Growing Wealth Archives | Page 150 of 224

Dec

2022

Investing Checklist: Things to Do Before the End of 2023

By Samuel Becker | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off

There are numerous things that investors can and perhaps should do before the clock strikes midnight on New Year’s Eve, such as maxing out retirement or college savings account contributions, and harvesting tax losses.

Read on to find out what should probably be on your investing checklist for the end of the year, what to consider tackling before your tax return is due in April, and how some simple moves this December can help set you up nicely for 2023 and beyond.

End-of-Year vs Tax-Day Deadlines

Before diving into the year-end investing checklist, it’s important to remember that there are a couple of key distinctions when it comes to the calendar. Specifically, though the calendar year actually ends on December 31 of any given year, Tax Day is typically in the middle of April (April 15, usually). That’s the due date to file your federal tax return, unless you file for an extension.

As it relates to your investing checklist, this is important to take into account because some things, like maxing out your 401(k) contributions must be done before the end of the calendar year, while others (like maxing out your IRA contributions) can be done up until the Tax Day deadline.

In other words, some items on the following investing checklist will need to be crossed off before New Year’s Day, while others can wait until April.

7 Things to Do With Your Investments No Later Than Dec. 31

Here are seven things investors can or should consider doing before the calendar rolls around to 2023.

1. Max Out 401(k) Contributions

Perhaps the most beneficial thing investors can do for their long-term financial prospects is to max out their 401(k) contributions. A 401(k) is an employer-sponsored retirement account, where workers can contribute tax-deferred portions of their paychecks.

There are also Roth 401(k) accounts, which may be available to you, which allow you to preemptively pay taxes on the contributions, allowing for tax-free withdrawals in the future.

You can only contribute a certain amount of money per year into a 401(k) account, however. For 2023, that limit is $22,500, and will increase to $23,000 in 2024. For those over 50, you can contribute an additional $7,500 in 2023, for a total of $30,000 in 2023. In 2024, the contribution limit rises to $23,000, with a $7,500 catch-up provision if you’re 50 and up, for a total of $30,500.

So, if you are able to, it may be beneficial to contribute up to the $22,500 limit for 2023 before the year ends. After December 31, any contributions will count toward the 2024 tax year.

2. Harvest Tax Losses

Tax-loss harvesting is an advanced but popular strategy that allows investors to sell some investments at a loss, and then write off their losses against their gains to help lower their tax burden.

Note that investment losses realized during a specific calendar year must be applied to the gains from the same year, but losses can be applied in the future using a strategy called a tax-loss carryforward. With 2022 having been a particularly rough year in the markets, this may be a beneficial tactic for investors to add to their year-end To Do list. Again, though, tax-loss harvesting can be a fairly complicated process, and it may be best to consult with a professional

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3. Consider 529 Plan Contributions

A 529 college savings plan is used to save for education expenses. There are a few different types, but the main thing that investors should focus on, as it relates to their year-end investing checklist, is to stash money into it before January as some states allow 529 contributions as tax deductions.

There is no federal contribution limit for 529 plans in 2022 — instead, the limit is set at the state level. Gift taxes, however, may apply, which is critical to consider.

4. Address Roll-Over Loose Ends

Another thing to check on is whether there are any loose ends to tie up in regard to any account roll-overs that you may have executed during the year.

For example, if you decided to roll over an old 401(k) into an IRA at some point during the year, you’ll want to make sure that the funds ended up with your new brokerage or retirement plan provider.

It may be easy to overlook, but sometimes checks get sent to the wrong place or other wires get crossed, and it can be a good idea to double-check everything is where it should be before the year ends.

5. Review Insurance Policies

Some employers require or encourage employees to opt into certain benefits programs every year, including insurance coverage. This may or may not apply to your specific situation, but it can be a good idea to check and make sure your insurance coverage is up to date — and that you’ve done things like named beneficiaries, and that all relevant contact information is also current.

6. Review Your Estate Plan

This is another item on your investing checklist that may not necessarily need to be done by the end of the year, but it’s a good idea to make a habit of it: Review your estate plan, or get one started!

Your estate plan includes several important documents that legally establish what happens to your money and assets in the event that you die. If you don’t have one, you should probably make it an item on your to-do list. If you do have one, you can use the end of the year as a time to check in and make sure that your heirs or beneficiaries are designated, that there are instructions about how you’d prefer your death or incapacitation to be handled, and more.

7. Donate Appreciated Stocks

Finally, you can and perhaps should consider donating stocks to charity by the end of the year. There are a couple of reasons to consider a stock donation: One, you won’t pay any capital gains taxes if the shares have appreciated, and second, you’ll be able to snag a tax deduction for the full market value of the shares at the time that you donate them. The tax deduction limit is for up to 30% of your adjustable gross income — a considerable amount.

Remember, though, that charitable donations must be completed by December 31 if you hope to deduct the donation for the current tax year.

3 Things for Investors to Do by Tax Day 2024

As mentioned, there are a few items on your investing checklist that can be completed by Tax Day, or in mid-April 2024. Here are the few outstanding items that you’ll have several more months to complete.

