Investopedia

Reviewed by Chip Stapleton
Fact checked by Vikki Velasquez

Leveraged buyouts (LBOs) have probably had more bad publicity than good because they make great stories for the press. However, not all LBOs are regarded as predatory. They can have both positive and negative effects, depending on which side of the deal you’re on.

A leveraged buyout is a generic term for the use of leverage to buy out a company. The buyer can be the current management, the employees, or a private equity firm. It’s important to examine the scenarios that drive LBOs to understand their possible effects. Here, we look at four examples: the repackaging plan, the split-up, the portfolio plan, and the savior plan.

Key Takeaways

• A leveraged buyout is when one company is purchased through the use of leverage.
• There are four main leveraged buyout scenarios: the repackaging plan, the split-up, the portfolio plan, and the savior plan.
• The repackaging plan involves buying a public company through leveraged loans, making it private, repackaging it, and then selling its shares through an initial public offering (IPO).
• The split-up involves purchasing a company and then selling off its different units for an overall dismantling of the acquired company.
• The portfolio plan looks to acquire a competitor with the hopes of the new company being better than both through synergies.
• The savior plan is the purchase of a failing company by its management and employees.

The Repackaging Plan

The repackaging plan usually involves a private equity company using leveraged loans from the outside to take a currently public company private by buying all of its outstanding stock. The buying firm’s goal is to repackage the company and return it to the marketplace in an initial public offering (IPO).

The acquiring firm usually holds the company for a few years to avoid the watchful eyes of shareholders. This allows the acquiring company to make adjustments to repackage the acquired company behind closed doors.

Then, it offers the repackaged company back to the market as an IPO with some fanfare. When this is done on a larger scale, private firms buy many companies at once in an attempt to diversify their risk among various industries.

Important

Private equity firms typically borrow up to 80% to 90% of the purchase price of a company when enacting a leveraged buyout. The remainder is funded through their own equity.

Those who stand to benefit from a deal like this are the original shareholders (if the offer price is greater than the market price), the company’s employees (if the deal saves the company from failure), and the private equity firm that generates fees from the day the buyout process starts and holds a portion of the stock until it goes public again.

Unfortunately, if no major changes are made to the company, it can be a zero-sum game, and the new shareholders get the same financials the older version of the company had.

The Split-Up

The split-up is considered to be predatory by many and goes by several names, including “slash and burn” and “cut and run.” The underlying premise of this plan is that the company, as it stands, is worth more when broken up or with its parts valued separately.

This scenario is fairly common with conglomerates that have acquired various businesses in relatively unrelated industries over many years.

The buyer is considered an outsider and may use aggressive tactics. Often in this scenario, the firm dismantles the acquired company after purchasing it and sells its parts to the highest bidder. These deals usually involve massive layoffs as part of the restructuring process.

It may seem like the equity firm is the only party to benefit from this type of deal. However, the pieces of the company that are sold off have the potential to grow on their own and may have been stymied before by the chains of the corporate structure.

The Portfolio Plan

The portfolio plan has the potential to benefit all participants, including the buyer, the management, and the employees. Another name for this method is the leveraged build-up, and the concept is both defensive and aggressive in nature.

In a competitive marketplace, a company may use leverage to acquire one of its competitors (or any company where it could achieve synergies from the acquisition).

The plan is risky: The company needs to make sure the return on its invested capital exceeds its cost to acquire, or the plan can backfire. If successful, then the shareholders may receive a good price on their stock, current management can be retained, and the company may prosper in its new, larger form.

The Savior Plan

The savior plan is often drawn up with good intentions but frequently arrives too late. This scenario typically includes a plan involving management and employees borrowing money to save a failing company. The term “employee-owned” often comes to mind after one of these deals goes through.

While the concept is commendable, the likelihood of success is low if the same management team and tactics stay in place. Another risk is that the company may not be able to pay back the borrowed money quickly enough to offset high borrowing costs and see a return on the investment. On the other hand, if the company turns around after the buyout, then everyone benefits.

What Is a Leveraged Buyout?

A leveraged buyout is a method of buying a company primarily through debt financing. It is often employed by private equity firms when making acquisitions. The assets of the company being acquired usually serve as the collateral for the loan. The strategy is employed by PE firms as it requires little initial capital on their end. The goal is to purchase the company, make improvements, and then sell it for a profit or take it public.

What Are the Risks of a Leveraged Buyout?

Leverage buyouts are risky because they involve using borrowed money to acquire a business, with the goal of improving its operations and selling it for a profit. The business being acquired is responsible for the debt repayments via its cash flows.

If the business does not generate enough cash flow, it will struggle to meet debt obligations, which could lead to default and bankruptcy. For the private equity firm that makes the business acquisition, the main risk is not being able to improve the business’s value and sell it for a profit, which could result in a financial loss.

How Can I Invest in a Leveraged Buyout?

As an individual investor, it is extremely difficult to invest in leveraged buyouts (LBO) as they are executed by private equity (PE) firms that have a large financial base and access to financing. You could invest in private equity funds, however, the minimum requirements are extremely high.

Alternatively, you could buy shares of companies that make LBOs, such as Blackstone or KKR. Private equity exchange-traded funds (ETFs) exist whereby individual investors can gain access to the strategies PE firms specialize in. Generally speaking, however, it is unlikely for individual retail investors to be able to invest in leveraged buyouts.

The Bottom Line

While there are forms of LBOs that lead to massive layoffs and asset selloffs, some LBOs can be part of a long-term plan to save a company through leveraged acquisitions. Regardless of what they are called or how they are portrayed, they will always be a part of an economy as long as there are companies, potential buyers, and money to lend.

Fact checked by Vikki Velasquez
Reviewed by Katie Miller

Financial advisory firms manage trillions of dollars and this connects them intimately to questions of wealth and equity. The U.S. Government Accountability Office (GAO) nonetheless found when it reviewed the industry in 2017 that less than 1% of those assets estimated at more than $70 trillion were managed by minority- or woman-owned firms.

There’s been growing investor interest in promoting diversity in firms, however. A study by the U.S. Securities and Exchange Commission (SEC) Asset Management Advisory Committee found that investors value DEI information when deciding to invest. The study has been characterized as the most detailed inspection of diversity, equity, and inclusion (DEI) in the industry to date.

Key Takeaways

• Financial advisory firms show a growing appetite for diversity, equity, and inclusion (DEI).
• Proponents argue that DEI increases innovation and revenue for businesses.
• Many projections suggest that increased DEI would significantly increase productivity for the U.S. economy as a whole.
• Many initiatives may not be evidence-led.
• Opinion about DEI is generally positive but the willingness of businesses to invest resources into promoting DEI goals may be unstable.

What Are DEI Initiatives?

Diversity, equity, and inclusion (DEI) refer to three separate though connected concepts.

• Diversity refers to including people with different demographic characteristics such as race, sex, sexual identity, or disability.
• Equity refers to businesses offering varying resources to account for privilege and power differences.
• Inclusion refers to whether people feel included and have a voice in decision-making.

These three concepts are used to evaluate a company’s progressiveness and innovation.

How Advisory Firms Can Do More in DEI

DEI for financial advisory firms can mean connecting consumers to a diverse set of qualified financial advisors or having a diverse staff. 

The retail wealth management group Lincoln Financial Network runs a network that connects consumers to Black and Latino/Latina financial professionals through a digital platform. The company argues that its platform will decrease isolation among these groups and will therefore stimulate financial well-being by expanding access to financial advice. The group has also held professional development sessions.

Internships such as the BLatinX (BLX) Internship Program are meant to encourage Black and Latino/Latina people to become certified financial planners.

Proponents suggest that there’s more work to do in the industry, however. It’s focused more on diversity than equity or inclusion, according to an interview given by Kevin Keller, CEO of the Certified Financial Planner Board of Standards, at their 2022 diversity summit. Other members present at the meeting called for more transparency in hiring practices.

The SEC’s Asset Management Advisory Committee report made recommendations to address what it argued was a lack of diversity and transparency around practices in the industry. It recommended that the agency require more detailed gender and race disclosures along with setting up a way to increase record keeping and further studies.

Important

It’s often been recommended that individual firms craft a mission unique to their firms and develop strategies and ways of measuring goals while getting employees and leadership to buy in.

Examples of DEI Initiatives

Investopedia surveyed the publicly available information for some of the largest firms and asked a few firms from its 100 Top Financial Advisors list to cite it. The biggest names in financial advice have issued DEI statements that include publishing regular reports about DEI initiatives that they’re pursuing.

