consider.

Benefits

A benefit of investing in wind energy is that it is a renewable resource, so it will never run out as long as the sun shines and the wind blows. Additionally, wind energy is cost-effective, and tends to be one of the lowest-priced energy sources. And because the power generated from wind farms is sold at a fixed price over a long period of time, it may provide reliable returns for investors — though there are no guarantees.

Wind power is also a clean energy source, meaning it does not produce emissions that can harm the environment like fossil fuels and power plants. This can be attractive for investors focused on building a portfolio of green investments.

Risks

One primary risk of investing in wind energy is that it is a relatively new technology, so there is little data available on its long-term performance. Wind energy and all renewable energy sources must compete with traditional energy sources like oil, coal, and natural gas. Because of this, the long-term outlook for wind energy investments may change. Wind energy investments may be harder to stomach for investors who are not comfortable with the risk of newer technologies.

Additionally, wind energy projects may get pushback from communities where companies want to operate.

How to Build a Wind Energy Portfolio

If you are ready to start investing and want to build a portfolio of wind energy investments, you can follow these steps:

Step 1: Open a brokerage account

You will need to open a brokerage account and deposit money into it. Once your account is funded, you can buy and sell stocks and other securities.

Step 2: Pick your assets

Decide what type of investment you want to make, whether in a company’s stock, a wind energy-focused ETF or mutual fund, or bonds.

Step 3: Do your research

It’s important to research the different companies and funds and find a diversified selection that fits your desires and priorities.

Step 4: Invest

Once you’re ready, make your investment and then monitor your portfolio to ensure that the assets in your portfolio have a positive social and financial impact.

It is important to remember that you should diversify your portfolio by investing in various asset classes. Diversification may help to reduce your risk and maximize your returns.

The Takeaway

Wind energy is a renewable resource that is becoming increasingly popular and is expected to grow significantly in the coming years. This makes it a potential growth investment for those looking to diversify their portfolios and reduce their reliance on traditional energy sources.

While the outlook for wind energy is promising, investments in wind energy may not always produce positive returns. When considering a wind energy investment, it is important to do your research and understand the risks and rewards involved with this nascent industry.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

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.


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How to Invest in Solar Energy

How to Invest in the Solar Energy Sector

Solar energy investing focuses on companies or funds focused on some aspect of the solar energy industry. You can invest in the solar energy industry by putting money into companies involved in some part of the solar power supply chain, including manufacturers of solar panels and operators of solar energy facilities. Investors can also profit from solar energy by installing solar panels on their homes.

Solar energy is one of the most popular and growing renewable energy sources. There are several ways to invest in solar energy for investors interested in supporting an industry that may help reduce dependence on traditional fossil fuels and help combat climate change.

What Is Solar Investing?

Solar investing generally refers to investing in companies that produce or sell solar energy products. This can include solar panel manufacturers, installers, or companies operating solar energy facilities. Investors usually invest in solar through traditional products like stocks, mutual funds, and exchange-traded funds (ETFs).

Another common type of solar investing is the installation of solar panels on a home or business. Solar panels can be used to power all or part of a home or business, and the electricity generated can offset the cost of an energy bill. Investors can also use solar panels to generate income by selling their electricity back to a utility company.

💡 Quick Tip: How to manage potential risk factors in a self-directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

💡 Recommended: Beginner’s Guide to Sustainable Investing

What Is Solar Energy?

Solar energy is a form of renewable energy that comes from the sun; it is an abundant source of energy that can be used to generate electricity, heat water, and provide other forms of energy for homes, businesses, and communities.

Solar energy is generally generated by solar panels, which are made up of photovoltaic (PV) cells that convert sunlight into electricity. Solar panels can be installed on an individual’s home or business or arrayed across open spaces that experience strong sunlight.

Though solar panels are common for most consumer and business applications, thermal solar is another type of solar energy. Thermal solar energy utilizes mirrors to reflect and concentrate sunlight onto receivers that collect the energy and convert it to heat, which can then be used to produce electricity or stored for later use. It is used primarily in large power plants.

Solar energy is considered a clean and sustainable energy source that can help reduce the dependence on fossil fuels to combat climate change. Analysts expect renewable energy sources like solar will make up a more significant portion of all energy generation in the coming decades.

