When it comes to maintaining a strong financial plan and healthy financial behaviors, our brains can sometimes work against us. Behavioral biases, mental traps, and neural wirings can all get in the way of setting and meeting financial goals.
Consider recency bias, which is the tendency for people to look to recent events to make decisions about the future. Just because a stock has skyrocketed recently, that doesn’t mean its upward trajectory will last forever. In fact, jumping into the market during a rally could mean you end up buying when prices are high, right before investors bail and prices fall.
Another mental tendency to consider: ego depletion. It’s the idea that people can only exert their willpower for a limited time, and after that, it’s harder to practice self-control. If you have an important financial decision to make, it may make sense to wait until you are no longer feeling depleted.
Here’s a closer look into the ego depletion theory, what it could mean for your finances, and how to overcome it.
What Is Ego Depletion?
The concept of ego depletion hinges on the idea that our willpower reserves are finite, and when we exert self-control for too long, we use up those reserves. Once those are depleted, it is harder to exert self-control, and we’re more likely to make poor decisions.
The term was coined by American social psychologist Roy Baumeister in the late 1990s, though the idea of ego depletion has become popular in recent years. This may be in part because it makes sense intuitively. For example, the experience of eating a healthy breakfast and lunch only to get home from work and eat a bag of chips for dinner is pretty easy to relate to.
However, not everyone agrees with the concept of ego depletion. Some scientists report a lack of consistent data to support the idea. Instead, they have found that motivation is not finite. Rather, it can be subjective, and there are ways to increase it. That can be a good thing as you begin to set long-term financial goals.
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Causes of Ego Depletion
There are a variety of factors that may play a role in ego depletion.
• Low blood sugar. If you haven’t eaten and your blood sugar has dropped, it may be more difficult to exert willpower.
• Emotional distress. Temptations may be harder to resist if you’re experiencing a state of mental anguish.
• Unfamiliar tasks. If you are doing something for the first time, you may need to exert more mental energy, which can lead to ego depletion.
• Lack of choice. If you are forced to do a task not of your choosing, you may be more likely to become depleted.
• Illusory fatigue. If you think that a task will be mentally tiring, you may experience ego depletion faster. In other words, ego depletion happens more often when you expect it to. If you think a task won’t tax you too much, you may be able to exert more self-control.
• Cognitive dissonance. Situations in which you do or say something that contradicts your beliefs can tire you out and diminish your self-control.
• Variable heart rate. Those who experience variable heart rate have been found to have less self-control.
The Effect of Ego Depletion on Your Finances
If tasks that require self-control weaken your willpower, you may be less likely to make good decisions when you experience ego fatigue. When it comes to your finances, for instance, you may be more likely to spend money on things that you can’t afford.
Ego depletion could also mean you’re less equipped to make important decisions, such as how to invest your money. For example, if the market is experiencing a downturn, you may find yourself more prone to panicking and potentially pulling out your money. But in doing so, you’ll lock in losses and potentially miss out on a subsequent upswing.
Ego depletion could also mean you miss important deadlines, such as deadlines for funding your 401(k) or IRAs, or tax deadlines.
Lack of sleep makes self-control difficult. Sleep counteracts fatigue and helps reset your willpower reserves, so practice good sleep hygiene. Go to bed at a consistent time. Make sure your bedroom is quiet, relaxing, and dark. Avoid large meals, caffeine, and alcohol before bed.
Manage Stress
Managing stress can help you address the causes of ego depletion as well as its effects. Consider strategies such as deep breathing, mindfulness exercises, eating healthy, and consistent exercise.
Set Goals
Clear financial objectives and the steps you need to reach them can help overcome ego depletion. Consider using SMART goals, or goals that are specific, measurable, achievable, relevant, and time-bound. With these in place, you’ll know what you need to do to accomplish your objectives, and you’ll also be less likely to make moves that stray from your plan.
Plan for the Long Term
Long-term financial plans take your goals, risk tolerance and time horizon into consideration. They are built to account for the natural cycles of volatility. With a long-term plan to refer to, you may be less likely to make rash decisions in the short term, such as panic selling when markets are down or buying when market prices are peaking and may be nearing a fall.
There are a variety of tools out there that can help you set and meet your goals and make financial freedom a reality. It’s worth shopping around to find the ones that work best for you and you’re more likely to stick with.
One to consider: a spending app, which can help you set up a budget, categorize and track spending, make bill payments on time, and track your credit score.
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The Takeaway
The idea of ego depletion centers around the idea that when we exert self-control for too long, we use up our willpower reserves and are more likely to make poor decisions. Learning the causes of ego depletion is a first step in helping you head off rash financial decisions that may work against you. If you recognize that your willpower is fading, take a breather. And when in doubt, refer back to your long-term financial goals and plan.
Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.
See exactly how your money comes and goes at a glance.
FAQ
What is the cause of ego depletion?
Ego depletion can be caused by a number of factors, such as emotional distress, fatigue, low blood sugar, or unfamiliar tasks.
What is an example of ego depletion?
An example of ego depletion might be spending the day hard at work and then coming home, sitting on the couch, and turning on the television instead of pursuing other healthier activities, such as going to the gym.
How do you deal with ego depletion?
There are a number of strategies to combat ego depletion, such as getting enough rest, managing stress, and setting and sticking to long-term goals.
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With the rise of environmental and climate-related concerns, more people are becoming familiar with the term greenwashing — which is when a company markets itself as more sustainable or environmentally friendly than it actually is.
Greenwashing impacts investors and consumers alike because it’s designed to mislead people through a variety of means, including: the use of vague terminology or false labels; making claims about green actions or outcomes that can’t be verified (or are found to be deceptive); using false or misleading research and data.
The term greenwashing is derived from the notion of whitewashing, which is when a company or individual conceals wrongdoings by presenting a cleaned-up, but deceptive version of their actions.
Key Points
• Greenwashing is when a company markets itself as more sustainable or eco-friendly than it is.
