Growing Wealth Archives

Nov

2025

A colorful rendering of the phrase, Rule of 72, with decorative images suggesting market returns.

The Rule of 72: Understanding Its Significance in Investing

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

Table of Contents

What Is the Rule of 72?
The Formula and Calculation of the Rule of 72
Applying the Rule of 72 in Investment Planning
Accuracy and Limitations of the Rule of 72
Comparisons and Variations on the Rule
FAQ

The Rule of 72 is a basic equation that investors can use to estimate how long it might take for a given amount of money to double, given a specific rate of return. The formula involves dividing 72 by the interest or return rate.

For example, a $50,000 investment that’s earning roughly 9% per year could double in about eight years (72 / 9 = 8).

The Rule of 72 can be used in cases that are based on compound returns, or compound interest. As such it can also be used to calculate how long it might take to pay down a certain amount of debt, and to gauge the impact of inflation over time.

The Rule of 72, like similar shortcuts, is meant to provide a ballpark estimate that investors can use when making their financial projections. The actual time it takes for your money to double can vary, depending on numerous factors.

Key Points

• The Rule of 72 is a simple equation that can help investors estimate how long it will take for their money to double.

• It’s calculated by dividing 72 by the annual return rate.

• This rule can also help people assess how long it might take to pay down debt or to gauge the impact of inflation on money’s value.

• While not perfectly accurate, the Rule of 72 provides a useful ballpark estimate, especially for interest rates between 6% and 10%.

• The accuracy of the Rule of 72 can be adjusted by adding or subtracting one from 72 for every three points the return rate deviates from 8%.

What Is the Rule of 72?

The Rule of 72 helps investors understand how different types of investments might figure into their investment plans. The basic formula for the rule is:

Number of years to double an investment = 72 / Expected rate of return

The expected rate of return on an investment will naturally vary over time, and will depend on the type of investment. The Rule of 72 is a way to plug in a hypothetical return rate or annual interest rate for an investment like a stock, bond, or mutual fund.

For example, consider someone who is investing online has $10,000 in an investment that may provide a possible 6% rate of return. That investment could theoretically double in about 12 years (72 / 6 = 12). So, approximately 12 years after making an initial investment, given a potential 6% annual return, the investor would have $20,000. Again, returns are effectively compounded with this formula.

Notice that when making this calculation, investors divide by 6, not 6% or 0.06. (Dividing by 0.06 would indicate 1,200 years to double the investment, an outlandishly long time.)

This shorthand allows investors to quickly compare investments and understand whether a potential rate of return will help them meet their financial goals within a desired time horizon. For example, a bond typically offers a fixed rate of return, which could be compared to the hypothetical return of an equity investment — which might be higher, but could be less reliable.

Who Came Up with the Rule of 72?

The Rule of 72 is not new. In fact, it dates back to the late 1400s, when it was referenced in a mathematics book by Luca Pacioli. The Rule itself, though, could date even further back. Albert Einstein is often credited with its invention, although it’s not his original concept.

The Formula and Calculation of the Rule of 72

The Rule of 72 is a shortened version of a logarithmic equation that involves complex functions you would need a scientific calculator to calculate. That formula looks like this:

T = ln(2) / ln(1 + r / 100)

In this equation, T equals time to double, ln is the natural log function, and r is the compounded interest rate.

This calculation is too complicated for the average investor to perform on the fly, and it turns out 72 divided by r is a close approximation that works especially well for lower rates of return. The higher the rate of return — as the rate nears 100% — the less accurate the Rule of 72 gets.

Example of the Rule of 72 Calculation

The Rule of 72 can help investors figure out helpful information. For one, it can help them compare different types of investments that offer different rates of returns.

For example, an investor has $25,000 to invest when they open an IRA, and they plan to retire in 20 years. In order to meet a certain retirement goal, that investor needs to at least double their money to $50,000 in that time period.

The same investor is considering two investment options: One offers a 3% return and one offers a 4% return. Using the Rule of 72 the investor can quickly see that at 3% the investment could double in 24 years (72 / 3 = 24), four years past their retirement date. The investment with a 4% return could double their money in 18 years (72 / 4 = 18), giving them two years of leeway before they retire.

The investor can see that when choosing between the two options, the 4% rate of return may help them reach their financial goals, while the 3% return might leave them short.

Applying the Rule of 72 in Investment Planning

There are numerous instances in which the Rule of 72 can be applied to investment planning. But it’s also important to understand a bit about how simple and compound growth occur, and how they can come into play when using the Rule of 72 to make projections.

Simple growth, like simple interest, is when the rate of return applies only to the principal amount. A $1,000 investment that earns a 5% simple rate of return would earn $50 per year.

Compound growth is more common for long-term investments; this is when the rate of return applies to the principal investment plus all earnings from previous periods. In other words, an investor earns a return on their returns.

Example of Compound Returns

To get an idea of the power of compound interest it might help to explore a compound interest calculator, which allows users to input principal, the rate or return or interest rate, and the compounding period.

For example, imagine that an individual invests that same $1,000 at a 5% rate for 10 years with the gains compounding monthly. At the end of the investment period, they will have made more than $674, without making any additional investments.

That fact is important to consider when conceptualizing the Rule of 72, because compound interest plays a big role in helping an investment double in value within a given time frame. Here, the Rule of 72 indicates that the investor’s initial $1,000 would double in about 14.4 years (72 / 5 = 14.4 ).

Recommended: Stock Market Basics

Practical Uses in Financial Projections

Higher returns are often correlated with higher risk. So the Rule of 72 can help investors gauge whether their risk tolerance — or their expected return on investment — is high enough to get them to their goal, without undue risk exposure. Depending on what their time horizon is, investors can evaluate whether they need to bump up their risk tolerance and choose investments that may offer higher returns.

