How to Prepare Your Finances for a Recession

How to Prepare Your Finances for a Recession

Recession warnings are everywhere. With interest rates rising, inflation hitting the highest levels in 40 years, and stocks plunging into bear market territory, most people are more than a little worried. Let’s face it, many of us are feeling the pain of the current economy every time we fill the tank, stock the fridge, or check our 401(k) balance.

But the reality is that, whether or not they fit the technical definition of a recession, these types of downturns are a normal (albeit painful) reality of economic cycles. When they happen, one of the most productive responses is to turn worry into action. Building a fortress around your finances can protect against tough times and put you in a better position when the economy bounces back.

So exactly what to do in a recession? These five steps can help you prepare for any type of economic slowdown, now and in the future.

💡 Recommended: What is a Recession and Why Do They Happen?

How to Prepare Yourself For a Recession

Step 1: Cut Expenses

Dramatic price increases across the board have already forced many consumers to cut back on their budget for basic living expenses such as groceries and travel. Now is also a good time to review bank and credit card statements to find other cost-cutting opportunities.

Maybe those streaming services that were a lifeline during COVID aren’t necessary any more. Or, it might make sense to put off some of those home improvements you were considering, keeping the equity in your home intact should you need it during the slowdown.

Revamping your budget can help you handle today’s higher prices and also help free up a few dollars for steps 2 and 3 below.

Step 2: Boost Emergency Savings

Hard as it may be to find extra cash right now, it’s important to make sure you are putting something aside for unexpected expenses. Don’t feel overwhelmed by the advice saying you should aim for three to six months’ worth of living expenses. Saving that much right now may sound more discouraging than helpful, especially for people who saw their emergency funds dwindle during the pandemic. Keep in mind, anything you can save (even $25 a month) is good, and even small weekly deposits add up over time. Whatever you can afford, know that it’s worthwhile to prioritize emergency funds.

With emergency savings, you may get to take advantage of one of the few benefits of rising interest rates. Savings accounts may begin to pay more interest soon. What kind of savings account should you get? You might look for high-interest accounts offered by online banks as they often pay more than bricks-and-mortar financial institutions. Your goal, of course, is to get the best rate. If you are employed full time, check with your benefits department to see if any emergency savings programs are available through your work. Having some cash in the bank can be a key step when you are wondering how to handle a recession. It can be a hugely helpful safety net.

💡 Recommended: Different Types of Savings Accounts

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Step 3: Pay Down Debt

Here’s the bad news about higher interest rates. The national average credit card rate rose above 17% for the first time in more than two years, according to a recent weekly rate report . The jump happened after the Federal Reserve increased interest rates. More rate hikes are expected throughout the year.

Check rates on all of your credit cards and other debts. Any variable rates may have already gone up. Next step? Pay as much as you can on your highest interest rate balances first to whittle down that debt; it’s the kind that can unfortunately snowball during tough economic times.

You might also look into balance transfer credit card offers. They can offer a period of no or low interest, during which you can pay down that debt. Another option is finding out how debt consolidation programs work.

Review Any Student Debt

The current economic turmoil hits just as federal student loan repayments are set to begin again in September, after a more than two-year reprieve during the COVID-19 pandemic. Another extension is expected (and hoped for by many) but has not been announced. Nonetheless, payments are likely to start again sometime.

If you’ve taken advantage of the pause, this is the time to get ready for repayment, whenever it comes. Contact the servicers of your federal student loans to make sure you know the monthly payment due date and other details that you may have forgotten or that may have changed during the pause.

If you’re worried about affording repayments, look into alternatives. Forbearance, for example, allows a qualified borrower to suspend federal student debt payments for a period of time, although interest continues to accrue. Government-sponsored income-driven repayment programs are another option. They cap monthly loan payments at a percentage of what is defined as discretionary income. Still other borrowers may find refinancing student loans through a private lender can be an affordable option. It can be worthwhile to do the research to find out what exactly your options are to stay current on your loans.

Step 4: Stay on Your Investment Course

When it comes to your long-term investments such as 401(k)s and other retirement accounts, the key to surviving a down market is simple: Hold tight. Nothing good is likely to happen when you sell in a panic. Not only do you risk selling at a loss, but you’ll miss out when the market rebounds, as it inevitably does.

Take a look at the most recent downturn. The Standard & Poor’s stock market index plunged almost 31% in March 2020 when Covid first hit. Then the index almost doubled just a year later. Investors who sold in a panic didn’t see any of those record-breaking returns.

If rising expenses are making it impossible for you to keep up with 401(k) contributions, you may want to try to deposit the minimum necessary to get any matching funds your employer offers. That’s free money, and you don’t want to miss out.