• Companies may engage in greenwashing to attract consumers, employees, or investors.
• Greenwashing can also be an attempt to avoid stringent or costly regulations.
• Common greenwashing techniques include misleading labels, vague or meaningless terminology, a deceptive use of data, and more.
• It’s vital for investors, as well as consumers, to look beyond an organization’s eco-friendly claims to verify whether they are adhering to ESG standards.
Types of Greenwashing
For some companies, greenwashing is a means to attract consumer and investor dollars. According to the 2023 Business of Sustainability Index, 68% of consumers said they’re willing to spend more money for environmentally friendly products.
But some companies engage in greenwashing to appear compliant with environmental regulations, which can be stringent and come with hefty penalties — especially now that some countries, like the EU. and U.K., are adopting anti-greenwashing laws.
Before you buy products marketed as sustainable or eco-friendly, or invest in a green company that makes similar claims, it may help to know the different types of greenwashing.
• Greenwashing a polluting product: Companies may attempt to improve the branding of a product by making it seem more environmentally friendly without actually changing much or anything about it.
• False associations: Brands can make it seem like they are endorsed by a third party when they really aren’t, or the third party is simply their own subsidiary.
• Green products from a polluting company: A company might make a product that has a lower environmental impact, such as an electric vehicle, but manufacture it in a way that creates significant waste and greenhouse gas emissions nonetheless.
Again, because socially responsible investing has grown so rapidly, and many companies want to attract the attention of investors and consumers with a green sensibility, there is commensurate growth on the greenwashing side, so it pays to be cautious when making choices.
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Example of Greenwashing
Greenwashing is increasingly on the radar of regulatory bodies that protect consumers and investors. But some watchdog organizations lack the resources to hold companies to account. A few examples of what would be considered greenwashing are described on the U.S. Federal Trade Commission (FTC) website:
• A company labels a trash bag they are selling as “recyclable.” Although this may be true, it’s unlikely that a bag full of trash will be emptied and then recycled on its own. This label makes the product appear to have an environmental benefit, but in reality it doesn’t.
• In another example, a company labels a product as having 50% more recycled content than a previous product did. This makes it sound like a significant amount, but in fact the company may have increased the recycled content from 2% to only 3%, so in reality there has been hardly any change.
• A company labels a product as “recyclable” but they don’t say specifically whether all parts of it are recyclable, just some parts, or just the packaging.
Other real-world examples include: An oil company that’s known for environmental negligence releases advertisements that state their dedication to a carbon-free future — or companies promising to do environmental cleanups, but failing to actually follow through on those promises.
Although in the short term greenwashing might benefit a company if it leads to more people buying their products, the risk is that a revelation of greenwashing practices could quickly and negatively outweigh those gains.
The Impact on Consumers
If consumers catch on that a company is engaging in greenwashing, rather than adhering to ESG standards, there could be a public relations backlash. Consumers may feel duped, and may express their discovery of a company’s contrary claims in various ways: with other consumers, on social media, writing to elected officials, contacting the Better Business Bureau.
Depending on the scale, and the level of consumer awareness, this has the potential to damage a company’s reputation and trustworthiness, and cause consumers to turn to other brands.
In addition, companies that get caught greenwashing can also face legal ramifications for their misleading claims. And investors interested in true impact investing may take their business elsewhere.
The Impact on the Environment
In the long term, the biggest negative consequence is the actual environmental impact of manufacturing and other business practices that are not, in fact, green or sustainable. By using green claims to bolster their business goals, yet not living up to actual sustainability standards, companies not only add to environmental damage, they hinder efforts to create sustainable products and reach other socially responsible goals.
Companies rely on clean water and air, quality soil, viable supply chains, and a stable climate to operate. A thriving economy requires a healthy planet, and greenwashing ultimately doesn’t support either.
The Impact on Investors
Just as many consumers are seeking a clearer understanding of the environmental claims of various products and consumer goods, investors are looking for ways to vet the claims of financial companies that offer ESG-focused securities, like exchange-traded funds (ETFs) and mutual funds.
This has led some organizations to develop ESG frameworks, in order to provide investors with a way to assess companies’ ESG progress, and use accepted standards and metrics to compare one company to another. Companies that make ESG claims for their investment products can come under regulatory scrutiny, and may face substantial fines.
How to Spot Greenwashing
Many greenwashing tactics can be convincing. Here’s what to look out for when purchasing a product, or investing in a company that claims to embrace sustainability or ESG investing strategies (i.e., environmental, social, and governance practices):
• Vague language: Labels such as “eco-conscious,” “clean,” or “100% sustainable” don’t actually mean anything in terms of a company’s manufacturing processes or adherence to environmental criteria. Be sure to research ESG standards that reflect actual environmental practices.
• Natural imagery: If a polluting company uses marketing images of flowers, trees, beaches, and so forth, they may be trying to appear more environmentally friendly than they really are. Be sure to check whether the company or product lives up to the advertising.
• Fabricated data: Companies might fund research that will provide “results” that make them look better, or make data up completely. In some cases, it’s easy to vet company research or data via the company website or by doing an internet search.
• Grand claims: Some companies may pledge to reduce carbon emissions or announce a net-zero policy (or another ambitious goal), with little to back up the claim.
How to Avoid Greenwashing
Whether purchasing products or investing in companies, if you are looking for the most sustainable options, there are a few ways to avoid greenwashing.
1. Look for Clear and Transparent Language
If a brand makes sustainability claims, look for specifics such as certifications, verifiable third-party endorsements, industry credentials, and details about exactly what the brand is doing.
2. Evaluate the Data
If a brand uses statistics and numbers to back up its sustainability claims, make sure the numbers are backed up with credible data.
3. Compare Similar Products
A company may make sustainability claims when in fact their product has basically the same environmental impact as a competitor’s. Compare ingredients, packaging, and manufacturing information to see whether one product is really better than another.
