Recently, many colleges have changed their college admissions testing policies, making standardized tests like the SAT optional and placing more emphasis on other factors, such as GPA and essays. One reason for the shift is a growing concern that these tests tend to unfairly reward students with more wealth and access to test prep courses and tutors.
The SAT might be less popular as a requirement for admissions to some colleges, but these test scores have an impact beyond just getting into a school. Read on to learn how SAT requirements are changing, but why taking the SAT and submitting your score may still be helpful.
Key Points
• The role of SAT scores in college admissions is evolving, but test scores may still be significant for some applicants and colleges.
• SAT scores can strengthen a student’s application, with strong scores possibly providing a competitive edge at test-optional schools.
• High SAT scores may qualify students for merit scholarships, lowering tuition costs.
• Strong SAT scores can help students bypass introductory college courses, saving time and money.
• Despite test-optional policies, taking the SAT can still be recommended for more opportunities.
How SAT Requirements Are Changing
The number of colleges dropping SAT scores as a requirement for admission is growing. However, policies vary from school to school and from admission year to admission year, so students might want to double- and triple-check before assuming that their dream school doesn’t want to see their standardized test score.
A “test-optional” policy allows applicants to decide whether or not they want to submit their SAT or ACT scores to a college. This means that you can take the SAT (or ACT) and, based on how you do and how those scores compare to the average SAT score of admitted students, can decide whether or not you want to submit the score with your application.
Less commonly, colleges will have a “test-blind” or “test-free” policy. This means that even if a student submits SAT or ACT scores, the school will not consider them during the application process.
While some schools no longer require or consider their applicants’ SAT scores, others are making it easier to put your best foot forward with scores. Many colleges and universities, including the Common Application, now allow applicants to submit their SAT superscore.
An SAT superscore allows you to mix and match individual section scores from different test dates to come up with a “superscore” that is higher than the SAT score from a single sitting.
For some, this takes off some of the pressure of standardized testing. It means if a student feels off on one section, they can use a higher score from a previous test to get their best score possible.
Two other major recent changes to the SAT come from the College Board (which creates the test) itself: The SAT no longer contains the essay or subject tests. This means you no longer have the option to take — or submit — these tests.
How SAT Scores Still Matter
Colleges and universities might be changing their guidelines about requiring SAT scores, but standardized tests still matter not only in the admissions process but beyond.
Here are some reasons why the SAT and a student’s score still matter:
• Avoiding the SAT could limit options. A student’s target school might not require an SAT score, but what about their safety or reach options? Bypassing the SAT test altogether could end up limiting a student in where they can apply to schools. With no test score at all, they may be limited to schools that don’t require an SAT score, potentially missing out on another great option for them. Forgoing the SAT test completely could mean dramatically cutting off a student’s options before the application process even begins.
• Considered, but not required. Some schools no longer require SAT scores for applicants, but will still consider them if submitted. Sharing SAT scores can help give admissions officers a more comprehensive picture of the applicant. In addition, if the school is particularly competitive, a strong standardized test score could help a student stand out.
• Scholarship eligibility. Some universities and nonprofits require an SAT score when applying for merit scholarships. Without an SAT score, applicants might be ineligible, losing out on an opportunity to get funding for education.
Qualifying for and receiving a scholarship can lessen the need for federal or private student loans.
• They’re just a piece of the puzzle. SAT scores aren’t the only thing college admission boards consider. They’ll also look at a student’s GPA, extracurriculars, essays, recommendations, and more. No applicant is just a number, and the SAT score is only one small part of a student’s profile. Often, the score serves only as a screening tool in the beginning and is considered less and less the further a student progresses in the admissions process.
• Testing out of college courses. Applicants might not need SAT scores to apply to a school, but providing them might make them eligible to test out of core classes. In some schools, SAT scores might determine placement into, or out of 101 classes all students are required to take. Testing out of these courses could lead to graduating faster or spending less on higher education (which can lower or eliminate the need for private or federal student loans).
While students might not need an SAT score to get into their dream school, taking a standardized test could help them secure admission, scholarships, and entry into higher-level courses. It can be a valuable step for some in preparing for college.
Another Number that Matters: Financing Your Tuition
A student’s SAT score isn’t the only number they’ll have to consider during the admissions process. Another important figure is the cost of tuition, and students will have to start thinking of how they can pay for their education.
On top of federal student loans and scholarships, students might consider private student loans. These are educational loans available through banks, credit unions, and online lenders. Unlike federal student loans, private loans typically don’t come with benefits like income-driven repayment plans and loan forgiveness options — which is why it’s best to apply for federal student loans first.
The Takeaway
While SAT scores are required by fewer colleges than in the past, it may still be worthwhile for students to take the test. The score could help a student’s application package when test scores are considered but not required. It also might contribute to a student securing a merit scholarship toward the cost of their education.
In addition to pursuing scholarships, many students pursue federal and private student loans to fund their college costs.
If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.
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FAQ
Do colleges really care about SAT scores?
It depends. Some colleges don’t consider the SAT at all, some have test-optional policies, and others do require it. Even in a test-optional setting, however, SAT scores can help contribute to a candidate’s application. Also, SAT scores may help applicants qualify for merit scholarships.
Why is the SAT not required anymore?
Some schools have decided that SAT scores are not as important an indicator of an applicant’s qualifications and likelihood to succeed in college as they did in the past. Test-optional colleges let students choose whether to submit SAT or ACT scores; if a student submits good test results, that could improve their profile. Test-free colleges do not consider scores at all.
Is 1200 a good SAT score?
A 1200 SAT score is usually considered a good score vs. the current average of 1040. , as it’s above the national average. It lands in the 76th percentile, which means you scored better than about three-quarters of those who took the test. It should help you qualify for admission to many schools, but it may not be high enough to qualify for the most selective universities.
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Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.
A naked (or uncovered) option is an option that is issued and sold without the seller owning the underlying asset or reserving the cash needed to meet the obligation of the option if exercised.
