It can provide you both with more security in the long run

Reviewed by Margaret James
Fact checked by Suzanne Kvilhaug

For many people, marriage brings many benefits, including financial ones. But don’t be surprised if you have a significant other who believes that getting married is more of a financial liability than a benefit. That mindset is more common than you’d think.

There’s a long-held belief that married couples pay more in taxes than single people. This is largely untrue for many couples. Moreover, there are several additional reasons why marriage makes financial sense.

Read on for the details on the financial benefits of marriage.

Key Takeaways

• For most couples, marriage makes financial sense.
• The so-called marriage penalty has not been reformed out of existence but in some instances, adjustments to the tax code have eased or erased it.
• There are a number of financial benefits to marriage, ranging from lower insurance costs to greater mortgage eligibility.
• The marriage benefits are particularly pronounced for people who have widely different incomes.

Penalties and Bonuses

America’s progressive tax system can cut both ways for couples. Despite various attempts at reform, a marriage penalty still exists for some couples who earn about the same amount of money.

This penalty occurs when they are pushed into a higher tax bracket due to their family income more or less doubling at marriage. This holds true for both high- and low-income couples.

Bonus for Income Levels That Vary

By contrast, when one partner earns all the income—or significantly more than the other—couples sometimes benefit from a so-called marriage bonus because the higher earner’s bracket drops after marriage. The couple ends up paying less in taxes than if they’d filed separately as singles.

Effectively, marriage bonuses can amount to 21% of a couple’s income, while marriage penalties can amount to as much as 12%, according to the Tax Foundation.

Eliminating marriage penalties and bonuses would require a significant rewrite of the tax code that would have far-reaching effects. Instead, lawmakers rely on marriage penalty workarounds.

Social Security Benefits

When married, you may be entitled to retirement benefits from Social Security equaling 50% of your spouse’s benefit. If your own benefit is less than 50% of your spouse’s benefit, this will apply to you.

Qualifying is dependent on whether specific requirements are met, according to the Social Security Administration.

This benefit also applies to divorcees who are 62 or older, were married for at least 10 years, and have not remarried. Additionally, the benefit that a divorcee would receive based on their own work history has to be less than the ex-spouse’s benefit.

Ultimately, this provides greater security to the spouse who earned significantly less than the primary wage earner in the household.

Tax Changes

Two pieces of tax legislation made significant changes that are of benefit to married couples, particularly those who have children.

The advent of the Tax Cuts and Jobs Act (TCJA), which was signed by President Donald Trump on Dec. 22, 2017, led to several changes to the tax code that were intended to lower corporate, individual, and estate taxes.

In particular, the changes resulted in small reductions to income tax rates for most individual tax brackets and significant tax reductions for corporations.

Unless extended, the cuts that benefit individuals are due to phase out in 2025 (but will remain for corporations and other entities).

Earned Income Tax Credit

The American Rescue Plan, signed by President Joe Biden on March 11, 2021, included substantial tax breaks for low- and moderate-income people. For example, even though it lasted for one year only (2021), the earned-income tax credit increased to $1,502 for childless households.

For the 2022 tax year, the earned-income tax credit was as much as $6,935 for qualifying taxpayers with three or more children. It has increased each year thereafter and for the 2025 tax year, the credit maximum is $8,046.

People without children could claim the earned-income tax credit beginning at age 19 (instead of the previous age of 25), and the upper age limit, 65, was eliminated.

EITC Marriage Penalties and Bonuses

The marriage penalty can be substantial for taxpayers who qualify individually for the earned-income tax credit (EITC) but fail to qualify as a couple due to one spouse’s income.

That said, marriage can boost the EITC if a non-working parent files jointly with a spouse who has relatively low earnings.

On the other hand, a couple with $40,000 in combined income (split 50/50) had a tax penalty of more than $2,070 for tax year 2023, according to the Tax Policy Center.

If this couple were not married, one parent could file as head of household with two children, and the other parent would file as single. When filing separate returns, the head of the household could claim an EITC and a child tax credit. Note that only one parent does so, the other parent qualifies for neither credit.

This means that the head of the household could be awarded a refund, while the other parent would likely owe tax. Had this couple filed jointly, they would have seen a far smaller EITC but a substantial child tax credit.

In all, the point is that the tax benefit of filing married as opposed to a different filing strategy may be complicated—but worth it—for certain taxpayers.

Why Get Married?

Getting married makes financial sense, especially for people who have widely disparate incomes. For example:

• The annual income limitations on IRA contributions by married couples are based on joint income, allowing for far higher savings.
• A couple’s combined income may well place them in a lower tax bracket than the higher-income spouse would pay as an individual.
• If each spouse has a different employer, each can choose the better of two health insurance plans.
• Car insurance and home insurance coverage is cheaper for two than for one.
• In the long run, the lower-paid spouse may be eligible for a larger Social Security benefit than that person’s solo income would allow.

Brackets and Phaseouts Align

The tax brackets for married couples filing a joint return are now approximately double the single bracket rate at the same income, except for those in the 35% and 37% brackets.

This alignment limits a big factor in the marriage penalty, as more married couples filing jointly find that their combined incomes now place them in a lower bracket.

Similarly, the child tax credit phaseout has been aligned, beginning at $400,000 for couples, double the $200,000 phaseout for singles under the Tax Cuts and Jobs Act.

Previously, the phaseout was $75,000 for singles and $110,000 for couples, so this change eliminated another potential marriage penalty for couples with kids. But in 2025, unless the law is extended, these unaligned amounts will replace the larger, aligned amounts legislated in 2017.

Deductible Expenses

Is the opportunity to use someone’s unused deductions a reason to marry them? Probably not.

But if the owner of a successful business marries someone who is not taking advantage of their tax deductions, they may be able to reduce their tax burden via a write-off. This may also apply to steep medical expenses. Though this may not be romantic, it is a solid tax-planning strategy.

IRA Contributions

The income ceiling for traditional and Roth IRA contributions is far higher for married couples when one spouse has no income. A spouse of an employed taxpayer can contribute to an IRA even if that spouse has no earned income.

That means a couple fitting this description can sock away extra thousands of dollars for retirement (a total contribution for each partner) while achieving significant tax benefits.

And if you’re wondering whether such marriage incentives (and disincentives) have any effect on whether a couple will marry, they don’t. That said, they may influence how much each spouse works.

Alimony Is Not Deductible

If you’re considering ending a marriage, be aware that a significant change under the TCJA was that taxpayers paying alimony after Dec. 31, 2018, were no longer able to deduct their payments as expenses.

However, since Dec. 31, 2018, the recipient of alimony no longer has to claim it as ordinary income on a federal return. Note that some states tax alimony payments as income.

Insurance costs are often lower for married people. Multi-policy discounts and the lower price that comes with being married are just a few of the insurance benefits that result when you tie the knot.

Insurance

Health Insurance Benefits

The largest financial benefit of getting married may be the chance to benefit-shop for health insurance. Each spouse has access to the other’s plan and can sign up for the better or cheaper of the two.

Generally, coverage can be changed in the 60 days following the marriage.

Couples who get their health insurance via an exchange must enroll together, although each individual can choose a different plan.

If each partner received a subsidy via the Affordable Care Act (ACA) when single, they likely would be penalized once they married, as their combined salaries could push them over the cutoff threshold.

Importantly, given the major costs of healthcare and insurance, married couples also tend to get big discounts on long-term care (LTC) insurance. This is because couples tend to care for each other at home for as long as possible, reducing the insurer’s liability.

Auto and Home Insurance Benefits

For married couples seeking auto and home insurance, discounts can result from multi-car policies and bundling homeowners insurance with auto insurance. Some home insurers offer discounts just for being married. Be sure to ask once you’re hitched.

Bigger and Better Loans

Two incomes are better than one where loans are concerned. If you apply for a $150,000 home mortgage as a single adult, you have only your own income for the bank to consider. A married couple’s combined income is likely to qualify for a larger loan with better terms.

Just remember that income isn’t the only factor. Lenders also examine credit histories, total debt, and type of debt, as well as the borrower’s debt-to-income ratio. So, your spouse’s financial history will become as important as your own.

Better Access to Credit

Because everyone’s credit score is attached to their Social Security number, getting married doesn’t erase or reset your credit history or that of your spouse. Over time, marriage creates a history of joint debts and new accounts, which is also reflected in individual credit histories.

