Reviewed by Marguerita Cheng
Fact checked by Suzanne Kvilhaug

An investment bank, which includes the likes of Bank of America, JPMorgan Chase, and Goldman Sachs, finances or facilitates trades and investment on a large scale for institutional clients. But that is an overly simplistic view of how investment banks make money. There are, in fact, several facets to what they do.

Key Takeaways

• Investment banks provide a variety of financial services, including research, trading, underwriting, and advising on M&A deals.
• Proprietary trading is an effort to make profits by trading the firm’s own capital.
• Investment banks earn commissions and fees on underwriting new issues of securities via bond offerings or stock IPOs.
• Investment banks often serve as asset managers for their clients as well.

Brokerage and Underwriting Services

Like traditional intermediaries, large investment banks connect buyers and sellers in different markets. For this service, they charge a commission on trades. The trades range from simple stock trades for smaller investors to large trading blocks for big financial institutions.

Investment banks also perform underwriting services when companies need to raise capital. For example, a bank might buy stock in an initial public offering (IPO), and then market the shares to investors. There is a risk that the bank will be unable to sell the shares for a higher price, so the investment bank might lose money on the IPO. To combat this risk, some investment banks charge a flat fee for the underwriting process.

Mergers and Acquisitions

Investment banks charge fees to act as advisors for spinoffs and mergers and acquisitions (M&A). In a spinoff, the target company sells a piece of its operation to improve efficiency or to inject cash flow. On the other hand, acquisitions occur whenever one company buys another company. Mergers take place when two companies combine to form one entity. These are often complicated deals and require a lot of legal and financial help, especially for companies unfamiliar with the process.

In hostile takeovers, they may assist either the acquiring or target company in crafting strategies to defend or advance the deal. Investment banks leverage their financial expertise, industry knowledge, and relationships to guide clients through the process to both maximize value as well as minimize regulatory/reporting risks.

Creating Collateralized Products

Investment banks might take lots of smaller loans, such as mortgages, and then package those into one security. The concept is somewhat similar to a bond mutual fund, except the collateralized instrument is a collection of smaller debt obligations rather than corporate and government bonds. Investment banks must purchase the loans to package and sell them, so they try to profit by buying cheap and selling at higher prices on the market.

Proprietary Trading

With proprietary trading, the investment bank deploys its own capital into the financial markets. Traders that risk the firm’s capital are typically compensated based on performance, with successful ones earning large bonuses and unsuccessful traders losing their jobs. Proprietary trading has been much less prevalent since new regulations were imposed after the 2007-2008 financial crisis.

Note

Investment banks had a part to play in the Global Financial Crisis in 2008. It’s widely believed that poor credit risk assessment and accountability was a contributing factor in the crash.

Dark Pools

Suppose an institutional investor wants to sell millions of shares, a size that’s large enough to impact markets right away. Other investors in the market might see the big order and this opens the opportunity for an aggressive trader with high-speed technology to front-run the sale in an attempt to profit from the coming move. Investment banks established dark pools to attract institutional sellers to secretive and anonymous markets to prevent front-running. The bank charges a fee for the service.

Swaps

Investment bankers sometimes make money with swaps. Swaps create profit opportunities through a complicated form of arbitrage, where the investment bank brokers a deal between two parties that are trading their respective cash flows. The most common swaps occur whenever two parties realize they might mutually benefit from a change in a benchmark, such as interest rates or exchange rates.

Securities Lending

Investment banks often lend stocks or bonds to institutional investors, hedge funds, and traders for short selling or other investment strategies. In return, they charge fees or interest. For example, an investment bank may be holding securities on behalf of a client. Instead of having that security simply sit, they can lend that security to other parties. In exchange for returning that security at a specific time, the investment can get a fee and the original security holder will never notice “their share” was lent out.

Market Making

Investment banks often have market-making operations that are designed to generate revenue from providing liquidity in stocks or other markets. A market maker shows a quote (buy price and sale price) and earns a small difference between the two prices, also known as the bid-ask spread. They are the “middle man” to make a financial transaction happen as they can help match buyers and sellers.

Investment Research

Major investment banks can also sell direct research to financial specialists. Money managers often purchase research from large institutions, such as JPMorgan Chase and Goldman Sachs, to make better investment decisions. These investment banks can publish information on economic forecasts, industry analysis, or specific company research.

Asset Management

In other cases, investment banks directly serve as asset managers to large clients. The bank might have internal fund departments, including internal hedge funds, which often come with attractive fee structures. Asset management can be quite lucrative because the client portfolios are large.

Investment banks sometimes partner with or create venture capital or private equity funds to raise money and invest in private assets. The idea is to buy a promising target company, often with a lot of leverage, and then resell or take the company public after it becomes more valuable.

Wealth Management

Wealth management is similar to asset management but focuses on individual clients. Investment banks provide tailored financial planning, estate planning, and tax strategies for wealthy individuals. Relationship managers will meet with these high-net-worth individuals periodically to assess their financial goals and targets. Fees are charged based on AUM, commissions on investment products, or advisory fees.

How Do Investment Banks Make Money Through Underwriting?

Investment banks earn money through underwriting by facilitating the issuance of stocks or bonds for corporations and governments. They purchase these securities at a discounted rate and resell them to investors at a higher price, making a profit on the spread.

What Is the Role of Investment Banks in Mergers and Acquisitions?

Investment banks act as advisors in mergers and acquisitions, helping companies identify suitable targets, negotiate deals, and structure transactions. They provide valuation expertise, due diligence, and strategic insights to ensure successful mergers or acquisitions.

How Do Investment Banks Profit From Trading and Market Making?

Investment banks act as market makers by buying and selling financial securities to provide liquidity to markets. They profit from the bid-ask spread—the difference between the price they buy and sell securities for. Additionally, they may charge commissions or fees for executing trades on behalf of institutional and retail investors.

How Do Investment Banks Make Money From IPOs?

When a company goes public, investment banks manage the IPO process, determining the share price, marketing the stock to institutional investors, and facilitating the sale. They earn underwriting fees and a percentage of the total capital raised. Since IPOs can generate millions in fees, they can be a major source of income.

The Bottom Line

In a capitalist economy, investment bankers play a role in helping their clients raise capital to finance various activities and grow their businesses. They are financial advisory intermediaries who help price capital and allocate it to various uses.

While this activity helps smooth the wheels of capitalism, the role of investment bankers has come under scrutiny because there is some criticism that they are paid too much in relation to the services they provide.

Reviewed by JeFreda R. Brown
Fact checked by Kirsten Rohrs Schmitt

In order to reach an opinion and communicate the value and volatility of a covered security, analysts research public financial statements, listen in on conference calls, and talk to managers and the customers of a company, typically in an attempt to come up with findings for a research report.

Ultimately, through all this investigation into the company’s performance, the analyst decides whether the stock is a “buy,” “sell,” or “hold.”

Key Takeaways

• It is important to understand each rating group’s rating styles, as there is no universal ranking system.
• “Buy, hold, and sell” recommendation meanings are not as transparent as they first seem; a plethora of terms and variance in meanings exist behind the curtain.
• Ratings are meant to complement or be used as a tool for existing strategies, not as a base to build them on.
• Ratings are independent of companies, and there are legal ramifications for analysts who rate a stock they have an interest in.

The Scale of Ratings

However, the analyst rating scale is a tad trickier than the traditional classifications of “buy, hold, and sell.” The various nuances, detailed in the following chart, include multiple terms for each of the ratings (“sell” is also known as “strong sell,” “buy” can be labeled as “strong buy“), as well as a couple of new terms: underperform and outperform.

To top it off, not every firm adheres to the same ratings scheme: an “outperform” for one firm may be a “buy” for another and a “sell” for one may be a “market perform” for another. Thus, when using ratings, it is advisable to review the issuing firm’s rating scale, in order to fully understand the meaning behind each term.