While an options writer (or seller) collects a premium upfront for naked options, they also assume the risk of the option being exercised. If exercised, they’re obligated to deliver the underlying securities at the strike price (in the case of a call option) or purchase the underlying securities at the strike price (in the case of a put).
But because a naked writer doesn’t hold the securities or cash to cover the option they wrote, they need to buy the underlying asset on the open market if the option moves into the money and is assigned, making them naked options. Given the extreme risk of naked options, they should only be used by investors with a very high tolerance for risk.
Key Points
• Naked options involve selling options without owning the underlying asset or reserving cash to cover the trade if the option is exercised.
• Naked options are extremely high risk due to unlimited potential losses if the market moves against the position.
• Naked options sellers must have a margin account and meet specific requirements to trade naked options.
• Naked options strategies include selling calls and puts to try to generate income.
• Using risk management strategies is essential to try to mitigate the significant risk of loss associated with naked options.
What Is a Naked Option?
When an investor buys an option, they’re buying the right (but not the obligation) to buy or sell a security at a specific price either on or before the option contract’s expiration. An option giving a buyer the right to purchase the underlying asset is known as a “call” option, while an option giving a buyer right to sell the underlying asset is known as a “put” option.
Investors pay a premium to purchase options, while those who sell, or write options, collect the premiums. Some writers hold the stock or the cash equivalent needed to fulfill the contract in case the option is exercised before or on the day it expires. The ones who don’t are sometimes called naked writers, because their options have no cover.
Writing naked options is extremely risky since losses can be substantial and even theoretically infinite in the case of writing naked calls. The maximum gain naked option writers may see, meanwhile, is the premium they receive upfront.
Despite the risks, some writers may consider selling naked options to try to collect the premium when the implied volatility of the underlying asset is low and they believe it’s likely to stay out of the money. In these situations, the goal is often to try to take advantage of stable conditions and reduced assignment risk, even if premiums are smaller, though there is still a high risk of seeing losses.
Some naked writers traders may be willing to risk writing naked options when they believe the anticipated volatility for the underlying asset is higher than it should be. Since volatility drives up options’ prices, they’re betting that they may receive a higher premium while the asset’s market price remains stable. This is an incredibly risky maneuver, however, since they stand to see massive losses if the asset sees bigger price swings and moves into the money.
Naked options offer writers the potential to profit from premiums received, but they come with a high risk of resulting in substantial losses. Here’s what to consider before using this advanced strategy.
Potential benefits of naked options
Premium income: Option writers collect premiums upfront, which can generate income if the contract expires worthless.
No capital tied up in the underlying asset: Because the writer doesn’t hold the underlying asset, their available capital may be invested elsewhere.
May appeal in low-volatility markets: While options writers often seek higher premiums during periods of elevated volatility, naked options may be attractive to some when implied volatility is low and premiums are relatively stable. This is because the price of the underlying asset may be less likely to see bigger price movements and move into the money. There is always the possibility, however, that the asset’s price could move against them.
Significant risks of naked options
Unlimited loss potential: For naked calls, a rising stock price can create uncapped losses if the writer must buy at market value. Naked puts can also lead to significant losses if the stock price falls sharply, obligating the writer to purchase shares at a strike price that is well above market value.
Margin requirements: Brokerages often require high levels of capital and may issue margin calls if the position moves against the writer.
Limited to experienced investors: Most brokerages restrict this strategy to individuals who meet strict approval criteria due to its complexity and risk.
Because naked call writing comes with almost limitless risks, brokerage firms typically require investors to meet strict margin requirements and have enough experience with options trading to do it. Check the brokerage’s options agreement, which typically outlines the requirements for writing options. The high risks of writing naked options are why many brokerages apply higher maintenance margin requirements for option-writing traders.
Generally, to sell a naked call option, for example, an investor would tell their broker to “sell to open” a call position. This means the investor is initiating the short call position. The trade is considered to be “naked” only if they do not own the underlying asset. An investor would do this if they expected the stock to go down, or at least not go any higher than the volatility priced into the option contract price.
If the investor who writes a naked call is right, and the option stays “out of the money” (meaning the security’s price is below a call option’s strike price), then the investor will pocket a premium. But if they’re wrong, the losses can be theoretically unlimited.
This is why some investors, when they expect a stock to decline, may instead choose to purchase a put option and pay the premium. In that case, the worst-case scenario is that they lose the amount of the premium and no more.
How to Manage Naked Option Risk
Most investors who employ the naked options strategy will also use risk-control strategies given the high risk associated with naked options.
Perhaps the simplest way to hedge the risk of writing the option is to either buy the underlying security, or to buy an offsetting option that would create an option spread, which may help limit potential losses if the trade moves against the writer. This would change the position from being a naked option to a covered option.
Some investors may also use stop-loss orders or set price-based exit points to try to close out a position before assignment, though this requires monitoring and quick execution. These strategies aim to exit the option before it becomes in-the-money and is assigned. Other risk-mitigation strategies can involve derivative instruments and computer models, and may be too time-consuming for most investors.
Another important way that options writers try to manage their risk is by being conservative in setting the strike prices of the options. Consider an investor selling a put option with a $90 strike price when the stock is trading at $100 (for a premium of say $0.50). Setting the strike price further from where the current market is trading may help reduce their risk. That’s because the market would have to move dramatically for those options to be in the money at expiration.
💡 Quick Tip: All investments come with some degree of risk — and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.
The Takeaway
With naked options, the investor does not hold a position in the underlying asset. Because this is a risky move, brokerage firms typically restrict it to high-net-worth investors or experienced investors, and they also require a margin account. It’s crucial that investors fully understand the very high risk of seeing substantial losses prior to considering naked options strategies.
SoFi’s options trading platform offers qualified investors the flexibility to pursue income generation, manage risk, and use advanced trading strategies. Investors may buy put and call options or sell covered calls and cash-secured puts to speculate on the price movements of stocks, all through a simple, intuitive interface.
With SoFi Invest® online options trading, there are no contract fees and no commissions. Plus, SoFi offers educational support — including in-app coaching resources, real-time pricing, and other tools to help you make informed decisions, based on your tolerance for risk.