4. Look Beyond the Final Product
Even if a company is improving the impact of its products, it may not be addressing the waste and emissions associated with its operations or supply chain. If this is the case, they may be just making changes for marketing purposes. Check out a company’s website and/or follow watchdog groups to learn how much effort is going into sustainability at the corporate level.
5. Look for Goals and Timelines
If a company is truly implementing a comprehensive sustainability plan, it would include measurable goals and timelines. Ideally those would be available to investors and consumers on a public forum such as the company website, in the interest of transparency.
6. Verify Ingredients and Materials
Some terminology and product labels can be misleading. For instance, a company might say that their product is made from organic cotton or recycled plastic, when in fact only a small percentage of the cotton or plastic is organic or recycled and the rest is not.
The FDA has no guidelines for what the term “natural” means, and according to the USDA the term simply means that a product is “minimally processed” with “no artificial ingredients.”
Greenwashing vs. Green Marketing
Although greenwashing is when a company attempts to cover up their bad practices, there is nothing wrong with a company telling the story of its environmental initiatives, and the steps it’s taking to produce products more sustainably.
That’s green marketing at its best and most transparent.
How to Recognize Green Marketing
Actual green marketing may include:
• Certifications and endorsements from established regulatory organizations
• Clearly labeled manufacturing processes
• Recyclable, compostable, or biodegradable materials (but watch out for these labels, sometimes a product can actually only be composted or biodegrade in very specific conditions that aren’t realistic).
• Products free from toxic chemicals
• Use of renewable energy
• The use of transportation measures such as EVs
• Purchase of carbon offsets for any unavoidable emissions
• In-office programs and measures such as renewable energy, LEED certified buildings, on-site composting, or elimination of single use plastic
• Doesn’t use too much packaging, and ideally avoids plastic packaging
• Circularity programs that allow consumers to send back the product for repair or reuse
• High-quality manufacturing made to last rather than one-time or short-term use
• Fair trade and ethical labor practices
• Environmental programs outside the company, such as donations or volunteer efforts
Greenwashing Regulations
There are currently no laws in place to prevent greenwashing practices in the U.S. The FTC does have a set of Green Guides, which are not mandatory, but can help companies avoid falling into greenwashing territory.
Globally, the outlook for anti-greenwashing measures is somewhat more robust. The last couple of years have seen a rise in anti-greenwashing policies or preliminary taskforces in various countries around the world.
• The EU Green Claims Directive is a new law that was approved by the European Parliament in 2024, and is now being enacted by member states, with a September 2026 target date for implementation.
• In the U.K., the Green Claims Code is a set of principles that businesses must adhere to, or face regulatory consequences.
The Takeaway
Greenwashing is a marketing tactic some companies use to align themselves with the growing consumer and investor desire for sustainable products and investments. It’s related to the concept of “whitewashing,” which means covering up the truth with a positive-sounding story.
Investors committed to sustainability can look for red flags of greenwashing before deciding whether to invest.
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FAQ
What is ESG greenwashing?
ESG greenwashing is the practice of using marketing tactics to exaggerate an organization’s environmental, social, or governance efforts in order to attract customers, employees, investors, or positive media attention.
What are the three most common kinds of greenwashing?
Three common types of greenwashing are the use of environmental imagery, misleading labels and language, and hidden tradeoffs where the company emphasizes one sustainable aspect of a product — while still engaging in environmentally damaging practices.
What is the role of regulations in combatting greenwashing?
Ideally, regulations against greenwashing practices will deter companies from false and misleading practices. Regulations can establish standards that result in clearcut penalties in the case of greenwashing violations. As of early 2025, there are only a few anti-greenwashing regulations in effect, worldwide.
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Automated investing is a type of investing that uses computer algorithms to recommend investment portfolios to an individual based on their goals, time horizon, and risk profile. Automated investing platforms, also known as robo-advisors, tend to feature lower fees, lower minimum balances, digital applications, and a more hands-off approach to investing.
Because automated investing can be done with little or no direct human effort, it can be an ideal option for investors just starting their wealth-building journey. Automated investing may reduce the learning curve for some investors entering the financial markets, helping them start building and managing a portfolio to achieve their financial goals.
Key Points
• Automated investing uses algorithms to provide tailored financial planning and retirement advice.
• Lower fees and minimum balances make automated investing accessible for beginners.
• Platforms collect data on financial situations, risk tolerance, and goals to manage a diversified portfolio.
• Automated platforms handle tasks like portfolio rebalancing and tax-loss harvesting.
• Drawbacks include limited human interaction and potential exposure to market volatility.
Automated Investing: A Primer
There are several reasons why investors choose automated investing tools to help them manage an investment portfolio.
Automated investing uses computer algorithms to select and trade stocks, exchange-traded funds (ETFs), or other assets without the need for oversight by a human financial advisor.
Automated investing has changed the financial advisory game in fundamental ways. Like so much else that has happened during the digital revolution, automated investing has eliminated the middle man and is delivering a service directly to the client – you, the investor.
Investors who sign up for an automated investing platform usually start by filling out a questionnaire, which collects information about the investor’s financial situation, risk tolerance, and goals. The automated investing advisor then uses this data to recommend investments to the client that may help them meet their financial goals. Based on the investor’s input, the automated investing platform will recommend and manage a pre-determined portfolio for the investor using computer algorithms and other data.
Automated investing advisors may also handle portfolio rebalancing and tax-loss harvesting if the client chooses these services. (SoFi’s automated portfolio includes the above features, but not automated tax-loss harvesting.)
Most automated advisors use Modern Portfolio Theory (MPT) to create and manage a portfolio’s asset allocation. The idea is to decrease risk by diversifying a portfolio into many assets and not “put all your eggs in one basket.”
Automated Investing vs Robo Advisors
Automated investing tools are sometimes referred to as robo advisors. Investors may see the terms automated investing and robo-advisors used interchangeably to describe digital tools that use computer algorithms to manage a financial portfolio.
In reality, though, automated investing is a broader term that can refer to several aspects of today’s financial products and features.
