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Dec

2023

Comprehensive Guide to Assets: Understanding Their Role and Value

By Samuel Becker | Financial Independence, Growing Wealth, invest, Investing | Comments Off

You’ve probably come across the term “asset” many times in your life — long before you began saving and investing.

What is an asset? Generally, the word may be used to refer to anything of value — from a great work ethic to a great group of friends. But when you’re talking about finances, the term asset is typically used to refer to things that have economic value to a person, a company, and/or a government.

Exploring the Definition of an Asset

For individuals, an asset can mean pretty much everything they own — from the cash in their wallet to the car in their garage to necklaces, rings, and earrings in a jewelry box. But usually, when people talk about their personal assets, they’re referring to something worth money.

Broad Categories of Assets

Assets typically include such things as:

• Cash and cash equivalents, including checking and savings accounts, money market accounts, certificates of deposit (CDs), and U.S. government Treasury bills.

• Personal property, including cars and boats, art and jewelry, collections, furniture, and things like computers, cameras, phones, and TVs.

• Real estate, residential or commercial, including land and/or structures on the land.

• Investments, such as stocks and bonds, annuities, mutual funds and exchange-traded funds (ETFs), and so on.

Those who freelance or own a company also may have business assets that could include a bank account, an inventory of goods to sell, accounts receivable (money they’re owed by their customers), business vehicles, office furniture and machinery, and the building and land where they conduct their business.

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Delving Into Different Types of Assets

Generally speaking, there are four different types of assets: current or short-term assets, fixed assets, financial investments, and intangible assets.

Current Assets

Current assets are short-term resources with economic value, and are typically referred to in accounting. Current assets are things that can be used or consumed or converted to money within a year. They include things like cash, cash equivalents, inventory, and accounts receivable.

Fixed or Noncurrent Assets

Fixed assets are resources with a longer term, meaning more than a year. This includes property, like buildings and other real estate, and equipment.

Financial Assets

Financial assets refer to securities or assets such as stocks, bonds, certificates of deposit (CDs), and preferred equity.

Intangible Assets

Assets considered intangible are things of value that don’t have a physical presence. This includes intellectual property like patents, licenses, trademarks, and copyrights, and brand value and reputation.

Identifying and Classifying Assets

Assets are things with economic value. They may be owned by you, like a sofa or your computer, or owed to you, like the $50 you loaned a friend. The loan or borrowed money is considered an asset for you since your friend will repay it to you.

Personal vs Business Assets

There are both personal assets and business assets. Personal assets include such things as your home, artwork you might own, your checking account, and your investments. Business assets are things like equipment, cash, and accounts receivable.

Liquid Assets and Their Convertibility

Liquid assets are things of economic value that can be quickly and easily converted to money. Liquid personal assets might include certain stocks, and liquid business assets could include inventory.

Assets in Accounting and Business Operations

In business, assets are resources owned by a business that have economic value. They might refer to the building the business owns, inventory, accounts receivable, office furniture, and computers or other technology.

How Assets Reflect on Financial Statements

Business assets are listed on a company’s financial statements. Ideally, a company’s assets should be balanced between short-term assets and fixed and long-term assets. That indicates that the business has assets it can use right now, such as cash, and those that will be available down the road.

The Distinction Between Assets and Liabilities

Assets are resources an individual or business owns that have economic value. Assets are also things owed to a business or individual, such as payment for inventory. A liability is when a business or individual owes another party. It could include things like money or accounts payable.

Asset Valuation and Depreciation

Asset valuation is a way of determining the value of an asset. There are different methods for determining value, such as the cost method, which bases an asset’s value on its original price. But assets can depreciate over time. That’s when an accounting method known as depreciation is used to allocate the cost of an asset over time.

Real-World Examples of Assets

As noted, assets can run the gamut from the physical to the intangible. What they all have in common is that they have economic value.

Everyday Items That Count as Assets

Many items that you use or deal with in your daily life are considered assets. This includes:

• Cash

• Bank accounts

• Stocks

• Bonds

• Money market funds

• Mutual funds

• Furniture

• Jewelry

• Cars

• House

• Certificates of deposit (CDs)

• Retirement accounts, such as 401(k)s

High-Value Assets in Today’s Market

The larger assets you own tend to be more valuable, such as your house, a vacation home, or rental property. Your investments may also be considered high-value assets, depending on how much they are worth.

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The Nuances of Non-Physical and Intangible Assets

Intangible assets, or those that have no physical presence, can be extremely important and quite valuable. So it’s wise to be aware of what they are.

Understanding Goodwill, Copyrights, and Patents

Intangible assets are such things as copyrights (on a book or piece of music, for instance) and patents (for an invention). A copyright protects the owner who produced it, and a patent protects the patent owner/inventor. What this means is that another party cannot legally use their work or invention without their permission.

Goodwill is another intangible asset, and it’s associated with the purchase of one company by another company. It is the portion of the purchase price that’s higher than the sum of the net fair value of all of the company’s assets bought and liabilities assumed.

