A certificate of deposit (CD) can be a useful tool for saving money for an upcoming goal. The downside is that you need to wait until the CD matures in order to access your money. If you withdraw some or all of your funds early, you typically get hit with a hefty penalty fee.
If you’re in a pinch and need cash quickly, however, you may be able to get a CD loan. Also known as a CD-secured loan, this is a type of personal loan that uses the value of a CD account as collateral. CD loans are offered by some banks and credit unions. Typically, the lender needs to be the same institution that holds your CD.
Here’s a closer look at how CD loans work and how they stack up against unsecured personal loans.
What Is a CD Loan?
A CD loan is a type of personal loan that is secured by the money you have in a CD. Since the collateral lowers the risk for the lender, these loans can be easier to qualify for and have lower interest rates than unsecured loans. However, if you don’t repay the loan, the bank can take the money out of your CD to cover their losses.
Of course, to get a CD loan, you need to have a CD, which is a type of savings account that pays a fixed interest rate over a set amount of time, or term. You must leave the money untouched for the CD term, which can range from three months to five years. If you withdraw your funds before the end of the CD’s term, you usually have to pay an early withdrawal penalty. CDs generally pay a higher annual percentage yield (APY) than regular savings accounts. And the longer the CD’s term, usually the higher the APY. Similar to other types of savings accounts, CDs come with FDIC protection, up to the applicable limits.
How Do CD-Secured Loans Work?
If you take out a CD loan, the lender will charge interest. So you’ll be earning interest on the CD but paying interest on the CD-secured loan. In some cases, a bank or credit union will set the minimum annual percentage rate (APR) on their CD loans at 2% over the CD rate. So if your CD pays 3%, your CD loan rate would start at 5%. Your actual rate would depend on your credit and the term of the loan, among other factors.
How much you can borrow with a CD-secured loan depends on the lender. Often, you are able to borrow up to 100% of the value of your CD principal. The term of the loan can generally be as long as the term of the CD.
While you can typically access money in a CD if absolutely necessary and pay a penalty, that may no longer be the case if you get a CD loan. Typically, the funds being used as collateral are sealed even in the event of an emergency.
Who Might CD Loans Be Right For?
The idea of paying interest on a loan backed by an interest-bearing CD may seem counterintuitive. However, there can be some logical reasons for taking out a CD-secured loan. One is that you may be able to build your credit by taking out a CD loan and then making a series of on-time payments on the loan. More common ways to do that include getting a secured credit card or becoming an authorized user on another person’s credit card. But if those options aren’t available, and you have a CD, you might use a CD loan for that purpose.
Another reason you might opt for a CD loan is that you need access to your funds for an emergency before it matures. However, you’ll want to first check what your CD’s early withdrawal penalty is. It might be cheaper and easier to simply break open a CD early and pay the penalty. However, if the penalty would be more than what you’d pay in a CD loan’s fees and interest, you might consider a CD loan.
Before taking out a CD loan, it makes sense to weigh the pros and cons.
CD Loan Pros
• Lower interest rates CD-secured loans often have lower interest rates compared to credit cards and unsecured personal loans, making them an attractive option for borrowers seeking lower borrowing costs.
• Building credit CD loans offer an opportunity to establish or improve your credit history if you currently have limited or no credit.
• Retaining CD benefits Despite using the CD as collateral, you can still earn interest on the deposited amount.
• Fast access to funds If you apply for a CD loan with the bank or credit union that holds your CD, you can often get approved quickly and receive funds within a day or two.
• Good for those with bad credit Borrowers with poor credit often qualify for CD-secured loans.
CD Loan Cons
While CD loans have their benefits, there are also some drawbacks to keep in mind.
• Frozen funds The funds in the CD are tied up as collateral, limiting access to the money until the loan is repaid.
• Potential loss of CD If you default on the loan, the lender can seize the CD, resulting in the loss of the deposited funds.
• Limited loan amount CD loans are typically limited to a percentage of the CD’s value, which might not meet your full borrowing needs.
• Fees Your bank may charge fees, such as an origination fee, for issuing you a CD loan.
• Hard to find CD loans aren’t as common as other types of personal loan, so your bank or credit union may not offer them.
CD Loan vs Personal Loan
While CD-secured loans and unsecured personal loans have some similarities, they also have some significant differences.
With both types of loans, you get a lump sum of money up front and can then use those funds for virtually any type of expense. Both also typically offer fixed interest rates and a set repayment term so payments are easy to predict and budget for.
Unlike a personal loan, however, a CD-secured loan can be hard to find. Also with a CD loan, you need to put your savings on the line to secure the loan. With an unsecured personal loan, you don’t need to provide any funds or personal assets as collateral, making them accessible to borrowers without a CD or other assets.
CD loans also tend to have lower interest rates than unsecured personal loans due to the collateral, while personal loans tend to offer more flexibility in loan amount and repayment terms.