• Using automatic transfers and contributions to investment portfolios and retirement plans is a form of automated investing.
• Target date funds, a type of mutual fund that rebalances over time to become less conservatively invested, uses a form of automated investing known as a glide path.
SoFi’s robo-advisor can offer a portfolio to suit your needs and risk level.
Why People Choose an Automated Investing Strategy
There are several reasons why investors choose automated investing tools to help them manage an investment portfolio.
Low-Cost Process
Automated investing advising generally costs less than traditional financial advisors. The reason the cost of automated advising is lower is because it relies on an algorithm, while the guidance of a live person can cost more. In other words: A human touch comes with a premium price.
Automated investment fees are usually a percentage of the assets under management (AUM). Typical fees are less than 0.5% of AUM annually. So if an investor puts $10,000 into an automated investing service, they generally pay less than $50 per year.
By comparison, a reasonable rate for a human financial advisor would be a 1% investment fee. On a $ 10,000 investment, that’s $100 per year just for the advisory fee. Investors may also have to pay fees on their investments and commissions for products the financial advisor sells.
However, automated investing services have additional fees as well. Robo-advisors charge a brokerage fee, and the ETFs themselves typically generate management fees, taxes, and other costs for which the consumer is responsible.
Like many investment costs, however, these fees can be hard to track as they may simply be deducted from investor returns. That’s why it’s important to look beneath the hood, so to say, of any investment product to learn the exact costs.
Many automated investing platforms have low minimum account requirements. And some platforms have no minimum initial investment requirements.
In contrast, some human financial advisors won’t take on a client unless they have more than $100,000. At the high end, private wealth managers could require minimums of $5 million.
Because of the lower initial investment required, younger consumers have turned to automated investing in planning for their financial future. Previously, high minimum balances had been headwinds to younger investors, preventing them from getting financial advice.
As younger investors, like Generation Z and millennials, start hitting life milestones like getting married and saving for a house, automated investing may be a good option for them to begin building wealth.
Efficient & Convenient Access
With traditional financial advisors, clients had limited access and had to work around the human advisor’s schedule. Automated advisors use digital platforms. This allows clients to ask questions and access help 24 hours, seven days a week, if needed.
Need to make a trade or a change? There is no need to call to schedule an appointment, fill out a physical form, meet with an advisor in person, or wait for office hours. Usually, a few button pushes can do the trick.
Lower fees and minimum balances have attracted younger investors to the automated investing industry. But the digital and mobile platforms these services offer have also made younger users turn to such automated services more.
Concerns About Automated Investing Services
Robo advisors do come with some downsides, however.
Limited Human Interaction
While some automated services may offer investors the ability to contact a live advisor or representative, not all of them do. And even when that’s available, your access may depend on how much money you have invested.
In any case, if you have pressing questions or an investing dilemma, it’s likely it will be up to you to figure out the right steps to take.
Not Fully Customizable
It’s true that a robo-advisor is designed to offer a range of pre-set portfolios, one of which will hopefully meet an investor’s needs. But automated platforms don’t have the flexibility to offer each person a fully customizable portfolio — for that they would need to craft their own or work with a professional.
By the same token, if your personal circumstances changed in such a way that your investment strategy also shifted, it’s unlikely that you’d be able to adjust an automated portfolio except in terms of its basic asset allocation.
Risks and Costs of ETFs
Most robo advisors use a mix of ETFs and low-cost index funds. ETFs hold a basket of stocks or bonds and the vast majority of these funds are passively managed, i.e. they are built to mirror an index, such as the S&P 500. ETFs differ from index mutual funds in that they are traded throughout the day on an exchange, similar to stocks.
ETFs come with certain risk factors. Because ETF shares are traded throughout the day, they’re bought and sold at the market price, which may or may not reflect the fund’s net asset value or NAV. Thus, an ETF’s performance is subject to market volatility. In addition there can be tax consequences, owing to the trading of shares.
What to Look for in an Automated Investment Platform
If you’re interested in opening an automated investing account, there are several factors you may want to consider before deciding if automating investing is right for you.
Automated Investing Fees
As mentioned above, automated investing fees are generally lower than traditional financial advisors. However, you still want to compare the fees of the various automated investing platforms on the market.
Some platforms charge a flat fee, while others charge a percentage of your assets under management. In addition, some platforms charge fees for specific services, such as tax preparation or additional investment advice.
Affordability
Some automated investment platforms require a minimum investment to open an account. You’ll want to understand any minimum investment requirements before opening an account. For example, some automated investing platforms may offer a $0 account minimum, but that might not include certain robo-advisory services you’re looking for.
Investment Options
The investment options offered by automated investment platforms vary. Some platforms offer a limited selection of investment options, while others offer a wide range of investments. You want to ensure the automated investing platform you choose offers investment options that meet your needs.
Usually, robo-advisors only invest in ETFs and mutual funds, so you’ll want to see if the services offer a range of funds, from international equities to domestic corporate bonds. Knowing what investment options a robo-advisor provides may help you ensure that you may end up with a diversified portfolio that aligns with your goals.
Investment Rebalancing
Generally, a robo-advisor will make automated investments based on your risk tolerance and financial goals. These services will create a portfolio of a certain percentage of stock ETFs and bonds ETFs based on risk tolerance. But you want to check that the automated investing services will rebalance your portfolio to maintain that percentage of stocks and bonds.
For example, an investor with a more aggressive risk tolerance may have a portfolio with an asset allocation of 80% stocks and 20% bonds. With time, the portfolio may change and knock that ratio off balance — too much of one and not enough of the other. An automated investor can automatically rebalance your account to its original 80/20 ratio. No human interaction is needed; the rebalance happens through the automated investing algorithm.
Human Interaction
Some automated investing services may give investors access to human financial professionals, which can be helpful for investors who need to ask questions, discuss goals, and plan for the future. Automated investing services might charge for this service, but it could be helpful to have this option.
Who Might Want to Consider Auto Investing?