1. Max Out IRA Contributions

One of the important differences between 401(k)s and IRAs is the contribution deadline. While 401(k) contributions must be made before the end of the calendar year, investors can keep making contributions to their IRA accounts up until Tax Day 2024, within the contribution limits of course.

So, if you want to max out your IRA contributions for 2023, the limit is $6,500. But people over 50 can contribute an additional $1,000 — and you’ll have until April to contribute for 2023 and still be able to deduct contributions from your taxable income (assuming it’s a tax-deferred IRA, not a Roth IRA).

Further, the limit will increase to $7,000 in 2024, with the same $1,000 catch-up provision, and some taxpayers may be able to deduct their contributions, too, under certain conditions.

2. Max Out HSA Contributions

If you have a health savings account (HSA), you’ll want to make sure you’ve hit your contribution limits before Tax Day, too. The contribution limits for HSAs in 2023 are $3,850 for self-only coverage and $7,750 for family coverage, though depending on your age and a few other factors, there may be some additional things to consider. For 2024, the contribution limits are $4,150 for self-only coverage and $8,300 for family coverage. People over 55 can contribute an additional $1,000 in both 2023 and 2024.

3. Take Your RMD (if Applicable)

If you’re retired, you may need to take a required minimum distribution (RMD) from your retirement account by the beginning of April next year, if it’s your first RMD. But if you’ve taken an RMD before, you’ll need to do so before the end of 2023 — so, be sure to check to see what deadline applies to your specific situation.

This generally only applies to people who are in their 70s, but it may be worth discussing with a professional what the best course of action is, especially if you have multiple retirement accounts.

The Takeaway

Doing a year-end financial review can be extremely beneficial, and a checklist can help make sure you don’t miss any important steps for 2023 — and set you up for 2024. That investing checklist should probably include things like maxing out contributions to your retirement accounts, harvesting tax losses in order to manage your tax bill, and possibly even taking minimum required distributions. Everyone’s situation is different, so you’ll need to tailor your investing checklist accordingly.

Also, it’s important to keep in mind that you may have until Tax Day in April to get some of it done — though it may be good practice to knock everything out by the end of the year. If you’re only beginning to invest, keeping this list handy and reviewing it annually can help you establish healthy financial habits.

You can also start next year off strong by opening an investment account with SoFi Invest, and using SoFi’s secure, streamlined app to buy stocks, ETFs, and more.

Start investing today!

Photo credit: iStock/dusanpetkovic

Dec

2022

What Is Mortgage Underwriting?

By Kylie Ora Lobell | Growing Wealth, Home Ownership, mortgage | Comments Off

Underwriters are a bit like jurors: They soberly weigh the evidence and render a verdict. Unlike jurors, underwriters sometimes reach out to those they are, well, judging to add information, clarify a matter, or otherwise help the case for mortgage approval.

If it’s a “yes” to the address, underwriting has found that you’re fiscally fit enough to take on a mortgage and that it’s a manageable size.

By learning about underwriting, you’ll be prepared for the document-gathering and hurdles ahead.

What Does an Underwriter Do?

Underwriters protect a bank, credit union, or mortgage company by making sure that they only give loan approval to aspiring homeowners who have a good chance of paying the lender back.

Here are some of their tasks:

• Verify documents and financial information and make sure that enough savings exist to supplement income or contribute toward the down payment.

• Check an applicant’s credit score and history and note any bankruptcies, late payments, a lot of debt, or other red flags.

• Calculate the debt-to-income ratio by adding up monthly debt payments and dividing that number by monthly pretax income.

• Request additional documents and ask questions if necessary. For example, if a homebuyer has had more than one job over the past year and their income is not consistent, an underwriter may want to see more assets.

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prequalify for a SoFi mortgage loan,
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What Is the Underwriting Process?

The mortgage-seeking journey is a winding path that eventually arrives at the underwriter.

Automated underwriting may approve your loan application, though a human underwriter will verify your application and documentation. If the software refers your application to manual underwriting, that’s usually a slower process.

Here are common steps leading to underwriting:

1. Explore your budget. Prequalifying for a mortgage is a quick act that will provide a ballpark figure, based on self-reported financial info. And you can employ a home affordability calculator to get a feel for your top price.

Think, too, about lender questions you’ll have during the mortgage process.

2. Get preapproved for a loan. Shop around for the best deal, and best-fitting loan, with a mortgage broker or direct lender.

This is the time to submit documentation of your income, employment, assets, and debts and allow a hard pull of your credit scores. What credit score is needed to buy a house? Much depends on whether you plan to use a conventional or government-backed mortgage loan (an FHA loan is especially more lenient).

A mortgage preapproval letter, often good for 30 to 90 days, indicates the lender’s willingness to lend you a particular amount at a tentative or locked interest rate. A preapproval letter also allows a buyer to act quickly in a seller’s market.

3. Go house hunting. You find a home that meets your needs, and agree on a price.

4. Apply for the loan. You may choose one of the lenders you gained preapproval from, or another lender, to apply for the mortgage. You’ll receive a loan estimate within three business days from each lender you apply with.