CD loans can be a viable option for someone who has a certificate of deposit and needs access to funds while keeping their deposited amount intact. The lower interest rates and potential credit-building opportunities make CD loans attractive for some borrowers.
However, these loans aren’t widely available and the cost of the loan could potentially exceed the CD’s early withdrawal fee. Also, you could lose the money in your CD if you have difficulty making payments. It’s crucial to weigh the pros and cons, consider your personal financial goals and needs, and compare loan options before deciding on the best borrowing solution.
If you’re interested in exploring personal loans, SoFi could help. SoFi’s unsecured personal loans offer competitive, fixed rates and a variety of terms. Checking your rate won’t affect your credit score, and it takes just one minute.
See if a personal loan from SoFi is right for you.
FAQ
Where can I get a CD loan?
CD loans are typically offered by banks and credit unions. It’s best to start by contacting your current financial institution to inquire about their CD loan options. They can provide you with specific details about their loan terms, interest rates, and application process. Typically, you need to take out a CD loan from the same institution that holds your CD.
What are CD loan interest rates?
CD loan interest rates vary depending on the lender, current market conditions, and your qualifications as a borrower. Rates tend to be lower than those of unsecured personal loans, since the loan is backed by the funds in the CD.
Some banks and credit unions will set the minimum annual percentage rate (APR) on their CD loans at 2% over the CD rate. So if your CD pays 3%, your CD loan rate would start at 5%. Your actual rate would depend on your credit and the term of the loan, among other factors.
Do you get money back from a CD loan?
When you take out a CD loan, you do receive money from the lender. However, it’s important to note that the funds received are borrowed money that you are obligated to repay, typically with interest. The funds from the loan are separate from the funds you have deposited in a certificate of deposit. The CD itself remains intact and continues to earn interest, but it is held as collateral until the loan is repaid. Once the loan is fully repaid, you regain full access to your CD and any interest it has earned during the loan term.
About the author
Rebecca Lake
Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.
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Cyclical investing means understanding how various stock sectors react to economic changes. A cyclical stock is one that’s closely correlated to what’s happening with the economy at any given time. The performance of non-cyclical stocks, however, is typically not as closely tied to economic movements.
Investing in cyclical stocks and non-cyclical stocks may help to provide balance and diversification in a portfolio. This in turn may help investors to better manage risk as the economy moves through different cycles of growth and contraction.
Cyclical vs Non-Cyclical Stocks
There are some clear differences between cyclical vs. non-cyclical stocks, as outlined:
Cyclical Stocks
Non-Cyclical Stocks
Perform Best During
Economic growth
Economic contraction
Goods and Services
Non-essential
Essential
Sensitivity to Economic Cycles
Higher
Lower
Volatility
Higher
Lower
A cyclical investing strategy can involve choosing both cyclical and non-cyclical stocks. In terms of how they react to economic changes, they’re virtual opposites.
• Associated with goods or services consumers tend to spend more money on during growth periods
• Highly sensitive to shifting economic cycles
• More volatile than non-cyclical stocks
When the economy is doing well a cyclical stock tends to follow suit. Share prices may increase, along with profitability. If a cyclical stock pays dividends, that can result in a higher dividend yield for investors.
Non-cyclical stocks, on the other hand, share these characteristics:
• Tend to perform well during periods of economic contraction
• Associated with goods or services that consumers consider essential
• Less sensitive to changing economic environments
• Lower volatility overall
A non-cyclical stock isn’t completely immune from the effects of a slowing economy. But compared to cyclical stocks, they’re typically less of a roller-coaster ride for investors in terms of how they perform during upturns or downturns. A good example of a non-cyclical industry is utilities, since people need to keep the lights on and the water running even during economic downturns.
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Cyclical Stocks
In the simplest terms, cyclical stocks are stocks that closely follow the movements of the economic cycle. The economy is not static; instead, it moves through various cycles. There are four stages to the economic cycle:
• Expansion. At this stage, the economy is in growth mode, with new jobs being created and company profits increasing. This phase can last for several years.
• Peak. In the peak stage of the economic cycle, growth begins to hit a plateau. Inflation may begin to increase at this stage.
• Contraction. During a period of contraction, the economy shrinks rather than grows. Unemployment rates may increase, though inflation may be on the decline. The length of a contraction period can depend on the circumstances which lead to it.
• Trough. The trough period is the lowest point in the economic cycle and is a precursor to the beginning of a new phase of expansion.
Understanding the various stages of the economic cycle is key to answering the question of what are cyclical stocks. For example, a cyclical stock may perform well when the economy is booming. But if the economy enters a downturn, that same stock might decline as well.
Examples of Cyclical Industry Stocks
Cyclical stocks most often represent companies that make or provide things that consumers spend money on when they have more discretionary income.
For example, that includes things like:
• Entertainment companies
• Travel websites
• Airlines
• Retail stores
• Concert promoters
• Technology companies
• Car manufacturers
• Restaurants
The industries range from travel and tourism to consumer goods. But they share a common thread, in terms of how their stocks tend to perform during economic highs and lows.