Automated investing may be a good option for people who want to invest for the long term but do not want to manage their own portfolios or pay high fees for a traditional financial advisor. It can also be a good option for people who want to invest in various asset classes, but don’t have the time or expertise to do so themselves.
That doesn’t mean auto investing is right for everyone. For those who aren’t particularly tech savvy or comfortable with automated platforms, using a robo-advisor might not make sense. Again, it’s important to be comfortable with the investments offered in these pre-determined portfolios, as well as the risks and costs associated with these products.
As noted above, many younger investors have begun using robo-advisors to create portfolios and make automated investment decisions. This may allow younger investors to build up experience in the financial markets while using a pre-set portfolio. As they build wealth and expertise, younger investors may decide to make investment decisions on their own or hire a traditional financial advisor to help manage their financial goals.
The Takeaway
An automated investing platform can be ideal for many investors, particularly regarding affordability, convenience, and avoiding potential human errors. This investment tool allows investors to use a hands-off approach, which many people may prefer over the time-consuming research and management required for picking and choosing stocks, bonds, and other assets to build and manage a portfolio.
Ready to start investing toward your future, but want some help? You might consider opening an automated investing account with SoFi. Whether you're interested in investments for your traditional brokerage or IRA account, you can access personalized, expert-curated recommendations and automatic monitoring, trading, and rebalancing. With a robo advisor from SoFi Wealth, you'll get a professionally managed portfolio aligned with your goals.
Open an automated investing account and start investing for your future with as little as $50.
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SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.
For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.
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ESG investing can be considered a form of sustainable or impact investing, but the term itself emphasizes that companies must focus on positive results in light of environmental, social, and governance factors.
ESG investing strategies are still popular, with global mutual funds and exchange-traded funds (ETFs) that embrace ESG-focused strategies seeing a high of $480 billion in assets under management, as of November 2023, up from $391 billion in 2021.
But ESG strategies have waxed and waned over the last few years, particularly in the U.S. Domestic ETFs and open-end funds saw outflows of about $19.6 billion in 2024, the largest amount since Morningstar began tracking sustainable fund flows in 2015.
Unfortunately, there has yet to be a single ESG framework used by all investors or financial firms to evaluate a company’s progress toward ESG goals. Rather, there are a number of ESG standards worldwide, most of them voluntary, and investors must learn which ones a certain fund or stock adheres to before choosing to invest.
Key Points
• ESG refers to non-financial criteria that can help investors assess a company’s performance in terms of environmental, social, and governance factors.
• ESG strategies are seeing an increase in investor interest, with global ESG-specific funds reaching $480 billion in AUM in 2023. But U.S. open-end funds and ETFs had another year of outflows in 2024.
• Tracking a company’s adherence to ESG standards can also reveal its ability to manage certain ESG risks.
• Currently, ESG standards are largely voluntary, although some ESG frameworks are more widely used than others.
• It’s possible to invest in ESG-focused stocks, bonds, mutual funds, and exchange-traded funds (ETFs).
What Is ESG Investing?
ESG refers to environmental, social, and governance factors that underlie certain investment strategies. By using ESG standards, investors can evaluate how well companies meet relevant criteria and manage risks.
Following are some of the factors that investors can consider when evaluating the three pillars of ESG, and deciding whether to invest online or through a brokerage in ESG funds, ETFs, or other options.
Environmental
The environmental component of ESG criteria might include metrics on a company’s energy emissions, waste, and water usage. Investors may also focus on the risks and opportunities associated with the impacts of climate change on the company and its industry.
Some company information that environmentally conscious investors may evaluate include:
• Pollution and carbon footprint
• Water usage and conservation
• Renewable energy integration (such as solar and wind)
The social component of ESG generally describes the impact of a company’s relationships with people and society. Factors as varied as corporate culture, commitment to diversity, and how much a company invests in local organizations or communities can impact socially conscious investors’ decisions on buying into a specific corporation.
Some other social factors can include:
• Employee pay, benefits, and perks
• Diversity, equity, and inclusion
• Commitment to social justice causes
• Ethical supply chains (e.g., no sweatshops, conflict-free minerals, etc.)
Governance
The governance component of ESG generally focuses on how the company is run. Investors want to know how the board of directors, company, and shareholders relate to one another.
Some additional governance factors that investors evaluate include:
• Executive compensation, bonuses, and perks
• Diversity of the board of directors and management team
• Transparency in communications with shareholders
• Rights and roles guaranteed to shareholders
Understanding ESG Investment Strategies
At one point, ESG strategies were primarily guidelines for investing according to certain values. But in the last couple of decades, it’s become clear that ESG factors can also impact a company’s bottom line. For instance, there may be potential risks to company performance that require a company to follow ESG risk mitigation efforts.
Unfortunately, there is no universal set of standards for measuring a company’s progress in these three areas. That said, many companies have embraced global ESG frameworks, which are largely voluntary.
Additionally, third-party organizations have stepped in to create ESG scores for companies and funds based on their adherence to various ESG factors.
How ESG Scores Work
ESG scores — sometimes called ESG ratings — are designed to measure a company’s performance based on specific environmental, social, and governance criteria. Investors can use them to assess a company’s success, risks, and opportunities concerning these three areas.
Where ESG Scores Come From
Due to the growing need for ESG information and metrics, third-party data providers have become a part of the industry.
That’s because ESG guidelines are still very much a work in progress. Some are mandatory, some are not. In some cases, companies have developed proprietary systems to assess and report their own performance or risk mitigation efforts.
In short, investors can’t rely on just one ESG score, but must become familiar with how different ESG scores work and how they’re applied.
ESG Scoring Systems
An ESG score is typically calculated by analyzing a company’s available data on environmental, social, and governance policies and practices using various sources, like SEC filings, government databases, and media reports.
A high ESG score typically means a company is reaching certain targets, or manages ESG risks better than its peers, while a low ESG score means the company is not reaching its ESG goals, or it has more unmanaged ESG risks. Evaluating a company’s ESG score, along with financial analysis, can give investors a better idea of the company’s long-term prospects.
