10 Signs You're Living Beyond Your Means

10 Signs You’re Living Beyond Your Means

Living beyond your means is an easy trap to fall into. And if you’re not keeping close track of everything that’s coming in and going out of your financial account, you may not even realize you’re doing it.

But if you often run out of money before the month is over — and you don’t know exactly where all the money is going — it could be a sign that you’re living above your means.

Over time, living a lifestyle beyond what you can actually afford can lead to mounting debt and also keep you from reaching your financial goals.

What Does “Living Beyond Your Means” Mean?

Simply put, ”living above your means” means that you are spending more money than you are earning. People are able to do this by relying on credit cards, loans, and pior savings to cover their expenses. However, the process is not sustainable, and eventually overspending is likely to catch up to you.

Living beyond your means can also mean that you’re spending everything you bring in, and, as a result, don’t have anything left over for saving or investing, such as building an emergency fund, saving for a short-term goal like buying a car or a home, or putting money away for retirement.

Here are ten red flags that you’re living a lifestyle you simply can’t afford — and tips for how to get back on track.

1. You Live Paycheck to Paycheck

If most or all of your paycheck is spent immediately on bills, and you don’t have anything left over at the end of the month to put into savings, you are likely living over your means and may need to make some adjustments.

If your current lifestyle has become a habit, you may feel there is no place to cut back. However, if you get out your monthly statements for the past three months and take a close look at where all your money is going each month, you will likely find places where you can cut back on spending. This might be ditching cable, cooking (instead of ordering take-out) a few more times per week, or quitting the gym and working out at home.

2. Your Credit Score Has Dropped

If you’ve been putting a lot of your expenses on your credit card and/or don’t always pay your bills on time, you may see your credit score take a hit.

This number is important because it can be accessed by anyone considering giving you new credit and may be used to determine the interest rate you’ll pay on a home or car loan, and also new credit cards.

If you aren’t sure what your credit score is, you can get a free copy of your reports from all three credit bureaus at www.annualcreditreport.com .

Looking it over can help you understand why your credit score has dropped, and help you take the necessary steps to repair it.

For example, you might set up automatic payments for the minimum amount due on credit card bills and loans, so you never miss a payment.

You may also want to pay down your balances on your credit cards and lines of credit. This can lower your “credit utilization rate” (how much of your credit limit you are using), which is factored into your score.

Recommended: What Is Considered a Bad Credit Score?

3. You’ve Stopped Your Retirement Contributions

If money is feeling a little tight, you may feel that now is not the time to worry about retirement. But you likely won’t be able to work forever, so it can be wise to make saving for retirement a priority and to get started early.

Thanks to compounding interest (which is when the interest you earn also starts earning interest), the earlier you start investing in a retirement fund, the easier it will be to save enough money to retire well.

You don’t have to contribute a lot–even just putting aside a small amount of each paycheck into a 401(k) or IRA each month can help you build wealth over time.

4. A Big Portion of Your Income Goes to Housing

Keeping your rent or mortgage below 30 percent of your monthly pre-tax income is sometimes recommended because it can leave you with enough income left over to save, invest, and build wealth in general.

Staying below 30 percent can be difficult, however, if you live in a region of the country where the cost of housing is high.

Nevertheless, spending a lot more than a third of your income on housing can leave you “house poor,” and put your other financial obligations at risk.

If you find that your housing costs are taking too large a chunk of your monthly paycheck, you might consider downsizing, taking on a roommate, or finding a way to increase your income with a side hustle.

5. Your Savings Account Isn’t Growing

Another sign you may be living beyond your means is that your savings have stagnated.

Making regular deposits into your savings account–in addition to your 401(k) or IRA–allows you to work towards your short- and medium-term financial goals, such as putting a downpayment on a home or a car or going on vacation.

6. You’ve Been Charged an Overdraft Fee More than Once This Year

An overdraft fee — or “non-sufficient funds fee” — is charged when there’s not enough money in your account to cover a check or debit card payment.

Mistakes happen, and a one-off overdraft isn’t necessarily an indicator of overspending. But repeat offenses can be a sign that you are living too close to the edge and don’t have a clear picture of how much money is going into your account and how much is going out.

You may want to start tracking your spending and keeping a closer eye on your spending account to make sure you always have enough to cover your electronic payments.

Recommended: Using a Personal Cash Flow Statement

7. You’ve Never Set a Budget

Many people think making and following a budget will be too complicated. But having a budget can actually simplify your spending decisions by letting you know exactly what you can and can’t afford.

