Here are the types of stocks that typically do well—and the types that typically don’t—during market downturns

Reviewed by Michael J Boyle
Fact checked by Timothy Li

During a recession, the worst-performing assets are highly leveraged, cyclical, and speculative. Companies that fall into any of these categories can be risky for investors because of the potential that they could go bankrupt.

Conversely, investors who want to thrive during a recession will invest in high-quality companies that have strong balance sheets, low debt, and good cash flow, and are in industries that historically do well during tough economic times.

Key Takeaways

• During a recession, most investors should avoid investing in companies that are highly leveraged, cyclical, or speculative, as these companies pose the biggest risk of doing poorly during tough economic times.
• A better recession strategy is to invest in well-managed companies that have low debt, good cash flow, and strong balance sheets.
• Countercyclical stocks do well in a recession and experience price appreciation despite the prevailing economic headwinds.
• Some industries are considered more recession-resistant than others, such as utilities, consumer staples, and discount retailers.

Types of Stocks with the Biggest Recession Risk

Knowing which assets to avoid investing in can be just as important as knowing which companies make good investments. The companies and assets with the biggest risk during a recession are those that are highly leveraged, cyclical, or speculative.

Highly Leveraged Companies

During a recession, most investors would be wise to avoid highly leveraged companies that have huge debt loads on their balance sheets. These companies often suffer under the burden of higher-than-average interest payments that lead to an unsustainable debt-to-equity (DE) ratio.

While these companies struggle to make their debt payments, they are also faced with a decrease in revenue brought about by the recession. The likelihood of bankruptcy (or at the very least a precipitous drop in shareholder value) is higher for such companies than those with lower debt loads.

Credit Crunch

The more leveraged a company is, the more vulnerable it can be to tightening credit conditions when a recession hits.

Cyclical Stocks

Cyclical stocks are often tied to employment and consumer confidence, which often decline in a recession. Cyclical stocks tend to do well during boom times, when consumers have more discretionary income to spend on nonessential or luxury items. Examples would be companies that manufacture high-end cars, furniture, or clothing.

When the economy falters, however, consumers typically cut back their spending on these discretionary expenses. They reduce spending on things like travel, restaurants, and leisure services. Because of this, cyclical stocks in these industries tend to suffer, making them less attractive investments for investors during a recession.

Cyclical Assets

Stocks that move in the same direction as the underlying economy are at risk when the economy turns down.

Speculative Stocks

Speculative stocks are valued based on optimism among the shareholder base. This optimism is tested during recessions, and these assets are typically the worst performers in a recession.

Speculative stocks have not yet proven their value and are often seen as under-the-radar opportunities by investors looking to get in on the ground floor of the next big investment opportunity. These high-risk stocks often fall the fastest during a recession as investors pull their money from the market and rush toward safe-haven investments that limit their exposure during market turbulence.

Speculation

Speculative asset prices are often fueled by the market bubbles that form during an economic boom—and go bust when the bubbles pop.

Types of Stocks that Often Do Well During Recessions

While it might be tempting to ride out a recession with no exposure to stocks, investors may find themselves missing out on significant opportunities if they do so. Historically, there are companies that do well during economic downturns. Investors might consider developing a strategy based on countercyclical stocks with strong balance sheets in recession-resistant industries.

Strong Balance Sheets

A good investment strategy during a recession is to look for companies that are maintaining strong balance sheets or steady business models despite the economic headwinds. Some examples of these types of companies include utilities, basic consumer goods conglomerates, and defense stocks. In anticipation of weakening economic conditions, investors often add exposure to these groups in their portfolios.

By studying a company’s financial reports, you can determine if they have low debt, healthy cash flows, and are generating a profit. These are all factors to consider before making an investment.

Strong Balance Sheets

Companies with strong balance sheets are less vulnerable to tightening credit conditions and have an easier time managing the debt that they do have.

Recession-Resistant Industries

While it might seem surprising, some industries perform quite well during recessions. Investors looking for an investment strategy during market downturns often add stocks from some of these recession-resistant industries to their portfolios.

Countercyclical stocks like these tend to do well during recessions because their demand tends to increase when incomes fall or when economic uncertainty prevails. The stock price for countercyclical stocks generally moves in the opposite direction of the prevailing economic trend. During a recession, these stocks increase in value. During an expansion, they decrease.

These outperformers generally include companies in the following industries: consumer staples, grocery stores, discount stores, firearm and ammunition makers, alcohol manufacturers, cosmetics, and funeral services.

Consumer Demand

Many of these companies see an increase in demand when consumers cut back on more expensive goods or brands or seek relief and security from fear and uncertainty.

Investing During the Recovery

Once the economy is moving from a recession to a recovery, investors should adjust their strategies. This environment is marked by low interest rates and rising growth.

The best performers are those highly leveraged, cyclical, and speculative companies that survived the recession. As economic conditions normalize, they are the first to bounce back and benefit from increasing enthusiasm and optimism as the recovery takes hold. Countercyclical stocks tend not to do well in this environment. Instead, they encounter selling pressure as investors move into more growth-oriented assets.

Risky, leveraged, speculative investments benefit from the rise in investor sentiment and the easy money conditions that characterize the boom phase of the economy.

Is It Risky to Invest When a Recession is Nearing?

When an economy is nearing a recession, chances are that markets will fall as profits shrink and growth turns negative. During a recession, stock investors must use extra caution, as there is a good chance that they will see price depreciation of their investments. That said, timing a recession is difficult to do, and selling into a falling market may be a bad choice. Most experts agree that one should stay the course and maintain a long-term outlook even in the face of a recession, and use it as an opportunity to buy stocks on sale.

Which Assets Tend to Fare Best in a Recession?

Not all assets are impacted the same way by a recession. As spending shifts to basics, consumer staples, utilities, and other defensive stocks may fare better. Companies with strong balance sheets will also be able to weather a temporary decline in profits more than a high-spending growth stock. Outside of stocks, bonds may rise and interest rates are cut in response to an economic contraction.

Which Stocks Are Hurt the Most by a Recession?

Growth stocks with high debt loads are often the most vulnerable to a recession. This is because they may find it hard to raise new capital as the economy contracts, while their profits can be eroded by lower consumer spending. Speculative stocks with shaky fundamentals are among the most risky as a recession hits.