Also try to avoid making any withdrawals from your retirement accounts. In most cases, if you’re younger than 59 ½, you’ll pay a 10% penalty plus taxes. Even more important, a chunk of your money won’t be there to see the growth in your long-term savings account when the market rebounds.

Step 5: Recession-proof Your Career

Most recessions include high unemployment and mass layoffs. This slowdown is a little different. So far, the unusually strong labor market has protected the U.S. from rising unemployment, contributing to the one bright spot in the U.S. economy. Wages have also increased, but generally not enough to offset the current record inflation.

Economists warn the strong employment market may not last. That’s something to be ready for, especially if you work in an industry that typically suffers downturns in a recession. And employees who may be counting on finding a higher-paying position in this strong job market may find their window for doing so is closing. What’s more, in a worst case scenario, some people could find themselves figuring out how to apply for unemployment.

Reducing debt and building emergency savings, as mentioned above, are two important steps you can take to prepare for the financial shock of a layoff. In addition, this is a good time to work to recession-proof your career: Update your resume, boost your network, and get the extra education, skills or training you may need to protect your livelihood.

💡 Check out our Recession Survival Guide to learn more about living through a recession.

The Takeaway

Economic downturns are never pleasant and often painful. But with some thoughtful planning and the steps outlined above, you can protect your finances and better position yourself when the economy bounces back.

Better banking at SoFi can help. When you open an online bank account with direct deposit, your money can grow faster thanks to competitive rates and no account fees.

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.


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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.


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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Beginners Guide to Index Fund Investing

A Beginners Guide to Index Fund Investing

Index investing is a passive investment strategy in which, typically, you buy and hold assets for the long term. As such, index investing has become a popular addition to retirement vehicles, like 401(k)s and 403(b)s. With index investing, instead of purchasing individual stocks, you buy an index — an exchanged traded fund (ETF), or a mutual fund that represents a particular market sector (technology, for instance) or a broad benchmark, like the S&P 500 index.

Index investing seeks to replicate the performance of the sector or benchmark it follows. Because this product is already composed of the companies or sectors whose performance it aims to mimic, once you purchase an index fund, there’s not much trading going on; it’s already set up to perform in line with its index. As such, it’s considered passive investing — a buy-and-hold play.

On the other hand, an actively managed fund is guided by a professional portfolio manager (PM), who makes decisions based on their experience and knowledge. Rather than wishing to generate returns in line with a sector or benchmark, actively managed funds seek to beat the market. They appeal to those who want to make a profit in the near term by outperforming the market. In an effort to do so, PMs watch their funds’ underlying assets carefully and may adjust their holdings aggressively, or as needed to beat the market.

We’ll come back to active versus passive investing later.

There are many ways to approach investing. Some require a significant amount of time and involvement, while others need less effort on your part. It’s important to be aware of your objectives and tolerance for risk, so you can choose which types of investments fit with your goals and are in line with your temperament.

In this article, we discuss the nature of index investing, its potential advantages and disadvantages, and how best to use this strategy.

What Are Index Funds?

An index fund is a type of mutual fund or exchange traded fund (ETF) that tries to track the performance of a specific broad sector of the market — like technology — or a market index — like the Standard and Poor’s (S&P) 500. The idea is to try to replicate the chosen benchmark’s performance as closely as possible. Because index funds seek to replicate an index as closely as possible without trying to change it, you may hear people refer to indexing as being passive.

There are index funds for the U.S. bond market, the U.S. stock market, international markets, and others. Index investing is the process of investing in these index funds.

How Do Index Funds Work?

An index fund is a mutual fund or ETF that aims to mimic the overall performance of a particular market. The fund includes multiple stocks or bonds and is bought and sold like it’s a single investment. Index funds follow a benchmark index, such as the S&P 500 or the Nasdaq 100.

When you put money in an index fund, that cash is invested in all the companies that make up the particular index, which adds more diversity to your portfolio than if you were buying individual stocks. The S&P 500 is one of the major indexes that tracks the performance of the 500 largest companies in the U.S. Investing in an S&P 500 fund means that your investments are tied to the performance of a wide range of companies.

Because the goal of index funds is to mirror the same holdings of whatever index they track, they are naturally diversified and thus generally have a lower risk profile than do individual stocks. Market indexes tend to have a good track record, too. Though the S&P 500 certainly fluctuates, historically, it has historically generated an approximate 10.5% average annual return for investors; from its inception in 1957 through 2021. Just remember that — as with all investments — future returns are not guaranteed.

Index Investing vs Active Investing

Active investing typically involves in-depth research into each stock purchase, as well as regularly watching the market in order to time buys and sells. Passive investing strategies either aim to bring in passive income or to grow a portfolio over time without as much day-to-day involvement. Index investing is a passive strategy which looks to match the returns of the market it seeks to track.