Mapping the Basics

For now, let us dissect the traditional ratings of “sell,” “underperform,” “hold,” “outperform,” and “buy,” and assume that each firm, no matter how wacky the system, can map back to these.

• Buy: Also known as strong buy and “on the recommended list.” Needless to say, buy is a recommendation to purchase a specific security.
• Sell: Also known as strong sell, it’s a recommendation to sell a security or to liquidate an asset.
• Hold: In general terms, a company with a hold recommendation is expected to perform at the same pace as comparable companies or in line with the market.
• Underperform: A recommendation that means a stock is expected to do slightly worse than the overall stock market return. Underperform can also be expressed as “moderate sell,” “weak hold,” and “underweight.”
• Outperform: Also known as “moderate buy,” “accumulate,” and “overweight.” Outperform is an analyst recommendation meaning a stock is expected to do slightly better than the market return.

If you are investing like Warren Buffett, the report can assist in finding the company with a durable competitive advantage, and if Peter Lynch is your hero, you might find a low P/E ratio, share buyback, or future earnings growth candidate in the depths of the report.

Important

The research report and subsequent rating should be used to complement individual homework and strategy.

Examples of Analyst Ratings and Performance

In order to truly understand analyst ratings, it is imperative to gauge their accuracy. Below are three moments in the lives of three well-known companies and the analyst ratings before their impressive liftoff, or dismal implosion, to see if the analysts got it right.

Coca-Cola

Coca-Cola Co. (KO) is the world’s largest nonalcoholic beverage company.

The Crucial Moment
An earnings surprise sent Coke bubbling over in a frenzy in early 2025, sending the price from $61.50 on Jan. 6 to $71.35 on Feb. 17, a gain of over 15%.

The Analyst Recommendation

Analysts were broadly favorable about Coca-Cola’s prospects leading up to the fourth-quarter earnings call. Deutsche Bank, TD Cowen, and Jefferies all raised “hold” ratings to “buy.”

Conclusion: Score one for the analyst!

Starbucks

Starbucks (SBUX) keeps the world caffeinated through a global chain of more than 30,000 company-owned and licensed stores.

The Crucial Moment
In April 2024, Starbucks fell from $88 to $72—a drop of nearly 20%. This double shot of drop was attributed to weak quarterly earnings and reduced sales.

The Analyst Recommendation

In March 2024, the analysts’ consensus for Starbucks was a “Strong Buy.” Eighteen firms listed it as a “buy” and 27 rated it as “hold.” There were zero sell recommendations, according to Tipranks.

Conclusion: Missed the mark.

Apple

Apple Inc. (AAPL) designs consumer electronic devices, including personal computers (Mac), tablets (iPad), phones (iPhone), and portable music players (iPod).

The Crucial Moment

In Feb. 2020, as the COVID-19 pandemic ripped through Chinese factories, Apple was among the first companies to take the hit. Apple shares fell by 25%, largely due to the company’s reliance on Chinese assembly plants.

The Analyst Recommendation

Goldman Sachs downgraded Apple to “sell” and Daiwa Capital lowered its evaluation from “Buy” to “Outperform.” Canaccord Genuity maintained its buy rating but lowered its price target from $345 to $300.

Conclusion

Investors who followed Goldman’s “sell” recommendation soon came to regret it. By Aug. 2020, after a brief pandemic drop, Apple was trading at a new all-time high.

Who Issues Stock Recommendations: Buy-side or Sell-side Analysts?

Sell-side analysts work at investment banks and are the ones who will issue recommendations of “strong buy,” “outperform,” “neutral,” or “sell.” Buy-side analysts instead work for investment firms or funds and choose investments that coincide with the fund’s investment strategy.

Why Are Some Recommendations Made as “Outperform” and Others as “Buy”?

Among sell-side firms, there is no standardized recommendation system, with different investment banks using their own internal rating scale. Thus, one bank may issue a “buy” rating that is equivalent to another bank’s rating of “outperform.” In both cases, the analysts have determined that the stock in question should have returns in excess of the broader market.

Should I Sell a Stock I Own If It Receives an Analysts Rating of “Sell”?

Analysts’ ratings are arrived at based on fundamental and econometric analysis of a company and its future prospects. But, analysts can sometimes be wrong or make a mistake. As a result, you will want to consider the consensus of recommendations from several professional analysts. If they all (or mostly) recommend “sell,” you may want to consider reducing or closing out your position in that stock,

The Bottom Line

Stock analysts are professional researchers who forecast the likely price changes of a company’s stock price. To do that, they evaluate public filings and investigate conditions at stores to determine if the company is effectively utilizing its resources to meet client needs. Fund managers often rely on analyst ratings to make investment decisions, so accurate ratings could mean the difference between millions of dollars of company value.

Learn where to look for unlisted properties.

Fact checked by Rebecca McClay

Most homes for sale are listed on the Multiple Listing Services (MLS). However, you can find homes not listed on an MLS for sale, which are known as off-market homes. Potentially, these properties can provide a better deal, a more private deal, or the specific features you may want in a home.

Key Takeaways

• Off-market homes are not publicly advertised and listed for sale on MLSs, databases that real estate agents use.
• Access to off-market homes can give buyers an edge in a competitive market.
• Buyers may prefer a more private sale, and they may potentially pay less in real estate commissions.
• You can contact real estate agents, look online, and approach homeowners directly to find off-market homes for sale.
• A National Association of Realtors policy, MLS Statement 8.0, places some restrictions on off-market homes.

What Are Off-Market Homes?

Off-market homes are not advertised for sale on through MLS. As a result, off-market homes, also known as pocket listings, are more exclusive. Typically, a single real estate agent will handle an off-market home transaction.

Advantages for Buyers and Sellers

Both buyers and sellers can find upsides to opting for an off-market home transaction.

Buyers

• Less competition: Off-market homes are not widely advertised, which means there is a smaller pool of potential buyers. If you find an off-market home as a buyer, you have less risk of getting into a bidding war with other buyers.
• More flexible negotiation: With an off-market home, you potentially have more room for negotiation. Buyers and sellers can talk directly and come to an agreement that works for their specific needs without the pressure of a traditional sales timeline.
• Potential for a better deal: Off-market homes offer more room for negotiation, and fewer competitors could result in a better price for a buyer.

Sellers

• More privacy: When a home is publicly listed, sellers must contend with more interest and the possibility of hosting an open house. An off-market listing means a smaller pool of interested buyers and more privacy.
• More serious buyers: Off-market listings are not always easy to find. Buyers searching for them may be more motivated and prepared to make an offer.
• Potential savings: With just one agent involved in the transaction, sellers could save on the sales commission. Given the exclusivity of off-market listings, sellers could also attract higher offers.

How to Find Off-Market Listings

While off-market homes have their advantages, finding them can be a little tricky.

Contact Real Estate Agents

Real estate agents can be a good source to tap when you are looking for off-market listings. You can start in your personal network. Do you know any real estate agents who work in the areas you want to buy? Let them know you are interested in off-market homes.

You can also start your search in a specific area. Look up real estate agents who work in that area and reach out about the possibility of off-market listings that might be on their radar.

Go Online

While you won’t find off-market homes on traditional real estate sites, there are sites and tools available specifically for pocket listings, such as:

• Unlisted
• For Sale By Owner

Approach Homeowners

You can also approach homeowners directly if you’re interested in buying their home. You can also spread the word through your network. Someone may be able to introduce you to a homeowner interested in selling an off-market home.

Simply knocking on doors or asking people directly may be a hit-or-miss strategy. You can also send out mailers or post online in neighborhood forums to help you chase down leads.

The Buying Process

Buying an off-market home is similar to buying a listed property in many ways. You will need to get approved for a mortgage unless you plan to pay in cash. Once you find a home you want to buy, you will make an offer and schedule a home inspection. The deal will go through the underwriting process and then, ultimately, close.

