investment

Photo and video sharing, messenger services, and visual positioning

Reviewed by Margaret James

Meta Inc. (META), the company that owns Facebook, the world’s largest social networking website, was founded by CEO Mark Zuckerberg and several Harvard University roommates in 2004. The company’s name initially was FaceMash, which was changed to TheFacebook, eventually dropping “The” from its name to Facebook, before being changed yet again to Meta in October 2021.

Zuckerberg and his co-founders initially launched the service for their Harvard classmates, quickly expanding it to other universities and then to the general public.

Since then, the company has grown into a global giant with a market capitalization of $1.58 trillion as of March 26, 2025. The company reported fiscal year 2024 net income of $62.3 billion on $164.5 billion in revenue, nearly all of which came from advertising.

Meta has expanded far beyond its original social networking platform since its founding. Its products also include messenger services, photo and video sharing, augmented reality, and many other apps and services.

Acquisitions have been key to growing these businesses and Meta’s revenue in general. Meta’s strategy has been to buy potential rivals before they can get too big. In the process, the company sometimes has paid exceptionally high prices for some deals. The majority of the companies Meta has purchased have either been rolled into the company or ceased operations.

The company has also drawn attention from the Federal Trade Commission (FTC) due to potential anticompetitive practices, with the FTC demanding data on unreported purchases from Meta as well as other Big Tech companies.

Below, we look in more detail at some of Meta’s most important acquisitions that still operate as stand-alone entities. The company does not provide a breakdown of how much profit or revenue each acquisition currently contributes to Meta.

Key Takeaways

• Facebook is the world’s most popular social media platform as measured by the number of monthly active users.
• Meta, the company that owns Facebook, also owns Instagram and WhatsApp, two other extremely popular social media platforms.
• The company has made many acquisitions over its history, most of which have been rolled into the company or ceased to exist.

Instagram

• Type of Business: Photo- and video-sharing app
• Acquisition Cost: $1.0 billion
• Acquisition Date: April 9, 2012

Instagram is a photo- and video-sharing social networking platform that was launched in 2010. Through the Instagram app, users can upload, edit, and tag photos and videos.

The company remained independent up until it was acquired by Meta for $1.0 billion in 2012. Meta bought Instagram as the photo-sharing company was garnering significant attention from venture capital firms and other investors. Some estimates indicate that Instagram generates more advertising revenue than its parent company.

When it acquired Instagram, Meta opted to build and grow the Instagram app independently from Meta’s main Facebook platform; Instagram remains a separate platform to this day. The price that Meta paid for Instagram, which at that time was generating no revenue, reflects Meta’s willingness to pay a premium for young companies.

WhatsApp

• Type of Business: Mobile messenger service
• Acquisition Cost: $19.0 billion
• Acquisition Date: Feb. 19, 2014

WhatsApp is a messenger and calling service available to users throughout the world. The platform was launched in 2009 as a low-cost alternative to standard text messaging services.

Throughout much of its history, WhatsApp has allowed users to send messages and make calls directly to other users for no cost, regardless of location. Users can also send photos, videos, and documents over the platform.

Meta bought WhatsApp at a time when the smaller company boasted more than 400 million active monthly users, making it a fast-growing potential rival to the Facebook network platform.

When Meta purchased WhatsApp, it was an independent company that had recently been valued at $1.5 billion. Although it is unclear exactly how much revenue WhatsApp generates, when it was acquired in 2014, WhatsApp generated a revenue of $1.29 million.

Fast Fact

As of March 26, 2025, Meta is the seventh-largest company in the world as measured by market cap.

Scape Technologies

• Type of Business: Visual positioning service
• Acquisition Cost: $40 million (estimated)
• Acquisition Date: January 2020

Meta purchased 75% of Scape Technologies in January 2020. Scape Technologies developed visual positioning services, which further developed location accuracy beyond the capabilities of GPS. The company offered products and services in 3D vision technology, robotics, 3D scanners, and various software. It was liquidated in 2023, according to the United Kingdom government website.

How Many Acquisitions Does Facebook Have?

Facebook, now known as Meta, has made 101 acquisitions over the course of its history, spending over $28 billion on them. These acquisitions include WhatsApp, Instagram, Ozlo, Presize, and Supernatural.

What Was Meta’s Biggest Acquisition?

Meta’s biggest acquisition was WhatsApp in 2014, for which it paid $19 billion. WhatsApp is now the fourth most popular social media platform as measured by the number of monthly active users.

Who Owns the Most Stock in Meta?

After founder Mark Zuckerberg (13.6%), the largest single owner of Meta stock is the investment management firm Vanguard. Vanguard owns 7.8% of Meta’s total shares outstanding. Vanguard Index Funds is next in line, owning almost 7%.

The Bottom Line

Meta is one of the largest companies in the world and a leading technology firm. While it started out as Facebook, the company now owns and operates some of the largest social media platforms in the world, including Facebook, Instagram, and WhatsApp, making it a true powerhouse in the technology world.

Beware of taking out a pension advance loan

Reviewed by Charlene Rhinehart

If you have an asset, you can probably get a loan against it. Your paycheck, your tax return, your home, your 401(k), and, yes, even your pension if you’re one of the relatively few people who still have one.

If you’ve never heard of a pension advance, consider yourself lucky. They’re also called pension sales, loans, or buyouts. Whatever the name, personal finance experts, and government agencies advise steering clear of these products, especially since there are alternatives.

Key Takeaways

• Pension loans are unregulated in the United States.
• Lump-sum loans as an advance on your pension may result in unfair payment plans.
• The Consumer Financial Protection Bureau (CFPB) warns customers of taking out loans against their pensions.
• Most pension plans are protected if you are forced to file for bankruptcy.
• If you need money, seek alternative solutions rather than borrowing against your pension.

How Pension Loans Work

A hypothetical scenario might go something like this: You’re a 65-year-old retired government employee. You receive a monthly payment from your pension, but recently, you’ve fallen on hard times. You need more money than your retirement benefits pay each month to pay one-time bills. The sum you need is substantial, so you start looking around for ways to borrow money. You run across an online ad that offers a lump-sum advance on your pension payments.

After you complete the paperwork, you learn that you have signed over five to 10 years—or all—of your pension payments to the company. Then you learn that the interest rate on the loan is upwards of 100% after all the fees. You also find yourself in a higher tax bracket for the year because the payment came as a lump sum. The above scenario may be hypothetical, but it’s very real in the lives of many retirees. Consumer advocacy groups advise finding other options if you need money fast.

Warning

If you’re receiving a military pension, definitely stay away: It is illegal for any loan company to take a military pension or veteran’s benefits.

Alternatives to Borrowing Against Your Pension

If you find yourself in a financial bind, don’t get a pension advance loan. Try everything else first. Ask your bank or credit union if you are eligible for a short-term loan. Check with your credit card company about a cash advance. The annual percentage rate (APR) on a cash advance from your credit card is high, but by any standards, it’s better than the terms on a pension advance loan.

If you own your home, consider a home equity loan or reverse mortgage. If you are not eligible for any other loan type, contact your creditors and tell them that you’re unable to pay and would like to negotiate a payment plan. This is a good time to contact a credit counseling agency.

As a last resort, you can consider bankruptcy. In most cases, your pension is safe if you file for bankruptcy. Even if you’re in a panic because of mounting bills, don’t sign away the source of income that you will need to live on going forward. Nearly every other financial option is better than a pension advance loan. There are reasons that the Federal Trade Commission (FTC), Consumer Financial Protection Bureau, and personal finance experts advise staying away from these loans.