Examples of Non-Cyclical Industry Stocks
Non-cyclical industry stocks would be shares of companies that are more insulated from economic downturns than their cyclical counterparts. It may be easier to think of them as companies that are probably going to see sales no matter what is happening in the overall economy. That might include:
• Food producers and grocers
• Consumer staples
• Gasoline and energy companies
Cyclical Stock Sectors
The stock market is divided into 11 sectors, each of which represents a variety of industries and sub-industries. Some are cyclical sectors, while others are non-cyclical. The cyclical sectors include:
Consumer Discretionary
The consumer discretionary sector includes stocks that are related to “non-essential” goods and services. So some of the companies you might find in this sector include those in the hospitality or tourism industries, retailers, media companies and apparel companies. This sector is cyclical because consumers tend to spend less in these areas when the economy contracts.
Financials
The financial sector spans companies that are related to financial services in some way. That includes banking, financial advisory services and insurance. Financials can take a hit during an economic downturn if interest rates fall, since that can reduce profits from loans or lines of credit.
Industrials
The industrial sector covers companies that are involved in the production, manufacture or distribution of goods. Construction companies and auto-makers fall into this category and generally do well during periods of growth when consumers spend more on homes or cars.
Information Technology
The tech stock sector is one of the largest cyclical sectors, covering companies that are involved in everything from the development of new technology to the manufacture and sale of computer hardware and software. This sector can decline during economic slowdowns if consumers cut back spending on electronics or tech.
Materials
The materials sector includes industries and companies that are involved in the sourcing, development or distribution of raw materials. That can include things like lumber and chemicals, as well as investing in precious metals. Stocks in this sector can also be referred to as commodities.
Cyclical Investing Strategies
Investing in cyclical stocks or non-cyclical stocks requires some knowledge about how each one works, depending on what’s happening with the economy. While timing the market is virtually impossible, it’s possible to invest cyclically so that one is potentially making gains while minimizing losses as the economy changes.
For investors interested in cyclical investing, it helps to consider things like:
• Which cyclical and non-cyclical sectors you want to gain exposure to
• How individual stocks within those sectors tend to perform when the economy is growing or contracting
• Your risk tolerance and risk capacity (i.e. the amount of risk you’re comfortable with versus the amount of risk you need to take to realize your target returns)
• Where the economy is, in terms of expansion, peak, contraction, or trough
For example, swing trading is one strategy an investor might employ to try and capitalize on market movements. With swing trading, you’re investing over shorter time periods to reap gains from swings in stock prices. This strategy relies on technical analysis to help identify trends in stock pricing, though you may also choose to consider a company’s fundamentals if you’re interested in investing for the longer term.
How to Invest in Cyclical Stocks
Investors can invest in cyclical stocks the same way they do any other type of stock: Purchasing them through a brokerage account, or from an exchange.
One way to simplify cyclical investing is to choose one or more cyclical and non-cyclical exchange-traded funds (ETFs). Investing in ETFs can simplify diversification and may help to mitigate some of the risk of owning stocks through various economic cycles.
Cyclical stocks tend to follow the economic cycle, rising in value when the economy is booming, then dropping when the economy hits a downturn. Non-cyclical stocks, on the other hand, tend to behave the opposite way, and aren’t necessarily as affected by the overall economy.
Investing around economic cycles is a viable strategy, but it has its potential pitfalls. Investors who do their homework may be able to successfully invest around economic cycles, but it’s important to consider the risks involved.
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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
What are indicators of cyclical stocks?
A few examples of indicators of cyclical stocks include the earnings per share data reported by public companies, which can give insight into the health of the economy, along with beta (a measure of volatility of returns) and price to earnings ratios.
What is the difference between cyclicality vs. seasonality?
While similar, cyclicality and seasonality differ in their frequency. Seasonality refers to events or trends that are observed annually, or every year, whereas cyclicality, or cyclical variations can occur much less often than that.
How do you mitigate the risk of investing in cyclical stocks?
Investors can use numerous strategies to mitigate the risk of investing in cyclical stocks, such as sector rotation and dollar-cost averaging.
Photo credit: iStock/Eoneren
About the author
Rebecca Lake
Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.
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Your 401(k) deferral rate is the amount that you contribute to the plan via your paychecks. Many companies have a default deferral rate on 401(k) plans, in which they automatically direct a certain amount of your paycheck to your 401(k) plan. This occurs automatically, unless you opt out of participation or select a higher default rate.
The default deferral rate on 401(k) plans varies from one plan to another (and not all plans have a default rate), though the most common rate is 7%. If you’re currently saving in a 401(k) plan or will soon enroll in your employer’s plan, it’s important to understand how automatic contributions work.
What Is a 401(k) Deferral Rate?
A deferral rate is the percentage of salary contributed to a 401(k) plan or a similar qualified plan each pay period. Each 401(k) plan can establish a default deferral percentage, which represents the minimum amount that employees automatically contribute, unless they opt out of the plan.
