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Setting financial goals is one of the most important steps you can take toward building a secure and stress-free future. Without clear goals, it’s easy to spend impulsively, fall into debt, or miss out on opportunities to build wealth. Whether you’re saving for a vacation, trying to get ahead of debt, or preparing for retirement, a well-structured financial plan can help you stay focused and motivated.

What follows is an essential guide to financial goals — from understanding their importance to setting achievable milestones and adjusting your plan when life changes.

What Are Financial Goals and Why Are They Important?

Financial goals are specific money-related targets you set to guide your financial decisions. They give you direction and help you align your daily spending habits with long-term priorities. Instead of letting money just come and go from month to month, you create a roadmap that leads you toward stability, independence, and growth.

Goals are also important because they provide:

•   Clarity: They help you understand what you’re working toward.

•   Motivation: Defined goals encourage you to save instead of overspend.

•   Control: They prevent financial stress by giving you a sense of purpose.

•   A way to track progress: Goals let you measure how far you’ve come.

Without goals, money has a tendency to slip through the cracks. With them, you can make strategic decisions that improve your financial health step by step.

💡 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.

Types of Financial Goals: Short-, Mid-, and Long-Term

Financial goals depend on timeframes and priorities. Generally, they fall into three categories — short-, mid- and long-term goals.

Examples of Short-Term Financial Goals (1-3 Years)

Short-term goals are immediate priorities. They include the things you want to buy or do within the next few months or years, and help build momentum for bigger challenges. Examples include:

•   Building an emergency fund

•   Paying off a credit card balance

•   Saving for a vacation or holiday gifts

•   Creating a monthly budget and sticking to it

•   Setting aside money for a new laptop or phone

Examples of Mid-Term Financial Goals (3-10 Years)

Mid-term goals take more time and planning and act as a bridge between short-term wins and long-term security.

They often involve saving or investing for significant life milestones and might include:

•   Paying off significant debt (such as student loans)

•   Saving for a wedding or dream vacation

•   Saving for a down payment on a house

•   Funding a large-scale renovation

•   Growing an investment portfolio

Examples of Long-Term Financial Goals (10+ Years)

Long-term goals shape your financial future and often require consistent commitment. These goals can seem intimidating, but breaking them into smaller steps makes them achievable. Common long-term goals include:

•   Saving for retirement through 401(k)s, IRAs, or pensions

•   Paying off a mortgage completely

•   Funding your children’s college education

•   Achieving financial independence or early retirement

•   Building generational wealth through investments

Recommended: Savings Goals by Age

How to Set Financial Goals in 5 Steps

Now that you understand the different types of goals, here’s how to set them effectively:

Step 1: Understand Your Current Financial Health

Before setting goals, it’s important to have a clear picture of where you currently stand. You can do this by gathering the last several months of financial statements and then using them to determine:

•   Your average monthly income

•   Your average monthly spending

•   Current debt balances

•   Status of your emergency savings and retirement accounts

This assessment forms the foundation for realistic goal setting.

Step 2: Define What You Want to Achieve

Once you have a snapshot of your overall financial situation, it’s worth spending some time reflecting on your money goals: what is really important to you.

While there are many things people commonly save for, like a down payment on a house or retirement fund, your financial goals might not be the same as your sibling’s or your coworker’s.

Think about what you would like to accomplish in the next few years, in five or so years, as well as decades from now, and simply jot them down. Keep in mind that these goals aren’t set in stone — they can and likely will change over time.

Step 3: Make Your Goals S.M.A.R.T.

A vague goal like “save money” is hard to stick to. Instead, consider using the S.M.A.R.T. framework:

•   S for Specific: Be clear  about what you want to achieve, such as exactly what you want to save or how much you’ll need to pay off a debt.

•   M for Measurable: Assign real numbers to your goals. Measurable goals allow you to track your progress and monitor your success.

•   A for Achievable: Setting unrealistic expectations can lead to frustration and disappointment. Ensure your goals are realistic for your income and expenses.

•   R for Relevant: Make sure your goals align with your overall financial plan and your life priorities.

•   T for Time-based: Set a deadline (e.g., within 10 months) for each goal.