The Bottom Line

Every recession eventually turns around and goes up over the long run. By developing a strategy based on countercyclical stocks with strong balance sheets in recession-resistant industries, investors can get in on one of the biggest market booms and avoid the turbulence that often results when the economy weakens.

Long-term investors willing to stand through these volatile times eventually will be able to reap the rewards. They may also be able to sell quickly and buy more profitable assets when the bear market is in full force and position themselves ahead of the recovery for even bigger gains when the market improves.

Reviewed by Charlene Rhinehart
Fact checked by Vikki Velasquez

Par Value vs. Market Value: An Overview

There are different types of value in the financial world. Two of the most common are par value and market value. Both represent an asset’s monetary worth. But they are inherently different.

A par value is the face or nominal value of an asset. The issuing entity assigns a par value to it. When shares of stocks and bonds were printed on paper, their par values were printed on the faces of the shares. A market value is the actual price that a financial instrument is worth at any given time. It fluctuates with market swings as investors buy and sell shares.

Key Takeaways

• A par value and market value are used to describe the monetary or assessed worth of an asset.
• Par values represent the face value or original price of an asset.
• An asset’s market value indicates how much someone is willing to pay for it at a specific time.
• Par values are important for bond investors because they represent the principal amount.
• Market values are common for stocks, whose prices change throughout a trading session.

Par Value

The term par value is the stated value of an asset—typically of a bond or stock. It is interchangeable with face value or nominal value, or the written value on a bond or stock certificate. Put simply, it is the original value of the asset.

Par Values for Bonds

Most individual investors buy bonds because they are considered to be safe-haven investments. When a bond is issued, its par value represents its worth when it matures. The yield is paid in regular installments, providing income until the bond matures. The investor then gets the original investment back. In other words, they intend to hold on to the bond until it matures.

Let’s assume that Company X issues bonds with a par value of $100 with a maturity date of one year. Once the year is up, the bondholder is entitled to collect $100 from the issuer in addition to whatever interest payments the bond yields.

A bond can be purchased for more or less than its par value, depending on prevailing market sentiment about the security. When it reaches its maturity date, the bondholder is paid the par value regardless of the purchase price. Thus, a bond with a par value of $100 purchased for $80 in the secondary market will yield a 25% return at maturity.

Par Values for Stocks

The par value for company shares is typically listed on the stock certificate. This is normally stated in the corporate charter. Unlike bonds, a stock share’s face value is unrelated to what is stated in the charter. Shares frequently have a par value near zero because most new companies are established with a limited number of authorized shares.

This means the market value is nearly always higher than par. Rather than looking to purchase shares below par value, investors make money on the changing value of a stock over time. This is based on company performance and investor sentiment.

Note

Bonds are not necessarily issued at their par value. They could also be issued at a premium or at a discount depending on factors like the level of interest rates in the economy.

Market Value

As noted above, the term market value refers to the amount that an asset is worth at any given time. Put simply, it’s the amount that people will pay for an asset on the open market. For instance, an asset may cost $10 one year ago but may fetch $20 a year later. Market value tends to fluctuate based on investor sentiment, the economy, market conditions, or a combination of any of these.

Market Values for Bonds

The market value of bonds is determined by the buying and selling activity of investors in the open market. This value matters for bonds only if it is traded in the secondary market rather than being held.

Before its maturity date, the market value of the bond fluctuates in the secondary market, as bond traders chase issues that offer a better return. However, when the bond reaches its maturity date, its market value will be the same as its par value.

Market Value for Stocks

The market value of stocks is what matters—not their par value. Most stocks are assigned a par value when they are issued. The par value assigned is generally a minimal amount, such as one penny. This avoids any potential legal liability if the stock drops below its par value.

Some stocks are issued with no par, depending on state laws. But, it’s the stock market that determines the stock’s real value, which continually shifts as shares are bought and sold throughout the trading session.

Par Value, Market Value, and Stockholders’ Equity

Stockholders’ equity is the book value of a company. It is calculated as a company’s total assets minus its total liabilities. It can also be determined as the value of shares held or retained by the company and the earnings the company keeps minus Treasury shares.

This figure is recorded on a company’s balance sheet. But, it does not accurately reflect the company’s market value. That’s because shareholders’ equity includes paid-in capital retained along with the par value of common and preferred stock. The values signify the par value of a stock at the time of the transaction—not their fair market values (FMV).

The value of common stock is calculated by multiplying the number of shares the company issues by the par value per share. To determine the value of the preferred stock, multiply the number of preferred shares issued by the par value per share.

Note

The par value of a bond is relevant to the average investor, while the par value of a stock is something of an anachronism. Par value for a share refers to the nominal stock value stated in the corporate charter. Shares can have no par value or very low par value, such as a fraction of one cent per share.

Par Value vs. Market Value Example

Apple (AAPL) had total assets of $364.98 billion and $308.03 billion of total liabilities at the end of fiscal year 2024. The company’s resulting total stockholders’ equity was $56.95 billion. However, its equity par value was roughly $83,28 billion. This is based on a par value of $0.00001 with 50.4 million authorized shares, over 15.55 million shares issued, and more than 15.94 million shares outstanding.

Why Is It Called Par Value?

Par is said to be short for parity, which refers to the condition where two (or more) things are equal to each other. A bond trading at its stated face value is trading at par. Par may also refer to scorekeeping in golf, where par is the number of strokes a player should normally require for a particular hole or course.

What’s the Difference Between a Bond’s Par Value and Its Face Value?

Nothing, the two terms are interchangeable. The par value for a bond is typically $100 or $1,000 because these are the usual denominations in which they are issued.

Is Par Value the Same as Book Value?

No. Book value is the net value of a firm’s assets found on its balance sheet, and it is roughly equal to the total amount all shareholders would get if they liquidated the company. Book value will often be greater than par value, but lower than market value.

Is Par Value More Important Than Market Value?

This depends on the type of asset you’re talking about. The par value matters for long-term bondholders because it is the bond’s face value or the amount that will be repaid as principal when the bond matures. This is regardless of what the market price is at any point in time.

The market value, on the other hand, is what matters the most for stock traders. This is the current price of shares and reflects how much people are willing to pay at a specific time.

What Are the Market Value and Par Value Methods for Treasury Stock?

Treasury stock refers to previously outstanding stock that is bought back from stockholders by the issuing company. There are two methods to record a firm’s treasury stock: the market value method and the par value method.

