What Is the U.S. Debt Ceiling?

The US Debt Ceiling, Explained

These days, the U.S. debt ceiling is in the headlines and on everyone’s mind. Although the debt ceiling is technically the amount of money the country can legally borrow to pay its bills, that doesn’t do justice to the hotly debated issue the debt ceiling has become.

As the country’s fiscal obligations continue to grow, Congress periodically must increase the limit the government can borrow, so that the U.S. can issue bonds to have enough money to continue to operate. The U.S. reached its current debt ceiling on January 19, 2023.

Many lawmakers and economists worry that increasing the debt ceiling continually could have a negative impact on the U.S. economy over the long term, as it allows the federal government to spend more than it takes in.

The danger, however, is that failing to raise the debt ceiling would have an immediate negative impact because the U.S. could default on its debts — pushing domestic and global markets into turmoil.

What Is the Debt Ceiling?

The U.S. debt ceiling — sometimes called the debt limit — is the legal limit on how much money the U.S. federal government can borrow to fund government operations. The debt ceiling only authorizes borrowing to cover existing obligations; it does not allow for new spending.

The U.S. government owes more than $31 trillion, which it accrues by issuing bonds. That includes more than $24 trillion owed to the public, including individuals, businesses, and foreign governments, and nearly $7 trillion to itself, borrowed from government agencies, such as the Social Security Administration.

💡 Recommended: Who Owns the U.S. National Debt?

Recent Changes to the Debt Ceiling

When federal spending pushes up against this limit, as it is right now, Congress must vote to raise the debt ceiling.

For example, in August of 2021, Congress reinstated the debt ceiling to about $28.5 trillion after suspending it in 2019. In October 2021, Congress voted to raise the debt ceiling limit by $480 billion to keep the government running through early December.

Next, Congress passed a $2.5 trillion increase in the debt ceiling in December 2021, which President Biden promptly signed, bringing the debt limit up to about $31.4 trillion. Analysts expected the U.S. government to hit the debt ceiling in January 2023, which it did on January 19.

What Will Happen to the Debt Ceiling?

As of May 9, 2023, the debt ceiling battle was front and center, with a few possible outcomes:

•   Congress could vote to raise the debt limit, as it has done since the debt ceiling was first created in 1917 (see more on the history of the debt ceiling below).

•   Both parties could negotiate a way forward, by agreeing to cut spending while also raising the debt ceiling.

•   The president could use his executive powers to bypass the debt ceiling.

Finally, although very unlikely, the government could default on its debts. This has never occurred, and would be unprecedented — potentially leading to a global financial crisis.

Where Did the Debt Ceiling Come From?

Congress first enacted the debt ceiling in 1917 at the beginning of World War I through the Second Liberty Bond Act. That act set the debt ceiling at $11.5 billion. The creators of the debt ceiling believed it would make the process of borrowing easier and more flexible. In 1939, as World War II loomed on the horizon, Congress established a debt limit of $45 billion that covered all government debt.

Before the creation of the debt ceiling, Congress had to approve loans individually or allow the Treasury to issue debt instruments for specific purposes. The debt ceiling granted the government greater freedom to borrow funds via issuing bonds, allowing it to spend as needed. And over time the ceiling was often raised, and rarely contested.

The debt ceiling has, however, become a partisan pain point in recent years.

Benefits and Drawbacks of the Debt Ceiling

The debt ceiling has several advantages. It allows Congress to fund government operations and simplifies the process of borrowing. It also, theoretically, serves as a way to keep government spending in check because the federal government should consider the debt ceiling as it passes spending bills.

However, there are also some drawbacks. Congress has consistently raised the debt ceiling when necessary, which some analysts claim dampens the legislative branch’s power as a check and balance. And if Congress does not increase the debt ceiling, there is a risk that the government will default on its loans, lowering the country’s credit rating and making it more expensive to borrow in the future.

Debt Ceiling and Congress

In the last 10 or 15 years, Congress has found itself embroiled in partisan battles over raising the debt ceiling. For example, during the Obama administration, there were two high-profile debt ceiling standoffs between the president and Congress. In 2011, some members of Congress threatened to allow the U.S. government to hit the debt ceiling if their preferred spending cuts were not approved.

This standoff led Standard & Poor’s, a credit rating agency, to downgrade U.S. debt from a AAA to a AA+ rating.

Moreover, in 2013 there was a government shutdown when members of Congress would not approve a bill to fund the government and raise the debt ceiling unless the president made their preferred spending cuts. This standoff ended after 16 days when Congress finally approved a spending package and a debt ceiling increase partially due to the potential for a further downgrade of U.S. debt.