Both credit scores will be factored into the approval process when couples jointly open an account. If one partner has poor credit, both could be out of luck with lenders when opening a joint account, as it could result in a denial or higher rates and fees.

Marriage Helps Credit in Various Ways

Of course, the opposite is true; if one partner has better credit than the other, their history and habit of meeting payments on time can help the other partner’s score.

There’s also the option of the partner with the better score opening accounts that both will use, though this may not work as well for mortgage applications when two incomes are helpful.

The upshot is that when someone with poor credit marries someone with good credit, the habits of the person with good credit tend to rub off on the other partner.

The fact that many couples can leverage two incomes plus combine and reduce many costs also helps improve their finances.

So as a couple, you may be in a better position to maintain a solid financial footing, or achieve it.

Is the Marriage Penalty for Taxes Real?

The marriage penalty has gradually been eradicated by changes in the tax code. Yet, some couples may find that they owe more in income taxes when filing jointly than they would have as single filers.

However, this is more than offset by other tax-related factors that make marriage a winning proposition financially. A marriage between two people with widely varying incomes works out particularly well for both partners. The spouse with the bigger income may owe less in taxes when that income is combined with the relatively modest income of the other spouse. Meanwhile, the partner with a lower income can qualify for Social Security benefits equal to half of the spouse’s income if that amount is greater.

There are other financial benefits unrelated to taxes. Access to larger mortgages, a choice of health care plans, and lower insurance rates are among the marriage bonuses.

Is There a State Marriage Penalty?

There can be. A number of states have tax codes that tend to penalize married couples, according to analyses by The Tax Foundation and the Niskanen Center. This is generally related to state tax brackets, the EITC, and the Child Tax Credit.

Is Marriage Worth the Tax Break?

Depending on your individual circumstances, marriage may benefit you or your intended, or both of you. Your overall cost of living might well be reduced if you’re sharing the expenses of a mortgage or rent, and insurance, You also have a better chance as a couple to put aside a substantial amount towards retirement.

The Bottom Line

Getting married and staying married for the long term brings the opportunity for more financial security, provided that each spouse practices good family and individual financial habits.

Don’t spend more than you have. Limit—or eliminate—the use of credit cards. Also, do your research on managing money as a couple, which is a little more complex than you might think.

Don’t skip having an honest talk between yourselves about spending habits, money anxiety, and financial goals.

Warren Buffett’s journey from a young entrepreneur selling gum and Coca-Cola bottles to becoming one of the world’s wealthiest investors offers invaluable lessons for anyone interested in building long-term wealth.

Through his company, Berkshire Hathaway, and personal investments, Buffett has demonstrated that successful investing doesn’t require complex strategies or sophisticated algorithms—but adherence to certain core principles and unwavering discipline.

Key Takeaways

• Warren Buffett’s success demonstrates that building wealth doesn’t require complexity.
• Instead, it comes from basic principles deeply and applying them consistently.
• Giving smart investments time to compound and minimizing unnecessary costs creates a powerful engine for wealth generation.

1) Invest in What You Understand

Buffett’s first investment principle is staying within his “circle of competence.” He famously avoids investments in businesses or industries he doesn’t fully comprehend, regardless of their overall importance or potential returns. This approach initially led him to avoid technology stocks during the dot-com boom, which protected him against significant losses when the bubble burst.

For investors, the lesson is clear: a deep understanding of an investment not only reduces the risk of costly mistakes but also keeps you focused on businesses you genuinely understand rather than chasing unfamiliar opportunities.

2) Buy Great Companies at Fair Prices

Buffett learned much about value investing from his mentor, Benjamin Graham, but evolved beyond purely seeking undervalued companies. He instead seeks exceptional businesses with strong competitive advantages at “fair” prices, even if they aren’t necessarily “cheap.” His massive investment in Coca-Cola in the late 1980s exemplifies this strategy. While not particularly undervalued when it was purchased, the company’s powerful brand and global distribution network generated extraordinary returns over decades.

This teaches investors to prioritize quality over bargain hunting. After all, Buffet noted that when you buy a stock, you are really buying a business.

3) Practice Patience in Building Wealth

“The stock market is a device to transfer money from the impatient to the patient,” Buffett once said. His incredible wealth accumulation accelerated after he turned 50, demonstrating the power of perseverance and compound interest over time.

Consider his purchase of GEICO. Rather than seeking quick profits, he held and gradually increased his position as the company grew. The lesson? Wealth building is often not about finding the next hot stock but giving great companies time to compound returns. Buffet once put this succinctly: “Our favorite holding period is forever.”

4) Keep Emergency Funds

Despite a preference for being fully invested, Buffett maintains significant cash reserves, often in the hundreds of billions of dollars. This “emergency fund” serves multiple purposes: it provides security during market downturns, enables quick action when rare opportunities arise, and removes the pressure to sell good investments at inappropriate times.

During the 2008 financial crisis, this strategy allowed Berkshire to make highly profitable investments in companies like Goldman Sachs when others were forced to sell. Individual investors should also maintain adequate cash reserves to avoid becoming forced sellers during market declines.

Buffett famously said that it’s wise for investors “to be fearful when others are greedy, and to be greedy only when others are fearful.”

5) Minimize Investment Costs

Buffett’s emphasis on minimizing costs has also been crucial to his success. He avoids excessive trading, which generates transaction costs and taxes, and maintains a lean operation at Berkshire.

In his 2013 letter to shareholders, he specifically advised average investors to use low-cost index funds rather than paying high fees to active managers. The takeaway is that seemingly small costs can significantly impact long-term returns, and investors should vigilantly guard against unnecessary fees and expenses.

The Bottom Line

Warren Buffett’s investment success stems not from complex formulas or fancy models, but from adherence to fundamental principles: understanding investments deeply, focusing on quality businesses, maintaining patience, keeping adequate cash reserves, and minimizing costs. The key is not just understanding these concepts but having the discipline to follow them consistently, especially during challenging market conditions.

While few will achieve his level of wealth, these principles provide a solid foundation for any investor seeking to build long-term financial security.

Reviewed by Chip Stapleton

A hedge fund is a type of investment vehicle and a business structure that aggregates capital from multiple investors and invests that capital in securities and other investments. Hedge funds are different from mutual funds—they are willing to take on more risk and their leverage is not capped by regulators.

Key Takeaways

• A select few hedge funds invest heavily in real estate, making them real estate hedge funds.
• Real estate hedge funds tend to invest in publicly traded real estate companies, mostly real estate investment trusts (REITs). 
• The other way a real estate hedge fund invests is through the acquisition of actual properties, generally underperforming ones.
• Angelo, Gordon & Company, Cerberus Real Estate Capital Management, Cliffwood Partners LLC, and The Praedium Group are key players in the real estate hedge fund market.
• Real estate hedge funds often use leverage and can charge higher fees since they are usually limited to institutional investors.

How Real Estate Hedge Funds Invest

All real estate hedge funds invest heavily in real estate, obviously, but the way in which they invest varies by managerial investment strategy. For the most part, real estate hedge funds invest in the publicly-traded stock of existing real estate companies, mainly real estate investment trusts (REITs). 

A REIT is a corporate entity—structured similarly to a mutual fund—that invests exclusively in real estate and is given a tax exemption for doing so. In return, REITs are required to pay at least 90% of their income out as dividends—although that income may be subject to tax for the REIT’s investors.

A second way a real estate hedge fund invests its money is through the acquisition of actual properties, usually underperforming ones, at low rates. These properties can be purchased in one specific region or around the globe, but they all tend to be up for sale normally due to a lack of liquidity on the part of the seller. So, unlike the REIT-investing hedge fund, these real estate hedge fund actually owns real estate.

Note

While they normally favor liquid assets, hedge funds can invest in different types of investment products. Lately, hedge fund managers lately have been adding real estate to their lists of nontraditional investments.

Specific Real Estate Hedge Funds

TPG Angelo Gordon is one of the larger real estate hedge funds with more than $78 billion invested in credit and real estate assets. The company has adopted a strategy of investing in investment-grade securities that the company deems to be underpriced.

Cerberus Real Estate Capital Management, formerly known as Blackacre Capital Management, is another large real estate hedge fund. This is the real estate arm of Cerberus Capital Management.