The market value method uses the market value paid by the company during a repurchase of shares and ignores their par value. In this case, the cost of the treasury stock is included within the stockholders’ equity portion of the balance sheet.

Under the par value method, the treasury stock account is debited when shares are repurchased. This decreases the total shareholder’s equity in the amount of the par value of the shares being repurchased. It is common for stocks to have a minimum par value, such as $1, but sell and be repurchased for much more.

The Bottom Line

As an investor, it’s important to understand the difference between par and market values. The term par value refers to an asset’s face value or the (original) price when it is issued while the market value is the price at which investors are willing to acquire an asset at any given time. Par values are important for people who invest in bonds because they represent the principal amount that is repaid to them at maturity in addition to any interest. Market values are used for stocks because their prices fluctuate during the trading day.

Reviewed by Eric Estevez
Fact checked by Vikki Velasquez

A restaurant can measure success through customer return visits and reviews from local media. Seven key ratios can help measure financial profits and ongoing costs and revenues. Keeping track of them allows owners to make adjustments to maintain the level of profitability the business needs to thrive.

Key Takeaways

• Financial ratios help measure how efficiently a restaurant is operating.
• Food costs, inventory control, and floor space can be evaluated.
• Restaurant owners and investors use financial data to identify where changes are needed.

Prime Costs to Total Costs

In the restaurant industry, prime costs include food, beverages, management, hourly staff, and benefits expenses. A rule of thumb is that the prime costs of a restaurant should equal 60% or less of the restaurant’s total sales figures.

The ratio is higher for a company that owns the structure in which it operates and does not have rent or mortgage payments to pay. Prime costs higher than these percentages may indicate that some costs can be trimmed.

Specific Food Cost to Total Cost

Food cost to total cost is used to measure the real expenses of specific products on the menu. This metric is especially useful if changes to the menu are planned. The food cost that is tracked can be for a specific menu item or a group of items. This metric is useful in determining if specific menu items should be discontinued.

For example, a restaurant may find that it is spending 20% of its total food costs on buying the ingredients for hamburgers, even though only 5% of its sales are of hamburgers. Or, 40% of food costs may be spent on seafood, even though fish is not the menu item the restaurant is known for.

Inventory Turnover

Restaurants depend on perishable goods, making it especially important that their managers maintain appropriate inventory. The inventory turnover ratio is calculated by dividing net sales by the average cost of inventory.

A metric materially higher than industry averages may suggest that inventory purchases are insufficient, that quantity discounts are not being exploited, or that the business is risking shortages of supplies. A calculation substantially lower than average might mean that too much food is being purchased, that business has slowed, or that food quality is declining due to a lack of fresh products.

Important

The U.S. Department of Agriculture estimates that 30% of the food supply is lost or wasted at the retail and consumer levels.

Sales Per Square Foot

Restaurants determine how efficiently floor space is being used by analyzing the sales per square foot ratio. This financial metric divides the total sales for a period by the total square footage of the restaurant location.

This number may lead to improvements in the layout of the restaurant and the use of the available space. It may help identify ways to expand seating or the need to replace bulky or underused equipment.

Revenue Per Seat

To calculate revenue per seat, the total dollar amount of revenue earned on a given night is divided by the total number of available seats in the restaurant.

This metric is most useful to management when it plans to reduce or expand the number of available seats. It also can be used to analyze the real benefits of renovation costs that would be incurred.

Food/Beverage Expenses to Sales

The food/beverage expense-to-sales ratio gauges how well the company is profiting on each item served. It can be broken down to a specific menu item, such as salmon, a food group, such as seafood, or as an aggregate, such as all food served.

By using this metric for a menu item, management and investors can understand the profit margin per item and whether changes are necessary for pricing or the menu.

Restaurants can use the Food & Drug Administration’s (FDA) Food Traceability Rule to quickly identify, and remove potentially contaminated foods from distribution.

Current Ratio

The current ratio is calculated by dividing assets on hand by liabilities incurred. This metric measures the liquidity of an organization.

A current ratio greater than one indicates that a company can pay its short-term debts using only short-term assets if liquidation is necessary. It is an indication of the company’s ability to pay for items in the short term, including food, beverages, and staff wages.

How Do Restaurants Measure Inventory?

While many restaurants may rely on traditional counts or tally sheets, most restaurants use cloud-based software programs for inventory management. They give owners real-time tracking integrated into the point-of-sale system and can break down the costs of individual recipes by ingredients. They also allow for ordering and purchasing links.

How Do Food Manufacturers Determine Food Quality Dates?

Restaurants and retail stores rely on quality dates to determine the shelf life of food products. Dates depend on factors such as the length of time and the temperature at which a food is held during distribution and offered for sale, and the type of food and its packaging.

What Do Sales Reports Tell Restaurant Owners?

Food and beverage sales reports can be generated daily, weekly, or monthly. They can detail sales by menu item and per employee.

The Bottom Line

Financial data helps restaurant owners zero in on details that affect profitability. Analyzing sales, inventory, and cost information allows restauranteurs to address low-profit areas quickly and plan for future investment.

Starting your own business remains a potent dream in the U.S. But most of us don’t have bundles of cash stored away to help get us started.

The good news? You don’t always need thousands of dollars to launch a successful venture. Many businesses can be started with $500 or less, depending on the skills you have or they could be acquired with relative ease.

Key Takeaways

• With $500 or less, it’s possible to start many types of small businesses.
• Better small business ideas will leverage the talents and interests you already have.
• Many of these businesses can be started as side hustles before becoming full-time ventures.
• Before getting started, you’ll want to gauge the local market and the risks associated with the business.

Here are 12 ideas to get you thinking about how you might get started:

1. Online Tutoring/Teaching

The e-learning market continues to expand, creating opportunities for subject matter experts in virtually any field. Beyond traditional academic tutoring, consider teaching specialized skills like coding, language learning, music, or creative arts via platforms like Zoom.

Typical startup costs:

• Video conferencing subscription (many platforms offer free tiers)
• Basic teaching materials
• Website or profile on tutoring platforms

Potential earnings: $25 to $75+ per hour, depending on specialization and expertise

2. Podcast Production

With over three-quarters of Americans listening to a podcast in the past month, demand for quality audio content is booming. If you have an ear for audio quality and storytelling, you can offer editing, production, and management services to podcasters.