Qualified distributions are allowed at age 59½, but an exception may allow you to make a penalty-free withdrawal

Fact checked by Suzanne Kvilhaug
Reviewed by David Kindness

Employer-sponsored 401(k) plans allow employees to save a portion of their salary for tax-advantaged retirement investments. Many companies match a percentage of the employee’s contribution and add it to the 401(k) account.

But you may incur a penalty if you take money out before retirement. Generally speaking, you may withdraw funds from your retirement savings account anytime, but if you do so before you reach age 59½, you may face an additional penalty of 10% on top of other taxes.

According to 401(k) withdrawal rules, penalty-free withdrawals (called qualified distributions) are allowed once you reach age 59½. You can also take qualified distributions earlier for certain life events, such as medical expenses. And, after age 72 or 73, depending on the year you were born, you must take required minimum distributions (RMDs) from either a 401(k) or an individual retirement account (IRA).

Here’s a look at the 401(k) withdrawal rules and how you can avoid the 10% early withdrawal penalty.

Key Takeaways

• If you withdraw from a 401(k) before age 59½, you may face a 10% early withdrawal penalty on top of other taxes.
• The IRS allows for hardship withdrawals that usually are not subject to the 10% penalty.
• You may be able to make a penalty-free withdrawal if you meet certain criteria, such as adopting a child, becoming disabled, or suffering economic losses from a federally declared disaster.
• To keep contributing after retirement, you’ll need to roll over your 401(k) into an individual retirement account (IRA) and have earned income that you can add to the account.
• With both a 401(k) and a traditional IRA, you will be required to take minimum distributions starting at age 72 or 73, depending on the year you were born.

401(k) Withdrawals Before Age 59½

Tax-advantaged retirement accounts, such as 401(k)s, exist to ensure that you have enough income when you get old, finish working, and no longer receive a regular salary.

From time to time, you may be eager to tap into your funds before you retire; however, if you succumb to those temptations, you will likely have to pay a hefty price. This can include early withdrawal penalties and taxes: federal and state income taxes and a 10% penalty on the amount that you withdraw.

Most Americans retire in their mid-60s, and the Internal Revenue Service (IRS) allows you to begin taking distributions from your 401(k) without a 10% early withdrawal penalty as soon as you are 59½ years old. But you still have to pay taxes on your withdrawals.

401(k) Penalty-Free Early Distributions

You may be able to withdraw from your 401(k) without incurring the 10% early distribution penalty in the following circumstances:

• You choose to receive a series of substantially equal payments from your account
• You retire, lose your job, or leave to take a new job when you are 55 or older (or 50 if you are a public safety employee, including federal law enforcement officers, corrections officers, and air traffic controllers, among others); this only applies to the 401(k) from the employer you just left
• A court’s qualified domestic relations order requires that you cash out a 401(k) to split it with your ex-spouse
• You’re a domestic abuse survivor (you can withdraw up to $10,000 or 50% of the account, whichever is less)
• You give birth or adopt a child ($5,000 per child for qualified birth or adoption expenses)
• You have a personal or family emergency for which you can take an emergency distribution of up to $1,000 in a calendar year
• You are terminally ill
• You are or become disabled
• You rolled over the account to another retirement plan within 60 days (called a 60-day rollover)
• You are deceased and payments were made to your beneficiary or estate after your death
• The money was used to pay an IRS levy
• You have experienced economic loss due to a federally declared disaster
• You are a qualified first-time homebuyer (no more than $10,000)
• You have unreimbursed medical expenses that are greater than 7.5% of your adjusted gross income (AGI)
• You’re a qualified military reservist called to active duty
• You were automatically enrolled in a 401(k) and you want to get out (within specified time limits), or you made corrective distributions for excess contributions

It’s wise to consult with a tax advisor if you have any questions about whether any withdrawals you make from your 401(k) will involve a penalty as well as taxes.

Can I Cancel My 401(k) and Cash Out While Still Employed?

No, you usually can’t close an employer-sponsored 401k while you’re still working there. You could choose to suspend payroll deductions; however, you would lose pretax benefits and any employer matches.

401(k) Hardship Withdrawals

Under certain circumstances, the IRS allows for what are known as hardship distributions for “an immediate and heavy financial need.” The distribution can only be for the amount required to satisfy that particular financial need, and it must be in compliance with your 401(k) plan terms.

Here are the life events that generally qualify for a hardship withdrawal and that may not be subject to the 10% penalty:

• Medical bills for you, your spouse, or your dependents
• Costs directly related to the purchase of your home (excluding mortgage payments)
• College tuition, related fees, and room and board for the next 12 months for you, your spouse, or your dependents
• Money to avoid eviction or foreclosure on your primary residence
• Funeral expenses for you, your spouse, or your children or dependents
• Certain expenses to repair damage to your home

To qualify for a hardship withdrawal, you must show your plan administrator that you were unable to obtain the needed funds from another source. The distributions are subject to income tax (unless they are Roth contributions; see “Taxes on 401(k) Distributions,” below), and they cannot be repaid into the plan or rolled over into another plan or IRA.

How to Take 401(k) Withdrawals

Depending on your company’s rules, when you retire, you may elect to take regular distributions in the form of an annuity, either for a fixed period or over your anticipated lifetime, or take nonperiodic or lump-sum withdrawals.

When you take withdrawals from your 401(k), the remainder of your account balance continues to be invested according to existing allocations. This means that the length of time over which withdrawals can be taken and the amount of each withdrawal depend on the performance of your investment portfolio.

Taxes on 401(k) Distributions

If you take qualified distributions from a traditional 401(k), all distributions are subject to ordinary income tax. Contributions were deposited from your paycheck before being taxed, deferring the taxation process until the withdrawal date. In other words, when you eventually tap into your 401(k) funds, distributions are treated as taxable earnings for that year, on top of any other money that you make.

On the other hand, if you have a designated Roth account within a 401(k) plan, you have already paid income taxes on your contributions, so withdrawals are not subject to taxation. Roth accounts allow earnings to be distributed tax free as well, as long as the account holder is over age 59½ and has held the account for at least five years.

Keeping Your Money in a 401(k)

Depending on your age, you are not required to take distributions from your account as soon as you retire. While you cannot continue to contribute to a 401(k) held by your former employer, your plan administrator is required to maintain your plan if you have more than $5,000 invested. Anything less than $5,000 will likely trigger a lump-sum distribution.

If you do not need your savings immediately after retirement, then let them continue to earn investment income in the 401(k). As long as your money remains in your 401(k), it is not subject to any taxation.

Important

If your account has $1,000 to $5,000, your company is required to roll over the funds into an IRA if it forces you out of the plan—unless you opt to receive a lump-sum payment or roll over the funds into an IRA of your choice.

Required Minimum Distributions

While you don’t need to start taking distributions from your 401(k) the minute you stop working, you must begin taking required minimum distributions (RMDs) when you turn 73, if you were born in 1951 to 1959, and 75 if you were born in 1960 or later. The age for RMDs had been 72 until Congress passed SECURE 2.0 in December 2022.

If you wait until you are required to take your RMDs, then you must begin withdrawing regular, periodic distributions calculated based on your life expectancy and account balance. While you may withdraw more in any given year, you cannot withdraw less than your RMD.

Converting a 401(k) to an IRA

You cannot contribute to a 401(k) after you leave your job. So, if you want to continue adding money to your tax-advantaged retirement savings, you’ll need to roll over your account(s) into an IRA.

Previously, you could contribute to a Roth IRA indefinitely but could not contribute to a traditional IRA after age 70½; however, the Setting Every Community Up for Retirement Enhancement (SECURE) Act changed the law so you can now contribute to a traditional IRA for as long as you like, provided you have earned money.