For example, such things as brand value, reputation, and a company’s customer base are considered goodwill. These intangibles could be highly valued and the reason why a purchasing company might pay more for the company they are buying.

The Role of Digital Assets in the Modern Economy

Digital assets refer to such things as data, photos, videos, music, manuscripts, cryptocurrency, and more. Digital assets create value for the person or company that owns them.

Digital assets are becoming increasingly important as individuals, businesses, and governments use them more and more. With more of our every day resources online, and with data stored digitally, these types of assets are likely to be considered quite valuable.

Labor and Human Capital: Are Skills and Expertise Assets?

Labor is not considered an asset. Instead, it is work carried out by people that they are paid for.

Human capital refers to the value of an employee’s skills, experience, and expertise. These things are considered intangible assets. However, a company cannot list human capital on its balance sheet.

Navigating Asset Management

As an investor, you’re also likely to hear about the importance of “asset allocation” or “asset management” for your portfolio. Asset allocation is simply putting money to work in the best possible places to reach financial goals.

The idea is that by spreading money over different types of investments — stocks, bonds, cash, real estate, commodities, etc. — an investor can limit volatility and attempt to maximize the benefits of each asset class.

For example, stocks tend to offer the best opportunity for long-term growth, but can expose an investor to more risk. Bonds tend to have less risk and can provide an income stream, but their value can be affected by rising interest rates. Cash can be useful for emergencies and short-term goals, but it isn’t going to offer much growth, and it won’t necessarily keep up with inflation over the long term.

When it comes to volatility, each asset class may react differently to a piece of economic news or a national or global event, so by combining multiple assets in one portfolio, an investor may be able to help mitigate the risk overall.

Alternative investments such as real property, precious metals, and private equity ventures are examples of assets some investors also may choose to use to counter the price movements of a traditional investment portfolio.

An investor’s asset allocation typically has some mix of stocks, bonds, and cash — but the percentages of each can vary based on a person’s age, the goals for those investments, and/or a person’s tolerance for risk.

If for example, someone is saving for a wedding or another shorter-term financial goal, they may want to keep a percentage of that money in a safe, easy-to-access account, such as a high-yield online deposit account. An account like this would allow that money to grow with a competitive interest rate while it’s protected from the market’s unpredictable movements.

But for a longer-term goal, like saving for retirement, some might invest a percentage of money in the market and risk some volatility with stocks, mutual funds, and/or ETFs. This way the money may potentially grow over the long-term, and there may likely be time to recover from market fluctuations. As retirement nears, some people may wish to slowly shift their investments to an allocation that carries less risk.

The Role of Automated Asset Management Solutions

Businesses may want to consider using automated asset management systems to track and collect data on their assets. This may be easier than manually tracking assets, which could become complicated and overwhelming. There are a number of different software programs available that could help businesses with this.

Individual investors might want to think about automated investing programs to help manage their financial portfolio. These platforms may help those who want to invest for the long-term but don’t have the time or expertise to do it themselves.

However, It’s important to do your homework and consider the risks involved since automated platforms are not fully customized to each individual’s specific needs. You also need to be comfortable with the types of investments they may offer, such as ETFs, and make sure you understand the risks and possible costs involved.

Unpacking Asset Classifications Further

The assets you accumulate will likely change over time, as will your needs and your goals. So, it’s important to know the purpose of each asset you own — as well as which ones are working for you and which ones aren’t. Here are some questions you can ask yourself as you mindfully manage your assets:

1. Are you getting the maximum return on your investment, whether it’s a savings account or an investment in the market?

2. How does the asset make money (dividends, interest, appreciation)? What must happen for the investment to increase in value?

3. How does the asset match up with your personal and financial goals?

4. Is the asset short-term or long-term?

5. How liquid is the investment? How hard would it be to sell if you needed money right away?

6. What are the risks associated with the investment? What is the most you could lose? Can you handle the risk financially and emotionally?

If you aren’t sure of the answers to these questions, you may wish to get some help from a financial advisor who, among other things, can work with you to set priorities, suggest strategies for investing, assist you in coming up with the right asset allocation to suit your needs, and draw up a coordinated and comprehensive financial plan.

Short-term vs Long-term Assets

As a quick recap, short-term assets are those held for less than one year. They are also known as current assets. These assets are typically meant to be converted into cash within a year and are considered liquid. For individual investors they can include such things as money market accounts and CDs.

Long-term assets are those held for more than one year. Long-term assets can be such things as stock and bonds, as well as fixed assets such as property and real estate. Long-term assets also include intellectual property such as copyrights and patents. Long-term assets are not as liquid as short-term assets.

The Importance of Asset Liquidity

Liquid assets can be accessed quickly and converted to cash without losing much of their value. Cash is the ultimate liquid asset, but there are plenty of other examples.

If you can expect to find a number of interested buyers who will pay a fair price, and you can make the sale with some speed, your asset is probably liquid. Stock from a blue-chip company is generally an asset with liquidity. So, typically, is a high-quality mutual fund.