Typical startup costs:

• Quality microphone ($100 to $200)
• Editing software (many free options available)
• Headphones
• Portfolio website

Potential earnings: $30 to $100+ per edited hour of content

Important

Most new businesses start with clients in their existing network for early validation and testimonials.

3. Social Media Management

A digital presence is now crucial for most businesses, so many smaller companies need expert help managing their social media accounts. If you understand platform algorithms and content creation, this business requires virtually no startup costs.

Typical startup costs:

• Portfolio website
• Social media scheduling tools (many offer free tiers)
• Basic graphic design tools

Potential earnings: $20 to $50+ per hour or $500 to $2,500+ monthly per client

4. Handyman Services

Demand for home repairs and minor maintenance work remains consistently strong. Think broadly for all kinds of home-based services: if you own specialized tools like a pressure washer or are great with a paintbrush, you can use that to help pay many of your monthly bills.

Typical startup costs:

• Basic tools
• Business cards and local advertising
• Liability insurance

Potential earnings: $25 to $50+ per hour, depending on location, tools involved, and specialization

Post-pandemic, you don’t need one of these small businesses to work from home. The U.S. Bureau of Labor Statistics (BLS) says that about 35% of full-time employees worked at least some of their time remotely. That rate climbs with the level of education: about half of those in the private sector with a bachelor’s degree work remotely at least in part, compared with less than a quarter of those with only a high school diploma.

5. Personal Training

You can help clients achieve their fitness goals with minimal equipment through customized workouts and nutrition advice.

Typical startup costs:

• Certification ($200 to $400, highly recommended)
• Basic fitness equipment
• Insurance
• Marketing

Potential earnings: $30 to $100+ per session, depending on location and specialization

Set aside time weekly for business development, not just client work.

6. Virtual Assistant

Remote work has dramatically increased demand for virtual administrative support. Organized individuals can provide calendar management, email handling, data entry, and other administrative tasks remotely.

Typical startup costs:

• Computer and reliable internet
• Professional communication tools
• Portfolio website
• Productivity and other software

Potential earnings: $25 to $50+ per hour, depending on specialization and experience

7. Mobile Notary Service

As a mobile notary, you travel to clients to witness and validate important document signings. This service requires state certification but minimal equipment to start.

Typical startup costs:

• Notary commission ($50 to $300 depending on state)
• Surety bond (if required)
• Notary stamp and journal
• Transportation

Potential earnings: $50 to $200+ per signing appointment, with higher rates for specialized services

8. Personal Concierge Services

Time-starved professionals increasingly outsource personal tasks, from grocery shopping to appointment scheduling. This flexible business allows you to offer services that match your strengths.

Typical startup costs:

• Transportation
• Organizational tools
• Business cards and local marketing
• Listing on gig platforms

Potential earnings: $25 to $50+ per hour, depending on service complexity

9. Holiday Decorating/Event Planning

Help clients create memorable celebrations with professional decorating and planning services. This seasonally variable business allows for creativity while requiring minimal equipment.

Typical startup costs:

• Basic decorating tools
• Portfolio documentation
• Business cards and local marketing
• Planning software (many free options available)

Potential earnings: $50 to $100+ per hour for decorating services, $10 to $20 an hour for event planning services

10. Pet Services

With about two-thirds of U.S. households owning pets, services like dog walking, pet sitting, or basic grooming remain in high demand.

Typical startup costs:

• Pet supplies
• Business insurance
• Listing on pet service apps
• Local marketing

Potential earnings: $15 to $25 per dog walk, $40 to $80 per day for pet sitting, or $30 to $90 per grooming session

11. Personal Chef/Meal Prep Service

With busy schedules and growing interest in healthy eating, many people seek convenient, home-cooked meal solutions. As an at-home chef, you can prepare weekly meals, cater small gatherings, or offer cooking classes from your own kitchen.

Typical startup costs:

• Basic cooking supplies and containers
• Food handler’s permit ($100 to $200 in many areas)
• Liability insurance
• Marketing materials and sample menus
• Initial ingredient investment

Potential earnings: $25 to $50+ per hour for meal prep services, $300 to $1,000+ for catering small events

If you find initial success and want to make your business a full-time venture, you’ll want to have an emergency fund that can cover three to six months of expenses.

12. Garden/Landscaping Maintenance

Many homeowners want beautiful outdoor spaces and fresh flowers and veggies sprouting in the spring but lack the time or expertise to maintain them. That puts garden maintenance services in demand. This business requires minimal startup costs and can be scaled from a simple mowing service to comprehensive landscape management.

Typical startup costs:

• Basic gardening tools (pruners, shovels, rake): $150 to $200
• Lawn mower (used): $100 to $250
• Leaf blower: $50 to $100
• Work gloves and personal protective equipment: $30 to $50

Potential earnings: Basic lawn mowing: $50 to $200 per yard, garden maintenance: $40 to $60 per hour, or seasonal services (fall cleanup, spring preparation): $100 to $300 per job

The Bottom Line

Starting a small business doesn’t require massive capital investment. By using or adding to your existing skills and focusing on services with low overhead, you can build a profitable business with an initial investment of less than $500.

Fact checked by Suzanne Kvilhaug

Before 401(k) plans, there were 501(c)18 plans offered by employers to employees in select industries. These plans, which started in the 1950s, are still around today.

“A 501(c) plan is a lesser-known, specialized retirement savings account primarily used by employees in certain unionized industries. It predates modern retirement plans like 401(k)s and is structured as a tax-exempt trust,” says Daniel Milks, a certified financial planner and founder of Fiduciary Organization.

Key Takeaways

• A 501(c)18 plan is a specialized employee pension benefit plan used in niche fields such as union trades.
• Contributions are made after taxes, and the money in the plan grows tax-deferred.
• Once in retirement, distributions are taxed as ordinary income.

What Is a 501(c)18 Plan?

A 501(c)18 plan is a type of trust that forms part of an employee pension benefit plan. To qualify for tax-exempt status, a 501(c)18 plan must:

• Have been created before June 25, 1959
• Be a valid, existing trust under local law
• Be evidenced by an executed written document
• Be funded solely from contributions by employees who are members of the plan

How Contributions Work

There are no upfront tax savings with contributions to a 501(c)18 plan.

“(Contributions) are typically made by employees on an after-tax basis, meaning there’s no immediate tax deduction for contributions,” Milks says.