Other hedge funds include Cliffwood Partners LLC and The Praedium Group, both of which have unique strategies of their own. Founded in 1991, The Praedium Group has the goal of making profits from the differences in indexes in the public and private equity real estate markets. Cliffwood Partners, one of the first real estate hedge funds, has a long-short strategy in the real estate market.

Real Estate Hedge Funds and Leverage

Leverage is a core tool used by real estate hedge funds to amplify returns. By borrowing funds to finance property acquisitions or development projects, hedge funds can control assets worth significantly more than their equity investment.

For example, a hedge fund might use $10 million in equity to secure $50 million in real estate assets, with the remaining $40 million financed through debt. This strategy allows hedge funds to enhance their potential returns because the income generated from the leveraged asset—such as rental income or resale profits—can exceed the cost of borrowing. Note that post-pandemic, with commercial real estate having less demand and interest rates being higher, this is sometimes a more difficult strategy.

To manage these risks, hedge funds often employ advanced financial strategies such as hedging. They may use interest rate swaps to mitigate the risk of rising borrowing costs or engage in derivatives contracts to hedge against currency fluctuations in international investments. Some hedge funds limit their leverage ratios, maintaining a buffer in which they are not allowed to exceed.

Real Estate Hedge Fund Properties

Real estate hedge funds may hold a variety of properties, including but not limited to:

• Commercial Properties: Office buildings, retail centers, and industrial warehouses, often chosen for stable rental income and long-term leases.
• Residential Properties: Single-family homes, multi-family apartments, and rental communities, targeting rising housing demand or redevelopment opportunities.
• Mixed-Use Developments: Combines residential, commercial, and retail spaces in one project.
• Hospitality Properties: Hotels, resorts, and short-term rental properties.
• Senior Housing and Assisted Living: Facilities catering to aging populations, valued for steady demand and government or private funding.
• Student Housing: Housing near colleges or universities, designed for consistent occupancy tied to academic cycles.
• Land Development: Undeveloped or underdeveloped land, targeted for future construction or speculative appreciation.
• Specialty Properties: Unique assets such as data centers, self-storage facilities, or logistics hubs, often serving niche markets with high growth potential.

Downsides of Real Estate Hedge Funds

One of the most significant risks is the use of leverage. The leveraged nature of these investments, discussed above, means that even a slight downturn can result in significant financial stress, potentially wiping out the fund’s equity.

Another downside is the illiquidity of real estate assets. Unlike publicly traded stocks or bonds, real estate properties are not easily converted into cash. Hedge funds may impose lockup periods, which restrict investors from withdrawing their capital for several years. This makes it difficult to access funds in case of an emergency or market volatility.

Finally, real estate hedge funds often charge high management and performance fees, which can erode investor returns over time. These fees, typically in the range of 1-2% for management, are designed to incentivize fund managers to maximize returns but can be burdensome for investors, especially when the market performs below expectations. The fees are typically charged regardless of the fund’s success, meaning that in suboptimal market conditions, investors may pay significant fees without seeing much of any returns.

How Do Real Estate Hedge Funds Work?

Real estate hedge funds are investment vehicles that pool capital from accredited investors to invest in real estate assets or related financial instruments. These funds aim to achieve high returns through strategies like property acquisition, development, distressed asset repositioning, or financial derivatives tied to real estate markets.

How Do Real Estate Hedge Funds Differ From REITs?

While both invest in real estate, hedge funds are privately offered and less regulated than Real Estate Investment Trusts (REITs). Hedge funds typically employ aggressive strategies and leverage, whereas REITs focus on steady income generation and are accessible to public investors.

Who Can Invest in Real Estate Hedge Funds?

Real estate hedge funds are typically open only to accredited investors, as defined by regulatory bodies such as the SEC. Accredited investors must meet specific income or net worth thresholds—such as earning $200,000 annually (or $300,000 jointly with a spouse) or having a net worth of $1 million excluding their primary residence.

How Are Real Estate Hedge Funds Regulated?

Real estate hedge funds are regulated by the SEC but face fewer restrictions compared to public funds like mutual funds or REITs. These funds are typically exempt from registration under the Investment Company Act of 1940.

The Bottom Line

Real estate hedge funds operate by pooling capital from accredited investors to invest in various real estate assets, aiming for high returns through strategies like leverage, flipping, and distressed asset acquisition. These types of hedge funds invest in a variety of properties while emphasizing the importance of due diligence and risk management practices.

Reviewed by Thomas Brock
Fact checked by Suzanne Kvilhaug

Investors looking for greater diversification or trying to tap into fast-growing parts of the world may have considered emerging-market economies, such as Brazil, Russia, India, or China. Of those, Russia is certainly the largest in terms of landmass, but it ranks only 11th in terms of worldwide gross domestic product (GDP)—well behind China (second) and India (sixth), and just ahead of Brazil (12th).

While the United States ranks as the world’s largest economy with a GDP of $27 trillion as of 2023, Russia’s nominal GDP comes in at $.202 trillion.

Key Takeaways

• Russia’s gross domestic product (GDP) is primarily made up of three sectors: agriculture, industry, and service.
• The agricultural sector makes up about 5.6% of GDP, while industry and services comprise 26.6% and 67.8%, respectively.
• In 2021, Russia experienced its best GDP growth since 2008, posting a 4.7% growth rate.
• In February 2022, the United States and other countries imposed new sanctions on Russia over its invasion of Ukraine.

Russia: Then and Now

The initial transition period for Russia after the fall of the Soviet Union in 1991 was tough, as it inherited a devastated industry and agricultural sector along with a formerly centrally planned economy. The regime introduced multiple reforms that made the economy more open, but a high concentration of wealth still continued.

Russia’s economic growth​ rate remained negative during most of the 1990s, before the start of the subsequent golden decade. From 1999 to 2008, Russia’s GDP grew by at least 4.7% each year. This expansion made Russia one of the fastest-growing economies. This growth, however, was mostly driven by the boom in commodity prices, notably oil.

The Russian economy got a jolt as oil prices dipped—triggered by the 2008–09 global financial crisis—exposing Russia’s dependence on oil. The economy gradually recovered as oil prices stabilized. 

The Russian economy then grew at a decent pace for 2011 and 2012, but structural issues started to emerge that caused a slowdown during 2013. The next couple of years brought a continued slowdown as the country faced multiple issues, including falling oil prices, geopolitical pressures, and sanctions by the West due to its 2014 invasion of Ukraine. Its GDP fell 2% in 2015. Russia’s GDP managed to grow each year from 2016 to 2018, before tapering off and falling 2.7% in 2020.

In 2021, Russia saw the best GDP growth since 2008, posting a 4.7% growth rate. For 2025, however, the expected GDP growth rate is 1.4%.

In February 2022, Russia again invaded Ukraine. In the same month, U.S. President Joe Biden announced sanctions against Russia in response to its military aggression against Ukraine, including the advancement of Russian troops into two separatist regions of eastern Ukraine. The administration noted this is the “first tranche of sanctions that go far beyond [the previous invasion of Ukraine in] 2014, in coordination with allies and partners in the European Union, United Kingdom, Canada, Japan, and Australia.”

The sanctions are mostly economic and include blocking two state-owned Russian financial institutions—Vnesheconombank and Promsvyazbank and their subsidiaries, which provide financing to the Russian military—from accessing the U.S. financial system. Other sanctions include the U.S. Treasury prohibiting the purchase of new Russian sovereign debt and banning U.S. companies and individuals from buying sovereign debt in the secondary market. Five Russian elites and their families have also been targeted.

Russia’s GDP Composition

Russia’s GDP is largely made up of three broad sectors: a small agricultural sector that contributes about 5.6% to GDP, followed by industry and service, which contribute 26.6% and 67.8%, respectively.

Agricultural

Harsh weather and tough geographic conditions make cultivation of land arduous and restricted to a few small areas of the nation. This is one of the main reasons for the minimal role of the agricultural sector in Russia’s economy.

The country’s agrarian sector is characterized by the co-existence of both the formal sector, represented by large producers for commercial purposes, and the informal sector, where small landholders produce for self-sustenance. The sector includes forestry, hunting, and fishing, as well as cultivation of crops and livestock production.

Despite being a large exporter of certain food items, Russia is a net importer of agriculture and food. Other than the nonavailability or shortage of certain food products domestically, a few factors explain Russia’s rising food imports.