But there are ways that the process of buying an off-market home is different from the traditional route. The deal will likely be a dual agency sale, which means a single real estate agent will represent both the buyer and seller.

Real estate agents who execute dual agency transactions are expected to represent each party equally. However, it is important to be aware of potential conflicts of interest, particularly if the agent has a personal relationship with one of the parties.

Challenge for Off-Market Listings

MLS Clear Cooperation Policy

The MLS Clear Cooperation Policy is a rule implemented by the National Association of Realtors. The MLS Statement 8.0 rule requires Realtors to add any property they are marketing to a MLS within one business day.

The Clear Cooperation Policy was implemented to reduce off-MLS listings, which the National Association of Realtors (NAR) says “… not only skew market data and reduce seller and buyer choice but also undermine Realtors’ commitment to provide equal opportunity to all.”

The Practical Impact

MLS Statement 8.0 does limit off-market listings. All real estate agents who are members of the National Realtors Association and all National Realtor Association MLSs are required to abide by this policy.

Off-Market Listings Remain

While MLS Statement 8.0 does limit off-market listings, buyers and sellers certainly still have opportunities.

Under MLS Statement 8.0, there are some options that allow for more privacy. For example, sellers can opt to keep their homes from being listed on an MLS IDX display. The listing will not be displayed on the internet. The policy also allows for “office-exclusive listings,” which allows agents to share listings one-on-one with buyers.

National Association of Realtors membership is voluntary. That means there are licensed real estate agents who do not work with the association and are not subject to its rules, including MLS Statement 8.0.

The Bottom Line

While MLS Statement 8.0 does place some restrictions on off-market listings, it is still possible to find them through real estate agents, online, and via word-of-mouth. Off-market homes can offer advantages for buyers and sellers. Consider those potential advantages, the legwork of finding an off-market home, and the ins and outs of the buying before deciding to pursue this option.

Know and understand the six key steps.

Fact checked by Rebecca McClay

When a borrower misses a certain number payments on their mortgage, the lender can begin the process of taking ownership of the property in order to sell it. This legal process, foreclosure, has six typical phases, but the exact procedure is subject to different laws in each state.

Key Takeaways

• Foreclosure is a legal proceeding that occurs when a borrower misses a certain number of payments.
• The lender moves forward with taking ownership of a home to recoup the money lent.
• Foreclosure has six typical phases: payment default, notice of default, notice of trustee’s sale, trustee’s sale, REO, and eviction.
• The exact foreclosure process is different depending on the state.

Phase 1: Payment Default

Mortgages often have a grace period of about 15 days. The exact length of that period is determined by the lender. If borrowers make a monthly payment during that grace period, after the payment due date, they will not be subject to a late fee.

A mortgage goes into default when the borrower is unable to make on-time payments or cannot uphold other terms of the loan.

Mortgage lenders typically begin foreclosure three to six months after the first monthly payment that you miss. You will likely receive a letter or phone call from your mortgage company after your first missed payment.

If you know you are going to miss a mortgage payment, reach out to your mortgage company proactively to discuss loss mitigation options. For example, you may be able to work out a forbearance plan with your mortgage company, which would allow you to temporarily pause making mortgage payments.

If you are worried about the possibility of foreclosure, you can contact a housing counselor. Housing counselors can help homeowners review their finances and evaluate their options to prevent the loss of their home.

Phase 2: Notice of Default

After the first 30 days of a missed mortgage payment, the loan is considered in default. You still have time to talk to your mortgage lender about potential options.

In the second phase of foreclosure, mortgage lenders will move forward with a notice of default. A notice of default is filed with a court and informs the borrower that they are in default. This notice usually includes information about the borrower and lender, as well as next steps the lender may take.

After your third missed payment, your lender can send a demand letter that states how much you owe. At this point, you have 30 days to bring your mortgage payments up-to-date.

Phase 3: Notice of Trustee’s Sale

As the foreclosure process moves forward, you will be contacted by your lender’s attorneys and begin to incur fees.

After your fourth missed payment, your lender’s attorneys may move forward with a foreclosure sale. You will receive a notice of the sale in accordance with state and local laws.

Phase 4: Trustee’s Sale

The amount of time between receiving the notice of trustee’s sale and actual sale will depend on state laws. That period may be as quick as two to three months.

The sale marks the official foreclosure of the property. Foreclosure may be conducted in a few different ways, depending on state law.

In a judicial foreclosure, the mortgage lender must file a suit in court. If the borrower cannot make their mortgage payments within 30 days, the property will be put up for auction by the local sheriff’s office or court.

During power of sale foreclosures, the lender is able to manage the auction process without the involvement of the local courts of sheriff’s office.

Strict foreclosures are allowed in some states when the amount you owe is more than the property value. In this case, the mortgage company files a suit against the homeowner and eventually takes ownership of the house.

You could potentially avoid the foreclosure process by opting for deed-in-lieu of foreclosure. In this scenario, you would relinquish ownership of your home to your lender. You might be able to avoid responsibility for the remainder of the mortgage and the consequences that come with foreclosure.

Phase 5: Real Estate Owned (REO)

Once the sale is conducted, the home will be purchased by the highest bidder at auction. Or it will become the lender’s property: real estate owned (REO).

Note

A property may become REO if the auction does not attract bids high enough to cover the amount of the mortgage. Lenders may then attempt to sell REO properties directly or with the help of a real estate agent.

Phase 6: Eviction

When a mortgage company successfully completes the foreclosure process, the occupants of the home are subject to eviction.

The length of time between the sale of a home and the move out date for the former homeowners varies depending on state law. In some states, you may have just a few days to move out. In others, the timeline for moving out after foreclosure could be months.

Keep in mind that you might have a redemption period after the sale. During this time, you have the possibility of reclaiming your home. You would need to make all outstanding mortgage payments and pay any fees that accrued during the foreclosure process.

The Bottom Line

Foreclosure is a legal process available to mortgage lenders when borrowers default on their loans. When you take out a mortgage, you are agreeing to a secured debt. Your home serves as collateral for the loan. If you cannot repay what you borrowed, your lender can begin the process to take possession of the home.

Understanding the different steps in foreclosure process and the options available to you can help you ultimately to avoid losing your home. If you are concerned about the possibility of a foreclosure, it is best to be proactive and communicate with your lender.

Learn how to help children develop healthy money habits and why it’s important

Fact checked by Vikki Velasquez

Educators all over the country are exploring ways to start teaching financial literacy earlier, including in elementary school.

“It’s one thing to know the skills, but it’s also highly beneficial to start learning how to apply them into your everyday life,” said Brittany Griffin, policy and communications deputy at the Utah Office of State Treasurer. “In an ideal world, parents would start talking with their children about money very early on.”

A lesson in investing is a key component in teaching financial literacy, which can also include lessons on earning, saving, reducing risk, spending, and borrowing, not only as fundamental concepts and how they work, but also as they relate to life skills, and how they fit into the other parts of a person’s life.

Context, prioritization, and syncing money with life are important ingredients in putting financial literacy to good use in a person’s life. Research has long shown that when it comes to teaching kids how to manage their money, it’s better to start young to build money knowledge and habits that will last a lifetime.

Key Takeaways

• Teaching financial literacy at a young age helps children develop healthy, lifelong financial habits.
• The main principles of financial literacy include earning, saving, investing, protecting, spending, and borrowing.
• Specific government policies and societal discrimination have fed into the creation of a racial wealth gap, which is important to note when it comes to financial literacy.
• Financial literacy can encourage habits that can help children avoid debt traps later in life.
• Children can form money habits starting as young as age 5.

U.S. Financial Literacy Gaps

Closing gaps in financial literacy could help close wealth gaps. You’ll often find disparities in financial literacy among different income, racial, and gender groups. For example, Americans quizzed on basic financial concepts by the Federal Reserve Bank of St. Louis generally did better when they had higher household incomes.