Benefits and Risks of Investing in Solar

The trend of investing in renewable energy sources like solar energy is rising as the public becomes more aware of the environmental and economic benefits. However, before investing in this sector, there are benefits and risks to consider.

Benefits

A benefit of investing in solar is that it provides a renewable energy source that can help reduce your carbon footprint. This can be appealing to investors interested in environmentally friendly and socially responsible investing.

Solar energy is also sustainable, especially compared to fossil fuels and traditional energy sources. The amount of oil and coal in the ground is limited, but the sun, hopefully, isn’t going anywhere. Investors interested in investments with long-term growth potential may prefer solar energy to other energy stocks.

Additionally, if you install solar panels on your home, it can increase the value of your property.

💡 Quick Tip: Investment fees are assessed in different ways, including trading costs, account management fees, and possibly broker commissions. When you set up an investment account, be sure to get the exact breakdown of your “all-in costs” so you know what you’re paying.

Risks

A primary risk of solar energy is that it is intermittent, meaning that solar energy is only generated when the sun is shining. Solar energy is only available during daylight, and a cloudy day may interfere with energy production. While this is a problem, technology is advancing so solar energy can be more adequately captured and stored during periods of extreme sunshine.

Another downside to solar energy is that many technologies in the sector require rare earth materials in the production process. The solar industry must compete with other industries for these scarce resources. Because there can be supply and demand issues for these commodities, it can increase costs for solar energy producers.

And though solar energy is a renewable resource, that doesn’t mean it doesn’t create any harm to the environment. The materials used in solar technologies are difficult to dispose of and recycle, which cuts into the sustainability claims of solar energy investments.

💡 Recommended: What Every New Investor Should Know About Risk

4 Ways to Invest in Solar Energy

Investors can invest in solar energy by putting money into the stocks and bonds of companies in the solar energy industry. Mutual funds and exchange-traded funds (ETFs) with solar energy or renewable energy-focused strategies are also potential investment vehicles for those interested in adding solar energy to their portfolio.

Regardless of the type of investment vehicle, investors need to remember that many companies and funds are diversified, meaning they may be involved in sectors other than solar energy. For investors that want to invest in purely solar energy companies or funds, it’s essential to do research into potential investments.

Stocks

Investors can put money into various publicly-traded companies involved in some aspect of the solar energy industry. Solar energy companies may include manufacturers of components for solar technologies, installers of solar panels, and firms that operate solar energy facilities.

Some companies involved in the solar energy industry include:

•   Enphase Energy (ENPH): This company designs and manufactures technologies that turn sunlight into energy

•   SolarEdge Technologies (SEDG): This firm creates products that help photovoltaic systems convert solar energy into power

•   First Solar (FSLR): This company is a manufacturer of solar panels and a provider of utility-scale photovoltaic power plants

•   Sunrun (RUN): This firm is a leading provider of residential solar panels

•   Daqo New Energy (DQ): This company manufactures monocrystalline silicon and polysilicon, primarily for use in solar photovoltaic systems

Mutual Funds and ETFs

Investors who don’t want to pick individual stocks to invest in can always look to mutual funds and exchange-traded funds (ETFs) that provide exposure to solar energy companies and investments.

Several index funds invest in a basket of companies in the solar energy industry. These funds allow investors to diversify their holdings by investing in one security. However, not all solar energy funds follow the same criteria and may focus on different aspects of solar energy. These funds may also have holdings in traditional energy and utility companies that only are partially involved in the solar energy industry.

Bonds

The bonds of corporations involved in solar energy business practices can be a good option for investors interested in fixed-income securities. Green and climate bonds are bonds issued by companies to finance various environmentally-friendly projects and business operations.

Additionally, government bonds used to fund solar energy projects can be an option for fixed-income investors. These bonds may come with tax incentives, making them a more attractive investment than traditional bonds.

Install Solar Panels

As mentioned above, investors who want to profit from solar energy can purchase solar panels and install them on a home or business. This may be an appealing way to save money on your energy bills, generate income by selling electricity to a utility company and helping reduce your carbon footprint.