By the same token, this rule can help investors understand if their time horizon is long enough at a certain rate of return. For example, the investor in the above example is already invested in the instrument that offers 3%.

The Rule of 72 can indicate that they may need to rethink their timeline for when they will retire, pushing it past 20 years. Alternatively, for those interested in self-directed investing, they could sell their current investments and buy a new investment that might offer a higher rate of return.

It’s also important to understand that the Rule of 72 does not take into account additional savings that may be made to the principal investment. So if it becomes clear that the goal won’t be met at the current savings rate, an investor will be able to consider how much extra money to set aside to help reach the goal.

Estimating Investment Doubling Times

Using the Rule of 72 to estimate investment doubling times can be a little tricky, and perhaps inaccurate, unless an investor has a clear idea of what the expected rate of return for an investment will be. For instance, it may be very difficult to get an idea of an expected return for a particularly volatile stock. As such, investors may want to proceed with caution when using it to calculate investment doubling times.

Application in Stock Market Investments

As mentioned, stock market returns can’t be predicted. But an investor could use the historic rate of return for the S&P 500 to try and get a sense of an expected return for the market at large – which can help when applying the Rule of 72 to index funds or other broad investments.

By contrast, bonds typically offer a fixed rate of return, making it easier to use the Rule of 72 effectively.

For example, if a traditional IRA, Roth IRA, or 401(k) plan includes investments that offer a potential 6% return, the investment will double in 12 years. Again, that’s an estimate, but it gives investors a ballpark figure to work with.

Use During Periods of Inflation

Money loses value during bouts of inflation, which means that the Rule of 72 can be used to determine how long it’ll take a dollar’s value to fall by half — the opposite of doubling in value. If inflation holds steady at 5%, the purchasing power of a dollar will be cut in half in about 14.4 years.

Accuracy and Limitations of the Rule of 72

The Rule of 72 has its place in the investing lexicon, but there are some things about its accuracy and overall limitations to take into consideration.

Is the Rule of 72 Accurate?

Perhaps the most important thing to keep in mind about the Rule of 72’s accuracy is that it’s a derivation of a larger, more complex operation, and therefore, is something of an estimate. It’s not perfectly accurate, but will get you more of a ballpark figure that can help you make investing decisions.

Situations Where the Rule is Most Accurate

The Rule of 72 is only an approximation and depending on what you’re trying to understand there are a few variations of the rule that can make this estimate more accurate.

The rule of 72 is most accurate at 8%, and beyond that at a range between 6% and 10%. You can, however, adjust the rule to make it more accurate outside the 6% to 10% window.

The general rule to make the calculation more accurate is to adjust the rule by one for every three points the interest rate differs from 8% in either direction. So, for an interest rate of 11%, individuals should adjust from 72 to 73. In the other direction, if the interest rate is 5%, individuals should adjust 72 to 71.

Comparisons and Variations on the Rule

There are a few alternatives or variations of the Rule of 72, too, such as the Rule of 73, Rule of 69.3, and Rule of 69.

Rule of 72 vs. Rule of 73

The basic difference between the Rule of 72 and the Rule of 73 is that it’s used to estimate the time it takes for an investment’s value to double if the rate of return is above 10%. The Rule of 73 is only a slight tweak to the rule of 72, using different figures in the calculation.

Rules of 72, 69.3, and 69

Similarly to the Rule of 73, some people prefer to use the Rule of 69.3, especially when interest compounds daily, to get a more accurate result. That number is derived from the complete equation ln(2) / ln(1 + r / 100). When plugged into a calculator by itself, ln(2) results in a number that’s approximately 0.693147.

The Takeaway

The Rule of 72 is one of a few simple formulas investors can use to evaluate when a given investment might double in value. The advantage of these formulas is that they can be applied quickly, without using a calculator. And because the Rule of 72 generally can apply to any situation that involves the compounding of returns, interest, or inflation, investors can use it in various circumstances.

That said, it’s important to be aware that the Rule of 72 is just an estimate. It cannot control for real-world conditions that may impact risk and returns.

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FAQ

What are the flaws in the Rule of 72?

There are a few key drawbacks to using the Rule of 72, including the fact that it’s mostly accurate only for a certain subset of investments, it’s only an estimate, and unforeseen factors can cause the rate of return for an investment to change, rendering it useless.

Does the Rule of 72 apply to debt?

Yes, the Rule of 72 can be applied to debt, and it can be used to calculate an estimate of how long it would take a debt balance to double if it’s not paid down or off.

Who created the Rule of 72?

Albert Einstein often gets credit for creating this formula, but Italian mathematician Luca Pacioli most likely invented, or introduced, the Rule of 72 in the late 1400s.

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

SOIN-Q425-005

Nov

2025

A woman with glasses sits at an office desk, looking at her alternative investment choices on a laptop, a large plant and brick wall behind her.

Why Invest in Alternative Investments?

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

Table of Contents

Why Consider Alternative Investments?
The Role of Alts in Your Portfolio
Important Considerations When Choosing Alternative Investments
Who Should Invest in Alts?

A growing number of investors are intrigued by alternative investments, due in part to factors like today’s lower-yield environment and volatility in the equity markets. Because alternative investments are not typically correlated with conventional stock and bond markets they can offer investors portfolio diversification and potential returns.

In addition, alternative assets — which fall outside conventional stock, bond, and cash options — used to be accessible only to high net-worth and accredited investors. Now “retail alts” have emerged as a category. These investments are available to a range of investors thanks to new vehicles that include different types of funds and alternative strategies.

