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Most people know that paying bills on time is an important task. But it can also be tedious, time-consuming, and something you may want to put off till…later.

Regularly getting those bills paid on schedule can help you avoid doling out money on interest and fees.

It can also help maintain a solid credit score, which is something that could pay off in the future. It might help you snag the best interest rates when qualifying for loans or getting a credit card.

Figuring out how to organize those bills can have another benefit: I can reduce the time you spend on this to-do and also perhaps lower the stress of wondering if you’re on time with your payments or late.

Fortunately, organizing your bills isn’t hard. You might use an old-school accordion folder and a calculator to manage the process. Or you might decide to handle the whole process digitally.

Here are some smart ideas for how to organize those bills.

1. Setting Up a Bill-Paying Station

Do you have a convenient spot where you can open, organize, and pay your bills?

Consider setting up a dedicated desk or area, or (if space is tight) a box or roll-away cart. The goal is simply to keep everything in one place, instead of scattered around in your car, briefcase, purse, or on the kitchen counter.

It’s a good idea to stock your station with all the items you’ll need to get the job done. Depending on how you pay your bills, this might include: envelopes, stamps, pens, your checkbook, a calendar, a filing system for sorting paper bills as they arrive, and storing those you’ve paid.

Or, if you receive bills and account statements via email as many do today, consider setting up a separate virtual bill paying space. You might, for instance, set up an email account just for bills. This will ensure that you don’t overlook an electronic bill in the midst of the other emails you receive.

Or, you might use your current email and create a folder, with subfolders, for anything related to your finances. That way, you’ll know exactly where to look if you need to check on a bill or other financial correspondence.

2. Making a Master List of Monthly Bills

Creating a list of every single bill you pay can be another way to help ensure that nothing falls through the cracks. It can also help you see where your money goes and how much money you have left after paying bills (if any).

You can do this with pen and paper, type it up in a document, or create a spreadsheet that includes a column for each month (allowing you to simply check off each bill as it gets paid).

You might be able to list some things from memory, like your rent and car payments, car insurance, or phone. But you also may want to check your bank and credit card statements for bills you pay less frequently (annual subscriptions, quarterly membership fees, tax bills, etc.), and anything that’s on autopay.

For each bill, consider including: the vendor/service provider/lender, the account number, contact information, the bill’s due date, the date you think you should send/make the payment so it’s always on time.

For loan/credit card bills, you may want to also include the balance owed, and the minimum monthly payment.

You can use this list to make decisions about which bills you might want to set up by automating your finances and which you’ll pay manually.

And once it’s done, you can keep a copy on your bulletin board and/or in your files to use as a checklist.

Recommended: How to Pay Bills When You’ve Lost Your Job

3. Using Automatic Payments When Appropriate

Looking for other ideas on how to organize bills? There are two basic automatic bill payment options.

•   One is setting up automatic debit payments with a merchant or service, which involves giving them your checking account or debit card number and authorizing them to withdraw money on a recurring basis to pay a bill.

•   Another way is to authorize your bank or credit union’s bill pay service to send recurring payments to a company.

Either way you set it up, there are both pros and cons to using automatic payments, or autopay.

Here are the pros:

•   Autopay can help simplify your finances, since you don’t have to write out checks or log on to various websites to pay online every month.

•   It also ensures that it happens. The money is whisked out of your account before you have a chance to think about it or forget to think about it. Automating this process can help you save on interest and fees.

Here are the cons, because that out-of-sight-out-of-mind factor has a downside.

•   Autopay can make it easier to forget that you’re still paying for a subscription service you don’t use anymore, for example, or you might not notice when a bill’s amount is incorrect.

•   If you don’t have enough money in your account when an autopay bill goes through, you could end up overdrafting your account, which can lead to overdraft or NSF fees.

If you generally have plenty of money in your account and you regularly check your bank and credit card statements to make sure the charges are accurate, autopay might be a good fit.

But if your account balance fluctuates, or you’re likely to forget about small or infrequent charges if they’re paid automatically, you may want to use a different payment method (or at least for certain bills).

One other point: If many of your bills hit on the same day of the month, you might talk to some of your payees about whether you can change your bill due date. That could help you spread out payments over the month is a way that eases your financial pressure.