However, only some debt ceiling increases have been a partisan battle. Congress has raised or made changes to the debt ceiling nearly 100 times since World War II, usually on a bipartisan basis.

What Happens if Congress Fails to Raise the Debt Ceiling?

The current debate centers on finding a long-term solution for raising the debt ceiling. If the executive and legislative branches can not reach an agreement, there could be several consequences.

•   The government will swiftly run out of cash if it can not issue more bonds. At that point, the money the government has coming in would not cover the millions of debts that come due each day. The government may default, at least temporarily, on its obligations, such as pensions, Social Security payments, and veterans benefits.

•   A U.S. government default could also have a ripple effect throughout the global economy. Domestic and international markets depend on the stability of U.S. debt instruments like Treasuries, which are widely considered among the safest investments.

•   Interest rates for Treasury bills could rise, and interest rates across other sectors of the economy could follow suit, raising the borrowing cost for home mortgages and auto loans, for example.

•   A default could also create stock volatility in global equity markets, turmoil in bond markets, and push down the value of the U.S. dollar.

💡 Recommended: What Is the U.S. Dollar Index?

Even the threat of a default can have serious economic ramifications. In 2011, delays in raising the debt limit increased the cost of borrowing by $1.3 billion, according to the U.S. Government Accountability Office estimates.

What Are Extraordinary Measures?

When the government hits the debt limit, there are certain “extraordinary measures” it can take to continue paying its obligations. For example, the government can suspend new investments or cash in on old ones early. Or it can reduce the amount of outstanding Treasury securities, causing outstanding debt to fall temporarily.

These accounting techniques can extend the government’s ability to pay its obligations for a very short amount of time.

Once the government exhausts its cash and these extraordinary measures, it has no other way to pay its bills aside from incoming revenue, which doesn’t cover all of it. Revenue from income tax, payroll taxes, and other sources only cover about 80% of government outlays, according to the U.S. Treasury.

Can Congress Get Rid of the Debt Ceiling?

As noted above, the debt ceiling debate has become fertile ground for partisan fighting in Congress, but theoretically, it doesn’t have to be that way. For example, Congress could give responsibility for raising the debt ceiling to the president, subject to congressional review, or pass it off to the U.S. Treasury. Congress could also repeal the debt ceiling entirely.

The Takeaway

A failure to raise the debt ceiling and a subsequent default could have a significant impact on financial markets, from increased volatility to a decline in the value of the dollar to a lower national credit rating or even a recession. Given such consequences, it’s likely that Congress will continue to find ways to raise the debt ceiling, although political battles around the issue may continue.

Even if the debt ceiling continues to go up, the growing national debt could lead to economic instability, according to some economists. It’s hard to predict, since the debt ceiling has been raised about 100 times since World War I, when it was first established, and the U.S. has yet to face grave consequences as a result.

While it’s important to keep an eye on macroeconomic trends, it’s also wise to stay focused on your own investment goals. One way to start is by opening an investment account with SoFi Invest®. With a SoFi online brokerage account, you can build a portfolio suited to your financial needs.

Take a step toward reaching your financial goals with SoFi Invest.


Photo credit: iStock/William_Potter

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.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. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.
In our efforts to bring you the latest updates on things that might impact your financial life, we may occasionally enter the political fray, covering candidates, bills, laws and more. Please note: SoFi does not endorse or take official positions on any candidates and the bills they may be sponsoring or proposing. We may occasionally support legislation that we believe would be beneficial to our members, and will make sure to call it out when we do. Our reporting otherwise is for informational purposes only, and shouldn’t be construed as an endorsement.
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The Risks of Playing the Stock Market

Playing the stock market is a common but misleading phrase: The stock market is not a game and it does come with investment risks.

To some degree, those risks can be mitigated by using certain strategies, including using a more long-term, buy-and-hold strategy and embracing diversification, among other things.

And while investing is a serious business, playing the stock market can have an element of fun to it in the sense that investors who do their research — and tune into the news and business cycles — can take advantage of trends that might enable them to earn better returns on investment.

Playing the Stock Market: What Does It Mean?

Despite the phrase “playing” the stock market, it’s important to make the distinction between investing and gambling up front.

While both gambling and investing involve risk, investing actively attempts to manage various forms of risk, rather than relying on blind luck. Second, smart investing involves a strategy, something that a gambler pulling the lever on a slot machine can’t employ.