That said, alternative assets and alternative strategies are generally less well regulated, and can be opaque and illiquid. In short, alts come with their own set of risk factors for investors to consider.

Key Points

• Alternative investments are generally not correlated with traditional stock and bond markets, so they can help diversify a portfolio and reduce risk.

• Alternative investments may deliver higher returns when compared with conventional assets, but are typically higher risk.

• Alternative investments are generally less liquid and less transparent than conventional securities, so there can be limits on redemption, a lack of data, and less regulatory oversight.

• Retail investors have more access to alternative strategies through certain types of funds and other vehicles.

• Alternative investments may be suitable for investors who have a higher risk tolerance, are looking for diversification, and understand the potential advantages and disadvantages of these investments.

Why Consider Alternative Investments?

Not only are alternative strategies more accessible to ordinary investors today, they offer several ways to add diversification to investors’ portfolios. Alternative investments come with risks of their own (see “Important Considerations” below), and investors need to weigh the potential upside of different alts with their disadvantages.

Unique Investment Options

For investors seeking diversification — or otherwise drawn to invest in a wider range of opportunities — the world of alts offers a number of options when investing online or through a traditional broker.

Alts can include tangible assets like commodities, farmland, renewable energy, and real estate. Alternatives also include art and antiques, as well as other collectibles (e.g. antiquarian books, vinyl LPs, toys, comics, and more).

In addition, alternative investments can refer to strategies like investing in private equity, private credit, hedge funds, derivatives, and venture capital. These vehicles may deliver higher returns when compared with conventional assets, but they are typically considered higher risk and generally more illiquid, owing to their use of leverage and short strategies and other factors. Some are available only to institutional investors or accredited investors.

Diversification

Investors wondering why to invest in alternatives often focus on diversification. Why does diversification matter? As many investors saw in recent years, volatility in the equity markets can take a bite out of your portfolio, as can inflation and interest rate risk.

In order to help mitigate those risks, adding alternatives to your asset allocation may provide a literal alternative to conventional markets, because for the most part these assets don’t move in tandem with the stock or bond markets.

In a general sense, diversification is like taking the age-old advice of not putting all your eggs in one basket. An investor can’t avoid risk entirely, even when self-directed investing, but diversifying their investments can help mitigate the risk that one asset class poses.

However, the challenge with alts is that there are no guarantees of how an alternative asset might perform. And because these assets are generally less liquid and not as highly regulated as most other securities, i.e. stocks, bonds, mutual funds, and exchange-traded funds (ETFs), there can be limits on redemption — and a limited understanding of real-time pricing.

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The Role of Alts in Your Portfolio

Taking all that into account, what could be the role of alts in your portfolio? In other words, why invest in alts? Of course, alternatives should only be part of your asset allocation. How much to put into alts would depend on your risk tolerance and overall financial goals. Here are some factors to consider.

Low Correlation With Stocks

As noted above, most alternative strategies are uncorrelated with conventional stock and bond markets. During periods of volatility or uncertainty in these markets, some investors may find alternative investments more appealing.

That doesn’t mean that alternatives will always outperform bonds or equities. Low correlation means that a particular asset class moves in a different direction than conventional markets. So, if the stock market drops, uncorrelated asset classes like commodities or real estate are less likely to experience a downturn — which may help mitigate losses overall.

The challenge with alts is that some of these assets (e.g. commodities, renewables, private equity, venture capital) come with their own intrinsic forms of volatility, and investors need to keep these risk factors in mind as well.

Tax Treatment of Alts

Generally speaking, investment gains are taxed according to capital gains tax rules. This isn’t always the case with alternative investments.

It may be a good idea to consult with a tax professional because alts don’t necessarily lower your investment taxes, but they are taxed in different ways. For example, collectibles (e.g., art and antiques) held for longer than a year can be taxed at a special long-term capital gains rate of 28%. Gains from a Real Estate Investment Trust, or REIT, can be subject to more complex taxes.

Important Considerations When Choosing Alternative Investments

Investing in alts requires careful thought because these assets aren’t traded or regulated the same way as more conventional securities.

Liquidity

Generally speaking, most alts are far less liquid than conventional assets. This can make them hard to evaluate in terms of price, and harder to trade. In addition to which, there can be limits on redemption, depending on the asset. Some alts only allow redemptions quarterly or twice a year.

Lack of Data

Owing to the lack of regulation in some sectors, it can be difficult to obtain accurate price history and trading data for some alts. This also adds to the challenge of trading some of these assets.

Who Should Invest in Alts?

Although some alternatives can be highly risky and expensive, some retail investors may want to consider alts because of the advantages these assets offer in terms of diversification and helping to reduce risk.

The investors who decide to invest in alts today may be drawn to the number of options available via mutual funds and ETFs, many of them offered by well-established asset managers. And in some cases, including alts in a portfolio may capture some of the desired advantages.

That said, investors need to do their due diligence to understand the potential pros and cons of these instruments.

The Takeaway

Alternative investments are on the radar of many investors today because these assets may offer some portfolio diversification, help tamp down certain risks, and potentially improve risk-adjusted returns. In addition, the sheer scope and variety of these investments means investors can look for one (or more) that suits their investing style and financial goals.

That said, unlike more conventional investments, alts tend to be higher risk, less transparent, and subject to complex tax treatment. Thus, it’s important to do your due diligence on any investment option in order to make the best purchasing decisions and reduce risk.