How to Start a Solar Investment Portfolio

If you are ready to start investing and want to build a portfolio of solar energy investments, you can follow these steps:

Step 1: Open a brokerage account

You will need to open a brokerage account and deposit money into it. Once your account is funded, you can buy and sell stocks and other securities. SoFi Invest® offers an active investing platform where you can start building your solar energy portfolio.

Step 2: Pick your assets

Decide what type of investment you want, whether in a company’s stock, a solar energy-focused ETF or mutual fund, or bonds.

Step 3: Do your research

It’s important to research the different companies and funds and find a diversified selection that fits your desires and priorities.

Step 4: Invest

Once you’re ready, make your investment and then monitor your portfolio to ensure that the assets in your portfolio have a positive environmental and financial impact.

It is important to remember that you should diversify your portfolio by investing in various asset classes. Diversification may help to reduce your risk and maximize your returns.

The Takeaway

Solar investing has become increasingly popular in recent years as the cost of solar panels has fallen and the technology has become more efficient. Solar panels are now available for a fraction of the cost of traditional electric power, and they are becoming more efficient at converting sunlight into electricity.

Investing in the solar energy industry may be a way to profit from the growth outlook for solar energy. However, it’s necessary to do your homework before investing in any solar company or fund or installing solar panels on your home.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

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.


Photo credit: iStock/deepblue4you

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
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 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.

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.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected]. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.


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How to Calculate Expected Rate of Return

When investing, you often want to know how much money an investment is likely to earn you. That’s where the expected rate of return comes in; expected rate of return is calculated using the probabilities of investment returns for various potential outcomes. Investors can utilize the expected return formula to help project future returns.

Though it’s impossible to predict the future, having some idea of what to expect can be critical in setting expectations for a good return on investment.

Key Points

•   The expected rate of return is the profit or loss an investor expects from an investment based on historical rates of return and the probability of different outcomes.

•   The formula for calculating the expected rate of return involves multiplying the potential returns by their probabilities and summing them.

•   Historical data can be used to estimate the probability of different returns, but past performance is not a guarantee of future results.

•   The expected rate of return does not consider the risk involved in an investment and should be used in conjunction with other factors when making investment decisions.

What Is the Expected Rate of Return?

The expected rate of return — also known as expected return — is the profit or loss an investor expects from an investment, given historical rates of return and the probability of certain returns under different scenarios. The expected return formula projects potential future returns.

Expected return is a speculative financial metric investors can use to determine where to invest their money. By calculating the expected rate of return on an investment, investors get an idea of how that investment may perform in the future.

This financial concept can be useful when there is a robust pool of historical data on the returns of a particular investment. Investors can use the historical data to determine the probability that an investment will perform similarly in the future.

However, it’s important to remember that past performance is far from a guarantee of future performance. Investors should be careful not to rely on expected returns alone when making investment decisions.

💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.

How To Calculate Expected Return

To calculate the expected rate of return on a stock or other security, you need to think about the different scenarios in which the asset could see a gain or loss. For each scenario, multiply that amount of gain or loss (return) by its probability. Finally, add up the numbers you get from each scenario.

The formula for expected rate of return looks like this:

Expected Return = (R1 * P1) + (R2 * P2) + … + (Rn * Pn)

In this formula, R is the rate of return in a given scenario, P is the probability of that return, and n is the number of scenarios an investor may consider.

For example, say there is a 40% chance an investment will see a 20% return, a 50% chance that the investment will return 10%, and a 10% chance the investment will decline 10%. (Note: all the probabilities must add up to 100%)

The expected return on this investment would be calculated using the formula above:

Expected Return = (40% x 20%) + (50% x 10%) + (10% x -10%)

Expected Return = 8% + 5% – 1%

Expected Return = 12%

What Is Rate of Return?

The expected rate of return mentioned above looks at an investment’s potential profit and loss. In contrast, the rate of return looks at the past performance of an asset.

A rate of return is the percentage change in value of an investment from its initial cost. When calculating the rate of return, you look at the net gain or loss in an investment over a particular time period. The simple rate of return is also known as the return on investment (ROI).

Recommended: What Is the Average Stock Market Return?

How to Calculate Rate of Return

The formula to calculate the rate of return is:

Rate of return = [(Current value − Initial value) ÷ Initial Value ] × 100

Let’s say you own a share that started at $100 in value and rose to $110 in value. Now, you want to find its rate of return.