SMART goals help keep you accountable and focused.

Step 4: Create a Budget That Includes Your Goals

Your budget is the tool that makes your goals achievable. And thanks to Step 1, you already know your average monthly income and expenses. The next step is to decide if your current spending aligns with your goals, or if you need to rejigger your spending to free up more funds for saving.

There are many different types of budgets, but one popular framework is the 50/30/20 rule. This divides your take-home income into three categories:

•   50% for needs (housing, food, utilities)

•   30% for wants (entertainment, travel)

•   20% for savings and debt repayment

“Thinking about where to put your 20% savings each month can help you reach your goals,” says Brian Walsh, CFP® and Head of Advice & Planning at SoFi. “High-yield savings accounts, money market accounts, certificates of deposit, and cash management accounts are all vehicles that may pay more interest than a traditional savings account, helping your savings grow.”

Step 5: Track Your Progress and Stay Flexible

Once you’ve set some goals and established a budget, it’s a good idea to track your spending for a few months to make sure you are sticking to the plan.

You can track your spending with plain old pen and paper or a computer spreadsheet, but a simpler option is to put a budgeting app on your phone. Your bank may even offer a free tool that automatically tracks and categorizes your spending in real time.

If you find that your budget isn’t realistic, or your financial situation changes at some point, you may need to make some adjustments to your budget. That’s why it’s important to check in with your money regularly.

Common Financial Goal Examples

Here are some six popular financial goals you might include on your list:

1. Build an Emergency Fund

Whether you’re easily covering your monthly expenses or grabbing change from the bottom of your bag to buy a coffee, many people are living paycheck to paycheck. But what if that paycheck disappeared or if you had a large, unexpected expense? Enter the emergency fund.

Having an emergency fund can help you comfortably manage an unexpected medical bill, major car or home repair, or a sudden loss of income with having to run up high-interest debt.

A general rule of thumb is to have three to six months’ worth of living expenses set aside for emergencies. While that can be a sizable sum, keep in mind that you don’t have to build your back-up fund overnight. You might first set a short-term goal of saving a small cushion of $1,000, then build from there.

Recommended: Emergency Fund Calculator

2. Pay Down High-Interest Debt

High-interest credit card debt can feel like a treadmill: Despite constant effort, you never seem to get any closer to the finish line. By prioritizing repayment, however, you can make real progress. This will free up cash flow you can then redirect towards savings and investments.

Two popular payoff approaches are the debt avalanche (paying off the highest-interset debt first) and the debt snowball (paying off the smallest balance first to build momentum). Whichever you choose, the key is to consistently make extra payments and avoid new debt along the way.

3. Start Saving for Retirement

Most of us know we should be saving for retirement, but making it happen can be challenging when there are so many competing places to put our money. The good news is that even small contributions to a retirement account can grow to significant savings over time. This is largely due to the magic of compounding returns — when the returns you earn start earning returns on their own.

One rule of thumb is to save at least 15% of your pre-tax income each year, including any employer match. If that’s not feasible right now, try to contribute at least up to any employer match (otherwise you’re leaving free money on the table).

4. Save for a Down Payment on a House

For many people, owning a home is a major milestone and a symbol of financial stability. But buying a home often requires a significant down payment, typically ranging from 3% to 20% of the purchase price. Saving for this can feel overwhelming, but breaking it into smaller milestones makes the goal achievable.

Consider opening a dedicated high-yield savings account for your down payment fund so it remains separate from everyday spending. Or, if your bank offers savings vaults, you might create a sub-savings account within your main one earmarked for your down payment. Then automate contributions to this account or vault so it grows over time.

💡 Quick Tip: Most savings accounts only earn a fraction of a percentage in interest. Not at SoFi. Our high-yield savings account can help you make meaningful progress towards your financial goals.

5. Invest for the First Time

Investing allows your money to work for you, building wealth beyond what traditional savings accounts can provide. While investing might seem intimidating at first, starting small is often the best approach. Low-cost options like index funds, exchange-traded funds (EFTs), or robo-advisors make it easier than ever to get started without needing extensive financial knowledge. As your income grows, you can increase contributions and diversify your portfolio.