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Photo credit: iStock/Ridofranz

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For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. This and other important information are contained in the Fund’s prospectus. For a current prospectus, please click the Prospectus link on the Fund’s respective page. The prospectus should be read carefully prior to investing.
Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. Alternative investments often employ leveraging and other speculative practices that increase an investor's risk of loss to include complete loss of investment, often charge high fees, and can be highly illiquid and volatile. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information. Registered and unregistered alternative investments are not subject to the same regulatory requirements as mutual funds.
Please note that Interval Funds are illiquid instruments, hence the ability to trade on your timeline may be restricted. Investors should review the fee schedule for Interval Funds via the prospectus.

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

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Mutual Funds (MFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or clicking the prospectus link on the fund's respective page at sofi.com. You may also contact customer service at: 1.855.456.7634. Please read the prospectus carefully prior to investing.Mutual Funds must be bought and sold at NAV (Net Asset Value); unless otherwise noted in the prospectus, trades are only done once per day after the markets close. Investment returns are subject to risk, include the risk of loss. Shares may be worth more or less their original value when redeemed. The diversification of a mutual fund will not protect against loss. A mutual fund may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

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

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

SOIN-Q425-002

Nov

2025

A person sits on the living room floor in front of an open laptop, holding a coffee cup and studying documents spread across the rug

How to Buy a House for Sale by Owner

By Austin Kilham | Financial Independence, Growing Wealth, Home Ownership, mortgage | Comments Off

A home that’s for sale by owner opens the door for you to buy the property without a middleman — though you may choose to use your own real estate agent to facilitate the transaction. A for-sale-by-owner deal can differ from a typical real estate transaction in a few important ways, so study this guide before you start perusing listings.

Key Points

• Buying a for-sale-by-owner (FSBO) home allows direct interaction with the seller, potentially offering more ability to negotiate and more information about the property.

• FSBO buyers might benefit from using their own real estate agent to protect their interests.

• Before making an offer, buyers should shop for a mortgage and consider getting preapproved.

• It’s a good idea to include contingencies in your purchase agreement, such as a satisfactory home inspection and appraisal.

• If foregoing a buyer’s agent, consider hiring a real estate attorney or transactional agent to assist with contract negotiation and ensure legal protection.

Table of Contents

Buying a House for Sale by Owner
Using a Buyer’s Real Estate Agent
Negotiating a Sale Yourself
FAQ

Buying a House for Sale by Owner

When homeowners choose the FSBO (“fizz-bo”) route, they take on all of the responsibilities real estate agents would typically shoulder in the homebuying process, from listing the house and showing it to negotiating and closing the deal.

The main motivation for doing so is often cash. Sellers who go it alone can save money on the real estate commission fee. If neither side uses an agent, the deal sidesteps the typical amount the seller would typically pay in commissions.

On the buyer’s side there can be a number of benefits of buying a house for sale by owner. First of all, the lack of a listing agent means you have more direct contact with the seller, which might give you more negotiating power. The seller will also likely have detailed knowledge of the house and neighborhood, which can be a bonus as you decide whether or not you want the property.

However, you may run into some pitfalls with FSBO properties. A seller may love her home and overprice it, potentially complicating matters when you get an appraisal.

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Using a Buyer’s Real Estate Agent

The home’s seller may not want to use a listing agent, but you can still engage the services of a buyer’s agent. You may already be working with an agent who can contact a FSBO seller for you. Or you may need to look for an agent who is willing to take on the job.

In some cases, buyer’s agents may be hesitant to work on a FSBO property. They may be wary of taking on extra liability, or extra work for which they will not necessarily be compensated.

That said, a buyer’s agent can negotiate the sale on your behalf and walk you through the complicated paperwork. If the seller is putting the contract together, your agent can also check the work to make sure you don’t run into any problems. Bear in mind, though, that your agent will need to be paid for these services, and you might be the one footing the bill. Although in the past it was common for sellers to cover agents’ commission, you will now need to have a representation agreement with your agent, defining compensation, before touring homes. You can still ask the home’s owner to pay your agent’s fee as a negotiation tactic, but you can’t count on it happening, particularly with a FSBO home where the seller isn’t paying an agent of their own.

Here’s what to expect in the FSBO buying process.

Shopping for a Mortgage

Before making an offer on a home, it’s a good idea to shop for a mortgage to get an idea of the terms different lenders offer and how much you are likely to pay each month.

A mortgage calculator can help you understand how down payments of various sizes will affect the numbers. And you may consider getting preapproved for a mortgage to see exactly how much you can afford to spend.

In an FSBO situation, homeowners may have no experience with the home financing process, and getting prequalified or preapproved for a home loan may remove some roadblocks on your path to making a purchase.

Viewing the Home

Your agent can contact the seller and set up an appointment to view the home. When you visit, be on the lookout for sagging floors or cracks in walls that might indicate structural issues. Test windows. Look for water damage on ceilings or walls that may be a sign of a leaky roof.

Since the seller will most likely be showing the house, take this opportunity to get as much detail about the home’s history as possible. What repairs have been made recently, and which ones haven’t been made in a while? It’s smart to ask about any warranties, and to be sure they will remain after a sale.

Recommended: What to Look for When Buying a House

Getting an Inspection

When buying a home for sale by owner, it’s unwise to skip an inspection. Home inspectors go over the house with a fine-toothed comb, looking at structure, plumbing, electricity, and appliances to see whether they need repair now or in the near future. (This home inspection checklist shows you what should be covered.)

If the inspector finds any problems, you can ask the seller to fix them, credit you the cost of repairs, or reduce the sales price. If you’ve already signed a purchase agreement, severe problems found during an inspection can be a reason to pull out of the contract.