Index investing is a form of passive investing. Index investors don’t need to actively manage the stocks and bonds investment as closely since the fund is simply copying a particular index. This is why index funds are known as passive investing — and it’s what sets them apart from mutual funds.

Mutual funds are actively managed by portfolio managers who choose your investments. The goal with mutual funds is to beat the market, while the goal with index funds is to match the market’s performance. Because index funds don’t require daily human management, they have lower management costs (called expense ratios) than mutual funds. The money saved in fees by investing in an index fund instead of a mutual fund can save you lots of money in the long term and help you to make more money.

A common strategy for many investors who have a long investment horizon is to regularly invest money into an S&P 500 index fund and watch their money grow over time.

Growth of Index Investing

Index investing started in the 1970s, when economist Paul Samuelson claimed that stockpilers should go out of business. Samuelson believed that even the best PMs could not usually outperform the market average. Instead of working with portfolio managers, Samuelson suggested that someone should create a fund that simply tracked the stocks in the S&P 500.

Two years later, struggling firm Vanguard did just that. The fund was not widely accepted, and neither was the concept of index funds. Index investing has only become widely popular in the past two decades as data continues to reaffirm its merits.

Index investing has been gaining in popularity in recent years. Since 2010, actively managed funds have dropped from comprising 75% of all mutual fund assets to just 51%, as passively managed funds have grown to 49%. It’s reached the point where some industry observers may believe that the craze for passively managed index funds could even be dampening capitalism’s greatest innovation driver: competition.

Popular Indexes Include

•   S&P 500 Index

•   Dow Jones Industrial Average

•   Russell 2000 Index

•   Wilshire 5000 Total Market Index

•   Bloomberg Barclays Aggregate Bond Index

Popular Index Funds Include

•   Vanguard S&P 500 (VOO)

•   T. Rowe Price Equity Index 500 (PREIX)

•   Fidelity ZERO Large Cap Index Fund (FNILX)

•   Standard and Poor’s Depository Receipt (SPDR) S&P 500 ETF Trust (SPY)

•   iShares Core S&P 500 ETF (IVV)

•   Schwab S&P 500 Index Fund (SWPPX)

Potential Advantages of Index Investing

The popularity of index investing is well-founded, as it has a number of benefits.

Can Be Easier to Manage

It might seem as though active investors would have a better chance at seeing significant portfolio growth than index investors, but this isn’t necessarily the reality. Day trading and timing the market can be extremely difficult, and may result in huge losses or underperformance. Active investors might have one very successful year, but the same strategy may not work for them over time.

Some individual investors who are not professionals just don’t have the time to learn the ins and outs of financial markets, let alone stock picking. Further, taking a hands-off approach to investing could eliminate many of the biases and uncertainties that arise in a stock-picking strategy.

Empirical research consistently demonstrates that index investing tends to outperform active management over the long term. Boston financial services market research firm, Dalbar, Inc., confirms that the average investor consistently earns below-average returns. For instance, for the 12-months ended Dec. 31, 2021, the S&P 500 posted a market return of 28.71%, while the average equity fund investor returned 18.39%.

SoFi users can take advantage of index investing by setting up an automated investing strategy to rebalance and diversify portfolios.

Lower Cost of Entry for Multiple Stocks

If you only have a small amount of money to start investing, and you choose to invest in individual stocks, you may only be able to invest in a few companies. With index investing, you gain access to a wide portfolio of stocks with the same amount of money.

Also, index investing doesn’t necessarily require a wealth manager or advisor — you can do it on your own. The taxes and fees tend to be lower for index investing because you make fewer trades, but this is not always the case. Always be sure to look into additional fees and costs before you make an investment.

Portfolio Diversification

One of the key tenets of smart investing is diversifying your portfolio. This means that rather than putting all of your money into a single investment, you divide it up into different investments. By diversifying, you may lower your risk because if one of your investments loses value, you still have others. At the same time, if an investment significantly goes up in value, you still typically benefit.

Index funds give you access to numerous stocks all within a single investment. For example, one share of an index fund based on the S&P 500 can give you exposure to as many as 500 different companies for a relatively small amount of money.

Index Investing Is Fairly Passive

Once you decide which index fund you plan to invest in and how much you will invest, there isn’t much more you need to do. Most index funds are also fairly liquid, meaning you can buy and sell them relatively easily when you choose to.

Potential Disadvantages of Index Investing

Although there can be upsides to investing in index funds, there can also be downsides and risks to be aware of.

Index Funds Follow the Market

Index funds track with the market they follow, whether that’s the U.S. stock market or another market. So, if the market drops, so does the index fund that’s trying to replicate that market’s performance.