6. Pay Off Student Loans

Student loans are a reality for millions of people, and paying them off can take years. Carrying this debt affects your ability to save, invest, and even qualify for other financial opportunities like a mortgage. That’s why making a structured repayment plan is so important.

Start by reviewing your repayment options — federal loans may offer an income-driven repayment plan or refinancing opportunities. Making extra payments towards the principal when possible can reduce the overall interest you pay and shorten the repayment timeline.

Financial Goal Examples for Students

Students often juggle limited income with rising expenses, making financial goals essential. Here are some practical ones to consider:

•  Creating and sticking to a monthly budget

•  Building a small emergency fund (even $500 helps)

•  Paying off credit card balances in full each month

•  Saving for textbooks or tuition payments

•  Beginning to invest through a low-cost brokerage app

•  Applying for scholarships or part-time jobs to reduce student loan reliance

Setting goals early can help students avoid financial pitfalls and build healthy habits for adulthood.

How to Adjust Your Financial Goals if Your Circumstances Change

Life rarely goes exactly as planned. You might face job loss, medical expenses, or unexpected windfalls like a bonus or inheritance. When your circumstances shift, it’s important to:

•  Reevaluate your priorities: Decide which goals still matter most.

•  Adjust timelines: You may be able to shorten a deadline or you might need to extend one or more of your timelines.

•  Reallocate resources: If money is tight or your priorities change, you may want to shift money from one goal to another.

•  Stay flexible: Remember, goals are not fixed — they evolve with your life.

The Takeaway

Setting financial goals isn’t about perfection — it’s about progress. By understanding your current financial health, defining clear objectives, and using the SMART framework, you can create a roadmap toward stability and success.

Whether you’re saving for your first emergency fund, tackling debt, or planning for retirement, goals can give you the motivation and direction you need to take control of your financial future. The key is consistency. Start small, stay flexible, and remember that every step forward brings you closer to your near- and long-term aspirations.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible 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 3.30% APY on SoFi Checking and Savings with eligible direct deposit.

FAQ

Is it wise to invest your emergency fund?

Generally, it’s not wise to invest your emergency fund in risky assets like stocks or mutual funds. An emergency fund should remain easily accessible and safe, since its purpose is to cover unexpected expenses or a sudden loss of income. Keeping it in a high-yield savings account or money market account balances safety with some interest growth. Once your emergency fund is secure, you can focus on investing other money for long-term goals.

What is the most important financial goal?

For many people, the most important financial goal is to build a strong foundation of financial security. This typically means creating a healthy emergency fund and paying down high-interest debt. Without stability, it’s difficult to make progress toward other goals like saving for retirement, buying a home, or investing.

Once your essential safety net is in place, you can prioritize goals that align with your lifestyle and values, such as long-term wealth building, financial independence, or providing for your family’s future.

How many financial goals should you have at once?

It’s often best to focus on a manageable number of goals (such as two or three) at one time. Trying to juggle too many can spread your money and attention too thin, making it harder to make meaningful progress. A practical approach is to prioritize one short-term goal (like building an emergency fund), one medium-term goal (such as saving for a car or vacation), and one long-term goal (like retirement savings). This balance helps you stay focused while still moving forward in multiple areas.

What is a good financial goal for a beginner?

A great financial goal for beginners is starting an emergency fund. Even saving a small amount, such as $500, can provide a cushion against unexpected expenses and reduce the need to rely on credit cards or loans. Once that’s established, beginners can aim to save three to six months of living expenses. Other beginner-friendly goals include paying off small debts, creating a realistic budget, or setting up automatic savings. These goals build confidence and establish strong money habits for future success.

How can I set financial goals with a partner or family?

Setting financial goals with a partner or family starts with open communication about values, priorities, and long-term dreams. Begin by discussing shared goals, such as buying a home, paying off debt, or saving for children’s education. Next, agree on a budget and assign responsibilities for managing finances to ensure accountability. Regular check-ins help you stay on track, celebrate progress, and adjust goals as life circumstances change.

What tools can help me track my financial goals?

