Nov
11
2020

Should I Have an Emergency Fund?

By | Budgeting & Goals, Growing Wealth, money | Comments Off on Should I Have an Emergency Fund?

A hospital bill in the thousands. A vet invoice for hundreds. A car repair for more than you make in a month. When faced with an emergency, it can compound the problem to try to figure out how to pay for the unexpected expenses, on top of an already stressful situation.

If you find yourself questioning, “Should I have an emergency fund?” the answer should be a resounding yes, absolutely! But where to begin? Forty percent of Americans say they are unable to afford even a $400 emergency expense.

Conventional wisdom claims you should have enough money saved in an emergency fund to cover at least three to six months of expenses, depending on your personal financial situation.

But with looming student debt, credit card payments, or other big financial burdens, it can be hard to imagine saving while keeping up with all of your bills and expenses. Emergency funds are great for major unexpected expenses, but preparing for the unexpected still takes time and planning.

Beefing up Your Budget

One of the first ways you can start saving up for an emergency fund is to evaluate your current spending habits and create a budget, if you don’t already have one. Take a look at where there is fat to trim, meaning extra expenses you can minimize or eliminate.

Start with a simple spreadsheet, which should help you break down your spending to see your total income, plus what you spend on necessities like rent, loan payments and groceries, discretionary spending like shopping or entertainment, and long-term goals, including emergency fund savings or retirement.

For a two-income household, you could aim to have three months of expenses in your basic emergency fund, with six months for a one-income household.

In a recent survey, 67% of millennials report having a savings goal and sticking with it every month, or most months. Your overall savings goal might actually include more than just saving for an emergency fund.

One common tactic for an easy budget to stick to is to put 20% of your take-home income toward financial goals, such as savings, and then make part of that just for your emergency fund.

You might want to look at your current bills and deadlines and see what you can adjust to make the most sense with your paydays. If you get paid every two weeks, but all of your bills are due at the end of the month, maybe you find you are dipping into those savings to pay everything on time.

You could try spreading out your bills throughout the month or grouped closer to your paychecks, so you can better budget your money throughout the year. Everybody’s financial situation is different, so figure out what works for you—and stick with it.

Having an emergency fund means you’ll be better prepared to cover any urgent, unplanned financial crises, like a high medical bill or costly car repair, without ruining your normal budgeted living expenses. With money set aside, you’ll be able to stress less and avoid more costly solutions like credit cards or personal loans to fund any emergencies.

However, one possible disadvantage to trying to build up your emergency fund is that you might feel like that money should be going toward paying off debt, like student loans or credit cards, before storing away funds in savings. But it’s important to know good debt from bad in this case.

A mortgage or student loan is generally considered good debt, while a high-interest credit card can be worse for your overall credit score and financial health. If you are weighing paying off debt versus building up your emergency fund, you might consider this order to figure out your top priorities:

•   Make sure you have enough money in the bank to pay any recurring bills.
•   Build a safety net equal to one month of your basic expenses
•   Match any contributions your employer makes for retirement contributions.
•   Pay off bad debt, like high-interest credit cards.
•   Build up your emergency fund.

Once you have three to six months’ worth of expenses saved up for your emergency fund, you can refocus your budget on other long-term goals.

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Putting Savings on Auto Drive

If you already use direct deposit, you’ve already got a possible solution to help you fund an emergency reserve. You can set up a recurring transfer with your bank, or split your direct deposit into a checking and a savings account, in order to make savings automatic.

If you don’t notice the money sitting in your account in the first place, it might be less tempting to spend it or move it back out of savings.

So how much can you afford to automatically transfer? The Consumer Federation of America says that an emergency savings fund should consist of at least $500 . They recommend using a savings account that you do not have easy access to, perhaps at a different bank than your current home bank.

You can kick-start your emergency fund by using a cash windfall like a tax refund, work bonus, or birthday check.

You could aim first to get to $500, then $1,000, then one month of essential living expenses, and work your way up from there.

You probably aren’t going to generate three or six months worth of extra money all at once.

Automating your savings might help, whether you choose to have a certain amount from your paycheck transferred into a separate savings account, or set up recurring transfers from checking to savings with your bank.

Then, when you do reach a comfortable number in your emergency fund, you can redirect those automated savings toward other financial goals like paying off debt or funding retirement.