But because all investing involves an element of risk — there is no 100% safe investment — in a way each investment can feel like a gamble. However, it’s important to keep in mind that the market is not a casino, and just because there’s risk involved doesn’t mean that “playing the market” is the same as playing roulette.

Playing the Market: Risks and Rewards

Learning how to play the stock market — in other words, become a good investor — takes time and patience. It’s good to know the basics of the risks and rewards.

Potential Risks

In a broad sense, the most obvious risk of playing the market is that an investor will lose their investment. But on a more granular level, investors face a number of different types of risks, especially when it comes to stocks. These include market risk, liquidity risk, and business risks, which can manifest in a variety of ways in the real world.

A disappointing earnings report can tank a stock’s value, for instance. Or a national emergency, like a viral pandemic, can affect the market at large, causing an investor’s portfolio to deflate. Investors are also at the mercy of inflation — and stagflation, too.

For some investors, there’s also the risk of playing a bit too safe — that is, they’re not taking enough risk with their investing decisions, and as such, miss out on potential gains.

Potential Rewards

Risks reap rewards, as the old trope goes. And generally speaking, the more risk one assumes, the bigger the potential for rewards — though there is no guarantee because risk always entails the possibility of losses as well. Investors may earn returns in a couple of different ways:

•   By seeing the value of their investment increase. The value of individual stocks rise and fall depending on a multitude of factors, but the market overall tends to rise over time, and has fully recovered from every single downturn it’s ever experienced.

•   By earning dividend income. Dividends from stocks can also be reinvested, in order to further grow your investments.

•   By leaving their money in the market. It’s worth mentioning that the longer an investor keeps their money in the market, the bigger the potential rewards of investing are.

How to Play the Stock Market Wisely

Nobody wants to start investing only to lose money or see their portfolio’s value fall right off the bat. Here are a few tips regarding how to play the stock market, that can help reduce risk:

Invest for the Long-term

The market tends to go up with time, and has recovered from every previous dip and drop. For investors, that means keeping their money in the market for the long haul can be one strategy to mitigate the risks of short-term market drops.

As another common saying has it: “Time in the market beats timing the market.”

Consider: If an investor buys stocks today, and the market falls tomorrow, they risk losing a portion of their investment by selling it at the decreased price. But if the investor commits to a buy-and-hold strategy — they don’t sell the investment in the short-term, and instead wait for its value to recover — they effectively mitigate the risks of short-term market dips.

That said, you can’t rule out the risk of a downturn from which the markets never recover. It’s never happened, but no one has a crystal ball.

Do Your Research

It’s always smart for an investor to do their homework and evaluate a stock before they buy. While a gambler can’t use any data or analysis to predict what a slot machine is going to do on the next pull of the lever, investors can look at a company’s performance and reports to try and get a sense of how strong (or weak) a potential investment could be.

Understanding stock performance can be an intensive process. Some investors can find themselves elbow-deep in technical analysis, poring over charts and graphs to predict a stock’s next moves. But many investors are looking to merely do their due diligence by trying to make sure that a company is profitable, has a plan to remain profitable, and that its shares could increase in value over time.

Diversify

Another risk-mitigation strategy that investors can employ is diversification. Diversification basically means that an investor isn’t putting all of their eggs into one basket.

For example, they might not want their portfolio to comprise only two airline stocks, because if something were to happen that stalls air travel around the world, their portfolio would likely be heavily affected. But if they instead invested in five different stocks across a number of different industries, their portfolio might still take a hit if air travel plummets, but not nearly as severely as if its holdings were concentrated in the travel sector.

Use Dollar-cost Averaging

Dollar-cost averaging can also be a useful strategy. Essentially, it means making a series of small investments over time, rather than one lump-sum investment. Since an investor is now buying at a number of different price points (some may be high, some low), the average purchase price smooths out potential risks from price swings.

Conversely, an investor that buys at a single price-point will have their performance tied to that single price.

The Takeaway

While playing the market may be thrilling — and potentially lucrative — it is risky. But investors who have done their homework and who are entering the market with a sound strategy may be able mitigate those risks to a degree.

By researching stocks ahead of time, and employing risk-reducing strategies like dollar-cost averaging and diversification when building a portfolio, an investor is more likely to be effective at mitigating risk.

Ready to invest in your goals? It’s easy to get started when you open an Active Invest account with SoFi invest. You can invest in stocks, exchange-traded funds (ETFs), and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here). Members can access complimentary financial advice from a professional.

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


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.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. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
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 $10 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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What Is the Age for Early Retirement for Social Security?

Throughout your working career, you pay employment taxes that help fund Social Security, which provides income when you retire. In 2023, nearly 67 million people will receive Social Security benefits, collectively totaling more than $1 trillion.