Several tools can make tracking financial goals easier and more organized. Budgeting apps like YNAB, GoodBudget, or PocketGuard allow you to set savings targets and monitor spending. Spreadsheets are another customizable option for tracking progress. Many banks also offer built-in goal-tracking features through their mobile apps.

For long-term goals, investment platforms often provide dashboards showing growth toward retirement or wealth-building objectives. The key is choosing a tool you’ll use consistently, helping you stay motivated and accountable.

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Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, 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 Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

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Generally, scholarships used to pay for qualified educational costs at an eligible educational institution aren’t considered taxable income. The same goes for any grants used to pay for college tuition and fees.

However, there are some cases in which scholarship or grant money may be taxable. For example, if you have money left over after covering your qualified education expenses and use it for other costs (such as room and board or school supplies not required by your program), these funds typically count as taxable income.

If you or your student received scholarship funding, it can be helpful to know ahead if it will contribute to your tax liability. Here’s what you need to know about identifying taxable scholarships and handling filing requirements.

Scholarships That Are Tax-Free

Students can be exempt from paying taxes on their college scholarships if they satisfy certain criteria. For one, they must be enrolled at an accredited college, university, or educational institution that maintains regular attendance.

Additionally, scholarship funds must be used to pay for qualified education expenses — a determination made by the IRS. Under this definition, qualified education expenses include the following:

• Tuition

• Mandatory fees (e.g., athletic and tech fees)

• Textbooks

• Equipment and supplies (e.g., lab equipment)

When it comes to textbooks, equipment, and supplies, anything that is required by your school to complete coursework would be free from taxes. If you use the funding towards an extra-curricular activity, such as a club or intramural sport, however, the amount you spend would be considered taxable.

If the scholarship is used for a certificate or non-degree program, the entire amount is taxable whether or not funds are used for qualified education expenses.

It’s important to note that any scholarship funds leftover after paying for qualified education expenses would become taxable income.


💡 Quick Tip: You can fund your education with a competitive-rate, no-fees-required private student loan that covers up to 100% of school-certified costs.

Scholarships Considered Taxable Income

How are scholarships taxable? According to the IRS, scholarships used for expenses outside the scope of qualified education expenses must be reported in gross income — making them taxable.

Scholarship funds used for the following costs are considered taxable by the IRS:

• Room and board

• Travel

• Medical expenses

• Optional equipment (e.g., new computer)

But are scholarships taxable income in any other situations?

Scholarships that are awarded in exchange for services like teaching or research, often known as fellowships, are classified as taxable compensation in most cases. Students would have to pay taxes even if their fellowship money is used to pay for tuition and other qualified education expenses.

However, there are a few exceptions when education-related payments could be tax-exempt. Specifically, students do not have to pay taxes on funds received for required services through the following scholarship programs:

• National Health Service Corps Scholarship Program

• Armed Forces Health Professions Scholarship and Financial Assistance Program

• Student work-learning-service programs operated by a work college

Other forms of financial aid could be considered taxable income as well.

Earnings through the Federal Work-Study program are subject to federal and state payroll taxes. If you stay below 20 hours a week while enrolled full-time, you won’t have to pay FICA (taxes for Medicare and Social Security) taxes.

Even Pell Grants — a federal aid program for students with significant financial need — are taxable if they’re not used for qualified education expenses.

Making it Legal: Reporting Taxable Awards

If a college scholarship is considered taxable, the student would need to report the scholarship (or portion of the scholarship) on their tax return.

Some students may receive a W-2 form from the scholarship provider outlining the taxable amount. Otherwise, they may need to calculate and enter the amount on their own tax return.

The student would report any taxable amount of a scholarship, grant, or fellowship as follows:

• If filing Form 1040 or Form 1040-SR, you would include the taxable portion in the total amount reported on Line 1a of your tax return. If the taxable amount wasn’t reported on Form W-2, enter it on Line 8 of Schedule 1 (and attach the form).

• If filing Form 1040-NR, you would report the taxable amount on Line 8 and fill out and attach a Schedule 1.

If you have questions about whether or not any portion of your scholarship money is taxable and how to report those funds on your tax return, it’s a good idea to consult a tax professional for personalized guidance.