🛈 SoFi does not offer naked options trading at this time.
FAQ
What is a naked option?
A naked option is a type of options contract where the seller does not hold the underlying asset, nor has sufficient cash reserved to fulfill the contract if exercised. This exposes the seller to potentially unlimited losses. Naked calls and puts are typically permitted only for experienced investors with high risk tolerance and margin approval.
What is an example of an uncovered option?
A common example of an uncovered, or naked, option is a call option sold by an investor who doesn’t own the underlying stock. If the stock price rises significantly and the option is exercised, the seller must buy shares at market price to deliver them, which can result in substantial losses.
Why are naked options risky?
Naked options are risky because the seller has no protection if the market moves against them. Without owning the underlying asset or an offsetting position, losses can be substantial or even technically unlimited in the case of naked call options if the stock price rises sharply.
Can anyone trade naked options?
No, not all investors can trade naked options. Many brokerages restrict this strategy to high-net-worth individuals or experienced traders who meet strict margin and approval requirements, due to the significant risk involved.
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Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
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If you’re married or in a committed relationship, you may be wondering whether combining your finances with a joint bank account is the right choice, or if it’s better to keep things separate.
Opening a joint checking account can simplify budgeting and spending, especially if you’re sharing household expenses. In SoFi’s 2024 Love & Money survey (which included 450 adults who live with their partners and plan to marry in the next few years), nearly 30% said they already had a joint account with their significant other, and 39% said they were planning to open one.
But joint accounts also have some drawbacks, including loss of financial privacy and independence. If you are mulling over this decision, read on to learn the pros and the cons of opening a joint bank account, as well as what’s required to open this type of account.
Key Points
• A joint bank account allows shared access to funds, simplifying bill payments and budgeting.
• Both account holders are equally responsible for the account’s activities.
• A joint account can help promote transparency and trust between account holders.
• Some potential downsides include financial disputes and loss of privacy.
• To open a joint account, you’ll generally need to provide identification and personal information for all account holders.
🛈 At this time, SoFi only offers joint accounts for members 18 years old and above.
What Is a Joint Bank Account?
A joint bank account is an account that is shared between two or more people. It allows all account holders to deposit, withdraw, and manage funds, and is often used by couples, family members, or business partners.
Sharing a checking account comes with a number of benefits, including the convenience of managing household expenses and promoting transparency between couples. However, joint accounts also have some potential downsides, such as increased risk for financial disputes and potential strain on the relationship.
One of the biggest decisions a couple will make is whether they decide to treat their money as a shared asset or as separate entities. As with any discussion about money, every individual or couple will have different goals and experiences, so it’s helpful to take a look at both sides. Considering the pros and cons of joint vs separate accounts may help you decide if this kind of account suits you.
How Does a Joint Account Work?
A joint account functions just like an individual bank account, except that more than one person has access to it.
Everyone named on a joint account has the power to manage it, which includes everything from deposits to withdrawals. Any account holder can also close the account at any time. In addition, all owners of a joint account are jointly liable for any debts incurred in relation to the account.
You can open a joint account with a spouse or partner you live with, but you don’t have to be a married couple or even live at the same address to open a joint checking or savings account. For example, you can open a joint account with an aging parent who needs assistance with paying bills and managing their money. You can also open a joint account with a friend, roommate, sibling, business partner, or (if your bank allows it) a teenage child.
What Are Some Pros of a Joint Bank Account?
Here are some of the benefits of opening a joint account:
• Ease of paying bills. When you’re sharing expenses, such as rent/mortgage payments, utilities, insurance, and streaming services, it can be a lot simpler to write one check (or make one online payment), rather than splitting bills between two bank accounts. A shared account can simplify and streamline your financial life.
• Transparency. With a joint checking account, there can’t be any secrets about what’s coming in and in and what’s going out, since you both have access to your online account. This can help a newly married couple understand each other’s spending habits and talk more openly about finances.
• A sense of togetherness. Opening a joint bank account signals trust and a sense of being on the same team. Instead of “your money” and “my money,” it’s “our money.”
• Easier budgeting. When all household and entertainment expenses are coming out of the same account, it can be much easier to keep track of spending and stick to a monthly budget. A joint account can help give a couple a clear financial picture.
• Banking perks. Your combined resources might allow you to open an account where a certain minimum balance is required to keep it free from fees. Or, you might get a higher interest rate or other rewards by pooling your funds. Also, in a joint bank account, each account holder is typically insured by the FDIC (Federal Deposit Insurance Corporation), which means the total insurance on the account is higher than it is in an individual account.
• Fewer legal hoops. Equal access to the account can come in handy during illness or another type of crisis. If one account holder gets sick, for example, the other can access funds and pay medical and other bills. If one partner passes away, the other partner will retain access to the funds in a joint account without having to deal with a complicated legal process.
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🛈 At this time, SoFi only offers joint accounts for members 18 years old and above.
What Are Some Cons of a Joint Bank Account?
Despite the myriad advantages of opening a joint account, there are some potential downsides to a shared account, which include:
• Lack of privacy. Since both account holders can see everything that goes in and comes out of the account, your partner will know exactly what you’re earning and how much you are spending each month.
• Potential for arguments. While a joint account can prevent arguments by making it easier to keep track of bills and spending, there is also the potential for it to lead to disagreements if one partner has a very different spending style than the other.
• No individual protection. As joint owners of the account, you are both responsible for everything that happens in the account. So if your partner overdraws the account, you will both be on the hook for paying back that debt and covering any fees that are charged as a result. If one account holder lets debts go unpaid, creditors can, in some cases, go after money in the joint account.
• It can complicate a break-up. If you and your partner end up parting ways, you’ll have the added stress of deciding how to divide up the bank account. Each account owner has the right to withdraw money and close the account without the consent of the other.
• Reduced benefits eligibility. If you open a joint account with a teenage child who is going to, or is already in, college, the joint funds will count towards their assets, possibly reducing their eligibility for financial aid. The same goes for an elderly co-owner who may rely on Medicaid long-term care.