If you go with one of the former, you submitted documents in order to get preapproved. Still, the lender will likely ask for further documentation now that you’re ready to act on a purchase, and will take another look at your credit.

5. Wait for the underwriting verdict. A loan processor will confirm your information, and then it’s time for the underwriter to review your credit scores and history, employment history, income, debts, assets, and mortgage amount.

The underwriter will order an appraisal of the chosen property and get a copy of the title insurance, which shows that there are no liens or judgments. Finally, the underwriter will consider your down payment.

Then comes the decision: approved, suspended (more documentation is needed), or denied.

Required Information for Underwriting

Lenders are going to request a lot of documents from mortgage loan applicants.

Income verification. The lender will want to see W-2s from the past two years, your two most recent bank statements, and two most recent pay stubs. Those who are self-employed will need to document stable work and payments and ideally have a business website. Applicants will typically need to show evidence of at least two years of self-employment income in the same field.

Any additional income. Pension, Social Security, alimony, dividends, and the like all count.

Proof of assets. This can include checking and savings accounts, real estate, retirement savings, and personal property. A lender might want to see that a down payment and closing costs have been in an applicant’s account for a while.

Debts. Your debt-to-income ratio matters greatly, so list all monthly debt payments, each creditor’s name and address, account numbers, loan balances, and minimum payment amounts.

Gift letter. If you’ve received money from a family member or another person to put toward the house, the lender will request a gift letter for the mortgage and proof of that funding in your account.

Rent payments. Renters will likely need to show evidence of payments for the past 12 months and give contact information for landlords for two years.

How Long Does Underwriting Take?

Underwriting may take a couple of days to more than a week. It all depends on how complicated someone’s finances are and how busy an underwriter is.

Thankfully, underwriters typically do everything online these days, so an applicant can upload documents to a website or simply email them.

How Can I Improve My Chance of Approval?

Before applicants try to get a mortgage, they can take a number of steps to improve their chances of getting approved.

Lighten the debt load. It’s critical to pay off as much debt as possible and to try to keep your credit utilization ratio below 30%, though some lenders like to see a ratio below 25%.

Applicants can pay off debt faster by making a budget, using cash instead of credit cards to make purchases, and negotiating interest rates with creditors.

Look at credit reports. Applicants should also scour their credit reports and fix any mistakes so that their score is as high as possible. Federal law guarantees the right to access credit reports from each of the three major credit bureaus annually for free.

The reports show only credit history, not credit scores. There are ways to monitor your credit scores and track your money at no cost.

Attempt to boost income. Applicants may want to apply for higher-paying jobs or get to know the benefits of a side hustle so they can save more money.

Ask for a gift or loan partner. You could also ask a family member for a gift to put toward the down payment, or you could ask a relative with a stable credit history and income if they would apply for the loan as a co-borrower or cosigner.

With an underwriter extending a hand, a solution may be found that leads to approval.

The Takeaway

Ready to apply for a mortgage? Prepare for a probing look at your private life — the financial one — by an underwriter, who is gauging the risk of lending you a bundle of money. The underwriter looks at a homebuyer’s finances and history, the loan amount, and the chosen property and renders a verdict.

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

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.

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Nov

2022

What Is a Dogecoin Mining Pool?

By Brian Nibley | Growing Wealth, invest, Investing | Comments Off

A mining pool is a collection of miners who pool their resources and share the rewards of mining a proof-of-work (PoW) cryptocurrency like Dogecoin (DOGE).

Individual miners receive a portion of block rewards in proportion to how much hashing power they contribute.

Miners may earn less overall when mining in a pool vs. solo mining, in which an individual tries to solve for a block on their own, using significant time and computing power. But they receive rewards on a more consistent basis and can maintain a profitable operation, even with smaller amounts of computing power.

💡 Recommended: Is Crypto Mining Still Profitable in 2022?

How Does Dogecoin Mining Work?

In order to understand Dogecoin mining and Dogecoin pool mining, it’s important to remember the qualities that distinguish DOGE among the other types of crypto.

What Is DOGE?

Dogecoin (pronounced dohj-coin), or DOGE, is widely known as the first joke cryptocurrency. It was launched in 2013 as a way to poke fun at Bitcoin. Nonetheless, the currency captured people’s attention and a fair amount of investment.

Dogecoin is an altcoin similar to Bitcoin and Ethereum in that it runs on a blockchain network using a PoW system. But the number of coins that can be mined are unlimited (versus the 21 million-coin cap on Bitcoin).

Despite its place as one of the biggest coins by market cap, DOGE trades at one of the lowest prices: $0.084 cents, as of November 18, 2022.

Understanding Dogecoin Mining

Dogecoin mining works in much the same way that mining any other PoW cryptocurrency works. Dogecoin is based off of Litecoin, which forked from the original Bitcoin source code.

The main difference between Bitcoin (BTC) and Dogecoin (DOGE) or Litecoin (LTC) is that the latter two are altcoins that use a mining algorithm known as Scrypt. Bitcoin mining, by contrast, uses an algorithm called SHA-256. Scrypt allows for faster block confirmation times, which means faster transaction times.