How Education Tax Credits Fit in

Students and their family members may be eligible to claim the American Opportunity Tax Credit (AOTC) or the Lifetime Learning Credit (LLC) if they paid for college and related costs in the past year. Take note that you can’t use both tax credits for the same student in the same year.

To claim either tax credit, you’ll need Form 1098-T from your college. This form shows any reportable transaction for an enrolled student.

To qualify for the AOTC or LLC, you could have paid educational expenses out of pocket or with any type of student loan. Expenses that were paid for by tax-free scholarships are not eligible for a tax credit.

The AOTC and LLC differ in scope and eligibility, so it’s helpful to compare both to see which may apply and provide a greater tax return.

American Opportunity Tax Credit (AOTC)

The AOTC can be used for qualified education expenses — tuition, fees, textbooks, and necessary supplies — for a student’s first four years of college.

The maximum credit currently stands at $2,500 a year for eligible students. This is calculated as 100% of the first $2,000 in qualified education expenses paid for an eligible student plus 25% of the next $2,000 in qualified education expenses.

If the AOTC reduces your taxes to zero, it’s possible to have 40% of the remaining credit (up to $1,000) refunded.

Eligibility for the AOTC is based on the tax filer’s modified adjusted gross income (MAGI). If you’re filing separately, your MAGI must be $80,000 or less to qualify for the full AOTC credit. The threshold is $160,000 for married filing jointly.

It’s possible to receive a reduced AOTC amount if filing separately with MAGI between $80,000 and $90,000 or $160,000 and $180,000 for married filing jointly.

Recommended: 23 Tax Deductions for College Students and Other Young Adults

The Lifetime Learning Credit (LLC)

The LLC can apply to a broader range of expenses than the AOTC. It can be used to claim up to $2,000 for tuition and related educational expenses for undergraduate, graduate, or professional degree courses. Costs of non-degree programs that improve job skills are also eligible for the LLC.

This credit does not have a limit on the number of years it can be claimed on your tax return. However, the LLC has stricter income requirements.

For Tax Year 2024, the amount of your LLC is gradually reduced (phased out) if your MAGI is between $80,000 and $90,000 ($160,000 and $180,000 if you file a joint return).

You can’t claim the credit if your MAGI is $90,000 or more ($180,000 or more if you file a joint return).


💡 Quick Tip: Even if you don’t think you qualify for financial aid, you should fill out the FAFSA form. Many schools require it for merit-based scholarships, too.

Don’t Forget Deductions

If you’re paying interest on a student loan, you may be eligible to deduct up to $2,500 of that interest with the student loan interest deduction. To be eligible, interest payments must be legally obligated and your filing status can’t be married filing separately.

There are also income requirements, which can vary annually, to factor in for the deduction calculation. For the tax year 2024, the filer’s MAGI must be less than $95,000 (or $195,000 if filing jointly) to be eligible for the full $2,500 deduction.

If your MAGI is between $80,000 and $95,000 (or $165,000 and $195,000 if filing jointly), you could qualify for a reduced deduction.

The Takeaway

Scholarships, grants, and fellowships can help make college more affordable. Not only that, the funds you receive typically aren’t taxable.

A general rule is that your college scholarship is tax-free when it is used to pay for “qualified education expenses.” Exceptions include any part of the scholarship or grant you used to pay for supplemental things (not required for a course) or as payment for work or services you performed.

If scholarships, grants, other aid, and federal student loans are enough to cover the cost of your college education, you may want to consider applying for a private student loan. Loan limits vary by lender, but you can often get up to the total cost of attendance. Interest rates may be fixed or variable and are set by the lender. Generally, borrowers (or cosigners) who have strong credit qualify for the lowest rates.

Keep in mind, though, that private loans may not offer the borrower protections — like income-based repayment plans and deferment or forbearance — that automatically come with federal student loans.

If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.

Cover up to 100% of school-certified costs including tuition, books, supplies, room and board, and transportation with a private student loan from SoFi.

FAQ

Are scholarships counted as income for taxes?