There are strict rules about when you can claim Social Security benefits. You can start collecting retirement benefits as early as age 62, but if you can delay claiming your benefits, your monthly benefit amount can continue growing until you reach age 70.

Learn more about Social Security benefits, early retirement age, and the advantages and disadvantages of filing for your benefits early and late.

What Are Social Security Benefits?

Social Security is a social insurance program created in 1935 to pay workers an income once they retired at age 65 or older. When people talk about Social Security benefits, they’re referring to a monthly payment that replaces a portion of a worker’s pre-retirement income.

The amount you receive depends on how much you earned and paid in Social Security taxes during the 35 highest-earning years of your career. Generally speaking, the higher your income, the bigger your monthly check will be — up to a point. Also important is the age at which you claim benefits. Typically, the later you receive benefits, the higher your monthly check will be.

Note that retirees aren’t the only ones who are eligible for Social Security benefits. People with qualifying disabilities, surviving spouses of workers who have died, and dependent beneficiaries may also qualify for benefits.

Recommended: When Will Social Security Run Out?

At What Age Can You Collect Social Security?

When the Social Security program began, the full retirement age (FRA) was 65, and that’s still what many in the U.S. think of as the average retirement age. However, as life expectancy in the U.S. has increased, the Social Security Administration (SSA) has adjusted the FRA accordingly.

The chart below illustrates FRA by year of birth.

If You Were Born In Your Full Retirement Age Is
1943-1954 66
1955 66 and 2 months
1956 66 and 4 months
1957 66 and 6 months
1958 66 and 8 months
1959 66 and 10 months
1960 or later 67

Recommended: At What Age Should You File for Social Security?

What Is the Early Retirement Age for Social Security?

You can choose to claim retirement benefits as early as age 62. However, SSA will reduce your benefit by about 0.5% for every month you receive benefits before your FRA. For example, if your full retirement age is 67 and you file for Social Security benefits when you’re 62, you’d receive around 70% of your benefit.

On the other hand, if you wait to claim benefits after your FRA, you’ll accrue delayed retirement credits. This increases your benefit a certain percentage for every month you delay after your FRA. For example, if your full retirement age is 67 and you delay receiving benefits until age 70, you’ll get 124% of your monthly benefits. Note that the benefit increase stops when you turn 70.

Recommended: When Can I Retire? This Formula Will Help You Know

Can You Claim Social Security While You’re Still Working?

When you claim your Social Security benefits, the SSA considers you retired. However, you can continue working after retirement and receiving benefits at the same time, though they may be limited.

If you’re younger than FRA for the entire year, the SSA will deduct $1 from your payment for every $2 you earn above an annual limit. In 2023, that limit is $21,240. In the year you reach full retirement age, the SSA will begin deducting $1 for every $3 you make above a different earnings limit — $56,520 in 2023.

No matter their work history, your spouse has the option to claim Social Security benefits based on your work record. That benefit can be up to 50% of your primary insurance amount, which is the benefit you’d receive at FRA. Your spouse can begin receiving spousal benefits at age 62, but they will receive a reduced benefit.

Pros and Cons of Claiming Social Security Early

The main advantage of filing for Social Security early is that you’ll have access to retirement funds sooner. This can be a boon to individuals who need extra money to get by each month. To help you maximize every last dollar, consider using a spending app to create budgets, track spending, and monitor bills.

The main disadvantage of filing early is that you may permanently reduce your monthly benefit amount. This could be a factor to keep in mind as you determine whether you’re on track for retirement.

So how do you decide when to file for your benefits? Consider your “break-even point.” This is the age at which receiving a delayed higher benefit outweighs claiming benefits earlier.

Here’s an example of how that works. Let’s say your FRA is 67 and your annual benefit is $24,000. If you claim your benefit at age 62, your benefit drops to $16,800 a year. If you delay until age 70, your benefit would be $29,760 a year.

By adding up each year’s worth of benefits and comparing them across different potential retirement ages, you find your break-even point. So in that last example, claiming your benefit at FRA breaks even with early filing at age 78. If you expect to live until this age or longer, you may consider filing for Social Security at full retirement age. Delaying until age 70 breaks even with claiming at FRA at age 82. So if you expect to live until 82 or longer, you may consider delaying your benefits.

Recommended: How Can I Retire Early?