For example, someone making a $50,000 annual salary would automatically contribute a minimum of $1,500 per year to their plan if it had a 3% automatic deferral rate.
Employees can choose not to participate in the plan, or they can contribute more than the minimum deferral percentage set by their plan. They may choose to contribute 10%, 15% or more of their salary into the plan each year, and receive a tax benefit up to the annual limit. Again, the more of your income you defer into the plan, the larger your retirement nest egg may be later.
There are several benefits associated with changing your 401(k) contributions to maximize 401(k) salary deferrals, including:
• Reducing taxable income if you’re contributing pre-tax dollars
• Getting the full employer matching contribution
• Qualifying for the retirement saver’s credit
If you qualify, the Saver’s Credit is worth up to $1,000 for single filers or $2,000 for married couples filing jointly. This credit can be used to reduce your tax liability on a dollar-for-dollar basis.
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1Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.
Average Deferral Rate
Studies have shown that more employers are leaning toward the higher end of the scale when setting the default deferral rate. According to research from the Plan Sponsor Council of America (PSCA), for instance, 32.9% of employers use an automatic default deferral rate of 6% versus 29% that set the default percentage at 3%.
In terms of employer matching contributions, a recent survey from the PSCA found that 96% of employers offer some level of match. The most recent data available from the Bureau of Labor suggests that the average employer match works out to around 3.5%. Again, it’s important to remember that not every employer offers this free money to employees who enroll in the company’s 401(k).
Research shows that higher default rates result in higher overall retirement savings for participants.
What Is the Actual Deferral Percentage Test?
The actual deferral percentage (ADP) test is one of two nondiscrimination tests employers must apply to ensure that employees who contribute to a 401(k) receive equal treatment, as required by federal regulations. The ADP test counts elective deferrals of highly compensated employees and non-highly compensated employees to determine proportionality. A 401(k) plan passes the ADP test if the actual deferral percentage for highly compensated employees doesn’t exceed the greater of:
• 125% of the ADP for non-highly compensated employees, or the lesser of
• 200% of the ADP for non-highly compensated employees or the ADP for those employees plus 2%
If a company fails the ADP test or the second nondiscrimination test, known as actual contribution percentage, then it has to remedy that to avoid an IRS penalty. This can mean making contributions to the plan on behalf of non-highly compensated employees.
How Much Should I Contribute to Retirement?
If you’re ready to start saving for retirement, using your employer’s 401(k), one of the most important steps is determining your personal deferral rate. The appropriate deferral percentage can depend on several things, including:
• What you can realistically afford to contribute, based on your current income and expenses
A typical rule of thumb suggested by financial specialists is to save at least 15% of your gross income toward retirement each year. So if you’re making $100,000 a year before taxes, you’d save $15,000 in your 401(k) following this rule. But it’s important to consider whether you can afford to defer that much into the plan.
Using a 401(k) calculator or retirement savings calculator can help you to get a better idea of how much you need to save each year to reach your goals, based on where you’re starting from right now. As a general rule, the younger you are when starting to invest for retirement the better, as you have more time to take advantage of the power of compounding returns.
It’s important to keep in mind that there are annual contribution limits for 401(k) plans. These limits determine how much of your income you can defer in any given year and are established by the IRS. The IRS adjusts annual contribution limits periodically to account for inflation.
For 2024, employees are allowed to contribute $23,000 to their 401(k) plans. An additional catch-up contribution of $7,500 is allowed for employees aged 50 or older. That means older workers may be eligible to make a total contribution of $30,500.
For 2025, employees can contribute $23,500 to their 401(k), and those 50 and older can make an additional catch-up contribution of $7,500. Those aged 60 to 63 can make an extra contribution of $11,250, instead of $7,500 in 2025, for a total of $34,750, thanks to SECURE 2.0
The total annual 2024 contribution limit for 401(k) plans, including both employee and employer matching contributions, is $69,000 ($76,500 with the catch-up). For 2025, the total annual contribution limit is $70,000 ($77,500 with the standard catch-up and $81,250 with the SECURE 2.0 catch-up).
The money that you contribute to the 401(k) is yours, but you might not own the contributions from your employer until a certain period of time has passed, if your plan uses a 401(k) vesting schedule.
You’re not required to max out the annual contribution limit and employers are not required to offer a match. But the more of your salary you defer to the plan and the bigger the matching contribution, the more money you could end up with once you’re ready to retire.
The Takeaway
Contributing to a 401(k) can be one of the most effective ways to save for retirement but it’s not your only option. If you don’t have a 401(k) at work or you want to supplement your salary deferrals, you can also save using an Individual Retirement Account (IRA).
An IRA allows you to set aside money for the future while snagging some tax breaks. With a traditional IRA, your contributions may be tax-deductible. A Roth IRA, meanwhile, allows for tax-free distributions in retirement.
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FAQ
What is a good deferral rate for 401(k)?