Scholarships are generally not taxable if used for tuition, fees, books, and supplies. However, any portion used for room, board, or other expenses is considered taxable income. Always consult a tax professional for personalized advice.

What happens if scholarships exceed tuition on 1098-T?

If scholarships exceed tuition, the excess amount is considered taxable income. This can be reported on your tax return. It’s important to keep detailed records of all scholarship funds and how they were used to ensure accurate tax reporting.

Do scholarship recipients receive a 1099?

Scholarship recipients may receive a 1099-MISC if the scholarship amount is taxable. This form is issued by the institution or organization providing the scholarship, detailing the taxable portion of the funds received.

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Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

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Private equity involves partnerships, whereby qualified investors combine their capital in a private equity fund, which in turn funnels the money into an ownership stake in other companies in order to manage, overhaul, and/or acquire them.

The goal of private equity firms is to then sell these companies for more than they invested. The key word in private equity is “private” — as these companies don’t trade on public exchanges.

Private equity investing requires a significant amount of capital, typically invested for a period of years; thus it’s generally only available to high net-worth or accredited investors. Individual investors may be able to access private equity through exchange-traded funds (ETFs) and other vehicles.

Private equity, which is a type of alternative investment, has a high-stakes reputation for good reason, as these investments can be highly risky.

What Is Private Equity?

Private equity can be confused with hedge funds and venture capital, but it’s important to understand what private equity is and how it differs from other high-risk alternative strategies.

Private equity firms raise capital from institutional and accredited investors in order to set up private equity funds that can then be used to buy, manage, and/or acquire other companies.

Private equity firms are typically not publicly traded on a stock exchange or regulated by the Securities and Exchange Commission (SEC), and typically neither are the companies they invest in.

With publicly traded companies, investors purchase shares of the company on a public market such as the New York Stock Exchange (NYSE), or buy stock online. With private equity, qualified investors can combine their assets to invest in private companies that aren’t typically available to the average investor.

Key Characteristics of Private Equity

Certain characteristics help define private equity:

•   Private equity firms pool capital from various investors into a designated fund that can then invest in private companies (those typically not listed on public exchanges).

•   A private equity investment typically involves large sums of money, invested for a period of years.

•   Private equity is typically available to high net-worth, institutional, and accredited investors.

•   Most retail investors would have to use other vehicles, such as exchange traded funds, or ETFs, to gain exposure to PE strategies.

•   Private equity funds also use leverage to invest in target companies.

•   The goal of private equity is to make a profit by overhauling a company and its product or operations, by breaking it apart and selling off parts of it, or by selling the company in an acquisition later.

How Do Private Equity Firms Work?

Private equity firms have funds that allow qualified investors to pool their assets in order to invest in existing private companies and manage them. PE firms typically don’t target startups, but rather mature companies that may benefit from restructuring or other interventions. Note that this process is separate from the type of self-directed investing most individual investors are familiar with.

Private equity investors are referred to as limited partners. They are often high net-worth individuals or institutions such as endowments or foundations. Equity firms usually require a sizable financial commitment from limited partners for a long period of time to qualify for this investment opportunity.

The equity firm uses the assets from investors to help the companies they invest in achieve specific objectives — like raising capital for growth or leveraging operations.

Private Equity Objectives

To help further these objectives, equity firms offer a range of services to the companies they invest in, from strategy guidance to operations management.

The amount of involvement and support the firm gives depends on the firm’s percentage of equity. The more equity they have, the larger the role they play.

In helping these private companies reach their business objectives, private equity firms are working toward their own goal: to exit the relationship with a large return on their investment. Equity firms may aim to receive their profits a few years after the original investment. However, the time horizon for each fund depends on the specifics of the investment objectives.

The more value a firm can add to a company during the time horizon, the greater the profit. Equity firms can add value by repaying debt, increasing revenue streams, lowering production or operation costs, or increasing the company’s previously acquired price tag.

Many private equity firms leave the investment when the company is acquired or undergoes an initial public offering (IPO).

Role of General Partners and Limited Partners

In private equity firms, general partners and limited partners play very different roles.