One is higher inflation in Russia vis-à-vis its EAEU and other trading partners, which makes foreign imports more price-competitive. The second reason is its sound economic progress, especially from 2000 to 2008. This boom period led to income growth, further pushing up consumer demand for food, which was met by imports.

In 2014, in response to the West’s food embargoes, the Russian government banned certain food categories for import, including dairy, meat, and produce, from several countries such as the U.S. and those of the European Union, which significantly cut Russia’s share of food imports.

Industry

The contribution of Russia’s industry sector to its GDP has remained more or less stable, averaging about 30% over the last decade. For context, the U.S. only generates about 18% of its GDP from industry. Industry comprises mining, manufacturing, construction, electricity, water, and gas. Russia has an array of natural resources, with a prominence of oil and natural gas, timber, deposits of tungsten, iron, diamonds, gold, platinum, tin, copper, and titanium.

Major industries in Russia have capitalized on the country’s natural resources. One of the prominent industries is machine building, which suffered heavily after the disintegration of the Soviet Union, as there was a severe shortage of capital. This business re-emerged with time and is the leading provider of machinery and equipment to the other industries in the economy.

Note

By order of importance, the fuel and energy complex (FEC) is one of the most crucial industries for the Russian economy.

While post-Soviet Russia ostensibly enjoys a market economy, its leaders have deemed its dominant energy sector too crucial to leave to the caprices of independent buyers and sellers. The idea of energy extraction and refinement being open to private enterprise, something more common in the U.S., is not commonplace in Russia.

Oil, natural gas, electricity, and more are under de facto control of the federal government. The FEC comprises the mining and production of energy resources, processing, delivery, and consumption of all types of energy. The FEC not only supports multiple sectors in the economy, but its products are also Russia’s main exports. The country is the third-largest oil producer in the world, behind the U.S. and Saudi Arabia. The nation accounted for 11% of total world oil production.

Service

The service sector currently comprises more than 56% of the country’s GDP and employs the most people in the country—more than 67% of the population. The key segments of the Russian service sector of late are hotel and catering services, construction, culture and entertainment, and trade. It is often pointed out that as the crisis that accompanied the fall of the Soviet Union devastated agriculture and industry, it gave services a chance to accelerate.

What Are the Main Parts of Russia’s Economy?

Russia’s gross domestic product (GDP) is mainly composed of three sectors: agriculture, industry, and service. Agriculture contributes about 5.6% to GDP, followed by industry and service, which contribute 26.6% and 67.8%, respectively.

How Does Russia Rank in World GDP?

Russia stands 11th in terms of global GDP—well behind China (second) and India (sixth), and just ahead of Brazil (12th) among large emerging-market economies.

What Is Russia’s Biggest Industry?

Russia has a heavy dependence on producing fuel and energy. The country’s so-called fuel and energy complex comprises the mining and production of energy resources, processing, delivery, and consumption of all types of energy. Those enterprises support multiple sectors in the economy, and its products are Russia’s main exports.

The Bottom Line

Russia will likely need to further diversify to establish a more balanced economy that is less susceptible to commodity price moves. Focusing on its manufacturing and service sectors may help achieve more sustainable long-term growth. Although the GDP composition reflects the growing importance of services, it is oil exports that drive most of its economy.

Fact checked by Suzanne Kvilhaug
Reviewed by Cierra Murry

Oil is the crown jewel of commodities. It’s used in many ways, from making plastics and asphalt to processing fuel. Price changes in oil ripple through the entire economy, since it is essential to the production, distribution, and delivery of most of the physical products we use.

As a result, the oil industry is an economic powerhouse, and changes in oil prices are closely watched by governments, corporations, investors, and consumers.

Many variables affect oil prices, but the key driver is the basic principle of supply and demand. The big question is: What affects the supply and demand of oil?

Key Takeaways

• Supply and demand based on global economic conditions and geopolitical tensions significantly impact oil prices.
• The United States, Saudi Arabia, and Russia are the top three oil producers globally, producing nearly 44 million barrels per day in 2023.
• OPEC, a cartel of oil-producing countries, retains the power to determine oil supply and prices but to a lesser degree than in the past.

Supply and Demand

Oil consumption consists of hundreds of millions of people and businesses collectively influencing supply and demand for oil-based products and, therefore, their prices.

Levels of oil production also affect oil prices, particularly in countries that produce large amounts of crude oil.

The United States is the largest oil producer in the world, outpacing the country that most assume to be the largest producer: Saudi Arabia. The U.S. surpassed Saudi Arabia as the world’s largest oil producer in 2018. The main driver was the surge in shale fracking in Texas and North Dakota.

That may change. Saudi Arabia and its OPEC partners have announced they will step up oil production in 2025 after several years of relatively low output.

The U.S. produced more than 22% of the world’s oil supply as of 2023, compared with 11% each for Saudi Arabia and Russia.

Top 10 Oil Producers

After the U.S., Saudi Arabia, and Russia, the world’s top 10 oil producers are Canada, China, Iraq, Brazil, the United Arab Emirates, Iran, and Kuwait.

Capacity and Reserves

The nations that produce the most oil and the countries that are most commonly identified with an abundance of oil aren’t necessarily the same. There is an important distinction between oil production and oil reserves.

Types of Reserves

Typically, oil reserves are categorized as proven reserves (90%+ chance that oil can be extracted), probable reserves (50%+ case that oil can be extracted), and possible reserves (at least a 10% probability that the quantities recovered will equal or exceed the sum of estimates proved plus possible reserves).

Determining the type of oil reserves countries have can help determine where future oil supplies will come from and the ability of future supply to meet demand.

Countries with Reserves

Venezuela has been identified as the leader on the list of largest oil reserves by country, with reserves estimated at more than 303 billion barrels. However, most of that oil is offshore or deep underground, making it difficult and expensive to reach. It is also dense oil, which makes it harder to refine into usable products such as gasoline.

Saudi Arabia has the second-largest reserves, with 267 billion barrels.

As for the United States, its proven reserves are less impressive than its current capacity. The U.S. had 55 billion barrels in reserve by 2024.

Pumping, Refining, and Distribution

Basic supply and demand theory states that when more of a product is produced, it should sell for less.

It’s a symbiotic dance. More was produced because it became more economically efficient (or no less economically efficient) to do so. For example, if an oil well stimulation technique was invented that could double an oil field’s output for only a small incremental cost, with demand staying static, prices should fall.

Oil Extraction

Technological developments have impacted production and the costs of extracting oil from the ground.

Oil production in North America has surged, with fields in North Dakota and Alberta as fruitful as ever.

Also, new supply has been added due to advancements in shale fracking. Fracking refers to hydraulic fracturing, in which fractures in rock formations are created by injecting fluid into the cracks to force them to open. Petroleum or natural gas can then be extracted from subterranean wells.

Note

The U.S. consumed 20.25 million barrels per day of oil in 2023 while producing about 21.91 million barrels per day, meaning the U.S. is a net exporter of oil.

Refining and Distribution

Despite the increase in oil production, crude oil prices have remained volatile. That has a ripple effect on the prices of most products, given the reliance on oil for production, shipping, and delivery of physical products.

The problem with the basic supply and demand theory is that distribution and refinement haven’t always kept up with production.

For example, the United States does not build refineries often. The newest refinery with significant capacity came online in Garyville, Louisiana, in 1977.

Important

There were 130 refineries in operation in the U.S. as of 2023. So, even though there is a large supply of oil, the ability to refine it and get it to market is limited, which affects the supply that is available for consumption.

OPEC and Oil Prices

Then there’s the power of the cartels. The Organization of the Petroleum Exporting Countries (OPEC) was founded in the 1960s. Although the organization’s charter doesn’t state this explicitly, they fix prices.

By restricting production, OPEC can force oil prices to rise and thereby enjoy greater profits than if its member countries had each sold on the world market at the going rate.

Geopolitical Tensions and Oil Prices

The oil industry is a global game and what happens in the world impacts the price of oil, especially since a many of the world’s biggest oil producers are in politically unstable areas.

Regions Susceptible to Tensions

Geopolitical tensions are associated with many oil-producing countries, particularly in the Middle East. Saudi Arabia, Iraq, Iran, Kuwait, and Libya all fall into this region.