Some assets are non-liquid or illiquid. These assets have value, but they may not be as easy to convert into cash when it’s needed. Your car or home might be your biggest asset, for example, depending on how much of it you actually own. But It might take a while to get a fair price if you sold it — and you’ll likely need to replace it eventually.

While some investments have long-term objectives — including saving for a secure retirement — liquidity can be an important factor to consider when evaluating which assets belong in a portfolio.

Many unexpected events come with big price tags, so it can help to have some cash or cash equivalents on hand in case an urgent need comes up. General recommendations suggest having three to six months’ worth of living expenses stashed away in an emergency fund — using an account that’s available whenever you need it.

Some might also consider keeping a portion of money in investments that are reasonably liquid, such as stocks, bonds, mutual funds and exchange-traded funds (ETFs). This way, ideally, the assets can be liquidated in a relatively quick timeframe if they are needed. (Although, of course, there’s never any guarantee.)

Choosing that original asset allocation is important — but maintenance and portfolio rebalancing is also key over time. As people attain some of their short- or mid-range goals (paying for that wedding, for instance, or getting the down payment on a house) they may wish to consider where the money will go next, and what kind of account it should be in.

As life changes, it is possible that the original balance of stocks vs. bonds vs. other investments is no longer appropriate for a person’s current and future needs. As a result, they may want to become more aggressive or more conservative, depending on the situation.

Rebalancing also may become necessary if the success — or failure — of a particular asset group alters a portfolio’s target allocation.

If, for example, after a big market rally or long bull run (both of which we’ve experienced in recent years) a 60% allocation to stocks becomes something closer to 75%, it may be time to sell some stock and get back to that original 60%. This way, an investor can protect some of the profits while buying other assets when they are down in price.

You can do your rebalancing manually or automatically. Some investors check in on their portfolio regularly (monthly, quarterly or annually) and adjust it if necessary. Others rebalance when a set allocation shifts noticeably.

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Dec

2023

7 Online Financial Calculators to Power Your Personal Finances

By Janet Siroto | Budgeting & Goals, Family Finances, invest, Life & Career, personal_loan, student_loan | No Comments

Your personal finances can be an important but challenging aspect of your life to manage. Even if you are brilliant at math, computing things like the payoff amount on student loans or the optimal goal for retirement savings can be complicated.

That’s where financial calculators can swoop in and help you. These tools can make it simple to see how much you are spending in, say, credit card interest or what a mortgage payment might look like on your dream house.

Here’s a resource with a variety of financial calculators. Read on to learn what kind of assistance is out there to help you take control of your money and your goals.

1. Student Loan Calculator

There are plenty of student loan calculators out there that can help you estimate your monthly payment and total interest cost.

In addition, you are likely to find student loan refinancing calculators to get a basic idea of how refinancing might affect your bottom line.

Typically, you enter your current loan information, then adjust the term “slider” to see how your monthly payment and total savings amount could be impacted by refinancing.

You could see valuable information like how much you might be able to save every month by refinancing or how much you could potentially save over the lifetime of a loan if you were to refinance. (Calculated payments and savings are only estimates, and don’t factor in your current credit picture or financial situation.)

Just keep in mind that refinancing isn’t necessarily the right choice for everyone. If you have federal student loans and refinance, you will forfeit federal protections and benefits. Also, if you refinance for an extended term, you may pay more interest over the life of the loan.

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2. Retirement Calculator

It’s almost impossible for one online retirement calculator to take into account all the variables that retirement planning requires. But a calculator could still be useful to give you a general idea of how much money you may want to be saving and how big your retirement nest egg could grow.

It might also give you some insight into how much you’re contributing now, and if you might want to think about adjusting your IRA (individual retirement account), 401(k), or other retirement investment.

One online tool that may be helpful is AARP’s Retirement Calculator . It asks for quite a bit of information, including information about your age, income, current savings and lifestyle expectations in retirement (i.e., will you need more, less, or the same amount of money as you now spend).

The calculator then gives an estimate of how much wealth you’re likely to accumulate and changes you could make — like working longer or saving more — that might help improve your outcomes. Understanding when to retire and what your expenses will be like at that life stage can be an important part of your future planning.

3. Budgeting Calculator

Making a budget — and sticking to it — is one important step on the road to financial security. By making a budget and sticking to it, you might be able to save some extra cash and even be able to gain some new insight and understanding about how you’re currently spending your money.

Setting up a budget might have a snowball effect, potentially empowering you to save even more money once you have a holistic view of current spending. By tracking your finances with a budgeting tool, you can get a better sense of how your earnings, spending, and savings are tracking. It can also help you course-correct if, say, you get hit with a big unexpected bill or move to an area with a different cost of living.

4. & 5. Credit Card Debt Payoff Calculator

Various tools can be helpful if you’re focused on paying down some credit card debt.

• You might want to use this debt snowball calculator to figure out how long it could take you to completely pay down your balance. In this method, you eliminate your smallest debt first, which can build your motivation. You may want to see how increasing your monthly payments could affect your debt and help you save on interest, which might help keep you motivated in your payoff goals.