How to Open a Joint Bank Account
If you decide opening a joint account makes sense for your situation, the process is similar to opening an individual account. You can check your bank’s website to find out if you need to go in person, call, or just fill out forms online to start your joint account.
Typically, you have the option to open any kind of bank account as a joint account, except you’ll select “joint account” when you fill out your application or, after you fill in one person’s information, you can choose to add a co-applicant.
Whether you open your joint account online or in person, you’ll likely both need to provide the bank with personal information, including address, date of birth, and social security numbers, and also provide photo identification. You may also need information for the accounts you plan to use to fund your new account.
Another way to open a joint account is to add one partner to the other partner’s existing account. In this case, you’ll only need personal information for the partner being added.
Before signing on the dotted line, it can be a good idea to make sure you and the co-owner know the terms of the joint account. You will also need to make decisions together about how you want to manage and monitor the account, such as which account alerts you want to set up.
Should I Open a Joint Bank Account or Keep Separate Accounts?
As you consider your options, know that it doesn’t have to be all or nothing. You might find that the best solution is to pool some funds in a joint account for specific purposes, from paying for basic living expenses to saving for the down payment on a house or building an emergency fund.
You might keep your own separate accounts as well, where you can spend on what you like without anyone watching (or judging). In SoFi’s Love & Money newlywed survey (which included 600 adults who have been married less than one year), the most popular banking set-up, chosen by 42% of couples, was a hybrid approach — having both joint and individual accounts.
Opening a joint bank account offers convenience by allowing shared access to funds for bills, savings, or everyday expenses. Joint accounts also promote transparency and can simplify money management for couples who share financial responsibilities.
But joint accounts also come with some downsides and potential risks. All transactions on the joint account are visible to both account holders, which can lead to a lack of privacy regarding personal spending habits and potential conflict. Plus, either holder can withdraw money without the other’s consent. If one person mismanages funds, both may be affected.
Some couples choose to maintain separate accounts alongside a joint one for shared expenses to achieve a balance of independence and collaboration.
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🛈 At this time, SoFi only offers joint accounts for members 18 years old and above.
FAQ
What are the disadvantages of a joint account?
A joint bank account can create financial complications if one account holder mismanages money or racks up overdraft fees, as both parties are equally responsible. Disagreements over spending habits may also come up, which could strain a relationship. Also, in the event of a breakup or divorce, separating funds can become more complicated.
Are joint bank accounts a good idea?
Joint accounts can be a good idea for couples, family members, and business partners who share financial goals and trust each other fully. They simplify bill payments, budgeting, and managing shared expenses. However, they also require communication and mutual agreement on spending. If that trust breaks down or if one person is less financially responsible, problems can arise. Whether it’s a good idea depends on the relationship and financial compatibility.
Is it better to have joint or separate bank accounts?
Whether to have joint or separate bank accounts depends on the relationship and financial habits of the individuals involved. Joint accounts offer transparency and make shared expenses easier to manage, which can work well for couples or family with aligned goals. Separate accounts allow more financial independence and privacy. Some people prefer a hybrid approach — maintain both joint and individual accounts. The best setup depends on trust, communication, and lifestyle needs
Who owns the money in a joint bank account?
In a joint bank account, both account holders have equal legal ownership of the funds, regardless of who deposits the money. This means either person can withdraw or use all the money at any time without the other’s permission.
About the author
Julia Califano
Julia Califano is an award-winning journalist who covers banking, small business, personal loans, student loans, and other money issues for SoFi. She has over 20 years of experience writing about personal finance and lifestyle topics. Read full bio.
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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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A key part of wrangling your personal finances can be building personal wealth and preparing for the future. There are various ways you can accumulate funds, such as putting your cash in a savings account or investing in the market. If you’re not sure which option is right for you (or are wondering if you should have both), then consider this deep dive into saving vs. investing accounts.
Key Points
• Savings accounts provide security and liquidity, ideal for short-term, low-risk goals.
• Investment portfolios, though riskier, can offer potential for significant long-term gains, suitable for long-term objectives.
• Multiple bank accounts simplify financial management, enhance privacy, and aid in budgeting and goal setting.
• A savings portfolio can combine savings and investments, offering flexibility and diversification for future goals.
• Starting a savings and investment plan involves setting goals, saving regularly, building an emergency fund, and learning about risk.
What’s the Difference Between Saving and Investing?
Savings accounts and investments can both help you get your finances on track for your future, but they can be used to meet very different goals. A big difference between savings vs. investing is risk.
When to Save
Think of savings as a nice safe place to park your cash and earn some interest.
You probably want lower risk on money you’ll need sooner, say for a fabulous vacation in two years. A savings account will fit the bill nicely for that goal because you want to be able to get to the money quickly, and savings accounts are highly liquid (they can be tapped on short notice).
When to Invest
With investing, you take on risk when you buy securities, but there’s also the potential for a return on investment.
For goals that are 10, 20, or even 40 years away, it might make sense to invest to meet those goals. Investments can make money in various ways, but when you invest, you are essentially buying assets on the open market; however, some investment vehicles are riskier than others.
Ways to Get Started Saving and Investing
So, what are some smart ways to start your savings and investment plan?
• First, if you’re not already saving, start today. Time works against savers and investors, so write out some of your goals and attach reasonable time frames to them. Saving for a really great vacation may take a year or two. Saving for the down payment of a house may take years, depending on your circumstances.
• One of the first goals to consider is an emergency fund. This money would ideally bail you out of an emergency, like having to pay a hefty medical bill or buying a last-minute plane ticket to see a sick loved one. Or paying your bills if you lost your job. You should save the equivalent of three to six months’ worth of expenses and debt payments available. You can use an online emergency fund calculator to help you do the math.
• When it comes to saving vs investing, investing shines in reaching long-term goals. Many Americans invest to provide for themselves in retirement, for example. They use a company-sponsored 401(k) or self-directed IRA to build a portfolio over several decades.