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Negotiating a Sale Yourself

If you decide not to use a buyer’s agent, you and the seller will have to negotiate the sale and write up the purchase contract yourself. You may also choose to hire a transactional agent or attorney who can help you write the contract and ensure it is done legally and in a way that protects your rights. If you do decide to go it alone, below are a few things to keep in mind.

Recommended: How to Buy a House Without a Realtor^®

Making an Offer

Before making an offer on a house, check comparable properties in the neighborhood and see if the listing price is reasonable. Doing so can help you pin down what a reasonable offer is.

Consider offering less than the listing price. The seller may ask you to come up in the asking price, but if you start too high, it’s difficult to negotiate down again. You can use the neighborhood comps you’ve researched as a negotiating tool.

Including Contingencies

Contingencies are certain conditions that must be met in order to close the deal. Some common contingencies are a satisfactory home inspection and property valuation, also known as an appraisal. If a home is appraised at less than the agreed-upon price, a lender may be unwilling to loan the buyer the money. In that case, the appraisal contingency can be an opportunity to negotiate the sales price.

A clear title is another common contingency. The title is a document that shows who has owned and now owns the home. The title company will make sure there are no liens or disputes associated with the property. If there are unresolvable issues, the clear-title contingency gives the buyer a way out of the contract.

Negotiating Fees

It can’t hurt to ask for seller concessions, such as closing costs that the seller agrees to pay. A seller may agree to help pay for property taxes, attorney fees, appraisal inspections, and the like. Even in a seller’s market, if the property has been sitting, possibly because the price was too high, a seller may offer a financial incentive to move the home.

Putting Earnest Money in Escrow

Your earnest money deposit is the money you submit with your offer to demonstrate your serious intent to buy.

The listing agent would usually put this money into escrow. But if you’re going it alone, it’s a good idea to engage a title company or escrow company to hold the money for you until the sale goes through.

If you give the money directly to the seller, they may refuse to give it back to you if a contingency causes the deal to fall through, which could mean suing to retrieve your cash.

Determining When You’ll Get Possession

Be sure your purchase agreement specifies when you will take possession of the new house and receive the keys. Possession may take place immediately after closing, or the contract may give the seller time to move.

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The Takeaway

Buying a house for sale by owner can come with challenges and opportunities. It may make sense to engage a professional real estate attorney to help you negotiate and deal with the documents. Another option is to engage a buyer’s real estate agent who can help safeguard your interests.

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FAQ

Is an FSBO house always cheaper?

A house that is for sale by owner isn’t always a great deal. Some owners, lacking the pricing advice usually provided by a real estate agent and having a strong emotional attachment to their property, might actually overprice their home when they list it for sale. Make sure you have the property inspected and appraised before you buy.

How can I determine if a FSBO house is fairly priced?

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SOHL-Q425-168

Nov

2025

How to Sell Options for Premium

By Laurel Tincher | Growing Wealth, invest, Investing | Comments Off

Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.

Table of Contents

What Is An Option Premium?
What Is Selling Options Premium?
How Is an Options Premium Calculated?
Options Premiums and the Greeks
FAQ

Options traders may sell (or write) options with the hope of profiting from the premium they receive in return. Options premiums are the fee that options buyers (or holders) pay to purchase an options contract, giving them the option — though not the obligation — to buy or sell an asset at a specific price by a set date.

Unlike options holders, option writers are obligated to fulfill the terms of an options contract in exchange for the premium they receive, which could expose them to the risk of seeing substantial losses, well beyond losing the premium they receive.

While option writing has the potential to generate profits, it’s an advanced investment strategy typically used by traders experienced with risk management techniques.

Key Points

• Selling options generates income via writing call or put contracts, collecting upfront payments.

• Factors affecting option premiums include stock price, time value, and implied volatility.

• Potential losses if the option is exercised represent a significant risk.

• Retaining premiums and assets is a benefit if options are not exercised.

• Financial advice is crucial before trading options due to their complexity and risk.

What Is An Option Premium?

An option premium is the price an option buyer pays to purchase a contract based on its upfront market cost. A seller, conversely, receives the premium upfront as compensation. In other words, it is the current market price of an option contract, and the amount the seller receives when someone purchases the contract.

When investors buy options contracts, they are purchasing a derivative instrument that gives them the right to trade the underlying asset represented by the contract at a specific price within a predetermined period of time. The premium is paid to the option writer at the time of sale, regardless of whether the buyer exercises the option.

The premium amount depends on how much time there is left until the option contract expires, the price of the underlying asset, and how volatile or risky it is.

What Is Selling Options Premium?

Many investors may be familiar with the concept of purchasing an option contract, but on the other side of the market are the sellers who generate income through the premiums they receive from buyers.

Selling options is an options trading strategy in which an investor sells a buyer the right to purchase or sell an asset (typically a stock) at a predetermined price by the option’s expiration date. The premium is collected upfront as payment for the seller taking on the risk that the price of the underlying asset may move in the buyer’s favor during the contract’s term. The premium is not refundable.

If the option expires worthless, and the buyer isn’t able to exercise their right to buy or sell the underlying asset, the seller gets to keep the premium as profit, as well as retain ownership of the underlying asset (in the case of call options).

However, if the option ends up “in the money” for the buyer, the seller could incur a loss, since they’ll have to sell the stock for less than (or buy it for more than) its market price.

How Is an Options Premium Calculated?

The main factors that affect an option contract price are its intrinsic value, as determined by the stock price and strike price, implied volatility, and time value. Options sellers receive premiums upfront when a buyer purchases a call or a put option.

When an option buyer looks at options contract prices, they receive a per share quote, but each contract typically represents 100 shares of the underlying stock. Buyers will decide to either buy call or put options, depending on how they expect the stock’s price to perform in the future.