Here’s a quick guide to crypto basics and how the mining process works.

• A blockchain is a type of distributed ledger technology (DLT).

• Blockchain networks are the highways on which cryptocurrencies travel.

• The computers that maintain a blockchain network are called “nodes.”

• Some nodes can add new blocks of transactions to the network and gain rewards. These nodes are called “miners.”

• Miners solve complex mathematical problems to process transactions and achieve consensus on the network, ensuring everyone agrees which transactions are valid.

💡 Recommended: How Does Bitcoin Mining Work?

Like gold mining, mining for crypto requires time and energy, whether you’re mining Bitcoin or an altcoin like Dogecoin or Litecoin. But unlike gold mining, computers do all the work in crypto mining. Individuals set up their mining rigs (powerful computer systems) and monitor the process. For some, mining cryptocurrency offers an opportunity to obtain cryptocurrency without buying it on an exchange.

How Do You Pool Mine Dogecoin (DOGE)?

To participate in a Dogecoin mining pool, you must have a crypto wallet that’s compatible with DOGE, and all the necessary hardware and software for mining.

Using a pool involves one extra step: telling the miners where to “point” their hashing power. This typically involves entering a single line of computer code into the mining software. The mining pool will provide the specific command, likely somewhere on its website or in the software itself.

Dogecoin Mining Equipment

Crypto mining requires sophisticated and powerful computers known as Application-Specific Integrated Circuits (ASICs). In the case of Dogecoin mining hardware, the ASIC must be specifically designed to run the Scrypt algorithm.

While there might be some pools that allow users to use SHA-256 ASICs, contribute that hashing power to the pool, and take rewards in DOGE, those interested in mining DOGE specifically should stick to Scrypt ASICs.

ASICs take so much electricity that even smaller miners usually require a special power supply to connect to an electrical outlet. They also generate considerable heat, and miners must keep them cool to prevent damage.

In addition to the ASICs and their power supplies, miners will need a laptop or desktop computer. Running the Dogecoin mining software can take a considerable amount of central processing unit (CPU) or graphic processing unit (GPU) power, so that computer probably won’t be able to do much else while the mining is happening.

💡 Recommended: What Is a Bitcoin Mining Pool? Should You Join One?

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Pool Mining vs Solo Mining Dogecoin

Before you decide whether you want to pool mine or solo mine DOGE, you want to weigh the pros and cons.

The benefit of mining solo is that 100% of the block reward will go directly to you. But it could be weeks or months before you find a block because there is so much competition.

Most miners choose to join a mining pool. Pool miners receive rewards in proportion to the amount of hashing power they contribute. However, they also have to pay a small fee in exchange for using the pool.

Pros and Cons of Pool Mining	Pros and Cons of Solo Mining
Doesn’t require as much computing power.	Requires a lot of computing power & energy.
Earn rewards proportional to your hashing power.	100% of the mining reward goes to you.
Easier to join a pool than find a block to mine.	Can be hard to find a block to mine.
Must pay pool mining fees, which eat into profits.	Overall costs of solo mining are quite high, which can eat into profits.

Using a Pool to Mine Multiple Coins

Some mining pools mine multiple cryptocurrencies. This allows the pool to switch its mining activities should mining a different coin become more popular depending on the constantly changing variables of price and difficulty.

For example, some pools mine both Dogecoin and Litecoin since both rely on the same mining algorithm. If such a pool’s miners were focused on Dogecoin but the price of DOGE stagnates, it could become harder to mine DOGE due to difficulty increases, meaning reduced profits for miners absent a rise in DOGE. Then they could switch to Litecoin.

Dogecoin Cloud Mining

Mining via the cloud is another option, and you won’t need physical hardware or software. Cloud mining DOGE involves buying a contract for a certain amount of hashing power over a certain amount of time. Essentially, you’re renting computing power from someone else.

Be careful, there have been many cloud mining scams over the years.

How to Join a Dogecoin Mining Pool

Other than the above, most mining pools don’t have any special requirements for joining. They want to make it as easy as possible for new miners to contribute because they take a small fee from each block reward. The more miners in the pool, the more often the pool finds new blocks, and the more fees the pool will generate.

Mining pools often have instructions on their website that teach new miners how to join. It usually involves little more than entering a line of code into a mining program. Computers handle the rest.

Here is a rundown of the steps that an individual will take when joining a mining pool:

Step 1: Obtain the necessary hardware. As noted above, joining a mining pool may require less sophisticated equipment than solo mining.

Step 2: Select a Dogecoin mining pool to join (more in the next section).

Step 3: Download and install the software from the pool’s official site.

Step 4: Set up a DOGE crypto wallet and enter the address into the software (so the software knows where to send the new coins.

How to Find the Best Dogecoin Mining Pool

To choose the best Dogecoin mining pool for you, consider the following factors:

Fees and Costs

Because mining cryptocurrency comes with a significant investment of time and money, miners will want to choose a pool that earns them the greatest profit. That involves a pool with the lowest fees and most equitable reward structure. The biggest Dogecoin pool may or may not be the best, as there are other factors to consider.