Saving Smarter, Not Harder

So, if you’re determined to start saving more for an emergency fund, you might want to explore exactly what kind of savings account you want to keep your money in.

Certain accounts can earn you significantly more money based on the amount of interest. This could help your emergency fund grow even faster while rewarding you for saving money rather than spending it.

In fact, a SoFi Checking and Savings® account has no account fees. Plus, as a SoFi member, you’ll also receive other benefits to help you figure out your finances, like career coaching, mobile transfers, financial advisors, and community events.

We work hard to charge zero account fees. With that in mind, our fee structure is subject to change at any time.

Before you start saving up for an emergency fund, consider what kind of account you want to keep that money in. It can be helpful to have easy access to cash, in case you are ever faced with a financial emergency.

Get started building your emergency fund with a SoFi Checking and Savings account today.


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Oct
29
2020
colored pencils

5 Trend Indicators to Know

By | Growing Wealth, invest, Investing, Terminology | Comments Off on 5 Trend Indicators to Know

Financial markets are notoriously fickle. Trying to time the market is a difficult task that few non-professional investors do with repeatable success. Still, there are some ways to make more educated investment picks based on publicly available data.

Once an investor selects which securities to buy, how do they decide a good price to enter into a trade at? One of the simpler ways to make a more informed decision regarding when to buy or sell a stock involves using trend indicators.

Trend indicators give investors a sense about which direction the market has moved and for how long it has been heading that way. Trend analyses aim to anticipate futures based on previous patterns in buying, selling, and pricing over time.

Understanding Trend Indicators

Trend indicators are an aspect of technical analysis. Technical analysis uses either computer-generated mathematical information (indicators) or looking for visible patterns in the charts of stock prices.

This investment approach isn’t guaranteed and doesn’t always boost investors’ returns. But, trend analysis can provide investors with one way to try to appraise the market’s next move.

Although technical analysis involves the use of objective data rooted in mathematics and historical price movements, this kind of analysis also relies on human interpretation of that data.

So, it can be said that using indicators and patterns involves aspects of both art (aka interpretation and intuition) and science (aka data and math).

Commonly Used Trend Indicators

Here’s an overview of five commonly used trend indicators that investors may want to look into:

1. Moving Averages

A “moving average” (aka MA) is defined as the mean of time series data. In finance, this technical trading term means the average price of a security (aka a monetary instrument, like stocks, with monetary value)—as calculated over a certain timeframe.

When prices begin trading above a moving average, this can sometimes be seen as a bullish signal, but doesn’t always produce reliable returns over time. A much stronger signal comes when two moving averages of different time lengths cross paths.

When a shorter-time-frame moving average crosses above a longer-time-frame moving average, the move is referred to as a “golden cross.” The general consensus among traders is that the most significant golden cross involves the 50-day MA moving above the 200-day MA. Put another way, it’s when a security’s short-term average is heading above it’s long-term valuation average.

While a single moving average can convey some important information, MAs can be much more useful when used in conjunction with additional MAs of different lengths or with other trend-following indicators.

2. Relative Strength Index (RSI)

The Relative Strength Index (aka RSI) provides insight into whether a security might be overvalued or undervalued. This indicator oscillates between extremes, which is a fancy way of saying that it moves up and down.

The RSI is as straightforward as they come. It’s represented by a single line plotted on a graph with values that range from 0 to 100.

The higher the Relative Strength Index value, the more overbought a security is thought to be. In contrast, lower values are generally thought to indicate oversold conditions. So, for some investors, a low reading on the RSI could signal a potential buying opportunity.

Just how low should this indicator drop before it can be considered a buy signal? The answer to this question might depend on who you ask.

Fortunately, there is an easy way to estimate when the RSI becomes overextended in either direction. Between 30 and 70 is a shaded area sometimes called “the paint.” When the line breaches this zone, it’s thought that trading momentum in a given security has begun to reach its limits, and a trend reversal could be in the cards soon.

In other words:

•  an RSI reading of below 30 is generally thought to indicate oversold conditions, meaning prices could be getting ready to move higher sometime soon.
•  An RSI above 70 is generally thought to indicate overbought conditions, meaning a move downward could be coming soon.

As with most other trend following indicators, the RSI works best when used in conjunction with other metrics of a stock’s overall trading sentiment.