Index Funds Don’t Directly Follow Indexes

Although index funds generally follow the trends of the market they track, the way they’re structured means that they don’t always directly track with the index. Because index funds don’t always contain every company that’s in a particular index, this means that when an index goes up or down in value, the index fund doesn’t necessarily act in exactly the same way. This is why it’s important to understand how specific index funds seek to track their underlying index.

Index Investing Is Best as a Long-Term Strategy

Because index funds mostly track the market, they do tend to grow in value over time, but they are certainly not get-rich-quick schemes. Returns can be inconsistent and typically go through upward and downward cycles.

Some investors make the mistake of trying to time the market, meaning they try to buy high and sell low. Investing in index funds tends to work the best when you hold your money in the funds for a longer period of time; or if you engage in as in dollar-cost-averaging. Dollar-cost-averaging is a method of investing the same amount consistently over time to take advantage of both high and low points in market prices.

Choosing an Index to Invest in

The name of a particular index fund may catch your eye, but it’s essential to look at what’s inside an index fund before investing in it. Determine what your short- and long-term goals are and what markets you are interested in being a part of before you begin investing.

There are both traditional funds and niche funds to choose from. Traditional funds follow a larger market, such as the S&P 500 or Russell 3000. Niche markets are more focused and may contain fewer stocks.

They may focus on a particular industry. Typically, a good way to start investing in index funds is to add one or more of the traditional funds first, then add niche funds if you feel strongly about their growth potential.

Index Funds Are Weighted

Depending on which index fund you invest in, it may be weighted. For example, the S&P 500 index is weighted based on market capitalization, meaning larger companies like Amazon and Meta (formerly Facebook) hold more weight than smaller ones.

If Meta’s stock suddenly goes down, it may be enough to affect the entire index. Other indexes are price weighted, which means that companies with a higher price per share will be weighted more heavily in the index. Another form of index weighting could be equal-weight or weights determined by other factors, such as a company’s earnings growth.

Less Flexibility

If you actively invest in individual stocks, you can usually choose exactly how many shares you want to buy in each company. But when you invest in index funds, you have less flexibility. If you’re interested in investing in a particular industry, there may not be an index fund focused solely on that.

How to Get Started With Index Investing

To invest in an index, investors typically purchase exchange traded funds that seek to track an index. Some funds include all the assets in an index, while others only include certain assets.

Prior to investing in any index fund, be sure to look into the details of how the fund works. You can find information about what is contained in the fund, how it is weighted, its fees and quarterly earnings, and other details on the fund’s website. You also can get that data via a financial advisor, or from the Electronic Data Gathering, Analysis, and Retrieval system (EDGAR) , which the U.S. Securities and Exchange Commission (SEC) oversees.

Alternatives to Index Investing

Despite the fact that index investing has grown in popularity over the past two decades, some analysts are now bringing up additional downsides and alternatives that investors may want to consider.

The stock market includes companies from many industries, some of which investors are moving away from investing in. Oil and gas companies, pesticide companies, and others — which some people could consider harmful to the environment or human populations — may be included in an index fund. As the economy moves away from these industries, these types of companies may not perform as well, and as an investor you may not want to support them financially.

Some new index funds are being formed around the principles of sustainability and positive social impact. You may also be interested in impact investing and other types of ETFs and mutual funds that focus on specific industries that affect society positively.

Building Your Portfolio

Whether you’re interested in investing in index funds or in hand-selecting each stock, it’s important to keep track of your portfolio and current market trends.

Once you know what your investment goals are, the SoFi Invest online investing platform can be a great tool to build your portfolio and track your finances. And, as we discussed above, with SoFi Automated Investing, you can easily add index fund ETFs to your portfolio, all on your phone if you choose. The automated investments are pre-selected for you, so you simply need to decide which funds to invest in, and how much you want to invest. Or, if you prefer to hand-select each stock in your portfolio, you can use the SoFi Active Investing self-directed brokerage platform.

SoFi has a team of credentialed financial advisors available to answer your questions and help you reach your goals. You only need a $1 to get started.

Find out more about how you can use SoFi Invest to meet your financial goals.

FAQ

What happens when you invest in an index?

When you invest in an index, you’re investing in not one stock, but in a collection of stocks (or other asset types, like bonds). The number of assets in an index can range from the tens to the hundreds. And they usually have something in common, be it their capitalization (large or small cap); their sector (tech or healthcare), and so on.

Are indexes safe investments?

Investing in the capital markets always entails a degree of risk; there are no guarantees, and no investment is 100% safe. That said, investing in an index fund can entail less risk than owning a handful of individual company stocks because index funds are diversified. That doesn’t mean you can’t lose money, but an index generally fluctuates a lot less than an individual stock. Index funds are only as stable as their underlying index.

