Mar
04
2024
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Applying for Economic Hardship Deferment

By | Fresh Out of School, Student Loans, student_loan | No Comments

Managing student loan payments can feel like a part-time job. It can be even more overwhelming if you’re experiencing financial trouble, whether that’s due to a job layoff, caring for a family member, or for another reason.

The good news is there are options available to those going through a rough financial patch, including the Economic Hardship Deferment program. But even then, it can be difficult to navigate all of the information on which deferment program you may be eligible to apply for based on the reason for your hardship and the type of student loans you have. So that’s what we’re going to discuss today.

Economic Hardship Deferment, also known as student loan financial hardship, is a program offered in certain cases on federal student loans for borrowers who are eligible and having an exceedingly difficult time making their student loan payments for financial reasons.

Below, we’ll discuss the Economic Hardship Deferment program and what it means for you and your loans, who qualifies to make a hardship claim for student loans, how to apply for the program, and whether it’s the right path for you. We’ll also cover alternatives to Economic Hardship Deferment.

What Is Economic Hardship Deferment?

Student loan deferment allows you to reduce or pause your student loan payments for a designated period of time. An Economic Hardship Deferment is awarded to those who are facing serious financial trouble, as determined by factors such as monthly income and family size.

Those approved for the program can take up to 36 consecutive months of deferment so long as they still meet the qualifications. All participants (except those in the Peace Corps) need to reapply each year.

An important distinction to understand is whether your loans will qualify for a deferment period where interest will accrue, or one where interest does not accrue. Generally, loans that are subsidized will not accrue interest during deferment, whereas an unsubsidized loan will.

In the event your loan qualifies for deferment but will continue to accrue interest, you’ll usually have two options: Make interest-only payments on the loan, or allow interest charges to rack up.

When you allow interest charges to accumulate on an unsubsidized loan, that interest will be tallied up and added to the balance of the loan at the end of the period. This is a process called “capitalization.”

Not only will you have a new, larger balance to pay off, but any future interest payments will be calculated on top of the new, higher balance, meaning you’re paying interest on top of interest. All else equal, the result is that your monthly payments will likely be even higher than they are now.

Which Loans Qualify for Economic Hardship Deferment?

This is a federal loan program, and not all federal loans qualify. Here are a few examples of loans that may qualify (and check the link below for a full, updated list of eligible loans):

•  National Direct Student Loans (NDSL Loans)

•  Federal Family Education Loans (FEEL Loans)

•  Federal Stafford Loans

•  Federal Perkins Loans

•  Federal Supplemental Loans for Students (SLS Loans)

•  Federal PLUS Loans

•  Federal Consolidation Loans

•  National Defense Student Loans

The Economic Hardship Deferment program is typically available for loans borrowed on or after July 1, 1993.

The Economic Hardship Deferment program is only available for federal student loans, so private loans borrowed through independent financial institutions won’t qualify. However, some private lenders offer their own hardship programs. If your lender offers such a program, they will have their own unique qualifications and application process.

It certainly doesn’t hurt to ask if you are in a difficult financial situation. Remember, lenders don’t want you to default on your loans, and are often willing to work with borrowers to find some sort of solution. With both federal and private loans, never hesitate to call the lender, discuss your situation, and explore options.

Who Qualifies for Economic Hardship Deferment?

To make a hardship claim for student loans, you will have to fill out paperwork and provide documentation proving that you are experiencing financial hardship. Some of the eligibility criteria for an Economic Hardship Deferment will depend on your income, family size, and the poverty income guidelines for your family size in the state where you live (150% of the state poverty level or less). It will also depend on what percentage your student loan payment is of your monthly adjusted gross income.

To qualify for Economic Hardship Deferment, you will need to provide personal information such as your name, Social Security number, and address. You’ll also need to know what type of loan you are requesting economic hardship deferment for.

Here are some examples of what you may need to prove to the loan servicer evaluating your eligibility for deferment:

  1. You’ve already been granted Economic Hardship Deferment on loans made under another federal student loan program.

  2. You’re receiving payments under a federal or state public assistance program during the time in which you request your loan deferment. Examples of such programs include Temporary Assistance for Needy Families (TANF), Supplemental Security Income (SSI), Food Stamps/Supplemental Nutrition Assistance Program (SNAP), or other forms of state assistance.

  3. You are serving as a Peace Corp volunteer.

  4. You work full-time (30 hours per week) and your monthly income does not exceed 150% of the poverty guideline for your family size and state.

Here’s how to tell if you meet this last guideline: First, determine your family size. This includes you, your spouse, any children who receive more than half of their support from you, any unborn children who are to be born during the deferment period, and anyone else living with you for whom you provide at least half of their support.

Next, find your family size on the following table, and compare it to your annual income (divide by 12 to get your average monthly income).

Family Size   Alaska     Hawaii     All Other States  
1 $18,210 $16,770 $14,580
2 $24,640 $22,680 $19,720
3 $31,070 $28,590 $24,860
4 $37,500 $34,500 $30,000
5 $43,930 $40,410 $35,140
6 $50,360 $46,320 $40,280
7 $56,790 $52,230 $45,420
8 $63,220 $58,140 $50,560
Each additional person, add $6,430 $5,910 $5,140

These figures are from 2023 and are subject to change annually.

You are likely to qualify for the student loan financial hardship program as long as you meet one of these prerequisites. If that is the case, and you would like to pursue the option, contact your lender or student loan servicer. Tell them you would like to apply for Economic Hardship Deferment. At this point, they typically ask you a series of questions and have you fill out an Economic Hardship Deferment Request form.