You could also use a calculator to see how much faster you could pay off your debt with the debt avalanche method. With this technique, you go after your highest interest-rate debt first.

• Additionally, to take a look at debt in terms of your credit card interest rate, you might spend some time using a credit card interest calculator. Since credit card debt can be one of the most challenging debts to pay off, you might want to understand how much you are paying overall.

This kind of calculator shows roughly how much interest you could end up paying on your credit card debt. It can give a broad estimate of when that debt could be paid off in full if you continue to make the same payments. Equipped with that information, you might decide to opt for a different way to pay down your debt, such as looking for a lower-interest personal loan.

6. Student Loan Payoff Calculator

If you’re budgeting for your student loans, you could try working with a student loan payoff calculator. Simply add your basic information, and it calculates when your estimated payoff date could be. Plus, you can often click through and discover additional information and tips you could use to potentially shorten that payoff period.

Some of these ideas might include things like seeing if you can find a lower interest rate or making additional payments. Plugging these two data points into the calculator might give you a basic estimate of how much sooner you could pay off your loans.

7. Housing Costs Calculator

Is your attention focused on buying a home? Are you all about mood boards for the primary bedroom and vegetable garden you’ll plant? Then you’re in the right place.

A home affordability calculator can help you look at how much house you can afford. It will help you factor in such considerations mortgage amount, interest rate, property taxes, and so forth. It can be a great way to get a handle on just how much homeownership might cost you.

Additionally, a mortgage calculator can help you get a sense of how much you can save on your monthly payment by changing your down payment. This intel can help you decide whether to start bidding soon or wait until you have a bigger chunk of cash to put down.

These tools can help you decide whether to rent or buy in the near future, as well as (when buying) how to determine the right balance of down payment and financing to suit your budget.

Get Started on Your Goals With These Tools

Your goals are probably pretty unique to you and where you’re at career-wise, with money, and maybe even with outstanding loans. So there’s probably not one end-all, be-all financial calculator to help you achieve all of your financial goals. But there are an array of tools that can help you track your money and determine good options as you move forward.

As you evaluate where your finances stand, you may want to consider ways to pay down debt, such as using a personal loan to eliminate high-interest debt and lower your monthly outlay of funds.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

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Dec

2023

Consumer Price Index (CPI): What Is CPI?

The Consumer Price Index (CPI): A Comprehensive Guide

By Austin Kilham | Growing Wealth, invest, Investing, Terminology | Comments Off

The Consumer Price Index (CPI) is a monthly measure of how the aggregate costs of consumer goods and services in the United States are changing. Economists use CPI to help them understand whether the economy is in a period of inflation or deflation, and individuals can use it to get a sense of where prices might be headed.

What Is the Consumer Price Index (CPI)?

The CPI measures the change of the weighted-average prices paid by urban consumers for select goods and services, according to the Bureau of Labor Statistics (BLS). In other words, the metric tracks the rise and fall of prices over a given period of time.

Definition and Significance

As mentioned, “CPI” is short for Consumer Price Index, and it’s an often-cited economic indicator.

The BLS produces indexes that cover two populations: CPI-U covers all urban consumers, representing more than 90% of the population. And CPI-W represents urban wage earners and clerical workers, representing approximately 30% of the population. The CPI excludes people who live in rural areas, the military, and imprisoned people.

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How the CPI Works

cpi year over year change 2020-2024

The CPI tracks prices for a basket of goods and services people commonly buy in eight major categories, including:

• Food and beverage

• Recreation

• Apparel

• Transportation

• Housing

• Medical care

• Education and communication

• Various services

CPI Formulas

Each month, the BLS contacts retailers, service providers, and rental spaces across the country gathering prices for about 80,000 items. It uses this data to calculate CPI using the following formula:

CPI = Cost of the Market Basket in a Given Year/Cost of the Market Basket in the Base Year.

The result is multiplied by 100 to express CPI as a percentage. The BLS uses the years 1982-1984 as its base year. It set the index level during this period at 100.

Annual CPI Calculation

Here’s an example of the annual CPI calculation, and comparing two different years to get a gist of the differences.

Imagine the cost of a hypothetical basket of goods in 1984.

	Sweatshirt	1 dozen eggs	Movie ticket
Price in 1984	$10	$1.50	$5
Quantity	2	6	10
Total Cost	$20	$9	$50

When you total the price of these goods you get $79. Using the CPI formula above you take $79/$79 x 100 = 100%. This is where the 1984 base rate of 100 comes from.

Now let’s consider the same basket of goods in 2023.

	Sweatshirt	1 dozen eggs	Movie ticket
Price in 2023	$24	$3	$15
Quantity	2	6	10
Total Cost	$48	$18	$150

When you total the prices of these goods you get $216. Now, when you plug this into the CPI formula you get $216/$79 x 100 = 273%. You can now tell that from 1984 to 2023 prices for this particular basket of goods have risen by 173%.