• Many retirement plans invest in mutual funds. Mutual funds are bundles of individual stocks or other securities, professionally managed. Because they have multiple stocks within, the account achieves diversification, which can help reduce some (but not all) investment risk.
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Do Investments Count as Savings?
While there are similarities between saving and investing, there are also very important distinctions.
• When you save, you are putting your money in a secure place. A bank account that offers Federal Deposit Insurance Corporation, or FDIC, or NCUA (National Credit Union Administration) insurance is a great example of this. You will be insured for up to $250,000 per account holder, per account ownership category, per insured institution in the very rare instance of a bank failure. And in many cases, you will be earning some interest.
• With investments, you have the opportunity to grow your money significantly over time. For almost 100 years, the average return on the stock market has averaged 10%. However, it could be higher or it could be lower. And your funds are not insured, so you might wind up withdrawing funds at a moment where the economy is in a downturn and you experience a loss.
Because of this element of uncertainty, it’s wise to understand the distinction between saving and investing.
What Are the Different Bank Accounts I Should Own?
While some first-time savers think it’s either/or, savings account vs. investing, both have their role. Savings accounts can help you get to a spot in life where you can begin investing consistently.
There are two rules of thumb when it comes to savings and checking accounts.
• On the one hand, you should own as few as you need. That reduces the strain of keeping up with multiple accounts and all those login passwords (and possibly fees).
• On the other hand, don’t neglect the benefits of having an additional savings account that you set aside for a certain purpose, like a house down payment.
You might even want to have additional different kinds of savings accounts. One could be for your emergency fund, kept at the same bank as your checking account. Another might be a high-interest one for that big vacation you’re planning. And the third might come with a cash bonus when you open it and be used to salt away money for that down payment on a home.
Having Multiple Bank Accounts
It can be a good idea to have at least one savings and one checking account. If you’re married, consider owning a joint checking account for paying family bills like the rent, mortgage, groceries, and other monthly expenses. You may also want separate accounts for you and your spouse to allow for some privacy. Decide what is the right path for your family.
There are many good reasons to open a checking account. It can be the hub for your personal finances. Money rushes in from your paycheck, and then it is sent off to pay some bills. Savings accounts are more like long-term car storage, letting you stow away money for longer periods.
Both can be interest-bearing accounts, but don’t simply look for the highest rates. Shop around for low or no fees, too. You may find the right combination of these factors at online banks, which don’t have the overhead of brick-and-mortar branches and can pass the savings along to you.
Any income for regular expenses can be placed in a checking account. If you have a business or do freelance work, maybe create a completely different checking account for it.
A savings account can be a secure, liquid spot to stash an emergency fund. You might look for a high-yield savings account to earn a higher rate of interest. These are typically found at online banks and may charge lower or no fees.
A money-market account could also be good for an emergency fund since it’s an interest-bearing account. Unlike savings accounts, however, money-market accounts often have minimum deposit requirements. Keep an eye out for the lowest limits that suit your situation. The nice thing about money-market accounts is that they also offer such features as a debit card and checks. And typically, money market accounts are insured by the FDIC for up to $250,000.
What Is an Investment Portfolio?
The difference between saving and investing can be summed up with two words: safety and risk. A collection of bank accounts suggests liquidity. It’s where you keep cash so you can get hold of it in a hurry. A collection of investment assets doesn’t have as much liquidity, because you may not want to pull your money out at a particular moment, which could be due to the funds thriving or falling, depending on your scenario. It’s riskier, but also has the potential for long-term gains.
An investment portfolio can hold all manner of investments, including bonds, stocks, mutual funds, real estate, and even hard assets like gold bars. A mix can be a good way to diversify investments and help mitigate some market risk.
When you start building your savings and investment, it’s a good idea to learn all you can and start slow. Figure how much risk you can live with. That will dictate the kind of portfolio you own.
What Is a Savings Portfolio?
A savings portfolio can mean a couple of different things:
• A savings portfolio can refer to the different ways you hold money for the future, possibly a combination of savings accounts and/or investments.
• There are also savings portfolios which are investment vehicles for saving for college.
How Should I Start a Savings and Investment Plan?
A good way to start your savings and investment strategy could be to look into an investment account. These accounts offer services such as financial advice, retirement planning, and some combination of savings and investment vehicles, usually for one set fee, which may be discounted or waived in some situations.
In addition, you’ll likely want to make sure you have money in savings. A bank account can be a secure place for your funds, thanks to their being insured. Plus, they are liquid, meaning easily accessed, and may well earn you some interest as well.
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FAQ
Is it better to have a savings account or invest?
Whether a savings or investing account is better depends on your specific needs and situation. You may want both. Investing can hold the promise of high returns, but it involves risk. A savings account can grow your money steadily and securely.
How much can investing $1,000 a month give me?
The amount you make from investing $1,000 a month will vary tremendously depending on your rate of return and fees involved. It’s wise to consider the risk involved in investing, historic returns, and how much of any growth will go to paying fees.
What is the 50/30/20 rule?
The 50/30/20 budget rule is a popular way of allocating your take-home pay. It says that 50% of your fund should go to necessities, 30% to discretionary (or “fun”) spending, and 20% to savings or additional debt payments.
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Unlike stocks, which are ownership shares in a company, bonds are a type of debt security. Various entities, ranging from federal and local governments to private corporations, may issue bonds to raise capital for infrastructure projects or company expansion.
Investors effectively loan money to the bond issuer in exchange for steady interest payments and a guaranteed return of principal when the bond matures.
For this reason, bonds are often described as fixed-income securities. And while there are bonds with higher and lower levels of risk, bonds in general are considered conservative investments because they are typically less volatile than stocks.
There is no bond market. Rather, bonds are issued over-the-counter via the primary market; they can also be bought and sold on the secondary market through a brokerage.
The bond market is vast and complex, comprising many different types of bonds and bond instruments (such as bond mutual funds and exchange-traded funds, or ETFs). Bonds can be used to provide income, support diversification, to help manage investment taxes, and more.