Pros and Cons of Economic Hardship Deferment

Pros

For someone who is in desperate need of reprieve from their student loan payments, the program can be a godsend. You may want to consider taking advantage of this program if the alternative is defaulting on student loans, which can have a long-lasting, detrimental effect on your credit score and history.

If your loans are subsidized, there is no cost to taking an Economic Hardship Deferment.

Periods of deferment are provided to borrowers who need time to find a job, increase their income, or recover from the many myriad of life events that could leave someone in a place of need. There is no shame in this, whatsoever, but it’s a great idea to use the deferment period to work on rebuilding.

Cons

With unsubsidized loans, taking a period of deferment will make the loans in question cost more over time. Even if you make interest payments during your deferment, you aren’t chipping away at the principal, and so all of those payments are essentially a wash. If you don’t make interest payments, the total value of those unpaid interest payments will be slapped on top of the loan balance, increasing your loan balance and the amount you’ll owe in interest, over time.

When the period of deferment ends, your monthly payment will likely be higher than it is now, which may be difficult for someone who is already experiencing financial hardship. Use the program if you need it, but know it can come with some costs in the long term.

It is also extremely difficult to qualify for Economic Hardship Deferment. The program utilizes stringent criteria to determine eligibility with income review using poverty level guidelines as noted above. (For example, a single person working full-time and earning $20,000 per year and living in California who is not already on food stamps or other forms of government assistance would probably not qualify for Economic Hardship Deferment.) This makes the program unavailable to many people who are legitimately having difficulty making their loan payments.

Alternatives to Economic Hardship Deferment

Forbearance

If you do not qualify for Economic Hardship Deferment, an option is to request forbearance. Forbearance is similar to deferment, though interest accrues in all cases, and periods of forbearance generally do not exceed 12 months (and could be shorter). You’ll need to check with your loan servicer to see if you qualify.

Income Driven Repayment Plans

There are four income-driven repayment plans, including the latest SAVE plan, that help make student loan payments more affordable by reducing them to a percentage of your discretionary income. SAVE, for example, caps your payments at 5% to 10% of your income, depending on the types of loans you have. Under other plans, your payments may be capped at anywhere from 10% to 20% of your income.

IDR plans also stretch your repayment timeline out up to 25 years. If you have any debt left over after than, it’s forgiven (though it may be subject to income taxes).

Though your monthly payments will be lower, which provides some immediate relief, you will pay significantly more in interest over time. It is possible to switch to an alternative repayment plan and back again if your financial situation improves.

Public Student Loan Forgiveness (PSLF) Program

With 10 years of on-time payments at a qualifying job (like a government worker, a teacher, a doctor, or nurse at a qualifying facility), it is possible to have student loans forgiven with the PSLF program. If you go this route, you’ll usually want to switch to an income-driven repayment plan.

Student Loan Refinancing

Another option to consider for both your federal and private student loans is student loan refinancing. Refinancing is the process of switching out your loan or multiple loans with one new loan at an (ideally) lower rate of interest.

The lower rate of interest could save you money on interest payments over the life of the loan. Use a student loan refinancing calculator to see how lower interest rates affect your monthly payments.

It’s important to know that if you refinance federal loans with a private lender, you will lose access to federal student loan programs such as Economic Hardship Deferment or PSLF.

With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.

SoFi Student Loan Refinance
If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.


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Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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

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Mar
01
2024
How Does Inflation Affect Retirement?

How Does Inflation Affect Retirement?

By | invest, Investing, Preparing for Retirement | Comments Off on How Does Inflation Affect Retirement?

For retirees on a fixed income, inflation can have a significant influence on their ability to maintain their budget. That’s because as inflation rises over time, that fixed income will lose value.

That could mean that retirees need to scale back their spending or even make drastic changes to ensure that they don’t run out of money. The average rate of inflation was 8% in 2022, the highest inflation rate in 40 years. By January 2024, the inflation rate had dropped to 3.1%.

When it comes to their retirement money, 90% of Americans ages 60 to 65 say inflation is their biggest concern, according to a 2023 survey by Nationwide. However, by planning ahead, it is possible to minimize some of the impact of inflation on your nest egg.

Read on to learn more about inflation and retirement and what you can do to help protect your savings.

What Is Inflation?

Inflation is the rate at which prices of goods and services increase in an economy over a period of time. This can include daily costs of living such as gas for your car, groceries, home expenses, medical care, and transportation. Inflation may occur in specific segments of the economy or across all segments at once.

There are multiple causes for inflation but economists typically recognize that inflation occurs when demand for goods and services exceeds supply. In an expanding economy where more consumers are spending more money, there tends to be higher demand for products or services which can exceed its supply, putting upward pressure on prices.

When inflation increases, the purchasing power of money, or its value, decreases. This means as the price of things in the economy goes up, the number of units of goods or services consumers can buy goes down.

How does inflation affect retirement? When purchasing power declines, the value of your savings and investments goes down. While the dollar amount does not change, the amount of goods or services those dollars can buy falls. In retirement, inflation can be especially harmful, since retirees typically don’t have an income that goes up over time.

Concerns about inflation and retirement may even push back the age at which some people think they can afford to retire.

5 Ways that Could Potentially Minimize the Impact of Inflation on Retirement

While inflation can seem like a challenging or even scary part of retirement, there are several investment opportunities that may help you maintain purchasing power and reduce the risk of inflation.