• Vanguard also emphasized its attempts to attract and retain diverse staff. It published an overview of the race and ethnicity of its workforce.
• Fidelity advertises its associate-led community investment program and it claims that 43% of its new hires in 2022 were people of color. The company spent $350 million on “diverse suppliers.”

Make it your “why”

“As a majority female, Black-owned firm, we are redefining the traditional structure of mainstream RIAs (registered investment advisors) by leveraging our cultural competency skills, authentically engaging holistic financial planning advice, and creating a hospitable environment for our employees and clients alike,” wrote Lazetta Rainey Braxton, founder and CEO of Investopedia Top 100 Financial Advisory firm Lazetta & Associates.

She described diversity, equity, inclusion, and belonging as holding at the center of why the firm began when the country was becoming a “racial mosaic.”

“We celebrate weaving our ‘Why’ into our internal and external practices that span employee training, career paths, company handbook, team huddles, prospect introductions, client meetings, and company retreats,” Braxton wrote.

Work with diverse suppliers

“We make intentional efforts to include a diverse slate of candidates for job openings and we select employees through a fair and consistent hiring process,” wrote Peter Lazaroff, chief investment officer of Plancorp, an Investopedia Top 100 Financial Advisory firm.

Plancorp also seeks out women- and minority-owned businesses to be their suppliers, according to Lazaroff.

Don’t focus on “initiatives”

“I disagree with how most firms are looking at DEI,” Kirk Chisholm said in an email. Chisholm is the wealth manager and principal of Innovative Advisory Group, another Investopedia Top 100 Financial Advisory firm.

Chisholm’s firm avoids specific initiatives that he views as the wrong approach to increasing diversity.

“Pragmatically, people who are in underrepresented groups in the financial services industry should not be looked at as lacking opportunity,” he said. “They have a tremendous opportunity. Their lack of presence in the industry gives them a competitive advantage over others who are not from that represented group. People like associating with others who are like them. If people looked at the issue as an opportunity rather than a problem, more could be accomplished.”

Benefits of DEI in the Workplace

The reputed benefits of DEI include higher employee morale, lower turnover, and greater competitive advantage. Proponents often stress profitability in what’s known as the “business case.”

Several projections suggest that “diverse” corporations outproduce and out-earn non-diverse firms largely by encouraging innovation from traditionally underrepresented groups. The upside is said to spill over into the broader economy as well with prominent projections claiming that greater diversity could pull in trillions of extra dollars.

There’s been some skepticism over how genuine most DEI pledges are in general, however. Corporations are quick to talk about their commitment to diversity but many have been slow to make non-superficial changes, according to Salvador Ordorica, CEO of translation service The Spanish Group LLC. Ordorica indicated that corporations can take “a cynical approach” to diversity as a way to win plaudits for minor changes, sometimes referred to as “slacktivism.”

Large companies tend to justify DEI by stressing its usefulness in business performance rather than making a moral case that DEI encourages fairness within organizations. The business case for DEI may discourage inclusion, however, with one study finding that emphasizing profitability in this way makes the businesses appear less attractive to the underrepresented groups it may be trying to attract.

The evidence can be thin even for well-intentioned initiatives. Some research suggests that many of the DEI industry’s recommendations from unconscious bias training to workshops are limited in effectiveness at best and can cause backlash at worst. One meta-analysis of hundreds of “prejudice-reduction” interventions found that only “a small fraction” were effective.

Note

There are also concerns that some corporate investments may prove ultimately unstable. Several companies have laid off DEI professionals as the macroeconomic environment has become less favorable, including several big tech companies like X (formerly Twitter) and Amazon where DEI positions have shown much greater attrition rates than other jobs.

Measuring DEI in the Workplace

There have been calls to make DEI more data-led, a process that involves spelling out DEI goals and using metrics to track progress. This is partly a response to criticisms of DEI that suggest the industry isn’t evidence-backed but it also allows companies to track whether their policies are having the desired effect.

What Is DEI?

DEI stands for diversity, equity, and inclusion. These are a set of concepts that are intended to test how innovative a company is.

What Are the Benefits of Workplace Diversity?

Embracing DEI in the workplace is said to offer companies a competitive advantage, decreased employee turnover, and better employee morale.

Why Is DEI Important in Nonprofit Organizations?

Embracing DEI makes “space for positive outcomes to flourish,” according to the National Council of Nonprofits, an organization that provides resources for nonprofits.

The Bottom Line

Corporate interest in DEI has surged and popular opinion is mostly positive. But corporate pledges may not be stable and actual DEI recommendations aren’t necessarily backed by evidence. There’s nonetheless an appetite for well-crafted, measurable DEI initiatives in financial advising that proponents argue will help combat structural hurdles like the racial wealth gap.

Homeownership is possible if you rebuild your credit

Fact checked by Betsy Petrick

If you’ve gone through bankruptcy, you’re probably considering your new financial options and might be wondering whether homeownership is in the cards for you. Although it does take time and is difficult, it’s not impossible to buy a house after declaring bankruptcy. The exact steps you need to take depend on what type of bankruptcy you filed. We’ll walk you through the details and cover strategies that increase your chances of getting approved for a mortgage after bankruptcy.

Key Takeaways

• Bankruptcy is a legal process that helps people who cannot pay their debts by discharging their debts.
• Mortgage lenders see bankruptcy as a red flag and, as a result, might deny mortgage applications.
• By improving your credit score and personal finances, you can better your chances of getting a mortgage approval.

How Long After Bankruptcy Can You Buy a House?

The bankruptcy process itself can take months or years to resolve. Generally, there’s also a waiting period before you can purchase a house. The exact waiting period depends on whether you filed Chapter 7 or Chapter 13 and the type of home loan you’re seeking.

Chapter 7 Bankruptcy Waiting Periods

Chapter 7 bankruptcy is sometimes called liquidation bankruptcy because the person’s assets are sold to satisfy their creditors. Whatever debt remains is forgiven. If you’ve filed Chapter 7, your waiting period from the discharge date before buying a house varies by loan type.

• Conventional: Four years
• FHA or VA: Two years
• USDA: Three years

Chapter 13 Bankruptcy Waiting Periods

Chapter 13 bankruptcy doesn’t seize assets to pay creditors. Instead, the person filing makes monthly payments to a bankruptcy trustee over a period of three to five years. Since making these payments regularly and on time can prove financial responsibility, you typically don’t have to wait as long after filing bankruptcy to apply for a home loan.

• Conventional: Two years (or four years from dismissal)
• FHA or VA: One year
• USDA: One year

Waiting Periods for Multiple Bankruptcies

If you have multiple bankruptcies within the last seven years, you’ll generally have to wait five years from the last discharge or dismissal before applying for a mortgage. One bankruptcy is already a red flag to lenders, so in their eyes, having multiple bankruptcies is all the more reason not to extend you credit.

Note

If co-borrowers, such as a married couple, each have a bankruptcy on their credit report, the two bankruptcies won’t count as multiple bankruptcies to the lender.

Types of Mortgage Loans You Can Get After Bankruptcy

Once you’ve met the waiting period, you can apply for any kind of mortgage, such as a United States Department of Veterans Affairs (VA) loan, U.S. Department of Agriculture (USDA) loan, or conventional loan. That said, you might find it easiest to get a Federal Housing Administration (FHA) loan. Unlike conventional mortgages, FHA loans don’t have as strict credit requirements. So, if your credit score is still a little lower than you’d like, you may have a better chance of qualifying for an FHA loan.

FHA loans also have lower down payment requirements, which is useful if you’ve been trying to manage debt and don’t have a large down payment set aside. These loans are insured by the government and issued through approved banks or lenders. The goal of FHA loans is to help low- to moderate-income families become homeowners.

How to Apply for a Mortgage After Bankruptcy

When applying for a mortgage, there are a few additional steps that people with bankruptcies will likely need to take in order to get approved.

Step 1: Repair Your Credit

Building credit takes time, but the waiting period is a great opportunity to focus on your finances. Although bankruptcy will cause your credit score to drop, its effect on your score lessens over time. Before you start tackling your credit score, pull up your current credit report to check for errors and see where your score stands. If you spot mistakes, contact the credit bureaus to dispute them.

Your credit score could improve if you:

• Pay your bills on time every month
• Keep your credit utilization ratio low by not maxing out your credit cards
• Getting a secured credit card if you don’t qualify for a standard unsecured credit card

Step 2: Write a Bankruptcy Explanation Letter

Your lender might request a letter from you explaining the circumstances that led to you filing for bankruptcy. This can help the underwriting department consider your situation.