4. Putting a Bill Paying System in Place

Once you’ve decided which (if any) bills you’ll manage with automatic payments, you can move on to choosing a strategy for paying all your other bills, as well as keeping track of autopayments.

You can go as full-on techie as you like, or handle it with classic pencil and paper. The key is simply having a system.

Some options to think about:

Paying Bills Right Away

There’s no reason you have to wait for a specific day of the week or month to pay your bills. With this method, you would just open and pay bills as they arrive in the mail or online.

Setting up Reminders

Another option is to set up reminders for when you need to pay each bill.
You can write the due dates down in a traditional planner/datebook or use a digital calendar that will send you email reminders or text alerts.

There are also bill reminder phone apps that will alert you when a bill needs to get paid.

In addition, some companies and service providers allow you to sign up for bill reminder emails or texts.

Paying Bills on a Specific Day

If you don’t want to (or can’t always) sit down immediately to write a check or get online to pay, you could make it a weekly, biweekly or monthly routine.

With this method, you would file any bills that arrive in a “to pay” folder or in-box. You might also consider opening them and organizing them by the due date.

If the due dates are all over the place or difficult to manage, you may be able to get the dates adjusted simply by calling or emailing the company or service provider. (For example, you could try to time bigger bills so they’re due just after your paydays.)

On whatever day you designate for paying bills, you may want to set aside 30 minutes to an hour to go through your folder or stack of bills, as well as open any bills that came by email.

It’s also a good idea to go through autopay notices to make sure you agree with the amounts charged.

Choosing the Best Way to Pay Manually

Many service providers and lenders offer customers several different methods for paying their bills.

Besides autopay, you might be able to use an app, a website, an automated phone system, deliver a payment in person, or send it in the mail.

No matter which option you choose, try to remember to always keep some sort of record of the payment in your files.

5. Keeping Good Records

In addition to checking off each paid bill on your master list, you may also want to create a system for managing your records after you’ve made your payments.

One option is to file paper copies of all your bills, noting on each how much you paid, when you paid, and how you paid (including any confirmation numbers for online or phone payments or check numbers for payments you mailed).

You might file these all together in a folder labeled for that month, or create separate folders for each account, with the most recently paid bill filed on top.

If any of these bills are needed for tax purposes, you may want to make a copy and file it with your yearly tax documents.

Another option is to scan each bill and file them digitally on your computer’s hard drive or in the cloud, using a folder for the year that has subfolders for each month.

You may also want to create a real or digital file with all your credit and debit card receipts until you have a chance to reconcile them with your statements. (It’s a good idea to hold onto any receipt, bill, or statement until you’re absolutely sure you won’t need it for taxes or some other purpose, such as an insurance claim.)

6. Designating a Family Bookkeeper

Here’s another way to go about organizing your bills. If one spouse or partner has a knack for organization and bookkeeping and the other is less inclined, you might want to have the “numbers” person take the lead on the household’s bill-paying duties. (Have you ever missed a payment because you each thought the other would take care of it?)

Another option is to sit down together to work through the bills. Or, you might decide to alternate from month to month.

No matter which approach you choose, consider setting up a regular time to sit down together and review the household budget, see how you stand, and make sure you both have access to account information, including passwords.

You also may want to consider setting up a separate account for paying household bills.

7. Using Budgeting Tools/Apps

Technology can step in and help you manage your bills, too. There are an array of ways to track your spending and paying. Your financial institution may offer digital tools for this, or you can download apps for this purpose, whether free or paid options.

You’ll likely find a variety of methods, from spreadsheets to virtual pen and paper or envelopes. You might want to experiment with a few and see which suits you best.

8. Using the Cash Envelope Method

There are a variety of budget techniques you might use. One popular one is the envelope method, which involves setting key budget categories, writing the name of each on an envelope, and putting the designated amount of cash for the month ahead into it.

Then you pay the bills from the appropriate envelope as needed. Once the money from an envelope is gone, it’s gone. You either have to forego spending in that category or else borrow from another envelope.

For those who prefer not to use cash, this program can be adapted to involve debit card payments or checks.

The Takeaway

Setting up a simple bill organization system can save you time, stress, as well as money, and can also make it easy to access records you need come tax time.