1. Invest in the Stock Market

Investing in stocks is one way to potentially fight inflation. A diversified portfolio that includes equities may generate long-term returns that are higher than long-term inflation. While past performance does not guarantee future returns, over the past 10 years, the average annualized return for the S&P 500 has been 12.39%. Even when inflation is factored in, investors still have substantial returns when investing in stocks. When adjusted for inflation, the average annualized return over the past 10 years is 9.48%.

However, stocks are risk assets, which means they are sensitive to market volatility. These price swings may not feel comfortable to investors who are in retirement so retirees tend to allocate a smaller portion of their portfolio to stocks to help manage market risk.

How much you may decide to allocate to stocks depends on a number of factors such as your risk tolerance and other sources of income.

2. Use Tax-Advantaged Retirement Vehicles

To maximize the amount of savings you have by the time you reach retirement, start investing as early as you can in young adulthood in retirement accounts such as employer-sponsored 401(k)s or Individual Retirement Accounts (IRA). The more time your money has to grow, the better.

With 401(k)s and traditional IRAs, the money in them grows tax-deferred; you pay income tax on withdrawals in retirement, when you might be in a lower tax bracket than you were during your working years.

Another option is a Roth IRA. With this type of IRA, you pay taxes on the money you contribute, and then you can withdraw it tax-free in retirement.

Recommended: How to Open an IRA

3. Do Not Over-Allocate Long-Term Investments With a Low Rate of Return

Risk averse investors may be tempted to keep their nest egg invested in securities that are not subject to major price swings, or even to keep their money in a savings account. However, theoretically, the lower the risk investors take, the lower the reward may be. When factoring in fees and inflation, ultra-conservative investments may only break even or perhaps lose value over time.

While they offer a guaranteed return, high-yield savings accounts, for example, typically don’t earn enough interest to beat inflation in the long run. Since savings account rates are not higher than inflation rates, the buying power of your savings will continue to decline. That’s particularly important for retirees who are often living off their savings and investments, rather than off of an income that rises with inflation.

Because of this, retirees may want to consider keeping a portion of their investments in the stock market.

💡 Quick Tip: If you’re opening a brokerage account for the first time, consider starting with an amount of money you’re prepared to lose. Investing always includes the risk of loss, and until you’ve gained some experience, it’s probably wise to start small.

4. Make Sure You Understand Inflation-Protected Securities

Treasury inflation-protected securities or TIPS, which are backed by the federal government, are designed to help protect investments against inflation. The principal value of the investment increases when inflation goes up and if there’s deflation, the principal adjusts lower per the Consumer Price Index.

However, for some investors, TIPS may have disadvantages. TIPS typically pay lower interest rates than other government or corporate securities. That generally makes them less than ideal for individuals like retirees who are looking for investment income. Also, unless inflation is quite high, and unless they are held for the long-term, TIPS may not offer much inflation-protection. There are also potential tax consequences to consider when the bonds are sold or reach maturity.

Finally, because they are more sensitive to interest rate fluctuation than other bonds, if an investor sells TIPS before they reach maturity, that individual could potentially lose money depending on the interest rates at the time.

Be sure to carefully weigh all the pros and cons of TIPS to decide if they make sense for your portfolio.

5. Buy Real Estate or Invest in REITs

Retirees may also consider investing in real assets. Real estate is typically an inflation hedge because it holds intrinsic value. During periods of inflation, real estate may not only be able to preserve its value, but it might also increase in value. One of the daily costs impacted by inflation is the cost of housing.

That’s why rental income from real estate historically has kept up with inflation. Investing in real estate investment trusts (REITs), may be another way for retirees to diversify their investment portfolio, reduce volatility, and add to their fixed-income. Just be sure to understand the potential risks involved in these investments.

Inflation Calculator for Retirement

It’s important to factor inflation into your plans as you’re saving for retirement. One way to do that is using a retirement calculator, like this one from the Department of Labor, which accounts for how inflation will impact your purchasing power in the future. That calculator uses a 3% inflation rate for retirement planning, but inflation fluctuates and could be higher or lower in any given year.

The Takeaway

While inflation can have an impact on a retirement portfolio, there are ways to protect the purchasing power of your money over time. Allocating a portion of your portfolio to stocks and other investments aimed at minimizing the impact of inflation may help.

Another way to curb the impact of inflation during retirement is to reduce expenses, which allows the money that you have to go further.

And starting to save for retirement as early as possible could help you accrue the compounded returns necessary to counteract rising prices in the future.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Help grow your nest egg with a SoFi IRA.

FAQ

Is inflation good or bad for retirees?

A small amount of inflation each year is a normal part of the economic cycle. But over time, inflation eats away at the value of the dollar and purchasing power of your nest egg is diminished. This can have a negative effect on a retirement investment portfolio or savings.

How can I protect my retirement savings from inflation?

There are several Investing strategies you can use to protect retirement savings from inflation. These include diversifying your portfolio with inflation hedges including TIPS (treasury inflation-protected securities) and investments that typically provide a high rate of return. It’s important to keep saving for retirement even if you don’t have a 401(k).

Does your pension increase with inflation?

Some pensions have a cost of living adjustment on their monthly payments, so they increase over time. However, this is not the case for all pensions. When inflation increases this can affect your benefits.

Photo credit: iStock/RgStudio

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

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.