In the letter, describe what happened. Maybe you lost your job and didn’t have income for an extended period of time, your spouse passed away and you couldn’t manage your finances alone, or you had significant medical bills that caused you to fall behind on other debts.

Conclude your letter by describing everything you’ve done since filing for bankruptcy to improve your financial situation. This can help the underwriters see that you’re creditworthy.

Step 3: Get Pre-Approved

During the pre-approval process, you ask potential lenders to review your credit and income to determine if you qualify for a loan. If you do, the lender also will tell you how much of a loan the bank or issuer is willing to lend you.

To get pre-approval, reach out to a lender and provide your contact information, employment history, Social Security number (SSN), bank and investment details, and proof of income when prompted. You’ll also typically have to give tax documents like returns, W-2s, and 1099s.

Step 4: Respond to Lender Inquiries

Since underwriting processes vary by lender, a potential lender might ask for more information after you submit your mortgage application. They might need more details in order to come to an approval decision, so it’s in your best interest to respond to their request as quickly as possible. For example, a lender might ask you to send in an additional year of tax returns if you changed jobs or companies.

Warning

Mortgage lending discrimination is illegal. If you think you’ve been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report to the Consumer Financial Protection Bureau (CFPB), the Federal Trade Commission (FTC), or the U.S. Department of Housing and Urban Development (HUD).

How Long Does It Take To Rebuild Credit After Bankruptcy?

The answer depends on your specific financial situation, but be aware that bankruptcy can stay on your credit report for up to 10 years. However, even though your credit may initially drop after filing, you may see your score improve within months, especially if you take steps to rebuild your credit.

What Is the Waiting Period After Bankruptcy?

The waiting period is the amount of time you have to wait after a bankruptcy discharge or dismissal before you can apply for a mortgage. The waiting period depends on what type of bankruptcy you file and what type of mortgage you’re taking out.

What Is the Downside to an FHA Loan?

FHA loans face additional restrictions and regulations, which can slow down the homebuying process. Plus, if you’re unable to make a 10% down payment, you’re required to purchase mortgage insurance. Unlike a conventional loan, an FHA loan requires you to pay mortgage insurance for the life of the loan, so it can cost you more in the long run.

The Bottom Line

Bankruptcy is never a decision to take lightly. If you have to file, you might face extra challenges in qualifying for a mortgage down the line, but it’s still possible to buy a home. By using the required waiting time to improve your credit score, you can prove to lenders that you’re responsible with your finances. You may also qualify for better interest rates if you can greatly improve your score. To help you come up with a post-bankruptcy recovery plan, you may want to speak with a financial advisor or credit counselor.

Reviewed by David Kindness
Fact checked by Yarilet Perez

Who doesn’t want to avoid taxes? Judge Billings Learned Hand famously summed up the American tax situation, saying, “Anyone may arrange his affairs so that his taxes shall be as low as possible … for nobody owes any public duty to pay more than the law demands.”

Avoiding taxes is one thing, but income tax evasion is another. Tax evasion occurs when a person or business uses illegal means to escape paying taxes, whereas tax avoidance is the practice of using legal means in order to lower the amount of taxes owed.

These famous tax evaders found ingenious (and illegal) ways to avoid paying up. Find out how much they owed and how they were caught.

Key Takeaways

• Tax avoidance is legal, but tax evasion, which involves using illegal methods to not pay taxes, can come with serious consequences.
• Many individuals have tried to evade taxes, from gangsters like Al Capone to celebrities like Wesley Snipes.
• Cheating the tax system can result in fines and jail time so it’s smart to just pay your taxes, not to mention that it is legally required.

Walter Anderson

Anderson’s case is the largest tax evasion case in the history of the United States. This former telecommunications executive was accused of hiding his earnings through the use of aliases, offshore bank accounts, and shell companies.

In 2006, Anderson entered a guilty plea in which he admitted to hiding approximately $365 million worth of income. He was sentenced to nine years in prison and restitution of $200 million.

A typographical error in the amount of the federal government’s judgment against Anderson has prevented him from having to pay the majority of the taxes owed.

The IRS conceded taxes and penalties for three years included in Anderson’s case, however, Anderson is still responsible for $23 million owed to the government of the District of Columbia.

Al Capone

This infamous mobster’s name has been associated with a variety of illegal acts including bootlegging, prostitution, and murder. However, only one illegal act landed Al Capone in prison—income tax evasion. Under Capone’s watch as boss of the Chicago Outfit, the organization generated estimated revenues of $100 million per year.

Due to the removal of the word “lawful” from the 16th Amendment in 1916, even income earned via illegal activities is subject to tax.

This put criminals like Capone in a bind because they could either admit to breaking the law and file proper taxes (essentially confessing), or cheat on taxes and risk getting jailed for evasion. In addition to paying fines and the outstanding tax bill, Capone was sentenced to 11 years in prison.

Joe Francis

The “Girls Gone Wild” creator is no stranger to controversy. In 2007, he was charged with felony tax evasion for reportedly filing false corporate tax returns. Authorities accused Francis of filing over $20 million worth of false business expenses in order to keep from paying taxes. A guilty plea allowed him to escape the felony charge.

However, it appears Francis has not fully escaped his tax woes. In November 2009, the IRS filed a tax lien against Francis. The tab is a whopping $33.8 million.

Note

If you pay your taxes late, the IRS will charge you a penalty. The penalty is 0.5% of the unpaid taxes for each month they remain unpaid, but it won’t exceed 25% of the unpaid taxes.

Wesley Snipes

Federal prosecutors have accused the “Blade” star of many offenses. Snipes allegedly hid income in offshore accounts and did not file federal income tax returns for several years. The actor’s federal tax debt was estimated to be in the range of $12 million.

In 2008, Snipes was acquitted of felony tax fraud and conspiracy charges but was found guilty of misdemeanor charges.

Snipes was sentenced to three years in prison. His accountant, Douglas P. Rosile, and tax protester Eddie Ray Kahn were charged as co-defendants. Rosile was sentenced to four and a half years. Kahn was sentenced to 10 years.

Leona Helmsley

Dubbed the “Queen of Mean,” this hotel operator reportedly told a former housekeeper, “We don’t pay taxes. Only the little people pay taxes.” Helmsley and her husband, Harry, accumulated a multi-billion dollar real estate portfolio.

Despite their immense wealth, they were accused of billing millions of dollars in personal expenses to their business in order to escape taxes. In 1989, Helmsley was convicted on three counts of tax evasion. She served 18 months of federal prison time. Coincidentally, she was ordered to report to prison on income tax deadline day for that year, April 15, 1992.

What Is the Difference Between Tax Avoidance and Tax Evasion?

Tax avoidance and tax evasion are methods of reducing the taxes you pay; however, they are on opposite sides of the legal system. Tax avoidance is legal whereas tax evasion is illegal. Tax avoidance involves reducing your taxes through legal methods, such as deductions, credits, and loopholes to lower your tax bill. Tax evasion on the other hand involves lying, creating fraudulent documents, not correctly reporting income, and other means which are not legal.

How Can I Legally Reduce My Taxes?

There are a handful of ways to legally reduce your taxes. Contributing to tax-advantaged retirement accounts, such as 401(k)s and IRAs reduces your taxable income. If you’re self-employed, you can take advantage of deductions such as office supplies, car payments, gas payments, travel, and more. Other ways to reduce your taxes are through charitable donations and health savings accounts (HSAs). For investing, you can employ tax-loss harvesting to offset the tax you pay on gains.

Does the IRS Check Every Tax Return?

No, the IRS does not check every tax return; in fact, the amount of tax returns they check is very few as most are automatically processed. The IRS does employ various systems to detect anomalies that could be red flags. If red flags arise, they can take a deeper look and ask for more information.

The Bottom Line

Some people go to creative lengths to save money, but there is a clear line between creativity and breaking the law. Minimizing taxes through legal means is a smart tax strategy but tax evasion comes with tough consequences. As we can see from the troubles of these five people, what you may save now will not be worth what you have to pay later.

Fact checked by Vikki Velasquez
Reviewed by Katie Miller

A 2024 survey from Investopedia and REAL SIMPLE found that 57% of women don’t hold any investments. Some who said they have retirement accounts don’t consider themselves to be investors. The two most common reasons women say they’re not investing are that they don’t know how to start or they don’t have enough money.