Other countries have added to the uncertainty of oil supply, impacting prices. For example, Russia has been a nefarious player in global politics, suffering sanctions from the U.S. and the European Union, among others, as a result.

Russia and Ukraine Tensions

Russia’s aggressive moves on Ukraine offer a recent timeline of the impact of geopolitics on oil prices.

Tensions that began in late 2021 and escalated in early 2022 led to a 35% surge in the price of West Texas Intermediate (WTI), the “sweet crude” oil that is a global benchmark.

In mid-December 2021, Russian officials demanded that Ukraine be precluded from joining the North Atlantic Treaty Organization (NATO) and that NATO forces be withdrawn from Eastern Europe. The U.S. and NATO refused, and these tensions again roiled energy markets.

In early 2022, Russia began military operations in Ukraine, which centered around the separatist regions in the east and other targets within the country. WTI oil prices spiked from $74.32 on Dec. 15, 2021, to $100, while Brent crude shot up to more than $105 during intraday trading in early 2022.

What Is the Supply and Demand for Oil?

The U.S. Energy Information Administration forecasts world oil production in 2023 to be 101.55 million barrels per day (mb/d), with world consumption reaching 101.58 mb/d.

How Does Oil Affect Overall Economic Supply and Demand?

The world relies on oil not only for fuel but for use in making plastics, chemicals, clothing, and much more. Moreover, its price gyrations directly affect manufacturers, shippers, and distributors of virtually all physical goods.

When oil prices rise and fall, there is generally a corresponding rise or fall in the costs to produce goods and services. When oil prices rise, costs for production and transportation rise, which decreases supply at a given price.

If oil prices fall, production and transportation costs fall, so more can be produced at a given price.

Demand increases or decreases in response to these supply fluctuations.

How Does Supply and Demand Effect Gas Prices?

Generally, if the oil supply increases, prices at the pump respond by going down. As supply decreases, demand increases and so do prices.

Where Are the Cheapest and Most Expensive Gas Prices in the U.S.?

The national average price per gallon of regular gas was $3.07 as of November 2024, according to the American Automobile Association. Consumers in most states paid less than that.

The highest gas prices can be found in Hawaii, at $4.57, and California, not far behind at $4.46.

Bargain gas can be found in Oklahoma, at an average of $2.57, and Texas, at $2.65.

The Bottom Line

The law of supply and demand drives oil prices. But oil prices drive the economy, influencing the cost of doing business and the prices of most consumer goods.

Fact checked by Suzanne Kvilhaug
Reviewed by Thomas Brock

Everybody wants to gain an edge in the markets, and social media has become a key ingredient in the mix. Major names like Facebook and Snapchat have evolved to become sources of information and breaking news. But the X platform (formerly Twitter) stands out among social media sites as a valuable source of breaking news, alerts, and tips that can inform trading decisions.

Key Takeaways:

• The most respected financial journals have X feeds that follow the news and often break it there first.
• You can use financial X feeds to get up-to-date information as well as analyst commentary, trader chat, and more.
• Consider using a social media dashboard app to streamline posts.
• Some of the major financial feeds include @CNBC, @Bespoke, and @WSJDealJournal.

The Best X Feeds for Investors

It isn’t unusual for breaking news to pop up on social media along with or even before the media’s in-depth reporting. Some of these events:

• The death of athlete Kobe Bryant in 2020 was first posted by the entertainment site TMZ. The outlet sent a tweet about the athlete’s death in a helicopter crash before filing a report on its website.
• Former President Donald Trump tweeted his decision to fire Secretary of State Rex Tillerson on March 13, 2018. The announcement caused uncertainty in the oil market, leading to speculation that increased risk could disrupt supplies.
• The 2012 Costa Concordia cruise ship disaster broke on feeds in the U.K. before it was widely reported elsewhere.
• The news that Greece had an economic reform deal with the European Union (EU) was reported by a reputable news outlet on its feed before the news hit the wires. Business Insider used a chart of the euro’s price to show how some savvy traders grabbed the chance to make money before most others got the news.

It’s not easy to find that one useful post among millions of constantly updating feeds. Some money managers use other social media dashboard apps to filter their results. If you’re an individual investor who’s looking for the latest in financial news, consider following some or all of the following 10 feeds.

1. @CNBC

The financial news network provides real-time business information to 355 million households worldwide per month. Its 14-hour live coverage is geared toward individual investors as well as trading professionals. The outlet’s account has more than 4.3 million followers.

2. @Benzinga

Benzinga provides real-time coverage of financial news, analyst upgrades and downgrades, and technical events like price breakouts or unusual volume. The site boasts more than 25 million readers per month. It has more than 288,000 followers on the social media platform.

3. @Stocktwits

The active trading community monitors Stocktwits’ feed, which has one million followers. Stocktwits is a real-time service that allows investors from all over the world to post what they are seeing and how they are trading at any given moment. The feed has highlights from those conversations.

4. @BreakoutStocks

The @BreakoutStocks feed, produced by TopBreakoutStocks.com, tracks stocks that demonstrate unusual price or volume changes, or both. The account has about 108,000 followers.

5. @bespokeinvest

Bespoke Investment Group is a respected Wall Street research firm with about 233,000 followers on X. You can check its website for its easy-to-read reports and follow it for alerts to new stories.

6. @WSJMarkets

Nobody needs an introduction to The Wall Street Journal. But you may not know that among its many X feeds is @WSJMarkets, which provides real-time finance, economic, and market news as it happens. The account has more than 940,000 followers.

7. @Stephanie_Link

If you’re a fan of Jim Cramer (@jimcramer) you’ll also appreciate the contributions of Stephanie Link, former director of research for his charitable trust. She’s now a frequent contributor to CNBC and a prolific tweeter. She’s also the chief investment strategist and portfolio manager at Hightower Advisors and boasts about 180,000 followers on X.

8. @nytimesbusiness

The New York Times business feed provides up-to-the-minute market news and other notable events. Financial news reporting is a fiercely competitive business, so having several of the best feeds is a good plan. Following this business feed means you’ll join the other 885,000 people looking for the latest business news.

9. @IBDinvestors

Investors Business Daily is a well-regarded publication intended for individual investors. Its feed focuses on the latest new trade-worthy ideas and has more than 400,000 followers.

10. @WSJDealJournal

This is another feed from The Wall Street Journal. If you’re interested in mergers and acquisitions, this is the one for you. It includes news and commentary on private equity activities and initial public offerings as well. It has about 11,000 followers on the X feed, making it a virtual niche feed but a crucial one if you follow this area.

When Did Twitter Become X?

Twitter was officially renamed X on July 24, 2023, after Elon Musk bought the company. Twitter’s company name was changed to X Corp in April 2023.

What Are the Best Sources of Information for Investors?

Investors can go directly to the source to find financial information on companies that are of interest to them. Company filings with the SEC can be accessed on the EDGAR database. Corporate websites also post their financial statements, annual reports, and press releases.

What Magazines Should Investors Follow?

The following are among the best financial magazines recommended by most sources: The Economist, Barron’s, Kiplinger’s, Investor’s Business Daily, Bloomberg Businessweek, Forbes, and Money.

The Bottom Line

While social media can be a valuable source of breaking news, these feeds should not be the sole source for decision-making. Savvy investors should read and learn from more nuanced media reports, corporate filings, and more to get a vision of a company’s performance and prospects.

Fact checked by Vikki Velasquez
Reviewed by Charlene Rhinehart

Buying back or repurchasing shares can be a sensible way for companies to use their extra cash on hand to reward shareholders and earn a better return than bank interest on those funds. But in many cases, share buybacks are seen as just a ploy to boost reported earnings—since there are fewer shares outstanding for calculating earnings per share. Even worse, it could be a signal that the company has run out of good ideas with which to use its cash for other purposes.

In the wake of the 2020 global crisis, companies that spent billions of dollars on share buybacks over the previous several years saw their stock prices plummet, with little cash on hand left to stem the fallout in the markets or to pay furloughed employees. As a result, the practice of stock buybacks was put under a critical microscope again.

This means that investors can’t afford to simply take buybacks at face value. Find out how to examine whether a buyback represents a strategic move by a company or a desperate one.