Interaction With Other Retirement Plans

Because contributions are made after taxes, 501(c)18 contributions won’t impact contribution limits on other retirement plans.

“Unlike traditional retirement accounts, a 501(c)(18) plan is rarely an employee’s primary savings vehicle. Since contributions are made after-tax, they don’t affect 401(k) or IRA contribution limits, allowing savers to diversify their tax treatment across different accounts,” Milks says.

Tax Implications

One tax advantage of a 501(c)18 plan is money in the plan grows tax-deferred.

“While contributions are not tax-deductible, the growth within the plan remains tax-deferred, and distributions in retirement are typically taxed as ordinary income,” Milks says.

Niche Retirement Plan

A 501(c)18 plan is a specialized retirement plan only found in select fields and trades. According to the Internal Revenue Service, 501(c)18 plans were created before June 25, 1959. Because these trusts were formed so long ago, a newer organization isn’t likely to apply or get this status.

“Most workers today won’t encounter a 501(c)(18) plan unless they’re in a niche field where these plans were historically used, such as certain unionized trades,” Milks says.

Can You Roll Over a 501(c)18 Plan?

A 501(c)18 plan cannot be rolled over into an individual retirement account or 401(k) plan.

“These plans are structured differently from traditional retirement accounts and are funded with after-tax contributions, meaning they don’t have the same rollover provisions as tax-deferred accounts,” Milks says.

How Soon Can You Make Withdrawals From a 501(c)18 Plan?

Withdrawals from a 501(c)18 plan are meant for retirement and may be made without penalty when the participant reaches age 59½.

“Withdrawals typically follow similar rules to other retirement accounts, meaning funds are intended for retirement use,” Milks says. “While specific rules may depend on the plan structure, early withdrawals (before age 59½) could be subject to income tax and potential penalties unless an exception applies. Since contributions are made with after-tax dollars, only the investment growth portion may be taxable upon withdrawal.”

How Do Terms in Union Contracts Affect 501(c)18 Plans?

“Some union contracts include negotiated terms for 501(c)18 plans such as mandatory contributions or employer-matching provisions, and there may be specific vesting schedules or restrictions when funds can be accessed,” Milks says.

The Bottom Line

Begun in the 1950s, 501(c)18 plans continue to serve as tax-exempt retirement trusts for employees in specialized trades. Contributions to 501(c)18 plans are made with after-tax dollars, and the money an employee puts into the plan grows tax-deferred. Plan distributions made by employees in retirement are taxed as ordinary income. Union contracts may set terms for 501(c)18 plans, including employer-matching contributions, mandatory contributions, and vesting schedules.

Finding affordable housing is always a challenge, but it’s especially difficult for low-income people with a disability. Homelessness can be a real risk when appropriate, affordable housing is difficult to access.

The U.S. Department of Housing and Urban Development (HUD) and the U.S. Department of Health and Human Services (HHS) fund housing programs for families and individuals who find themselves in this position. State, county, and local programs exist as well.

Key Takeaways

• Low-income housing options for the disabled are available through the housing subsidy voucher programs of states’ public housing authorities.
• Different voucher programs are aimed at different populations, depending on specific criteria; eligibility requirements vary for each program.
• Finding and applying for the right HUD or other federal program can be complex; the waiting lists are long and may close when demand is too high.
• Many states run their own housing assistance programs in addition to those offered by federal agencies, so individuals or families should explore local options as well.

Affordable Housing Options If You Have Low Income

HUD and HHS fund state, county, and local municipalities that administer the various programs. Applicants access the benefits by applying through their local public housing authority (PHA).

Nationally, the HUD housing voucher programs are the most important source of assistance for low-income families with a family member with a disability. The grants are administered through state and local PHAs and have the same eligibility criteria regarding income level and amount of financial help provided.

The demand for vouchers and other types of housing support far outstrips the funding available. The process can take years.

HUD Voucher Programs

All HUD voucher programs are aimed mainly at households with extremely low incomes, meaning incomes that do not exceed the poverty line or 30% of the local median, whichever is greater.

A family with a voucher generally must pay 30% of its income for rent and utilities; the voucher covers the balance, up to a certain amount, with the percentages and limits varying according to local market housing costs. Housing agencies may establish a higher payment standard as a reasonable accommodation for a person with a disability.

In practice, income and eligibility requirements can be adjusted by the local PHA to meet local conditions. The PHAs administering the voucher program will give priority to the families most in need—for instance, homeless families, families living in substandard housing, or families whose income is so low that they’re paying more than 50% of their income on rent.

The housing choice voucher (HCV) program is the main housing subsidy program. This program alone helps more than 5 million individuals and more than 2.3 million households nationally. Its goal is to assist “very low-income families, the elderly, and the disabled to afford decent, safe, and sanitary housing in the private market.” 

There is no requirement that there be a disabled person in the household to qualify for an HCV, but having a person with a disability is considered when reviewing their application. 

Mainstream vouchers are specifically designed to help families who have a disabled person, ages 18 to 61, in the household. With the exception of serving applicants under age 62—mainstream vouchers follow the same criteria as other housing choice vouchers.

Non-elderly disabled (NED) vouchers are very similar to the mainstream vouchers, the chief difference being the target population: families where the head, co-head, or spouse in the family is disabled. Like the other vouchers, applications go through the local PHA.

The Housing Opportunities for Persons With AIDS (HOPWA) program is a federal program to assist low-income people living with HIV/AIDS and their families. Granters partner with nonprofit organizations and housing agencies to provide housing and support to these beneficiaries.

HUD VA Supportive Housing (VASH) vouchers are dedicated to U.S. military veterans and their families who are experiencing homelessness or are at risk of losing their homes. The VASH program combines HUD’s HCV rental assistance for homeless veterans with services provided by the Department of Veterans Affairs (VA). As of 2023, this program had dispensed more than 112,000 vouchers to eligible veterans.

HUD provides rental assistance vouchers through state PHAs for privately owned housing. Information is available through your state’s PHA.

Warning

Housing 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 that you can take. One such step is to file a report with the Consumer Financial Protection Bureau (CFPB) or with HUD.

Types of Housing Vouchers

HUD vouchers take two main forms:

Tenant-Based Vouchers

These vouchers “follow the person,” meaning that the family who receives the voucher can remain in the housing that they already occupy, provided that the building meets the required housing quality standards established by HUD.