Research shows that Black and Latino/Latina people have lower levels of financial literacy than White people because of different socioeconomic statuses.

Note

Researchers typically use the Big Three or the Big Five quiz of three or five questions when they study financial literacy.

It’s important to note that anti-minority and anti-Black policies in the U.S. have systemically led to a racial wealth gap. In addition to income inequality and historic discrimination in U.S. housing policy, education disparities have historically impacted the creation of the wealth gap, too.

Educational inequalities usually begin early in life. In the U.S., the odds of attending a high-poverty or high-minority school depend largely upon a child’s racial or ethnic background and social class.

For example, Black and Hispanic students are more likely to go to high-poverty schools than White or Asian American students. Attending a high-poverty school lowers math and reading achievement for students in all racial or ethnic groups—an effect that is still relevant today.

According to research, women generally have lower levels of financial literacy than men and are less likely to answer financial literacy questions correctly.

Benefits of Teaching Financial Literacy

People tend to make better financial decisions when they’re armed with knowledge about how money works. That’s why a financial education can help close wealth gaps in the U.S.

Take what happened with middle schoolers Stockton Carlson and Calvin Lambert in 2021, who were participating in a statewide stock market simulation with their class at Vista Heights Middle School in Saratoga Springs, Utah.

The two students noticed chatter on social media about video game retailer GameStop (GME). The company’s shares spiked the day before, so Lambert and Carlson decided to jump in—just in time for GME to surge again in another meme-fueled frenzy. They eventually grew their simulated money from $100,000 to $171,526.61 over 10 weeks, scoring first place in the middle school category.

“We learned that social media, and Reddit in this case, can really have a big effect on things,” Lambert told the contest organizers.

These students learned a valuable lesson by taking part in the contest. However, diving in with a stock simulator and getting hands-on experience isn’t the only way to teach or improve financial literacy. Below, you’ll find some other key advantages of financial literacy.

Building Good Financial Habits

People who scored better on a test of financial literacy were more likely to spend less than their income, have an emergency fund, and have a retirement account, according to a report by the Financial Industry Regulatory Authority (FINRA) Investor Education Foundation.

Financial literacy is also associated with better retirement planning, a lower tendency to borrow against 401(k)s, and a greater likelihood of stock investing.

Avoiding Debt Traps

Financial literacy helps people avoid costly mistakes. People with more financial literacy education are more likely to avoid payday loans, which have high interest rates and hidden fees, a 2019 study by a University of Wisconsin-Madison researcher found.

People with greater financial literacy also were less likely to take pawnshop loans, make only the minimum payment on credit cards, or incur late fees on various financial products, the FINRA Investor Education Foundation found.

Another study by researchers at Montana State University found that college students who took mandatory financial education classes were more likely to fund their educations with low-interest federal loans and less likely to carry credit card balances. Those from less wealthy families were less likely to work while enrolled in school, while those from wealthier backgrounds were less likely to take out private loans. 

Better Financial Health

Students who went to high schools where personal finance education was required were less likely to default on their debts and had higher credit scores than their peers, a study by researchers at Montana State University showed.

Knowledge often sticks with students after graduation, giving them an edge on tests of personal finance knowledge, an audit of Utah’s financial literacy program showed. That knowledge then helps them develop better financial habits. Graduates were more likely to be able to cover a $1,000 emergency expense and to have invested in the stock market, and they were less likely to be late on monthly payments.

Reasons to Start Teaching Financial Literacy Early

Karsten Walker, a retired teacher and learning coordinator at the Alpine School District in Provo, Utah, said there may be other benefits to early financial education not yet captured by the research. He helped establish his district’s financial literacy program that rolled out in the early 2000s, and he said many of his former students have gone on to careers in the field.

“Not only do you help kids with their personal finances, but you’re going to see that kids gravitate to that as a career interest,” according to Walker, who said students would probably be even better served by starting to learn about money well before high school.

“While high school is great for financial education, you do need to start earlier,” he said.

Note

Research shows that people are getting credit at younger ages and that financial habits developed in young adulthood tend to stick throughout life. Children form persistent habits with money as young as age 5, a study by researchers at the University of Michigan found.

Parents are up against what Vince Shorb, chief executive officer (CEO) of the nonprofit National Financial Educators Council, called “psychological warfare” in the form of toy advertisements, peer pressure, and social media.

They are all bombarding children with messages encouraging excessive consumption and a spendthrift attitude. Shorb said high school financial literacy classes are a step in the right direction, but they may not be enough on their own.

“Try speaking a foreign language after one semester of anything,” he said. “Kids in school aren’t really getting anything about money. And parents aren’t training children to be good stewards of money and understand it and develop positive habits from a young age.”

Griffin said developing habits of good money management will likely take more than just one class.

“Money management is largely behavioral. It’s one thing to know the skills, but it’s also highly beneficial to start learning how to apply them to your everyday life,” she said. “It’s kind of like anything with mathematics or reading. You progress as the years go on.”

Tips for Getting Started

There are many ways to get children thinking about money. Shorb offered several tips to prime children for early financial literacy.

• Explain what you’re doing. Parents or guardians can help children understand how household finances work by engaging them in their own finances. Whether it’s a shopping trip or paying the bills, you can walk children through the decisions you’re making. You can also let kids listen in on your conversations with bankers, accountants, and other financial professionals. “Kids are sponges,” Shorb said. “They’re smarter than we think. They’re picking up things that we don’t even understand.”
• Have children earn money with chores. Rather than buying toys, parents can use a classic technique of having the kids earn money by doing chores. That way, they learn the connection between labor and income. Consider having kids put some of their chore money toward household bills as they get older. 
• Get kids into career conversations related to their interests. Earning income is a crucial part of having good finances, and kids model their career interests on jobs that they’ve been exposed to. This explains why so many children want to be teachers or YouTube influencers. Help kids expand their horizons by having them talk to people with other jobs, especially ones related to their interests. For example, if a child is interested in BMX biking, the parent can bring them to a competition and ask a vendor to explain what they do—most people are usually happy to talk to kids.
• Set aside time to teach the fundamentals. Consider sitting kids down and teaching them basic concepts. The lessons should be age-appropriate. For example, the topic of FICO Scores would probably be too advanced for a four-year-old, but they may understand the concept of borrowing and returning.

What Are the 5 Principles of Financial Literacy?

The five principles of financial literacy are: earn, save and invest, protect, spend, and borrow. Focus on understanding your pay and benefits, then develop a budget to save and invest your earnings. Ensure your financial health is protected by, for example, having an emergency fund. Finally, be sure that you are spending wisely and that you borrow responsibly. 

What Is the Best Way to Teach Financial Literacy?

The best method for teaching financial literacy is the method that engages the student the most successfully. Each student will have different needs and different ways of learning. Understand how a child absorbs information, then develop the best method for teaching financial literacy based on their responsiveness. Methods can include playing games like Monopoly, engaging in discussions, or providing allowances, among many others.

What Is the First Rule of Financial Literacy?

The first rule of financial literacy is to understand your pay or your earnings. Understanding your pay includes knowing what benefits are available to you and how you can take advantage of them.

The Bottom Line

Teaching financial literacy is important for instilling healthy habits in children so they can make the best decisions about money throughout their lives.

Start financial lessons at an early age to give them a head start in developing these critical skills, then continue to provide financial guidance on more advanced lessons as they are ready. The strategies you use to foster financial literacy in your child will depend on how your child learns and how you best interact with them.

Fact checked by Katrina Munichiello
Reviewed by JeFreda R. Brown

Though recessions can be tough on investment portfolios, it’s important to remember that they don’t last forever. Most asset prices tend to recover and continue their upward trajectory once the economy is back on track again.

Still, there are things you can do to prepare your portfolio for an economic shock. Here are four ways to help set your mind at rest and be covered for all scenarios.