Key Takeaways

• A share repurchase or buyback happens when a company buys back its own shares from the marketplace.
• Companies execute buybacks to boost the value of their stock and to improve their financial statements.
• Companies tend to repurchase shares when they have cash on hand and the stock market is on an upswing.
• There is a risk, however, that the stock price could fall after a buyback.
• Spending cash on shares can reduce the amount of cash on hand for other investments or emergency situations.

When Buybacks Work

A share buyback occurs when a company purchases some of its shares in the open market and retires these outstanding shares. This can be great for shareholders because once the buyback is complete, they each own a bigger portion of the company, and therefore a bigger portion of its cash flow and earnings. The company also buys shares in the market, bidding up the prices of the stock, and reducing the overall supply of shares outstanding.

In theory, management pursues share buybacks because they offer the greatest potential return for shareholders—a better return than it could get from expanding operations into new markets, investing in the brand, or any of the other uses that the company has for cash. If a company with the potential to use cash to pursue operational expansion chooses instead to buy back its stock, then it could be a sign that the shares are undervalued. The signal is even stronger if top managers are buying up stock for themselves.

Most importantly, share buybacks can be a fairly low-risk approach for companies to use extra cash. Reinvesting cash into, say, research and development (R&D) or a new product can be very risky. If these investments don’t pay off, that hard-earned cash goes down the drain. Using cash to pay for acquisitions can be perilous, too. Mergers hardly ever live up to expectations. Share buybacks, on the other hand, let companies invest in themselves when they are confident their shares are undervalued and offer a good return for shareholders.

When Buybacks Fail

Some of the time, share buybacks can be a great thing. But oftentimes, they can be a downright bad idea and can hurt shareholders. This can happen when buybacks are done in the following circumstances:

1. When Shares Are Overvalued

For starters, buybacks should only be pursued when management is very confident the shares are undervalued. After all, companies are no different than regular investors. If a company is buying up shares for $15 each when they are only worth $10, the company is clearly making a poor investment decision. A company buying an overvalued stock is destroying shareholder value and would be better off paying that cash out as a dividend so that shareholders can invest it more effectively.

2. To Boost Earnings per Share (EPS)

Buybacks can boost earnings per share (EPS). When a company goes into the market to buy up its own stock, it decreases the outstanding share count. This means earnings are distributed among fewer shares, raising EPS. As a result, many investors applaud a share buyback because they see increasing EPS as a surefire approach to raising share value.

But don’t be fooled. Contrary to popular wisdom (and, in many cases, the wisdom of company boards), increasing EPS doesn’t increase fundamental value. Companies have to spend cash to purchase the shares while investors adjust their valuations to reflect the reductions in both cash and shares. The result, though, cancels out any impact on EPS. In other words, lower cash earnings divided between fewer shares will produce no net change to earnings per share.

Of course, plenty of excitement gets generated by the announcement of a major buyback as the prospect of even a short-lived EPS rise can give share prices a pop-up. But unless the buyback is wise, the only gains go to those investors who sell their shares on the news. There is little benefit for long-term shareholders.

Important

Signed by President Joe Biden on Aug. 16, 2022. the Inflation Reduction Act of 2022 includes a provision for corporate share buybacks. Any repurchases executed after Dec. 31, 2022, that exceed $1 million will incur a 1% excise tax. It excludes new shares allotted for public issues or employee stock option plans.

3. To Benefit Executives

Many executives get the bulk of their compensation in the form of stock options. As a result, buybacks can serve a goal. So as stock options are exercised, buyback programs absorb the excess stock and offset the dilution of existing share values and any potential reduction in earnings per share.

By mopping up extra stock and keeping EPS up, buybacks are a convenient way for executives to maximize their own wealth. It’s a way for them to maintain the value of the shares and share options.

Some executives may even be tempted to pursue share buybacks to boost the share price in the short term and then sell their shares. What’s more, the big bonuses that chief executive officers (CEOs) get are often linked to share price gains and increased earnings per share, so they have an incentive to pursue buybacks even when there are better ways to spend the cash or when the shares are overvalued.

4. Buybacks Using Borrowed Money

The temptation for executives to use debt to finance earnings-boosting share purchases can be hard to resist, too. The company might believe that the cash flow it uses to pay off debt will continue to grow, bringing shareholder funds back into line with borrowings in due course. If they’re right, they’ll look smart. If they’re wrong, investors will get hurt.

Managers have a tendency to assume that their companies’ shares are undervalued—regardless of the price. When done with borrowing, share buybacks can hurt credit ratings, since they drain cash reserves that can serve as a cushion if times get tough.

One of the reasons given for taking on increased debt to fund a share buyback is that it is more efficient because interest on the debt is tax deductible, unlike dividends. However, debt has to be repaid at some time. Remember, what gets a company into financial difficulties is not lack of profits, but lack of cash.

5. To Fend off an Acquirer

In some cases, a leveraged buyback can be used as a means to fend off a hostile bidder. The company takes on significant additional debt to repurchase stocks through a buyback program. Such leveraged buybacks can be successful in thwarting hostile bids by both raising the share value (hopefully) and adding a great deal of unwanted debt to the company’s balance sheet.

6. To Get Rid of Cash

It’s very hard to imagine a scenario where buybacks are a good idea, except if the buybacks are undertaken when the company feels its share price is far too low. But, then again, if the company is correct and its shares are undervalued, they will probably recover anyway. So, companies that buy back shares are, in effect, admitting that they cannot invest their spare cash flow effectively.

Even the most generous buyback program is worth little for shareholders if it is done in the midst of poor financial performance, a difficult business environment, or a decline in the company’s profitability. By giving EPS a temporary lift, share buybacks can soften the blow, but they can’t reverse things when a company is in trouble.

What Is the Difference Between a Buyback and a Dividend?

A dividend occurs when a company distributes some of its earnings back to shareholders, while a stock buyback is when the company buys back its own shares to raise the price. Buybacks are generally taxed more favorably than dividends, since investors are taxed according to the capital gains rate, while dividends are taxed at the ordinary income rate.

Why Are Buybacks Controversial?

Buybacks have attracted some controversy among progressive politicians, because they are seen as a ploy by corporations to use their earnings to boost stock prices rather than actually investing in capital or labor. However, proponents argue that buybacks are an effective way to return earnings to shareholders.

How Are Buybacks Taxed?

The Inflation Reduction Act places a 1% excise tax on buybacks valued at $1 million or more. This tax is non-deductible and can be reduced by new issues to the public.

The Bottom Line

As investors, we should look more closely at share buybacks. Look in the financial reports for details. See whether the stock is being awarded to employees and whether repurchased shares are being bought when the shares are a good price. A company buying back overvalued stock—especially with lots of debt—is destroying shareholder value. Share repurchase plans aren’t always bad, but they can be. So be careful out there.

Reviewed by Khadija Khartit
Fact checked by Vikki Velasquez

Getting a Mortgage vs. Paying Cash for Investment Property: An Overview

The housing crash entirely restructured the American mortgage market. Part of that development has included tighter restrictions on obtaining mortgages, coupled with an abundance of newly available homes for sale. This, in turn, has allowed some investors to buy second properties for investment and rental purposes.

There are two major schools of thought when considering real estate investments and how to approach them: One believes it is wiser to pay all out cash for a second home, while the other side holds that being leveraged on a second—or even third or fourth property—is far more lucrative. Below are the cases for both.

Key Takeaways

• A leveraged investor can turn quite a profit with three or four properties while a cash-buyer might be limited.
• Cash investors can purchase quickly when there is a good opportunity rather than wait on the mortgage process.
• Whether purchasing property with a mortgage or cash, each requires a significant amount of disposable income.

Getting a Mortgage

This debate is heavily covered online, and several financial news sites and blogs state that being leveraged makes more sense when buying investment properties. For example, Ali Boone of BiggerPockets.com argues that the returns are higher and the risks are lower when leveraging this type of investment. The logic behind this is that if property increases in value, an investor will have put less down, but can then receive far more than the original capital.

For example, let’s supposed you put down 15% on a $500,000 house. Your initial investment would then be $75,000. Two years later, should that house increase in value to $650,000 you could sell and receive far more than your initial $75,000. In this scenario, your principal investment of $75,000 gets returned, plus an extra $75,000. In that case, you would have risked far less than a cash-buying investor would have in this situation, yet still made a considerable profit.