Diverse Categories Within CPI

The CPI tracks more than 200 categories of items, and within each category it samples hundreds of specific items at various businesses which serve to represent the thousands of items available to consumers. In addition to these categories, CPI includes government-charged user fees like water, sewages, tolls, and auto registration fees. It also factors in taxes associated with the price of goods such as sales tax and excise tax. However, it does not include Social Security taxes or income taxes that aren’t directly related to the purchasing of goods and services.

The CPI also does not include the purchase of investments, like stocks and bonds.

The Consumer Price Index (CPI) in Practice

The CPI can be used in a variety of ways, but perhaps most prominently, in economic policy.

Usage in Economic Policy

The CPI is the most common way to measure inflation, the economic trend of rising prices over time, or deflation, the trend of falling prices. The federal government — or the Federal Reserve, more specifically — sets a target inflation rate of 2% annually, and the CPI can help the government understand whether or not its monetary policy is effective in meeting this target.

The Federal Reserve’s Utilization

The Federal Reserve may look at the CPI to gauge whether or not to raise interest rates, which may cool or heat up the economy, accordingly, by increasing the cost of borrowing. As borrowing costs go up, demand for goods or services tends to fall, lowering prices, and putting downward pressure on the CPI.

Implications for Other Government Agencies

Economists also use CPI as a measure of cost of living, the amount of money you need to cover basic expenses, such as housing, food, and health care. This is important because the government may make cost-of-living adjustments to programs such as Social Security benefits. As the cost of living rises, benefit amounts may be adjusted higher to keep up with the rising costs of goods.

Employers may also look at the cost of living to help them set competitive salaries and determine when to raise wages for employees.

Recommended: Cost of Living by State

CPI’s Influence on Market Sectors

The CPI can also have an influence on market sectors, like the housing markets, financial markets, and even labor markets. As noted, a lot of it is top-down — depending on how the Federal Reserve reads the CPI and decides to change interest rates, if at all.

Raising rates can temper demand in the housing market, as a mortgage can become more expensive. It can also slow down sales for all sorts of businesses, which is reflected in earnings reports and finally, in the stock market. That can then spill into the labor market, and potentially raise unemployment as companies look to cut costs.

All told, the CPI’s influence can run deep in an economy.

CPI Versus Other Economic Indicators

The CPI is only one of many economic indicators, as mentioned. Others include unemployment, and the Producer Price Index (PPI).

CPI vs Unemployment: Understanding the Relationship

As noted, there tends to be a relationship between the CPI and unemployment rate, as the Fed targets 2% inflation, and full employment. As such, it can decide to make changes to monetary policy to try and restore balance or at least get closer to its goals.

CPI vs PPI (Producer Price Index)

The Producer Price Index or PPI measures the average change over time in the selling prices received by domestic producers of goods and services. In simpler terms, this metric measures wholesale prices for the sectors of the economy that produce goods. Like the CPI, the PPI can help analysts estimate inflation, as higher prices will show up on the wholesale level first before they get passed on to consumers at the retail level.

Analyzing and Critiquing the CPI Methodology

The CPI is a useful measure in many ways, but it does have some limitations. First, it doesn’t apply to all populations in the United States. CPI considers urban populations alone, so it is not necessarily representative of the costs for those who live outside of those areas.

Also, the CPI calculation does not take into account all of the goods and services available to consumers or new technologies not yet considered consumer staples. What’s more, the metric does not provide any contact into what’s causing prices to move up and down, such as social or environmental trends.

CPI’s Broader Impact and Usage

CPI reports are issued monthly by the BLS, and are available to anyone who wants to access them online. They give a broad breakdown of the previous month, and compare price changes year-over-year, and month-over-month.

Breaking Down the Monthly CPI Report

The standard CPI report has an introduction that discusses the changes over the previous month, followed by a table that outlines changes in specific price categories over the past year and several months. It further breaks down food, energy, and “all items less food and energy,” providing additional insight for each category.

Anticipating the Next CPI Report

The BLS publishes the date and time of the upcoming CPI report on its website, typically the second week of the month, at 8:30am ET.

Contemporary Relevance of CPI

In recent years, many people have kept a closely-trained eye on the CPI and CPI reports due to increased costs following the pandemic in 2020. While there were a variety of reasons as to why prices increased, that bout of inflation — the first serious case of inflation since the 1980s — caught many people off guard, and strained consumers’ budgets.

It also led to the Fed increasing interest rates. Inflation, or the increase in the CPI over the past couple of years, peaked at more than 9% during the summer of 2022, and as of late 2023, was back down to around 3.1%.

Educational Resources and Further Reading on CPI

There are numerous resources and places to learn more about the CPI, especially after all the attention it has garnered in recent years.

Learning More About CPI

A simple internet search will net a cornucopia of results, loaded with information and insight into the CPI. You’re also likely to find opinion pieces and other media discussing the CPI’s shortcomings or strengths — it can be a good idea to consider everything, and formulate your own opinion.

But in terms of learning more about the CPI itself, the BLS publishes a handbook discussing the concepts and methods it uses, which can also be helpful if you’re hoping to bolster your CPI IQ.