Once the resident receives the voucher, they inform the building owner or manager to request that the voucher be used to pay for a portion of the rent. If the building hasn’t been certified, a HUD housing inspector will inspect it. If the resident wants to move to a different location, even another state, their voucher “travels” with them.

Project-Based Vouchers (PBVs)

These vouchers are attached to specific units in a specific building or project, whose landlord contracts with the state or local PHA to rent to families and individuals with low incomes and disabilities.

For elderly or disabled tenants, PBVs have the advantage of offering more services closer to hand because a higher percentage of residents in the project have similar needs, which enables service providers to work more efficiently.

How to Apply for a HUD Voucher Program

For all HUD voucher programs, people seeking assistance should contact the PHA in their area that administers a voucher program and has an open waiting list. Once the voucher is granted, the tenant receives a list of PHA-approved units to choose from or can apply to remain in their current unit.

Referrals to Voucher Programs

Some properties rely on referrals from state agencies for applicants—i.e., the disabled applicant’s caseworker. These properties are privately owned and managed, and are generally developed to serve the following populations: people who are chronically mentally ill, people who are developmentally disabled, or people who are physically disabled and would benefit from the features of the unit.

HUD-Approved Housing Counseling Agencies

If you’re just starting out, it can be time-consuming and confusing to track down the correct information for your situation. HUD-approved housing counseling agencies offer guidance.

The Administration for Community Living (ACL), an agency within HHS, directs funds to several housing programs for the disabled. One of the ACL’s main goals is to move disabled individuals out of large institutional settings and into smaller group residences. The ACL’s Centers for Independent Living provide links to programs and agencies state by state.

The ACL also supports the Aging and Disability Networks—local, state, and national organizations that support older adults and people with disabilities in their desire to live independently in the community. The focus of an agency can be a specific condition or disability, age group, or service. Some organizations have a wider lens for delivering services.

The Arc is a national organization that helps individuals with intellectual and developmental disabilities and their families live productive lives integrated into their communities. The Arc’s state offices can assist people seeking resources and programs in their area.

No Wrong Door (NWD) is a collaboration among the ACL, the U.S. Centers for Medicare and Medicaid Services, and the Veterans Health Administration of the U.S. Department of Veterans Affairs (VA). NWD supports state services for older adults, people with disabilities, and their families.

Eldercare Locator is aimed at an older population, but this online network can help connect people to state and local services who are knowledgeable about low-cost housing options in their area.

How Do I Apply for a U.S. Department of Housing and Urban Development (HUD) Voucher Program?

A good place to start is to contact the public housing authority (PHA) in your area that administers a voucher program and allows applicants onto the waiting list.

How Do I Find Low-Cost Housing Resources Near Me?

The HUD website lists counseling agencies by state, or you can call (800) 569-4287. Look for an agency that lists “Rental Housing Services.”

Can Military Service Veterans Get Assisted Housing?

Veterans Affairs Supportive Housing (VASH) combines HUD’s rental assistance for homeless veterans with services provided by the U.S. Department of Veterans Affairs (VA). Contact a VA medical center near you and mention your interest in HUD-VASH, or find instructions for contacting the National Homeless Veteran Call Center here.

The Bottom Line

Low-income people with a disability will likely find it especially challenging to obtain affordable and accessible housing. Two federal agencies, HUD and HHS, have partnered to create a more coordinated approach to services. These programs are different from low-income loan programs offered by some lenders.

States and communities have siloed housing and service systems, according to a release about the partnership. A stronger collaboration among systems would enable older adults and people with disabilities, among other populations, to better access supportive services for housing stability.

Reviewed by Chip Stapleton
Fact checked by Vikki Velasquez

You can’t use your 401(k) account as collateral for a loan. Internal Revenue Service (IRS) regulations prohibit it. However, you may be able to borrow money from your 401(k) account.

You’ll be borrowing money from yourself, and paying it back to yourself.

Key Takeaways

• The IRS doesn’t allow you to use funds in your 401(k) account as collateral for a loan.
• Under certain circumstances, you can borrow from your 401(k) if your plan permits it.
• Taking a loan from your 401(k) comes with drawbacks that need to be considered.

Why 401(k) Funds Are Off-Limits

A 401(k) plan has some great features, such as tax-deferred status (for traditional 401(k)s), the potential for matching contributions from an employer, and a catch-up provision for older savers. 

That said, their lack of accessibility can be a drawback. The structure of a 401(k) account is different from that of a traditional individual retirement account (IRA), which is funded directly by an individual.

While an IRA is held in the name of the account holder, a 401(k) account is held in the name of the individual’s employer on the individual’s behalf. The specific 401(k) plan offered by the employer governs the circumstances under which individuals can withdraw money from the account.

Many employers only allow early withdrawals in the event of severe financial hardship.

Protection from Creditors

Moreover, 401(k) accounts are specifically protected from creditors by the Employee Retirement Income Security Act (ERISA). If a 401(k) were used as collateral for a loan, the creditor would have no means of collecting if the borrower defaulted on the loan.

Finally, taking money out of your 401(k) for any reason before you’re age age 59½ years old is a bad move financially. You could owe a 10% early withdrawal penalty in addition to income tax on the amount withdrawn. Plus, you’re damaging your long-term savings prospects by removing money that was quietly compounding in your account.

Borrowing From a 401(k)

Instead of using a 401(k) account as collateral, an individual may be able to borrow money directly from the 401(k) account. This is an option only if your employer’s plan includes a loan provision. You can request this information from your company’s human resources contact or your 401(k) plan sponsor.

After determining that a loan against your 401(k) is available, make a loan request for the amount you need up to your available limit directly to your 401(k) plan sponsor. For instance, if your 401(k) plan is managed by Fidelity Investments, direct your request there.

Once your plan sponsor processes and approves your 401(k) loan request, you receive a check or direct deposit for the amount requested, minus any loan origination fees.

Borrowing from a 401(k) has both benefits and drawbacks that need to be weighed carefully.

Pros

• You’re borrowing from yourself and repaying yourself. No bank is involved.

• The interest is substantially lower than the rates on an unsecured loan offered by a lender.

• No credit application, credit check, or underwriting is required.

Cons

• If you leave your job you’ll owe the entire loan balance immediately. If you can’t repay it you’ll owe taxes and, if you’re not at least age 59½ years old, a 10% penalty.