Some of the most prominent ESG score providers are MSCI, Morningstar Sustainalytics, and S&P Global. But some financial firms conduct their own ESG evaluations and provide proprietary scores. Transparency into how the scores are calculated can vary.
ESG vs SRI vs Impact Investing
ESG investing is sometimes called sustainable investing, impact investing, or socially responsible investing (SRI). But these terms are not interchangeable. Impact investing and SRI are broader terms. ESG could be seen as a type of impact or socially responsible investing.
What Is SRI?
Socially responsible investing selects or excludes investments according to specific ethical guidelines. Investors utilizing an SRI strategy may avoid investing in companies related to gambling and other sin stocks, or they may avoid companies that cause damage to the natural environment — or they may choose companies with a track record of green initiatives or policies that support a diverse workforce.
Impact investing is generally employed by institutional investors and foundations. The aim of impact investing is often to generate positive social or environmental impact, but it can refer to any agenda that involves using capital to push for a certain outcome or result.
Impact investing is a broad category that can include a range of strategies, including ESG (environmental, social, and governance) and SRI (socially responsible investing), as well as others.
Other Types of Impact Investing
In addition there are a couple of other designations investors may want to know:
• Green investing refers to strategies that aim to benefit the physical environment. Investors may put money into organizations that support renewable energy, low carbon, pollution mitigation, and more.
• Last, corporate social responsibility initiatives, or CSR refers to programs that companies may establish on their own. Often, these business initiatives support socially responsible movements, like environmental sustainability, ethical labor practices, and social justice initiatives.
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Types of ESG Investments
Investors can make ESG investments in the stocks and bonds of companies that adhere to ESG criteria or have high ESG scores. Other potential investment vehicles are mutual funds and ETFs with an ESG strategy.
Stocks
Buying stocks of companies with environmental, social, and governance commitments can be one way to start ESG investing. However, investors will often need to research companies that have ESG credibility, or rely on third-party agencies that release ESG scores.
Bonds
The bonds of corporations involved in ESG-friendly business practices can be a good option for investors interested in fixed-income securities. Green and climate bonds are bonds issued by companies to finance various environmentally-friendly projects and business operations.
Additionally, government bonds used to fund green energy projects can be an option for fixed-income investors. These bonds may come with tax incentives, making them a more attractive investment than traditional bonds.
Investors who don’t want to pick individual stocks to invest in can always look to mutual funds and exchange-traded funds (ETFs) that provide exposure to hundreds of ESG companies and investments.
A growing number of index funds invest in a basket of sustainable stocks and bonds. These allow investors to diversify their holdings by buying shares of a single fund.
However, not all ESG funds follow the same criteria, and each fund can focus on different aspects of environmental, social, and governance issues. Interested investors would do well to look under the hood of specific funds to evaluate their holdings and other criteria.
What is the best way to find an ESG company? Some 600 third-party agencies now gather ESG data from companies and conduct their own analysis and scoring.
Commonly used rating agencies include:
• Bloomberg ESG Data Services
• Dow Jones Sustainability Index
• MSCI ESG Research
• Morningstar Sustainalytics
• S&P Global, ISS ESG
• Moody’s Investors Service
• Thomson Reuters ESG Research Data.
Benefits of ESG Investing
ESG investing has several potential benefits, including:
• Improving long-term financial performance: A growing body of evidence suggests that companies with solid ESG ratings may be good investments. They tend to outperform those with weaker ratings, both in share price performance and earnings growth.
• Mitigating risk: ESG factors can help identify companies with poor governance practices or exposure to environmental and social risks, leading to financial losses.
• Creating social and environmental impact: By investing in companies that are leading the way on environmental, social, and governance issues, investors can help drive positive change and make a positive impact on society.
These potential benefits are increasing the popularity of ESG investing. According to Bloomberg, all global ESG assets reached $30 trillion by the end of 2022, and are projected to reach $40 trillion by 2030, up from $22.8 trillion in 2016.
Risks of ESG Investing
The main disadvantage of ESG strategies is that they limit the number of investments that people can consider. Thus, in some cases investors could end up trading potential returns for the ability to invest according to their values.
In addition, ESG investments can sometimes come with higher costs, for example an ESG fund may have a higher expense ratio vs. a traditional counterpart.
While there is a growing body of data regarding the performance of ESG indices and securities, it’s still a relatively new sector relative to more traditional investments, and again many standards and disclosures are still not mandatory.
How to Invest in ESG
If you’re interested in creating an ESG portfolio, you can start by contacting a financial advisor who can help you shape your investment strategy.
However, if you are ready to start investing and want to build a portfolio on your own, you can follow these steps:
1. Open a brokerage account
You will need to open a brokerage account and deposit money into it. Once your account is funded, you will be able to buy and sell stocks, mutual funds, and other securities.
2. Pick your assets
Decide what type of investment you want to make, whether in a stock of a company, an ESG-focused ETF or mutual fund, or bonds.
3. Do your research
It’s important to research the different companies and funds and find a diversified selection that fits your desires and priorities.
4. Invest
Once you’re ready, make your investment and then monitor your portfolio to ensure that the assets in your portfolio have a positive social and financial impact.
It is important to remember that you should diversify your portfolio by investing in various asset classes. Diversification may help to reduce your risk and improve your returns.
ESG Investing Strategies
ESG investing can be different based on values and financial goals. It’s therefore essential to start with your investment goals and objectives when crafting an ESG investing strategy. Consider how ESG factors may help you reach these goals.
It’s also crucial to understand the data and information available on ESG factors; this will vary by company and industry. When researching potential ESG investments, you want to make sure a company has a clear and publicly available ESG policy and regularly discloses its ESG performance. Additionally, it can be helpful to look at third-party scores to determine a company’s ESG performance.
Why Is ESG Investing Important?
ESG investing offers investors a way to invest their money with the hope of having a genuine impact in terms of environmental, social, and governance factors.