For example, a buyer could decide to purchase a call option. The seller offers it to them for a $4 premium. If the buyer purchases one contract, which represents 100 shares of that stock, they would pay $400 for it. If the buyer never executes the contract (because the price of the stock doesn’t move in their favor before the contract expires), the seller may keep the full $400 premium as compensation.

Stock Price

If an option buyer purchases a call option, they are hoping the underlying stock price increases, whereas if they buy a put option they hope it decreases. When the stock price goes up, the call option premium tends to increase and the put option premium tends to decrease. When the stock price falls, the call premium decreases and the put premium increases.

Recommended: What Makes Stock Prices Go Up or Down?

Intrinsic Value

The intrinsic value of an option is the difference between the current underlying stock price and the option’s strike price. This difference is referred to as the “moneyness” of the option, where the intrinsic value of the option is a measure of how far in the money the option is.

If the price of the underlying asset is higher than the option’s strike price, a call option is in the money, making it worth more and priced higher. If the stock price is lower than the option’s strike price, this makes a put option in the money and worth more. If an option is out of the money, it has no intrinsic value.

Time Value

Time value is the portion of the option’s premium that exceeds its intrinsic value due to time remaining before expiration. If the option has a longer timeframe left until its expiration date, it has more time to potentially move beyond the strike price and into the money. That makes it more valuable because it gives the investor more time to exercise their right to trade for a potential gain. The decrease in time value over time is called time decay.

The closer the option gets to expiring, the more rapidly time value erodes (and time decay increases). The value of the options contract declines over time due to time decay, which can be a risk for buyers. Options buyers want the stock to move enough, and soon enough to increase the option’s value before time decay reduces it. On the other hand, options sellers want the premium to decrease, which happens with every day that goes by.

Time value, sometimes referred to as extrinsic value, is calculated by subtracting intrinsic value from the option’s premium.

Implied Volatility

High premium options often reflect securities with higher volatility. If there is a high level of implied volatility, it suggests the underlying asset may experience larger price swings in the future, making the option more expensive.

A low level of implied volatility can make the option premium lower. It may benefit buyers to consider options with steady or increasing volatility, because this can increase the chance of the option reaching the desired strike price. Those who are selling options may prefer lower volatility because it may reduce the risk of large price swings, and could create an opportunity to buy back the option at a reduced price.

Other Factors

Other factors that influence option premium prices include:

• Current interest rates

• Overall market conditions

• The quality of the underlying asset

• Any dividend rate associated with the underlying asset

• The supply and demand for options associated with the underlying asset

Options Premiums and the Greeks

Certain Greek words are associated with types of risks involved in options trading. Traders can look at each type of risk to figure out which options they may consider trading, and how those trades might respond to factors like price changes, volatility, or time decay.

• Delta: The sensitivity of an option price to changes in the underlying asset

• Gamma: The expected rate of change in an option’s delta for each point of movement of the underlying asset

• Theta: The rate at which an option’s price decays over time

• Vega: A measure of the amount the option’s price may change for each 1% change in implied volatility

• Rho: The expected change in an option’s price for a one percentage point change in the risk-free interest rate

The Takeaway

Options are one type of derivatives that give the buyer the right, but not the obligation, to buy or sell an asset. To sell options for a premium, options writers must consider several factors that could influence the option’s premium value. Selling options for premium is potentially a strategy that may allow sellers to generate income. However, given that option writing has the potential to result in substantial losses, it should only be undertaken by experienced traders.

While investors are not able to sell options on SoFi’s options trading platform at this time, they can buy call and put options to try to benefit from stock movements or manage risk.

FAQ

How do you sell options to collect premium?

To sell options to collect premium, a trader writes call or put contracts and receives payment upfront from the buyer. This strategy involves agreeing to buy or sell a stock if the buyer exercises the option by expiration. Common strategies include covered calls and cash-secured puts.

What happens to the premium when you sell an option?

When an option is sold, the premium is paid upfront to the seller. If the seller holds the position to expiration and the contract is not exercised, they may keep the full amount. But if they close the position early by buying it back, the final result depends on the repurchase price.

What is the premium when you sell an option?

The premium when selling options is the amount a buyer pays for the contract. It compensates the seller for taking on the obligation to buy or sell the underlying asset if the option is exercised.

How is the premium of an option determined?

An option’s premium is based on intrinsic value, time value, implied volatility, and the price of the underlying stock. The final premium reflects current market expectations of risk and time until expiration.

Photo credit: iStock/sefa ozel

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

SOIN-Q325-012

Nov

2025

Buy to Open vs Buy to Close

By Mike Zaccardi, CMT, CFA | Growing Wealth, invest, Investing | Comments Off

Table of Contents

What Is Buy to Open?
What Does Buy to Close Mean?
Differences Between Buy to Open vs Buy to Close
Understanding Buy to Open and Buy to Close
Using Buy to Open or Buy to Close
FAQ

Buy to open and buy to close are options orders used by traders in order, as the names suggest, to open new options positions or to close existing ones.

Investors use a “buy to open” order to initiate a long call or put option, anticipating that the option price may move in their favor. On the other hand, traders who want to exit an existing short options contract may use a “buy to close” order.

Key Points

• Buy to open establishes a long position and may increase open interest depending on the counterparty.

• High reward potential may accompany a buy to open, especially for calls, but the risk of expiration at zero value is significant.

• Buy to close is the closing transaction for short option positions, which may benefit from time decay, yet carry the risk of loss if prices move adversely.

• An example buy-to-open strategy involves buying a put to open, anticipating a stock decline, and later selling to close the put for more than the premium originally paid.