Having a budget also helps to ensure you have enough money to cover essentials, fun, and also sock some away in savings.

If you’ve never set financial parameters for yourself, you may want to consider taking an honest inventory of how much you are bringing in each month and how much is going out each month.

Once you get a sense of your own patterns and habits, you can work toward building a realistic budget that allows you to spend and save more wisely.

8. You’re Leasing a Car You Can’t Afford to Buy

Leasing a vehicle you would not be able to purchase outright or finance can be a major financial red flag. Leasing lets you rent a high-end lifestyle, but many people end up with leases they really can’t afford.

You might be covering your monthly payments, but if you can’t do that while meeting your other expenses and also putting money into savings, then your car is likely too expensive.

You may want to consider downgrading your vehicle or saving up enough money to buy a car — either outright or by making a solid downpayment so your monthly payments are low.

9. You’re Only Making Minimum Payments on Credit Cards

It’s fine to use your credit card to pay for everyday expenses and the occasional big purchase. But if you can’t pay off most of the balance each month, you’re likely living beyond your means.

Rather than give over part of your paycheck just to interest each month, you may want to cut back on nonessential spending and divert that money towards paying off your balances.

10. You Don’t Have an Emergency Fund

Not having a stash of cash you can turn to in a pinch can be a sign that you’re overspending. You may be gambling on the fact that nothing will go wrong. But life is unpredictable, and getting hit with an unexpected expense you can’t pay for can lead to a financial crisis.

Instead, you may want to build an emergency fund that can cover three to six months worth of living expenses. That way, you’ll be covered should something happen, such as an illness or injury, job loss, housing issue, or any other expensive personal matter should come up.

The Takeaway

Unfortunately, living beyond your means is all too easy to do. And while a few weeks or months of spending more than you earn may not be a major problem, overspending on a regular basis will likely catch up to you in the form of high debt and neglected savings.

Creating (and sticking to) a spending budget can help ensure that you can afford your bills and basic expenses, and still have money left over to save for the things you want in the future.

Ready to get better control of your spending? With a SoFi Money® cash management account, you can easily keep track of your weekly expenses right in the dashboard of the SoFi app.

Learn how SoFi Money can help you manage your spending and saving today.

Photo credit: iStock/urbazon


SoFi Money®
SoFi Money is a cash management account, which is a brokerage product, offered by SoFi Securities LLC, member FINRA / SIPC .
Neither SoFi nor its affiliates is a bank. SoFi Money Debit Card issued by The Bancorp Bank. SoFi has partnered with Allpoint to provide consumers with ATM access at any of the 55,000+ ATMs within the Allpoint network. Consumers will not be charged a fee when using an in-network ATM, however, third party fees incurred when using out-of-network ATMs are not subject to reimbursement. SoFi’s ATM policies are subject to change at our discretion at any time.
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.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
​​Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s
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Marginal Propensity to Save: Definition & Formula

A Look at Marginal Propensity to Save (MPS)

The marginal propensity to save (MPS) refers to the amount of disposable income a consumer is able to save. It’s used to reflect the proportion someone is willing to save for each additional dollar of their income.

To understand why MPS is important when quantifying fluctuations in savings and income, we’ll go over how to calculate MPS and how to apply it to your budgeting strategy.

What is the Marginal Propensity to Save?

The marginal propensity to save is defined as the portion of an increase in income that goes towards household savings. In other words, it’s the percentage of additional income a household saves instead of spending on goods and services, and it offers insight into the consumption habits of consumers.

MPS is also referred to as leakage, where the savings is an amount (expressed as a percentage that doesn’t go back into the economy via consumption. Typically, the more a household saves, the more likely it indicates that there is a higher income and better equipped to cover their household expenses.

So, theoretically, if a household saves 10%, it means that for every additional dollar they earn, they’ll save 10 cents.

When consumers are more likely to save as their income grows, the chances are higher they’ll become wealthier. Plus, households will also be able to access services and goods that require more money, such as larger homes in higher cost of living areas, elaborate vacations, or luxury vehicles.

How Income Level Affects Marginal Propensity to Save

Given data on household income and household saving, economists can calculate households’ MPS by income level. This calculation is important because MPS is not constant—it varies by income level. Typically, the higher the income, the higher the MPS because as wealth increases so does the ability to satisfy needs and wants, and so each additional dollar is less likely to go toward additional spending. However, the possibility remains that a consumer might alter savings and consumption habits with an increase in pay.