In our example, the calculation would be [($110 – $100) ÷ $100] x 100 = 10

A rate of return is typically expressed as a percentage of the investment’s initial cost. So, if you were to sell your share, this investment would have a 10% rate of return.

Recommended: What Is Considered a Good Return on Investment?

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*Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

Different Ways to Calculate Expected Rate of Return

How to Calculate Expected Return Using Historical Data

To calculate the expected return of a single investment using historical data, you’ll want to take an average rate of returns in certain years to determine the probability of those returns. Here’s an example of what that would look like:

Annual Returns of a Share of Company XYZ

Year

Return

2011 16%
2012 22%
2013 1%
2014 -4%
2015 8%
2016 -11%
2017 31%
2018 7%
2019 13%
2020 22%

For Company XYZ, the stock generated a 21% average rate of return in five of the ten years (2011, 2012, 2017, 2019, and 2020), a 5% average return in three of the years (2013, 2015, 2018), and a -8% average return in two of the years (2014 and 2016).

Using this data, you may assume there is a 50% probability that the stock will have a 21% rate of return, a 30% probability of a 5% return, and a 20% probability of a -8% return.

The expected return on a share of Company XYZ would then be calculated as follows:

Expected return = (50% x 21%) + (30% x 5%) + (20% x -8%)

Expected return = 10% + 2% – 2%

Expected return = 10%

Based on the historical data, the expected rate of return for this investment would be 10%.

However, when using historical data to determine expected returns, you may want to consider if you are using all of the data available or only data from a select period. The sample size of the historical data could skew the results of the expected rate of return on the investment.

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How to Calculate Expected Return Based on Probable Returns

When using probable rates of return, you’ll need the data point of the expected probability of an outcome in a given scenario. This probability can be calculated, or you can make assumptions for the probability of a return. Remember, the probability column must add up to 100%. Here’s an example of how this would look.

Expected Rate of Return for a Stock of Company ABC

Scenario

Return

Probability

Outcome (Return * Probability)

1 14% 30% 4.2%
2 2% 10% 0.2%
3 22% 30% 6.6%
4 -18% 10% -1.8%
5 -21% 10% -2.1%
Total 100% 7.1%

Using the expected return formula above, in this hypothetical example, the expected rate of return is 7.1%.

Calculate Expected Rate of Return on a Stock in Excel

Follow these steps to calculate a stock’s expected rate of return in Excel (or another spreadsheet software):

1. In the first row, enter column labels:

•   A1: Investment

•   B1: Gain A

•   C1: Probability of Gain A

•   D1: Gain B

•   E1: Probability of Gain B

•   F1: Expected Rate of Return

2. In the second row, enter your investment name in B2, followed by its potential gains and the probability of each gain in columns C2 – E2

•   Note that the probabilities in C2 and E2 must add up to 100%

3. In F2, enter the formula = (B2*C2)+(D2*E2)

4. Press enter, and your expected rate of return should now be in F2

If you’re working with more than two probabilities, extend your columns to include Gain C, Probability of Gain C, Gain D, Probability of Gain D, etc.

If there’s a possibility for loss, that would be negative gain, represented as a negative number in cells B2 or D2.

Limitations of the Expected Rate of Return Formula

Historical data can be a good place to start in understanding how an investment behaves. That said, investors may want to be leery of extrapolating past returns for the future. Historical data is a guide; it’s not necessarily predictive.

Another limitation to the expected returns formula is that it does not consider the risk involved by investing in a particular stock or other asset class. The risk involved in an investment is not represented by its expected rate of return.

In this historical return example above, 10% is the expected rate of return. What that number doesn’t reveal is the risk taken in order to achieve that rate of return. The investment experienced negative returns in the years 2014 and 2016. The variability of returns is often called volatility.

Standard Deviation

To understand the volatility of an investment, you may consider looking at its standard deviation. Standard deviation measures volatility by calculating a dataset’s dispersion (values’ range) relative to its mean. The larger the standard deviation, the larger the range of returns.