Key Takeaways

• Defensive stocks are built to withstand a recession. Many offer decent dividends that can add up over time.
• Recessions serve as a reminder of the importance of owning various investments across different asset classes and regions of the world.
• Dollar-cost averaging can pay off during an economic downturn by reducing the average purchase price.
• If you have built a well-balanced portfolio, stick by it and don’t check it every day to see how much it is losing.

1. Invest in Quality, Cash-Rich Defensive Stocks

Some businesses tend to struggle during a recession, while others are better built to withstand them.

Stocks are generally placed in one of two categories: cyclical or defensive. Cyclical stocks are sensitive to the health of the economy, excelling when there is growth and struggling when everything slows down. Defensive stocks, on the other hand, offer stability through all phases of the business cycle.

How do they achieve that? By being well-run, possessing strong pricing power, and supplying products that consumers either cannot or do not want to live without, such as water, electricity, food, and essential household products like toilet paper.

Defensive companies, which are mainly associated with the consumer staples and utilities sectors, are good to own. Other than being less volatile and sensitive to economic downturns, they also tend to generate lots of cash and pay decent dividends.

Income investments, in general, are an important component of a well-rounded, balanced portfolio and add significant value over the years when dividend proceeds are reinvested. Dividends can also offer a nice cushion against stock price depreciation, provided the balance sheet doesn’t become too stretched and there’s enough money to continue to fund them.

During recessions, you want to own high-quality assets that keep making money, generate lots of cash, and have robust balance sheets. Avoid companies with lots of debt as a slowdown in revenues and changing credit conditions could spell trouble for them.

2. Diversify: Don’t Put All Your Eggs in One Basket

When the economy is booming, holding growth stocks can really pay off. But these types of companies are likely to perform poorly when growth in the economy slows or turns negative. When there’s a recession, investors can begin to appreciate diversification by owning investments across different asset classes.

To build a portfolio truly capable of weathering any type of situation, you ideally need to add some government and investment-grade corporate bonds, money market instruments, and maybe even gold. That’s especially the case when you’re nearing retirement or need the money you’ve invested soon.

Each asset class tends to behave differently. For example, historically, while stocks have done well when the economy is expanding, bonds often do well during recessions. This inverse relationship means the two can complement each other and essentially ensure that no matter the economic climate, at least part of your investment portfolio will grow in value—or not get completely clobbered.

International exposure is also important. While the economies of the world’s nations are increasingly interlinked, there can be exceptions and regions offering slightly better growth prospects at any given moment.

Important

If you don’t feel comfortable building a well-balanced, diversified portfolio, consider enlisting the help of a financial advisor or an asset manager.

3. Try Dollar-Cost Averaging

Recessions present a great opportunity to profit from dollar-cost averaging, which is the process of buying investments at regular intervals, such as when you get paid. Consider setting up a system that will do this for you automatically.

This strategy makes the purchase price less essential and reduces the importance of getting the timing right. It also means that you can profit from a recession by buying shares or assets at lower prices. Many investors make the mistake of buying high and selling low. With dollar-cost averaging, it’s all automatic and you get the chance to top up holdings when they are at their most undesirable and cheapest.

One common complaint is that regular buying restricts potential upside when markets are trending upwards. Others would say that’s a fair price to pay for the option of spreading out payments and limiting volatility.

4. Stick to the Plan and Don’t Panic

The above tips can help you build a portfolio to weather any storm. Beyond that, the best piece of advice on how to protect yourself against a recession is to not panic.

Many great investors say that when the market is in a downtown, don’t check your portfolio on a regular basis. This is because it can be tempting to cut your losses and exit your positions. Instead, they say, you should stay the course, especially if you built your portfolio for the long-term.

Long-term, buy-and-hold investors should stick to their guns and not let short-term market noise push them off course.

During a recession, it might all seem doom and gloom. But if you look at the performance of the S&P 500 over time, you’ll see that it moves up, and occasionally dips, and then moves up even higher than before.

Long-term investing is a marathon, not a sprint. Think carefully about how to build a well-balanced portfolio, get advice when needed, and then once you’ve settled on how you want to invest, sit back, be patient, and stand by your plan.

What Stocks Do Well During Recessions?

It’s very rare for individual share prices to rise during a huge market sell-off. However, there are companies that tend to shed less value and perform better than others. They generally have pricing power and limited competitive pressures. These include utilities and consumer staples companies that supply the population with goods and services that people can’t live without.

What Falls Most in a Recession?

Highly cyclical industries and companies with lots of debt suffer more than others during a recession. Sectors that can be hit more severely include real estate, restaurants, hotel chains, and airlines. When money is in short supply and people are scared to spend, demand for these types of non-essential goods and services tends to dry up.

What Should I Do During a Recession?

Outside of investing, it generally pays to be more prudent with spending and prepare yourself for the reality that you could lose your job. Put as much money aside as possible and try to avoid selling your long-term investments.

The Bottom Line

Unfortunately, recessions are an inevitable part of the business cycle. It’s importantly to be prepared for any scenario as things can quickly and unexpectedly go south, as we saw, for example, in 2020 (briefly) and in 2007-2009. You can minimize the damage by investing in quality defensive stocks, diversifying, using dollar-cost averaging, and not panicking.

Reviewed by Khadija Khartit
Fact checked by Vikki Velasquez

Financial ratios can be used to assess a company’s capital structure and current risk levels, often in terms of a company’s debt level and risk of default or bankruptcy. Some of the financial ratios commonly used by investors and analysts to assess a company’s financial risk level and overall financial health include the debt-to-capital ratio, the debt-to-equity (D/E) ratio, the interest coverage ratio, and the degree of combined leverage (DCL). Let’s take a look at what they’re used for, how they’re calculated, and how they’re used.

Key Takeaways

• Financial risk ratios are analytical tools that consider a company or investment’s financial health to determine whether the potential for loss is likely.
• If a company uses revenues to repay debt, those funds cannot be invested elsewhere within the company to promote growth, making it a higher risk.
• The most common ratios used by investors to measure a company’s level of risk are the interest coverage ratio, the degree of combined leverage, the debt-to-capital ratio, and the debt-to-equity ratio.

What Are Financial Risk Ratios?

Financial risk ratios are tools that investors, creditors, and analysts can use to determine whether a company or investment is financially unstable—and just how unhealthy it is. These metrics help people understand whether the potential for loss is likely.

Whether a firm can manage its outstanding debt is critical to the company’s financial soundness and operating ability. Debt levels and debt management also significantly impact a company’s profitability, since funds required to service debt reduce the net profit margin and cannot be invested in growth.

Debt-to-Capital Ratio

The debt-to-capital ratio indicates a firm’s financial soundness by measuring leverage. This provides a basic picture of a company’s financial structure in terms of how it is capitalizing its operations. Put simply, the debt-to-ca ratio compares a company’s total short-term debt and long-term debt obligations with its total capital provided by both shareholders’ equity and debt financing.

To determine a company’s debt-to-capital ratio, you’ll need to find its total debt and its shareholders’ equity on its balance sheet, then plug them into the following formula:

Debt-to-Capital Ratio = Debt ÷ (Debt + Shareholders’ Equity)

Let’s say Company X has total debt of $200 million and $300 million in shareholders’ equity. Using the formula above, we can determine that Company X has a debt-to-capital ratio of 0.4 or 40%. This means that 40% of its capital assets are being funded by debt.

Lower debt-to-capital ratios are preferred because they indicate a higher proportion of equity financing to debt financing.

Debt-to-Equity (D/E) Ratio

The debt-to-equity ratio is a key financial ratio that provides a more direct comparison of debt financing to equity financing. This ratio is also an indicator of a company’s ability to meet outstanding debt obligations.

Debt-to-Equity Ratio = Debt ÷ Shareholders’ Equity

Using the figures from the example above, we can determine that Company X has a D/E ratio of about 0.67 or 67%.