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

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Feb
29
2024

Women and Retirement: Insight Into the Gender Divide

By | invest, Life & Career | Comments Off on Women and Retirement: Insight Into the Gender Divide

Retirement is supposed to be a time for enjoying life after decades of work. Yet many women are in a financially precarious situation when it comes to the so-called “golden years.” In a 2023 SoFi survey, 57% of women said they aren’t saving for retirement. Similarly, 50% have no personal retirement savings according to a 2022 Census Bureau Report.

Given that women now outlive men by approximately six years, according to a recent study in JAMA, they need to save for an even longer retirement than their male counterparts. That makes the fact that they have fewer funds earmarked for retirement even more troubling.

Why aren’t women saving for the future? And how can they start financially preparing for retirement? Read on to learn about the retirement gender divide, why it exists, and some possible solutions for overcoming it.

A Look at Retirement Trends for Women and Men

There has long been a disparity in retirement savings for men and women. According to the U.S. Department of Labor, as women get older, their chances of living in poverty increase, a trend that has persisted for at least 50 years, when such data collection started.

Consider the current retirement savings divide between women and men today, as reported by respondents to the SoFi 2023 Ambitions Survey:

Retirement Savings for Women and Men in US

According to the survey of Americans ages 18 to 75, men have a median retirement savings that’s about $40,000 to $60,000 higher than women’s savings. In addition, 11% more women than men aren’t saving for retirement, and likewise 11% more women don’t know how much is in their retirement savings. In fact, 33% of women have less than $5,000 in retirement savings, the survey found.

Men

 Women
Median Retirement Savings $70,001-$80,000 $20,001-$30,000
% Not Saving for Retirement 46% 57%
% Who Don’t Know What Their Retirement Savings Is 45% 56%
*Source: SoFi Ambition Survey, 2023

This savings disparity typically begins early in adult life and accumulates over time. Employment, marriage, and motherhood all play a role.

💡 Quick Tip: Did you know that opening a brokerage account typically doesn’t come with any setup costs? Often, the only requirement to open a brokerage account — aside from providing personal details — is making an initial deposit.

How Marriage and Children Impact Retirement

Women aged 55 to 66 who have been married once tend to have more retirement savings than women who have never been married, or those who have been married two or more times. According to a recent income survey from the U.S. Census Bureau, close to 37% of women married once have no retirement savings, compared to 41% of women married two or more times and 55% who never married.

Women, Marriage and Retirement Savings*
Women Married Once

 Women Married Two or More Times Women Who Never Married
36.7% have no retirement savings 40.9% have no retirement savings 54.5% have no retirement savings
11.8% have $1 to $24,999 11.8% have $1 to $24,999 11.7% have $1 to $24,999
14.9% have $25,000 to $99,999 13.6% have $25,000 to $99,999 13.6% have $25,000 to $99,999
36.6% have $100,000 or more 33.7% have $100,000 or more 20.2% have $100,000 or more
*Source: U.S. Census Bureau, Survey of Income and Program Participation

In a divorce, some couples may be required to split their retirement savings or one may need to transfer some of their retirement funds to the other, which could be one of the reasons why the percentage of those without retirement savings is lower among women married two or more times than those who never married.

Motherhood and Money

When women have children, they often take time off from the workforce and/or may work part-time, which can have an impact on their earnings. According to an analysis by the Pew Research Center, among people 35 to 44, 94% of fathers are active in the workforce while 75% of mothers are.

Motherhood is also a time when the wage gap comes into play. In 2022, mothers 25 to 34 earned 85% of what fathers the same age did, while women without children at home earned 97% of what fathers earned, the Pew analysis found. The less money women make, the less they have to save for retirement.

Earnings for Mothers 25-34

 85% of what fathers earned
Earnings for Women 25-34 Without Children at Home 97% of what fathers earned
*Source: Pew Research Center, 2023

Earning less also affects the Social Security benefits women get in retirement. While men got $1,838 a month on average in Social Security in 2022, women received on average $1,484, according to the Social Security Administration.

Retirement Is a Top Priority for Women and a Bigger Concern

While saving for retirement is the top goal for women, they are also focused on, and perhaps feeling stress about, paying off credit card and student loan debt, according to the SoFi Ambitions Survey.

Overall, women tend to perceive financial goals and success quite differently than men do. Two-thirds of female survey respondents said their marker of success is being able to feed their families. By comparison, one-third of men said their marker of success is being seen as successful, while another one-third say it’s reaching a certain income bracket.

That divergence may help explain why men are far more likely than women to consider investing a top financial goal, which could help them build retirement savings. For women, investing is at the bottom of the list of their financial priorities, perhaps out of necessity.

Women’s Financial Goals vs. Men’s Financial Goals
Women’s Financial Goals

 Men’s Financial Goals
Saving for retirement: 45%
Paying down credit card debt: 41%
Paying down student loans: 39%
Continue Investing: 33% 		Continue Investing: 52%
Saving for retirement: 49%
Paying down credit card debt: 33%
Paying down student loans: 27%
*Source: SoFi Ambition Survey, 2023

Retirement is women’s number-one goal and it’s also one of their greatest worries. One in five female respondents to SoFi’s survey said they may not be able to retire.

Those Who Worry They Won’t Be Able to Retire
Women

 Men
20% 15%
*Source: SoFi Ambition Survey, 2023

That means women are 33% more likely than men to believe that retirement may not happen for them.

Even if they can retire, there is no guarantee women’s savings will cover their expenses. In fact, women are approximately 10% more likely than men to say they are concerned about outliving their assets and having enough savings, according to a report from McKinsey Insights.