Keep in mind that you can only contribute earned income, not gross income, to either type of IRA. So this strategy will only work if you have not retired completely and still earn “taxable compensation, such as wages, salaries, commissions, tips, bonuses, or net income from self-employment,” as the IRS puts it. You can’t contribute money from either investments or your Social Security check, though certain types of alimony payments may qualify.

How to Roll Over Funds

To execute a rollover of your 401(k), you can ask your plan administrator to distribute your savings directly to a new or existing IRA. Alternatively, you can elect to take the distribution yourself; however, in this case, you must deposit the funds into your IRA within 60 days to avoid paying taxes on the income.

Traditional 401(k) accounts can be rolled over into either a traditional IRA or a Roth IRA, whereas designated Roth 401(k) accounts must be rolled over into a Roth IRA.

Traditional IRA and Roth IRA Withdrawals

Like traditional 401(k) distributions, withdrawals from a traditional IRA are subject to your normal income tax rate in the year when you take the distribution.

Withdrawals from Roth IRAs, on the other hand, are entirely tax free if they are taken after you reach age 59½ (or see out a five-year holding period, whichever is later).

However, if you decide to roll over the assets in a traditional 401(k) to a Roth IRA, you will owe income tax on the full amount of the rollover. That’s because with Roth IRAs, you pay taxes upfront (and you haven’t yet paid taxes on contributions made to your 401(k)).

Traditional IRAs are subject to the same RMD regulations as 401(k)s and other employer-sponsored retirement plans; however, there is no RMD requirement for a Roth IRA.

Can I Take All My Money Out of My 401(k) When I Retire?

You are free to empty your 401(k) as soon as you reach age 59½—or 55, in some cases. It’s also possible to cash out earlier, although doing so will trigger a 10% early withdrawal penalty. You still have to pay taxes on your withdrawals, and if you have a large balance, that may move you into a higher tax bracket.

What Is a Hardship Withdrawal?

A hardship withdrawal is a withdrawal from your 401(k) for what the IRS calls “an immediate and heavy financial need.” The type of needs that qualify include expenses to prevent eviction or foreclosure from your home, certain medical expenses, the cost of repairs from casualty losses to your principal residence, and burial expenses, among others. To qualify, you must show that you have no other assets or insurance to cover the need. And your 401(k) plan must allow hardship distributions.

What Proof Do You Need for a Hardship Withdrawal?

If your plan permits hardship distributions, you must supply a statement of financial need and have documents (such as estimates, contracts, bills, and statements from third parties) that substantiate it. Depending on the need, documentation might include invoices from a college or a funeral home, hospital bills, bank statements, or court records. The documentation is for tax purposes and usually doesn’t need to be disclosed to your employer or plan sponsor.

How Long Does It Take to Get a 401(k) Distribution?

Times can vary, depending on who administers the account. For a more precise time frame, contact the HR department of the company for which you worked or the financial institution managing the funds.

What Are My 401(k) Options After Retirement?

Generally speaking, retirees with a 401(k) have the following choices:

• Leave your money in the plan until you reach the age when you start to take required minimum distributions
• Convert the account into an individual retirement account
• Start cashing out via a lump-sum distribution, installment payments, or purchasing an annuity through a recommended insurer

The Bottom Line

Rules controlling 401(k) withdrawals and what you can do with your 401(k) after retirement are very complicated, and shaped by both the IRS and the company that set up the plan. Consult your company’s plan administrator for details. It may also be a good idea to talk to a financial advisor before making any final decisions about your retirement account.

Estimate your monthly loan repayments, interest rate, and payoff date

Fact checked by Rebecca McClay

Amortization is an accounting technique that’s used for several different purposes. Most of us encounter the term when we take out a home mortgage or other loan.

Amortization, in that case, shows how much of each loan payment goes toward paying off principaland how much goes toward interest and the remaining balance on the loan at any given time. If you have a mortgage or similar loan, our amortization calculator will tell you how each of your monthly payments breaks down—and how close you are to paying off the loan completely.

Key Takeaways

• Amortization refers to how much of each loan payment goes to interest and how much to principal.
• At first, most of your payment will be applied to interest, but that gradually changes as your principal is whittled down.
• You can use this amortization calculator to see how your payments break down as well as to run different scenarios for loans with different amounts, terms, or interest rates.

Estimate Your Monthly Amortization Payment

Traditional, fixed-rate mortgages and other self-amortizing loans are structured so that you make equal payments each month (or other period) until you have paid off everything you owe. While your payments never change, the portion that goes toward interest and the portion that goes toward your loan’s principal will change each month. At first, the bulk of each payment will go toward interest, with a small amount applied toward the principal.

As you continue to pay down the loan, those principal payments will begin to add up. So, each time your outstanding principal is multiplied by the interest rate on your loan, your interest payment will decline a bit.

Since you’re still paying the same amount overall, more of each payment will now go toward the principal, continuing to reduce the interest portion of your payment. Eventually, the bulk of your payment will go toward the principal and smaller amounts toward interest. And ultimately, your loan principal and the loan itself will be completely paid off.

Using the amortization calculator above will show you how this works for your specific loan.

Amortization Calculator Results Explained

The amortization calculator needs just three pieces of information from you:

• Your loan amount
• The term (or length) of the loan, in years or months
• The annual interest rate on your loan

Suppose you’re borrowing $300,000 on a 30-year mortgage at a fixed interest rate of 7%. Plugging those numbers into the amortization calculator will tell you a number of things.

For example, your monthly payment will be $1,995.91.

Of your first $1,995.91 payment, $1,750 will go to interest and just $245.91 to principal. Your second payment will represent $1,748.57 interest and $247.34 principal. And so on until the loan has been paid off after 30 years and 360 payments.

The calculator will also tell you that you’ll have paid $718,527 when all is said and done—the original $300,000 you borrowed plus $418,527 in interest.

What Is an Amortization Schedule? 

Our amortization calculator also produces an amortization schedule, which lists each payment on your loan, divided into principal and interest, as well as the total amount you still owe as of that point.

Important

Your lender should provide you with an amortization schedule, but if you lose track of it, you can always create a new one with this amortization calculator.

How Can You Calculate an Amortization Schedule on Your Own?

If, for some reason, you wanted to create your own amortization schedule, you can do so with a spreadsheet program like Microsoft Excel.

You’d start by calculating your monthly payment (if you don’t already know it), using Excel’s PMT function. Following our example above, for a loan with a 7% interest rate, 12 payments a year, 360 payments in total, and an initial balance of $300,000, you’d enter =PMT(7%/12,360,300000). The result will be $1,995.91.

Next, you could calculate how each payment breaks down in terms of principal and interest using this formula:

Total Monthly Payment – [Outstanding Loan Balance × (Interest Rate/12)] = Monthly Interest Payment

In this example, that would be $1,995.91 – [$300,000 x (7%/12)] = $1,750 for the first month’s payment.

Since your total payment is $1,995.91 and your interest payment is $1,750, your principal payment for that month would be $245.91.

Because you’ve now reduced your outstanding loan balance by $245.91, the formula for the second month would be $1,995.91 – [$299,754.09 x (7%/12)] = $1,748.57.

Then, continue this process for the rest of your 360 payments.

How to Calculate Amortization with an Extra Payment

One way to pay your loan off faster and to reduce the amount of interest you’ll pay over the life of the loan is to make additional payments when you’re able to and instruct your lender to apply them to principal.

Following the example above, suppose that instead of $1,995.91, you kicked in an additional $50 each month. In month one, you’d still pay $1,750 in interest, but your principal payment would now be $295.91. In month two, rather than paying interest on an outstanding balance of $299,754.09, you’d pay it on a balance of $299,704.09.

While the savings would be small at first, they would multiply over time. In this case you’d finish paying off your loan 27 months sooner and save yourself $38,400 in total interest in the bargain.