Key Points
• The bond market, or credit market, is where fixed-income securities are traded.
• A bond is basically a loan to a government, corporation, or other entity that promises to repay the loan, plus interest, by a certain date.
• Bonds can be bought on the primary market, from the bond issuer. Bonds can also be traded on the secondary market through a broker.
• While bonds are considered less risky than stocks, all bonds receive a rating from established credit agencies, which evaluate their creditworthiness.
• The bond market is vast and complex, and investors interested in bonds have a number of options to choose from, including bond mutual funds and ETFs.
What Are Bonds?
Just as individuals often need to take out loans in order to buy a home or a car, governments, cities, and companies also need to borrow money for operations or expansion. They can do this by selling bonds, a form of structured debt, and paying a specified amount of interest on them over time to the bondholder.
Essentially a bond is an interest-bearing IOU. An institution might need to borrow millions of dollars, but investors are able to lend them a lesser amount of that total loan by purchasing bonds. The reason an institution would choose to issue bonds instead of borrowing money from a bank is that they can often get better interest rates with bonds.
How Do Bonds Work?
Bonds are issued for a specific amount (the face value), and a certain length of time, called the “term to maturity.” A fixed amount of interest is paid to the investor every six months or year (known as the coupon rate), and the principal investment gets paid back at the end of the loan period, on what is called the maturity date.
In some cases, the interest is paid in a lump sum on the maturity date along with the principal.
For example, an investor could buy a $10,000 bond from a city, with a 10-year term that pays 2% interest. The city agrees to pay the investor $200 in interest every six months for the 10-year period, and will pay back the $10,000 principal at the end of the 10 years.
Bonds are generally issued when a government or corporation needs money for a specific purpose, such as developing infrastructure, making capital improvements or acquiring another business.
Investors can buy bonds directly through a government site, or via a brokerage or an online investing platform.
Holding Bonds and Trading Bonds
Investors who purchase bonds have the option of holding the bond to maturity, and then collecting the interest and the principal when they redeem the bond. But it’s also possible to buy and sell bonds.
Trading bonds requires a deeper understanding of how bond values change, based on the time left to maturity and the interest or coupon rate. The face value or par value of a bond — its value when it was issued — doesn’t change, exactly, nor does the coupon rate.
Similar to investing in stocks, the price you pay for bonds on the secondary market fluctuates, depending on various factors — including its yield and maturity. A bond with a longer maturity might be less attractive than a bond with a shorter maturity, owing to the risk of interest rates changing, for example. This is why longer-term bonds typically offer higher yields.
Bonds are sold in two different markets: the primary market and the secondary market. But bonds are not traded on exchanges; they’re sold over-the-counter.
Newly issued bonds are sold on the primary market, where sales happen directly between issuers and investors. Investors who purchase bonds may then choose to sell them before they reach maturity, using the secondary market (brokerages). One may also choose to purchase bonds in the secondary market rather than only buying new issue bonds.
Bonds in the secondary market are priced based on their interest rate, their maturity date, and their bond rating (more on that below).
Differences in Bonds
Bond terms and features vary depending on the type and who issues them. The main types of bonds are:
U.S. Treasury Securities
These government-issued bonds are considered among the safer types of fixed-income investments: they are backed by the full faith and credit of the U.S. government, which has yet to default on its debts. There are three main types of Treasury securities.
• Treasury Bills, or T-Bills. These short-term Treasuries have maturity terms of four, eight, 13, 26, and 52 weeks. T-bills don’t pay a coupon rate; rather, investors buy T-bills at a discount to their face value. On maturity, investors get the full face or par value. The difference between purchase and redemption acts as a modest interest payment.
The sale of T-bills funds most government functions. These bonds are subject to federal income taxes, but are exempt from local and state income taxes.
• Treasury Notes, or T-Notes. T-notes are sold at longer maturities of two, three, five, seven, and 10-year terms. These longer maturities pay a higher rate.
• Treasury Bonds, or T-Bonds. This 30-year government bond is typically known as the long bond, and is similar to the T-note, except with a much longer maturity.
Treasury notes and bonds are issued at $100 par value per bond, with bond interest rates depending on the current environment.
These government bonds specifically protect against inflation, because the principal or purchase amount adjusts according to changes in the Consumer Price Index — either higher or lower, on a semi-annual basis. The coupon rate remains fixed, however.
At maturity, investors can redeem the bond for the original principal amount or the adjusted principal, whichever is greater. The bond is inflation protected in that the bondholder cannot lose their original principal.
Municipal Bonds
Also known as muni bonds, these securities are issued by cities and towns to fund projects like hospitals, roads, schools, and public utilities. They are somewhat riskier than Treasury bills, but muni bonds are exempt from federal taxes, and often state taxes as well.
As a result, munis generally pay a slightly lower rate than, say, corporate bonds or other taxable fixed-income securities.
U.S. Agency Bonds
U.S. agency bonds are debt obligations sold by government-sponsored enterprises (GSEs). While these are not fully backed by the U.S. government like Treasuries, agency bonds are offered by large federal agencies such as Freddie Mac and Fannie Mae, the Tennessee Valley Authority, the Federal Farm Credit Bank, and so on.
These bonds can offer a higher yield than Treasuries, depending on the maturity, without incurring substantially more risk than Treasuries.
Corporate Bonds
Riskier bond types are those issued by companies. The reason they have more risk is that companies can’t raise taxes to pay back their debts, the way a government might, and companies generally have some risk of failure.
The interest rate on corporate bonds depends on the company. These bonds typically have a maturity of at least one year, and they are subject to federal and state income taxes.
Junk Bonds
Corporate bonds with the highest risk, and generally higher potential return, are called junk bonds or high-yield bonds. All bonds get rated from a high of triple-A down to junk bonds — more on bond ratings below.
Junk bonds are so called because the bond issuer has a lower credit rating than another company, which means there is a risk the investor could lose their principal if the company defaults. Junk bonds pay higher coupon rates to appeal to investors, and help offset some of that risk.