Smart ways to organize your bills include creating a master list of all your monthly bills, deciding when autopay makes sense (and when it might not), and creating a virtual or actual filing system to track and streamline the bill paying process.

The best way to manage your bills is with a system that makes sense for you. And you might have to try a few different methods to figure out what works best for your situation.

Another move that might help you get your finances organized is signing up for a Checking and Savings account with SoFi.

SoFi Checking and Savings lets you spend and save in one convenient place, and offers a feature called Vaults. With SoFi Vaults, you can easily separate your spending from your savings while still helping your money grow.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall. Enjoy up to 4.60% APY on SoFi Checking and Savings.

FAQ

What bills are most important to pay?

While all bills are important to pay, basic living expenses (the things that keep you up and running, such as rent, utilities, and healthcare) and debt (student loan payments, for instance) can be priorities.

How do I organize my monthly expenses?

There are many ways to organize your monthly expenses, depending on your personal preferences and financial style. You might use an app or pencil and paper; you could try the envelope budgeting method or set up autopay. Many people try a couple of techniques before they land on one that suits them best.

How do you simplify bill payments?

Many people find that either using an app or automating their bills makes payment simpler. Your bank might offer a good app, or you can download one. And automating bill payments is something that vendors may set up for you or you can set up with your financial institution.

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SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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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 website .

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If you’re scrolling through home listings and dreaming of a place to call your own, you probably know that mortgage lenders traditionally have wanted to see borrowers put down 20% of a home’s purchase price. But what are the benefits and challenges of a down payment that’s less than 20%? And can you purchase a home with a lot less money down (even nothing) in today’s economy?

Learn the answers to these questions and more here. This insight could help you qualify for a mortgage, and ultimately turn your dream house into a reality.

What is a Down Payment?

A down payment is an initial, upfront cash payment for some portion of the cost of the home you are purchasing. It is usually paid at the closing, with the remainder of the balance on the home paid in the form of a home mortgage loan. What portion of the home’s cost a buyer pays as a down payment can have a big impact on the mortgage loan amount, rate, and terms.

What is the Typical Down Payment on a House?

Conventional wisdom says you should buy a house with a 20% down payment. But the national average down payment on a house is actually less than 20% and it is even possible to buy a home with no money down or considerably less than 20%, as you’ll see below. First-time homebuyers are especially likely to put down less than 20%.

How Much Do I Need to Put Down on a House?

Mortgage programs that will finance your purchase with as little as 3% down can make homeownership possible even for those with smaller nest eggs. Mortgages like these can be either government-backed or offered by commercial lenders. You may also find offers that require 5% or 10% down.

When accessing these loans, it’s typically a requirement that you use the home as a primary residence. You may also encounter minimum credit score requirements to qualify; one in the 500s might qualify you for one program, while a score of 680 or higher could open other opportunities.

Of course, keep in mind that the more you pay upfront toward the cost of your home, the lower your monthly costs will likely be.

Consider Your Budget

The question of how much should you put down on a house is really a subset of a bigger home-buying question: how much house can you afford?

Many house hunters use a popular formula to determine how much to spend. They take their household gross annual income (before taxes) and multiply it by 2.5. They could also use a home affordability calculator to get a more precise estimation.

So, if your household income is $150,000, the maximum purchase price, using this formula, would be $375,000. Note that this isn’t a formula used by a lender; it’s a general rule of thumb.

Household Gross Income (before taxes)	Home Price They Can Afford
$150,000	$375,000

*Based on formula: Gross household income * 2.5

A lender often wants your total housing expense — monthly principal, interest, property taxes, and insurance, plus any homeowners association fee or private mortgage insurance — to be, at most, 28% of your gross monthly income.

So, using the figure of $150,000, that would equal a maximum housing expense of $3,500 per month ($150,000/12 x 28%).

Household Gross Income (before taxes)	Max Housing Expense
$150,000	$3,500 per month

*Based on formula: Gross household income * 28%

Your estimated housing payment will depend on how much of a down payment you make. Let’s say the house you want costs $329,000. If you wanted to put down 20%, you would need $65,800, plus closing costs, to swing the deal. So the first question is whether you have or can get those funds easily enough.