•   General partners are typically those who are involved in the oversight of a private equity fund, taking a more strategic role. For example, a general partner may look for target companies to invest in, evaluate these opportunities, and then oversee the companies ultimately added to the private equity firm’s portfolio.

•   Limited partners are the investors who put up the capital for these partnerships: e.g., pension funds, endowments, HNW investors. They are typically less involved in daily operations, and as such they assume less risk for the success or failure of the companies in the portfolio.

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

Types of Private Equity Funds

Typically, private equity funds fall into three categories: Venture Capital (VC), Leveraged Buyout (LBO) or Buyout, and Growth Equity.

Venture Capital Funds

Venture capital (VC) funds focus their investment strategy on young businesses that are typically smaller and relatively new with high growth potential, but have limited access to capital. This dynamic creates a reciprocal relationship between VC fund investors and emerging businesses.

The start-up depends on VC funds to raise capital, and VC investors can possibly generate large returns.

Leveraged Buyout

In comparison to VC funds, a leveraged buyout (LBO) is typically less risky for investors. LBO or buyouts often target mature businesses, which may generate higher rates of return. On top of that, an LBO fund typically holds ownership over a majority of the corporation’s voting stock, otherwise known as controlling interest.

Growth Equity

In some cases, a private equity fund may invest in an established company that has a working business model, but requires capital in order to expand. This is considered a growth equity play.

Can Anyone Invest in Private Equity?

According to the SEC, under securities laws, private equity funds are not registered or regulated as investment companies. Thus, a PE fund cannot offer its securities on a public exchange. In addition, in order to remain exempt from securities regulations, the structure of private equity funds must fall within one of three defined categories:

•   a traditional 3(c)(1) fund with no more than 100 owners

•   a 3(c)(7) fund that’s limited to qualified investors

•   and a qualifying VC fund

So when it comes to how to invest in private equity, only qualified or accredited investors are allowed to become limited partners in a private equity fund. Because private equity funds are not registered with the SEC, investors must understand the risk of such investments and be willing to lose their entire investment if the fund doesn’t meet performance expectations.

Since the initial investment is typically pretty high, and may be well into the millions of dollars, an individual must meet strict criteria to qualify as an individual accredited investor.

•   A person must make over $200,000 per year (for two consecutive years) as an individual investor or $300,000 per year as a married couple.

•   Alternatively, an investor can qualify as accredited if they have a net worth of at least $1 million individually or as a married couple to qualify (excluding the value of their primary residence), or if they hold a Series 7, 65, or 82 license.

•   In addition, some private equity opportunities may require that investors be considered qualified investors, which can mean having assets of at least $5 million.

Other examples of accredited investors include insurance companies, pension funds, and banks.

Direct vs. Indirect Investment Options

As interest in private equity has grown, and private equity firms have sought to develop new avenues to give retail investors that access, there are a growing number of direct and indirect private equity investment options.

•   Direct private equity investments include new offerings from large financial institutions as of Q2 2025, that include a mix of public and private assets. These may include active as well as index options. Some platforms also offer investors the chance to invest their capital into so-called feeder funds, which provide exposure to certain private equity strategies.

•   Indirect private equity investments can include ETFs, and Limited Investment Trusts (LITs), which are closed-end funds that enable investors to pool their capital in a multi-asset fund.

How to Invest in Private Equity

As noted above, there are an increasing number of options for average investors seeking to gain exposure to private equity, including:

Publicly traded stock: Some private equity firms have publicly traded stock that investors can buy shares of. This includes PE firms like the Carlyle Group, the Blackstone Group, and Apollo Global Management.

Funds of funds: Mutual funds are restricted by the SEC from buying private equity, but they can invest indirectly in publicly traded private equity firms. This is known as funds of funds.

Interval funds: These closed-end funds, which are not traded on the secondary market and are largely illiquid, may give some investors access to private equity. Interval funds may invest directly or indirectly through a third-party managed fund in private companies. Investors may be able to sell a portion of their shares back to the fund at certain intervals at net asset value (NAV). Interval funds typically have high minimum investments.

Advantages and Disadvantages of Private Equity

While private equity funds provide the opportunity for potentially larger profits, there are some key considerations, costs, and high risks investors should know about.