In addition, companies today face a number of ESG risk factors. Adhering to certain ESG principles may help manage ESG risks.
Whether or not companies or funds that embrace ESG strategies deliver on the promised goals is a matter for investors to decide via due diligence. As noted above, without a commonly agreed-upon set of standards and some form of accountability, it’s difficult to ascertain which companies are truly having an impact.
Are ESG Strategies Profitable?
Investors have continued to be interested in ESG strategies over time. As noted above, global ESG-focused assets under management have continued to grow, although U.S. sustainable open-end fund and ETF outflows increased for the second year in a row, according to a 2024 report from Morningstar.
According to the report: “Sustainable funds faced many headwinds in 2024. They continued to lag conventional peers, with only 42% of sustainable funds landing in the top half of their respective Morningstar Categories.”
The Takeaway
In recent years, investor interest in sustainable investing strategies like ESG has grown. In addition, there is some data that suggests that ESG strategies may be just as effective as traditional strategies in terms of performance.
This is despite the fact that ESG criteria are inconsistent throughout the industry. There are a myriad different ways that companies can provide ESG-centered investments, but there aren’t industry-wide benchmarks for different criteria or success metrics.
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FAQ
What are the three pillars of ESG?
ESG stands for three areas that some companies strive to embrace by being proactive about the environment, supportive of social structures, and transparent and ethical in corporate leadership.
What are some examples of ESG investing?
There are many ways to add ESG strategies to your portfolio: You can consider investing in green bonds, in companies that focus on environmentally supportive technologies, in funds that invest in renewable energy companies, clean water initiatives, carbon sequestration, and more.
What is the difference between ESG and sustainability?
Sustainability is a broader term. Environmental, social, and governance (ESG) factors may support sustainability in different ways: by limiting air or water pollution, by supporting fair labor practices, by requiring transparency in corporate governance.
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With the median U.S. home listing price sitting at $400,500 in January 2025, most people will need a mortgage to fund their purchase, and the majority of them will choose a fixed-rate loan, in which the interest rate does not fluctuate over the life of the loan.
But if you’re preparing to take the homeownership plunge, how do you know which kind of loan is right for you and what are the pros and cons of fixed-rate mortgages? Let us be your guide.
Key Points
• Fixed-rate mortgages offer a consistent interest rate and monthly payment throughout the loan term.
• These loans are especially popular among first-time homebuyers.
• Fixed-rate loans are available in terms of 10, 15, 20, and 30 years.
• Shorter-term mortgages have higher monthly payments but lower total interest.
• Refinancing a fixed-rate mortgage is possible but involves additional costs.
What Is a Fixed-Rate Mortgage?
The fixed-rate mortgage definition is, as its name suggests, a mortgage loan whose interest rate is fixed across the lifetime of the loan. The rate is stated at the time the documents are signed and does not change at any point throughout the loan term (provided that all payments are made in full and on time).
Fixed-rate mortgages are the most common type of mortgage. According to the National Association of Realtors® 2024 Profile of Home Buyers and Sellers, 64 percent of all buyers use a fixed-rate mortgage, with this type of mortgage being slightly more common among first-time homebuyers than repeat buyers. Fixed-rate mortgage terms can be 10, 15, 20, or 30 years. A mortgage calculator can help you work through the different monthly payments for each and see what best suits your situation.
How Does a Fixed-Rate Mortgage Work?
Once you sign your home loan documents and close on your purchase, you’ll begin making a monthly mortgage payment. With a fixed-rate loan, you can expect to pay the same amount each month. How much of your payment goes toward the principal vs. interest will change over the life of your loan — typically more of your payment goes toward interest at the outset of the loan, with more going toward the principal nearer to the end of the term — but the overall payment amount will remain the same. You can see the breakdown of your payments in your loan’s mortgage amortization table.
How are fixed mortgage rates determined? Monetary policy actions by the Federal Reserve and overall economic factors (such as inflation) influence the rates lenders offer in broad strokes. The specific rate each individual borrower is offered is additionally affected by factors such as the loan amount, loan type, and loan term as well as borrower credit scores and financial profile.
Fixed-Rate Mortgages vs. Adjustable-Rate Mortgages
If you’re deciding between a fixed-rate vs. adjustable-rate mortgage (or ARM), the difference is that with an ARM, the interest rate can move up or down according to the market. The rate is calculated according to the index and margin — the index is a benchmark interest rate based on market conditions at large, and the margin is a number set by the lender when the loan is applied for.
You may see options like a 5/1 ARM, which means the rate is set for the first five years of the loan and then adjusts annually after that.
Long story short: A fixed-rate mortgage offers you a predictable interest rate and monthly payment, whereas an adjustable-rate mortgage can shift over the course of the loan term according to external factors, like inflation affecting the APR or the actions of the Federal Reserve.
It is, however, important to understand that your total monthly housing bill can still change, even with a fixed-rate mortgage, if, for example, your property taxes or homeowners insurance rates change or if you miss several payments.
There are a few variables to fixed-rate mortgages.
• Conventional Loans: Conventional fixed-rate mortgages are offered by banks, credit unions, and other lending institutions. They typically have stringent requirements about credit score and debt-to-income ratio (or DTI) that an applicant must meet.
• Government-Insured Loans: FHA, USDA, and VA mortgages tend to have less tough requirements and target certain kinds of homebuyers, like those with lower income, in the military (past or present), and living in rural areas. They may offer no or low down payment and other perks, too.
• Conforming and Non-Conforming Loans: Mortgages can also be considered “conforming” or “nonconforming,” depending on whether or not they meet the guidelines established by the Federal Housing Finance Agency (commonly known as Fannie Mae and Freddie Mac). For 2026, the conforming loan limit for one-unit properties is $832,750, or up to $1,249,125 in areas deemed “high cost.”
Of course, homes costlier than these limits exist, and it is possible to take out a mortgage to buy one. Those loans are considered “nonconforming” and are also sometimes called “jumbo loans.”