This data shows a need to reinforce two points: Women are investors and you don’t need hundreds or even thousands of extra dollars to get started. Shifting your mindset about investing can be the hardest part of starting your journey but it can pay off. 

Key Takeaways

• Experts say that shifting your mindset around investing can be the hardest part of getting started.
• Some things like fear, lack of knowledge, and lack of transparent peer-to-peer conversations hold women back from investing.
• Even investing a small amount of money now can be more valuable than investing a large amount of money years from now because of the power of compound interest.
• According to a Fidelity Women and Investing Study, women outperform their male counterparts in their investment portfolios by 40 basis points.

How Women Feel About Investing

Women have mixed feelings and participation rates when it comes to investing. The 2024 Her Money Mindset survey found that just 43% of respondents said they’re invested. Only 7% of women confidently said they know the most about investing compared to other financial topics.

The survey showcased the power and confidence that can be found in investing. Of the women who are invested, 61% said they’re proud of an investing decision they made. Here’s what some of the women-identifying survey respondents anonymously said when asked what financial decision or action they are most proud of.

• “Becoming more financially literate and learning about investing in something that can be used as a separate source of income. I have slowly but surely been investing in stocks and crypto when I have extra money.” Millennial, single, annual household income of less than $75,000.
• “I am most proud of myself for investing part of my savings into the stock market and learning about the everyday trends within the market.” Generation X, married or living with a partner, annual household income over $75,000.
• “Deciding right out of college to join my company’s 401k. If I didn’t do that, I would not be financially secure now.” Baby boomer, married or living with a partner, annual household income over $75,000.

These insights paired with data that shows that women are starting to invest at a higher rate than men are moves in the right direction. A lack of communication, knowledge gaps, and fear are still holding women back, however.

Changing the Mindset

Perhaps one of the most important ways to increase women’s awareness and participation in investing is talking about it but that’s not happening much.

The Her Money Mindset survey found that women get most of their financial information from the internet and family and friends. Seventy percent of women said they talk to their friends about money but only 34% of those talk about investing.

“As women, it is crucial for us to talk more about money and investing,” said Valerie Leonard, CEO and financial advisor at EverThrive Financial Group. “We must have empowering conversations with one another that will help bridge the gender gap and encourage our friends and the next generation to get smarter with money.”

It can be hard to trust what you don’t understand, too. A lack of information is the No. 1 reason women said they’re not investing.

Stephanie McCullough, founder and financial planner at Sofia Financial and host of the Take Back Retirement podcast, sees this often in her investment practice. She regularly tells women, “You don’t have to have all the answers. You just need to know what questions to ask and have the guts to ask them.” 

Note

The Her Money Mindset Survey found that investing is the No. 2 financial topic they want to learn more about, behind saving money.

The Truth: Women Are Investors—And Good Ones

Women outperformed their male counterparts in their investment portfolios by 40 basis points or 0.4 of a percentage point, according to a Fidelity Women and Investing Study.

The 2024 Her Money Mindset Survey reinforced that women who are investing are engaged with their portfolios and market happenings. This engagement may help drive portfolio performance.

Note

Thirty-one percent of invested women said they check the performance of their investments at least monthly and 29% check the performance of the stock market at least monthly, according to the 2024 Her Money Mindset Survey.

The research women are doing may be boosting confidence in their investing, too. One woman surveyed by Investopedia and Real Simple said that she focuses on “choosing to invest in stocks that pay dividends rather than focusing solely on performance and trends.” Another said her best investment strategy is “purchasing high-quality company stocks and holding them for the long term.”

Advice From Women, For Women

Our experts haven’t been shy about offering some advice. They focus on some key points.

Start now

Stephanie Tisdale, an avid investor and owner of Breakthrough Bookkeeping, said that learning to invest “was like drinking from a firehose.” There was so much information that she had a hard time distilling what was most important to her and her circumstances. This led to inaction for longer than she would have liked. She quickly realized the impact investing makes on reducing the distance between where she began at age 35 and where she wants to be.

Leonard said women’s desire to invest is usually tied to their goals. Women aren’t jumping into investing simply for the love of the game. She finds that they’re motivated to invest because they want to put kids through college, buy a new home, or save for retirement.

Time is your best friend when it comes to investing. The sooner you start, the more time you have to benefit from compound interest. Identify a goal you’re passionate about and invest with that goal and timeline in mind.

Money isn’t shameful

McCullough specializes in working with women investors and supporting them in meeting their financial goals. She finds that a lot of women self-describe as “a mess” because of societal stereotypes about overspending and being “bad” with money. Many of McCullough’s clients have never been taught about money and they take on the stereotypes as truth about themselves even when they’re not true. And most of the time, they’re not.

McCullough wants women to know that it’s not a character flaw and the shame spiral won’t get you any closer to meeting your goals even if it’s true that you’re not “good” with money now.

Consider what you can gain

McCullough frequently sees women enter the market “when the pain of staying where you are is greater than the pain of change.” Many tell her that they can’t believe they waited as long as they did, however, when they take the plunge into investing.

Important

Research by Fidelity confirmed that seven out of 10 women wished they would have started investing sooner.

Start small

One of the biggest reasons women say they’re not investing is that they don’t think they have enough money left over at the end of the month, according to the 2024 Her Money Mindset Survey. It’s a huge misconception that you have to have a lot of money to invest.

A great place to start is participating in an employer-sponsored plan like a 401(k) especially if your employer is offering a contribution match. You can also put a few dollars a month into a target-date ETF and let dollar-cost averaging and compounding interest work for you.  

McCullough said she wants to remind all women, “You can start long before you feel you know everything.”

Make a Plan

The first thing you should do to get started in investing is figure out why you want to save. The journey of investing should always start with goals and a timeframe. Are you planning to buy a house in five years? How much money will you need to make a necessary down payment? 

You can build a roadmap with investment products to get you there when you’ve answered these questions.

Look into individual retirement accounts, both Roth and traditional, and find out if your employer offers a 401(k) plan and matches contributions if you’re prioritizing retirement savings. Look into 529 Plans and Coverdell accounts if you’re hoping to save for education expenses. Look into mutual or index funds if you’re saving for long-term goals like building a dream home in 10+ years.

And, of course, you can always contact a financial advisor in your area of interest. You can find someone to guide you on your wealth-building journey if you have even $50 a month to invest.

Do I Have to Have a Lot of Money to Start Investing?

You don’t have to have a lot of money to start investing. Even small amounts can grow significantly with the power of compounding interest.  A small amount invested early can be worth more than a greater amount invested later. 

What Is the First Thing I Should Do to Start Investing?

First, consider your goals and timeline. They’ll determine the best products for you to use. Long-term goals will allow you to take more risks with products like stocks. Shorter-term goals can best be achieved with safer options that offer less growth potential. 

How Do I Build Wealth As a Single Woman?

You should first participate in employer-sponsored retirement plans up to the matching amount if you are eligible. Focus on paying down any high-interest debt and saving for emergencies then prioritize investing for long-term goals.

The Bottom Line

Investing can be intimidating for many women but they can be capable and conscientious investors when they take the first step and get started. Education is key to overcoming the hesitations that keep women out of the investment markets whether it be with self-directed research, conversations with seasoned investment professionals, or even conversations with friends.   

Remember, women are investors. 

Disclosure: Investopedia does not provide investment advice. Investors should consider their risk tolerance and investment objectives before making investment decisions.

Success is all about being prepared

Fact checked by Suzanne Kvilhaug
Reviewed by Andy Smith

Calling ahead to learn what kind of information a financial advisor would like you to supply before meeting for the first time is always a good idea. It will save you a lot of scrambling to collect the necessary paperwork at the last minute. An understanding of what to expect at the meeting can guide you as well.

Key Takeaways

• Your first meeting with a financial advisor can be an opportunity to get to know each other or an actual start of the process.
• Make sure the advisor understands your financial goals.
• Ask what the advisor charges and what you’ll get in return.
• Be prepared to round up documents including recent pay stubs, retirement plan account statements, investment accounts, and cash balances.

What to Expect

Your first in-person meeting may be little more than a meet-and-greet unless you’ve already had an introductory phone or Zoom conversation. It’s an opportunity for the two of you to decide whether you’re a good match.

“I usually tell potential clients they don’t need to bring anything. The point of the meeting is to get to know each other,” says Michael J. Garry, a certified financial planner (CFP) with Yardley Wealth Management in Yardley, Pennsylvania. “I start the meeting by asking what made them reach out to a financial advisor and what they’re hoping to get from the relationship. One exception to that is if in the initial call they express some need to make a financial decision that is pressing.”