• You’re lowering the balance in your retirement account for a prolonged period of time. You may never fully make up the loss.

• You may be paying yourself but you’re adding another regular bill to your expenses.

Source: Internal Revenue Service

401(k) Loan Limits

The IRS allows an individual to borrow whichever is less: up to $50,000 or 50% of the account’s vested value (the amount in an individual’s 401(k) that they would receive in the event they left their job).

Important

Some plans require a spouse’s consent for a loan of more than $5,000.

While this restriction is the same for nearly all employer-sponsored plans, companies vary on which limitations are placed on the use of loan proceeds.

With some 401(k) plans, employees are only allowed to take a loan to pay for medical expenses not covered by insurance or education expenses for a spouse or child. In other cases, they can use loan funds for a down payment on a home purchase or for general financial hardship.

The 50% loan limit may not apply in the event an individual’s vested account value is less than $20,000. In that case, the individual may be allowed to borrow as much as $10,000 from the account provided the vested account value is at least $10,000.

How Would I Repay a Loan from My 401(k)?

The principal and interest on the loan will be made through payroll deductions. Note that the interest as well as the principal is going into your account, as you’re repaying yourself.

Most employers limit most loan terms to five years or less.

If you leave the job before the loan is repaid, you have until October of the following year to put the money back. If the loan is not repaid by then, it is designated as a premature distribution of funds and is subject to income taxes plus a 10% early withdrawal penalty for borrowers under age 59½.

Why Can’t I Just Withdraw Money from My 401(k)?

The IRS slaps a 10% penalty in addition to requiring full repayment of income taxes on the balance for withdrawing money from your account early. There is a long list of exceptions to the rule on the penalty, for money used for a down payment on a first home, among many other reasons. However, you would still owe all income taxes due on the money withdrawn in the year in which it is withdrawn.

What Can I Use as Collateral for a Loan?

Businesses routinely use business assets as collateral. The buildings, land, and equipment they own can be collateralized.

It’s tougher for individuals. If you own a house, a car, or some other valuable asset outright, it can be used as collateral. A regular savings account also can be used as collateral.

The Bottom Line

Your 401(k) account balance is off-limits as collateral for a loan. However, an alternative source of money is a loan from the balance in your 401(k). You’ll be loaning your own money to yourself, and repaying it to yourself.

If that interests you, check whether your 401(k) plan permits such loans.

Reviewed by Somer Anderson
Fact checked by Suzanne Kvilhaug

Debit notes are a form of proof that a business has created a legitimate debit entry in the course of dealing with another business. This might occur when a purchaser returns materials to a supplier and needs to validate the reimbursed amount. In this case, the purchaser issues a debit note reflecting the accounting transaction.

A business might issue a debit note in response to a received credit note. Mistakes (often interest charges and fees) in a sale, purchase, or loan invoice might prompt a company to issue a debit note to ensure that the accounts are accurate.

Key Takeaways

• A debit note is a written transaction that states one business has taken financial action as a result of dealing with another business.
• The note corresponds to a debit note in an accounting log, serving as a record of a revision.
• Business-to-business transactions use both debit and credit notes.

Debit Notes in Transactions

Debit notes and credit notes are used mostly in business-to-business (B2B) transactions.

They correspond to debit and credit entries in accounting logs, serving as documentation of a prior business transaction. They may also be referred to as debit memos.

An example of a debit note would be a corrected invoice for an earlier under-billed invoice from a supplier. Another example would be a retailer seeking reimbursement after returning products to its supplier.

Debit notes include the same general information: the date of the note, a serial number, a brief description of the prior business transaction, details of items returned (including sales taxes and a reference to the invoice), and the signatures of appropriate company authorities.

Note

Debit notes, debit memos, debit receipts, and invoices are similar documents. All are records of financial transactions between businesses.

You are most likely to hear about a debit note following an under-billed invoice. Suppose a supplier shipped $10,000 worth of materials to a client, but only sent an invoice for $9,500. Upon realizing its mistake, the supplier would submit a debit note to its client for the difference of $500 to resolve the issue and make any proper adjustments to its accounting records.

Debit Receipts

There is some ambiguity between the terms debit note and debit receipt. The terms are sometimes used interchangeably.

However, a debit receipt customarily means a written record indicating that a customer owes money to a company. It is rare to see the term debit receipt used for B2B transactions.

Invoices

A debit note or debit receipt is similar to an invoice. The main difference is that invoices always show a sale, while debit notes and debit receipts reflect adjustments or reversals of transactions that have already taken place.

Important

B2B transactions are based on credit. Vendors send shipments to companies and invoice the companies for the amounts owed only after delivery. Debits and credits are the accounting methods used to keep track of these transactions.

Debit notes can be substituted for traditional invoices when a product or service is delivered that is outside of the normal scope of business. This helps distinguish the transaction for both accounting departments and keeps the issuing company from creating a new type of invoice.

Material Returns

Debit notes can be seen as claims against business errors. In the case of returned goods from a purchaser to a vendor or supplier, the debit note shows the change in the accounting logs and requests a return of funds (credit). The supplier or vendor often sends a credit note as proof of the reversal.

For example, say company XYZ returns material to its supplier, company ABC. To record the amount it should be reimbursed, XYZ drafts a debit note. The original purchase was for $5,000, so the debit note should reflect the cost of materials plus local sales tax. The taxes and cost of goods should be separate line items in the note.

Upon receipt, ABC would create a small credit note as proof of understanding, then proceed to reimburse (or offer credit to) company XYZ.

Interest/Commission Receivable

Suppose one business owes interest to a creditor or commission to a third party for services rendered. In such a case, the debit note is normally issued to respond to a received credit note, but a debtor could always issue one unprompted.

Commission receivable debit notes are common between parent companies and subsidiaries. Interest receivable debit notes can be used to adjust prior payments or as a simple form of record keeping.

When Are Debit Notes Most Often Used?

Debit notes are most often used to adjust an outstanding balance due when goods have been returned to a vendor. They could be viewed as requests for a balance adjustment or credit.

What Is the Purpose of a Debit Note?

Debit notes, used only in business-to-business dealings, keep the books straight on both sides of a transaction. They resolve discrepancies that occur only after a transaction appears to have been completed.

Can I Use Business Software to Create Debit Notes?

Yes. Major business-to-business accounting software products allow businesses to create debit notes as needed.