Consider two different investments: Investment A has an average annual return of 10%, and Investment B has an average annual return of 6%. But when you look at the year-by-year performance, you’ll notice that Investment A experienced significantly more volatility. There are years when returns are much higher and lower than with Investment B.

Year

Annual Return of Investment A

Annual Return of Investment B

2011 16% 8%
2012 22% 4%
2013 1% 3%
2014 -6% 0%
2015 8% 6%
2016 -11% -2%
2017 31% 9%
2018 7% 5%
2019 13% 15%
2020 22% 14%
Average Annual Return 10% 6%
Standard Deviation 13% 5%

Investment A has a standard deviation of 13%, while Investment B has a standard deviation of 5%. Although Investment A has a higher rate of return, there is more risk. Investment B has a lower rate of return, but there is less risk. Investment B is not nearly as volatile as Investment A.

Recommended: A Guide to Historical Volatility

Systematic and Unsystematic Risk

All investments are subject to pressures in the market. These pressures, or sources of risk, can come from systematic and unsystematic risks. Systematic risk affects an entire investment type. Investors may struggle to reduce the risk through diversification within that asset class.

Because of systematic risk, you may consider building an investment strategy that includes different asset types. For example, a sweeping stock market crash could affect all or most stocks and is, therefore, a systematic risk. However, if your portfolio includes different types of bonds, commodities, and real estate, you may limit the impact of the equities crash.

In the stock market, unsystematic risk is specific to one company, country, or industry. For example, technology companies will face different risks than healthcare and energy companies. This type of risk can be mitigated with portfolio diversification, the process of purchasing different types of investments.

Expected Rate of Return vs Required Rate of Return

Expected return is just one financial metric that investors can use to make investment decisions. Similarly, investors may use the required rate of return (RRR) to determine the amount of money an investment needs to generate to be worth it for the investor. The required rate of return incorporates the risk of an investment.

What Is the Dividend Discount Model?

Investors may use the dividend discount model to determine an investment’s required rate of return. The dividend discount model can be used for stocks with high dividends and steady growth. Investors use a stock’s price, dividend payment per share, and projected dividend growth rate to calculate the required rate of return.

The formula for the required rate of return using the dividend discount model is:

RRR = (Expected dividend payment / Share price) + Projected dividend growth rate

So, if you have a stock paying $2 in dividends per year and is worth $20 and the dividends are growing at 5% a year, you have a required rate of return of:

RRR = ($2 / $20) + 0.5

RRR = .10 + .05

RRR = .15, or 15%

What is the Capital Asset Pricing Model?

The other way of calculating the required rate of return is using a more complex model known as the capital asset pricing model.

In this model, the required rate of return is equal to the risk-free rate of return, plus what’s known as beta (the stock’s volatility compared to the market), which is then multiplied by the market rate of return minus the risk-free rate. For the risk-free rate, investors usually use the yield of a short-term U.S. Treasury.

The formula is:

RRR = Risk-free rate of return + Beta x (Market rate of return – Risk-free rate of return)

For example, let’s say an investment has a beta of 1.5, the market rate of return is 5%, and a risk-free rate of 1%. Using the formula, the required rate of return would be:

RRR = .01 + 1.5 x (.05 – .01)

RRR = .01 + 1.5 x (.04)

RRR = .01 + .06

RRR = .07, or 7%

The Takeaway

There’s no way to predict the future performance of an investment or portfolio. However, by looking at historical data and using the expected rate of return formula, investors can get a better sense of an investment’s potential profit or loss.

There’s no guarantee that the actual performance of a stock, fund, or other assets will match the expected return. Nor does expected return consider the risk and volatility of assets. It’s just one factor an investor should consider when deciding on investments and building a portfolio.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

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

How do you find the expected rate of return?

An investment’s expected rate of return is the average rate of return that an investor can expect to receive over the life of the investment. Investors can calculate the expected return by multiplying the potential return of an investment by the chances of it occurring and then totaling the results.

How do you calculate the expected rate of return on a portfolio?

The expected rate of return on a portfolio is the weighted average of the expected rates of return on the individual assets in the portfolio. You first need to calculate the expected return for each investment in a portfolio, then weigh those returns by how much each investment makes up in the portfolio.

What is a good rate of return?