What does index mean in investing?

In investing, the term “index” refers to the basket of assets (stocks, bonds, etc.) that comprise an index fund.


Photo credit: iStock/PixelsEffect

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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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.

Fund Fees
If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.
SoFi Invest may waive all, or part of any of these fees, permanently or for a period of time, at its sole discretion for any reason. Fees are subject to change at any time. The current fee schedule will always be available in your Account Documents section of SoFi Invest.


Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected]. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.


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What Is the 30-Day No-Spend Challenge?

A 30-day no-spend challenge is a set period of time — 30 days, in this case — during which you can only spend money on absolute necessities. Allowed expenses include utility bills, rent, transportation costs, and groceries. Anything that falls outside the necessity bucket is banned for the 30-day duration.

With many people looking to cut back on expenses due to recent price increases, a 30-day no-spend challenge can be a great way to take stock of your spending habits and find ways to use your money more wisely.

How Does the 30-Day No-Spend Challenge Work?

Again, a no-spend challenge is a time period during which you stop spending money on anything other than what you absolutely need to live. To get started, you create a list of items and services you consider essential. When you review the list, ask yourself if all of your so-called essentials really are that important – or are some superfluous or impulsive?

Keep in mind that this challenge is designed to help curb troublesome overspending or more specific bad spending habits. So don’t beat yourself up if you do spend some money on wants versus needs.

Recommended: The 70/20/10 Rule for Budgeting

Allowed Expenses During the 30-Day No-Spend Challenge

During the no-spend challenge, you will still need to pay your rent or mortgage, gas, utility bills, insurance, and things like your internet and phone bills. You can purchase essential personal care items, too, such as medications, groceries, and cleaning products. A budget planner app can help you decide on your “needs” list.

But the lines can get blurry. For instance, what happens if you wear out your shoes and want/need a new pair? After all, walking in bad shoes could lead to injury or avoiding activity. Feel free to give yourself some wiggle room in deciding what’s essential for you.

Forbidden Expenses During the 30-Day No-Spend Challenge

Remember that before you begin the challenge, you’ll be questioning what’s essential and how strict you want to be. It’s smart to decide in advance which of the following will be on your do-not-spend list:

•   Eating out: fast food, restaurants, takeout, alcohol, coffees, etc.

•   Personal care items or services

•   Clothing

•   Gifts

•   Home decor and furnishings

•   Hobbies

•   Entertainment: movies, concerts, books, streaming services

You may determine ahead of time that there will be certain exceptions to these categories. For example, you can decide on “no gifts” except for your mom’s birthday. Or no salon appointments except for a needed haircut.

Recommended: 15 Ways to Save Money on Food

Tips for Completing the 30-Day No-Spend Challenge

Anticipate what will be the most difficult part of the challenge for you, and create strategies for coping. Is your busy social life going to tempt you to break the rules? Or will the siren call of online shopping be your undoing?

Come up with a plan on how you will get past your specific spending challenges. If your social life will be tough to navigate that month, recruit friends to join the challenge and make it a competition. If online shopping is your budget-killer, unsubscribe from retail email lists and delete shopping apps from your phone. The point is to make the challenge as easy on yourself as possible.

Here are a few additional ways to set yourself up for success:

•   Unsubscribe from memberships and apps

•   Set aside time during the week for meal prep, and bring lunch to work

•   Dust off your travel mug and skip the coffee shop

•   When you get an urge to buy something, add it to a post-challenge wish list

•   Print out a 30-day calendar and make a checkmark at the end of each successful day. Visual reinforcement can motivate you to keep going.

10 Free Things to Do Instead of Spending Money

Taking part in a 30-day no-spend challenge doesn’t have to mean isolating yourself at home in an effort to save money. This is a time to get creative and search out free activities. You may find that some free experiences are more fun than what you normally spend money on!

1. Take a Hike

Whether you’re walking a mile or seven, hiking is a great way to spend the day outdoors. You can invite friends or go solo and get in tune with nature.

2. Get Some Exercise

Many great athletes and trainers offer workouts on social media and YouTube. Or download one of the many free apps that feature yoga, strength training, and high-intensity workouts.

3. Set Up a Sports League

Call your friends and organize a weekly game of flag football, basketball, or frisbee. Encourage folks to BYO beverages and snacks so that there’s no need to visit a restaurant or bar after the game.

4. Dine Al Fresco

Get your picnic blanket and paper plates ready, and propose a pot-luck in the park.

5. Host a Movie Night

Dust off that old projector and DVD player, and watch a movie in your backyard. (Don’t forget the mosquito repellent.) If you’re feeling inspired, select a classic film and ask friends to come dressed in the style of that time period.