Home Price	Percent Down	Estimated Down Payment
$329,000	20%	$65,800

What if you don’t have that kind of cash for the down payment? If you could afford a smaller down payment plus closing costs and still meet the income requirements, your next step would be to see which lenders offer home loans for less than 20% down.

Understand How Your Down Payment Impacts Your Mortgage Payment

Making a down payment of less than 20% can affect your monthly mortgage costs. Private lenders that provide conventional loans to homebuyers who put down less than 20% almost always require the purchase of private mortgage insurance (PMI).

PMI, which insures the lender, adds a fee to the monthly mortgage payment.

Borrowers usually choose to pay PMI monthly, and it is included in the monthly mortgage payment. Expect to pay about $30 to $70 per month for every $100,000 borrowed, Freddie Mac says.

Once you have accumulated 20% equity in your home, you may be able to get rid of PMI as long as you have a good payment record, the property has held its value, and there are no liens on the property. This applies to borrower-paid mortgage insurance. You can’t cancel lender-paid mortgage insurance because it is built into the loan.

Estimate Your Monthly House Payment

The amount of your down payment also affects how much money you borrow to fund the total cost of a house. Plus, with a lower mortgage amount, you’ll pay back less interest over the life of the loan. Use the calculator below to test different down payment amounts and see how they would change the estimated mortgage payment.

Do I Have to Put 20% Down on a Home?

By now you’ve probably realized that you don’t have to have a 20% deposit on hand in order to buy a home. But what are the minimum down payment requirements? That depends on the type of loan you have. For those who need a boost to enter the ranks of homeownership or have an opportunity to get a dream house before they have saved 20%, lower down-payment options can be invaluable.

Conventional Loans

A conventional, fixed-rate home mortgage loan is accessible with a down payment as low as 3% – 5% for certain homebuyers. These loans typically have a term of 10, 15, 20, or 30 years.

Adjustable-Rate Mortgages (ARMs)

An adjustable-rate mortgage, combined with a down payment of 5% or more, can make homeownership possible for those with more limited savings and incomes, but it is important to plan for future cost increases. How it works: The ARM typically has a lower initial interest rate than a comparable fixed-rate mortgage. After anywhere from 3 to 10 years, the rate “resets” up (or down) based on current market rates, with caps dictating how much the rate can change in any adjustment.

Because borrowers may see their rate rise, they need to be sure they can afford the larger payments that come after the introductory years if they don’t plan to sell their house, pay off the loan, or refinance the loan.

Can You Buy a House With No Money Down?

The truth is, it is possible to become a homeowner with zero or very little money down. If you want to get a mortgage with no money down, a government-backed loan is likely your best bet.

These loans are insured by the federal government, so your lender doesn’t assume the risk of loaning money to someone who might default. They know Uncle Sam is standing behind the loan. These mortgages can be a win-win. They encourage citizens to become homeowners even if they don’t have a down payment, and they make banks more likely to lend under these no-down-payment conditions.

💡 Recommended: How to Buy a House With No Money Down

FHA Loans: 3.5% – 10% Down

Another home loan option is a Federal Housing Administration (FHA) loan. The FHA doesn’t directly make mortgage loans. Instead, certain lenders offer FHA loans that are backed by a government guarantee. Because of this guarantee, lenders will typically offer more flexible guidelines for mortgage approvals, including lower down payments.

In general, if you have a credit score of 500 to 579, the minimum down payment required for FHA loans is 10%. If your credit score is 580 or above, the minimum down payment is 3.5%.

FHA loans require an annual mortgage insurance premium (MIP) and an upfront MIP of 1.75% of the base loan amount. You can estimate the upfront and ongoing MIP with an FHA Mortgage Calculator.

VA Loans: 0% Down

If you’re a military veteran, active service member, or, in some cases, a surviving military spouse, you may qualify for a U.S Department of Veterans Affairs (VA) mortgage loan without any down payment required.

This program was created by the U.S. government in 1944 to help people returning from military service purchase homes.

Monthly mortgage insurance is not required, but some borrowers pay a one-time funding fee. For a first VA-backed purchase or construction loan, the fee is 2.3% of the total loan amount if you put less than 5% down. It’s 1.65% of the loan amount if you put 5% to 10% down.

What is the Minimum Down Payment on a House?