The Bottom Line

Debit notes are issued when a debit entry adjustment is required because money is owed. They are primarily found in under-billed invoices. That is, a supplier has sent an invoice to a customer for a lower amount than it should have charged.

A debit note stipulates the amount of money owed by one of the parties to the other.

How well can current assets cover current liabilities?

Reviewed by Amy Drury

The acid-test ratio (ATR), also commonly known as the quick ratio, measures the liquidity of a company by calculating how well current assets can cover current liabilities. The quick ratio uses only the most liquid current assets that can be converted to cash in a short period of time.

Key Takeaways

• The acid test, or quick ratio, involves assessing a company’s balance sheet to see whether it has enough funding on hand to cover its current debt.
• It is seen as more useful than the often-used current ratio since the acid test excludes inventory, which can be hard to liquidate quickly.
• In the best-case scenario, a company should have a ratio of 1 or more, suggesting the company has enough cash to pay its bills.
• Too low a ratio can suggest a company is cash-strapped, but in some cases, it just means a company is dependent on inventory, like retailers.
• Too high a ratio could mean a company is sitting on cash, but in some cases, that’s just industry-specific, like with some tech companies.

What You Need to Calculate the Acid-Test Ratio

All of the information necessary to calculate the acid-test ratio can be found on a company’s balance sheet and includes the following: 

Current assets or all assets that can be converted into cash within one year:

• Cash and cash equivalents
• Marketable securities
• Accounts receivable

Current liabilities or a company’s debts or obligations that are due within one year:

• Short-term debt
• Accounts payables
• Accrued liabilities and other debts

Calculating the Acid-Test Ratio

The ratio is calculated by totaling cash and equivalents, accounts receivables, and marketable investments, and dividing the total by current liabilities as shown below:

Interpreting the Acid-Test Ratio

Ideally, companies should have a ratio of 1.0 or greater, meaning the firm has enough liquid assets to cover all short-term debt obligations or bills.

The acid-test ratio can be impacted by other factors such as how long it takes a company to collect its accounts receivables, the timing of asset purchases, and how bad-debt allowances are managed.

Certain tech companies may have high acid-test ratios, which is not necessarily a negative, but instead indicates that they have a great deal of cash on hand.

The acid-test ratio is a more conservative measure of liquidity because it doesn’t include all of the items used in the current ratio, also known as the working capital ratio.

The current ratio, for instance, measures a company’s ability to pay short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The acid-test ratio is more conservative than the current ratio because it doesn’t include inventory, which may take longer to liquidate.

1.0

The minimum acid-test ratio a company should have. Firms with a ratio of less than 1 are short on liquid assets to pay their current debt obligations or bills and should, therefore, be treated with caution.

Because the acid test is a quick and dirty calculation, other ratios that include more balance sheet items, such as the current ratio, should be evaluated as a more comprehensive check on liquidity if the acid test appears to fail.

Example

Consider Tesla’s (TSLA) balance sheet for Q1 2024.

The information we need includes Tesla’s Q1 2023 cash & cash equivalents, receivables, and short-term investments in the numerator; and total current liabilities in the denominator.

Cash & equivalents total $22.4 billion + $3 billion in receivables = $25.4 billion (there are no short-term investments listed). Current liabilities total $27.4 billion.

The acid-test ratio for TSLA in Q1 2024 is therefore $25.4 / $27.4 = 0.93

This value is below 1.0, indicating that Tesla’s liquidity is tight and that it may have trouble meeting its short-term obligations.

What Is the Difference Between the Current Ratio and the Acid-Test Ratio?

The acid test or quick ratio only includes the most liquid current assets in the numerator. The current ratio instead uses total current assets, which includes additional items such as inventories that may not be as liquid.

What Does the Acid Test Tell You?

The acid test provides a back-of-the-envelope calculation to see if a company is liquid enough to meet its short-term obligations. In the worst case, the company could conceivably use all of its liquid assets to do so. Therefore, a ratio greater than 1.0 is a positive signal, while a reading below 1.0 can signal trouble ahead.

What Is the Difference Between Liquidity and Solvency?

Liquidity corresponds with a company’s ability to immediately fulfill short-term obligations. Ratios like the acid test and current ratio help determine a firm’s liquidity. Solvency, although related, refers to a company’s ability to instead meet its long-term debts and other such obligations. A company may be illiquid but solvent, for example, or vice-versa.

The Bottom Line

No single ratio will suffice in every circumstance when analyzing a company’s financial statements. It’s important to include multiple ratios in your analysis and compare each ratio with companies in the same industry.

Reviewed by Eric Estevez
Fact checked by Michael Rosenston

The direct cost margin is calculated by taking the difference between the revenue generated by the sale of goods or services and the sum of all direct costs associated with the production of those goods, divided by the revenue generated by these goods or services.

Expressed as a percentage, the direct cost margin indicates what portion of each revenue dollar is retained as profit after accounting for only those expenses incurred for the production of goods and services.

The direct cost margin is often referred to as the gross margin and is an important metric in corporate finance.

What are Direct Costs?

Direct costs are those expenses that can be directly linked to items for sale. For manufacturers, this includes raw materials such as lumber, paint, hardware and the cost of labor needed to build each item. For retail operations, direct costs include the price paid to the wholesaler or manufacturer and any commissions paid to salespeople.

Depending on the operation, it may also include supervisor salaries if the presence of the supervisor is directly and uniquely beneficial to the production or sale of goods. The salaries or wages of employees whose roles are not intrinsically linked to the production or sale of goods are not included as direct costs.

Some other direct costs may include:

• Direct labor
• Direct materials
• Manufacturing supplies
• Wages for the production staff
• Fuel or power consumption related to production

Direct costs are sometimes used synonymously with the cost of goods sold, or COGS.

Calculating Direct Cost Margin

Depending on how revenue and expense data are labeled on company financial documents, this margin may be expressed in two ways:

Direct Cost Margin = (Revenue – Direct Costs) / Revenue

Gross Margin = (Revenue – Cost of goods sold) / Revenue

Measuring Operational Profitability

The direct cost margin is an excellent indicator of whether a company’s most basic expenses are eating into its net profits. A low direct cost margin means relatively little revenue is left over to cover all the other expenses a business incurs in its day-to-day operations. A weak gross margin can easily trickle down to a less-than-impressive net profit margin.

Keeping direct costs down is a crucial component of maintaining a healthy bottom line.