The Takeaway

Social Security is an important source of guaranteed income during retirement and can help ensure you can cover recurring expenses like housing payments and utilities. Your monthly payment amount is determined by how much you’ve earned during your working career and the age at which you claim Social Security benefits. You’re eligible to receive your full benefits when you reach full retirement age (FRA). If you file before then, the monthly payment will be reduced. If you file later, your monthly payment can increase, up to a point. Consider your short- and long-term financial needs carefully before deciding when to claim Social Security.

Whether you’re planning to continue working past your FRA or are preparing for retirement, using a money tracker app can help you manage your overall spending and saving. The SoFi Insights app connects all of your accounts in one convenient dashboard. From there, you can see all of your balances, spending breakdowns, and credit score monitoring, plus you can get other valuable financial insights.

Stay up to date on your finances by seeing exactly how your money comes and goes.

FAQ

Can I take Social Security at age 55?

You cannot claim Social Security benefits at age 55. The earliest you can file for benefits is age 62.

What happens to my Social Security if I retire at 55?

If you retire at 55, you will have to wait seven years, until age 62, before you are eligible to claim early Social Security benefits. Retiring early may also affect the size of your benefit if you are leaving work in your top-earning years.

What is the average Social Security benefit at age 62?

The average monthly Social Security retirement benefit in 2023 is about $1,827 for those filing at full retirement age. Filing early at age 62 would reduce that benefit by 30% to $1,278.90.


Photo credit: iStock/svetikd

SoFi’s Insights tool offers users the ability to connect both in-house 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. 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 provided to you is a Vantage Score® based on TransUnion™ (the “Processing Agent”) data.
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.
Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.
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Luxury for Less: How to Travel Posh

If you like to travel and appreciate the finer things in life, you might dream of a posh vacation. Maybe your fantasy is staying at a sprawling resort by the sea or an urban boutique hotel with a spectacular rooftop bar. Or perhaps you dream of immersive experiences, liking a private cooking class with a local chef or a wine-tasting tour through Napa Valley.

But then reality kicks in. You look at your actual budget and realize you probably can’t make that fantasy a reality.

Or could you? It just so happens there are a few ways to snag luxury travel for less. Learn more here, including:

•   Which destinations can help you afford luxury travel

•   Tips for traveling posh for less

Unlimited 2% cash back rewards* and no annual fee.†︎

Earn 3% cash back on up to $12,000 in purchases your first year when you set up direct deposit through SoFi.** After that, earn 2% unlimited cash back on everything.*


Average Cost of an Affordable Luxury Vacation

It’s hard to give just one number here, since costs will vary depending on the number of travelers, your destination, and how long you plan to stay. But expect to pay a few thousand dollars.

Recent surveys indicate that the cost strictly for travel (airline tickets, parking, car rental) for a family of four on a four-day domestic trip can easily nudge close to $2,000. And that’s not including lodging or food, let alone expenses for attractions and entertainment, which can easily add another $1,000 to that sum.

So make sure to decide where to keep a travel fund and nurture it, and then work to keep your vacation’s price tag from busting your budget.

Destinations Where You Get More for Less

According to crowd-sourced travel expense site Budget Your Trip, here are a few places where you can get more bang for your buck. The average prices listed below are for two people for a week on a high-end trip. Your cost may vary, but this should give you an idea of destinations where you can travel luxuriously for less than you might think.

•   Thailand $4,675

•   Mexico $4,091

•   Portugal $3,807

•   Slovakia $3,311

•   Costa Rica $3,098

•   Vietnam $2,077

•   Morocco $1,475

Obviously, if you are traveling domestically, you’ll save money by avoiding air travel. If you can drive to a nearby city or resort, you can reallocate dollars to lodging or entertainment.

Recommended: Where to Find Book Now, Pay Later Vacations

7 Tips for Traveling Posh

If you want to travel in luxury on a budget, here are a few tips to keep in mind.

1. Visit Off-Season

It’s generally true that if you want to visit a popular destination at the same time that everyone else wants to go there, you’re likely to pay more. If your summer travel takes you to a popular beach destination, you’ll pay more than if you visit it in the off season. A week of shopping and cafe hopping in Paris may be pricey in July, but what if you went in March or November? You might be able to afford a junior suite at the hotel you’ve been eyeing vs. a standard room. The more flexible that you can be with your travel dates or destination, the more likely you’re able to travel in luxury at a reduced cost.

One way that families afford to travel is by traveling during the off season or shoulder season, which is the bridge between high season, when everyone wants to go, and the low season, where demand is much diminished.