Don’t be bashful about asking how much the advisor charges someone in your situation if you haven’t already worked it out beforehand. Some advisors charge by the hour. Others have flat fees for preparing a financial plan.

What Do You Need Help With?

The advisor you choose to work with may eventually want information regarding your income, investments, other assets, your current debts, insurance, and your tax situation. Your goals and expectations can be more important than any documents, however.

Why are you seeing the advisor? What do you hope to accomplish? Are you looking ahead to retirement and want to make sure you’ll have an adequate income to support you when the time comes? Are you thinking about how you might be able to provide for your heirs someday? Maybe you’re going through a major life change such as getting married or divorced, launching a new business, or facing the prospect of big college tuition bills.  

What to Take to Your First Meeting

You might want to have a few items handy for your first or perhaps second meeting.

• Most recent federal tax return
• Pay stubs
• Information on expected income such as a year-end bonus
• Latest Social Security statement
• A list of your investments and cash accounts
• Retirement plan statements
• Documentation of mortgage and property tax payments
• Documentation of outstanding debts
• Documentation of insurance policies

Many financial planners provide online portals where you can upload your documents in advance.

Important

Don’t forget to include any unusual sources of income such as a congratulatory bonus at work or an expected inheritance in your income total.

Your income 

Your most recent federal tax return or the last several years’ returns will tell the advisor a lot about your financial situation, particularly your income, investments, and deductions. Elizabeth Cox, a CFP with Merit Financial Partners in Westport, Connecticut, frequently works with divorced clients. Cox says that tax returns “often contain information that even the client isn’t aware of.” This can include investment accounts opened by their spouse.

You might want to collect some pay stubs if you work for an employer who provides you with them, especially if your income is higher or lower now than when you filed your taxes. Your pay stubs will also show how much you’re contributing to any at-work retirement plans.

Tell the advisor if your income is irregular. Make sure they know about if you usually get a big year-end bonus. Discuss how and why your income may wax and wane if you’re a self-employed freelancer.

A copy of your most recent Social Security statement will give the advisor an idea of how large a monthly benefit you can eventually expect even if retirement isn’t in your foreseeable future. Workers under aged 60 can get these on the Social Security website. Those age 60 and older also have the option of receiving paper statements annually.

Your investments and other assets

Make a list of any bank accounts, stocks, bonds, mutual funds, individual retirement accounts (IRAs), or other investments you own. The monthly or quarterly statements you receive from the financial institutions that hold them should show their current value.  

Gather the latest statements you’ve received from the plan administrator if you have a retirement plan at work whether it’s a traditional defined-benefit plan, a 401(k) or similar defined-contribution plan, or both. You should receive a statement at least once every three years in the case of defined-benefit plans and annually for defined-contribution plans.

Documentation of your mortgage payments if any and property taxes could be helpful if you own a home or other real estate. The lender should have provided you with a year-end statement if you have a mortgage, also known as Internal Revenue Service (IRS) Form 1098.  

Your debts

Make sure the advisor knows how much you owe to credit card issuers, auto lenders or leasing companies, and other creditors as well as the amounts of your monthly payments. The same goes for any student loans for which you’re personally on the hook, either yours or your child’s. The advisor can help you with budgeting if you’re having trouble keeping up with your bills.

Your insurance 

Your advisor will probably want to know how much insurance you have. They can tell you whether you have an adequate amount of life insurance depending on your stage of life. People with young children or other dependents may need a lot but those with no dependents may need little or none. Make sure the advisor knows how much insurance your employer provides, if any, in addition to any policies you’ve bought on your own.

The advisor might want to make sure you have sufficient liability coverage on your auto, homeowners, and optional umbrella policies as well in case you’re ever sued.

What If You Don’t Have These Documents?

You can usually retrieve these documents fairly quickly if you haven’t saved them or can’t easily locate them.

Your income

You should ideally hang on to your tax returns for at least three years but you can get copies from your tax preparer if you don’t have your most recent ones or from the Internal Revenue Service (IRS).

Cox notes that you can also request tax transcripts from the IRS. They contain much the same information as your tax returns and they’re free. Copies of tax returns were $43 each as of October 2024.

Your employer’s human resources department should be able to provide you with all the information on your pay stubs. 

Investments and other assets

The details regarding all your financial accounts should be readily available online. Your employer or plan administrator can provide information on your retirement accounts. Information on your mortgage and property taxes should also be available online, especially if you pay your taxes through an escrow account maintained by the lender.

You may otherwise have to consult your local tax authority or check your payment records such as canceled checks. 

Your debts

Information on your debts should be available online at your various creditors’ websites. You can also find your monthly payment amounts there or on your bank statements if you pay these bills through a bank account.

Your insurance

This information is often available online as well. Your agent should be able to help, too, if you purchased your policy through one.

Questions to Ask Your Financial Advisor

You shouldn’t hesitate to ask some questions either at your first meeting or even before then.

How are you paid?

Some financial advisors receive commissions on the products they recommend in addition to whatever they charge you. You might choose to go with a fee-only financial advisor to avoid this potential conflict of interest. They’ll be working only for you, at least theoretically.

What are your qualifications?

You can usually get this information from the advisor’s website but they shouldn’t be insulted if you ask them directly. Anyone can call themselves a financial advisor or financial planner but individuals who have gone through rigorous training and testing and have the credentials to prove it are usually proud of the fact.

Don’t be unduly impressed by a long string of letters after the advisor’s name. Some of those credentials are meaningful but others are of dubious value. Among the more highly regarded ones are the CFP held by both Cox and Garry and chartered financial consultant (ChFC). Fee-only financial planners will often indicate that they’re members of The National Association of Personal Financial Advisors (NAPFA). Some advisors also have credentials as certified public accountants (CPAs).

Will I be working directly with you?

Some financial advisors are one-person shops. Others have teams of associates. A junior person at the firm may be just fine for your needs but you’ll want to make sure you aren’t shuffled off to someone who isn’t right for you.

How Can I Find a Good Financial Advisor?

Ask trusted friends and co-workers for recommendations based on their own experiences. You can also ask an accountant or a lawyer. Don’t stop there, however, or you could inadvertently become the victim of an affinity scam. Check out the advisor with other independent sources.

How Can I Check Out a Financial Advisor?

You can use a variety of online resources to check out financial advisors depending on what sort of credentials they have or claim to have. You can find out whether someone is a CFP and if they’ve had disciplinary actions against them by using a search tool on the Certified Financial Planner Board of Standards website. The National Association of Personal Financial Advisors (NAPFA) has a similar search tool on its website.

What Is a Robo-Advisor and What Can It Do for Me?

Robo-advisors are online platforms that are typically offered by investment companies to help small investors build and manage their portfolios. They’re often available at a very modest cost. Human financial advisors sometimes work in conjunction with robo-advisors.

The Bottom Line

A financial advisor can help you with a lot of things but you’ll have to do some of the work yourself. Be prepared to clearly articulate the kind of help you need and round up whatever information the advisor requires to help them understand your situation and make useful recommendations.

Fact checked by Vikki Velasquez

Many Americans approach filing taxes with trepidation. In fact, 64% of Americans report feeling stressed about tax season. The best way to alleviate tax-related stress is to take a deep breath and file your return early, however. You’ll lower your stress level and get your tax refund back faster if you get your return in well in advance of the April 15 deadline.

“Filing your taxes as soon as your documents are ready offers both financial and mental benefits. While many Americans procrastinate, taxes are inevitable so why hold on to unnecessary stress and mental fatigue? Filing early lifts that burden off your shoulders while also unlocking key tangible benefits,” says Zack Gutches, a certified public accountant and lead financial planner at True Riches Financial Planning.

Key Takeaways

• You’ll get a quicker refund if you file your tax return early.
• You’ll have more time to plan how you’ll pay your taxes if you prepare your taxes early.
• Early tax preparers have more time to fix mistakes and they may save on tax preparation costs.
• Filing early will help you avoid penalties and reduce stress.

Get Your Refund Faster

A big advantage of filing your taxes early is that you’ll get your tax refund more quickly if you’re due one.

“The IRS processes returns on a first-in, first-out (FIFO) basis, meaning the earlier you file, the sooner you’ll receive your refund,” Gutches says. “Instead of giving the government an interest-free loan, you can put your money to work sooner, whether that’s earning 4%+ in a high-yield savings account, investing in a money market fund, or allocating funds toward debt repayment, retirement savings, or college funding,”

Important

There have been some concerns that tax refunds could be delayed in 2025 due to pending IRS budget and staff cuts, but the New York Times reported in February that any effect shouldn’t be significant if you e-file your return and it’s not flagged for errors. And it’s another good reason to file as early as possible in case the cuts do take effect.