A good deferral rate for 401(k) contributions is one that allows you to qualify for the full employer match if one is offered, at a minimum. The more money you defer into your plan, the more opportunity you have to grow wealth for retirement.
What is an automatic deferral?
An automatic deferral is a deferral of salary into a 401(k) plan or similar qualified plan through paycheck deductions. Your employer automatically redirects money from your paycheck into your retirement account.
What is the maximum default automatic enrollment deferral rate?
This depends on your employer. Some employers may set the threshold higher to allow employees to make better use of the plan.
About the author
Rebecca Lake
Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.
Photo credit: iStock/guvendemir
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®
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.
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Crowdfunding allows businesses to raise capital by pooling together small amounts of money from many investors. This can include private investors, institutional investors, friends, and family. There are different types of crowdfunding, but they tend to share a common goal: helping entrepreneurs raise money for their business.
Entrepreneurs may raise money from the public through social media platforms or crowdfunding websites. This is an alternate take on the traditional methods of financing a business through equity or debt. Crowdfunding offers some advantages to business owners who may not qualify for traditional loans or would prefer to avoid them. There are, however, some potential downsides to know if you’re interested in exploring crowdfunding for business.
What Is Crowdfunding?
Crowdfunding is more or less exactly what it sounds like: funding that comes from the crowd. Note, though, that regulators like the Securities and Exchange Commission (SEC) have their own definition of crowdfunding — but for our purposes, a broad definition will do the trick. Generally, crowdfunding for business is subject to federal securities laws. That means any efforts to raise capital through the crowd require SEC registration.
💡 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.
History of Crowdfunding
The concept of raising capital as a collective effort is not a new one.
For example, Ireland launched several loan funds in the 1700s and 1800s to help less-advantaged people gain access to credit. A group of wealthier citizens pooled their money together to provide the funding for those loans.
More recently, online crowdfunding began at the start of this century. In 2003, ArtistShare became the first crowdfunding website, allowing people to collectively fund the efforts of artists. At the time, the platform used the term “fan-funding” rather than crowdfunding to describe its mission.
In 2006, entrepreneur Michael Sullivan coined the term “crowdfunding,” using it to describe an ultimately failed video-blog project for which he was seeking backers.
Crowdfunding began to move into the mainstream in 2008 and 2009, with the launch of companies such as Indiegogo and Kickstarter, respectively. Those websites allow supporters to help people build projects or businesses, but they do not receive equity in return.
In 2012, President Barack Obama signed into law the Jumpstart Our Business Startups (JOBS) Act, which included a provision allowing equity crowdfunding. This permitted early-stage businesses to sell securities to raise funds via online platforms. The SEC followed up with the adoption of Regulation Crowdfunding to oversee the crowdfunding provisions included in the JOBS Act.
How Does Crowdfunding Work?
In general, crowdfunding works by allowing multiple people to contribute money to a common cause. To launch a campaign, an entrepreneur will set up an account on an online crowdfunding platform.
Instead of presenting their product or service and their business plan to professional investors like venture capital firms, they’ll share it with the public and appeal for funds from them. The entrepreneurs will typically select a time period during which the investors can put money into the campaign to help it achieve its crowdfunding goal.
Crowdfunding is not a loan, in the traditional sense. The entrepreneur does not get the money they need to launch or scale your business from a lender. Instead, they tap into capital markets sourced from a group of people, which can include people they know as well as strangers.
With crowdfunding, anyone can invest but there are limits on the amount that can be invested in Regulation Crowdfunding during a 12-month period. These limits reflect their net worth and income.
Here’s a brief look at how crowdfunding works:
• If either your annual income or net worth is less than $107,000 you can invest up to the greater of either $2,200 or 5% of the lesser of your annual income or net worth during any 12-month period.
• If both your annual income and net worth are equal to or more than $107,000 you can invest up to 10% of your income or net worth, whichever is less but not more than $107,000 during any 12-month period.
If you’re an accredited investor, there are no limits on how much you can invest. An accredited investor has earned income of at least $200,000 ($300,000 for married couples) in each of the two prior years and a net worth of over $1 million. Individuals who hold certain financial professional certifications can also get accredited investor status.
Crowdfunding vs IPO
It’s important to note that crowdfunding is not the same as launching an Initial Public Offering (IPO). IPOs involve taking a company public and offering shares to investors through a new stock issuance. This is another way businesses can raise capital.
The IPO process begins with getting an accurate business valuation. Once a company goes public, an IPO lock-up period prevents insiders who already own shares from selling them for a certain time period. This period may last anywhere from 90 to 180 days. When it’s over, investors can buy and sell shares of the company on public exchanges.
For businesses, an IPO could be an effective way to raise capital if there’s sufficient demand among investors who are interested in buying stock at IPO price. Meanwhile, IPO investing may be attractive to investors who are interested in getting on the ground floor of start-ups and early-stage companies.
How Many Types of Crowdfunding Are There?
There are different types of crowdfunding you can use to raise capital for your business. Each one works differently, though entrepreneurs may choose to use one or all of them for business fundraising. Here’s a closer look at how the various types of crowdfunding work.
