investment

Fact checked by Suzanne Kvilhaug
Reviewed by Samantha Silberstein

About 47.4 million Americans are living with food insecurity, including 7.2 million children, according to a 2023 study from the U.S. Department of Agriculture. They make up about 13.5% of the nation’s households.

Food insecurity is a lack of confidence that a person will be able to get enough to eat from day to day to maintain good health.

Widespread hunger does not harm only the poor. The effects spread throughout the U.S. economy.

Key Takeaways

• Living with food insecurity means being unsure that food sufficient for healthy living will be available from day to day.
• The short-term consequences include illness and hunger.
• The long-term consequences include diminished lifetime earnings and poverty in old age.
• Food assistance programs are considered “automatic stabilizers” that deliver food to families while benefiting the grocery industry and its supply chains.

USAID and American Farmers

In 2023, the USAID program purchased more than one million metric tons of food from U.S. farmers for global distribution. In February 2025, President Donald Trump issued an executive order freezing the program for 90 days.

How Does Food Insecurity Impact the Economy?

When people cannot afford to buy enough good-quality food, it has significant negative effects on the economy, including, of course, affecting the health of the workforce.

For individuals, the malnutrition and sickness that food insecurity can cause leads to more absences from work. These illnesses, particularly when chronic, require massive resources for treatment. Food insecurity is also linked to low wages and neighborhood segregation.

Food insecurity is usually not fatal, as the so-called “extreme hunger” found in the poorest nations often is. Rather than a complete lack of food, food insecurity indicates a lack of access to nutritious food and a reliance on the cheapest and lowest-quality products.

Unlike extreme hunger, food insecurity is usually associated with low-income people living in advanced economies.  

Important

The effects of food insecurity can be severe for children. It can delay cognitive development, cause struggles with education and behavioral problems, and increase the risk of chronic illnesses.

Impact on the Workforce

Stronger economies have a higher labor force participation rate, which is the percentage of people of working age who are working or looking for work.

A healthy job market is one in which the labor force participation rate is high and the unemployment rate is low. Without enough sustenance, workers can find participating in the workforce to be extremely difficult.

Sustained food insecurity can lead to higher rates of chronic illness, causing both lost economic activity when people are kept from working and high healthcare bills. To participate at full capacity in the workforce, employees need enough nutrition.

Food insecurity in children impacts their parents’ ability to work. When children can’t go to school, parents may have to stay home with them, which can mean they are not contributing to the economy. The result is lost productivity.

Food insecurity can negatively affect the performance of childless people as well. It can increase presenteeism, when employees try to work through illness.

One way that companies calculate productivity is to measure output or units produced relative to total labor hours. Ultimately, food insecurity can reduce what a worker can produce and, therefore, reduce the competitiveness of their employer.

Impact on Children

Access to a stable food supply is critical for healthy physical and cognitive development in children. Not having food security can result in several physical and psychological harm. Education suffers when children cannot focus due to hunger.

Children who are suffering food insecurity are more likely to miss school or to try to work through hunger, which limits their performance. Absorbing information is more difficult when a student is distracted by hunger pains, regardless of age. 

Note

Students with food insecurity tend to fall behind in school. They can be unprepared for work later in life emotionally, socially, educationally, and even physically. This further harms the economy, as it affects the performance of future workers and, in turn, economic productivity.

Healthcare Costs

Food insecurity can result in significant healthcare costs. According to one analysis, food insecurity increases illness costs by tens of billions of dollars nationally while diminishing lifetime earnings. That includes lost work time and productivity and the cost of treating illnesses in people who are unlikely to be able to afford health insurance.

In the United States, diabetes is just one of the chronic illnesses exacerbated by food insecurity. The disease accounts for an estimated $1 of every $4 spent on healthcare in the country, including about a third of Medicare drug spending.

Diabetes accounts for high rates of complications and hospitalizations, along with a higher likelihood of comorbidities, including coronary disease. Economically, this translates to a large expenditure of resources on medical care. Chronic illnesses with other causes may also be exacerbated by food insecurity.

Impact of Food Insecurity Solutions

The attempts to solve food insecurity also carry economic consequences. 