Book a (Semi-) Private Plane

Some ultra-glamorous experiences have a surprisingly manageable price. An example: With the rising cost of airfare, you may be able to fly a semi-private jet for not much more than flying commercial. While booking a private plane will likely cost more than flying with a traditional airline (especially if you usually travel basic economy), the added cost may be worth the trade off for the extra luxury and convenience. Plus, you get bragging rights to drop the phrase “private jet” into your conversation.

With a semi-private flight, 15 to 30 passengers fly on a predetermined route and schedule. Carriers include Aero, Blade, Surf Air, and Set Jet. Typical flights go from California to Mexican getaway destinations, or New York to vacation islands off the Eastern seaboard.

Prices can be similar to first-class flights: $200 and up for a short hop; into four figures for ones that are longer flights. Bonuses include avoiding the draining experience of going through long security lines at major airports, as these carriers often use smaller private terminals.

You may also be able to use credit card rewards to help defray some of the costs.

Book New Hotels

If you’re wondering how to save money on hotels and travel in luxury for less, look into booking a brand new hotel. Sometimes new hotels will offer discounts when they first open. They might not have all the kinks worked out yet, plus they need to start building a clientele.

Just make sure that you stay flexible with your plans, since hotels don’t always open on time — consider booking your stay with a travel credit card that offers trip insurance if your hotel is still under construction.

Recommended: How Does Credit Card Travel Insurance Work?

Skip the Hotel

Another luxury travel tip is to consider alternative forms of lodging. Rather than stay in a chain hotel, you might be able to find an alternate vacation rental that gives you a more elegant and authentic experience at a similar price point.

For instance, instead of booking into a small and expensive Los Angeles hotel room, you might stay in an Airbnb or VRBO apartment in a cool neighborhood. Having, say, a whole one-bedroom to yourself can make for a stay that’s more posh and memorable.

If you are traveling with pets, you may be able to find a place that is more pet-friendly and allows you to skip hotel pet fees.

Use a Travel Agent

If you prefer elegant travel, consider using a travel agent that specializes in luxury travel. Many travel agents have access to special deals or know of ways to travel in luxury on a budget. It’s possible to come out ahead even after paying the agent their commission.

Redeem Your Rewards

Another way to travel in luxury for less is to consider using your credit card miles or credit card cash back to travel. As one example, many airlines allow you to redeem miles for business class flights, often at very reasonable rates. Or if you don’t have enough miles for a free ticket, you could buy an economy class ticket and use your rewards to bump up to business class.

Either way, when you arrive at your destination relaxed and rested after using your miles to fly business class at a fraction of the cash cost, you’ll definitely feel like you’ve traveled in style.

You may also get other bonuses. Some hotel rewards programs will offer a free night when you book three, free breakfast, and other perks for being a member. Working those freebies and discounts can really pay off.

Also, you may have points from renting a car from the same agency every time. That can give you an affordable set of wheels for the weekend so you and your bff can stay at a posh spa together.

Plan a High-Low Trip

Another way to travel posh is to prioritize what’s important to you and allocate more of your travel budget there. For instance, if you want to go to London for the theater and high tea, you can fly economy and stay in a basic hotel so you can enjoy those luxurious experiences.

Or if it’s your dream to spend a week somewhere near Cancun or Tulum and snorkel every day, make that snorkel time your top priority, budget for it, and then find a small, relaxed hotel versus one of the mega-resorts to save on your lodging bill.

The Takeaway

A luxury trip doesn’t always have to break the bank. Instead, set a budget and decide beforehand what types of lodging, experiences, and activities are most important to you. If you have the money set aside for it, don’t be afraid to splurge on something that is meaningful to you. Often those types of experiences can make memories that stay with you forever. Remember, not every aspect of a trip needs to be five-star in order for you to savor a posh getaway.

Whether you want to travel more or get a better ROI for your travel dollar, SoFi can help. SoFi Travel is a new service exclusively for SoFi members that lets you budget, plan, and book your next trip in a convenient one-stop shop. SoFi takes the guessing game out of how much you can afford for that honeymoon, family vacation, or quick getaway — and we help you save too.

SoFi Travel can take you farther.


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Is Automated Tax-Loss Harvesting a Good Idea?

Automated tax-loss harvesting can be a tool for tax-efficient investing because it involves using an algorithm to sell securities at a loss so as to offset capital gains and potentially lower an investor’s tax bill.

Standard tax-loss harvesting uses the same principle, but the process is complicated and an advisor might only harvest losses once or twice a year versus automated tax-loss harvesting which can be done more frequently.

That said, automated tax-loss harvesting — which is sometimes a feature of robo-advisor accounts — may give investors only limited (or possibly no) tax benefits. Here’s a breakdown of whether an automated tax-loss strategy makes sense.