Recommended: When Can I Retire?

Why Are Women Facing a Retirement Gap?

In addition to the financial impact of marriage, motherhood, and lower earnings, women also experience some additional barriers to retirement saving.

For instance, a report from the Global Financial Literacy Excellence Center found that women tend to score lower in financial literacy than men do. And women with lower financial literacy are less likely to save and plan for retirement, according to the research.

Women also lack confidence when it comes to investing. Only 33% see themselves as investors, according to a 2022 SoFi Women and Investing Insights analysis, and 71% of their assets are in cash, rather than in investments or a retirement account, where their funds might have the potential to grow.

Minding and Mending the Gap

So how can women and society at large move forward and start closing the retirement gap?

The first step is for everyone, across all genders and ages, to build confidence in their financial skills by learning about money, saving, and investing. Knowledge helps create strength and belief in oneself, and it’s never too early or too late to start learning.

There are numerous good resources on retirement planning, to help individuals determine how much they may need to save for retirement and strategies that could help them get there. They can also sign up for financial classes and courses, and they might even want to consult a financial advisor.

At work, employees can participate in their employer’s 401(k) plan or any other retirement savings plan offered. Because money is automatically deducted from their paychecks and placed in their 401(k) account, saving may be easier to accomplish.

💡 Quick Tip: Did you know that a traditional Individual Retirement Account, or IRA, is a tax-deferred account? That means you don’t pay taxes on the money you put in it (up to an annual limit) or the gains you earn, until you retire and start making withdrawals.

How to Start Saving for Retirement

No matter what your age, the time to kick off your retirement savings is now. Here’s how to begin.

Figure out your retirement budget.

To determine the amount you’ll need for retirement, think about what you want your life after work to look like. Do you want to move to a smaller, less expensive home? Do you hope to travel as much as possible? Having a clear picture of your goals can help you calculate how much you might need.

You can also consider the 4% rule, which suggests withdrawing 4% of your retirement savings each year of retirement so that you don’t outlive your savings. That could give you a ballpark to aim for.

Cut back on current expenses.

Take an honest look at what you’re spending right now on everything from rent or your mortgage to car payments, groceries, clothing, and entertainment. Find things to cut or trim — for example, do you really need three streaming services? — and put that money into your retirement savings instead.

Some savvy belt tightening now could help give you a more financially secure future.

Contribute as much as you can to your 401(k).

If you can max out your 401(k), go for it. You’re allowed (per IRS rules) to contribute up to $23,000 in 2024. If that much isn’t possible, contribute at least enough to get your employer’s matching contribution. That’s essentially “free money” that can help build your retirement savings.

Consider opening an IRA.

If you’ve contributed the max to your workplace retirement plan, a traditional or Roth IRA could help you save even more for retirement. You can contribute up to $7,000 in an IRA for 2024, or $8,000 if you’re 50 or older. IRAs offer certain tax advantages that may help you save money as well by lowering your taxable income the year you contribute (traditional IRA), or allowing you to withdraw your money tax-free in retirement (Roth IRA).

Diversify your portfolio.

Whatever type of retirement account you have, including a brokerage account, diversifying your portfolio — which means investing your money across a variety of different asset classes — may help mitigate (though not eliminate) risk, rather than concentrating your funds all in one area.

Just make sure that the way you allocate your assets matches your retirement goals and your risk tolerance.

The Takeaway

Women are far behind men when it comes to retirement savings, due to a number of factors, including earning lower wages, and motherhood, which can mean time away from work, costing them in lost earnings. There’s also an emotional component involved: Women are less confident about investing overall.

However, building financial strength, and educating themselves about retirement planning is a good way for women to start saving for their future. Cutting expenses and directing that money into savings instead, participating in their workplace retirement plan, and opening an IRA or investment account are some of the ways women can take charge of their finances and help position themselves for a happy and secure retirement.

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).


Invest with as little as $5 with a SoFi Active Investing account.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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.

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

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.

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

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Feb
29
2024
How Does a Margin Account Work?

Margin Account: What It Is and How It Works

By | Growing Wealth, invest, Investing | Comments Off on Margin Account: What It Is and How It Works

Margin accounts give investors the ability to borrow money from a brokerage to make bigger trades or investments than they would have been able to make otherwise. Just as you can borrow money against the equity in your home, you can also borrow money against the value of certain investments in your portfolio.

This is called margin lending, and it happens within a margin account, which is a type of account you can get at a brokerage. Most brokerages offer the option of making a taxable account a margin account. Tax-advantaged retirement accounts, such as traditional IRAs or Roth IRAs, generally are not eligible for margin trading.

What Is a Margin Account?

As mentioned, a margin account is used for margin trading, which involves borrowing money from a brokerage to fund trades or investments.A margin account allows you to borrow from the brokerage to purchase securities that are worth more than the cash you have on hand. In this case, the cash or securities already in your account act as your collateral.

Margin accounts are generally considered to be more appropriate for experienced investors, since trading on margin means taking on additional costs and risks.

When defining a margin account, it helps to understand its counterpart — the cash account. With a cash brokerage account, you can only buy as many investments as you can cover with cash. If you have $10,000 in your account, you can buy $10,000 of stock.

Margin Account Rules and Regulations

When it comes to margin accounts, the Securities and Exchange Commission (SEC), FINRA, and other bodies have set some rules:

•   Minimum margin: There is a minimum margin requirement before you can start trading on margin. FINRA requires that you deposit the lesser of $2,000 or 100% of the purchase price of the stocks you plan to purchase on margin.