More Time to Plan If You Owe

Nobody likes a tax bill but you’ll have more time to consider your options for paying if you prepare your taxes early.

“Even if you owe taxes, you don’t have to pay until April 15. Filing early gives you extra time to plan how you’ll cover the payment, whether that’s adjusting your budget, shifting funds, or identifying missed deductions, credits, or pre-tax retirement contributions to lower your tax bill,” Gutches says.

Protect Against Identity Theft

Another advantage to preparing your tax return early is that it helps to guard against identity theft.

“Tax-related identity theft is a growing issue,” Gutches says. “Fraudsters will attempt to file a return using your Social Security number before you do, claiming a refund in your name. Filing early helps block identity thieves from beating you to the punch.”

More Time for Corrections

You’ll give yourself time to catch and fix mistakes if you prepare your tax return well ahead of the April 15 deadline.

“Filing early allows extra time to catch any mistakes or omissions. If you spot any errors on the return, taxpayers can fix them and finalize without the added stress of a looming deadline,” says Prudence Zhu, a certified public accountant and founder of Enso Financial.

You can submit an amended tax return to the IRS if you catch a mistake after you’ve filed your return.

Reduced Costs

You may catch a break on your tax prep costs by preparing your return early.

“Some preparers offer discounts for clients who submit their documents early, and tax software companies often provide promotional codes early in the filing season,” Zhu says. “On the other hand, if you file last minute, expect higher prices and limited service options. Tax preparers’ schedules fill up fast during tax season.”

Maximize Tax Benefits

Early tax preparers have more time to explore tax-saving benefits.

“By filing early, taxpayers have more time to strategize tax-saving opportunities such as making last-minute contributions to tax-advantaged accounts like IRAs or HSAs, which can lower taxable income. It also gives you time to explore any potential deductions or credits you might have missed,” Zhu says.

You can also submit an amended return to the IRS if you realize after you’ve filed that you’re eligible for a tax credit or deduction that you didn’t claim.

Avoid Penalties

File early and you won’t have to worry about late filing penalties.

“Filing early allows more time to prepare for payment, minimizing the risk of penalties and interest for late filing,” Zhu says.

The Bottom Line

Preparing taxes early saves you stress and money. File an early return, and you’ll receive your tax refund more quickly. You’ll give yourself more time to plan how you’ll pay the tax bill if you owe one, more time to explore tax benefits, and more time to correct errors. You’ll be able to avoid penalties for late filing by not leaving your return to the last minute and you may save money on tax prep costs.

Reviewed by Ebony Howard
Fact checked by Suzanne Kvilhaug

Unclaimed property generally consists of unclaimed money in financial and bank accounts that have been dormant for more than a year. Each state has a process by which unclaimed property can be identified and reclaimed; these returned assets are worth billions of dollars every year.

Find out how to check if you have any unclaimed property and how to claim it.

Key Takeaways

• Unclaimed properties are assets or funds for which the rightful owner cannot be located or has left the account dormant for a prolonged period.
• Typically unclaimed funds and property are handed over to the state where the assets are located after a dormancy period has passed.
• States have established processes whereby legal owners of assets can reclaim unclaimed funds.
• When claiming unclaimed funds that have risen in value, taxes may be assessed on the current value of the property.
• If you claim property, it will be treated as ordinary income and taxed accordingly unless the property is related to a tax refund.

Reclaiming Property

The process for reclaiming unclaimed or escheated property varies by state, as the federal government does not have a central website for finding unclaimed property. Most state websites are similar in format and often fairly simple to navigate. The office of the comptroller is usually the official agency tasked with managing the list of unclaimed property.

Funds associated with unclaimed property may be absorbed and used in state operating expenses. Still, unclaimed property funds are nearly universally kept track of as debt to the property owner on record.

Once you’ve identified the website where unclaimed property queries are made, you can use criteria such as first and last name, business name, ZIP code, and city associated with the property to locate it.

Important

Many government agencies are prohibited from contacting owners of unclaimed funds/assets by phone. Scammers are aware of this limitation and may attempt to defraud individuals by claiming to have records of unclaimed property.

Unclaimed Property and Dormancy Period

Unclaimed property is essentially property that has gone unclaimed beyond the dormancy period. The dormancy period is the amount of time between when a financial institution reports an account or asset as unclaimed and when the government deems that account or asset to be abandoned.

For most states, the dormancy period is five years. When a property is officially designated by the state as abandoned or unclaimed, it undergoes a process known as escheatment. The state assumes ownership of that property until the rightful owner files a claim.

Depending on the state, the comptroller or state treasury office may make attempts to locate the rightful owner of the unclaimed property. Methods may include mailing notifications to the last listed address of residence or employment.

Property can often go unclaimed when the owner fails to report a new mailing address so this method can be less successful. States may also subscribe to online contact databases that could have more up-to-date information.

Escheatment

After the dormancy period, dormant accounts become unclaimed property. At this point, states have escheatment statutes take effect.

Escheatment state laws require companies to transfer unclaimed property from dormant accounts to the state general fund. This fund takes over record-keeping and returning of lost or forgotten property to owners or their heirs if the owner has passed away. This protects the unclaimed funds from reverting to the financial institutions at which they are held.

Owners can gain back the unclaimed property by filing an application with their state at no cost or for a nominal handling fee. Because the state keeps custody of the unclaimed property in perpetuity, owners can claim their property at any time.

A dormant account with no activity for a long time, other than posting interest, is also a potential case of unclaimed property. A statute of limitations usually does not apply to dormant accounts, meaning that funds can be claimed by the owner or beneficiary at any time.

Note

Financial institutions are required by state laws to transfer resources held at dormant accounts to the state’s treasury after the accounts have been inactive for a certain period. The length of this period varies by state.

Unclaimed Property and Taxes

Types of unclaimed property include uncashed payroll checks, inactive stocks, court funds, dividends, checking and savings accounts, and estate proceeds. When property accounts go unclaimed, they are turned over to the state for reasons that may include:

• Death of the account holder
• Failure to register a forwarding address after changing residence
• Forgetting about an account

Unclaimed property is not taxed while it is filed as unclaimed; however, the property may be officially recognized as taxable income when it is reclaimed. Some unclaimed funds such as investments from a 401(k) or an IRA can be reclaimed tax-free.

Example of Unclaimed Property

According to the Office of the New York State Comptroller, the state returns $1.5 million in unclaimed property to people who file claims each day. As of March 2025, the state had returned $137 million since the start of the year.

In addition, every year, the Internal Revenue Service (IRS) has millions in unclaimed federal tax refunds. While there is no centralized database for unclaimed funds, you can visit USA.gov’s unclaimed money from the government page and check the various links to sites that can help you find unclaimed money.

What Kind of Assets Can Be Unclaimed Property?

Unclaimed property is often cash, such as dormant bank accounts, tax refunds, or payroll checks. However, it can also include a variety of assets, such as stocks, dividends, bonds, utility deposits, insurance payouts, and tangible property.

What Is an Example of Tangible Unclaimed Property?

Tangible unclaimed property is physical property, rather than intangible property such as an uncashed paycheck. An example of tangible unclaimed property could be the contents of a safety deposit box that was abandoned or inherited.

Do All States Have Unclaimed Property Laws?

All states have unclaimed property laws, however, these laws differ from state to state. Unclaimed property is managed by the rules and regulations of the state where the property is held, not the state in which you currently reside.

The Bottom Line

Unclaimed properties are assets for which the owner can’t be located. These properties can be tangible, such as the contents of a safety deposit box, or intangible, such as unclaimed tax refunds. Unclaimed property can also be accounts that have been dormant for a prolonged period.

Unclaimed property is usually handed over to the state in which the assets are located after the end of the dormancy period. States then have rules and regulations governing how the legal owners of these assets can reclaim their property. Reclaimed property is treated as income and subject to ordinary income tax rates unless it is related to a tax refund.

Captive insurance can have perfectly legal tax and financial benefits, but some companies go too far

Reviewed by Lea D. Uradu
Fact checked by Vikki Velasquez

All businesses need to protect themselves against financial risk, and that’s where insurance comes into the mix. But, businesses don’t always have to purchase insurance from another company.