Government Investments

Governments often spend money to try to reduce food insecurity. Their investments to stabilize access to food can positively impact the economy.

In the U.S., people who need access to food can get government-funded food stamps. Money spent by the Supplemental Nutrition Assistance Program (SNAP) delivers economic activity by triggering spending at farmer’s markets, grocery stores, and other locations where the benefit is accepted.

Federal studies have estimated that every $1 of federal spending increases gross domestic product (GDP) by $0.80 to $1.50, according to the U.S. Department of Agriculture (USDA), the federal agency that administers the SNAP program in America.

SNAP is considered an “automatic stabilizer” in economic recessions because the number of people who require assistance grows during economic downturns and shrinks during upturns.

Charitable Contributions

When addressing hunger is left to nonprofits, charitable contributions to those organizations are directed at hunger and food insecurity instead of other social issues. Anti-hunger advocates estimate that this money totals $17.8 billion in charitable contributions.

These donations represent an opportunity cost. That is, the contributions needed to address food insecurity displace money that would have gone to benefit other causes.

Why Is Food Important to the Economy?

Food production represents a significant chunk of the economy. In the U.S., food-related industries made up about 5.5% of gross domestic product as of 2023. It also made up 12.9% of household budgets, according to figures from the U.S. Department of Agriculture.

Where Does Food Insecurity Have the Greatest Impact?

In the U.S., food insecurity impacts more than twice as many Black and Latinx people as White people, according to the Food Research and Action Center, an anti-hunger advocacy group. Geographically, food insecurity is most common in Southern states, followed by the Midwest region.

How Does Food Waste Affect the Economy?

Food waste increases the price of food for consumers because it adds costs associated with transportation and disposal, which require labor, land, and energy. Wasted food can also represent a missed opportunity to provide nutrition to hungry people.

The Bottom Line

Food insecurity can affect current workforce participation and harm the future workforce, such as chronic school absences among children suffering from it. This insecurity also worsens chronic illnesses, which can carry staggering healthcare costs.

Some solutions to food insecurity, like social safety net programs, may boost the economy.

Reviewed by Somer Anderson
Fact checked by Timothy Li

In a sluggish economy or an outright recession, it’s best to watch your spending and not take undue risks that could put your financial well-being and goals in jeopardy.

Below are several specific financial risks that you should avoid taking during a recession.

Key Takeaways

• When the economy is in a recession, financial risks increase, including the risk of default, business failure, job losses, and bankruptcy.
• Avoid becoming a co-signer on a loan, taking out an adjustable-rate mortgage (ARM), or taking on new debt.
• Don’t quit your job if you aren’t prepared for a long search for a new one.
• If you own your own business, consider postponing spending on capital improvements and taking on new debt until the recovery has begun.

1. Co-Sign a Loan

Co-signing a loan is a risky commitment even in flush economic times. If the borrower does not make the required payments, the co-signer will be required to make them instead.

During an economic downturn, the risks associated with co-signing on debt are even higher, since both the borrower and the co-signer may face an elevated likelihood of losing a job or a decline in business income.

That said, you may find it necessary to co-sign for a family member or close friend regardless of what is happening in the economy. In such cases, it pays to have some savings set aside as a cushion. Or, instead of co-signing, you might help with a down payment or make a personal loan rather than leaving yourself on the hook for a co-signed loan.

2. Get an Adjustable-Rate Mortgage (ARM)

When purchasing a home, you have the choice of an adjustable-rate mortgage (ARM) or a fixed-rate mortgage.

Interest rates usually fall early in a recession and then rise later as the economy recovers. This means that the adjustable rate for a loan taken out during a recession is likely to rise once the downturn ends. The fixed-rate loan at recession pricing could be a better deal in the long run.

Important

While interest rates usually fall early in a recession, credit requirements are often stricter, making it challenging for some borrowers to qualify for the best interest rates and loans.

Consider the worst-case scenario: You lose your job and interest rates rise as the recession starts to abate. Your monthly mortgage payments go up, making it extremely difficult to keep current on the payments. Late payments lower your credit rating, making it more difficult to obtain a loan in the future.