•   Initial margin: Your margin buying power has limits — generally you can borrow up to 50% of the cost of the securities you plan to buy. This means, for example, that if you have $10,000 in your margin account, you can effectively purchase up to $20,000 of securities on margin. You would spend $10,000 of your own money and borrow the other 50% from the brokerage. (You can also borrow much less than this.) Your buying power varies, depending on the value of your portfolio on any given day.

•   Maintenance margin: Once you’ve bought investments on margin, regulators require that you keep a specific balance in your margin account. Under FINRA rules, your equity in the account must not fall below 25% of the current market value of the securities in the account. If your equity drops below this level, either because you withdrew money or because your investments have fallen in value, you may get a margin call from your brokerage.

Example of a Margin Account

An example of using a margin account could look like this: Say you have a margin account with $5,000 in cash in it. This allows you to use 50% more in margin, so you actually have $10,000 in purchasing power – you are able to actually make a trade for $10,000 in securities, using $5,000 in margin.

In effect, margin extends your purchasing power as an investor, and you’re not obligated to use it all.

💡 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.

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.

Benefits of a Margin Account

For an experienced investor who enjoys day trading, having a margin account and trading on margin can have some advantages:

•   More purchase power. A margin account allows an investor to buy more investments than they could with cash. That might lead to higher returns, since they’re buying more securities and may be able to diversify their investments in different ways.

•   A safety net. Just as an emergency fund offers access to cash when you need it, so does a margin account. If you need funds but you don’t want to sell investments at their current price point, you can take a margin loan for short-term cash needs.

•   You can leave your losers alone. In another scenario, if you need cash but your investments aren’t doing so well, taking a margin loan allows you to keep your securities where they are instead of selling them right now at a loss.

•   No loan repayment schedule. There is no repayment schedule for a margin loan, so you can repay it at any rate you please, as long as your equity in the account maintains the proper threshold. Monthly interest will accrue, however, and be added to your account.

•   Potentially deductible interest. There may be tax situations in which the interest in a margin loan can be used to offset taxable income. A tax professional will tell you whether this is a move you can consider.

Drawbacks of a Margin Account

Despite the advantages, using a margin account has risks. Here are some things to consider before trading on margin:

•   You could lose substantially. While it’s possible that trading on margin can help realize greater returns if an investment does well, you will also see greater losses if an investment takes a dive. And even if an investment you’ve purchased on margin loses all of its value, you’ll still owe the margin loan back to the brokerage — plus interest.

•   There may be a margin call. If your investments tank, it’s possible that you’ll have to sell securities or deposit additional funds to bring your account back up to the required margin threshold. It’s also possible for a brokerage to sell securities from your account without alerting you.

How to Open a Margin Account

Opening a margin account is as simple as opening a cash account, but you’ll likely need to sign a margin agreement with your brokerage. You may also need to request margin for your account, depending on the brokerage.

But there are some other things to keep in mind.

If you’re a beginner investor, a cash account gives you an opportunity to learn how to trade and invest, and there’s a low level of risk. If you’re a more experienced investor and fully understand the risks of trading on margin, a margin account may offer the opportunity to expand and diversify your investments.

Some financial advisors suggest that clients open margin accounts in case they need cash in a hurry. For instance, if you need money quickly, it takes time to sell investments and for the money to be deposited in your account. If you have a margin account, you can take a margin loan while your securities are being sold. Typically, margin accounts don’t carry any additional fees as long as you aren’t borrowing on margin.

You also need a margin account for short selling. With short selling, you borrow a stock in your brokerage account and sell it for its current price. If the price of the stock falls — which you’re betting will happen — you repurchase shares of the stock and return it to the original owner, pocketing the difference in price.

Like trading on margin, short selling is a strategy for experienced investors and comes with a large amount of risk.

Things to Know About Margin Accounts

Here are a few other things to keep in mind about margin accounts.

Margin Calls

Margin calls are a risk. If the equity in your margin account drops below a certain threshold, you may get an alert from your brokerage, called a margin call. This is meant to spur you to either deposit more money into your account or sell some securities to bolster the equity that’s acting as collateral for your margin loan.

It’s worth noting that if your investment value drops quickly or significantly, you may find that your brokerage has sold some of your securities without notifying you. Commonly, investors are forced by a margin call to sell investments at an inopportune time — such as when the investment is priced at less than you paid for it. This is an inherent risk of trading on margin.

Margin Costs

Investors should also know about relevant margin costs. When you borrow money from the brokerage to buy securities, you are essentially taking out a loan, and the brokerage will charge interest. Margin interest rates are different from company to company, and may be somewhat higher than rates on other kinds of loans.

Consider interest costs when you’re thinking about your margin trading plan. If you use margin for long-term investing, interest costs can affect your returns. And holding investments on margin means the value of your securities must hold steady.

💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.

How to Manage Margin Account Risk

If you decide to open a margin account, there are steps you can take to try to minimize the amount of risk you’re taking by leveraging your trading:

•   Skip the dodgy investments. Trading on margin works if you’re earning more than you’re paying in margin interest. Speculative investments can be a risky portfolio move, since a swift loss in value can result in a margin call.

•   Watch your interest costs. Although there is no formal repayment schedule for a margin loan, you’re still accruing interest and you are responsible for paying it back over time. Regular payments on interest can help you stay on track.