With captive insurance, a business can provide its own coverage, offering better protection against the types of risks it may likely face as well as potential financial benefits for the business owners. Captive insurance is also sometimes promoted as a tax shelter, but using it that way has its hazards.

Key Takeaways

• Captive insurance is a form of self-insurance for businesses.
• A captive insurance company may insure a single business or a group of them.
• Captive insurance can be less expensive than commercial insurance and better tailored to the specific needs of particular types of businesses.
• Captive insurance can also provide tax and other financial benefits to business owners.
• The IRS can challenge captive insurance arrangements that it believes to be skirting the law.

How Captive Insurance Works

A captive insurance company is owned by the business or businesses it insures. Unlike mutual insurance companies, which are also owned by their policyholders (who may number in the many thousands), captive insurance companies are both owned and controlled by policyholders. In a nutshell, captive insurance is a form of self-insurance. However, a captive insurance company is subject to state regulations just like other insurance companies.

While policyholders own the captive insurer, their ownership interest is not an investment in the true sense of the word. Ownership ceases when insurance lapses, such as when the business owner no longer needs coverage and stops paying for it. The policyholder cannot sell, gift, or bequeath anything.

Captive insurance companies can be set up in a variety of ways:

• A pure captive insures only its parent company and affiliated companies.
• Group captives can have multiple owners and insure multiple companies.

For example, companies in a single industry might form a captive insurance company (a group captive) to meet their special risk needs.

Captive insurers are common in the U.S. and other jurisdictions worldwide. Each country has separate rules about capitalization and how much surplus these insurers must retain. According to the National Association of Insurance Commissioners (NAIC), there are more than 7,000 captive insurers worldwide and about 90% of Fortune 500 companies have captive subsidiaries.

Important

Businesses risk their own capital when they decide to create their own captive insurance company.

Captive Insurance As a Tax Shelter

Captive insurance can have legitimate tax benefits for business owners. Premiums paid to a captive insurer can be tax-deductible if the arrangement meets certain risk-distribution standards. Thus, the business gets a current year write-off even though losses may never occur.

The Internal Revenue Service (IRS) laid out the rules (in publications in Rev. Rul. 2002-89 and Rev. Rul. 2002-90) under which captive insurance constitutes insurance for federal income tax purposes so that premiums are deductible.

There are two safe harbors under which captive insurance is viewed as real insurance (i.e., premiums are deductible):

• Fifty percent third-party insurance safe harbor. If the captive insurance company gets at least 50% of its premiums from unrelated third-party insureds, there is sufficient risk distribution.
• Twelve insured safe harbor. If the captive insurance company has at least 12 insureds, each having between 5% and 15% of the total risk, then there is sufficient risk distribution, too.

Risks of Captive Insurance

The IRS may still challenge premium deductions where it believes stopgaps thwart risk distribution, such as reinsurance or tax-shelter-like arrangements.

In 2016, the IRS identified micro-captive insurance transactions as a potential risk for tax avoidance or evasion. Such arrangements are still singled out as abusive tax shelters on the IRS’s “dirty dozen” list of tax scams and schemes.

As the IRS explains:

“Abusive micro-captives involve schemes that lack many of the attributes of legitimate insurance. These structures often include implausible risks, failure to match genuine business needs, and in many cases, unnecessary duplication of the taxpayer’s commercial coverages.”

How Captive Insurance Protects Businesses

Traditional insurance products may not meet a particular company’s needs, at least not at an affordable price. Captive insurance can provide coverage that is better tailored than is available through existing products. For example, professional services businesses and construction companies may find captive insurance appealing.

Trade associations may also offer captive insurance for their members. For instance, the Coin Laundry Association used captive insurance for many years because its members could not obtain traditional coverage for their 24-hour businesses.

The extent of this special type of coverage can be limited. According to the International Risk Management Institute, the typical captive insurance limit is $250,000 per occurrence.

The captive insurer does not protect losses over and above that limit, but companies with captive insurance can use reinsurance to cover losses that exceed the limit.

What Financial Advantages Does Captive Insurance Provide?

While the main reason for captive insurance is risk management, an ancillary benefit for businesses is that they stand to profit if the company’s underwritings are sound. Captive insurers generally distribute dividends to owners.

One way to increase these returns is to reduce claims. This can be done by better business practices aimed at safety so that claims are minimized or avoided. Another way is to control operating expenses. Captive insurance companies can run leaner operations than commercial insurers and don’t, for example, need the big advertising budgets that their commercial counterparts often have.

Who Regulates Captive Insurance Companies?

Like other types of insurance companies, captives are regulated primarily on the state, rather than federal, level. As the Insurance Information Institute notes, “A captive insurance firm must be licensed in each state in which it does business or must use a fronting insurer to do business across state lines. Most jurisdictions have established a specific regulatory framework based on the structure and operation of captives.”

The III adds: “Captives that are owned by publicly held companies also must comply with all the regulatory compliance and governance requirements stipulated by the Sarbanes-Oxley Act, enacted in 2002 to increase the accountability of boards of publicly held companies to their shareholders.”

What Is Reinsurance?

Reinsurance is a means by which insurance companies spread their financial risk through contracts with other insurance companies. Spreading the risk to other insurers allows ceding insurance companies to remain solvent by reducing the net liability from large or multiple losses.

What Are the Disadvantages of Captive Insurance?

A major potential downside of captive insurance is that the owners are putting their own capital at risk. Another is that it represents a long-term commitment.

As a 2021 report from the Insurance Information Institute notes, “Companies must commit significant capital in order to comply with minimum capitalization requirements…While considerably less capital is required when joining a member-owned group captive versus a single parent captive, member companies are generally expected to make a long-term commitment when joining the captive and it likely would not make sense unless they planned to remain in for at least three to five years.”

The Bottom Line

Captive insurance can meet risk-management needs for a small or large company while providing financial rewards for its owners. But this type of insurance is not for everyone.

Typically, initial premiums can run into the hundreds of thousands of dollars or even millions. And there are considerable start-up costs—often more than a quarter of a million dollars, to create a captive insurance company and cover fees to actuaries, attorneys, and others.

Fact checked by Vikki Velasquez

There are many reasons why teens should invest. The most significant advantage is the time they have to allow their investments to grow and increase in value, benefiting from the time value of money and compounding. 

The other not-so-obvious reasons are teenagers bring their views of the world as they see them from their generation, activities, interests, values, and culture. These might give them their own investment opinions about companies to invest in based on the products they sell, the culture, or the brand.

For instance, Millennials and Gen Z had an important role in driving environmental, social, and governance (ESG) investing because they voted about issues such as the environment and social equity through their investing. 

Sometimes it might seem confusing where to begin, but it does not have to be. There are many strategies and tools to help young people as they begin their investment journey. In this article, we break down the most important things that teens should know about investing.

Some people may have a misconception that investing is off-limits for people who are not yet legal adults. But unlike the casino or the bar, there are no age restrictions on investing. It is true that you generally need to be at least 18 years old to open your own brokerage account, but people younger than that have plenty of options to invest—although they require varying levels of supervision or collaboration with an adult.

Key Takeaways

• People who have not yet reached the age of legal adulthood have various options to begin investing in coordination with a parent or responsible adult.
• Beginning to invest at a young age provides significant advantages, as investments have a longer time to grow and benefit from the power of compounding.
• Although many brokerages and trading platforms have age restrictions, there are apps specifically geared toward teen investors.

The Importance of Investing Early

Beyond just being allowed to invest, younger people have an upper hand—quite simply, the sooner you begin investing, the more time your money has to grow. This early-mover advantage for younger investors is magnified by the power of compounding.

As you reinvest your capital gains and interest to generate additional returns, the value of your account can snowball higher, making it even more beneficial to start investing while time is on your side.

A quick example can illustrate the advantages of getting an early start. Let’s say you begin to invest for retirement when you begin your career at age 22.

If you consistently set aside $100 per month and earn a healthy 10% return on your investment (compounded annually), you will have $710,810.83 when you reach age 65. However, if you had started investing at age 15, you would have $1,396,690.23, or nearly double the amount.

Riley Adams, CPA, is the founder and publisher of the financial literacy website WealthUpdate and an expert on teen investing (as well as investing for all ages). For Adams, helping young people understand the benefits of investing early is an important step in encouraging their financial empowerment.

“The one thing, the last true edge in investing, is really time in the market,” Adams explains. People who realize this edge and begin to take advantage of it sooner in life increase their chances of financial success.