The Multiplier Effect

The MPS plays an important part in regulating the multiplier effect. The multiplier effect looks at the proportional increase or decrease in income that comes from consumption or savings.

For instance, if there is spending at the government level, it’ll have a multiplier effect (much like how a snowball rolls down a hill) on different parts of the economy. This change is due to the fact there is now additional disposable income consumers can spend on consumption and savings.

By understanding what the MPS is, economists can see how increased government spending can influence savings. It’ll also help to determine how consumers’ saving habits will influence the overall economy. The lower the MPS, the more of an impact on changes in government spending there will be.

Calculating the Marginal Propensity to Save

Calculating the MPS involves dividing the change in savings by a change in disposable income.

The following formula is used to calculate the MPS:

MPS = change in savings / change in disposable income

The savings represented by the value of the MPS will change if income changes by a dollar. Presented on a graph, the MPS is the equivalent of the savings line that’s created by plotting changes in income on the horizontal line (x-axis) and changes in savings on the vertical line (y-axis).

Another important point to note is that MPS will range between zero and one. If the MPS is zero, then it means changes in income doesn’t have an effect on savings (consumers spend all additional income). If MPS is one, then all additional income is saved.

Example

Jasmine successfully negotiated a promotion and annual bonus and received an additional $3,000 with her next paycheck. Jasmine decides she wants to spend this amount on a nice dinner out with friends totaling $150, and a vacation in Mexico for $2,000. The total she spends out of her bonus is $2,150, saving $850.

Using the above MPS formula, the calculation is as follows:

$850 / $3,000 = 0.283 = 28.3%

Therefore, Jasmine saved 28% of her additional income or 28 cents for each additional dollar she earns.

Remember, MPS isn’t constant since various factors in addition to changes in income will influence consumer spending habits. For instance, the time of the year can influence seasonal trends, which can correlate with higher spending.

Applying MPS to Your Budget Strategy

Though it seems like MPS is more for economists, you can apply this tactic to your personal budget.

When it comes to increasing your income, it might be tempting to spend a large portion of it. After all, you might want to celebrate a pay raise or promotion. Or, you might decide to increase your grocery budget, swapping out some of your regular produce for organic varieties.

However, there are benefits to saving some of the extra money. Perhaps you have a financial goal you can use it towards, like saving for a down payment on a house. Or you want to start investing and with this boost in income, you now have the means to do so.

If you haven’t yet decided what you’re saving for, just getting into the habit of saving will get you on the right track. Plus, you’ll learn how to budget effectively, no matter which type of budgeting technique you use.

Let’s say you want to be able to set aside 20% of each paycheck towards investments and a larger emergency fund. You received a $1,000 bonus from work this month and want to make sure you’re not tempted to spend it all.

Using the above formula, you want to have an MPS of 30%, or 0.3. That means with that bonus, you want to be able to save $300, allowing you to put $800 of it towards other areas in your budget. Once you have this number, you can take proactive steps to save that money. Automatically transferring $300 to a separate savings account is a good start.

Considering your income may fluctuate, you’ll probably want to revisit this formula on occasion to make sure you’re on track. Plus, it’s likely your spending habits will also change—such as spending more during the holidays—so if you need to spend more, then you can adjust your savings rate temporarily. At the end of the day, it’s all about being aware of where your money is going.

Recommended: 39 Ways to Earn Passive Income Streams

The Takeaway

Marginal propensity to save may seem like a term that doesn’t relate to your budget since it’s normally used to help economists. However, thinking about it in simple terms such as a savings rate is more helpful. That way, you can use it to apply it towards your savings goals and budgeting tactics as your income changes.

Saving money is half the battle: making sure your money is working for you is the other half. Opening a cash management account like SoFi Money® can earn you more than the national interest average, squeezing even more value from your hard-earned dollars.

Check rates offered by SoFi Money.