CPI-Related Statistics and Where to Find Them

The BLS publishes the CPI, and a whole host of data and statistics related to it. With that in mind, it can be a great place to start when hunting down CPI-related data. There are multiple other sources that utilize the BLS’ data to compile charts, graphs, and more, but typically, it’s all sourced back to the BLS.

The Bottom Line: Why the CPI Matters to Everyone

Rising inflation decreases the value of individuals’ cash savings over time. Investing in stocks, bonds and other investments that offer inflation-beating returns may help consumers protect the value of their savings. Understanding CPI, and how it’s moving, can help you devise a strategy for your investment portfolio.

The CPI can be a deep topic, especially when you consider how it intersects and relates to other elements of the economy, such as unemployment and interest rates. And again, the more an investor understands about the underlying machinations of the economy, the more knowledge they’ll have to power their decisions in the market.

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

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SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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.

Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

SOIN1023145

Dec

2023

What Is Initial Margin? Initial Margin Definition & Examples

What Is Initial Margin? Examples and Minimums

By Colin Dodds | Growing Wealth, invest, Investing | Comments Off

When an investor buys a security using a margin account, the initial margin or initial margin requirement is how much of the purchase price – represented as a percentage – that the investor must cover with either cash or the collateral in that account.

The Federal Reserve Board’s Regulation T sets the minimum initial margin at 50%, meaning investors trading on a margin account must have cash or collateral to cover at least half of the market value of the securities they buy on margin.

Using Initial Margin

Investors who want to open a margin account at a brokerage must first deposit the initial margin requirement. They can make that deposit in the form of cash, securities or other collateral, and the amount they deposit will vary depending on how much trading the investor plans to do on margin, and where the brokerage firm sets its initial margin.

Once the investor makes that initial margin deposit as collateral, they essentially have a line of credit with which they can begin margin trading. That line of credit allows the investor to buy securities with money borrowed from the brokerage.

As noted, Regulation T sets minimum initial margin levels. It’s important to note, however, that the Federal Reserve Board’s Regulation T only sets the minimum for margin accounts. Brokerage firms offering margin accounts can set their initial margin requirement higher than 50% based on the markets, their clients, and their own business considerations. But brokerages cannot set the initial margins for their clients any lower than 50%. The level that a brokerage sets for margin is known as the “house requirement.”

Risks of Margin Trading

Trading on margin brings its own unique set of opportunities and risks. It can lead to outsized profits if investors buy appreciating stocks on margin. But if investors buy sinking securities on margin, they can lose even more than if they’d purchased the securities outright.

In the unfortunate situation where the securities purchased on margin lose all value, the investor must deposit the full purchase price of the securities to cover the loss. Given these risks, you’re typically not able to trade on margin in retirement accounts such as an IRA or a 401(k).

Sometimes investors use margin to short a stock, or bet that it will lose value. In that instance, they’d borrow shares from the brokerage firm that holds a position in the stock and sell them to another investor. If the share price goes down, the investor can purchase them back at a lower price.

In general, investors looking for safer investments might want to avoid margin trading, due to their inherent risk. Investors with a high appetite for risk, however, might appreciate the ability to generate outsize returns.

💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.

How Do You Calculate Initial Margin?

An investor who wants to trade in a margin account, must first determine how much to deposit as an initial margin. While that will depend on how much the investor wants to trade, and how big a role margin will play in their strategy, there are some guidelines.

The New York Stock Exchange and some of the other securities exchanges require that investors have at least $2,000 in their accounts. For day traders, the minimum initial margin is $25,000. Each brokerage has its own set of requirements in terms of the amount clients need to keep as collateral, and the minimum size of the account necessary to trade on margin.

Increase your buying power with a margin loan from SoFi.

Borrow against your current investments at just 10%* and start margin trading.

*For full margin details, see terms.

Initial Margin Requirement Examples

It’s possible, for example, that a brokerage firm might require 65% initial margin. That’s the first number an investor needs to know. The next is how much they plan to invest. The initial margin calculation simply requires the investor to multiply the investment amount by the initial margin requirement percentage. For an investor who wants to buy $20,000 of a given security, they will take that purchase price, multiply it by the margin requirement is 65% or 0.65 – to arrive at an initial margin requirement of $13,000.

The advantage for the investor is that they get $20,000 of exposure to that stock for only $13,000. In a scenario where the investor is buying a stock at a 50% margin, that investor can buy twice as many shares as they could if they bought them outright. That can double their return if the stock goes up. But if the stock drops, that investor could lose twice as much money.

If the price falls far enough, the investor could get a margin call from their broker. That means that they must deposit additional funds. Otherwise, the broker will sell the stock in their account to cover the borrowed money.

Initial Margin vs Maintenance Margin

For investors who buy securities on margin, the initial margin is an important number to know when starting out. But once the investor has opened a margin account at their brokerage, it’s important to know the maintenance margin as well.