A recession may be a good time to lock in a lower fixed rate on a mortgage refinance if you qualify. However, be cautious about taking on new debt until you see signs that the economy is recovering.

3. Assume New Debt

Taking on new debt—such as a car loan, home equity line of credit (HELOC), or student loan—need not be a problem in good times when you can make enough money to cover monthly payments and still save for retirement.

But when the economy takes a turn for the worse, the risk that you will be laid off or lose business income increases. If that happens, you may have to take a job—or jobs—that pay less than your previous salary, which could eat into your ability to pay your debt.

Taking on new debt in a recession is risky and should be approached with caution. Pay cash if you can, or wait on big new purchases.

4. Take Your Job for Granted

During an economic slowdown, even large corporations can come under financial pressure, leading them to look for cost cuts. All too often, that means layoffs.

Because jobs become so vulnerable during a recession, workers can’t take finding another one for granted, so it is wise to think carefully before leaving a job when the economy is in a rough patch.

In addition, older workers retiring during a recession could see their income decline and their retirement portfolio suffer just as they start to draw it down. If the economy is tumbling as you near retirement age, it’s important to weigh your options. You might decide to hang in there for another year or so.

5. Make Risky Investments

This tip applies to business owners. While you should always be thinking about the future and ways to grow your business, an economic slowdown may not be the best time to make risky bets.

Early on in a recession is not the time to stick your neck out. Later, once the economy starts to show signs of a sustainable recovery, it will be time to start thinking big. 

Borrowing to add space or increase inventory may sound appealing—particularly since interest rates are likely to be low during a recession. But if business slows down more—as it may during a recession—you may struggle to make the payments on your debt.

Wait until interest rates start to tick upward and leading economic indicators for your market or industry turn up.

What Is a Recession?

A recession is a meaningful and extensive downturn in economic activity. A common definition holds that two consecutive quarters of decline in gross domestic product (GDP) constitute a recession. In general, recessions bring decreased economic output, lower consumer demand, and higher unemployment.

What Are the Biggest Risks to Avoid During a Recession?

Many types of financial risks are heightened in a recession. This means that you’re better off avoiding some risks that you might take in better economic times—such as co-signing a loan, taking out an adjustable-rate mortgage (ARM), or taking on new debt.

A recession is no time to panic, but you should be conscious of the potential for layoffs in your industry and the difficulty you may have in finding a new job if you end up unemployed.

If you own a business, it’s best to avoid overextending yourself with risky new investments until the turnaround begins.

How Can I Protect My Investments During a Recession?

There is no surefire way to position your investment portfolio during a recession. In some cases—particularly if you have a longer investment horizon that will give your assets time to recover from any losses during the recession—you may benefit from leaving your portfolio alone.

This keeps you invested in the markets and poised to gain from an eventual recovery. If you decide to make some changes to your investment strategy in response to economic concerns, there are ways to reduce your risk.

Most stocks and high-yield bonds tend to lose value in a recession, while lower-risk assets—such as gold and U.S. Treasuries—tend to appreciate. Within the stock market, shares of large companies with solid cash flows and dividends tend to outperform in downturns.

The Bottom Line

There’s no need to panic in response to an economic slowdown, but you should pay extra attention to your spending and be wary of taking unnecessary risks.

Even in the midst of a significant economic downturn, there are many positive steps you can take to improve your situation and recession-proof your life. These include adopting a realistic budget, establishing an emergency fund, and generating additional sources of income if necessary.

It can give you greater control over what happens after you die, including taxes

Reviewed by Lea D. Uradu
Fact checked by Kimberly Overcast

When you buy a home, you may have the option of buying it in a trust. Legally, that means the trust, rather than you, owns the home. However, you can be the trustee of the property and have significant control over it and what happens to it after you die. Buying a home in a trust can have tax and other advantages, but it’s more complicated than buying one conventionally.

Key Takeaways

• Buying a home in trust can give you greater control over what happens to the property when you die and possibly avoid inheritance taxes.
• A revocable trust allows you to change the beneficiary and other terms at any time.
• An irrevocable trust is much harder to change but offers tax advantages.
• For either type of trust, make sure you enlist expert advisors who know the laws of your state.