Our amortization calculator doesn’t do these calculations, but others that do are widely available online from bank websites and other sources.

Mortgage Amortization Isn’t the Only Kind

In addition to fixed-rate home mortgages, other kinds of loans that amortize can include: auto loans, home equity loans, student loans, and personal loans. What they have in common is regular fixed payments and a fixed end date.

Not every loan amortizes, however. Non-amortizing loans include interest-only loans, which don’t reduce the principal you owe, and balloon loans, which are paid off with a single payment rather than a series of them.

How Can Using an Amortization Calculator Help Me?

An amortization calculator can not only show you how your payments will break down and what you’ll ultimately pay in interest for a particular loan. You can also use it to try out different scenarios for loans of different terms, amounts and interest rates.

Suppose you need to borrow $300,000, as in the example we’ve been using, but wonder what your payments would look like if you switched to a shorter term. Assuming the interest rate is still 7%, you’d find, for example, that compared with a 30-year loan, a 20-year one would cost you about $2,326 a month (rather than about $1,996) but save you $160,312 in interest over time ($418,527-$258,215).

You can explore many such permutations by adjusting the term, loan amount, and interest rate. Note that the interest rate can also vary according to the selected term. A lender might, for example, be charging a slightly lower rate on a 15- or 20-year loan versus a 30-year one.

The Bottom Line

Using an amortization calculator is an easy way to determine how much interest you’re paying on your mortgage or other loan each month and how quickly your outstanding balance is going down. You can also use it to explore various what-ifs, such as what if you opt for a shorter loan term, borrow a different amount, or get a lower interest rate.

Fact checked by Michael Logan
Reviewed by Lea D. Uradu

There are several ways to deduct business expenses from your small business revenue to lower your tax bill. Sometimes, business deductions can reduce your income on a dollar-for-dollar basis. You can also deduct certain expenses incurred during the startup phase of your business, but the rules are not as straightforward as those for deducting operating expenses. To understand how business startup deductions work, you must know which expenses are deductible and how to take them at tax time.

Key Takeaways

• The IRS allows certain tax deductions for creating, launching and setting up a business.
• You can’t claim startup costs if the business doesn’t take off and you aren’t actually able to start it.
• Startup expenses that you might be able to deduct include the cost of office space, hiring attorneys and accountants, and investing in the necessary software to launch your business.
• Working closely with a certified public accountant (CPA) can provide insights into the startup costs you’ll face and help you save money at tax time.

Allowable Business Startup Deductions

Launching a new business is pretty exciting. However, amidst the excitement, remember that there are inevitable costs involved in getting a new venture up and running. You may be able to reduce the tax you pay based on these expenses. Many expenses, from office supplies to legal fees, can be deductible, potentially lowering your tax liability in the crucial early stages of your business.

The Internal Revenue Service (IRS) allows certain tax deductions in three specific categories of business startup costs:

1. Creating the business: These are costs associated with investigating the creation of an active trade or business, including feasibility studies, market and product analysis (including the costs for surveys, focus groups, and other methods to understand customer needs and preferences), examining the labor supply, travel for site selection, and other costs involved in creating a new business.
2. Launching the business: This includes any costs associated with getting your business operational, including licenses and permitting fees; recruiting, hiring, and training employees; expenses related to securing suppliers; expenses for creating and distributing marketing materials like brochures, flyers, and ads; and professional fees. The costs for equipment purchases aren’t included, as they’re depreciated under normal business deduction rules.
3. Business organization costs: These are the costs of setting up your business as a legal entity such as a corporation, limited liability company (LLC), or a partnership. These costs would include state and legal fees, director fees, accounting fees, and expenses for conducting any organizational meetings.

Startup expenses that are not deductible include personal and capital expenses, pre-operational research and experimentation costs, costs for acquiring intangible assets, and existing business acquisition expenses.

There’s one thing you must keep in mind. You can only write off these expenses if you actually opened up the business. This means that any costs incurred if your company didn’t get off the ground don’t qualify for a deduction.

How to Take Business Startup Deductions

Although you may be able to deduct certain startup costs associated with your business, limits may apply. For new businesses, up to $5,000 in start-up costs and another $5,000 in organizational costs can be deducted as business expenses in the year the business begins, provided total start-up costs are under $50,000. So if your startup expenses exceed $50,000, your first-year deduction is reduced by over $50,000.

For example, if your startup expenses total $53,000, your first-year deduction will be reduced by $3,000 to $2,000. If your expenses exceed $55,000, you would lose the deduction entirely. You may then amortize the remaining expenses and deduct them in equal installments over 15 years starting in the second year of operation.

Claiming the Deduction on Your Tax Forms

If you choose to take the first-year deduction, it needs to be reported on your business tax form. That would be Schedule C for a sole proprietor, K-1 for a partnership or S corporation, or Form 1120 of a corporate tax return. In subsequent years, the amortized deduction is claimed on Form 4562, Depreciation and Amortization.

The deduction is then carried over to your Schedule C under other expenses if you’re a sole proprietor or to your partnership or corporate income tax form. You can continue to claim it under other expenses throughout the amortization period.

When Should You Claim the Deduction?

The business startup deduction can be claimed in the tax year the business became active. However, if you anticipate showing a loss for the first few years, consider amortizing the deductions to offset profits in later years. This would require filing IRS Form 4562 in your first year of business. You can choose from different amortization schedules, but once you have selected a schedule, you can’t change it.

Important

Consult with a qualified tax professional or tax advisor before claiming your startup costs to ensure compliance with current tax laws, accurately identify deductible expenses, and maximize your potential tax benefits.

What If You Don’t Start the Business?

If you spend money to research creating a business but then decide not to move forward, the expenses you incurred would be considered personal costs. Unfortunately, these expenses aren’t deductible. However, expenses incurred in your attempt to start a business could fall under the category of capital expenses, which you may be able to claim as a capital loss.

Can I Deduct My Business Start-Up Costs?

You can deduct certain startup expenses for your business, including market research, legal and accounting fees, employee training, marketing, and organizational costs. The IRS permits deductions of up to $5,000 each for startup and organizational expenses in the year your business begins, provided your total startup costs are less than $50,000. Expenses beyond this limit can be amortized over 15 years. However, to qualify for these deductions, your business must actually start operating.

How Long Are You Supposed to Amortize Start-Up Expenses?

Startup expenses exceeding the initial $5,000 deduction limit can be amortized over a period of 15 years. This means you can spread the deduction of these expenses across 15 tax years, starting with the year your business begins operations.

Where Do Start-Up Costs Appear on a Balance Sheet?

Startup costs do not typically appear directly on the balance sheet. Instead, these costs can be capitalized (meaning they are recorded as an asset) and then gradually expensed through amortization over the IRS-specified period of 180 months (15 years), starting with the month your business starts operating. The initial capitalization of startup costs on the balance sheet under “Other assets” or a similarly named category reflects their nature as investments in the business’s future operations.

The Bottom Line

Understanding and claiming business startup deductions is key for new business owners. It’s important to know which startup costs, like market research and legal fees, can lower your tax bill. Although you might feel you know enough to navigate the process, consulting with a tax advisor specializing in small business taxation is always a good idea. This step can help new businesses manage their taxes effectively and focus on growing their company.

Fact checked by Michael Logan
Reviewed by Ebony Howard

Clients who seek to disperse their worldly assets in a complex or specific manner will often use living trusts as the vehicle of choice. These versatile instruments can provide users with a wealth of benefits and protections that ensure that their financial wishes and needs are met in an efficient manner while they are living, and also after they die. Here’s what a revocable trust is and how it works and may benefit you.