For example, the Dogecoin mining pool power cost is also important to consider. Mining requires cheap electricity to be profitable, and for miners to make more money.

In addition, the mining pool itself will charge a fee, maybe 0.5% to 4% of the reward. You’ll want to compare the fees charged by different pools.

Reward Distribution

The reward for each block of transactions is 10,000 DOGE, and it’s split among the mining pool members, in proportion to the hashing power that member contributed to the mining pool. For that reason, computing power does matter when you join a mining pool.

The bigger the pool, the more consistent your rewards will be. So while you might be able to score 10,000 DOGE per month as a solo miner, you could earn the same amount in smaller chunks when you join a mining pool.

Hashing Power

You want a pool with a high combined hashrate. That’s more important than the overall size of the pool. But the size of the pool is also an indicator of how trustworthy/secure it is.

The more hashing power you contribute, the bigger your share of the rewards will be. Hashing power is a function of computing power, so it’s something to consider as you invest in your rig, or cloud mining.

Server Locations

In theory, it may be smarter to join a pool with servers on the same continent, in terms of hash rate needed. Proximity to servers may enhance your rewards.

Security

The security of the mining pool is obviously critical, and there are various aspects to consider. First, you want to ensure that the pool is transparent about its hashrate and payout structures. Does the pool have a real-time dashboard of activity that you can review?

Stability is also important. Does the pool have a lot of down time, which can impact your ability to mine as well as potential profits.

5 Popular Dogecoin Mining Pools

While there are many Dogecoin mining pools, some are more popular. Remember that the number of coins mined is correlated with the pool’s computing power. A larger pool may equal more computing power, but not necessarily. A smaller pool running more high-powered computers would outperform a larger pool with older networks.

1. Aikapool

One of the oldest mining pools, Aikapool doesn’t charge a fee and there are no withdrawal limits. The payout is PROP, or proportional to your hash rate.

2. Prohashing

The Prohashing pool is one of the largest pools and it’s notable for paying in DOGE, vs. converting rewards to BTC or LTC.

3. Multipool

Multipool allows you to mine for more than one type of crypto at once, sometimes called merge mining. So you can mine DOGE and LTC, for example. Multipool charges a fee of about 0.25%.

4. 1CoinPool

1CoinPool has a transparent fee structure, and pays according to the PPS (proportional pay per share, where you get a fixed amount per work submitted). 1CoinPoll operates two mining pools – Litecoin and Dogecoin. Also, there are no fees for withdrawals. This means that the miners are rewarded proportionally as per the hashing power. Furthermore, the coins get automatically added to the wallet.

5. LitecoinPool

Litecoin also has a transparent reward system (PPS), and doesn’t charge fees, including no withdrawal fees.

The Takeaway

Cryptocurrency mining is not an easy task, and won’t be profitable for most people most of the time. All the right variables must align for an individual to make money mining in most instances. Many take up mining as a hobby and as a way to build a small crypto portfolio while contributing to the livelihood of the network of a particular coin.

FAQ

Can Dogecoin still be mined in 2022?

Yes. Despite the ongoing volatility in the crypto markets, mining for many types of crypto continues. There are both solo Dogecoin miners and pool miners still active today.

How long does mining 1 Dogecoin take?

You can’t really mine 1 DOGE, because the rewards for mining a block is 10,000 DOGE. Given that it takes about a minute to mine a block of Dogecoin, depending on your equipment and the size of your mining pool, that’s roughly what it would take to obtain 1 DOGE.

How much Dogecoin could you mine in just 1 day?

Again, it depends on the number of blocks you have access to — either as a solo miner or as a pool miner — and how much hashing power you have. The supply of DOGE is unlimited, but you can only earn 10,000 DOGE per block of transactions that are confirmed.

Photo credit: iStock/Thirawatana Phaisalratana

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Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.

²Terms and conditions apply. Earn a bonus (as described below) when you open a new SoFi Digital Assets LLC account and buy at least $50 worth of any cryptocurrency within 7 days. The offer only applies to new crypto accounts, is limited to one per person, and expires on December 31, 2023. Once conditions are met and the account is opened, you will receive your bonus within 7 days. SoFi reserves the right to change or terminate the offer at any time without notice.

First Trade Amount		Bonus Payout
Low	High	Bonus Payout
$50	$99.99	$10
$100	$499.99	$15
$500	$4,999.99	$50
$5,000+		$100

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Nov

2022

How to Invest and Profit During Inflation

How to Invest During Inflation

By Brian O'Connell | Growing Wealth, invest, Investing | Comments Off

Inflation occurs when there is a widespread rise in the prices of goods and services. The inflation rate, or the rate at which prices increase, was rising throughout 2022 at the fastest pace in 40 years. That has an impact on both consumers and investors. High inflation makes common goods like groceries, gasoline, and rent more expensive for consumers, meaning paychecks might not go as far if wages don’t rise along with prices.