Photo credit: iStock/Toxitz


SoFi Money®
SoFi Money is a cash management account, which is a brokerage product, offered by SoFi Securities LLC, member FINRA / SIPC .
Neither SoFi nor its affiliates is a bank. SoFi Money Debit Card issued by The Bancorp Bank. SoFi has partnered with Allpoint to provide consumers with ATM access at any of the 55,000+ ATMs within the Allpoint network. Consumers will not be charged a fee when using an in-network ATM, however, third party fees incurred when using out-of-network ATMs are not subject to reimbursement. SoFi’s ATM policies are subject to change at our discretion at any time.
As of 6/9/2020, accounts with recurring monthly deposits of $500 or more each month, will earn interest at 0.25%. All other accounts will earn interest at 0.01%. Interest rates are variable and subject to change at our discretion at any time. Accounts opened prior to June 8, 2020, will continue to earn interest at 0.25% irrespective of deposit activity. SoFi’s Securities reserves the right to change this policy at our discretion at any time. Accounts which are eligible to earn interest at 0.25% (including accounts opened prior to June 8, 2020) will also be eligible to participate in the SoFi Money Cashback Rewards Program.
The SoFi Money® Annual Percentage Yield as of 03/15/2020 is 0.20% (0.20% interest rate). Interest rates are variable subject to change at our discretion, at any time. No minimum balance required. SoFi doesn’t charge any ATM fees and will reimburse ATM fees charged by other institutions when a SoFi Money™ Mastercard® Debit Card is used at any ATM displaying the Mastercard®, Plus®, or NYCE® logo. SoFi reserves the right to limit or revoke ATM reimbursements at any time without notice.
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Exploring IVF Financing Options

Couples who are finding it hard to get pregnant can often feel isolated while they’re going through this difficult experience. But struggling with fertility is actually quite common.

Between 10$ and 15% of couples trying to have children in the US experience infertility problems, according to the Mayo Clinic. More than 12% of American women between the ages of 15 and 49 have gotten medical treatment for infertility issues, according to the last National Survey of Family Growth. And more than 55,000 American women per year give birth thanks to assisted reproductive technology.

One of the most common and effective treatments for fertility problems is in vitro fertilization (IVF). This involves removing an egg from a woman’s ovaries, fertilizing it with sperm in a lab, and then implanting the embryo in her uterus. Women under the age of 35 have a nearly 50% chance of having a baby through IVF, while women over the age of 42 have about a 3.9% chance.

The procedure is expensive—the average cost of one IVF cycle in the U.S. is between $12,000 and $17,000. That number can depend on the city or state you live in, the treatment center you use, how many medications you take, and other factors. In many states, insurance doesn’t cover IVF at all. So, on top of the emotional toll of fertility struggles, the high cost of treatment can sometimes be a financial burden as well.

Options for Financing IVF

For many would-be parents, that hefty price tag is worth it for the chance to have children. But how can people afford to pay for treatment? Here are a few ideas for IVF financing.

1. Tapping into Your Health Insurance

Your first step should probably be to check whether your health insurance will cover IVF. There are 15 states that require insurance companies to cover infertility treatment: Arkansas, Connecticut, Delaware, Hawaii, Illinois, Louisiana, Maryland, Massachusetts, Montana, New Jersey, New Hampshire, New York, Ohio, Rhode Island, and West Virginia. However, not all of these states include IVF in the requirement. Another two states—California and Texas—require insurers to offer coverage for infertility treatment, and in California this doesn’t include IVF.

You can contact your insurer to find out your specific benefits. If you have the option and if the timing works out with your enrollment period, you might consider switching your insurance plan to one that covers IVF. But in most states, where insurance companies don’t have to pay for IVF, so in those locations, you may be responsible for covering all expenses yourself.

2. Using Your Health Savings Account or Flexible Spending Account

A health savings account (HSA) allows you to put away money for medical expenses. Typically, you get an HSA in tandem with a qualifying high-deductible health plan. If you have funds in your HSA, you can use them to pay for IVF and related medical expenses. As long as you paid for the expenses after you opened the HSA, you can reimburse yourself for them at any time—it doesn’t have to be in the year that you incurred the costs.

If your employer offers a flexible spending account (FSA), you can also use those funds to pay for IVF. You don’t need a qualifying health plan to have and use this account. However, you do have to use all your FSA funds in the year they’re doled out or lose them.

Bear in mind that there are annual limits on how much money you can contribute to either kind of account. For 2022, the individual cap on HSA contributions is $3,650 and the family cap is $7,300. Health flexible spending account limits were at $2,750 in 2021. At the time this article was updated, the IRS had not announced what, if any, changes it plans to make for 2022.

3. Budgeting and Saving

If you’re planning to pay for IVF out-of-pocket and you don’t just have that kind of cash lying around, the most basic financial move is to save up, the way you would for any major expense. That likely means making a budget. You can start by tallying up your monthly expenses and take-home income. If you have enough financial leeway to save cash every month, you could set up an automatic paycheck withdrawal amount that could go directly into a savings account dedicated to your IVF fund.