Advantages

Here are some possible benefits of private equity investments.

Potentially Higher Returns

With private equity, returns may be greater than those from the public stock market. That’s because PE firms tend to invest in companies with significant growth potential. However, the risk is higher as well.

More Control Over the Investment

Private equity investors are typically involved in the management of the companies they are invested in.

Diversification

Private equity investments allow investors to invest in industries they may not be able to invest in through the public stock market. This may help them diversify their holdings.

Disadvantages

The drawbacks of investing in private equity include:

Higher Risk

Private companies are not required to disclose as much information about their finances and operations, so PE investments can be riskier than publicly traded stocks.

Lack of Liquidity

Private equity funds tend to lack liquidity due to the extensive time horizon required for the investment. Since investors’ funds are tied up for years, equity firms may not allow limited partners to take out any of their money before the term of the investment expires. This might mean that individual investors are unable to seek other investment opportunities while their capital is held up with the funds.

Conflicting Interests

Because equity firms can invest, advise, and manage multiple private equity funds and portfolios, there may be conflicts. To uphold the fiduciary standard, private equity firms must disclose any conflicts of interest between the funds they manage and the firm itself.

High Fees

Private equity firms typically charge high management fees and carry fees. Upon investing in a private equity fund, limited partners receive offer documentation that outlines the investment agreement. All documents should state the term of the investment and all fees or expenses involved in the agreement.

Private Equity Comparisons

Private equity is one type of alternative investment, but there are others. Here’s how a few of them compare.

Private Equity vs IPO Investing

From an investor’s standpoint, private equity investing means you’re putting money into a company, and hopefully making money in the form of distributions as the company becomes profitable.

Investing in an IPO, on the other hand, means you’re buying stocks in a new company that has just gone public. In order to make money, the company’s stock price needs to rise, and then you need to sell your stocks in that company for more than you initially paid.

Private Equity vs Venture Capital

Venture capital funding is a form of private equity. Specifically, venture capital funds typically invest in very young companies, whereas other private equity funds typically focus on more stable companies.

Private Equity vs Investment Banking

The difference between these two forms of investing is of the chicken-and-egg variety: Private equity starts by building high-net-worth funds, then looks for companies to invest in. Investment banking starts with specific businesses, then finds ways to raise money for them.

The Takeaway

Private equity firms manage funds that invest in private companies that are typically not available to investors. Sometimes these companies are small and new with high growth potential; in other cases, the companies are well-established, and may offer a higher rate of return.

Not everyone qualifies to invest in private equity. If you do qualify, it’s important to remember that while private equity funds may offer the opportunity for profitability, they also come with some hefty risks. As with any investment, it’s a good idea to make sure you fully understand the risks of investing in a private equity fund before moving forward.

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FAQ

What’s the history of private equity?

Pooling money to buy stakes in a private company can be traced back to the early days of the industrial revolution, when this type of financing was a common source of equity for the burgeoning railroad industry. Modern private equity took hold in the 20th century, however, with its roots in venture capital firms that emerged after WWII. Private equity as it’s known today gained popularity when leveraged buyouts took off in the 1980s.

How does private equity make money?

Private equity firms make money by buying companies they consider to have value and potential for improvement. PE firms then make improvements, which in turn, can increase profits. These firms also benefit when they can sell the company for more than they bought it for.

How much money do you need to invest in private equity?

Private equity funds have very high minimum investments that typically start at $1 million, with a diversified portfolio reaching much higher than that. In addition, an individual usually needs to be an accredited investor with a net worth of at least $1 million, or an annual income higher than $200,000 for at least the last two years ($300,000 for those who are married).

What are common private equity exit strategies?

Common exit strategies for private equity firms include initial public offerings (IPOs), where a refurbished once-private company goes public; secondary buyouts, whereby a company is sold to another private equity firm; and liquidation, when a company is dissolved and sold off.

Is private equity suitable for individual investors?

It depends. While direct investments in private equity are generally out of reach for most individual investors, today there are investment options that provide private equity exposure for individuals. These include ETFs, and closed-end funds (like interval funds), and typically permit lower minimums than traditional PE funds.

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