For investors, high inflation can also affect the financial markets. Traditionally, rising inflation has tempered stock market growth, as consumers have less money to spend, and the Federal Reserve may step in to check rising inflation by making loans and credit more expensive with higher interest rates. What’s an investor do when inflation is on the upswing? Often, it means adjusting investment portfolios to protect assets against rising prices and an uncertain economy.

Investing & Inflation: How Are They Related?

Inflation’s Impact on Stock and Bond Investments

Investing during inflation can be tricky. It’s important to know that inflation impacts both stock and bond markets, but in different ways.

Inflation and the Stock Market

Inflation has an indirect impact on stocks, partially reflecting consumer purchasing power. As prices rise, retail investors may have less money to put into the stock market, reducing market growth.

Perhaps more importantly, high inflation may cause the Federal Reserve to raise interest rates to cool down the economy. Higher interest rates also make stock market investments less attractive to investors, as they can get higher returns in lower-risk assets like bonds.

💡 Recommended: How Do Interest Rates Impact Stocks?

Also, when inflation rises, that puts pressure on investors’ stock market returns to keep up with the inflation rate. For instance, consider a stock portfolio that earns 5% before inflation. If inflation rises at a 6.0% rate, the portfolio actually loses 1.0% on an inflation-adjusted basis.

However, some stocks and other assets can perform well in periods of rising prices, which can be a hedge against inflation. When inflation hits the consumer economy, companies boost the prices of their goods and services to keep profits rolling, as their cost of doing business rises at the same time. Consequently, rising prices contribute to higher revenues, which helps boost a company’s stock price. Investors, after all, want to be in business with companies with robust revenues.

Overall, rising inflation raises the investment risk of an economic slowdown or recession. That scenario doesn’t bode well for strong stock market performance, as uncertainty about the overall economy tends to curb market growth, thus reducing company earnings which leads to sliding equity prices.

Inflation and the Bond Market

Inflation may be a drag on bond market performance, as well. Most bonds like U.S. Treasury, corporate, or municipal bonds offer a fixed rate of return, paid in the form of interest or coupon payments. As fixed-income securities offer stable, but fixed, investment returns, rising inflation can eat at those returns, further reducing the purchasing power of bond market investors.

Additionally, the Federal Reserve’s response to inflation — higher interest rates — can lower the price of bonds because there is an inverse relationship between bond yields and bond prices. So, bond investors and bond funds may experience losses because of high interest rates.

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What to Invest in During Inflation

Investors can take several steps to protect their portfolios during periods of high inflation. Choosing what to invest in during inflation is like selecting investments at any other time — you’ll need to evaluate the asset itself and how it fits into your overall portfolio strategy both now and in the future.

1. Retail Stocks

Investors might consider stocks where the underlying company can boost prices in times of rising inflation. Retail stocks, like big box stores or discount retailers with a global brand and a massive customer base, can be potential investments during high inflation periods. In that scenario, the retailer could raise prices and not only cover the cost of rising inflation but also continue to earn profits in a high inflation period.

2. Consumer Goods Stocks

Think of a consumer goods manufacturer that already has a healthy portion of the toothpaste or shampoo market and doesn’t need excess capital as it’s already well-invested in its own business. Companies with low capital needs tend to do better in inflationary periods, as they don’t have to invest more cash into the business to keep up with competitors — they already have a solid market position and the means to produce and market their products.

3. Commodities

Investing in precious metals, oil and gas, gold, and other commodities can also be good inflation hedges. The price growth of many commodities contributes to high inflation. So investors may see returns by investing in commodities during high inflationary periods. Take the price of oil, natural gas, and gasoline. Businesses and consumers rely highly on oil and gas and will likely keep filling up the tank and heating their homes, even if they have to pay higher prices. That makes oil — and other commodities — a good portfolio component when inflation is on the move.

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4. Treasury Inflation-Protected Securities (TIPS)

Treasury Inflation-Protected Securities (TIPS) can be a good hedge against inflation. By design, TIPS are like most bonds that pay investors a fixed rate twice annually. They’re also protected against inflation as the principal amount of the securities is adjusted for inflation.

5. I Bonds

During periods of high inflation, investors may consider investing in Series I Savings Bonds, commonly known as I Bonds. I Bonds are indexed to inflation like TIPS, but the interest rate paid to investors is adjustable. With an I bond, investors earn both a fixed interest rate and a rate that changes with inflation. The U.S. Treasury sets the inflation-adjusted interest rate on I Bonds twice a year.

Inflation Basics, Explained

Inflation is primarily defined as a continuing rise in prices. Some inflation is okay — historically, economic booms have come with an annual inflation rate of about 1% to 2%, a range that reflects solid consumer sentiment amidst a growing economy. An inflation rate of 5% or more can be a different story, with higher rates associated with an overheated economy.

Inflation rates often correlate to economic growth, which is sometimes good for consumers. When economic growth occurs, consumers and businesses have more money and tend to spend it. When cash flows through the economy, demand for goods and services grows, leading food and services producers to raise prices. That triggers a rise in inflation, with the inflation rate growing even more as demand for goods and services outpaces supply.