What Does It Mean to Own a House in Trust?

When you buy a home in trust, you can become the property’s trustee (rather than the outright owner). Then, when you die, a person or financial institution you have designated becomes the trustee.

The trustee is essentially the administrator of the assets in a trust, in this case, a home. But as trustee, you’ll also have certain powers over the property and what becomes of it, depending on the type of trust you choose and how it is written.

You can even put a home with a mortgage into a trust. Seek out the best mortgage lenders to work with during the purchase process if you plan to transfer a mortgaged home into a trust.

The first step to buying a home in trust is to establish a living trust. That is a trust created during a person’s lifetime, and it allows the trustee to manage the assets for the benefit of a beneficiary, such as a child. 

In setting up a trust, you can name your successor trustee who may or may not be the same as the trust’s beneficiary. For example, you might choose to name your son as both your beneficiary and your successor trustee, or one but not the other.

The benefit of a trust is that the home won’t go through the lengthy court process of probate, which reviews your will and approves the distribution of assets after your death. Also, by avoiding probate, the name of the person or other entity who inherits the home will not be a matter of public record as is the case with a will.

There are two types of trusts you can establish: a revocable trust or an irrevocable trust.

Revocable vs. Irrevocable Trust

Revocable Trust

• You can change the beneficiaries and other terms at any time.

• The home will bypass the probate process when you die.

• Doesn’t have the tax or liability protection advantages of an irrevocable trust.

Irrevocable Trust

• Beneficiaries and other terms are very hard to change.

• Trust assets are not included in your estate for inheritance tax purposes.

• Can shield the assets from creditors.

Buying a Home With a Revocable Trust

In a revocable trust, the owner or grantor of the trust has full control over it at all times and can change its terms whenever they please. The grantor can assign beneficiaries, or in some cases, be the beneficiary of the trust.

For example, let’s say the son you appointed as your future beneficiary does not want the estate, or you’ve changed your mind and would now like to leave the home to your daughter. A revocable trust allows you to do that. You can also appoint multiple trustees or beneficiaries.

Note that revocable trusts do not have the inheritance tax or liability protection benefits that irrevocable trusts do.

Buying a Home With an Irrevocable Trust

Unlike a revocable trust, an irrevocable trust does not allow modification or termination of the trust without the permission of the beneficiary. The trustee acts as a fiduciary who is responsible for managing the assets on behalf of the beneficiary.

Note

Families often use an irrevocable trust to avoid taxes on inheritances that are above the federal estate tax threshold, which is $13.99 million in 2025.

Irrevocable trusts can also be useful when you want to protect the estate from possible future financial liability.

For example, suppose you have built a sizable estate, but your children fall on hard financial times later in life. An irrevocable trust can protect their assets from creditors, given that the assets were put into the trust before the credit problems arose.

For obvious reasons, it’s extremely important with an irrevocable trust to be careful in choosing your beneficiaries.

How to Buy a House in Trust: The Steps

Both revocable and irrevocable trusts are estate planning tools, and there are some crucial steps to take when doing this type of estate planning.

Determine the Level of Control You Want

The first step is to decide how much control you want to have over the assets in the trust. That can help you decide between a revocable or an irrevocable trust. You’ll also want to consider questions such as whether the home can be sold upon your death and what happens if you become ill or incapacitated. In addition, look at the size of your estate (both your home and other assets) to see if inheritance taxes are likely to be an issue.

Call in the Professionals

Find a financial advisor and an estate planning attorney who are familiar with the laws and inheritance tax rules of your state. Each has their own specialty, and you will need both of them to direct the dispersion of your assets appropriately. One of the biggest mistakes individuals make, experts say, is meeting separately with their financial advisor and attorney only to find out after the legal document is drafted that there are problems.

For example, by meeting with your advisor and attorney separately, you could lose out on possible tax advantages that the attorney wasn’t aware of and that the financial advisor would better understand. Conversely, you could receive advice from the financial advisor that doesn’t make legal sense. So, it’s crucial to be sure all three of you communicate effectively.

Consider the Costs

A lawyer might charge between $1,500 and $3,000 to establish a typical trust, whether revocable or irrevocable. Of course, costs can vary depending on the level of work involved. The financial advisor’s fees will also depend on the time they expend and their professional credentials.