A lower ratio value is preferred as this indicates the company is financing operations through its own resources rather than taking on debt. Companies with stronger equity positions are typically better equipped to weather temporary downturns in revenue or unexpected needs for additional capital investment. Higher D/E ratios may negatively impact a company’s ability to secure additional financing when needed.

Important

A higher D/E ratio may make it harder for a company to obtain financing in the future.

Interest Coverage Ratio

The interest coverage ratio is a basic measure of a company’s ability to handle its short-term financing costs. This ratio value reveals the number of times a company can make the required annual interest payments on its outstanding debt with its current earnings before interest and taxes (EBIT).

Interest Coverage = EBIT ÷ Interest Expense

Assume Company X has interest expenses of $100 million and EBIT of $200 million. Plugging the numbers into the formula, we can see that it has an interest coverage ratio of 2.

A relatively lower coverage ratio indicates a greater debt service burden on the company and a correspondingly higher risk of default or financial insolvency. Put simply, it means there’s a lower amount of earnings available to make financing payments, so the company is less able to handle any increase in interest rates.

An interest coverage ratio of 1.5 or lower is generally considered indicative of potential financial problems related to debt service. This is not the case with our Company X example. Keep in mind that an excessively high ratio can indicate the company is failing to take advantage of its available financial leverage.

Note

A company with an interest coverage ratio of 1.5 or lower is likely to face potential financial problems related to debt service.

Degree of Combined Leverage

The degree of combined leverage provides a more complete assessment of a company’s total risk by factoring in both operating and financial leverage. This leverage ratio estimates the combined effect of business risk and financial risk on the company’s earnings per share (EPS), given a particular increase or decrease in sales.

Calculating this ratio can help a company’s management team identify the best possible levels and the combination of financial and operational leverage for the firm.

DCL = % Change EPS ÷ % Change Sales

A firm with a relatively high level of combined leverage is seen as riskier than a firm with less combined leverage because high leverage means more fixed costs to the firm.

Why Are Financial Ratios Important?

Financial ratios are analytical tools that people can use to make informed decisions about future investments and projects. They help investors, analysts, and corporate management teams understand the financial health and sustainability of potential investments and companies. Commonly used ratios include the D/E ratio and debt-to-capital ratios.

What’s the Difference Between a Financial Ratio and a Liquidity Ratio?

Financial ratios are analytical tools that can be used to determine how well a company is performing and whether it is financially stable. A liquidity ratio, on the other hand, is a financial metric that indicates whether a company can pay its short-term financial obligations on time without having to raise capital.

What Are Some of the Most Common Income Statement Ratios?

Income statement ratios are financial metrics that are calculated using data from a company’s income statement. Some of the most common types of this class of ratios include earnings per share (EPS), gross profit margin, operating profit margin, and net profit margin.

The Bottom Line

Financial ratios are used in fundamental analysis to help value companies and estimate their share prices. Certain financial ratios can also be used to evaluate a firm’s level of risk, especially as it relates to servicing debts and other obligations over the short and long run.

This analysis is used by bankers to grant additional loans and by private equity investors to decide investments in companies and use leverage to pay back debt on their investments or augment their return on investments.

Reviewed by Ebony Howard
Fact checked by Michael Rosenston

Members of the U.S. Armed Forces should be aware of tax breaks available to them. To benefit you need to be in the Army, Marine Corps, Navy, Air Force, Space Force, Coast Guard, National Guard, or the military reserve.

Among the tax breaks you may receive, if you qualify, are postponement of tax deadlines, partial or fully tax-free pay, tax deductions, and other benefits around filing tax returns. Learning to take advantage of these tax breaks can help you make the most of your money and your benefits as a member of the military.

Key Takeaways

• Combat pay is partially or fully tax-free if you serve in a combat zone, and you receive automatic extensions on deadlines for filing your taxes.
• Most military bases offer tax preparation and filing assistance services during tax season.
• Some costs—such as moving expenses, reservists’ travel, and some uniforms—may entitle you to deductions when filing your taxes.

Helpful Tax Tips

When it comes to general information about your taxes, keep in mind the following two tips:

• Combat pay exclusion: Your combat pay is partially or fully tax-free if you serve in a combat zone. You may also qualify for this extension if you serve in support of a combat zone.
• Tax services: If preparing your taxes is the hardest part of tax season for you, seek help from the tax preparation and filing assistance services, MilTax, during tax season.

When Filing Your Taxes

When it comes to actually filing your taxes, note that you may qualify for extensions on deadlines and that you may have options when it comes to signing your return or choosing what to include as taxable income.

• Extensions: Military members who serve in a combat zone receive automatic extensions on deadlines for filing their taxes. You can receive extensions of time to file your tax return and pay your taxes.
• Earned Income Tax Credit (EITC): If you receive nontaxable combat pay, you can still choose to include it as part of your taxable income. If you do, it may boost your EITC, leading to a potentially larger refund.
• Joint returns: Spouses may be able to sign the tax form for a spouse who is absent due to certain military duties or conditions. You may need a power of attorney (POA) to file a joint return; the legal office at your installation maybe able to help you.

Deductions and Allowances

It’s important to be aware of the deductions and allowances you can include when filing your taxes. This can make a substantial difference in the amount you owe or are refunded, so be sure to take advantage of every option that you can.

• Moving expense deduction: Moving costs can be deducted using Form 3903. This usually only applies when the move is due to a permanent change in station.
• Reservists’ travel deduction: Members of the reserves can deduct unreimbursed travel expenses if their duties take them more than 100 miles from home. They can do this on Form 2106 (even if they do not itemize their deductions).
• Uniform deduction: Some uniforms that must be purchased cannot be worn while off duty. The cost and upkeep for these can be deducted. You must reduce your deduction by any allowance you get for these costs.
• Post-military life:  You may be able to deduct some job search expenses if you leave the military and seek other work, such as costs of travel, preparing a resume, job placement agency fees, and even moving fees.
• ROTC allowances: Some amounts paid to ROTC students in advanced training—such as allowances for education and subsistence—are not taxable. However, active duty ROTC pay and pay for summer advanced camp is taxable.

Other Tax Considerations

There are other tax considerations worth being aware of as well, including some that affect veterans or your dependents.

• Disabled veterans: Disabled veterans may be eligible to claim a federal tax refund if there was an increase in their percentage of disability from the Department of Veterans Affairs (this may include a retroactive determination) or if they are a combat-disabled veteran who is granted Combat-Related Special Compensation.
• Combat-Injured Veterans Tax Fairness Act of 2016: This law states that veterans who suffer injuries related to combat are not to be taxed if they receive a lump-sum disability severance payment from the Department of Defense. The Department of Defense must instruct you to amend your return if you were taxed on this payment.
• Death benefits: The death gratuity benefit paid to survivors of deceased Armed Forces members is not taxable.
• Dependent care flexible spending accounts: Service members can divert pre-tax money into a dependent care flexible spending account. This allows them to lower their taxable income while putting aside money to care for family.
• Education benefits: If you are serving or have served—and are receiving education benefits—these are excluded from taxation.

The Bottom Line

The Internal Revenue Service has an Armed Forces’ Tax Guide that covers everything about taxes for members of the armed forces in great detail.

Knowing as much as possible about the tax breaks that you can take advantage of as a member of the military will help you make the most of your money. Whether you are currently serving or are a veteran, there will always be tax considerations that you should review when filing your taxes to ensure that you are taking full advantage of all your benefits.

Investopedia & REAL SIMPLE research reveals how women are thinking about, talking about, and engaging with money.

As women are poised to inherit $31 billion of assets from older generations by 2033, a joint survey from Investopedia and REAL SIMPLE found this demographic needs more wealth-building guidance and shame-free support, even within friendships.

The 2024 Her Money Mindset Survey polled a representative sample of U.S. women to learn how women across generations and income levels are thinking about, talking about, and engaging with money. 