Because the loans are so large, eligibility requirements tend to be more stringent, with borrowers usually needing a down payment well above 3%, cash in the bank, and a solid credit score.
Fixed-Rate Mortgage Term Lengths
You can’t answer the question “what is a fixed-rate mortgage?” without looking closely at mortgage term lengths. The term length that a buyer chooses for a fixed-rate mortgage can have a significant effect on the overall costs of the loan, so it’s helpful to understand how term lengths and costs intersect.
30-Year Fixed
The most common term length for a fixed-rate mortgage is 30 years. Repaying the loan (plus interest) over three decades means paying more interest over the life of the loan than you would if you chose a shorter term length, but the longer term also makes for a lower monthly payment than a shorter term. This is one reason it’s such a popular choice. A chart showing 30-year mortgage rate trends can help you see how current rates compare to historical highs and lows.
15-Year Fixed
A shorter term means higher monthly payments but less interest paid over the life of the loan, which is a critical consideration when choosing between a 30-year and a 15-year mortgage. For example, if a homebuyer borrowed $350,000 at 7.00% with a 30-year loan, the monthly payment amount would be $2,328.56 and the total interest paid would be $488,281.14. But borrowing the same amount at the same rate with a 15-year term would mean a monthly payment of $3,145.90 and total interest paid of $216,261.81. A 15-year mortgage term, or other shorter-term fixed-rate loan, may be a good choice for those who can afford to comfortably make the higher monthly payment.
Other Terms
As noted above, a fixed-rate mortgage term can also be 10 or 20 years. To see how changing the term length affects the monthly payment amount and the total interest paid over the life of the loan, try plugging different term lengths into a mortgage calculator.
Example of a Fixed-Rate Mortgage
Here’s an example of how a fixed-rate mortgage might work if you buy a house for $428,700 with 20% down and take out a 30-year fixed-rate home loan. Your mortgage principal will be $342,960, and at a rate of 6.72% with a solid credit score of 740+, your monthly payment (not including any taxes or insurance) will be $2,217.
As we’ve seen, when you make your loan payments, at first most of the money goes towards interest. This is because the interest is “front-loaded,” to use the industry lingo. Perhaps 90% of your payment will be paying interest and 10% will be applied to the principal. As you get to the end of your loan payment, these figures may well be reversed. That is, 10% of the $2,217 goes towards interest and 90% toward the principal.
Pros and Cons of Fixed-Rate Mortgages
Fixed-rate mortgages are more common among homebuyers because of the predictability they offer. Still, there are both drawbacks and benefits to pursuing this kind of home loan.
Benefits of Fixed-Rate Mortgages
Because homebuyers who take out fixed-rate mortgages will know their rates at the time they sign on the dotted line, these loans provide long-term predictability and stability — which can help people who need to fit their housing expenses into a tight budget.
Fixed-interest mortgages, and other types of fixed-rate loans, shield borrowers from potentially high interest rates if the market fluctuates in such a way that the index significantly rises.
Drawbacks of Fixed-Rate Mortgages
Although fixed-rate mortgages are more predictable over time, they tend to have higher interest rates than ARMs — at least at first. Sometimes an ARM might have a lower interest rate but only for a relatively brief introductory period, after which the rate will be adjusted.
If the index rate falls in the future, homebuyers who opt for a fixed-rate loan might end up paying more in interest than they would have with an ARM.
Because lenders risk losing money on fixed-interest mortgages if index interest rates go up, these loans can be harder to qualify for than their adjustable-rate counterparts.
How to Calculate Fixed-Rate Mortgage Payments
Now that you know what a fixed-rate mortgage is and how it functions, you might wonder how much it could cost you. If you are curious about what fixed-rate mortgage payments would look like at different home price points, for varying terms, you use an online mortgage calculator or, for an even more detailed look at what you’ll pay each month, check out a mortgage calculator with taxes and insurance.
When Is a Fixed-Rate Mortgage the Right Choice?
Fixed-rate mortgages offer long-term predictability, which can be a must for those who need budget stability. Furthermore, fixed interest rates can be beneficial for those who plan to stay in their home for a longer period of time — say, at least seven to 10 years.
Here’s why: Homebuyers with 30-year fixed-rate loans may need that long to build home equity (remember: during the initial years of the loan most of your payments go toward interest, not equity).
Finally, if homebuyers suspect that interest rates are about to rise, a fixed-interest loan can be a good way to protect themselves from those increasing rates over time.
That said, there are some instances in which an ARM may be a better choice. If a homebuyer is planning to sell in a short amount of time, for example, the low introductory interest rate on an adjustable-interest loan could save them money (as long as they can sell the property) before the rate can tick upward.
Fixed-rate loans, in which the interest rate holds steady for a loan term of 10, 15, 20, or 30 years, are popular in part because their costs are predictable. But when you’re in the market for a home, shopping for the right loan is almost as important as shopping for the house itself, so an adjustable-rate mortgage might be worth a look too, especially if you need a lower monthly payment and don’t plan to stay in the home for very long.
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FAQ
Can you refinance a fixed-rate mortgage?
Yes, you can refinance a fixed-rate home loan. Because refinancing means taking out an entirely new loan and involves some upfront costs, it’s important to make sure that these costs don’t outweigh the savings you will enjoy due to, say, a lower interest rate or a shorter loan term (two of the chief reasons people opt to refinance).
What is the average fixed-rate mortgage?
Mortgage rates can change daily, so if you want to know the current average fixed-rate mortgage number, it’s best to check online. For most of the last two and a half years (dating back to mid-2022) the 30-year fixed rate has been between 6.00% and 7.00%.
Are most mortgages fixed rate?
Fixed-rate mortgages have been more popular than adjustable-rate mortgages since the housing market crisis in 2007, largely because they offer borrowers a predictable payment schedule. Over the last 15 years, the share of adjustable-rate mortgages originated has been between 4 percent and 25 percent of all new home loans.
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