If you don’t have enough left over after your expenses to save for IVF, one option is to work on cutting your spending. Can you take in a roommate or boarder to reduce housing costs? Could you spend time doing more free or low-cost activities with your friends instead of going out to bars or shows? What about giving up that gym membership in favor of YouTube fitness videos or running outdoors?

Another option is to increase your income. Perhaps you or your partner could ask for a raise at work or look for a better-paying job. Or you might take on a side hustle, such as driving for a ride-sharing service or renting your place out on Airbnb.

4. Borrowing From a Loved One

If you have a friend or relative who is financially comfortable, you might consider asking them for a loan. There may be people in your life who would be happy to support you in such an important and personal investment. But approach this option carefully to avoid damaging relationships. You may want to make it clear that the person you’re asking can say no with no hard feelings. If they agree, it’s a good idea to set out the terms of the loan clearly, including whether you’ll pay interest and your repayment schedule. Then, of course, you should be sure to honor the agreement.

5. Getting a Medical or Fertility Loan

Some IVF providers work with companies that offer financing for medical treatments. You can also search for IVF-specific loans and financing programs online. Take note of any origination fees or penalties for repaying the loan early.

These options can be convenient, but it never hurts to shop around before borrowing, since both loans and financing programs can come with higher interest rates than you might expect.

Some fertility treatment providers may also offer IVF payment plans that let you break the cost down over a number of months.

6. Applying for a Grant

A number of nonprofit organizations offer grants and scholarships to those who cannot afford to pay for IVF. Bear in mind that there’s no guarantee that you’ll receive a grant. That said, groups that provide assistance nationally include the AGC Scholarship Foundation, BabyQuest Foundation, the Tinina Q. Cade Foundation, the Family Formation Charitable Trust, the Footsteps for Fertility Foundation, among others.

Other groups may offer support to individuals and families who live in specific regions. You might also want to look at this list of infertility financing resources from Resolve .

7. Taking Out a Home Equity Line of Credit

If you own a home, you may be able to take out a revolving line of credit against the equity that you’ve built up. The advantage is that home equity lines of credit (HELOC) often have lower interest rates than credit cards or other types of loans. As of September 1, 2021, the average rate for a R30,000 HELOC was 4.10% (but this rate will change daily).

The amount you can borrow and the terms depend on the equity in your home, as well as your credit history, debt-to-income ratio, and other factors.

The downside of a HELOC is that if you have trouble making payments, your home is on the line. It’s up to you to pay the entire balance off within a certain time period, or else, typically, a sky-high interest rate kicks in.

8. Borrowing From Your Retirement Account

This is a path that financial advisors generally would not recommend. That’s because nest eggs usually stay untouched for decades in order to have enough time to grow for retirement. The more funds you leave in, and the earlier you invest, the more time your retirement savings has to grow or to recover from losses.

However, you may have the option of borrowing up to $50,000 or half of the amount vested in your 401(k)—whichever is smaller. If you take this path, you are basically lending the money to yourself at market interest rates for up to five years. However, if you leave your job for any reason during the time you’re paying off the loan, there may be penalties for early withdrawal if you don’t pay the loan off in time. Keep in mind that you will be repaying the loan with after-tax dollars, and they’ll be taxed again when you take the money out in retirement.

You may also qualify to actually withdraw money from your 401(k) to pay for out-of-pocket medical expenses, if your plan allows what’s called a hardship withdrawal . You’ll have to pay taxes and a 10% penalty on the amount you take out. If you have a Roth IRA, you can withdraw your contributions (but not earnings) at any time without penalties or taxes.

9. Taking Out a Personal Loan

Compared to using high-interest credit cards or money in your retirement accounts, a personal loan might be a better option for many people. A personal loan can be used for almost any expense, including IVF, and it often (but not always!) comes with a much lower interest rate than credit cards.

Unlike a HELOC, unsecured personal loans don’t require you to put up any assets as collateral. With SoFi, for example, you can borrow from $5,000 up to $100,000 without paying any fees or prepayment penalties. If you qualify, you then have a fixed rate with a fixed monthly payment for the term of the loan, so you know exactly what to expect.

The Takeaway

IVF might be one of the most meaningful investments you’ll ever make, but it’s undeniably expensive. You can look to your insurance, health savings accounts, cash savings, or a loved one. If that’s not enough, an unsecured personal loan may be a smart way to finance treatment and help make your dreams a reality. See if you might be eligible for one of SoFi’s IVF Treatment Loans with no fees to help you cover the costs.


SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.

External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.

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How to Buy Bonds: A Guide for Beginners

How to Buy Bonds: A Guide for Beginners

Investing in bonds is a method of lending money to a company or government. Governments, municipalities, and companies issue bonds to investors who are willing to lend them money for a set period of time. In exchange, the issuer pays interest over the life of the loan and returns the principal when the bond “matures” at the end of a predetermined period known as the bond term.

When building a diversified portfolio, many investors want to include a mix of equities (stocks) and fixed income (bonds), since the two securities have different attributes and often behave differently throughout the economic cycle. Here’s a closer look at how bonds work, and how and why to buy them.

Why Invest in Bonds

As investors choose between the different types of investments, there are several reasons they might opt for bonds. Bonds pay interest at regular intervals, such as twice a year, which provides investors with a predictable stream of income. Also, if investors hold the bond to maturity, they get back their entire principal. In this way, investors can preserve their savings while investing.

Bonds are also an important tool for diversification. Compared with stocks, bonds are less volatile, so they can offset some of the risk inherent to stock investing.

Recommended: Bonds vs. Stocks: Understanding the Difference

While investors typically consider bonds a less risky investment, it’s still possible to lose money when investing in bonds, if the issuer is unable to fulfill its obligation. In addition, inflation can eat away at bond returns, since fixed returns are worth less during periods of high inflation.

Where Can You Buy Bonds?

The best way to purchase bonds for you will depend on the type of bond and the bond market exposure that you want.

The Government

If you’re 18 or older, you can buy government bonds directly from the federal government through the TreasuryDirect website. The site is available at all times and gives investors access to Treasury bills, notes, bonds, Floating Rate Notes, Treasury Inflation-Protected Securities and savings bonds.

A Brokerage

Investors can buy a variety of bonds, including corporate, municipal, and government bonds, through their bank brokerage account. Bond prices vary depending on transaction fees and markups.

Recommended: What is a Brokerage Account?

An ETF or Mutual Fund

Investors who don’t want to buy bonds directly can gain access to the asset class by buying shares of exchange-traded funds (ETFs) or mutual funds that themselves invest in bonds.

Diversification is the main reason for investing in funds. Because issuers typically sell individual bonds tend in large units (a single bond might cost $1,000) the average investor may only be able to purchase a few of them on their own, making it tricky to put together a diversified bond portfolio.

Meanwhile, funds typically hold a diversified basket of bonds that tracks a bond index or a certain sector of the bond market, making it much easier for individuals to diversify. It’s important to note that while the yield of individual bonds is fixed, the yield on bond mutual funds or ETFs can fluctuate over time.

What Type of Bonds Can You Buy?

There are a few basic types of bonds you may consider buying:

Corporate Bonds

Corporate bonds are a type of debt security issued by public and private corporations. Investment banks typically underwrite the debt and issue it on the entities behalf. Companies use the money they raise through bond sales for a variety of reasons, such as investing in new equipment, research and development, paying investor dividends, and stock buybacks.

Municipal Bonds

States, cities, and counties issue municipal bonds, sometimes called “munis”, to finance capital expenditures like the building of new roads or bridges. There are three general types of municipal bonds:

• General obligation bonds aren’t backed by assets, but rather the “full faith and credit” of the issuer. Governments have the power to tax residents to pay bondholders back.

• Revenue bonds are backed by revenue from a specific source, such as highway tolls. That said, some revenue bonds are “non-recourse” meaning that if the revenue source disappears, bondholders have no claim to it.

• Conduit bonds are issued on behalf of private entities like hospitals.

US Treasuries

The Department of the Treasury issues U.S. Treasury bonds for the federal government. Investors typically consider Treasuries one of the safest investments, since they have the full faith and credit of the U.S. government backing them.

Treasury bills are short-term debt obligations that mature within one year or less.

• Treasury notes are longer-term debt securities that mature within 10 years.

• Treasury bonds mature in 30 years and pay bondholders interest every six months.

Treasury Inflation-Protected Securities, or TIPS, are notes or bonds that adjust payments to match inflation. Investors can buy tips with maturities of five, 10 and 30 years, and they pay interest every six months.

Bond Mutual Funds

A mutual fund is a pool of money that’s invested by an investment firm according to a set of stated objectives. A bond mutual fund focuses specifically on bonds. They may focus on one type, such as corporate bonds, or they may contain all types. Unlike traditional bonds, investors don’t get their principal returned with bond mutual funds, and there may be ongoing fees and expenses associated with owning shares of the mutual fund.