6. Sand and Surf

Sticking to your challenge budget during summer is simple: Head to the nearest beach. Bring towels, chairs, and umbrellas and set up shop for the day. And of course, pack a cooler full of sandwiches and drinks.

7. Have an At-home Spa Night

You don’t need to spend hundreds at the spa. Set the tone with candles and music.
And use personal care items that you already have to pamper yourself.

8. Check Out a Local Park

Odds are, there’s at least one park near your home that you’ve never visited. If you live near a botanical garden, even better. Also, see if any national or state parks nearby have free visitor days.

9. Visit Art Galleries and Museums

Support local artists by visiting small art galleries, or see if any local museums have free visitor days.

10. Whip Up a Gourmet Meal

Instead of dining out, try recreating your favorite meal yourself. Take your time, experiment, and have fun with it. You can pull up an online recipe or follow along with a cooking show.

The Takeaway

Intended to encourage better spending habits, the 30-day no-spend challenge asks you to limit your purchases for one month to essential items and services only. Utilities and groceries are allowed. Dining out and other “treats” are not. You’ll likely learn a lot about your money habits, and perhaps let go of some “needs” that you really don’t.

Before the challenge, review your monthly spending habits with SoFi. With its budgeting app and debt payoff planner, you can easily examine all your financial accounts and save money for what’s really important to you.

Tracking your money like a champion just got easier with SoFi.

FAQ

What is the no-spend challenge?

A no-spend challenge is a stretch of time – a week, month, or longer – when participants vow not to spend money unnecessarily. Essentials are still allowed, such as bills, transportation, and groceries. Anything that falls outside of your predetermined needs has to wait until the challenge is over.

How do you do a no-spend month challenge?

Don’t spend any money you don’t have to — it can be as simple as that. Before you begin the challenge, ask yourself which items are essential (such as groceries) and how strict you want to be. The goal is not to purchase anything unnecessary.

How do you challenge yourself to not spend money?

Make spending less money a game by trying a 30-day no-spend challenge. Motivate yourself to stick with it by setting up a reward once the challenge is over. And be sure to track how much you save over those 30 days.


Photo credit: iStock/Seiya Tabuchi

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

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.

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Why Did My Credit Score Drop After a Dispute?

Why Did My Credit Score Drop After a Dispute?

Under federal law, you are allowed to dispute information that shows up on your credit report both with the company that reported the information and with the reporting bureau that recorded it. There’s no fee for filing a dispute, and the credit reporting bureaus may make changes based on the information that you provide.

This can be great news if your credit report changes in your favor and your credit score gets a boost. However, it is possible that when information on your reports gets changed, your credit score actually takes a hit.

Here’s a closer look at why your credit score may have dropped after a dispute, plus other common reasons your score might drop.

Can a Dispute Hurt Your Credit Score?

When you dispute your credit report, it’s important to understand that the dispute itself does not cause your credit score to drop. In other words, you aren’t punished for questioning the information on your credit report. That said, the information in the dispute could have a negative impact on your score. For example, if the information in your dispute demonstrates that you have a lower credit limit than previously reported, your credit score could take a hit.

Common Reasons for Credit Scores to Drop

As you manage your credit score and work to build credit, there are a number of reasons your credit score may drop. Here’s what to look out for.

Recommended: What Credit Score is Needed to Buy a Car

Late or Missed Payment

Your payment history — whether you have a track record of paying off your debts on time — is a big part of how your credit score is calculated. In fact, it makes up 35% of your FICO score, which is calculated by the Fair Isaacs Corporation. Your score will likely fall if you make late payments or if you miss payments entirely.

Derogatory Remark on Your Credit Report

A derogatory mark on your credit report is a negative item that indicates you didn’t pay back a debt according to agreed upon terms with your lender. These marks tend to remain on your report for a long time, anywhere from seven to 10 years. Examples include bankruptcies, missed payments, debts in collection, foreclosures, and repossessions.

Change in Credit Utilization Rate

Your credit utilization rate indicates how much of your available credit you are currently using. You can find it by dividing your available credit by your current debt. The higher your utilization rate, the more debt you are carrying in comparison to the amount of credit you have, which may suggest that you’re overextended. Banks might get worried about your ability to pay off your loans. That’s why the amount you owe makes up 30% of your FICO score, and why a higher utilization rate can hurt your score.

Reduced Credit Limit

Your credit limit has an impact on your credit utilization rate. If your limit is reduced, your utilization rate could increase, hurting your credit score. You can lower your utilization rate by paying off some of your debts.

You can also ask one of your credit card companies to raise your credit limit. They’re usually happy to do it as long as your account is in good standing.