A good rate of return varies from person to person. Some investors may be satisfied with a lower rate of return if its performance is consistent, while others may be more aggressive and aim for a higher rate of return even if it is more volatile. Ultimately, it is up to the individual to decide what is considered a good rate of return.


SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
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 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.

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 $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

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Guide to Term Deposits

Guide to Term Deposits

A term deposit, also known as a certificate of deposit (CD) or time deposit, is a low-risk, interest-bearing savings account. In most cases, term deposit holders place their funds into an account with a bank or financial institution and agree not to withdraw the funds until the maturity date (the end of the term). The funds can earn interest calculated based on the amount deposited and the term.

This guide explains what a term deposit is in more detail, including the pros and cons of term accounts.

What Is a Term Deposit or Time Deposit?

Time deposit, term deposit, or certificate of deposit (CD) are all words that refer to a particular kind of deposit account. It’s an amount of money paid into a savings account with a bank or other financial institution. The principal can earn interest over a period that can vary from a month to years. There is usually a minimum amount for the deposit, and the earned interest and principal are paid when the term ends.

One factor to consider is that the account holder usually agrees not to withdraw the funds before the term is over. However, if they do, the bank will likely charge a penalty. Yes, that’s a downside, but consider the overall picture: Term deposits typically offer higher interest rates than other savings accounts where the account holder can withdraw money at any time without penalties.

Compared to stocks and other alternative investments, term deposits are considered low-risk (they’re typically insured by the FDIC or NCUA) for up to $250,000 per account holder, per account ownership category (say, single, joint, or trust), per insured institution. For these reasons, the returns tend to be conservative vs. higher risk ways to grow your funds.

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How Does a Bank Use Term Deposits?

Banks and financial institutions can make money through financing. For example, they likely earn a profit by issuing home, car, and personal loans and charging interest on those financial products. Thus, banks are often in need of capital to fund the loans. Term deposits can provide locked-in capital for lending institutions.

Here’s how many bank accounts work:

•   When a customer places funds in a term deposit, it’s similar to a loan to the bank. The bank will hold the funds for a set time and can use them to invest elsewhere to make a return.

•   Say the bank gives the initial depositor a return of 2.00% for the use of funds in a term deposit. The bank can then use the money on deposit for a loan to a customer, charging a 6.00% interest rate for a net margin of 4.00%. Term deposits can help keep their financial operation running.

Banks want to maximize their net interest margin (net return) by offering lower interest for term deposits and charging high interest rates for loans. However, borrowers may choose a lender with the lowest interest rate, while CD account holders probably seek the highest rate of return. This dynamic keeps banks competitive.

Recommended: Understanding the Different Types of Bank Accounts

How Interest Rates Affect Term Deposits

Term deposits and saving accounts in general tend to be popular when interest rates are high. That’s because account holders can earn a high return just by stashing their money with a financial institution. When market interest rates are low, though, people are more inclined to borrow money and spend on items like homes and cars. They may know they’ll pay less interest on loans, keeping their monthly costs in check. This can stimulate the economy.

When interest rates are low (as checking account interest rates typically are), the demand for term deposits usually decreases because there are alternative investments that pay a higher return. For example, stocks, real estate, or precious metals might seem more appealing, although these are also higher risk.

The interest rate paid on a term deposit usually depends on the amount deposited and the time until maturity. A larger deposit may earn higher interest, and a deposit for a longer period of time (says, a few years vs. a few months) may also reap higher rewards.

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Types of Term Deposits

There are two main types of term deposits: fixed deposits and recurring deposits. Here’s a closer look.

Fixed Deposits

Fixed deposits are a one-time deposit into a savings account. The funds cannot be accessed until the maturity date, and interest is paid only on maturity.

Recurring Deposits

With a recurring deposit, the account holder deposits a set amount in regular intervals until the maturity date. For example, the account holder might deposit $100 monthly for five months. Each deposit will earn less interest than the previous installment because the bank holds it for a shorter period.

In addition to these two types, you may see banks promoting different kinds of CDs, whether they vary by term length or by features (such as a penalty-free CD, meaning you aren’t charged if you withdraw funds early).