Multiply this formula and strategy over three or four properties, and the savvy investor can turn quite a profit. A leveraged investor has more opportunity than their cash-buying counterpart in these types of situations. Cash buyers will often buy a house outright with most of the money they have available for investment. In contrast, a leveraged investor can diversify the allocation of that money across several different properties, thus possibly increasing their rate of return in the long run.

The Risks of Being Leveraged

Taking on any type of investment has an inherent risk—especially when dealing with uncertainties in the housing market. First and foremost, the diversification of money across investment properties is an approach that should seriously be considered only by a well-informed investor. A sharp understanding of current economic conditions, the overall health of the housing market in general, and the area into which you are buying specifically is necessary.

While there are several advantages to taking out a loan to buy an investment property, things could go awry. Let’s assume each rental property depreciated sharply in value. The leveraged investor now owes far more than they ever put down. Should you misstep the market by even a little, you could lose massively, especially with a couple of properties in your portfolio.

While a benefit here is that the bank will certainly lose more than you will, your credit score could be severely impacted. The potential for significant returns attracts many to this type of strategy, but it should be approached with clear consideration for all the risks involved. This strategy will, of course, also require you to go through the mortgage process—in many cases, several times—which is another thing to consider.

Paying Cash for Investment Property

Cash investors can sidestep the entire mortgage application process and make a quick investment should they see an opportunity, which is highly advantageous. Another benefit to paying cash for a property upfront is that you don’t have to pay interest. Even if interest rates were as low as they were in 2021, it will always be more expensive over the long run to pay any type of interest than it will be not to have any.

For many investors who have the funds, buying property with cash makes sense, especially if you believe the market will upswing greatly in the next couple of years.

For example, let’s say you buy a home outright for $400,000 and sit on it until you see the moment is right to sell. Should you be right about an upswing, and the home appreciates in value to $500,000, that’s a direct profit of $100,000 to the investor, without having to consider paying the bank interest payments or the amount you borrowed in a mortgage. Having 100% equity in a home also makes it easier for an investor to take out a loan against it in the future, should that be needed. Buying a home outright in cash can also create immediate cash flow for the investor.

Certain investors look to create moving income with their properties, and the right type of renters can provide this.

Important

Buying real estate with a mortgage or with cash both require a substantial amount of disposable investment income.

Special Considerations: The Risks of Paying Cash

Tying up all of your assets in one investment is extremely risky. This approach might not then be the best strategy for the investor who has a limited amount of money to use in the long-term.

While a home can increase in value, it can just as quickly depreciate, and the money you lose will be outright. Diversification is one of the fundamental commandments of investing. Tying up the majority of assets in one asset class can provide massive loss. Putting hundreds of thousands of dollars into one asset class also ties up your liquidity until you have a seller.

Key Differences

Both strategies offer advantages, but for different types of investors. One important thing to note is that either strategy requires a substantial amount of disposable investment income. Even leveraged buyers who spread out their investment across several properties will need to assume the risk that all of those properties depreciate. Further, when purchasing a new home for cash, do not use retirement savings or your emergency fund.

For the investor who has a large amount of money ready to invest, propensity for risk is what will truly drive the direction of the decision here. Leveraged positions in investment properties will undoubtedly yield higher returns, but for the less-involved or dovish investor who still seeks equity and return, cash purchase might be the better option.

Tax Implications

Tax implications play a role in deciding between paying cash and using a mortgage for investment properties. Mortgage interest deductions are a key benefit for financed purchases, meaning investors can deduct interest payments from taxable income which lowers their tax liability. This deduction can be especially advantageous for high-income earners or in cases where the mortgage interest is substantial.

On the other hand, paying cash avoids the need for interest payments entirely, eliminating this potential deduction. However, cash buyers might face higher capital gains taxes when selling the property since they lack the opportunity to offset taxable income with interest expenses. Additionally, they don’t benefit from the tax relief that financing provides during the holding period.

While cash purchases simplify tax filings by removing complexities like interest deductions and loan amortization, cash buyers may miss out on the potential tax advantages tied to leveraging. The basis of deciding which tax strategy depends on many of your own personal factors.

Note

Even if you purchase a house with cash, you’ll still be responsible for annual expenses such as property tax assessments.

Factoring in Market Conditions

The decision on whether to get a mortgage or pay cash also depends on the current market conditions. In a seller’s market, characterized by rising prices and high demand, financing allows investors to secure more properties without tying up all of their capital. For example, in the mid-2010s, cities like Seattle experienced rapid property price increases, and many investors chose to leverage mortgages to buy multiple properties, maximizing their investment potential while taking advantage of low interest rates.

Meanwhile, in a buyer’s market where property values stagnate or decline, paying cash becomes a more attractive option. Investors can avoid the risks associated with holding mortgage debt when property values may not appreciate as expected. For example, during the 2008 housing crisis, many cash buyers were able to acquire properties at discounted prices without the pressure of mortgage payments, allowing them to hold the properties until the market recovered. This means they never had an outstanding liability in excess of the market value of the home.

Local economic conditions also influence the decision to finance or pay cash. In markets with high volatility or uncertainty, such as some parts of Florida after major hurricanes, cash buyers can sometimes have the advantage, as sellers may be eager for a quick sale without the complications of financing. This gives cash buyers more negotiating power.

Understanding Opportunity Cost

We’ll wrap up this article by talking about opportunity cost. When you choose to pay cash, you forgo the ability to invest that same capital elsewhere, potentially missing out on higher returns in other investments like stocks, bonds, or additional real estate. This is called the opportunity cost of the transaction, or the next best alternative.

For example, if an investor has $500,000 in cash and decides to buy a property outright, they lose the opportunity to invest that amount in a diversified portfolio with an average annual return of 7%. The year-one opportunity cost of buying the $500,000 house with cash is the $35,000 of income revenue foregone, though this does not consider any appreciation of the home value. Note that the second year opportunity cost may be higher due to potential earnings made on year-one earnings.

What Are the Key Advantages of Paying Cash for Investment Properties?

Paying cash for investment properties offers several immediate financial benefits. First, Plus, cash transactions eliminate the risk of foreclosure due to missed payments and could simplify the buying process, leading to quicker closings.

What Are the Key Advantages of Using a Mortgage?

Using a mortgage allows investors to leverage their capital, enabling them to purchase more properties or higher-value ones than they could afford with cash alone. This leverage can lead to higher returns, especially in a growing market where property values are appreciating.

How Does Liquidity Factor Into the Decision?

Financing a property preserves cash flow and gives investors the flexibility to use their capital elsewhere, such as investing in other assets or covering unexpected expenses. This can be particularly valuable, especially if the investor may not have the capital upfront needed (i.e. they do not have liquid assets or enough assets).

Which Option Is Better in a Competitive Real Estate Market?

In a competitive real estate market, cash buyers often have the upper hand. Sellers are more inclined to accept cash offers because they reduce the uncertainty of financing falling through.

The Bottom Line

While paying cash offers advantages like faster closings and no-interest payments, financing allows investors to leverage their capital and take advantage of tax benefits, such as mortgage interest deductions. The best approach depends on factors like market conditions, liquidity needs, and long-term investment goals.

Unfortunately, yes—levied both by the IRS and by the issuer

Reviewed by Marguerita Cheng
Fact checked by Suzanne Kvilhaug

Annuities can be great investments for retirement savings and estate planning, but they come at a cost. If money is withdrawn from an annuity prior to the term of the contract, the insurance company usually assesses a surrender charge for early withdrawal.

The Internal Revenue Service (IRS) may also assess a premature penalty of 10% and income tax on the withdrawn funds. The amount of the surrender charge depends on how long the owner stayed in the contract. The penalty for early withdrawal depends on the age of the contract holder and the circumstances for making the withdrawal.

In early January 2020, then-President Donald Trump signed the Setting Every Community Up for Retirement Enhancement (SECURE) Act. Part of the act is expected to make annuities more popular. First, the act created a “fiduciary safe harbor” that lowers the risk that a plan participant will have to sue a plan fiduciary if the insurance company cannot pay on the annuity as promised.

Additionally, annuities sold inside qualified plans are now more portable. If the annuity option is taken out of the plan, the participant can roll it out of the plan “in-kind” rather than having to liquidate the option.

Key Takeaways

• Withdrawals from annuities can trigger one of two types of penalties.
• The insurer issuing the annuity charges surrender fees if funds are withdrawn during the annuity’s accumulation phase.
• The IRS charges a 10% early withdrawal penalty if the annuity holder is under the age of 59½.