Tax-Loss Harvesting: The Basics

First, a quick recap of how standard tax-loss harvesting works. Tax-loss harvesting is a way of selling securities at a loss, and then “harvesting” that loss to offset capital gains or other taxable income, thereby reducing federal tax owed.

The reason to consider this strategy is that capital gains are taxed at two different federal tax rates: long-term (when you’ve held an asset for a year or more) and short-term (when you’ve held an asset for under a year).

•   Long-term capital gains are taxed at 0%, 15%, or 20%, depending on the investor’s tax bracket.

•   Short-term capital gains are taxed at a typically higher rate based on the investor’s ordinary income tax rate.

The one-year mark is crucial, because the IRS taxes short-term investments at the higher marginal income tax rate of the investor. For high-income earners that can be 37% plus a 3.8% net investment income tax (NIIT). That means the taxes on those quick gains can be as much as 40.8% — and that’s before state and local taxes are factored in.

Example of Basic Tax-Loss Harvesting

For example, consider an investor in the highest tax bracket who sells security ABC after a year, and realizes a long-term capital gain of $10,000. They would owe 20%, or $2,000.

But if the investor sells XYZ security and harvests a loss of $3,000, that can be applied to the gain from security ABC. So their net capital gain will be $7,000 ($10,000 – $3,000). This means that they would owe $1,400 in capital gains tax.

The differences can be even greater when investors can harvest short-term losses to offset short-term gains, because these are typically taxed at a higher rate. In this case, using the losses to offset the gains can make a big difference in terms of taxes owed.

According to IRS rules, short-term or long-term losses must be used first to offset gains of the same type, unless the losses exceed the gains from the same type. When losses exceed gains, up to $3,000 per year can be used to offset ordinary income or carried over to the following year.

What Is Automated Tax-Loss Harvesting?

Until the advent of robo-advisor services some 15 years ago, tax-loss harvesting was typically carried out by qualified financial advisors or tax professionals in taxable accounts. But as robo-advisors and their automated portfolios became more widely accepted, many of these services began to offer automated tax-loss harvesting as well, though the strategy was executed by a computer program.

Just as the algorithm that underlies an automated portfolio can perform certain basic functions like asset allocation and portfolio rebalancing, some automated programs can execute a tax-loss harvesting strategy as well. SoFi’s automated platform does not offer automated tax-loss harvesting, but others may, for example.

So whereas tax-loss harvesting once made sense only for higher-net-worth investors owing to the complexity of the task, automation has enabled some retail investors to reap the benefits of tax-loss harvesting as well. The idea has been that automated tax-loss harvesting can be conducted more often and with less room for error, thanks to the precision of the underlying algorithm — which can also take into account the effects of the wash-sale rule.

The Wash-Sale Rule

It’s important that investors understand the “wash-sale rule” as it applies to tax-loss harvesting.

What Is the Wash-Sale Rule?

The wash-sale rule prevents investors from selling a security at a loss and buying back the same security, or one that is “substantially identical”, within 30 days. If you sell a security in order to harvest a loss and then replace it with the same or a substantially similar security, the IRS will disallow the loss — and you won’t reap the desired tax benefit.

In the example above, the investor who sells security XYZ in order to apply the loss to the gain from selling security ABC may then want to replace security XYZ because it gives them exposure to a certain market sector. While the investor can’t turn around and buy XYZ again until 30 days have passed, they could buy a similar, but not substantially identical security, to maintain that exposure.

That said, it can be tricky to follow this guidance because the IRS hasn’t established a precise definition of what a “substantially identical security” is. This is another reason why automated tax-loss harvesting may be more efficient: It may be simpler for a computer algorithm to make these choices based on preset parameters.

How ETFs Help With the Wash-Sale Rule

This is how the proliferation of exchange-traded funds (ETFs) has benefited the strategy of tax-loss harvesting. Exchange-traded funds, or ETFs, are baskets of securities that typically track an index of stocks, bonds, commodities or other assets, similar to a mutual fund. Unlike mutual funds, though, ETFs trade on exchanges like stocks.

In some ways, ETFs may make tax-loss harvesting a little easier. For instance, if an investor harvests a loss from an emerging-market stocks ETF, he or she can soon after buy a “similar” but non-identical emerging-market stocks ETF because the fund may have slightly different constituents.

Because most robo-advisors generate automated portfolios comprised of low-cost ETFs, this can also support the process of automated tax-loss harvesting.