• Understanding buy to open and buy to close is essential for managing risk and leveraging market movements effectively.

What Is Buy to Open?

“Buy to open” is an order type used in options trading, similar to going long on a stock. In options trading, you can buy to open a call if you expect the price to rise, which is a bullish position, or you may buy to open a put, which is taking a bearish position. Either way, to buy to open is to enter a new options position.

Buying to open is one way to open an options position. (The other is selling to open.) When buying to open, the trader uses either calls or puts and speculates that the option itself will increase in value — that could be a bullish or bearish outlook depending on the option type used. Buying to open sometimes creates a new option contract in the market, so it may increase open interest if the trade is matched with a seller opening a new position.

A trader pays a premium when buying to open. The premium paid, also called a debit, is withdrawn from the trader’s account in a manner that’s similar to buying shares.

Example of Buy to Open

If a trader has a bullish outlook on XYZ stock, they might use a buy to open options strategy. To do that, they’d buy call options. The trader must log in to their brokerage account, and then go to the order screen. When trading options, the trader has the choice of buying to open or selling to open.

Buying to open can use either calls or puts, and it may create a new options contract in the market. As noted earlier, buying to open calls is a bullish position, while buying to open puts is a bearish position.

Let’s assume the trader is bullish and buys 10 call contracts on XYZ stock with an expiration date of January 2025 at a $100 strike price. The order type is “buy to open” and the trader also enters the option’s symbol along with the number of contracts to purchase. Here is what it might look like:

• Underlying stock: XYZ

• Action: Buy to Open

• Contract quantity: 10

• Expiration date: January 2025

• Strike: $100

• Call/Put: Call

• Order type: Market

A trader may use a buy to open options contract as a stand-alone trade or to hedge existing stock or options positions.

Profits can potentially be substantial with buying to open. Going long calls features unlimited upside potential while buying to open puts has a maximum profit when the underlying stock goes all the way to zero. Buying to open options carries the risk that the options will expire worthless, however.

Finally, user-friendly options trading is here.*

Trade options with SoFi Invest on an easy-to-use, intuitively designed online platform.

*Check out the
OCC Options Disclosure Document.

What Does Buy to Close Mean?

Buying to close options are used to exit an existing short options position and may reduce the number of contracts in the market. Buying to close is an offsetting trade that covers a short options position. A buy to close order occurs after a trader writes an option.

Writing options involves collecting the option premium — otherwise known as the net credit — while a buy to close order debits an account. The trader is attempting to profit by keeping as much premium as possible between writing the option and buying to close. The process is similar to shorting a stock and then covering.

Example of Buy to Close

Suppose a trader opened a position by writing puts on XYZ stock with a current share price of $100. The trader expected the underlying stock price would remain flat or rise, so they entered a neutral to bullish strategy by selling one options contract. A trader might also sell options when they expect implied volatility will drop.

The puts, with a strike of $100, expiring in one month, brought in a credit of $5 per share (an options contract typically covers 100 shares).

The day before expiration, XYZ stock trades relatively close to the unchanged mark relative to where it was a month ago; shares are $101. The put contract’s value has dropped sharply since the strike price is below the stock price and because there is so little time left until the expiration date. The trader may realize a profit by buying to close at $1 the day before expiration.

The trader sold to open at $5, then bought to close at $1, resulting in a $4 profit per contract ($400 at 100 shares per contract).

Differences Between Buy to Open vs Buy to Close

There are important differences between a buy to open vs. buy to close order. Having a firm grasp of the concepts and order type characteristics is important before you consider trading.

Buy to Open	Buy to Close
Creates a new options position	Closes an existing options contract
Establishes a long options position	Covers an existing short options position
May offer reward potential	Is typically used after selling an option to close a short position that may have benefitted from time decay
Can be used with calls or puts	Can be used with calls or puts

Understanding Buy to Open and Buy to Close

Let’s dive deeper into the techniques and trading strategies for options when executing buy to open vs. buy to close orders.

Buy to Open Call

Either calls or puts may be used when constructing a buy to open order. With calls, a trader usually has a bullish outlook on the direction of the underlying stock. Sometimes, however, the trader might speculate based on movements in other variables, such as volatility or time decay.

Buying to open later-dated calls while selling to open near-term calls, also known as a calendar spread, is a strategy that may be used to attempt to benefit from time decay and higher implied volatility. Buying to open can be a stand-alone trade or part of a bigger, more complex strategy.

Buy to Open Put

Buying to open a put options contract is a bearish strategy when done in isolation, since profit potential comes from a decline in the underlying stock’s price. A trader commonly uses a protective put strategy when they are long the underlying stock. In that case, buying to open a put is simply designed to protect gains or limit further losses in the underlying stock. This is also known as a hedge.

A speculative trade using puts is when a trader buys to open puts with no other existing position. The trader executes this trade when they anticipate that the stock price will decline. Increases in implied volatility may also benefit the holder of puts after a buy to open order is executed.

Buy to Close

A buy to close order completes a short options trade. It can reduce open interest in the options market whereas buying to open can increase open interest. The trader may profit when buying back the option at less than the price they sold it for.

Buying to close occurs after writing an option. When writing (or selling) an option, the trader seeks to take advantage of time decay. That can be a high-risk strategy when done in isolation — without some other hedging position, there could be major losses. Writing calls has unlimited risk since the stock could theoretically continue to rise, while writing puts has substantial risk as the underlying stock can fall all the way to zero. So, a writer may use a buy-to-close order to close a position and limit losses when the price of stock is moving against them.

Shorting Against the Box

Shorting against the box is a strategy in which a trader has both a long and a short position on the same asset. This strategy may allow a trader to maintain a position, such as being long a stock.