Key Takeaways

• A revocable trust is a legal entity that can own, buy, sell, hold, and manage assets according to a specific set of instructions.
• It can be changed at any time or even revoked by the grantor who set it up.
• The other parties involved in a revocable trust are the trustee who oversees the management of the assets in the trust and the beneficiary or beneficiaries for whom the assets are managed.
• When the trust owner dies, the assets are exempt from probate and information about their dispersion is not made public. However, they are still subject to federal and state estate taxes.
• Different types of revocable trusts are designed to serve different purposes. Two examples are the qualified terminal interest property, or QTIP trust, and the incentive trust.

What Are Revocable Trusts?

A trust, by definition, is a legal instrument created by a lawyer. A trust resembles a corporation in that it is a separate entity that can own, buy, sell, hold and manage property according to a specific set of instructions. Some trusts have their own tax ID numbers and can be taxed as a separate entity or structured as a pass-through instrument that passes all taxable income generated by the assets in the trust through to the grantor. This is usually the case for revocable trusts, as the tax rates for trusts are among the highest in the tax code.

There are typically three parties who are involved in a trust:

• The grantor is the person who creates the trust (by paying a lawyer to draft it) and then funds it by depositing cash or assets into the trust account. Tangible property is simply re-titled in the name of the trust.
• The trustee is appointed by the grantor to oversee the management of the assets in the trust and follow any instructions that the grantor has written in the trust.
• The beneficiary is the recipient for whom the assets are managed.

The grantor, trustee, and beneficiary (or at least the primary beneficiary) can all be the same person in many cases.

All trusts are either revocable or irrevocable. The former type allows the grantor to change the instructions in the trust, take assets out of the trust and terminate it. Irrevocable trusts are called such because assets that are placed inside them cannot be removed by anyone for any reason. The instructions that are written into them can likewise not be changed. Most revocable trusts are known as revocable living trusts because they are created while the grantor is still living.

Pros and Cons of Revocable Trusts

Revocable trusts can allow grantors to disperse assets in ways that would be extremely difficult to do with a will. All assets that are deposited into revocable trusts are unconditionally exempt from the probate process, which can greatly simplify and accelerate the estate planning process.

Furthermore, all activities relating to trusts and their dispersion of assets to beneficiaries are strictly confidential and are not published in the public records of probate courts.

One disadvantage is that the assets in a revocable trust aren’t shielded from creditors to the degree that they are in an irrevocable trust. So if the grantor is on the losing end of a lawsuit, trust assets may be ordered liquidated to satisfy a judgment. Also, after the owner dies, the trust assets are subject to federal and state estate taxes. In addition, some trusts can cost thousands of dollars to create if they are complex or if they deal with complicated intangible assets.

Pros

• A revocable trust may be altered or revoked at any time by the grantor

• Assets are exempt from the probate process, which can simplify estate planning

• Activities relating to a trust and the dispersion of assets is strictly confidential

Cons

• If a grantor is sued, trust assets can be used to satisfy a judgment.

• Once the owner dies, trust assets are subject to estate taxes

• Trusts that are complex or that deal with intangible assets may be costly to set up

Types of Revocable Trusts

There are several types of revocable trusts that are designed to meet specific objectives. They include:

Qualified Terminal Interest Property (QTIP) Trust: This type of trust is generally used when the grantor has divorced and remarried. The grantor will name the current spouse as the primary beneficiary, and they will get to use the property (such as a house) inside the trust as long as they live. The property will then be distributed to the children that the grantor had from the previous marriage upon the death of the second spouse.

Incentive Trust: This type of trust can reward beneficiaries with monetary or other incentives if they meet certain criteria that are laid out by the grantor. This could include getting an education, marrying a certain type of person, or accomplishing other objectives.

There are also other types of revocable trusts that are designed to reduce estate taxes for wealthy grantors, protect land from lawsuits, and facilitate the Medicaid spend down strategy.

What Is a Major Benefit of a Revocable Trust?

There are two major benefits: First, as the owner of the trust, you get the benefits of the trust assets during your lifetime—trust income and the right to use trust assets. And second, after your death, the trust assets are distributed in the way in which you have spelled out through the terms of the trust.

What Assets Shouldn’t Be Placed in a Revocable Trust?

For a variety of reasons, retirement accounts, health savings accounts, life insurance policies, and UTMA and UGMA accounts that are set up to benefit a minor should not (or cannot) be put into a revocable trust. If you transfer a retirement account into a trust, for example, it will count as a withdrawal, which is a taxable event. Instead, you can name the trust as the beneficiary of the retirement account so the funds will transfer upon your death, and you can spell out in the trust document how the funds should be divided among your beneficiaries. Consult an estate planning attorney for assistance on creating a revocable trust and the assets that are best put into it.

Which Is Better, a Revocable or an Irrevocable Trust?

It depends on your situation and your goals in creating a trust. Revocable trusts are easier to set up and can be modified at any time by the owner, or grantor. While the trust assets won’t go through probate, they are still subject to federal and state estate taxes. Irrevocable trusts are harder to create and are very difficult to modify, but the trust assets are not subject to estate taxes upon the owner’s death. In addition, assets in an irrevocable trust are protected from creditors, so people in professions that may be at risk of lawsuits (doctors, lawyers) might want to create one to protect their property.

The Bottom Line

Revocable trusts can accomplish many objectives and provide many benefits for both grantors and beneficiaries. They can be used to reduce income and estate taxes and avoid probate. Their cost can vary according to their complexity and the number of them that are used. For more information on revocable trusts and how they can benefit you, visit the Financial Planning Association website.

Reviewed by Amy Drury
Fact checked by David Rubin

Using trailing 12-month (TTM) figures is an effective way to analyze the most recent financial data in an annualized format. Annualized data is important because it helps neutralize the effects of seasonality and dilutes the impact of non-recurring abnormalities in financial results, such as temporary changes in demand, expenses, or cash flow.

By using TTM, analysts can evaluate the most recent financial data, rather than using older numbers from full-year annual reports. TTM charts are less useful for identifying short-term changes and more useful for forecasting.

Key Takeaways

• Trailing 12-month, or TTM, refers to the past 12 consecutive months of a company’s performance data used for reporting financial figures.
• By consistently evaluating trailing 12-month numbers, company financials can be evaluated both internally and externally without regard for the artificiality of fiscal year-end.
• TTM allows for a like comparison of a company’s performance trajectory that smooths away any inconsistencies.

TTM for Financial Reporting

Companies conducting internal corporate financial planning and analysis have access to detailed and very recent financial data. They use the TTM format to evaluate key performance indicators (KPI), revenue growth, margins, working capital management, and other metrics that may vary seasonally or show temporary volatility.

By keeping a running tab of TTM metrics, a firm’s management and stakeholders can understand how the company is doing at any point in time using an apples-to-apples comparison. In other words, by always looking at the previous 12 months, effects such as seasonality or one-time charges can be smoothed out.

TTM for Equity Research

In the context of equity research and valuation, financial results for publicly traded companies are only released on a quarterly basis in securities filings in accordance with generally accepted accounting principles (GAAP). Securities and Exchange Commission (SEC) filings generally display financial results on a quarterly or year-to-date basis rather than TTM.

TTM revenue (sales) and profitability metrics show how much money the company brought in and earned over the previous one-year period, regardless of which quarter’s financial statements are being released. Less frequently, firms provide monthly statements with sales volumes or key performance indicators.

Important

TTM figures can also be used to calculate financial ratios. The price/earnings ratio is often referred to as P/E (TTM) and is calculated as the stock’s current price divided by a company’s trailing 12-month earnings per share (EPS).