Other Important Tax Rules to Know

Tax losses don’t expire. So an investor can apply a portion of losses to offset profits or income in one year and then “save” the remaining losses to offset in another tax year. Investors tend to practice tax-loss harvesting at the end of a calendar year, but it can really be done all year.

As noted above, another potential perk from tax-loss harvesting is that if the losses from an investment exceed any taxable profits from trades, the losses can actually be used to offset up to $3,000 of ordinary income per year.

How Much Does Automated Tax-Loss Harvesting Save?

It’s hard to say whether automated tax-loss harvesting definitively and consistently delivers a reduced tax bill to investors. A myriad of variables — such as the fluctuating nature of both federal tax rates and market price moves — make it difficult to calculate precise figures.

The Upside of Automated Tax-Loss Harvesting

One study of standard (not automated) tax-loss harvesting that was published by the CFA Institute in 2020 found that from 1926 to 2018, a simulated tax-loss harvesting strategy delivered an average annual outperformance of 1.08% versus a passive buy-and-hold portfolio.

Taking into account transaction costs and the wash-sale rule, the outperformance or “alpha” fell to 0.95%.

The study found the strategy did better when the stock market was volatile, such as between 1926 and 1949, a period which includes the Great Depression. The average outperformance was 2.13% a year during that period, as investors found more opportunities to harvest losses. Meanwhile, between 1949 and 1972 — a quieter period in the market as the U.S. underwent economic expansion after World War II — tax-loss harvesting only delivered an alpha of 0.51%.

The Downside of Automated Tax-Loss Harvesting

While the research cited above identifies some benefits of tax-loss harvesting, like many investment studies it’s based on historical data and simulations of a portfolio, not real-world investments.

Another fact to bear in mind: This study does not factor in the impact of automated tax-loss harvesting, which is typically conducted more frequently — and may not deliver a tax benefit.

Indeed, in 2018 the Securities and Exchange Commission (SEC) charged a robo-advisor for making misleading claims about the benefits of automated tax-loss harvesting in terms of higher portfolio returns. Investors should know that there could be no or little tax savings, or even a bigger tax bill, depending on how different securities perform after they’re sold (or bought back).

For instance, if the underlying algorithm that automates trades in a robo portfolio harvests a loss from one ETF (to offset the gains from a sale of another ETF), it might then purchase a replacement ETF that’s not substantially identical, per the wash-sale rule.

If the second ETF is sold later, the gains realized from this second sale could be so high that they cancel out or be greater than the tax benefits from selling the first fund to harvest the loss.

In that case, the investor could end up paying more taxes down the road — effectively deferring, not eliminating, the tax burden.

Continuously trading assets in automated tax-loss harvesting also means an investor may incur additional costs, such as more transaction fees.

Pros of Automated Tax-Loss Harvesting

1.    Standard tax-loss harvesting is complex and time-consuming, but the benefits are well established. Therefore using automated tax-loss harvesting may be an efficient way to reap the benefits of this strategy because it can be done more automatically and consistently.

2.    To realize the benefits of tax-loss harvesting investors must obey the IRS wash-sale rule, which imposes restrictions that can be tricky to follow. In this way, an automated strategy may limit the potential for human error and may increase the tax benefits for investors.

Cons of Automated Tax-Loss Harvesting

1.    Because an algorithm performs tax-loss harvesting on an automated cadence, investors cannot choose which investments to sell and when and therefore have less control.

2.    An automated tax-loss program may not be able to anticipate a security’s future gains that could reduce or eliminate the tax benefit of harvested losses.

3.    Automated tax-loss harvesting could increase the amount an investor pays in transaction fees, which can lower portfolio returns.

The Takeaway

Automated tax-loss harvesting is a feature primarily offered by robo-advisors, which use a computer algorithm to automatically sell securities at a loss in order to potentially reduce the tax impact of capital gains realized from the sale of other securities.

While this practice can offer tax benefits in some cases, and academic studies have used portfolio simulations to gauge the potential for outperformance, it’s unclear whether automated tax-loss harvesting offers the same benefits. Because the strategy is carried out by an underlying algorithm, a computer program may not be capable of making more nuanced choices about which assets to sell and when.

Investors could potentially end up still owing capital gains taxes or paying more in transaction fees and brokerage fees.

If you’re ready to start investing, it’s easy to open an Active Invest account with SoFi Invest® and start trading stocks or set up an automated portfolio. SoFi’s automated portfolio does not offer tax loss harvesting. SoFi members have access to complimentary advice from a financial professional. Set up your portfolio today!

See why SoFi is this year’s top-ranked robo advisor.


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The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
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