Tax reasons often drive the desire to layer on a bearish options position with an existing bullish equity position. Selling highly appreciated shares can trigger a large tax bill, so a tax-motivated approach does not involve shorting against the box; that strategy is no longer permitted for tax deferral under the Taxpayer Relief Act of 1997, which classifies such offsets as constructive sales. A more common modern alternative is using buy-to-open puts for downside protection. Not all brokerage firms allow this type of transaction. Also, when done incorrectly or if tax rules change, the IRS could determine that the strategy is effectively a sale of the stock that may require capital gains payments and, under current U.S. tax law, entering an offsetting short position is treated as an immediate constructive.

Using Buy to Open or Buy to Close

A trader must decide if they want to go long or short options using puts or calls. Buying to open may generally be used to seek profits from large changes in the underlying stock while selling to open often involves attempting to take advantage of time decay. Traders often place a buy to close order after a sell to open order executes, but they might also wait with the goal of the options potentially expiring worthless.

Another consideration is the risk of a margin call. After writing options contracts, it’s possible that the trader might have to buy to close at a steep loss or be required to liquidate positions by the broker. The broker could also demand more cash or other assets be deposited to satisfy a margin call.

Test your understanding of what you just read.

The Takeaway

Buy to open is a term that describes when an options trader establishes a long position. Buy to close is when a short options position is closed. Understanding the difference between buy to open vs. buy to close is crucial to options trading. These option orders allow traders to put on positions to fit a number of bullish or bearish viewpoints on a security.

SoFi’s options trading platform offers qualified investors the flexibility to pursue income generation, manage risk, and use advanced trading strategies. Investors may buy put and call options or sell covered calls and cash-secured puts to speculate on the price movements of stocks, all through a simple, intuitive interface.

With SoFi Invest® online options trading, there are no contract fees and no commissions. Plus, SoFi offers educational support — including in-app coaching resources, real-time pricing, and other tools to help you make informed decisions, based on your tolerance for risk.

Explore SoFi’s user-friendly options trading platform.

FAQ

What is the difference between buy to open and buy to close options?

Buy to open means a trader enters a new long options position by purchasing a call or put contract. Buy to close means exiting an existing short options position by purchasing it back.

What is the most successful option strategy?

There is no single “most successful” strategy. An options approach’s effectiveness may depend on the market environment, the trader’s outlook, and risk management practices.

Is it better to buy at open or close?

There is no universal rule on whether it’s better to buy options at the market’s open or close. Traders often consider liquidity, volatility, and bid–ask spreads.

Is it better to buy options that are ITM or OTM?

In-the-money (ITM) and out-of-the-money (OTM) options each have trade-offs. ITM contracts cost more but have intrinsic value, while OTM options are cheaper but riskier because they require larger price moves to be profitable.

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

SOIN-Q325-020

The Rule of 72: Understanding Its Significance in Investing

What Is the Rule of 72?

Who Came Up with the Rule of 72?

The Formula and Calculation of the Rule of 72

Example of the Rule of 72 Calculation

Applying the Rule of 72 in Investment Planning

Example of Compound Returns

Practical Uses in Financial Projections

Estimating Investment Doubling Times

Application in Stock Market Investments

Use During Periods of Inflation

Accuracy and Limitations of the Rule of 72

Is the Rule of 72 Accurate?

Situations Where the Rule is Most Accurate

Comparisons and Variations on the Rule

Rule of 72 vs. Rule of 73

Rules of 72, 69.3, and 69

The Takeaway

FAQ

What are the flaws in the Rule of 72?

Does the Rule of 72 apply to debt?

Who created the Rule of 72?

Why Invest in Alternative Investments?

Why Consider Alternative Investments?

Unique Investment Options

Diversification

Alternative investments, now for the rest of us.

Explore trading funds that include commodities, private credit, real estate, venture capital, and more.

The Role of Alts in Your Portfolio

Low Correlation With Stocks

Tax Treatment of Alts

Important Considerations When Choosing Alternative Investments

Liquidity

Lack of Data

Who Should Invest in Alts?

The Takeaway

How to Buy a House for Sale by Owner

Buying a House for Sale by Owner

First-time homebuyers can prequalify for a SoFi mortgage loan, with as little as 3% down.

Using a Buyer’s Real Estate Agent

Shopping for a Mortgage

Viewing the Home

Getting an Inspection

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Negotiating a Sale Yourself

Making an Offer

Including Contingencies

Negotiating Fees

Putting Earnest Money in Escrow

Determining When You’ll Get Possession

The Takeaway

FAQ

Is an FSBO house always cheaper?

How can I determine if a FSBO house is fairly priced?

Can I buy a FSBO house without a real estate agent?

How to Sell Options for Premium

What Is An Option Premium?

What Is Selling Options Premium?

How Is an Options Premium Calculated?

Stock Price

Intrinsic Value

Time Value

Implied Volatility

Other Factors

Options Premiums and the Greeks

The Takeaway

FAQ

How do you sell options to collect premium?

What happens to the premium when you sell an option?

What is the premium when you sell an option?

How is the premium of an option determined?

Buy to Open vs Buy to Close

What Is Buy to Open?

Example of Buy to Open

Finally, user-friendly options trading is here.*

Trade options with SoFi Invest on an easy-to-use, intuitively designed online platform.

What Does Buy to Close Mean?

Example of Buy to Close

Differences Between Buy to Open vs Buy to Close

Understanding Buy to Open and Buy to Close

Alternative investments,
now for the rest of us.

First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.

Get matched with a local
real estate agent and earn up to
$9,500^‡ cash back when you close.

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