Convertible bonds, which pay a fixed coupon rate, can offer downside protection during times of stock volatility. And when the stock market is on an upswing, investors have the option to convert their bonds into shares.
There is no obligation to convert a convertible bond, however, and investors can hold the bond to maturity, collecting regular interest payments, and receive their principal at maturity.
Mortgage-Backed Securities (MBS)
These securities are different from traditional bonds, where investors lend their money to the bond issuer, who repays it based on agreed-upon terms. Mortgage-backed securities give investors a claim on the cash flow and interest payments from mortgages that have been pooled together by public or private entities, and sold as securities.
Ginnie Mae (short for the Government National Mortgage Association) is the U.S. government agency that issues most mortgage-backed securities. In addition, Freddie Mac and Fannie Mae, both U.S. government-sponsored enterprises (GSEs), also issue MBSs.
MBSs can be risky when mortgage holders default on their loans, but these securities can offer a steady yield that’s relatively high compared with other bonds. The GSEs that offer mortgage-backed securities offer certain repayment guarantees that help manage risk.
Foreign Bonds
Similar to U.S. bonds, investors can also purchase bonds issued in other countries. Similar to domestic bonds, these are generally issued in the local currency by governments or corporations. Bear in mind that these bonds carry the additional risk of currency fluctuations.
While it’s possible to invest in foreign bonds via a self-directed brokerage account, it’s also possible to invest in mutual funds or ETFs that have a portfolio of foreign bonds.
Emerging Market Bonds
Companies and governments in emerging markets issue bonds to help with continued economic growth. These bonds have potential for growth, and often provide higher yields as a result, but can also be riskier than investing in developed market economies.
Zero-Coupon Bonds
Zero-coupon bonds don’t make regular interest payments, but are sold at a steep discount to their face value.
Investors earn a profit when the bond reaches maturity because they receive the full face value of the bond at the maturity date. For example, a zero-coupon bond with a face value of $10,000 and a five-year maturity might be sold at a discount for $8,000. When the bond matures after five years, the investor would get $10,000 — getting the equivalent of a 4% coupon rate.
Bond Funds
Investors can also buy into bond mutual funds or bond ETFs, which are portfolios of different types of bonds collected into a single fund — similar to the way equity funds are based on a portfolio of stocks. There are bond funds that hold a portfolio of corporate bonds, government bonds, or other types of bonds.
These funds are generally managed by a fund manager, but some bond funds are index funds in that they’re passively managed and track one of the many bond indices.
Bond funds can be safer than individual bonds, since they diversify money into many different bonds.
When investors are looking into stocks to invest in, the differences are mainly in the prospects of the company, the team, and the company’s products and services. Bonds, on the other hand, can have significantly different terms and features. For this reason, it’s important for investors to have some understanding of how bonds work before they begin to invest in them.
The main features to look at when selecting bonds are:
Coupon
This is the fixed interest rate paid to investors based on the face value, and it determines the annual or semi-annual coupon payment. For example, if an investor buys a $1,000 bond with a 3% coupon rate, the coupon payment is $30/year.
Face Value
Also referred to as “par,” this is the price of the bond when it’s issued. Usually bonds have a starting face value of $1,000. If a bond sells in the secondary market for higher than its face value, this is known as “trading at a premium,” while bonds that sell below face value are “trading at a discount.”
Maturity
The maturity date tells an investor the length of the bond term. This helps the buyer know how long their money will be tied up in the bond investment. Also, bonds tend to decrease in value as they near their maturity date, so if a buyer is looking at the secondary market it’s important to pay attention to the maturity date.
Bond maturity dates fall into three categories:
• Short-term: Bonds that mature within 1-3 years.
• Medium-term: Bonds that mature around 10 years.
• Long-term: These bonds could take up to 30 years to mature.
Yield
This is the total return rate of the bond. Although a bond’s interest rate is fixed, its yield can change since the price of the bond changes based on market fluctuations. There are a few different ways yield can be measured:
• Yield to Maturity (YTM): Yield to maturity refers to the total return of a bond if all interest gets paid and it is held until its maturity date. YTM assumes that interest earned on the bond gets reinvested at the same rate of the bond, which is unlikely to actually happen, so the actual return will differ somewhat from the YTM.
• Current Yield: This calculation can help bondholders compare the return they are getting on different bonds, as well as other securities. You can calculate current yield by dividing the bond’s coupon by its current price. A $1,000 bond that pays $50 has a current yield of 5%.
• Nominal Yield: This is the percentage of interest that gets paid out on the bond within a certain period of time. Since the current value of a bond changes over time, but the nominal yield calculation is based on the bond’s face value, the nominal yield isn’t always useful.
• Yield to Call (YTC): Some bonds may be called before they reach maturity. Bondholders can use the YTC calculation to estimate what their earnings will be if the bond gets called.
• Realized Yield: This is a calculation used if a bondholder plans to sell a bond in the secondary market at a particular time. It tells them how much they will earn on the bond between the time of the purchase and the time of sale.
Price
This is the value of a bond in the secondary market. There are two bond prices in the secondary market: bidding price and asking price. The bidding price is the highest amount a buyer is willing to pay for a specific bond, and the asking price is the lowest price a bondholder would be willing to sell the bond for.
Bond prices change as interest rates change, along with other factors, so it’s important to understand bond valuation.
Rating
As mentioned above, all bonds and bond issuers are rated by bond rating agencies. The rating of a bond helps investors understand the risk and potential earnings associated with a bond. Bonds and bond issuers with lower ratings have a higher risk of default.
Ratings are done by three bond rating agencies: Standard & Poor’s, Moody’s, and Fitch. Fitch and Standard & Poor’s rate bonds from AAA down to D, while Moody’s rates from Aaa to C.
Bond Market Terminology
When buying bonds, there are a few terms which investors may not be familiar with. Some of the key terms to know include:
• Duration Risk: This is a calculation of how much a bond’s value may fluctuate when interest rates change. Longer term bonds are at more risk of value fluctuations.