Rewards-Based Crowdfunding
Rewards-based crowdfunding allows you to raise capital from the crowd in exchange for some type of reward. For example, say you’re launching a start-up that produces eco-friendly water bottles. In exchange for funding your campaign, you may choose to offer your backers samples of your product.
This type of crowdfunding can be helpful for testing the waters, so to speak, to gauge interest in your product. If your campaign succeeds, that could be a sign that there’s sufficient consumer interest in your offerings. But if your efforts to raise capital fizzle, it could mean your idea needs some tweaking.
Donation-Based Crowdfunding
Donation-based crowdfunding allows you to raise funds on a donation basis, with no rewards offered. With this type of crowdfunding, you’re asking people to give money to your cause. Succeeding with this type of crowdfunding campaign may depend less on the product or service you’re trying to launch than on the story behind your business.
Equity Crowdfunding
Equity crowdfunding allows you to raise capital for your business by offering unlisted shares or equity in your business to investors. This is the type of crowdfunding that falls under the Regulation Crowdfunding heading.
Equity crowdfunding can be better than rewards-based or donation-based crowdfunding if you need to raise large amounts of money for your business. The tradeoff, however, is that you have to be sure that you’re observing SEC regulations for launching this type of campaign and you’ll need to spend time carefully determining the value of your business.
Peer-to-Peer Lending
Peer-to-peer (P2P) lending is another type of crowdfunding that allows businesses to raise capital through pooled loans. With this kind of crowdfunding, you borrow money from a group of investors. You then pay that money back over time with interest.
Getting a peer-to-peer loan may be preferable if you’d rather not give up equity shares in the business or deal with regulatory issues. And a P2P loan may be easier to qualify for compared to traditional business loans.
There is, however, the cost to consider. If you have a lower credit score, you could end up with a higher interest rate which would make this type of loan more expensive.
Pros and Cons of Crowdfunding
Relying on different crowdfunding methods can benefit businesses in a number of ways. Companies may lean toward crowdfunding in lieu of other financing methods, including debt financing with loans or equity financing through angel investors or venture capitalists. There are, however, some potential drawbacks associated with crowdfunding for business. Here’s a quick rundown of how both sides compare.
Crowdfunding Pros
• Raise capital without trading equity. Venture capital and angel investments require businesses to trade equity or ownership shares for capital. Depending on the types of crowdfunding you’re using, you may not have to give up any ownership to get the capital you need.
• Increased visibility. Launching a crowdfunding campaign online through a funding platform and/or social media could help attract attention from investors and potential clients or customers alike, increasing brand awareness.
• Get funding when you can’t qualify for loans. If you’re having trouble getting approved for a business loan or start-up loan, crowdfunding could help you access the capital you need without having to meet a lender’s strict standards.
Crowdfunding Cons
• Requires time and effort. Launching a successful crowdfunding campaign means doing your research to understand who your campaign is likely to reach and what kind of response it’s likely to get. In that sense, it can seem more complicated than filling out a loan application.
• No guarantees. Using crowdfunding to raise capital for your business is risky because there’s no guarantee that your campaign will attract the type or number of investors you need. It’s possible that you may put in a lot of work to promote a campaign only to come up short with funding.
• Fees. Crowdfunding platforms typically charge fees to launch and run a campaign. The fees can vary from platform to platform but it’s important to factor the costs in if you’re considering this fundraising method.
💡 Quick Tip: Newbie investors may be tempted to buy into the market based on recent news headlines or other types of hype. That’s rarely a good idea. Making good investment choices shouldn’t stem from strong emotions, but a solid strategy.
How to Decide If Crowdfunding Is Right for Your Business
If you look at some of the most successful crowdfunding examples, you’ll see that it’s possible for companies to raise large amounts of capital this way. Some of the most successful crowdfunding campaigns, in terms of outpacing their original funding goals, include:
• The Micro, a 3D printer that raised $3.4 million in 11 minutes, easily surpassing its original $50,000 fundraising goal
• Reading Rainbow, which raised over $5 million and broke the Kickstarter record for having the most backers of any project
• Pono, which met its $800,000 goal within a day of campaign launch and went on to raise more than $6 million
• Pebble smartwatch, which with more than $10 million raised is the most funded Kickstarter campaign of all time
Whether crowdfunding, an IPO, or some other source of capital is right for your business depends on how much capital you need to raise, whether you’re interested in or able to qualify for loans, and what types of crowdfunding you’re interested in. Weighing the pros and cons and comparing crowdfunding to other types of equity and debt financing can help you decide what may work best for your business.
The Takeaway
Crowdfunding involves raising capital for a business venture by soliciting a large number of small investors. Crowdfunding can also have appeal for investors as well, though it’s important to understand how SEC regulations work. It has pros and cons for both entrepreneurs and investors.
If you’re interested in funding up-and-coming companies without having to observe net worth and income requirements, IPO investing could make more sense. But that also comes with its pros and cons, and some significant risks.