The average down payment falls below 20%, so if you can’t cough up 20%, you’re in good company. Use this handy reference to see which opportunity might be a good fit for your budget and lifestyle.

Mortgage Type	Minimum Down Payment
Conventional fixed-rate loan	3 – 5%
Adjustable-rate mortgage	5%
FHA loan	3.5 – 10%
VA loan	0%

In general, it makes sense to put down as much as you can comfortably afford. The more you put down, the less you’ll be borrowing, which translates into more equity in the house and lower monthly payments.

On the other hand, it doesn’t always make sense to empty the bank in order to put down the largest down payment possible. That’s because you’ll likely have moving expenses, plus you’ll need to pay closing costs, which can vary by purchase price, state in which the property is located, interest rate chosen, lender processing fees, and more.

Furthermore, the home you’re moving into may need cosmetic repairs, or you may want to redecorate, add new landscaping, and so forth. Plus, you’ll probably want to keep an emergency fund to pay for unexpected costs.
If this doesn’t all seem doable, you may want to look for a more affordable house for now and save up for your dream house. Or, if you can wait a while before buying, then you can create a savings plan to build up a down payment.

Tips to Help You Save for a Down Payment

For 47% of recent buyers, their down payment came from savings (a fortunate 22% of first-time buyers used a gift or loan from a friend or relative toward the down payment), according to a 2022 National Association of Realtors® report.

Saving can be difficult, especially for first-time homebuyers. But if you are ready to be a homeowner, now is the time to get serious about saving for a down payment on your first home.

Here are steps to consider taking:

1.    Track your spending, including fixed expenses (rent, utilities, student loan and car payments, and so forth) and variable ones (like dining out, clothes shopping, and hobbies). Add expenses that you pay annually or semiannually, breaking those down into monthly amounts.

2.    Make a budget that helps you to trim unnecessary expenses. (As you do this, you might consider if it makes sense to refinance student loans or consolidate credit card debt into a personal loan.)

3.    Brainstorm ways to boost your income. Asking for a raise may be an option, or you might start a side hustle to bring in additional cash.

4.    Figure out what you can save each month, both for your down payment and to build up how much you should have in your emergency fund.

5.    Set a timetable for your plan.

💡 Recommended: First-Time Homebuyer’s Guide

The Takeaway

If you can manage a down payment but it’s south of 20%, know that you’re in good company. Finding a mortgage with less than 20% down is often doable, though fees usually come along for the ride.

Still, if you’d like to hear the jingle of house keys instead of apartment keys in your pocket, give SoFi Mortgage Loans a look.

SoFi offers a range of mortgage loans with as little as 3% to 5% down. And you can get prequalified with no obligation.

Ready to get started? It’s easy to check your rate.

FAQs

Is 10% down payment on a house enough?

For some buyers, especially first-time buyers, a 10% down payment is adequate to purchase a home. The amount a buyer pays upfront does affect their mortgage amount, rate, and fees.

Do I have to put 20% down on a house?

Many buyers purchase a home without putting down 20% of the cost upfront.

Does the down payment reduce the loan amount?

Yes, the more money you put toward a down payment, the less you need to borrow.

What is the optimal down payment for a house?

The optimal down payment for a house depends on your personal finances, the location where you are buying, and what mortgage programs you qualify for. A mortgage calculator can help you see how different down payment amounts affect a mortgage.

How would a 20% down payment affect a home loan?

Putting down 20% will help you avoid the added expense of private mortgage insurance, and, of course, the less you borrow to fund your purchase, the lower your monthly payments will be.

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SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

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.

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Tail risk is the danger of large investment gains or losses because of sudden and unforeseen events. The term “tail risk” refers to the tails on a bell curve: While the fat middle of the bell curve represents the most probable returns, the tails — both positive and negative — represents the least likely outcomes.

When looking at the bell curve that gives the phenomenon its name, investors sometimes also refer to tail risk as “left-tail risk,” as it refers to the very unlikely and very negative outcomes on the curve.

What Is Tail Risk?

Tail risk is defined by a concept called standard deviation. As a metric, standard deviation shows how widely the price of an asset fluctuates above and below its average. For a volatile stock, the standard deviation will be high, while the standard deviation for a stock with a steady value will be low.