•   Maintain some emergency cash. Having a cushion of cash in your margin account gives you a little wiggle room to keep from facing a margin call.

The Takeaway

A margin account is an account that lets you borrow against the cash or securities you own, to invest in more securities. As with other lending vehicles, margin accounts do charge interest.

While margin accounts do come with risk — including the risk of losing more money than you originally had, plus interest on what you borrowed — they also offer benefits including more purchasing power and a safety net for short-term cash needs. If you’re unsure about using a margin account, it may be worthwhile to discuss it with a financial professional.

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).

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

Is a margin account right for me?

A margin account may be a good tool for a specific investor if they’re comfortable taking on additional risks and investment costs, but also want to extend their purchasing power.

How much money do you need to open a margin account?

Before opening a trading account, investors will need a minimum of $2,000 in their brokerage account, per regulator rules.

Is a margin account taxable?

Any capital gains earned by using a margin account will be subject to capital gains tax, and the ultimate rate will depend on a few factors.

Should a beginner use a margin account?

It may be best for a beginner to stick to a cash account until they learn the ropes in the markets, as using a margin account can incur additional risks and costs.

Who qualifies for a margin account?

Most investors qualify for a margin account, granted they can reach the minimum margin requirements set forth by regulators, such as having $2,000 in their brokerage account.

What’s the difference between a cash account and a margin account?

A cash account only contains an investor’s funds, while a margin account offers investors additional purchasing power by giving them the ability to borrow money from their brokerage to make bigger trades.

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.

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Feb
28
2024

Aiming to Become a Millionaire? These Steps Could Help

By | Financial Independence, Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off on Aiming to Become a Millionaire? These Steps Could Help

Do you find yourself dreaming about what you would do if you were a millionaire? Maybe you fantasize about retiring early and traveling the world. Or perhaps what excites you is the thought of being able to donate to causes you care about.

But, you might be wondering, how to become a millionaire? You may suspect the only way you’ll ever be that rich is if you win the lottery.

Fortunately, the road to wealth isn’t that narrow — there are many ways to become a millionaire. For instance, some individuals retire with over a million dollars in savings because they made good financial decisions.

Others may have started businesses that brought them success, advanced their careers so that they made enough to save seven figures, or made smart investments.

Read on to learn more about how to become a millionaire, and strategies that could help get you there.

Introduction to the Millionaire Mindset and Goals

You may have a certain image of a millionaire in your mind. Maybe it’s a jetsetter or a celebrity. But many millionaires are not born into wealthy families or individuals who suddenly struck it rich. In fact, many millionaires are people who work for a living every day. In general, what tends to set them apart is that they have a millionaire mindset. They are smart and disciplined when it comes to their money. And they stay focused on their financial goals.

Defining What it Means to be a Millionaire

The true definition of a millionaire is someone with a net worth of at least $1 million. That means that their assets, minus any debt, is $1 million or more.

So, if you have $500,000 in savings and investments, plus a house that’s worth at least $500,000, are you a millionaire? Yes, if you own the house outright and don’t have a lot of debt such as car loans, student loans, or credit cards to pay off. But if you still owe money on your house and you’ve got a fair amount of debt to repay, you probably aren’t a millionaire. At least, not yet.

To do the math for your situation, total up your assets. Then subtract your debts from that amount. This will show you how close you are to reaching millionaire status, and possibly give you a sense of what you might have to do to get there.

Following these eight strategies can help when it comes to how to become a millionaire.


💡 Quick Tip: Did you know that opening a brokerage account typically doesn’t come with any setup costs? Often, the only requirement to open a brokerage account — aside from providing personal details — is making an initial deposit.

Step 1: Stay Away From Debt

As we just saw in the example above, one thing that could be holding you back from becoming a millionaire is debt — especially if that debt is “bad debt,” a term often used for high-interest debt. Eliminating your debt is key because it’s difficult to build wealth if you’re paying a significant portion of your income toward interest.

Paying off debt could help free up money to invest and build wealth. One way to repay debt is to use the debt avalanche method. With this technique, you pay off your debts with the highest interest rates first and then focus on debts with the next highest interest rates (while still making minimum payments on all of your debt, of course).

Eliminating debt isn’t just about paying off existing debt, though, it’s also about avoiding the chances of going into debt in the future. Part of a debt payoff strategy could involve spending less so that you don’t need to rely on credit. You can also set a strict budget and pay with cash whenever possible.

In addition, you may want to create an emergency fund by setting aside a certain amount of money every month. That way, if you have a financial setback, you don’t have to go into credit card debt.

Step 2: Invest Early and Consistently

Investing successfully doesn’t happen overnight. It takes time. That’s why you need to start early. There are a few rules to know that could help you improve your chances of becoming a millionaire.

Benefits of Compounding Returns

First, compounding returns can make all the difference. They can help your money grow, as long as the returns are reinvested.

Here’s how they work: Compounding returns depend on how much an investment gains or loses over time, which is known as the rate of return. The longer your money is invested, the more compounding it can do. That’s why some individuals start saving aggressively when they’re young.

Saving $100,000 by the time you’re 30 might not be possible for everyone, but the more you save early on, the greater impact it could have on your net worth.

And here’s the thing: Even if you’re in your 30s, 40s, or 50s now, it’s never too late to start saving. The important thing is that you start, period. And that you keep saving.

There are other investing strategies that could help as you work on how to become a millionaire. For instance, you could reduce the amount you spend on investment fees. High investment fees can have a big impact on your returns, so you might want to look into low-fee investments.