Example

To get a clear picture of the last year of performance, analysts and investors often must calculate their own TTM figures from current and prior financial statements. Consider General Electric’s (GE) Q1 2015 financial results.

In Q1 2015, GE generated $29.4 billion in revenue versus $33.5 billion in Q1 2014. GE logged $148.6 billion of sales for the full year of 2014. By subtracting the Q1 2014 figure from the full-year 2014 figure and adding Q1 2015 revenues, you arrive at $144.5 billion in TTM revenue.

It depends on business type, operating cycle, and management goals

Fact checked by Timothy Li
Reviewed by Erika Rasure

The amount of working capital a small business needs to run smoothly depends on three different factors: type of business, operating cycle, and the business owners’ goals for future growth. Large businesses can get by with negative working capital (because of their ability to raise funds quickly), but small businesses should maintain positive working capital figures.

Key Takeaways

• Working capital is the cash on hand used to keep a business operational, less liabilities and obligations.
• Depending on the line of business, working capital needs may be significant in order to procure raw materials and labor.
• Service businesses, on the other hand, rely far less on working capital and can operate with less overhead.
• Businesses looking to grow and expand will require larger levels of working capital than businesses looking to maintain their current size.
• A business’s operation cycle will also impact working capital needs; businesses with a shorter time frame from production to revenue generation require less working capital.

What Is Working Capital?

Working capital refers to the difference between a company’s current assets and current liabilities. Current assets are the items a business owns that can be turned into cash within the next 12 months, while current liabilities are the costs and expenses the business incurs within the same period.

Common current assets include checking and savings accounts, marketable securities (such as stocks and bonds), inventory, and accounts receivable. Current liabilities include the cost of materials and supplies (that need to be purchased to produce goods for sale), payments on short-term debt, rent, utilities, interest, and tax payments.

Important

Seasonal businesses require different amounts of working capital at different times of the year.

A company’s working capital is a reflection of its operational efficiency and budget management. If a business has more current liabilities than assets, its working capital is negative, meaning it may have difficulty meeting its financial obligations.

A company with a very high working capital figure, conversely, is easily able to pay all its expenses with ample funding left over. Whether a given business requires high working capital is determined by three key factors: business type, operating cycle, and management goals.

Business Type

Certain types of businesses require higher working capital than others. Businesses that have physical inventory—such as retailers, wholesale businesses, and manufacturers—often need considerable amounts of working capital to run smoothly.

Manufacturers must continuously purchase raw materials to produce inventory in-house, while retailers and wholesalers must purchase pre-made inventory to sell to distributors or consumers.

In addition, many businesses are seasonal, meaning they require extremely high working capital during certain parts of the year. Leading up to the winter holidays, for example, retail businesses— such as department stores and grocery stores—must increase inventory and staffing to accommodate the expected influx of customers.

Businesses that provide intangible products or services, such as consultants or online software providers, generally require much lower working capital. Businesses that have matured and are no longer looking to grow rapidly also have a reduced need for working capital.

Operating Cycle

Ideally, a business can pay its short-term debts with revenue from sales; however, the length of a company’s operating cycle can make this impossible. Companies that take a long time to create and sell a product need more working capital to ensure that financial obligations incurred in the interim can be met.

Similarly, companies that bill customers for goods or services already rendered, rather than requiring payment upfront, need higher working capital if collection on accounts receivable cannot be made promptly.

Management Goals

The specific goals of the business owners are another important factor that determines the amount of working capital required by a small business. If the small business is relatively new (and looking to expand), a higher level of working capital is needed compared to the working capital needed by a small business intending to keep its operations small.

This is particularly true for businesses planning to expand product lines to venture into new markets because the costs of research and development, design, and market research can be considerable.

How Do You Calculate Working Capital?

Working capital is calculated by subtracting current liabilities from current assets. Both current assets and current liabilities can be found on a company’s balance sheet as line items. Current assets include cash, marketable securities, accounts receivable, and other liquid assets. Current liabilities are financial obligations due within one year, such as short-term debt, accounts payable, and income taxes.

What Is Working Capital Used for?

Working capital demonstrates a business’s ability to fund its operations and pay its short-term expenses. When a business has enough liquidity to pay its short-term debt, accounts payable, and any other costs due within one year, it is functioning well and generating enough liquidity from its business operations to cover its costs. This is a sign of the company’s financial health.

How Can I Improve Working Capital?

Working capital can be improved by increasing assets and decreasing liabilities. Reducing your company’s reliance on debt, negotiating better terms with suppliers on accounts payable, managing expenses more efficiently, and cutting extraneous costs can all improve current liabilities. Collecting receivables faster, increasing the value of marketable securities, and improving inventory efficiency can all help improve your current assets.

The Bottom Line

Working capital demonstrates how efficiently a business is operating. Having a positive working capital (i.e. current assets exceed current liabilities) is important for a small business because small businesses don’t have many other options to fall back on if its assets don’t cover its expenses.

The amount of available working capital differs greatly depending on the type of company. Companies with a high inventory of physical goods require more working capital than ones with a low inventory. Similarly, businesses looking to grow will need more working capital than those looking to maintain their size.

Lastly, a business’s operating cycle determines the level of working capital it needs: Businesses that can produce and sell goods quickly need less working capital than those with a longer duration between production and revenue generation.

Fact checked by Amanda Jackson
Reviewed by Margaret James

Getting yourself on sound financial footing is a lot like building a successful business. It can be a decades-long enterprise requiring planning, skill, patience, and a little bit of luck. The proverbial millionaire next door is an overnight success 20 years in the making. Considering the long road ahead, you have every reason to get started today.

Key Takeaways

• Financial success requires a long-term strategy with short-term goals; a deliberate plan is essential for security and success.
• Similar to businesses investing in growth, individuals should invest in education and continuous skill development to enhance career prospects.
• Managing debt is crucial for financial success. Avoid consumer debt, pay off education before making large purchases like a home, and recognize the difference between productive and wasteful consumer debt.
• A shared financial outlook and planning in marriage can contribute to financial stability.
• Patience is vital in financial planning. Allow your investment to benefit from the compounding effect to grow over time.

Have a Plan

Financial security won’t happen by accident, and it won’t happen overnight. Just as businesses have quarterly goals, annual revenue targets, and five-year business plans, you need to approach your life with a long-term strategy made up of a series of short-term actions and goals. Success rarely happens at random. You need to have a plan.

Invest in Yourself

When businesses want to grow, they invest in themselves. The same logic applies to individuals. Before you even begin your career, an investment in education can provide an opportunity to increase your potential lifetime earnings. Going to college or a trade school can provide knowledge and credentials that make you a more attractive and higher-paid part of the workforce.

If circumstances or personal interests do make education an attractive option for you, consider starting a business. Entrepreneurs from all walks of life have started successful enterprises. Working for yourself can bring more satisfaction, more money, and greater control over your job stability than working for somebody else.

Keep in mind that investing in yourself is not a one-time effort. Think of it from a business perspective. Investments in research and technology, infrastructure, and physical plants are an ongoing part of the business. Keeping up with the times and the competition is part of the process of maintaining a successful business and a crucial part of building and growing the business to take it to the next level. Looking at the situation from a personal perspective, if you have a bachelor’s degree, going back to school at mid-career can provide a boost to your credentials and help you keep pace with the competition. If you have a trade, continuing your education can open up new opportunities.

Regardless of your profession, adding a new skill or designation can increase your revenue-generating opportunities. If you run a business, opening up a new sideline can increase your opportunities in the marketplace. If you don’t own a business, moonlighting at mid-career can provide a second source of income that serves as a backup to your primary career.