Key Takeaways

• On average, 63% of women’s income is directed to necessities and 64% of women have under $500 at the end of each month after their necessities are paid. 
• Only 39% of women are invested, and participation varies based on age, income level, and financial literacy.
• 1 in 5 women have helped someone cover a significant expense and are currently struggling to meet at least one expense of their own.
• While money talks between friends are fairly common, the level of detail shared (and how truthful those details are) varies.
• Overall, women are confident financial decision makers and want to learn about saving money and investing. 

“Too often, we’re discouraged from talking about money. We worry it might seem crass, impolite, or inappropriate. But experts agree that open conversations around our finances help normalize the topic, motivate us to save, and make complex situations less confusing,” said REAL SIMPLE Editor in Chief Lauren Iannotti. “Collaborating with Investopedia, we set out to uncover the barriers hindering women’s financial confidence because when we determine what’s holding us back, we can set a plan to move ahead.”

The study, which was conducted during a period of high inflation and ongoing economic uncertainty, found that even on a tight budget, women are generous, and actively seek out more information. They have more to learn—and talk about—but overall, women are resilient, confident money managers. 

Women Are Focused on Short-Term Finances

One thing that U.S. women have in common across generations and income levels is that the majority of monthly income (63%) is spent on necessities, including housing, transportation, healthcare, education, and child care. Another 20% goes to flexible spending, and approximately 17% helps fund their financial goals. 

Monthly bills are eating up a lot of dollars, too. The 2024 Her Money Mindset Survey found that 64% of women have just under $500 left each month after covering the necessities—$422 on average. Another 44% have less than $250 left each month. 

Overall, although most women are able to cover monthly expenses, 54% said they are currently struggling to cover at least one type of monthly expense. 

Most women surveyed (67%) carry some debt, too. Credit card debt is the most common, followed by mortgages and car loans. 

While stretching dollars, women are very aware of where their money is going, and have big short-term goals, too. Seventy-six percent of women keep an eye on where their money goes every month, while 72% are saving for short-term goals.

In addition to covering bills and other necessities, the most common three-year financial goals include saving for retirement, buying a car, and paying (or paying down) credit card debt. 

Some Women Are Investing, But Mindset Varies 

The narrative surrounding women investors is often one of underrepresentation and hesitance, but that is not the whole story. Women’s investment behavior is nuanced, and The 2024 Her Money Mindset survey highlights the interplay of age, income, and financial literacy in how women see themselves as investors. 

Overall, 39% of women surveyed currently hold investments. When you break that down further, the rate of women investors is higher among those in Generation X or older (42% of which currently hold investments). Women who make more than $75,000 annually are also more invested (58%), and are more likely to hold multiple types of investments.

Retirement accounts, stocks, and mutual funds are the most common types of investments held. Cryptocurrency is more popular among women who are millennials or younger, too.  

Important

51% of invested women are proud of an investment decision they have made. 

The survey asked women to share more about their investing decisions, and four main themes emerged from the anonymous responses: Women take pride in seeking professional help from financial advisors, teaching themselves about investing, discussing their strategies, and detailing the habits they have developed along the way. 

For example, one Gen X survey respondent said: 

“I am most proud of myself for investing part of my savings into the stock market and learning about everyday trends within the market.” 

What’s Holding Some Women Back?

Despite positive investing sentiment, knowledge gaps are hindering some women from investing—or even just thinking of themselves as investors. 

For example, a little over half of the women told Investopedia & REAL SIMPLE that they are not invested (53%), but 10% of those respondents went on to say they have a retirement account, such as a 401(k) or IRA. 

The reality is, if you hold such an account, you are in fact invested. 

Why aren’t more women investing? The most common reason reported was that women don’t feel like they have enough money to invest. Perhaps unsurprisingly, women with lower household incomes are more likely to cite this reason.  

Another reality? You don’t need thousands of extra dollars to start investing.

“Think about putting aside money to invest every month as another way you are actually paying yourself. Just like you wouldn’t work without getting paid, pay your future self—even if it’s just a little bit—every month,” said Investopedia Editor in Chief Caleb Silver. “Investing something as small as $50 a month can grow into tens of thousands of dollars by the time you retire. Start simple with index funds or ETFs, and watch your initial investments and their dividends compound over time.”

Aside from feeling like money may not spread far enough to pay bills and invest, fear and uncertainty impact women’s willingness to jump into investing with both feet: 29% of those who aren’t invested say it’s because they fear losing money, and 25% don’t know where to start. 

Women with higher household incomes are actually more likely to cite a lack of knowledge or a fear of losing money as their primary reason for not investing. 

There is curiosity, though: nearly 1 in 4 women say they want to learn more about investing. 

Women Are Financially Generous, Despite Own Struggles

Most women surveyed (67%) have acted as a financial supporter for someone in their life. That rate jumps to 73% for younger women, too.  

This level of generosity extends to smaller purchases, too. On an ordinary day, almost all women say they would pay for a friend’s meal, which has an average cost of $24. 

For many, generosity is not dependent on a woman’s financial well-being, either: 1 in 5 women said they have at one point helped someone cover a significant expense and are also currently struggling to cover housing expenses. 

If they need financial help themselves, women are actually more likely to have asked a friend for a loan before asking a significant other or family member. 

Money Conversations Are Complicated

When it comes to communicating about money, women have ambivalent feelings. The 2024 Her Money Mindset survey found that while there is often some degree of money talks happening between friends, the level of detail shared—and how truthful those details are—are a mixed bag. 

Overall, 70% of women say that they sometimes talk to their friends about money. Younger women (millennials and generation z) tend to be more comfortable talking about money matters with friends and those with household incomes above $75,000 are most likely to broach these topics with their friends.

The women we surveyed told us that talking about money with friends can lead to bonding, and a greater support system. Among those who talk to their friends about money, budgeting and planning for the future are the most common money conversation topics, and 1 in 3 have also discussed investing decisions with their friends. 

However, while the women we surveyed told us that talking about money with friends can lead to bonding and more support, sharing details is rare. Half (51%) of women who talk to their friends about money say they share very little about their own financial situation. 

Note

Fewer than 1 in 4 women who talk with their friends about money have shared with their friends how much money they make. 

Of those who will not discuss money with friends, most (54%) say it is because they feel it is not appropriate. This response is more common among women who are Gen X or older, while younger generations are more likely to avoid talking about money because it’s too awkward. 

Income differences and financial situations play the biggest role in women avoiding money conversations with friends. Fear of judgment and shame are common, especially among women with household incomes below $75,000 a year, and those in different financial situations than their peers. In some cases, these feelings result in lies or omissions. 

Here’s what some Her Money Mindset survey respondents across generations told us anonymously when asked to share a time they lied about money:

“I was embarrassed to share how much debt I had or how little I had in my bank account, so I lied.” -Gen Z woman (18-26 years old)

“I felt ashamed that I couldn’t pay off my student loan and credit card debt compared to some of my friends. The financial burden of helping out my parents (sharing expenses under the same roof) seemed to be the differentiator, since many of my friends had younger parents who were working and supporting them.” -Millennial woman (27-42 years old)

“I was asked by a friend if I had any debt and I said no even though I have medical debt. I was embarrassed.” -Millennial woman (27-42 years old)

“I didn’t want to let on how difficult of a financial situation we were in when both me and my husband were laid off around the same time so downplayed it and said we had enough in savings to live on, which was untrue.” -Woman age 59 or older

Overall, Women Are Confident Financial Decision Makers

Tight budgets, knowledge gaps, and uncomfortable conversations aside, the 2024 Her Money Mindset survey found that women are taking charge of their finances. 

More than half of all women (58%) told Investopedia and REAL SIMPLE that they feel somewhat or very confident in their ability to make good financial decisions, and that confidence increases with age and income.