Custodial Accounts

In a custodial account, an adult controls the investments on behalf of a minor until they reach 18 or 21 years of age, depending on the state. Custodial accounts under the Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA) are a great way to transfer assets to a child or teen, but the custodian adult maintains the legal responsibility and the final say over the investment decisions.

People younger than 18 can even get an early start on retirement planning through a custodial Roth individual retirement account (Roth IRA), but they will need earned income from a job or another paid activity to begin contributing.

There are also joint brokerage accounts that allow minors to share legal ownership with an adult, which may help younger people take a more active role, although investment decisions are generally subject to approval by the adult co-owner.

Are You Ready to Invest?

The benefits of investing when you’re young are clear enough, but some teenagers may still be wondering if they’re prepared to take the leap. Here are a few questions teens may want to ask themselves as they consider whether the time is right to make their first investments:

• Do you have money from a job or another source that you won’t need to access immediately?
• Can you afford to lose this money if your investments don’t play out as planned?
• If you’re under age 18, do you have a parent or another adult willing to help you invest?
• Do you know what you’re getting into? In other words, do you understand the investment you’re considering and how it works?

According to Adams, companies that teenagers frequently interact with can spark an interest in investing. Buying shares of a familiar company is a way to enter the stock market while following the critical advice of investing in what you know.

“Being engaged with companies you see on a regular basis gets you interested, makes you want to understand how they tick, how they grow, how they make decisions,” Adams says. “And then once you kind of understand that, digging a little deeper and asking the question of: Do I think this is good, do I think this is going in the right direction, and then do I have money that I want to invest in it?”

The Risk of Investing

Just as younger people need to be aware of the upside of investing early and often, it’s important for them to know the risks. Of course, the main downside to investing is that it’s possible to lose some—or all—of your money.

While the reality of potential losses is impossible to escape, different types of investments are riskier than others, allowing you to control the amount of risk you would like to take on. As a general rule, the riskier the investment, the greater its potential to provide you with higher returns.

Understanding this tradeoff is key for all investors—young and old—in determining their strategy. But yet again, youth has its advantages. Since younger investors have a longer time frame to remain in the markets, they can afford to take more risks, thereby increasing their potential rewards. When the inevitable market downturn strikes, younger investors have time to wait for the markets to recover.

This explains why the classic investment advice says that you should take more risks when your goals are far in the future but become more conservative as you approach the time when you’ll need to access your money. However, no matter your age, it’s important to discover your own style as an investor, ensuring that you’re OK with the level of risk you’re facing.

“People have different risk tolerances, and I think you need to be honest with yourself,” Adams advises. “If someone walks you through the logic of ‘You’re young, you should take on risk, you should let it grow’—but you just don’t feel comfortable with it, you absolutely should not do that. You should look for lower-risk investments that might not have as much upside but also might not have as much downside.”

Note

People younger than 18 can get an early start on retirement planning through a custodial account. In a custodial account, an adult controls investments on behalf of a minor until they reach 18 or 21 years of age, depending on the state. Note that the conditions for different types of accounts may vary by the financial institution providing the service.

What Teens Can Invest In

Once you get a sense of your own risk tolerance, you can begin researching investments with the characteristics that you believe will best help you reach your goals. Depending on what you hope to accomplish and in what time frame, here are a few of the more common types of investments, or asset classes, that you may choose to buy.

Stocks

When you buy a stock, you take over a small share of ownership, or equity, in a publicly traded company. Stocks can earn you money in two ways:

1. Many companies make payments known as dividends to their shareholders.
2. Stock prices fluctuate based on the market’s determination of the company’s value, and if the price of your stock goes up, you can sell it for a profit.

Because of their changes in value, known in the markets as volatility, stocks can be risky. If the company that you invested in begins to struggle, you may be left with shares that are worth less than you paid for them. However, with this risk comes higher potential returns, making stocks a useful investment for younger people with longer time horizons.

Funds

Whereas stocks represent a share in a single company, you can also buy shares of funds that invest in multiple stocks and other types of assets.

Directed by professional money managers, mutual funds invest in an array of assets based on an objective outlined in their prospectus. Exchange-traded funds (ETFs) also own a basket of different investments, but they are designed to track a specific market index, sector, or other assets, and unlike mutual funds, they are available to trade on the stock market.

Funds offer numerous advantages to younger investors. Since they comprise multiple investments in one, funds offer built-in diversification. In other words, investors in a fund automatically own a variety of assets, so if one component loses value, they won’t see their investment completely wiped out.

While some mutual funds charge steep fees for taking an active role in managing the portfolio, passively managed and index-tracking funds generally have low fees and a proven history of providing solid returns, particularly over the long term.

Bonds

Instead of equity, or ownership in a company, bonds are a type of debt instrument. When you buy a bond, you are essentially making a loan to the bond issuer, who agrees to pay back the principal amount borrowed along with interest payments. Bond issuers include governments as well as corporations.

Bonds are considered fixed-income investments because they provide preset payments over a particular time period. They are particularly useful for investors looking to generate a regular income. However, they are less risky than stocks and by extension offer lower return potential, making them less suitable for young investors seeking long-term growth.

Other Investments

Other types of investment assets could be suitable for certain young investors. For instance, certificates of deposit (CDs) allow you to earn a fixed interest rate on your investment over a specific time frame.

CDs work a lot like a savings account, but since you agree to leave the money alone for the duration of the investment, you generally earn a higher interest rate. CDs are more conservative than stocks or bonds, with a more moderate risk profile but lower return potential.

The list of potential investments does not stop there. From high-risk cryptocurrencies to derivatives including futures and options, there are plenty of ways to put your money to work. However, since these instruments are riskier and more complex, they are more suitable for advanced investors than for those who are just getting started.

5 Steps to Start Investing as a Teen

For a young person who has decided to invest some of their money, the question is: What’s next? Here’s a step-by-step guide to help teens get started along their investment journey:

1. Educate yourself about investing: There are plenty of online and printed materials to help you grasp the basics. You can also ask your parents or another person with investment experience to share their knowledge.
   
2. Set your investment goals: It’s important to be upfront about your end game. What do you want to do with the money? Is your goal far in the future? Setting clear goals will help you determine an investment strategy that works for you.
   
3. Select investments: With so many options available, researching potential investments can seem overwhelming. It is key to ask yourself what type of investment has the best chance of helping you reach your goals.
4. Open a brokerage account: You will need to open an account where you can buy and hold your investment assets. Although you will be unable to open a brokerage account on your own if you are under the age of majority, you can work with a parent, guardian, or trusted adult to open a custodial or joint account that will allow you to begin investing.
5. Buy your selected investment: Now it’s time to put your investment plan into action. The process may vary based on the investment you’ve chosen, but you should be able to buy almost any asset on your brokerage platform’s website or mobile app.

How Do You Invest If You Are Under Age 18?

If you are younger than 18, you cannot be the outright owner of a regular brokerage account. However, with the help of a parent, guardian, or another trusted adult, you are never too young to start putting your money to work for you. With adult supervision, you can open a custodial account, where the adult manages the investments on your behalf until you reach the age of majority, at which point you can take over official ownership. Alternatively, you can open a joint account where you and an adult legally share ownership of the assets.

Is It Illegal to Start Investing Under 18?

Although there are certain restrictions, no laws prohibit people from investing when they are underage. It is generally impossible for minors to open their own brokerage account, but custodial accounts and joint accounts allow young people to begin their investing journey with varying amounts of adult supervision.

How Can I Build My Wealth at 16?

It is never too early to think about your long-term financial future. At age 16, there are some restrictions on how you can invest, but you can get started fairly easily with the collaboration of a parent, guardian, or another dependable adult. The conventional wisdom is that, at a young age, you can afford to take more risks with your investments, which will help you maximize your returns over time. In practice, this means concentrating on stocks and funds that have the potential to appreciate in value over time.

What Is the Child Poverty Rate in the U.S.?

Child poverty rates in the U.S. have fluctuated across the decades but remain persistent and structural. According to the U.S. Census Bureau, child poverty is higher than the national poverty rate. In 2023 (latest information) child poverty was at 13.7% while the national rate was 11.1%.

Some of the highest rates of poverty are found among Black, Hispanic, American Indian, and Alaskan Native children rather than their White counterparts. This means that for many children and young people, finding the resources to invest may not be as realistic as it is for other groups.

The Bottom Line

Although underage individuals will need to collaborate with a parent or another adult to begin investing, teens have a leg up—the supreme advantage of having time on their side. Custodial accounts and joint accounts provide an opportunity for teens to get a head start on building their wealth.