Rather than serving as trustee yourself, you may decide to engage a bank or law firm to handle that role. If so, you’ll typically pay maintenance fees equal to 1% or more of the trust’s assets each year.

Can You Put a House With a Mortgage in a Trust?

Yes, you can put a home with a mortgage into a trust. Be aware that the bank that holds the mortgage might require advance notice if you plan to put the home in a trust; also, you’ll of course need to make sure the mortgage continues to be paid. You may need to remove the home from the trust with a transfer if you wish to refinance; you can transfer the property back into the trust when the refinance is complete.

What Are the Disadvantages of Buying a House in Trust?

Despite the estate planning benefits of buying a home in trust, there are some disadvantages to be aware of—the first of which is that it can be an expensive, time-consuming process. Another drawback is that putting your home in a trust can make refinancing your mortgage more complex. Finally, although the trust can help you avoid probate for your home, it doesn’t affect other property or assets that will still need to go through probate.

Do You Need a Trust If You Have a Will?

There are benefits to a trust that you don’t get if you only have a will. For example, trusts don’t have a probate period like wills. That means your property can pass much more quickly to your heirs (and without the fees associated with the probate process) if you’ve placed it in a trust. Also, a will only takes effect when you die; you can arrange things with precision using a trust while you’re still alive, and protect your assets even if you are incapacitated.

The Bottom Line

Buying and owning a home in trust is more complicated and expensive than buying one in the conventional manner. However, depending on the type of trust you choose, it can have its advantages. Those may include greater control of what happens to the home after your death, the minimization of estate taxes, and protection from financial liability in the event of a lawsuit. It’s important to seek the help of knowledgeable professionals to ensure that the trust is established correctly and in accordance with your wishes.

Reviewed by JeFreda R. Brown
Fact checked by Suzanne Kvilhaug

While some large and successful companies are privately-owned, many aspire to “go public.” An initial public offering (IPO) represents a private company’s first offering of its equity to public investors. This process is considered intensive and includes many regulatory hurdles to transform from a private to a public firm.

Key Takeaways

• The first stage is a restructuring phase when a private company sets the groundwork for becoming publicly-traded.
• The IPO transaction phase usually occurs before the first public shares are sold.
• The post-IPO period involves the execution of business strategies for long-run success.

1. Pre-IPO

The pre-IPO transformation stage is a restructuring phase when a private company sets the groundwork to become publicly-traded. The company may acquire management with publicly traded company experience. Companies may reexamine their organizational processes and policies. They might enhance the company’s corporate governance and transparency.

The company will likely develop and articulate an effective growth and business strategy. Such a strategy can persuade potential investors that the company will be profitable. To prepare for scrutiny from Securities and Exchange Commission (SEC) regulatory officials and the public, management should ensure the company’s operations, financial health, and governance are in order. This phase may take one to two years to complete.

Companies preparing to go public may need to provide two years of audited financial statements and have the infrastructure to produce quarterly and annual financial statements post-IPO.

2. IPO Transaction Stage

The IPO transaction phase involves achieving goals that enhance the firm’s initial valuation. Companies may choose reputable accounting and law firms to handle the formal paperwork associated with the filing.

During the IPO transaction stage, expectations may collide with reality and the IPO may fail. As the IPO approaches, it becomes necessary to find investors willing to pay what the company is estimated to be worth.

Some IPOs, such as Uber, faced difficulties with investors’ questioning the valuation. Other IPOs fail, such as WeWork’s, which was cancelled shortly before the firm was supposed to go public.

Note

A roadshow is the series of sales presentations conducted in multiple locations leading up to an initial public offering (IPO). It is a promotion made by the underwriting firm and a company’s management team to potential investors.

3. Post-IPO

The post-IPO transaction stage involves the execution of the business strategies the company committed to investors. Companies that frequently beat earnings estimates are usually financially rewarded for their efforts. This stage commonly reveals which companies will be successful in the long-run.