The maintenance margin is the minimum amount of money that an investor has to keep in their margin account after they’ve purchased securities on margin. It is generally lower than the initial margin.

Currently, the minimum maintenance margin, as set by the Financial Industry Regulatory Authority (FINRA,) is 25% of the total value of the margin account. As with the initial margin requirements, however, 25% is only the minimum that the investor must have deposited in a margin account. The reality is that brokerage firms can – and often do – require that investors in margin accounts maintain a margin of between 30% to 40% of the total value of the account.

Some brokerage firms refer to the maintenance margin by other terms, including a minimum maintenance or a maintenance requirement. The initial margin on futures contracts may be significantly lower.

Maintenance Margin Example

As an example of a maintenance margin, an investor with $10,000 of securities in a margin account with a 25% maintenance margin must maintain at least $2,500 in the account. But if the value of their investment goes up to $15,000, the investor has to keep pace by raising the amount of money in their margin account to reach the maintenance margin, which rises to $3,750.

Maintenance Margin Calls

If the value of the investor’s margin account falls below the maintenance margin, then they can face a margin call, or else the brokerage will sell the securities in the account to cover the difference between what’s in their account and the maintenance margin.

With a maintenance margin, the investor could also face a margin call if the investment goes up in value. That’s because as the investment goes up, the percentage of margin in relation by comparison goes down.

The Takeaway

Initial margin requirements and maintenance margins are just two considerations for investors who are looking to trade on margin. They allow investors to understand how much cash they need to hand on hand in order to trade on margin — and when they might be susceptible to a margin call.

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

FAQ

What is an example of initial margin?

If initial margin is 65% and an investor wants to purchase $20,000 of a given security, they will take that purchase price, multiply it by the margin requirement is 65% or 0.65 – to arrive at an initial margin requirement of $13,000.

Is initial margin refundable?

Yes, initial margin is refundable, as it acts as a deposit put forward to enact a transaction or trade.

Why is initial margin important?

Initial margin is important because it acts as a form of collateral to cover a loss in the event loses money using borrowed funds. It helps the lender – or brokerage – recoup some of those losses.

Why is initial margin paid?

Initial margin is paid or put forth to act as a deposit or a form of collateral and establish good faith between a borrower and lender, typically an investor or trader and their brokerage.

Who sets the initial margin requirement?

Initial margin requirements are established by the Federal Reserve’s Regulation T. But there can also be other requirements put in place by an individual brokerage, and FINRA’s additional margin rules can further increase the amount.

Does initial margin have to be cash?

Generally, initial margin needs to be in the form of cash deposits, but it’s possible that some brokerages will allow it to take the form of other securities, such as government bonds.

Is initial margin a cost?

Initial margin is not a cost per se, but a form of collateral, and is money that is returned or refunded like a deposit. As such, it’s not spent or a typical “cost,” though it may be a financial barrier of sorts for some traders.

Photo credit: iStock/FG Trade

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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.

*Borrow at 10%. Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.
Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

SOIN1023155

Dec

2023

Putting Goals-Based Investing Into Practice

By Samuel Becker | Growing Wealth, invest, Investing | No Comments

Using a goal-based investing strategy means to focus more on specific outcomes related to an individual’s goals, rather than trying to outperform the market or certain market benchmarks. Investment goals will and do vary from investor to investor, so a goal-based investing approach will vary as well – the specifics will all depend on an investor’s individual goals.

If goal-based investing sounds appealing, learning the basics does amount to a big lift. Read on to learn what you need to know to piece together a goal-based investment strategy.

What Is Goals-Based Investing?

Goal-based investing, also known as goals-driven investing, is exactly what it sounds like; it’s an investment approach focused on your financial goals, rather than on market benchmarks.

Traditionally, investment strategy focuses on portfolio returns and measuring risk tolerance, or, how much risk you want in your investments. Those factors would then determine your investment strategy and portfolio makeup. Investments can make money in a number of different ways, including yielding interest or dividends which translate to earnings for the investor.

What you choose to invest in, and how much, is known as your asset allocation. And your asset allocation is determined by what you want out of your investment returns and your investment timeline.

For example, your investment strategy might be different if you’re going to retire in five years compared to someone who plans to retire in 25 years. Goals-based investing, by contrast, measures your portfolio against your goals. That allows you to plan for different goals with different investment strategies.

💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.

Crafting and Implementing a Goal-Based Investment Strategy

The key to goal-based investing is figuring out short-term and long-term financial goals.

Identifying Financial Goals and Assessing Risks

In the short term, goals could include saving for a vacation or a wedding; something like a down payment on a house might be a medium-term goal; and setting aside money for retirement — whatever kind of retirement you envision — is perhaps the longest-term goal.

Some common financial goals include: saving up an emergency fund; accumulating enough for a large purchase, like a car or a trip; paying for your kids’ colleges; putting a down payment on a house; caring for elderly parents and other loved ones; and planning for retirement. These all require different strategies and different timelines.