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Conversely, prices fall when demand slides and supply is abundant; the inflation rate tumbles as economic growth wanes.

The main barometer of inflation in the United States is the Consumer Price Index (CPI). The CPI encompasses the retail price of goods and services in common sectors such as housing, healthcare, transportation, food and beverage, and education, among other economic sectors. The Federal Reserve uses a similar index, the Personal Consumption Expenditures Price Index (PCE), in its inflation-related measurements. Economists and investors track inflation on both a monthly and an annual basis.

The Takeaway

Investors should proceed with caution when inflation rises. It may be tempting to readjust your portfolio because prices are rising. However, massive changes to a well-planned portfolio may do more harm than good, especially if you are investing with a long time horizon. Periods of high inflation usually wane, so throwing a long-term investment plan out the window just because inflation is moving upward may knock you off course to meet your long-term financial goals.

If you’re ready to build a solid portfolio to meet your long-term financial goals, a great place to start is with a SoFi Invest® online brokerage account. With SoFi, you can trade stocks and exchange-traded funds (ETFs) with no commissions for as little as $5.

Take a step toward reaching your financial goals with SoFi Invest.

Photo credit: iStock/pondsaksit

Nov

2022

Should You Invest With Friends?

By Anna Davies | Growing Wealth, invest, Investing | Comments Off

Investing with friends can seem like an intriguing concept. Instead of being the sole decision maker, you can share financial and knowledge-based resources to come up with a compelling investment strategy that serves your collective goals.

Investing with friends may also be a way to make a substantial impact in a cause you believe in, such as raising funds to invest in a friend’s startup or business venture.

And investing is something you’re likely already using as a way to connect. According to SoFi’s research, 70% of SoFi Invest members talk about investing with friends, family, or colleagues at least once a week. So it might make sense to some people to pool that passion and capital and begin investing together.

Of course, investing with friends also comes with some particular concerns you’ll want to consider in advance:

• Who controls the investment account and how are investment decisions made?

• What is the process if one person wants to remove their portion of the investment?

• How will any returns be distributed?

• Does the investment have a set length of time, or will it continue in perpetuity, or until all parties have decided to withdraw or buy out their investment?

Talking through scenarios like this can be helpful. It can also be helpful to come up with some sort of contract that outlines contingencies, so you know everyone is on the same page.

Pros and Cons of Investing With Friends

There are a number of upsides to investing with friends, but also some reasons to be cautious.

Pros	Cons
Friends can enjoy trust and similar POVs	Friends may rely on an honor system rather than proper procedures
May be able to reach compromises more easily	Strong emotions can lead people to make impulsive money choices
Friends add enthusiasm and support

Pros

When you invest with your friends, you enjoy a certain amount of trust and, often, similar values and perspectives on life. This can make it easier to explore new opportunities and set goals together.

Friends may have the ability to overcome disagreements and reach necessary compromises — a big plus when it comes to managing money.

Last, friends can cheer each other on, and pool enthusiasm as well as funds to generate momentum, and sustain commitment.

Cons

On the flip side, being friends sometimes leads people to rely on a “handshake” or honor system for doing business, rather than setting up proper protocols, paperwork, and protections.

This is understandable — you want to believe your friends have your back in all cases — but financial endeavors often function better with firewalls in place. That’s because, as much as you may like your friends, they’re only human. They may drop the ball, forget important details, or put their own interests ahead of yours.

In a similar vein, the camaraderie of good friends can generate a lot of enthusiasm for certain ideas or investment choices. But when it comes to money, as many behavioral finance studies have shown, emotions around money can lead people astray. It’s usually smarter to have a few guardrails in place, to guide any group.

What to Talk About Before You Invest With Friends

Before pooling resources, it may be wise to talk a little about how you each approach investing.

Maybe one friend is a Warren Buffett aficionado, while another is eager to invest in crypto.

Maybe one friend is eager to hit a specific financial goal while another is looking at investing with friends as a way to start an investment club to diversify their portfolio.

Before pooling resources, it’s a good idea to talk about how you each approach the market.

It can also be a good time to talk through all the what-ifs you can think of, including:

• What if our investments lose money?

• What if one of us needs the money for an emergency?

• What if more people want to invest in the future?

Finally, make sure your goals are aligned. Are you looking for specific investment opportunities?

Some friend groups get together for what is called impact investing, or socially conscious investing — investing in companies that have positive social, environmental, and environmental impact on the world.

Other friends may pool their money to gain access to investment opportunities that may have a minimum investment threshold, such as private investments and alternative investments like venture capital.

Once you’re all on the same page, you can then assess different methods of investing as a group of friends.

How Do You Start Investing With Friends?

There are a few different ways to start investing with friends.

Set Up a Brokerage Account

One way to invest with friends is to designate someone as the account holder, and have them open a brokerage account online with your group’s pooled resources. But that method may not allow for safeguards to protect your capital, or empower each individual investor with decision-making power.

Opening a brokerage account for your pooled funds may work for groups where there is one designated, trusted leader who manages the execution of trades, and where everyone involved agrees about the group investing style, whether active investing or some other strategies.