• Liquidation Preference: If a company goes bankrupt, investors get paid back in a specific order as the company sells off assets. Depending on the type of investment, an investor may or may not get their money back. Companies pay back “Senior Debt” first, followed by “Junior Debt.”
• Puttable Bonds: Some bonds allow the bondholder to redeem their principal investment before the maturity date, at specific times during the bond term.
• Secured vs. Unsecured
◦ Secured bonds are backed by collateral whereas unsecured bonds are not. One type of secured bond is a mortgage-backed security, which is secured with real estate collateral. Secured bonds are slightly lower risk than unsecured bonds, which are not backed by tangible assets, and as such tend to pay a lower rate.
◦ Unsecured bonds, also known as debentures, are not backed by any assets, so if the company defaults on the loan the investor loses their money. The other difference between secured and unsecured bonds is the lower credit rating and the higher rate unsecured bonds may offer to be more attractive to investors.
The Bond Market and Stocks
There is an inverse correlation between the bond market and the stock market, and the performance of the secondary bond market often reflects people’s perceptions of the stock market and the overall economy.
When investors feel good about the stock market, they are less likely to buy bonds, since bonds provide lower returns and require long-term investment. But when there’s a negative outlook for the stock market, investors want to put their money into safer assets, such as bonds.
How to Make Money on Bonds
While one way to make money on bonds is to hold them until their maturity to receive the principal investment plus interest, there is also another way investors can make money on bonds.
As mentioned above, bonds can be sold on the secondary market any time before their maturity date. If an investor sells a bond for more than they paid for it, they make a profit.
There are two reasons the price of a bond might increase. If newly issued bonds come out with lower interest rates, then bonds that had been previously issued with higher interest rates go up in value. Or, if the credit risk profile of the government or corporation that issued the bonds improves, that means the institution will be more likely to be able to repay the bond, so its value increases.
Potential Advantages of Bonds
There are several reasons that bonds may be an attractive investment.
• Predictable Income: Since bonds are sold with a fixed interest rate, investors know exactly how much they will earn from the investment.
• Security: Although bonds offer lower return rates than most stocks, they generally don’t have the volatility and risk.
• Contribution: The funds raised from the sale of bonds may go towards improving cities, towns, and other community features. By investing in bonds, one is supporting community improvements.
• Diversification: Bonds can provide diversification. Building a diversified portfolio can help manage portfolio risk.
• Obligation: There is no guarantee of payment when investing in stocks. Bonds are a debt obligation that the issuer has agreed to pay.
• Profit on Resale: Investors have the opportunity to resell their bonds in the secondary market and potentially make a profit.
Potential Disadvantages of Bonds
Bonds also come with potential risk factors to consider.
• Lack of Liquidity: Investors can sell bonds before their maturity date, but they may not be able to sell them at the same or higher price than they bought them for. If they hold on to the bond until its maturity, that cash may not be available for use for a long period of time.
• Bond Issuer Default and Credit Risk: Most bonds are considered low risk, but there is a possibility that the issuer won’t be able to pay back the loan. If this happens, the investor may not receive their principal or interest.
• Low Returns: Bonds offer fairly low interest rates, so in the long run investors are likely to see higher returns in the stock market. In some cases, the bond rate may even be lower than the rate of inflation.
• Market Changes: Bonds can decrease in value if the issuing corporation’s bond rating changes, if the company’s prospects don’t look good, or it looks like they may ultimately default on the loan.
• Interest Rate Changes: One of the most important things to understand about bonds is that their value has an inverse relationship with interest rates. If interest rates increase, the value of bonds decreases, and vice versa. The reason for this is that if interest rates rise on new bond issues, investors would prefer to own those bonds than older bonds with lower rates. If a bond is close to reaching maturity it will be less affected by changing interest rates than a bond that still has many years left to mature.
• Not FDIC Insured: There is no FDIC insurance for bondholders. If the issuer defaults, the investor loses the money they invested.
• Call Provision: Sometimes corporations have the option to redeem bonds. This isn’t a major downside, but does mean investors receive their money back and will be able to reinvest it.
How to Buy Bonds
Bonds differ from stocks in that, for the most part, they aren’t traded publicly on an exchange. Investors can buy bonds directly from an issuing entity, such as a government or company. And they can also buy and sell bonds on the secondary market, through a brokerage.
When using a broker, it’s important for investors to research to make sure they are getting a good price. They can also check the Financial Industry Regulatory Authority (FINRA) to see benchmark data, and get an idea about how much they should be paying for a particular bond. FINRA also has a search tool for investors to find credible bond brokers.
As mentioned above, traders can either buy bonds in the primary or secondary market, or they can buy into bond mutual funds and bond ETFs.
The Takeaway
Many investors focus on the performance of the stock market owing to its volatility and its capacity to make headlines. But the global bond market is actually far larger — with a $140 trillion capitalization, versus $115 trillion for the global stock market, as of the end of 2023.
The bond market may be complex, but it can be rewarding. And bonds tend to have a lower risk profile compared with stocks. As such, bonds can play an important role in investors’ portfolios, owing to their potential to provide steady income as well as diversification.
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FAQ
Do all bonds pay interest?
No. Most bonds pay a coupon rate, a fixed interest payment every year or every six months. But zero-coupon bonds are sold at a discount to their face value, for example, and rather than pay interest these bonds can be redeemed at maturity for the full face value — effectively providing a fixed return.
Can you lose money with a bond?
Yes, bonds may be less risky than stocks, but you can still lose money with bonds. For example, a high-yield or junk bond may promise higher rates, but these bonds are at a higher risk of defaulting. It’s also possible to lose money on bonds when interest rates fluctuate, potentially reducing the value of the bonds you’d hoped to sell.
What is the coupon rate versus the coupon payment?
The coupon rate of a bond is the interest rate that’s set when the bond is issued. For example, you might buy a $1,000 bond with a 3% coupon rate. The annual coupon payment is the % rate x the face value (0.03 x $1,000) or $30 per year.
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