Closed Credit Card

The length of your credit history comprises 15% of your FICO score. When you cancel credit cards — when consolidating credit card debt, for example — you may be reducing your credit history. You could also be reducing your credit mix, which makes up 10% of your FICO score.

Recommended: 10 Credit Card Rules You Should Know

Paid off Loan

Similarly, paying off a loan might have a slight negative effect on your credit score because it can reduce your credit history and credit mix. That said, it could also have a positive effect on your record if it reduced your credit utilization rate.

Multiple Lines of Credit Opened or Applied for

New credit accounts make up 10% of your FICO score. Banks worry that when a person opens several lines of credit in a short period of time, they are at greater risk of defaulting on their loans. As a result, new lines of credit can ding your credit score.

Not only that, but simply applying for new credit can hurt your score. When you apply for a credit card or loan, your lender will make what is known as a “hard inquiry” to view your credit report. Lenders may see those seeking new credit as more risky, so hard inquiries can also have a negative effect.

Checking your own credit doesn’t lower your score. A credit check that doesn’t hurt your record is considered a “soft inquiry.”

Mistake on Your Credit Report

Mistakes on your credit report can lead to a lower score. That’s why it’s important that you monitor your credit report regularly and report errors to the credit reporting bureaus as soon as possible. You can request a free credit report from each of the credit reporting bureaus — TransUnion, Equifax, and Experian — once a year.

Identity Theft

Monitoring your credit report is also a good way to catch fraudulent behavior. If you’ve been subject to identity theft, bad actors may have used your personal information to open fraudulent accounts, which could have a negative effect on your credit score. Report these accounts immediately.

Types of Credit Report Errors to Look out for

When reviewing your credit report, look out for the following errors:

•   Personal information errors. Check your name, phone number, address, etc.

•   Accounts that belong to another person with the same name.

•   Fraudulent accounts that you didn’t open.

•   Account status errors. Check for closed accounts that are reported as still open, accounts incorrectly reported as late or delinquent, incorrect payment information, and the same debt listed more than once.

•   Balance and credit limit information that is inaccurate or out of date.

Correcting Errors on Your Credit Report

If you spot a mistake on your credit report, you can file a dispute with the credit reporting bureau. The mistake may be on your credit report with each bureau, so you may need to file a separate dispute with each.

You’ll need to file your dispute in writing and using the credit reporting bureau’s dispute form if they have one. Include documents that support your dispute, and be sure to keep a record of what you send.

Recommended: What is The Difference Between Transunion and Equifax

The Takeaway

Disputing information on your credit report can be an important part of ensuring that your credit score is as accurate as possible. You won’t be penalized for filing a dispute, though in certain circumstances, it is possible that your credit score will drop if information in your dispute has a negative impact on your credit.

To maintain a healthy credit score, carefully keep track of your finances and be sure to always make payments on time. With SoFi, you can get free credit score monitoring, spending breakdowns, and financial insights to help keep you on track.

Monitor all your account balances in one place with SoFi’s money tracker app.

FAQ

Why Did My Credit Score Go Down for No Reason?

Your credit score likely didn’t go down for no reason at all. It’s possible that a creditor reported new information to the credit reporting bureaus that had a negative impact on your credit report. Or there could be a mistake on your credit report. Regularly monitoring your credit report can help you catch errors.

Why Did My Credit Score Drop After Filing a Dispute?

Your credit score may have dropped after you filed a dispute if information in that dispute had a negative impact on your score. You are not penalized for filing the dispute itself.

Does Losing a Dispute Hurt Your Credit?

Losing a dispute does not necessarily hurt your credit, but it may leave it unchanged if the information you were hoping would boost your score is rejected.


Photo credit: iStock/pepifoto

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

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.

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 .

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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What Is the Starting Credit Score?

What Is the Starting Credit Score?

Contrary to logic, a person’s starting credit score doesn’t begin at zero. In fact, no one’s credit score is zero. The lowest credit score is 300, but that doesn’t necessarily mean that’s a person’s starting score. If a person is just starting and has no credit history, they’re more likely to have no score.

So, for a person just beginning their credit journey, what is the starting credit score? Read on to learn the factors that impact this score from the beginning, and the habits to establish to ensure a better credit score.

How Your Credit Score Is Calculated

There’s no standardized starting credit score. That may be partly due to the factors that influence how a score is calculated. What a person’s done in their young credit history will impact their starting score.

The FICO® Score is widely used in the U.S. to help determine a person’s credit score. This FICO company uses the following to calculate its score:

Payment history

Payment history is the most important factor for any credit score, including a starting credit score. Paying on time and avoiding missed payments account for 35% of a person’s credit score. That’s why it’s important to pay everything from credit card bills to rent on time: Even a single late payment can harm a starting credit score.