Also, you should make sure that you invest in a way that’s right for you throughout your life. That may mean investing more aggressively when you’re younger and gradually becoming more conservative in your investments as you get older and closer to retirement.

Step 3: Make Saving a Priority

Your savings is the amount of money you have left after paying taxes and spending money.

Many Americans aren’t saving enough to become a millionaire — in October 2023, the average personal savings rate was 3.8%, according to the Bureau of Economic Analysis. You’ll likely need to save more than three times that amount to become a millionaire.

Effective Saving Strategies for Long-term Wealth

To save for your goals, start by investing in your company’s 401(k). Max out your 401(k) if you can. At the very least, invest at least enough to earn the employer match, if there is one. That way your employer is contributing to your savings.

In addition, consider opening a traditional IRA or a Roth IRA and contribute as much as possible — up to the limit set by the IRS. These IRAs are tax-advantaged, so they’ll help with your tax bill, too.

And investigate other savings options as well. For instance, you could open a high-yield savings account rather than a regular savings account for a higher return.

Step 4: Increase Your Income

You can’t join the ranks of millionaires if you’re not bringing in more money than you need for your basic necessities. The more money you make, the more you can save and invest.

Tips for Boosting Earnings and Maximizing Income

Some ways to boost your income include asking for a raise or looking for a new higher-paying job. You could also go back to school to earn an advanced degree that could lead to a position with a higher income. Your current employer might even help you cover the cost; check with your HR department.

Another one of the ways to earn extra money is to take on a side hustle. You could tutor students on evenings or weekends, do freelance writing, or dog sit. And those are just some of the options to consider.

Step 5: Cut Unnecessary Expenses

Getting control of your spending is critical to building wealth. That doesn’t mean you have to cut back on everything that gives you pleasure, but you could consider the happiness return on investment you get from the money that you spend. How big of an apartment or home do you truly need to be content? What kind of car do you need? Do you have to buy lunch out every day or could you bring your own lunch from home?

Identifying and Eliminating Non-Essential Spending

You could find ways to cut back on the things that don’t matter so much, but not skimping to the point that you miss out on things you love. For example, maybe you need your gym sessions (and there are plenty of low-cost gyms out there), but you can do without a $5 latte every morning.

Also, you could focus on cutting back on big expenses instead of those that won’t have a huge impact on your budget. For example, dining out only once a month, adjusting your thermostat higher or lower depending on the season, or finding a less expensive, smaller home could help you save a significant amount of money over time.


💡 Quick Tip: Distributing your money across a range of assets — also known as diversification — can be beneficial for long-term investors. When you put your eggs in many baskets, it may be beneficial if a single asset class goes down.

Step 6: Keep Your Financial Goals in Focus

To become a millionaire, you’ll need to stay laser-focused on your financial goals. When everyone else around you is spending money, going on fancy vacations, and buying expensive cars, remind yourself what’s truly important to you. Keep your spending in check, continue to save and invest, and avoid taking on debt.

It takes discipline. But instead of thinking about the stuff you don’t have, appreciate all the good things in your life, like your family and friends. Remember that you’re saving for your future. You’ll be able to enjoy yourself then if you have the money you need to live comfortably and happily.

Think of it this way: You’re making yourself and your financial security the priority. Make that your mantra.

Step 7: Consult with Investment Professionals

Investing can be complicated because there are so many options to choose from. If you need help figuring out what investments are right for you, consider working with a qualified financial advisor.

Leveraging Advice for Wealth Building

A good financial advisor could help you select the right investments and the best investing strategies for your situation. They can also help you plan and budget to reach your goals. But be sure to be an active participant in the process. Ask questions, be involved. Why are they suggesting a specific investment? And if you don’t feel comfortable with something, say so.

Finally, be sure to check your investment performance regularly. Know what you are investing in, how much, and why.

Recommended: How to Find the Best Investment Advisor For You

Step 8: Repeat and Refine Your Financial Plan

The final step to becoming a millionaire is to stay committed to your goal and your plan. Keep saving and investing your money. Stay out of debt. Let time and the power of compounding returns kick in. Be patient.

But also, don’t be afraid to refine or change your plan if need be. For instance, as you get closer to retirement, you will likely want to choose safer, less aggressive investments. You can keep saving and growing money throughout different ages and stages, but your method for doing so can evolve to make sense for where you are in your life.

Additional Tips for Wealth Building

In addition to all of the strategies above, there are a few other techniques that may help you reach millionaire status.

Lifestyle Considerations and Spending Habits

As you work your way up the ladder and earn more money throughout your career, you may be tempted to increase your lifestyle spending, too. After all, you have more money now, so you may feel the urge to spend it.

But here’s the thing: Giving in to these temptations can be a slippery slope. It might start with a bigger house in a nice neighborhood, and then grow to taking extravagant vacations and driving a luxury car. Before you know it, you could be spending way more than you’re saving.

Try to avoid lifestyle splurging if you want to be a millionaire. Instead, take the extra money and save and invest it. That way, you’ll be able to reach your goal even faster.

The Takeaway

Becoming a millionaire is possible if you take the right approach. It involves saving and investing your money, spending wisely, and avoiding debt. You need to be disciplined and focused, and it won’t always be easy. But staying committed to your goals can reward you with financial security and success.

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).


Invest with as little as $5 with a SoFi Active Investing account.

Photo credit: iStock/pixelfit

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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.

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.

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

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