Opening a Term Deposit

To open a term deposit account, search online for the best interest rates, keeping in mind how much you want to deposit, how often, and for how long. Most banks will ask you to fill in an online application. Make sure you read and agree to the terms of the agreement. For example, check the penalties that apply if you decide to withdraw your funds early as well as the minimum amount required to earn a certain interest rate.

Closing a Term Deposit

A term deposit may close for two reasons — either the account reaches maturity or the account holder decides to end the term early. Each bank or financial institution will have different policies regarding the penalties imposed for breaking a term deposit. Read the fine print or ask a bank representative for full details.

When time deposit accounts mature, some banks automatically renew them (you may hear this worded as “rolled over” into a new account) at the current interest rate. It would be your choice to let that move ahead or indicate to the bank that you prefer to withdraw your money.

If you want to close a term deposit before the maturity date, contact your bank, and find out what you need to do and the penalties. The penalty will depend on the amount saved, the interest rate, and the term. The fee may involve the loss of some or all of interest earned. In very rare cases, your CD could lose value in this way.

Term Deposits and Inflation

Term deposits may not keep up with inflation. That is, if you lock into an account and interest rates rise over time, your money won’t earn more. You will likely still earn the same amount promised when you funded the account. Also, once tax is deducted from the interest income, returns on a fixed deposit may fall below the rate of inflation. So, while term deposits are safe investments, the interest earned can wind up being negligible. You might investigate whether high-yield accounts or stocks, for instance, are a better option.

Term Deposit Pros

What are the advantages of a term deposit versus regular high-yield savings account and other investments? Here are some important benefits:

•   Term deposit accounts are low-risk.

•   CDs or time deposits usually pay a fixed rate of return higher than regular savings accounts.

•   The funds in a CD or deposit account are typically FDIC-insured.

•   Opening several accounts with different maturity dates can allow the account holder to withdraw funds at intervals over time, accessing money without paying any penalties. This system is called laddering.

•   Minimum deposit amounts are often low.

Term Deposit Cons

There are a few important disadvantages of term deposit accounts to note, including:

•   Term deposits can offer lower returns than other, riskier investments.

•   Term deposits and CDs usually have fixed interest rates that do not keep up with inflation.

•   Account holders likely do not have access to funds for the length of the term.

•   Account holders will usually pay a penalty to access funds before the maturity date.

•   A term deposit could be locked in at a low interest rate at a time when interest rates are rising.

Examples of Bank Term Deposits

Here’s an example of how time deposits can shape up. Currently, Bank of America offers a Featured CD account: A 13-month Featured CD with a deposit of more than $1,000 but less than $10,000 pays 4.75% APY.

At Chase, a 9-month CD with a deposit of more than $1,000 but less than $10,000 pays 4.25% APY. If you have $100,000 or more to deposit, the APY rises to 4.75%.

Recommended: How Do You Calculate Interest on a Savings Account?

The Takeaway

Term deposits, time deposits, or CDs are conservative ways to save. Account holders place a minimum amount of money into a bank account for a set term at a fixed interest rate. The principal and interest earned can be withdrawn at maturity or rolled over into another account. If funds are withdrawn early, however, a penalty will likely be assessed.

While these accounts typically have a low interest rate, they may earn more than standard bank accounts. What’s more, their low-risk status can help some people reach their financial goals.

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.


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FAQ

Can you lose money in a term deposit?

Most term deposits or CDs are FDIC-insured, which means your money is safe should the bank fail. However, if you withdraw funds early, you may have to pay a penalty. In a worst-case scenario, this could mean that you receive less money than you originally invested.

Are term deposits and fixed deposits the same?

There is usually no difference between a term deposit and a fixed deposit. They both describe low-risk, interest-bearing savings accounts with maturity dates.

Do you pay tax on term deposits?

With the exception of CDs put in an IRA, any earnings on term deposits or CDs are usually subject to federal and state income taxes. The percentage depends on your overall income and tax bracket. If penalties are paid due to early withdrawal of funds, these can probably be deducted from taxes if the CD or term deposit was purchased through a tax-advantaged individual retirement account (IRA) or 401(k).


Photo credit: iStock/Olga Trofimova

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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 recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit 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, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

As an alternative to direct deposit, 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 https://www.sofi.com/legal/banking-rate-sheet.


*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

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.

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.

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