Learning new skills is an investment that should continue over the course of your lifetime. Expand your interests. Keep an eye out for opportunity. You can continue to build your skill set even during retirement. A second career is not only often more fulfilling than the first one, but it can set up a revenue stream that truly makes you successful in life. Even if you’ve been tremendously successful and no longer need to work, you can continue to invest in yourself by building your knowledge base. Learning about your investment portfolio, for example, can be an interesting and lucrative opportunity. In an age marked by scandal, there’s no better motto than “trust but verify.”

Get Out of Debt

Debt management is a critical exercise for every successful business, and there’s a reason for the saying “cash is king.” Be different. Buck the trend. Don’t rack up debt in the typical consumer fashion. The cost of an education and a primary residence are generally beyond most people’s ability to pay for in cash. Beyond that, if you can’t pay cash, don’t make the purchase. As far as education and the home, pay off the education before you buy the home.

As for the home, don’t stretch your budget. Buy what you can easily afford and pay it off as quickly as possible. Forget the advice about good debt and bad debt. All debt is bad. There’s a long list of financially strapped investors who had supposedly great and fool-proof ideas about going into debt to put the money to work in investments that would earn a greater rate of return than the cost of the interest rate to service the debt.

If you are an entrepreneur, debt may be a necessary tool. Putting your money into an appreciating asset is different than using debt to fund a new car, vacation, or wardrobe. Paying interest on consumer goods is simply a waste of money and undermines your financial foundation. Investing in your business is a way to increase your potential revenue.

Note

In Q4 2024, the Federal Reserve Bank of New York noted that American household debt had risen to $18.04 trillion and delinquency rates were stable but elevated.

Find a Like-Minded Partner

Getting married can give your life a powerful financial boost. Of course, more than a few marriages have ended in divorce over the topic of money. Shared values are the key to success. While it may not sound romantic, having the same outlook on money will go a long way toward creating both a secure financial future and a happy marriage. There aren’t many couples in divorce court complaining about the fact that they are financially secure, debt-free, and successful.

Approach the financial aspects of marriage as you would a business. Plan together and spend together. The purchase of big-ticket items should not be a surprise to either partner. Make decisions regarding debt and credit as a team. If one member of the team is opening up credit cards and the other member is working two jobs to pay for the debts, the team is headed for trouble. Save together. Set a goal of living on one income while using the other to pay down debts. Once you are debt-free, live on the lower income and invest the rest.

Be Patient

Patience is a virtue that holds particular significance in the realm of finance in several ways. In the financial landscape, the power of compound interest is a prime example of why patience is a valuable asset. By allowing investments to grow over time, the compounding effect can significantly amplify returns.

Patience can also serves as a way to overcome impulsive financial decisions that can lead to unnecessary risks and losses. In a world driven by instant gratification, there’s tremendous benefit to researching something, developing a long-term plan, then following steps to execute the plan.

On a broader scale, patience is so important in achieving financial goals and milestones. Whether it’s saving for a major purchase, funding education, or planning for retirement, the ability to stay patient throughout the journey can’t be overstate. Even if you make just a little bit of progress everyday, those small incremental steps can and will add up over time to a greater benefit you will one day be able to enjoy.

What Role Does an Emergency Fund Play in Financial Planning?

An emergency fund serves as a financial safety net, providing a cushion for unexpected expenses or income disruptions. It prevents the need to tap into long-term savings or accumulate debt during unforeseen circumstances such as medical emergencies, car repairs, or job loss. One of the first things you should consider doing, even before saving for retirement, is making sure you have a large enough emergency fund.

When Should I Start Saving for Retirement?

Starting to save for retirement early is advantageous due to the power of compound interest. Ideally, individuals should begin in their 20s or 30s, allowing their investments more time to grow. As mentioned in the ‘Patience’ section above, your portfolio has a greater chance of accumulation when you start investing earlier.

How Can I Improve My Credit Score?

Improving your credit score requires responsible credit management. Pay bills on time, reduce outstanding debt, and review your credit report regularly for errors. Demonstrating responsible credit behavior over time positively impacts your credit score, meaning you’re more likely to get cheaper debt in the future (which further perpetuates your positive financial health).

What Steps Can I Take to Increase My Income?

Increasing income involves a proactive approach to career development and financial growth. Pursue opportunities for career advancement, acquire new skills, and consider negotiating salary raises. Consider advancement opportunities at other companies if your current company does not have great upward mobility. In addition, don’t just focus on your income – you can also improve the amount of money you end up with each month by keying in on expenses.

The Bottom Line

Adopt the mindset and lifestyle outlined in these five points and you will be well on your way to building a secure financial future. While the journey is long and the road not always easy, be sure to take the time to appreciate what you have. Taking time to savor the small victories will help you stay on your long-term course. Enjoy each success, no matter how small. After all, you earned it.

Reviewed by Samantha Silberstein
Fact checked by Vikki Velasquez

Whether you have an established financial plan or are just beginning to consider how to put your money to work, you should keep in mind the differences between saving and investing. These terms are often used interchangeably, but they represent different approaches to your finances. Consider saving and investing at different points in your life, but the key is to understand the pros and cons of each and how they fit into the bigger picture of your financial journey.

Key Takeaways

• Understanding the purpose of saving and investing helps in making informed financial decisions.
• Factors such as time horizon, risk tolerance, and financial goals may influence your choice to save or invest.
• Saving offers low risk and quick access to funds, while investing provides the potential for higher returns and wealth growth.
• Determining the right approach requires evaluation of your personal financial situation, goals, and comfort with saving and investing.

The Basics of Saving and Investing

Most people tend to confuse saving and investing. It’s easy to see why, though, because both involve setting money aside. But, the reasons and ways you save and invest are different, which we highlight below.

Saving

Saving refers to setting aside cash in a low-risk, low-return environment. This could include traditional or online savings accounts, money market accounts, certificates of deposit (CDs), or even a situation in which you hold onto cash outside of a financial institution.

Money held in one of these settings is more liquid than money in most investment types, which means you can access it more quickly and easily if necessary for emergencies or short-term goals. However, in exchange for carrying a lower level of risk than investments, these methods of saving money also provide less of a reward—in this case, they offer lower rates of return.

One of the key characteristics of saving is that you won’t lose your money. Although the return is generally low, the money you set aside in one of these accounts is insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA).

Investing

Investing your money means buying any of several different investment vehicles that carry a higher risk and, potentially, a higher reward. Investments may include stocks, bonds, exchange-traded funds (ETFs), commodities, real estate, and more.

There are many ways to access investments, including through retirement accounts, mutual funds, individual stock trading, and more. However, regardless of the type of investment or its particular risk and reward profile, the goal of all investments is the same: to grow your wealth over the long term. Keep in mind that not all investment vehicles carry the same levels of risk and reward. Some, such as bonds, may require months or even years before reaching maturity.

Factors to Consider When Deciding to Save or Invest

Saving and investing involve setting aside money for a future goal or expense. However, the time horizon, level of risk, and most pertinent financial goals vary depending on whether you are looking at saving or investing your money. Looking at these factors can help you determine what to prioritize:

Time Horizon

One of the biggest considerations when deciding whether to save or invest is your time horizon. To realize short-term goals, keeping your money in a savings account or similar vehicle may make more sense because you won’t hold the money long enough for it to grow significantly in an investment setting.

Bradley Baskir, vice president and financial advisor at Morgan Stanley, says that saving is usually better “when the time horizon for liquidity is under 12 months.” He adds that saving for short-term goals by “depositing that pool of money in a savings account may make more sense than investing it because [you] can feel confident that the money will be there” when the goal arrives.

On the other hand, other financial goals may be more significant or more open-ended. If you’re planning for retirement, you are more likely thinking years or even decades ahead. Longer-term goals like this benefit from an investment-centered approach. The longer time horizon of these priorities means your money has the opportunity to grow more significantly if it is invested. As such, you won’t need it to be liquid until you get close to reaching the goal at some point in the future.