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Create an LLC

You may also choose to invest with friends as a show of faith for a mutual friend or family member’s startup or business venture. In this case, it can be helpful to create a limited liability company (LLC). And LLC can provide a structure for raising and investing cash, as well as making sure there is an agreement laid out as to potential returns on the investment and whether investors will have any power in the direction and decisions the company makes.

In creating an LLC, it may be helpful to seek legal advice to help create a contract so that everyone is on the same page and there is no confusion as to how money is used and what the return on investment will look like for investors.

Investing in Real Estate With Friends

Real estate can be expensive, so pooling your resources with friends may make sense.

There are a number of different ways to invest in real estate with friends. Among the most common:

• You might buy a long-term investment property, like a rental property.

• You could buy a short-term investment property, where you renovate and flip a home, for example.

• You could invest in a shared property where you and your friends live, or a property where one or more friends might live, with an agreement to sell it at a certain point, ideally for a profit.

However you approach your joint real estate venture, be sure to do research into the different types of business arrangements and real estate agreements that might suit your aims. Given how expensive and complicated real estate can be — even owning a shared home — and how many legalities could come into play, it’s best to get professional advice.

Investing in a Friend’s Business

While history abounds with successful businesses started by friends, think carefully before investing your own funds in a friend’s new venture. Ideally, you want to approach the question of whether to invest in your friend’s enterprise with your business hat on, so to say.

• Wait to be asked. Just because your friend is on fire about their new startup doesn’t mean they want you or your money involved. If they ask for your advice, rather than money, that could be a lower-stakes way to provide support.

• Kick the tires. If your friend does want you to invest, pretend you work on Wall Street. Read their business plan. Ask hard questions: how they’re raising capital, what kind of audience they’ve identified, and so on. Before deciding to put your own money into a project, you want to know it’s solid.

• Sign on the dotted line. Don’t attempt to do business with friends over a beer and a handshake. Lay out all the terms and expectations in a contract that protects all parties.

• Set emotional boundaries. You’re friends first, so have some rules in place that help you navigate when and where to talk business.

The Takeaway

For many people, there are tangible benefits to investing with friends: shared wisdom and experience, supporting each other’s financial goals, and in some cases the profits that may come from your joint venture. But there are disadvantages as well. It can be tempting to trust friends to do the right thing, when having a contract might provide more structure and clearcut consequences if an investment project goes awry.

There are many things to consider before investing with friends, and many different ways to go about it. In some cases, you might want to create an LLC with friends, to safeguard your own interests and make sure everyone is in agreement on the details of the arrangement.

If you’re not quite ready to invest your money directly with other people, and you want to gain more experience and wisdom on your own, you can start by actively trading stock with SoFi Invest.

SoFi’s investing platform has a feature available for Active Investing members that allows them to opt-in to share their investment portfolios, so you can see how your friends are doing and the market moves they’re making. Dollar amounts are hidden, but you can follow the holdings of friends who also have opted-into this feature, look at watchlists, and comment on trades.

You can also see you and your friends on a dynamic leaderboard with other members. This is a seamless way to see your friends’ investing behaviors, ask questions, and connect on investment decisions — while still keeping your finances separate.

Take a step toward reaching your financial goals with SoFi Invest.

FAQ

Is it a good idea to invest with a friend?

Investing with friends can offer some distinct advantages, including the power of combined finances, similar values, and basic trust. On the downside, though, friends might be tempted to do business with a handshake, rather than spelling out details and expectations clearly in an agreement or contracts that protects everyone involved.

Can a group of friends invest in stocks?

Friends can invest in stocks together in a few different ways. A set of friends can form an investment group or club, where they pool money and agree on a stock-picking strategy. It’s also possible for friends to invest in fractional shares.

How do I start an investing group with friends?

There are many different books and websites that can offer steps and guidelines for setting up an investment group with your friends.

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1. Max Out 401(k) Contributions

2. Harvest Tax Losses

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3. Consider 529 Plan Contributions

4. Address Roll-Over Loose Ends

5. Review Insurance Policies

6. Review Your Estate Plan

7. Donate Appreciated Stocks

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1. Max Out IRA Contributions

2. Max Out HSA Contributions

3. Take Your RMD (if Applicable)

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How to Invest During Inflation

Investing & Inflation: How Are They Related?

Inflation’s Impact on Stock and Bond Investments

Inflation and the Stock Market

Inflation and the Bond Market

What to Invest in During Inflation

1. Retail Stocks

2. Consumer Goods Stocks

3. Commodities

4. Treasury Inflation-Protected Securities (TIPS)

5. I Bonds

Inflation Basics, Explained

The Takeaway

Should You Invest With Friends?

Pros and Cons of Investing With Friends

Pros

Cons

What to Talk About Before You Invest With Friends

How Do You Start Investing With Friends?

Set Up a Brokerage Account

Create an LLC

Investing in Real Estate With Friends

Investing in a Friend’s Business

The Takeaway

FAQ

Is it a good idea to invest with a friend?

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