The firm’s management must deal with stock price fluctuations in the post-IPO transaction stage. Newly publicly traded firms and their Chief Financial Officers (CFO) must focus on regulatory compliance and reporting, quarterly and annual reporting, SOX compliance, and annual meetings.

What Are the SEC Financial Reporting Regulations for Publicly Traded Companies?

Publicly traded companies must submit quarterly (Form 10-Q) and annual reports (Form 10-K) to the SEC.

What Is SOX Compliance?

SOX compliance requires companies to follow the financial reporting, information security and auditing requirements of the Sarbanes-Oxley (SOX) Act of 2002, which aims to prevent corporate fraud.

How Many Companies Go Public Annually in the U.S.?

In 2024, 176 successful IPOs in the United States raised a total of $33 billion with their initial public stock offerings.

The Bottom Line

An initial public offering (IPO) is when a private company offers shares to the public in a new stock issuance. Companies must meet the requirements by exchanges and the Securities and Exchange Commission to hold an IPO.

Fact checked by Suzanne Kvilhaug
Reviewed by Margaret James

While many people take a passing interest in the benefits of saving as much money as possible, saving money should take up a significant portion of the attention you give to your life. Money saved and generating interest or returns earns cash you don’t have to work for.

If you’re interested in saving, here are some of the top money wasting activities you could begin addressing.

Key Takeaways

• Convenience stores and cell phone plans can eat into your savings plan.
• You should make sure you bank at an institution with no fees, or at least the lowest fees you can find.
• Magazine subscriptions can save you money on occasional purchases if you enjoy reading them.
• If you have credit cards with annual fees, you should consider getting rid of them because you will likely never use the “perks” and can do just as well with a no-fee card.
• Eating out and paying for soft drinks can increase your annual expenses, so skipping soft drinks can help you save.

1. Convenience Stores

Many people don’t consider the markup they pay for convenience store items. Here’s a hint: it’s huge. This is because, unlike grocery stores, convenience stores don’t purchase food in large quantities, and also because they make you pay more for the convenience they provide. So, unless it’s an emergency, avoid shopping at convenience stores.

The premium you pay for convenience is not worth the assumed convenience you get. For example, a bottle of Coke at a convenience store might cost you about four dollars, while you can go to Walmart and buy a 12-pack for about $7. If you tend to pull over for a drink, buy a 12-pack and keep it in your car. If you visit convenience stores often, the annual savings of cutting out these visits can be tremendous.

2. Cell Phone Plans

Take the time to check your monthly cell phone bill–you may be paying more than you need to. If you use fewer minutes than your monthly plan allows, switch to a lower-rate plan. If you use more minutes than your monthly allotment, upgrade to a higher-minute plan.

Before making any changes to your plan, sit down with a list of your cell phone company’s offerings and compare and determine which plan provides the most value based on your needs. You should also scan through your cell phone plan for added features like text messaging and mobile internet. If you aren’t really using these features, get rid of them–they’re costing you money each month!

3. Soft Drinks

This one is a sneaky money waster. Not only does ordering beverages along with a restaurant meal boost your total expenses, but soft drinks also have one of the highest markups of any restaurant item, and thus provide lower value for your money.

Consider a typical family of four that eats out twice a week at fast-casual restaurants. Assuming an average price of $1.50 for a fountain soft drink, that totals $12 a week, $48 a month, $624 a year. Just cutting out this one item from your meal could mean significant savings that could go into something much more productive, such as a retirement savings plan. If you invest $624 at a 9% rate of return year every year, you would have almost $32,000 at the end of 20 years. So dine out, but opt for water!

4. Unnecessary Bank Fees

Many people unknowingly pay a lot to their banks in the form of fees. If you don’t know what fees your accounts are subject to, spend a few minutes finding out. Some banks charge ATM fees for using another bank’s ATM, for example. These can be as high as $3! This amounts to a 15% one-time fee for a $20 withdrawal. The key with this type of fee is simply knowing about it. You would be better off using a credit card to make the purchase and paying it off at the end of the month.

Go back and examine the rules governing your checking and savings accounts. Also consider consolidating bank accounts, as often one account with a larger minimum can eliminate numerous fees that might otherwise exist.