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About the author
Rebecca Lake
Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.
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When planning a move to a new city or state, the cost of living is an important consideration. Here’s why: Cost of living tells you how much money it takes to maintain a basic standard of living in a given place. If you were offered your dream job in a city 1,000 miles away, you’d want to know whether the salary would allow you to live well…or whether you’d have to be on a super tight budget.
Location typically plays a major role in determining the level of income needed to finance your lifestyle. For instance, a dollar doesn’t buy as much in New York as it would in Des Moines. If the cost of living is higher because you live in a major city, you’ll likely have to allocate more of your budget toward everyday expenses, such as housing, food, and transportation.
It’s important to understand the factors that affect cost of living calculations and what a higher or lower cost of living means for your finances. Otherwise, you could wind up with an uncomfortable level of “sticker shock” if you relocate.
Key Points
• Cost of living refers to the expenses required to maintain a basic standard of living and varies significantly across different cities and states.
• Calculating the cost of living involves assessing essential expenses like housing, food, transportation, and healthcare, which can fluctuate over time.
• The cost of living index helps compare the affordability of living in different locations, indicating how much income is needed to sustain a particular lifestyle.
• Regions with higher demand for housing and services often experience increased living costs, affecting purchasing power and lifestyle choices.
• Strategies to lower the cost of living include reducing unnecessary spending, refinancing debts, and potentially relocating to more affordable areas.
What Is the Cost of Living?
The cost of living is the cost to cover basic household expenses. The cost of living can vary from state to state and city to city. As you might guess, renting a 1,500-square-foot home is likely to be much more affordable in a small town in the middle of the country than doing so in a hip neighborhood in San Francisco.
That said, you can also have different costs of living within the same metro area. For example, someone who owns a home in the suburbs of a major city may have higher or lower expenses compared to someone who lives downtown.
In terms of what the cost of living is used for, it’s a gauge for determining affordability. Before moving to a new location, you might look at the cost of living in that area to help you decide if it’s realistic for your budget.
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.
How Does the Cost of Living Work?
Cost of living calculations work by measuring how much it costs to live in a specific location, using basic living expenses as a guide. The cost of living is not static; it can go up or down over time. Looking at cost of living trends for a certain city, region, or state can give you an idea which way consumer prices are trending.
There are a number of entities that perform cost of living calculations. The Council for Community and Economic Research, for example, maintains a cost of living index for participating cities across the U.S. Other organizations calculate cost of living for locations around the world.
On a personal level, the most important question to ask is, “What does the cost of living mean for me?” The simple answer is that cost of living can determine how far your income is able to go toward funding your lifestyle.
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Factors That Determine Cost of Living
When discussing cost of living and expenses, you’re talking about necessities. In other words, the things you need to spend money on to live each month. According to the Economic Policy Institute, that includes:
• Housing
• Food
• Childcare
• Transportation
• Healthcare
• Taxes
• Other necessities, such as clothing, household supplies, and personal care items
Cost of living calculators use prices for those types of expenditures in a particular area to determine how much it costs to live there on average. Consumer prices for goods and services are largely a product of supply and demand, and what’s happening with inflation. Inflation is a general upward trend in prices over time.
When inflation is higher, prices tend to rise across the board, which brings a higher cost of living. Even when inflation is lower, prices may still be higher in some areas than others if there’s higher demand for goods and services.
Calculating Cost of Living
Cost of living indexes collect information about various costs for different cities and locations, then use average prices to determine how much it costs to live there. If you’re comparing two cities, you can use a cost of living index to see which one is less expensive.
If you’d like to calculate your personal cost of living, you’d use your spending history to determine your average monthly expenses for these categories:
• Housing
• Food
• Transportation
• Utilities
• Childcare, if applicable
• Healthcare
• Taxes
• Other necessary expenses
Using those numbers can tell you how much it costs to maintain your basic standard of living each month. You can also add in your average monthly spending for debt repayment or non-essentials or discretionary expenses, like dining out, travel, or recreation, to get a sense of what your actual cost of living adds up to.
What Is the Cost of Living Index?
Generally speaking, a cost of living index is a measurement of average prices. Similar to a stock market index, a cost living index is meant to provide a benchmark for comparison. The Consumer Price Index (CPI) is often referred to as a cost of living index, though that description isn’t entirely accurate.
The CPI measures the average change in prices over time for a market basket of consumer goods and services. That’s how the U.S. Bureau of Labor Statistics (BLS) defines the Consumer Price Index. The CPI isn’t a true cost of living index but an inflation index. Changes to the CPI can be an indicator of how inflation is changing; whether it is rising, falling, or remaining flat.
Does Cost of Living Vary State by State?
The cost of living by state is not uniform and what you might pay to live in one state could be very different from what you’d pay to live in another. That’s important to keep in mind if you’re considering moving across state lines to a new location. The more expensive a state is, the less purchasing power your money holds.