Standard deviation is an important number that investors use to understand how historically volatile a stock is, as well as the level of volatility they can project for it in the future. That projection is based on the underlying assumption that the price changes of a stock will follow the pattern of what’s called normal distribution.

Normal distribution is a statistical term used to describe the probability of an event, and it shapes the bell curve. If you flip a coin 10,000 times, how often will it land on heads or tails? Each time, there is a 50% probability it will land on heads or tails, and the curve describes the likelihood that those 10,000 flips will come out 50/50. The fat middle of the curve says it will be close to 50/50, but there are extremely low probabilities at the low (or skinny) ends of the bell curve that it could be more like 80/20 heads or 80/20 tails.

That approach to probability predicts that a stock selling at a mean price of $45 with a $5 standard deviation is 95% certain to sell between $35 and $55 at the close of that day’s market.

“Tail risk” is used to describe the risk that an investment will fall or rise by more than three standard deviations from its mean price. To continue the example, the hypothetical stock $45 stock has entered the domain of tail risk if, at the end of the trading day, it is priced at $30 or below, or at $60 or above.


💡 Quick Tip: Before opening any investment account, consider what level of risk you are comfortable with. If you’re not sure, start with more conservative investments, and then adjust your portfolio as you learn more.

What are Fat Tail Risks?

Unpredictable events are ironically predictable, and happen in the markets on a regular basis. And those markets, such as the one following the onset of the pandemic in early 2020, exhibit much “fatter” tails. Another period characterized by having an extremely fat tail was the 2008 Financial Crisis.

They’re called “fat tails” because the outcomes that had been on the extremes were suddenly happening, instead of the ones previously considered probable. This condition is also called by the mathematical term leptokurtosis. As a general rule, because they deviate so wildly from the expected norm, fat tail events present great risk as well as great opportunities for investors.

Tail Risk Strategy

Financial models such as Harry Markowitz’s modern portfolio theory (MPT) or the Black-Scholes Merton option pricing model, employ the assumption that the returns of a given asset will remain between the mean and three standard deviations.

The assumptions made in these long-term market projections can help with planning. But they’re not realistic about how investors receive their market returns over the long term. Rather, the bulk of their returns, no matter how diversified their portfolio, are largely the result of positive tail events. The power of tail events over long periods is one reason that experts tell investors to stay in the markets during fat-tail periods of volatility, even if it is stressful at the time.

Why Investors Hedge Tail Risks

Left-tail events also have the potential to have an extremely negative impact on portfolios. That’s why many investors hedge their portfolios against these events — aiming to improve long-term results by reducing risk. But these strategies necessarily come with short-term costs.

Downside Protection

One strategy that’s designed to protect against tail risks involves taking short positions that counterbalance the rest of a portfolio, also known as buying downside protection. For example, if an investor is heavily invested in U.S. equities, they may consider investing in derivatives on the Chicago Board Options Exchange (CBOE) Volatility Index (VIX), which correlates to the inverse of the S&P 500 index. (Using short strategies is also one way to invest during a bear market.)

Another way to hedge by buying downside protection is to purchase out-of-the-money put options. When the assets connected to these put options go down, the put options become more valuable. Granted, buying those options costs money, but it can be a strategy to consider for investors who believe the markets are likely to be volatile for a while.

Tail Risk Parity

Tail risk parity is a way to structure a portfolio based on the expectations that events that have a negative impact on one asset class will likely be a boon to others. This requires looking at each asset class in terms of how it might fare in the event of a particular crisis, and then finding an asset class that would likely do well in that same circumstance, and then keeping them in balance within your portfolio.

Managed Futures Funds

Other investors who want to trim their exposure to tail risks may invest in managed futures funds. These funds buy long and short futures contracts in equity indexes, and can thrive during times of crisis in the markets.

The Takeaway

A tail risk is the risk that an event with a low likelihood of happening will happen. And it’s something that investors need to keep in mind. There are a few different ways to mitigate the impact of tail risk in an investment portfolio, but for long-term investors, it can be helpful to keep in mind that tail risk is responsible for most returns over time.

Tail risk and fat tails may seem like granular investing terms, but they do play a role in the markets, which means that every investor can benefit from learning about them, and how they can affect a portfolio.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

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