Bond ETFs

Like bond mutual funds, bond ETFs represent a way for investors to pool their money and spread it across a basket of many different investments. While investors can only trade mutual funds once a day, they can trade ETFs throughout the day. ETFs may have lower fees than mutual funds.

How to Invest in Bonds

As investors decide which bonds to buy, they may want to consider the following factors:

Credit Ratings

Credit ratings are a way to gauge the creditworthiness of companies or governments that issue bonds. The ratings give investors an idea of how likely the bond issuer is to default. Standard & Poor’s, Moody’s and Fitch are the three private companies that control most bond ratings. The rating system is slightly different at each company, but generally speaking, a mark of AAA represents the highest rated and least likely to default issuers, while C or D denotes the riskiest issuers.

Duration

A bond’s duration is not the same at its term, or maturity. Rather it is a measure of how sensitive a bond’s price will be to changing interest rates. The longer a bond’s duration, the more likely its value will fall as interest rates rise. However, you can avoid duration issues by holding the bond to its maturity date.

Fees

If you buy bonds through a broker, you should expect to pay transaction fees. Brokers typically mark up the price of a bond when they sell it to you in lieu of charging a commission. Markups may be anywhere from 1% to 5% of the bonds original value. Look for brokerages that have low fees and markups.

Risk Level

Before buying a bond, investors should understand the associated risks, including:

• Credit risk: The risk that issuers may fail to make interest payments and default on the bond.

• Interest rate risk: The possibility that changes in interest rate will raise or lower a bond’s value if sold before maturity.

• Inflation risk: The risk that inflation will decrease the value of bond returns.

• Liquidity risk: The risk an investor won’t be able to sell their bond when they want to due to low or no demand.

Recommended: Investment Risks and Ways to Manage

Timing

You might consider matching the maturity date to your investment timeline. For example, if you need your principal in five years to make a down payment on a house, you may not want to buy a 10-year bond. While you could sell the 10-year bond after five years, market conditions could make it less valuable than if you waited until maturity.

The Takeaway

Whether purchased individually or accessed through mutual funds and ETFs, bonds provide an important way for investors to diversify their portfolios. They can also help investors develop a reliable stream of income, which can become increasingly important as they move toward retirement.

Before buying a bond, you should research issuers and credit ratings to be sure you aren’t taking on undue risk. And above all, you should be sure that whatever you buy fits into your long-term investment plan.

If you’re interested in adding bonds to your portfolios via exchange-traded funds, a great way to start is by opening a brokerage account with SoFi Invest. With SoFi Active Investing, you can buy and sell ETFs and trade traditional company stocks and fractional shares.

Photo credit: iStock/ILIA KALINKIN


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected] Please read the prospectus carefully prior to investing. Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
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What Is a Paper Wallet? How Paper Wallets Work

What Is a Paper Wallet? How Paper Wallets Work

A paper wallet is just what it sounds like – a crypto wallet made from a piece of paper. It contains a private and public key pair for making crypto transactions. Typically, a key generator program creates the key and prints it on paper in the form of two QR codes and two strings of alphanumeric characters.

A paper wallet is among the oldest kinds of noncustodial, cold crypto wallets, but it is an outdated method that has security flaws.

History of Paper Wallets

In the early days of Bitcoin, paper wallets may have been the most secure form of Bitcoin storage. There was no other mechanism to take coins offline and put them into cold crypto storage.

Still, investors realized that having a safe method of holding onto their crypto was a necessity for crypto investing. Over time, as crypto exchanges, institutional-grade custody solutions, hardware wallets, multi-signature wallets, and other secure forms of storing crypto became more commonplace, crypto paper wallets became less popular.

How Does a Paper Wallet Work?

When created correctly, a paper wallet is immune to hacking. There’s no way to access a piece of paper via the Internet. But certain parts of the process could still make users vulnerable.

The problem is that users have to be very careful when creating paper wallets. The process requires using a computer, and there could be traces of evidence left behind that a sophisticated attacker might be able to access.

How to Keep a Paper Wallet Secure

There are several steps that investors can take to protect their paper wallet. For starters, create the wallet entirely offline, but following these steps:

• Download the wallet generator software to a USB drive

• Plug the USB drive into a new device that has never been connected to the internet

• Create the wallet keys and print them out using a wired connection to a printer

What about when you want to take funds off of a paper wallet and spend them? Things can get a little tricky here, and users who don’t know exactly what they’re doing could lose most or all of their funds.