3. Moving Average Convergence Divergence (MACD)

The Moving Average Convergence Divergence (aka MACD) illustrates the relationship between two moving averages. While the Relative Strength Index (aka RSI) noted above tracks changes in pricing in a single stock or asset (typically represented as a fluctuating line graph), the MACD shows two lines in addition to a histogram that indicates trend strength.

This indicator is used in a similar way as the RSI, although there is a little more information contained in the MACD. Both indicators are known as momentum indicators because they try to gauge the strength of a trend.

Whereas the RSI oscillates between 0 and 100 based on average price gains and losses over a set period, the MACD measures the relationship between two exponential moving averages.

Subtracting the 26-period Exponential Moving Average (EMA) from the 12-period EMA is how the MACD is calculated. This calculation results in the MACD line. A nine-day EMA of the MACD, which is often referred to as the “signal line,” is shown on top of the MACD line. The lines are plotted atop a histogram meant to give traders an idea of momentum strength.

As with most trend indicators, there are multiple ways to interpret the MACD. One of the most common interpretations involves the MACD crossing its signal line.

A cross above the signal line is considered to be a potential buy signal, while a cross below the signal line is considered to be a potential sell signal.

4. On Balance Volume (OBV)

On balance volume (OBV) is a measurement of the selling and buying pressure on a given security. Volume gets added on up days and subtracted on down days.

On a day when the security closes at a higher price than its previous closing price, all of that day’s volume is considered upward volume. When the security closes lower than its previous closing price, that day’s volume is considered downward volume.

The numerical value of the OBV isn’t really important – it’s the direction that counts. Declining volume tends to indicate declining momentum and price weakness, while increasing volume tends to indicate rising momentum and price strength.

While the RSI is an indicator that signals bullishness when weak, OBV works in the opposite way. One of the most striking signs of a potential pullback in price can be seen using OBV. This can happen when the price of a security continues making higher highs even as OBV stalls or begins declining.

When this happens, it’s referred to as a negative divergence, and may mean that fewer traders are pouring money into a trade—potentially indicating that prices could start falling.

Here are a few other quick notes about OBV:

•  When both OBV and price make higher highs and higher lows, there’s a higher likelihood that the upward trend may continue.
•  When both OBV and price make lower highs and lower lows, it’s likely the trend could continue.
•  When prices are confined to a tight range, and OBV is rising, this may signal a period of accumulation. An upward breakout could be on the horizon.
•  When prices are confined to a tight range, and OBV is falling, this may signal a period of distribution. A downward breakout could be on the horizon.

5. Average Directional Movement Index (ADX)

The ADX is another trend indicator that aims to measure trend strength. It works by averaging the differences in price range over time. So, if an asset’s price barely move from day-to-day, the ADX will show a lower reading—while a big change in price will show a higher reading.

The Average Directional Movement Index is represented by a simple line graph beneath a stock chart. This trend line is even easier to use than most. It’s thought that an ADX above 25 indicates a strong trend and an ADX below 20 indicates little to no trend.

Here are some notes about potential ways to interpret the ADX:

•  When the ADX nosedives from a high point, it could signal a coming trend reversal.
•  A downward trend in the ADX could suggest that trends are dissipating overall. And, so, using any trend-following indicators could prove less reliable.
•  If the ADX rises by 5 points or more after a long period of staying low, this could be interpreted as a trade signal (a time to potentially buy or sell, depending on the direction of price movement).
•  A rising ADK generally means the market is entering into a stronger trend. The slope of the ADX line will be steeper when prices change faster. Steady, gradual trends tend to lead to a flattening of the ADX.

Keeping Tabs on Market Trends

There’s an old saying among traders—“the trend is your friend.”

Simply put, trends tend to keep moving in a certain direction when they have enough momentum. That’s why traders try to take note of them by studying trend-following indicators.

Trend indicators are a key way that many traders try to discern things like:

•  Which way a trend is moving
•  How strong that momentum is
•  How long the trend is likely to continue.

Some traders even go as far as trying to pick the exact time when a trend will change, using advanced strategies like options and futures contracts to try and profit from market volatility.

For most novice investors, adopting this kind of exact-timed technical strategy could prove highly risky, and might not always be necessary to earn returns over time. Individual investors might find it easier to use trend indicators to try determine when to buy and sell orders.

Whether an investor is brand new to the markets or has been building a portfolio for years, SoFi Invest® lets users take care of their investment needs in one secure app – including, trading stocks, buying crypto, and automated investing.

Learn more about building a financial future with SoFi Invest.

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