For example, the California cost of living index is much higher than the Texas cost of living index. So why do some states have a higher cost of living? Again, it depends largely on things like supply and demand, though taxes and average incomes can also play a part.
When the average income in a state is higher and job opportunities abound, that can lead to an increase in people moving to the state. That means more demand for housing, which can send home and rental prices soaring. More people can also mean more demand for everyday goods and services, such as food or utilities. As demand rises, prices can follow suit.
So, in our example above, if you were living in Texas in a two-bedroom rental apartment and were offered a job at the same salary in California, you’d face a higher cost of living. If you moved there, you might have to rent a smaller home. Your groceries would likely be more expensive as well as your other monthly necessities. You might find you couldn’t eat out or go to concerts as often since prices are higher.
As of 2024, West Virginia had the lowest cost of living in the U.S., with a cost of living index of 84.3. For perspective, cost of living indexes are generally based on 100 as an average. So an index of 84.3 means that the cost of living in West Virginia is 15.7% less than the national average.
Housing, which is typically the biggest expense most people have, is nearly 40% cheaper in West Virginia compared to the U.S. average. The median sale price for a home there was $284,000 as of January 2024.
Which State Has the Highest Cost of Living?
Hawaii is the most expensive place to live in the U.S., with a cost of living index of 188.4. Housing is more expensive there than in any other state in the country, with a median list price of $714,100 as of January 2024. A home buyer would have to shell out considerably more to live in Hawaii’s natural paradise than elsewhere in America.
But housing demand isn’t the only factor. Higher taxes and higher costs for transporting goods and materials to the state are some of the other factors that drive up the cost of living in Hawaii. Other states that rank among the most expensive include New York, California, and Massachusetts.
How Much Should Your Cost of Living Be?
Your cost of living should be a figure that, given your income, you can reasonably afford to pay. When your expenses exceed your income, that can cause shortfalls in your budget each month. You may need to use credit cards or loans to fill the gap, which can leave you with a pile of bills, wondering how to pay off high-interest debt.
When calculating your ideal cost of living, start with your income. Then work your way backwards to determine how much you should be spending on things like housing, food, transportation, utilities, and other necessities. If your income comfortably covers those things, you can then decide how much to allocate to savings, debt repayment, or “wants” like travel and entertainment.
Also, consider your household size. The cost of living for a single person can be very different from the cost of living for a family of four. So you may need to allocate more of your budget for necessities if you have a spouse, partner, or children in your household.
Quick Tip: If you’re saving for a short-term goal — whether it’s a vacation, a wedding, or the down payment on a house — consider opening a high-yield savings account. The higher APY that you’ll earn will help your money grow faster, but the funds stay liquid, so they are easy to access when you reach your goal.
Tips to Improve Cost of Living
If you’ve run the numbers and your cost of living is higher than you’d like it to be, you aren’t necessarily out of luck. There are some things you can do to try and bring it down. Here are some ideas for ways to reduce your cost of living:
• Eliminate unnecessary spending from your budget.
• Move your money to a different financial institution to avoid bank fees and/or earn higher interest.
• Plan meals at home, and cut down on restaurant meals.
• Consider refinancing student loans or your mortgage to lower your interest rate.
• Consolidate credit card debt using a 0% balance transfer offer.
• Shop around for better rates on auto, homeowners, or renters insurance.
• Aggressively pay off debt.
• Consider moving to a cheaper area.
• Take on a roommate to share expenses.
• Downsize into a smaller home.
• Sell a vehicle if you own more than one.
Some of these money-saving ideas are relatively easy to implement; others may seem a bit more extreme. But the more you can cut your expenses, the easier it may be to improve your cost of living.
You can also research different ways to make more money. That might mean taking a different job, getting a part-time gig, or starting a side hustle. If you’re contemplating a move for a higher-paying role, remember to factor in the cost of living in a new location to see how far a higher salary might go. A higher cost of living could eat up the salary boost you’ll receive, and so you’d want to be prepared for that.
Managing Finances With SoFi
Achieving a manageable cost of living starts with keeping a close eye on your budget and spending. Even making small changes, such as cutting out high banking fees and earning more interest, can free up more cash that you can use to save and fund your 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
What is a cost of living adjustment?
The Social Security Administration (SSA) applies a cost of living adjustment to Social Security benefits, based on changes to the Consumer Price Index. That means benefits can rise as the cost of living does. In other words, these adjustments are designed to ensure that recipients’ benefit payments are able to keep pace with inflation.
How can I compare the cost of living between two cities?
The easiest way to compare the cost of living between two cities is to use a cost of living index, which measures the relative cost of living in different areas of the U.S. You can subtract the cost of living index for the city that’s lower from the one that’s higher to figure out how much cheaper it is.
Which country has the highest cost of living?
Monaco is the most expensive country to live in. The average monthly cost of living there, as of 2024, is $6,538.
About the author
Rebecca Lake
Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.
SoFi members with Eligible Direct Deposit activity can earn 3.80% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Eligible 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 (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below).
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