Annuity Surrender Charges

Annuity contracts are issued by insurance companies for a specified investment term, typically from four to eight years. Also known as the accumulation phase, this is the period during which your initial lump sum is supposed to grow, accumulating the funds that will be paid out to you later in the annuitization phase. This means that any withdrawal you make during this period incurs a surrender charge.

For each year the investment is held, the penalty for early withdrawal changes, decreasing lower the longer the annuity is held. This is called a surrender schedule. It is not uncommon for an early withdrawal penalty made in the first few years of owning an annuity to exceed 5%. For example, an annuity with an investment term of eight years might have a surrender charge of 8% in year one after you sign up, 7% in year two, and so on, dropping one percentage point annually until year eight.

Tax Penalties on Annuities

In addition to penalties assessed by the insurance company, early withdrawals may also trigger an IRS penalty—specifically a 10% withdrawal penalty, the same fee levied on early distributions from a 401(k) or individual retirement account (IRA).

Why? Annuities are considered a retirement product by the IRS regardless of whether or not the contract is held in a qualified retirement plan (which usually isn’t a good idea, anyway). Even non-qualified annuities (those purchased with after-tax dollars and not held in a retirement account) require the owner to reach the age of 59½ before taking penalty-free distributions.

Important

Along with penalties, early withdrawals from annuities may also be subject to income taxes calculated at your regular income tax rate (generally, any earnings minus the original amount you invested in the annuity).

The 10% penalty applies to the earnings portion of a withdrawal—which doesn’t sound too bad, except that, when it comes to annuities, the IRS assumes that earnings are withdrawn first (not your original investment).

Exceptions to Annuity Penalty Rules

Fortunately, like retirement accounts, annuities allow for early withdrawal with no penalty in the event the annuitant becomes disabled or dies. Additionally, some contracts offer a benefit for taking penalty-free withdrawals to pay for long-term care expenses.

Many annuity contracts also let the owner withdraw up to 10% of the contract value or premium each year, as defined in the contract, penalty-free.

What Are Annuities?

An annuity is a contract that’s issued and distributed by an insurance company and bought by individuals. The insurance company pays out a fixed or variable income stream to the purchaser beginning right away or at some time in the future in exchange for premiums they’ve paid.

How Did the SECURE Act of 2019 Affect Annuities?

The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 was expected to make annuities more popular by:

• Creating a “fiduciary safe harbor” that lowers the risk that a plan participant will have to sue a plan fiduciary if the insurance company cannot pay on the annuity as promised.
• Making annuities sold inside qualified plans more portable. If the annuity option is taken out of the plan, the participant can roll it out of the plan “in-kind” rather than having to liquidate the option.
• Encouraged plan sponsors to include annuities as an option in workplace plans by reducing their liability if the insurer cannot meet its financial obligations.
• Encouraged employers to include more annuities in 401(k) plans by removing their fear of legal liability if the annuity provider fails to provide, and not requiring them to choose the lowest-cost plan.

How Did the SECURE 2.0 Act of 2022 Affect Annuities?

The SECURE 2.0 Act of 2022, which was signed into law by then-President Joe Biden on Dec. 29, 2022, as part of the Consolidated Appropriations Act (CAA) of 2023, increased the amount that individuals can move to a qualified longevity annuity contract (QLAC) from $125,000 to $200,000. It also adjusted the $200,000 limit annually for inflation and eliminated the rule capping QLAC premiums at 25% of the participant’s total plan assets.

A QLAC is a deferred annuity funded with an investment from a qualified retirement plan or an IRA. It allows funds in a qualified retirement plan, such as a 401(k), a 403(b), or an IRA, to be converted into an annuity.

The SECURE 2.0 Act also removed availability barriers to some life annuities in tax-advantaged retirement accounts and allowed a retiree with a partially annuitized plan to combine the payments from the annuity and the plan in order to calculate their required minimum distribution (RMD).

The Bottom Line

Annuities can be great for retirement savings and estate planning, but withdrawals can trigger one of two types of penalties. The insurer issuing the annuity assesses surrender fees if funds are withdrawn during the annuity’s accumulation phase, and the IRS charges a 10% early withdrawal penalty and income tax on the withdrawn funds if the annuity holder is younger than 59½.

Reviewed by Thomas Brock

Uber and Lyft are the two big ridesharing companies in the United States. Both receive additional capital funding as they continue to grow. Activist Carl Icahn threw his considerable weight behind Lyft with a $100 million investment in May 2015. He called it “a bargain” and acquired a seat on the board.

Lyft is still in second place behind Uber in the ridesharing business, rebounding more slowly from the pandemic. Uber’s rideshare sales were up 10% year-to-year in March 2024 compared to 3% for Lyft. That hasn’t stopped venture capitalists and other investment entities from throwing money at both companies, however.

Key Takeaways

• Uber and Lyft are the two biggest ridesharing companies in the United States but Uber claims first place.
• Google Ventures plunged over $250 million into Uber in August 2015.
• Lyft raised over $500 million in funding in early 2015.
• Lyft reported a year-end operating loss of $475.6 million for the year ending Dec. 31, 2023 compared to Uber’s $1.11 billion in income from operations for the same period.

Uber’s Early Investors

Uber was founded in 2009 with a killer app concept: An individual could hail a car ride with a smartphone rather than a wave of a hand. The concept caught on with the Silicon Valley venture capital crowd. The company’s valuation increased by $10 billion within seven months by the summer of 2015.

There was an almost insatiable appetite to buy into Uber and its leadership in the car-hailing business in its early days. Google Ventures plunged over $250 million into Uber in August 2015.

The company’s biggest investors also included blue-chip Silicon Valley venture capital firm Kleiner Perkins Caufield & Byers, Fidelity Investments, Jeff Bezos of Amazon, Goldman Sachs, Blackrock, Lone Pine Capital, and dozens of other venture capital firms, hedge funds and private billionaires. Traditional Wall Street wasn’t left at the curb either.

The thinking among Uber financial supporters was that a tidal wave of cash would drown any rival and allow the realization of the ultimate goal: a monstrously successful initial public offering (IPO) valued at $70 billion or more. Shares instead dropped 7.6% at the close of its first day of trading in May 2019.

Lyft’s Big Money Investors

Lyft is clearly the smaller of the two companies. It was operating in more than 800 cities in the United States and Canada as of December 2024. Uber covers more than 10,000 cities worldwide.

Marc Andreessen, the founder of Netscape, had a fractious history of public feuds with Icahn but he nonetheless poured $60 million into Lyft through his firm Andreessen Horowitz LLC. Former New York City mayor Michael Bloomberg was a major investor in Andreessen’s firm. Bloomberg promised to destroy the yellow cab business in New York City.

Important

Lyft also raised over $500 million in funding led by a Japanese online retailer in early 2015.

Invested Money, Big Losses

Plenty of capital has been provided to both Uber and Lyft in this ridesharing war but they’ve had their share of operating losses as well.

The companies were close to being neck-and-neck in 2022 as the Covid-19 pandemic began moving behind them. Uber reported a $1.832 billion operating loss for the year ending Dec. 31, 2022. Lyft’s operating loss was $1,458 billion for the same period.

Then came 2023. Lyft reported a year-end operating loss of $475.6 million for the year ending Dec. 31, 2023 compared to Uber’s $1.11 billion in income from operations for the same period.

What Is the Silicon Valley Venture Capital Crowd?

The “crowd” is a group of venture capital firms and tech companies headquartered in Silicon Valley, California and there are a number of them. Their primary mission is to provide funding and support to startups in the region.

What Are Some Other Major Rideshare Companies?

Uber and Lyft control the industry but there are other major companies as well. The biggest of them operate outside the United States, however. They include Gojek Tech in Indonesia which reported 2024 annual revenue of $46.074 billion in U.S. dollars.

Who Is Uber’s Biggest Institutional Investor?

China Universal Asset Management Company Ltd. held more than 79,000 shares valued at $4.78 million as of Jan. 24, 2025. Institutions owned 80.24% of Uber shares as of this date.

The Bottom Line

The capital markets continue to be bountiful for companies such as Uber and Lyft but conditions can change overnight if markets hit a speed bump. This can limit or delay growth for the ridesharing business as venture capitalists and Wall Street hit the road.