Credit utilization

The second most important factor in a credit score is credit utilization, which makes up 30% of a person’s score. Credit utilization is the percentage of their available credit a person actually uses. The ideal credit utilization ratio is 30% or under.

Length of credit history

How long someone’s accounts have been open makes up 15% of their credit score. The longer an account has been open, the higher the credit score.

While it’s out of their hands, consumers who are just beginning to establish credit will likely be negatively impacted by this factor, lowering their starting credit score.

Recommended: How to Get a Personal Loan With No Credit History

Credit mix

Making up 10% of a person’s credit score, credit mix refers to the different types of credit a person has. Generally, the two types of credit are:

•   Installment loans. Think car loans, student loans, and mortgages.

•   Revolving credit. Including credit cards and home equity lines of credit (HELOCS).

If an individual can manage different types of credit without late or missed payments, it reflects well on their score.

Recommended: Does Net Worth Include Home Equity

New credit

Opening multiple new accounts at a time? This factor accounts for 10% of a credit score. New credit includes “hard inquiries” as well as opening new accounts.

For a person with a starting credit score, they may have all, none, or some of these factors on their credit history. The mix varies from person to person, making it hard to predict one starting credit score for everyone.

Recommended: Should I Sell My House Now or Wait

What Is a Good First Credit Score?

Unfortunately, a starting credit score won’t be the perfect 850. More likely it’s in the Good (670-739) or Fair credit score (580-669) range.

That’s mostly because of their limited payment history. If a person just opened a credit card or started paying back student loans, the credit bureaus don’t see an established history of timely repayment. Even if the consumer has never missed a payment, payment history is limited.

Similarly, the length of credit history is short, perhaps only a few months, which doesn’t give lenders enough data to judge a consumer as low- or high-risk.

Recommended: What Credit Score is Needed to Buy a Car

Ways to Establish Good Credit

While it can be discouraging that a starting credit score is penalized just for being new, it doesn’t take long to build credit with a few simple habits:

•   Paying bills on time will continue to be important, as payment history is a major factor in a credit score.

•   Keeping accounts open and in good standing, even if they’re no longer used, can help lengthen a person’s history.

•   Adding to the credit mix with a personal loan, credit-builder loan, or other types of credit can boost the credit mix.

•   Paying bills in full can help keep the credit utilization ratio balanced at 30% or below.

•   Not applying for too much at once will avoid the pitfall of too many hard inquiries and new accounts, which can have a negative impact.

While an individual can proactively try to improve their score, a good portion of a credit score comes from paying bills consistently over time.

Establishing good habits, and continuing them, will likely lead to a higher credit score.

Recommended: When Do Credit Card Companies Report to Credit Bureaus?

Why Your Credit Score Is Important

It may be just a three-digit number, but a good credit score is a gateway to better financial opportunities. With a Very Good (740-799) or Exceptional (800-850) credit score, borrowers have better odds of being approved for loans and may even have better repayment terms or more favorable interest rates.

Businesses and lenders may pull your credit history to confirm your qualifications for any of the following:

•   Credit cards

•   Mortgages

•   Rental apartments

•   Job applications

•   Car loans

•   Personal loans

•   Student loans

With a low credit score, or no credit score, getting favorable terms or qualifying for anything above could be challenging.

How to Check Your Credit Score

Checking a credit score isn’t just a good way to track progress. It can also highlight any incorrect or fraudulent activity tied to a person’s name.

Monitoring a credit score is free and easy. Anyone can get their free FICO Score annually from Experian using AnnualCreditReport.com. The site allows visitors three free reports annually, one from each credit bureau.

In addition, credit card companies and lenders often offer free credit score reporting on their portals.

Recommended: What is The Difference Between Transunion and Equifax

The Takeaway

Having a starting credit score doesn’t mean starting from zero – or with a perfect 850. Consumers may start at a Fair to Good level. Working to establish healthy credit habits, such as paying bills on time and in full, will raise their credit score. That’s important because the higher your credit score, the more financial opportunities you will have.

SoFi’s money tracker app helps those starting on their credit journey. With free credit monitoring tools, users can track their credit score in real time, with customized insights to help improve their credit.

Getting your financial goals on track starts with your credit score.

FAQ

What are the FICO credit score ranges?

FICO® credit scores range from 300 to 850.

Can you have a credit score without a credit card?

Yes. Credit scores aren’t based solely on credit cards. The score takes into account student loans, rent, and utility payments.

What are the differences between FICO, Experian, and Equifax?

Experian and Equifax are credit bureaus that create credit scores and compile credit histories. FICO® creates its own credit score. All three companies provide slightly different credit scoring models.


Photo credit: iStock/blackCAT

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

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 .

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.

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

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