Important

The 2024 Her Money Mindset Survey found 66% of women have made at least one financial decision they’re super proud of.

When comparing their financial know-how to friends and partners, 40% of women feel confirmed they know more than their friends, and 36% feel they know more than their partner and are able to make more responsible decisions. 

Ahead of a great wealth transfer that will put more wealth in women’s hands than ever before, women are directing this confidence into action and leading, or in some cases owning, financial decision-making for their household.

Our survey found 60% of all women make decisions about their finances independently, and the other 40% share financial decision-making with someone else. Half of the women surveyed are married or living with a significant other, and in that citation, women said they are talking about money with their partner, sharing finances, and sharing responsibilities, despite often earning less than their partner. 

Women are taking an active role in learning more about managing finances, too: 39% of women said they look for financial information at least monthly. That rate is even higher for millennials and younger women (48%). The preferred sources of education? Financial information websites, online searches, and talking to friends and family. 

Methodology

For the 2024 Her Money Mindset Survey, REAL SIMPLE and Investopedia surveyed 2,002 American women (aged 18+) from January 9th to 22nd, 2024. The survey was fielded online via a self-administered questionnaire to an opt-in panel of respondents from a market research vendor. 

Quotas were implemented in sampling using benchmarks from American Community Survey (ACS) from the U.S. Census Bureau for region, age groups, race/ethnicity, and household income. Respondents must have reported at least partially managing their own finances in order to qualify.

Reviewed by Somer Anderson
Fact checked by Jared Ecker

Unemployment “rises like a rocket and falls like a feather,” as two economic experts put it. That is, in a downturn, unemployment rises quickly but drops slowly. Let’s explore what happens to unemployment during a recession.

Key Takeaways

• Recession and unemployment go hand in hand and reinforce one another.
• The 2007-2009 recession has characteristics of common economic downturns as opposed to the relationship between unemployment and economic growth during the 2020 recession.
• Fiscal and monetary policies try to limit the impact of unemployment on recessions.
• Prompt, automatic aid for those who need it most tends to produce the most benefit.

Understanding Recessions

A recession is a significant and broad decline in the economy, usually lasting more than a few months. In the United States, the National Bureau of Economic Research (NBER) uses a number of indicators to determine when recessions start and end, including:

• The monthly nonfarm payrolls report and household employment survey
• Real personal income less transfers
• Real personal consumption expenditures
• Wholesale and retail sales
• Industrial production

Important

One rule of thumb is that if there are two consecutive quarters of negative gross domestic product (GDP) growth, then the economy is in recession. However, this method isn’t used by all analysts—take the 2022 non-recession, for example.

Unemployment During the 2007-2009 Recession

While unemployment is an important recession indicator, it’s also important to remember that unemployment usually peaks long after the recession has begun and can last well into the recovery. That’s because the NBER and other sources say a recession is over when the economic contraction hits bottom and starts to rebound, not when the recovery is complete.

For an example, the charts below show the change in unemployment and GDP growth during the Great Recession.

That recession began in December 2007 and ended in June 2009, according to the NBER. Yet in April 2008, five months into the recession, the U.S. unemployment rate was just 5%, up only slightly from 4.7% six months earlier. Unemployment continued to rise to hit 10% by October 2009, four months after the official end of the recession and seven months after the stock market hit bottom.

Unemployment During the 2020 Recession

During the much shorter two-month recession set off by the COVID-19 pandemic, unemployment climbed from just 3.5% in February 2020 to 14.7% in April 2020, the month when the recession ended. That was unusual: it was the first time in 70 years that unemployment associated with a recession peaked before the economy was well into recovery.

Why Unemployment Rises During a Recession

Because a recession is a slowdown in economic activity and labor is a key economic input, along with capital, it is logical that unemployment would rise as output (what companies make and sell) declines as companies making less and selling less need fewer employees.

The relationship between employment and output growth is consistent enough that there is an economic principle that describes it: Okun’s law, named after Arthur Okun, the economist who first documented it. A related rule of thumb says the economy must grow two percentage points faster than its potential growth rate to cut the unemployment rate by one percentage point.

The potential growth rate is an estimate of what GDP growth could be if labor and capital were fully used—that is, everyone who can work has a job and all money available to invest is invested. But because potential GDP is theoretical and not easily measured, there are a variety of ways to calculate it, and each way produces different results.

Thus, while Okun’s law is useful to understand the relationship between unemployment and economic growth, the law is not very useful in forming economic policy, since it is difficult to make accurate assessments.

The Extra Costs of Unemployment in a Recession

Unemployment is contagious. Initial layoffs when the recession starts cut demand as unemployed workers spend less, cutting demand further, which can in turn lead to more layoffs. The negative feedback loop eventually runs out of steam, but not before inflicting lasting damage on the economy and workers.

People who lose jobs during recessions, especially deep recessions, are more likely to become long-term unemployed and find it more difficult to reenter the labor market later. Among workers who lost their jobs during the Great Recession, only 35% to 40% were employed full-time by January 2010. Reemployment rates remained unusually low as late as 2013.

Another survey found that men lose an average of 1.4 years of earnings if laid off when the unemployment rate is below 6%, but they lose twice as much if the unemployment rate is above 8%. Beyond its immediate economic costs, long-term unemployment also damages public health and the economy’s long-term productive potential.

Policies That Limit Unemployment in Recessions

Governments around the world use fiscal and monetary policies to manage the highs and lows of the business cycle. This means that they usually spend more but also collect less in tax when the economy slumps as they try to boost aggregate demand to avoid even more unemployment that could worsen the downturn. A similar rationale leads central banks to cut interest rates and buy assets to stimulate the economy during downturns.

There are also many automatic stabilizers that kick in during economic downturns. These mechanisms do not require the government to make a policy change or pass new legislation. They include programs such as unemployment insurance and other transfer payments. Automatic stabilizers are especially valuable because they can quickly direct aid to the people who need it most and often spend it fastest, increasing its benefit to the economy.

Most controversial of all is targeted government relief for specific industries or companies, the sort of assistance also known as a bailout. Some critics object to public aid to for-profit companies on principle, while others argue that the relief is misguided and may not benefit the right companies.

In 2008–2009, the U.S. government spent nearly $80 billion to avert the bankruptcy of U.S. automakers. It did, however, later recoup 85% of that aid. Supporters note that the bailout saved hundreds of thousands of auto industry jobs and prevented a regional depression. Critics argue that it set a bad precedent and encouraged riskier business behavior by the industry.

Why Does Unemployment Rise in a Recession?

As economic activity slows in a recession, consumers cut spending. When that happens, there is less demand for the goods and services that companies sell, so companies manufacture less and may trim their service offerings. But making fewer products and offering fewer services also means companies need fewer employees, and layoffs often result. When people are laid off, they are forced to cut spending, which further decreases demand, which can lead to further layoffs. The cycle continues until the economy recovers.

Why Does Unemployment Tend to Fall Slowly After a Recession?

Companies are usually quick to cut costs when demand for their products and services declines, but they are generally more cautious about adding that cost back by hiring new employees even as the economy recovers. Also, a recession ends when the economy hits bottom, but employment tends to recover long after the economy is well into recovery.

How Has Unemployment Been Different in Recent Recessions?

Historically, unemployment improves long after the official end of the recession. This is because a recession ends when the economy hits bottom, and companies start to rehire only after the economy has started to recover. However, in the COVID-19 pandemic-induced recession, employment recovered more quickly than the economy, for the first time in 70 years.

The Bottom Line

Recession and unemployment go hand in hand: a spike in unemployment and its persistence are hallmarks of a recession, and joblessness, in turn, aggravates recessions. The short-term and long-term costs of unemployment have led governments to develop a range of policy measures aimed at curbing joblessness during downturns.  The most recent recession (in 2020) was different, as unemployment improved more quickly than in most economic cycles, recovering before economic growth did.