Recommended: 6 Crypto Debit Cards to Consider in 2021

Taking coins out of a cryptocurrency paper wallet requires either sweeping or importing the private keys into a software wallet. Sweeping keys and importing keys don’t result in the same outcome, however.

Importing Keys

Users who import their crypto private keys, essentially creating a copy of them, could lose funds if they fail to first set up something called a “change output.”

A change output, or change address, is the destination where the remaining funds on a paper wallet will go when a user only spends a portion of the wallet’s balance. If this address hasn’t been set up beforehand, the unspent portion of a paper wallet will disappear forever after the first transaction from that wallet.

For example, if a user has 0.1 BTC on a paper wallet and decides to spend just 0.01 BTC, the remaining 0.09 BTC would automatically go to a change address. If no change address has been established before the transaction, the Bitcoins would simply be lost.

Sweeping Keys

“Sweeping” the private keys from a paper wallet into a software or mobile wallet avoids this problem, as the keys are transferred to a new location in their entirety.

How Do You Use Paper Wallets?

Using a paper wallet doesn’t involve a lot of hassle. Users simply have to:

• Create the wallet addresses

• Print out the paper wallet

• Deposit coins to the public key address

Paper wallets typically include addresses in both QR code and alphanumeric format.

When a user wants to spend the funds stored on a paper wallet, they import or sweep the private key. To do this, a user must install a digital wallet on their desktop or mobile device that allows private keys to be imported (Electrum would be one example).

Crypto exchanges generally do not support this function.

Pros and Cons of Paper Wallets

Paper wallets represent a simple and inexpensive way to put small amounts of crypto into cold storage. But the cons outweigh the pros.

A paper wallet is, of course, made of paper, which means that water, fire, or the family pet could damage or destroy it. This could result in total loss of funds.

Pros of paper wallets

Cons of paper wallets

Inexpensive Not suitable for holding large amounts of coin
Easy to create User error can result in total loss of funds
Secure cold storage If someone gets hold of the wallet, they will have the private keys and can steal the coins
It can be difficult to bring the funds back online
Vulnerable to water or fire damage

Alternatives to Paper Wallets

In addition to paper wallets, there are several other, more common types of virtual vaults to store different types of crypto.

Web Wallets

Web wallets are hosted online in a web browser. These wallets can be convenient but are among the least secure types of hot wallets. They can be easily hacked and if something goes wrong with the web browser, the wallet could be lost.

Wallets like these have great utility value in that they are easy to use and can enable users to participate in different crypto applications.

Software Wallets

Software wallets are basically desktop applications that come with a simple graphic user interface for sending and receiving transactions. While somewhat more secure than web wallets, software wallets are generally not considered good options for long-term storage of large amounts of crypto.

Funds held in a software wallet on someone’s personal computer can be vulnerable to hacking, a user could lose their password, or the device could be stolen or damaged.

Hardware wallets

Hardware wallets have been growing in popularity ever since a company called Trezor created the first one back in summer 2014. Later that same year, Ledger also created a hardware wallet. Both companies are still leaders in this space today.

Hardware wallets keep a user’s private keys securely stored offline in cold storage, like paper wallets. The big difference is that a user can easily bring a hardware wallet online and use it to make transactions. Hardware wallets are also much more durable than paper wallets.

Most users will find all of the wallet types listed above much easier to use than paper wallets with Bitcoin.

Exchange Wallets

Some crypto exchanges also have integrated wallets, which allow users to store their crypto on the exchange. Exchange wallets are easy to use, but their security depends on the overall security of the exchange. Ideally, an exchange will offer users the option to use cold storage or multi-signature wallets.

The Takeaway

A Bitcoin paper wallet isn’t recommended in the modern age of hardware wallets and other secure forms of cold storage. Paper wallets with Bitcoin are too vulnerable to human error and other factors to make them risky, especially for investors who want to use them over the long term and HODL their crypto investments.

These types of wallets represent a bygone relic of crypto’s earliest days. Unless someone is on a strict budget with only a small amount of coin to store, it’s hard to justify using a paper wallet to store your private keys.

An easy way to get started trading crypto is by downloading the SoFi Invest® brokerage platform. You can use it to buy several forms of crypto, including Bitcoin, Ethereum, Litecoin, Dogecoin, and Cardano.

Photo credit: iStock/Vladimir Sukhachev


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
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.
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