The Process: Discover, Advise, Implement, and Track

The first step in developing your goals and implementing them into a goal-based investment strategy is to take a realistic look at your current financial situation. Talking to a financial professional or advisor may help you refine and clarify your financial objectives. Then, create targets and separate accounts for your various goals.

From there, you’ll want to actually implement your strategy as they align with your goals. That likely includes actually figuring out the investment strategy for each of your investment accounts. For example, you might have a different investment strategy for savings you’re going to use in five years, versus your retirement savings that you’re going to use in 20 years.

Tracking is the final item on the list – you’ll want to keep an eye on your accounts and make sure that you stay on track with your goals, or change gears when needed.

Practical Aspects of Goal-Based Investing

Goal-based investing has some practical advantages, such as that you can adapt your investment strategy to meet your actual needs. Many households have far more goals than just retiring — and have not, historically, had a way to plan for them. The other benefit of goals-based investing is a bit more psychological.

A number of recent studies and research also suggest goals-based investing can have a behavioral impact on how you act—including, how invested you are in your investments and how emotionally you react to market fluctuations. Having a goal helps you focus your efforts. But where to focus them?

Typical Goals and Associated Risks

Some typical investing goals include retirement, a child’s education fund, or even a vacation or new car – there really isn’t a limit. Some people may simply want to accrue a massive amount of money in a retirement account, like $1 million. For some people, that’s doable – given enough time, resources, and fortunate market swings.

But each of those goals has its own risks. For instance, investing to try and accrue enough money to retire likely involves a long-term strategy, and an aggressive one. That may mean investing in riskier assets that are more volatile. Alternatively, investing with the goal of accruing enough money to take a vacation – in three years – may mean using a less-risky strategy, and investing in different types of stocks, bonds, or other securities.

Bucketing Goals into Broad Categories

Many, if not most investors will likely have many goals. As discussed, those can include retirement (a long-term goal), with vacations, tuition, or other goals that are shorter-term. For some investors, it may be helpful to mentally “bucket” those goals into different categories to help reach them.

For example, it may be helpful for some investors to group their shorter-term goals together, and utilize a higher-risk, higher-potential-reward strategy to try and reach them sooner. They could use a less-risky approach to their longer-term goals, such as retirement or funding a child’s education.

Goal-Based Investing with Professional Guidance

As discussed, some investors may find developing a goal-based investing approach to be easier with some professional guidance.

Working with Financial Advisors for Goal-Based Planning

Investors may opt to work with a financial professional for any number of reasons, and developing some goals and implementing those goals into an investing plan could easily be one of them. There are financial professionals out there who specialize in goal-based planning approaches, too.

Effectively, working with a professional to develop a strategy would likely involve identifying or tagging the specific goals or objectives an investor is trying to reach, and then creating a specialized investing plan or roadmap to get them there. Again, the specifics of such will depend on an individual investor, but in general, investors could probably expect some introspection into their hopes for the future, and some discussion as to how, specifically, to achieve those hopes.

Evaluating and Adjusting Your Investment Strategy

Many investors will implement a strategy and then need to tweak or adjust it as they go along – the market isn’t static, after all, and things change. As such, it’s important to be ready to evaluate and adjust your strategy over time.

Keeping Your Investment Plan Up to Date

While the market will see its ups and downs over time, other things will change, too. The economy will expand and contract, investors may have different jobs and income levels, and interest rates may change, too. This can all have an effect on your investment plan, and may require changes.

An investor can do those with the helping hand of a professional, of course, but the point is that a static plan likely won’t be the most efficient in a dynamic world.

Adapting to Changes in Goals and Market Conditions

Goals-based investing also gives you more buy-in as an investor, and more of a say in the process. However, the danger of goals-based investing is you might not fully know what your goals are — or, more likely, what your goals will be down the road. Researchers have found that we often fail to predict how much we will change in the next decade, and in turn, that can have a distorting effect on our goals and how we plan for them.

For example, right now, you might think you want a low-key retirement in a rural woodsy cabin, but what happens if you only invest enough to purchase a small cheap plot of land and then you change your mind in 20 years and need more money? That’s also why you want to re-evaluate your goals regularly and change your investing strategy as appropriate.

Goal-Based Investing Examples

Here’s a simple example of a goal-based investing example: Let’s say an investor’s goal is to accrue enough money to purchase a house. So, they’re aiming for a 20% down payment on a $500,000 home – a total of $100,000. And, they want to start with an initial investment of $50,000, and reach their goal within three years.

Accordingly, the aim is to return 100% over a three-year period. With that goal in mind, the next step is to implement a strategy that has the best possibility of attaining that goal. That means choosing how to deploy or allocate the initial investment to try and give themselves the best chance of reaching their goal.

Again, it may be helpful to have some professional guidance, but an investor may look at investing in specific ETFs or mutual funds, and certain stocks – there’ll be risks to consider, and a bit of tea-leaf reading to try and sense where the market is going. It won’t be easy, but it’s possible to reach that goal.

Similar strategies could be enacted for other goals, too, like building an emergency fund, or retiring. But the nuts and bolts of it all will depend on the individual investor.

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