Risk Tolerance

Your risk tolerance is the degree of risk that you are willing to take on given the potential volatility of a financial decision. Saving your money is less risky than investing it. If you invest your money, you stand to potentially lose your principal or initial investment.

Consider a situation in which you’re looking ahead to a longer-term financial goal. Given your time horizon alone, you might be inclined to assume investing is the best approach. However, if you are uncertain about your job, periods of volatility in the market, or what your financial situation will be, it may be safest to put your money in a savings account instead.

Note

Each person has a different risk tolerance, which is distinct from that person’s risk capacity, or capability to take on risk. Your risk tolerance may be dependent upon factors such as your age, financial goals, and income, among other factors.

Financial Goals

Laying out clear financial goals will help you to decide when it is appropriate to save or invest—or a combination of both. Financial goals may be large, such as preparing for a down payment on a home, a new vehicle, college tuition, or planning for retirement. They may also be more modest, such as saving for a small purchase or a short weekend trip.

The nature of your financial goals will influence your decision to save or invest. If your goal requires quick access to cash, you’ll likely opt to hold money in a savings account or similarly liquid space. On the other hand, if you hope for better returns on your money than can be achieved with savings account interest rates and over a long time, then investing may be the answer.

Many financial advisors recommend setting aside an emergency fund in a liquid account before considering investing.

Pros and Cons of Saving

Saving offers security but lower potential for rewards.

Pros

• Low level of risk

• Money is FDIC or NCUA insured

• Accessibility to your funds

• Ease of use

Cons

• Lower potential returns

• May erode purchasing power

Pros Explained

• Low level of risk: Saving your money entails a low level of risk, which means your money is safe.
• Money is FDIC or NCUA insured: In the event of a bank run, the Federal Deposit Insurance Corp. or National Credit Union Administration insures your deposits. Keep in mind that only certain deposit accounts are covered.
• Accessibility to your funds: Savings and similar accounts typically make it easy to access your funds.
• Ease of use: Most savings vehicles do not require regular upkeep or observation.

Cons Explained

• Lower potential returns: You won’t get as much bang for your buck by saving compared to investing.
• May erode purchasing power: Savings accounts may fail to keep up with inflation, which can erode your purchasing power over medium- and long-term time horizons.

Pros and Cons of Investing

Investing offers both benefits and downsides. Baskir notes that “investing is by nature a trade-off between risk and return, so those who are willing to stay the course in a diversified portfolio, over long periods of time, in any market environment, should stand to be rewarded with returns that outperform that of cash equivalents earned from saving alone.”

Pros

• Potential for (significantly) higher returns

• Align with your investment strategies

• Choose where you invest:

Cons

• Less liquid

• High volatility

• May require more monitoring

• Subject to external factors

Pros Explained

• Potential for (significantly) higher returns: You stand a better chance of earning higher returns on your principal. As your investments grow, they allow you to take advantage of compounding to accelerate gains.
• Align with your investment strategies: Investing in different asset classes, such as stocks, bonds, mutual, and ETFs, can help you achieve your investment strategy goals.
• Choose where you invest: Investing your money allows you to buy into companies, industries, and sectors that interest you or that you support.

Cons Explained

• Less liquid: Investments are less liquid than savings. It may take more time to access your funds, and it could potentially cost you money, as in the case of withdrawing early from retirement accounts.
• High volatility: Markets for stocks, commodities, real estate, and other assets are often highly volatile, meaning that you may not achieve gains and may even lose some of your principal.
• May require more monitoring: Some approaches to investing are very hands-on and require both time and specialized knowledge.
• Subject to external factors: Investors can be swayed by biases and emotion-based decision-making, which can adversely impact their investments.

Determining the Right Approach

According to Baskir, “saving is to walking what investing is to running.” He adds that it’s vital to “have enough saved up for a rainy day, typically equal to three to six months worth of expenses in the event of a layoff, health issues,” or other unexpected changes to a financial situation before investing.

To determine what works best for you, consider this checklist:

• Do you have an adequate cash cushion to cover three to six months of fixed expenses? If not, start saving.
• Do you have other short-term goals requiring quick access to cash (like travel plans)? If so, start saving.
• Are you on track to reach your retirement goals by your desired age? If not, start investing.
• Do you understand the risks involved in investing this money for a long-term goal such as retirement? You may not be able to access it until age 59½ without taxes and a penalty, plus you’ll face volatility risk, etc.
• Are you comfortable waiting to access your money to take advantage of compounding? If so, you may want to start investing.
• Do you feel comfortable with your current split of saving and investing every month? Where does it feel like you’re falling short?

Saving vs. Investing: Example

Let’s say you’re in your late 30s, single, and earn six figures. You have about two months of expenses in savings and just over a year’s salary in your company-sponsored 401(k). You also recently paid off your student loans and have $500 to reallocate to your other financial goals, which include:

• Boosting your emergency fund to cover at least three months of expenses
• Increasing your retirement savings to ensure that you will be able to retire at age 67 with an income that covers your needs
• Putting aside extra money for travel

The amount you decide to contribute to each category depends on your priorities. It’s also subject to change. For instance, you might decide that in the short term, creating an emergency fund that covers three months of expenses is most important. Once that goal is funded, you can move on to putting more money toward retirement (and fun). 

When to Save vs. When to Invest

Saving may be the best option to establish a rainy-day fund for short-term financial goals, for access to your funds on short notice, or if your risk tolerance is low and you want to protect your principal. Investing may make sense if you already have an emergency fund, are planning for long-term financial goals, seek compounding interest, can hold your funds in a less accessible account, or have a higher risk tolerance.

Choosing a Savings Account

A variety of savings accounts are available, including traditional accounts, online-only accounts, high-yield accounts, money market funds, and more. Check out Investopedia’s in-depth guide for an overview of many of the most popular savings account options and suggestions on how to pick the right account for you.

Choosing a Brokerage Account

Selecting a way to invest your money can be a much more complex question than selecting a savings account. Most beginning investors will use a brokerage account to facilitate trades. Many of the leading brokerages offer an easy-to-use interface, free trades in certain cases, and access to a variety of assets including stocks, mutual and exchange-traded funds, and more.

It pays to consider the ways you plan to invest—actively or passively, what types of asset classes you will target, and so on—and to use Investopedia’s guide to select a broker.

What Are the Advantages of Saving Instead of Investing?

Some of the advantages of saving over investing include a lower level of risk, easier access to your funds, and a comparably straightforward process.

What Factors Should Be Considered When Deciding Between Saving and Investing?

Keep in mind your financial goals—large or small, necessary or discretionary—and what the time horizons of those goals are. Your appetite for risk is also important. You can also allocate some funds to saving and some to investing in order to achieve both short- and long-term priorities.

Can Saving and Investing Be Done Simultaneously?

Absolutely. Advisors recommend that individuals set aside an emergency fund of several months’ worth of expenses in a savings account or similarly liquid option before considering whether to invest additional funds. Further, you may consider saving for some types of financial goals while you also invest in an effort to achieve other goals.

The Bottom Line

Saving and investing are sometimes used interchangeably, but they represent different ways of using your money. Saving refers to holding your funds in a low-risk, low-return savings account, CD, or money market account, while investing refers to buying and selling stocks, bonds, ETFs, mutual funds, commodities, and/or real estate.

Saving is generally better for investors with short-term financial goals, a low risk tolerance, or those in need of an emergency fund. Investing may be the best option for people who already have a rainy-day fund and are focused on longer-term financial goals or those who have a higher risk tolerance.