5. Magazines

If you’re the type of person who likes to occasionally pick up your favorite magazine from the local grocery store or newsstand, consider getting an annual subscription. Even if you don’t want the magazine every month, the cost of a couple of issues at the newsstand is enough to cover the entire annual subscription. 

6. Annual Credit Card Fees

Unless you have a poor credit history, there is no reason to pay annual credit card fees. A host of Visa, MasterCard and Discover cards have no annual fee, yet many people pay $100 or more a year for the privilege of holding a premium credit card. Unless you’re a wealthy holder of an elite-level credit card with exclusive perks, most people should not be paying annual credit card fees.

And speaking of credit cards, make sure you make a payment on time every month, even if it’s the minimum. Many credit cards charge high monthly late fees, charges which accrue interest along with your existing balance.

Be Proactive

Spend a couple of hours and go over these categories along with any other regular habits you may have accumulated over the years. The time will be well spent as it could mean hundreds of dollars of recurring annual savings.

How Do You Stop Spending Money Mindlessly?

Many people find success by creating a budget and tracking their expenses. Other methods are to consult an objective friend or loved one before making large purchases to avoid impulse buys, and avoid using credit.

What Are Big Money Wasters?

Food delivery via apps, subscriptions you’ve lost track of, grocery shopping without a list of needed items, and late payments on bills are some of the most common money wasters.

What Do Rich People Waste Money On?

“Wasting money” is a subjective term. One person might think someone is wasting money on one thing, while another might not. However, rich people might hire people to do things they could or should be doing themselves, buy unnecessary luxury items, and go out for expensive dining—all of which could be considered a waste of money by some.

The Bottom Line

Shopping at convenience stores, wasting money on magazines, and high credit card and bank fees are easy ways to waste money. Taking some time to go over your spending habits could be well worth your time.

Reviewed by David Kindness
Fact checked by Vikki Velasquez

Decision trees are major components of finance, philosophy, and decision analysis in university classes. Yet, many students and graduates fail to understand their purpose, even though these statistical representations play an integral role in corporate finance and economic forecasting.

Key Takeaways

• Decision trees are essential tools in finance, helping analysts and investors visualize choices, risks, and potential outcomes.
• They are widely used in option pricing, real option analysis, and evaluating competing projects, often incorporating probability models.
• Binomial option pricing models rely on decision trees to estimate asset values, particularly for American and European options.
• Decision trees also assist in corporate analysis and financial forecasting but can become overly complex with many variables.
• While useful, decision trees have limitations, such as handling correlated variables and continuous financial data, making other models like neural networks sometimes more effective.

Decision Tree Basics

Decision trees are organized as follows: An individual makes a big decision, such as undertaking a capital project or choosing between two competing ventures. These decisions, which are often depicted with decision nodes, are based on the expected outcomes of undertaking particular courses of action. An example of such an outcome would be something like, “earnings are expected to increase by $5 million.” However, since the events indicated by end nodes are speculative in nature, chance nodes also specify the probability of a specific projection coming to fruition.

As the list of potential outcomes, which are contingent upon prior events, becomes more dynamic with complex decisions, Bayesian probability models must be implemented to determine priori probabilities.

Binomial Option Pricing in Decision Tree Analysis

Decision tree analysis is often applied to option pricing. For example, the binomial option pricing model uses discrete probabilities to determine the value of an option at expiration. The most basic binomial models assume that the value of the underlying asset will rise or fall based on calculated probabilities at the maturity date of the European option. 

However, the situation becomes more complex with American options, wherein the option can be exercised at any point until maturity. The binomial tree would factor in multiple paths that the underlying asset’s price can take over time. As the number of nodes in the binomial decision tree increases, the model eventually converges onto the Black-Scholes formula.

Although the Black-Scholes formula provides an easier alternative to option pricing over decision trees, computer software can create binomial option pricing models with “infinite” nodes. This type of calculation often provides more accurate pricing information, especially for Bermuda Options and dividend-paying stocks.

Using Decision Trees for Real Option Analysis

Valuing real options, such as expansion options and abandonment options, must be done with the use of decision trees, as their value cannot be determined via the Black-Scholes formula. Real options represent actual decisions a company may make, such as whether to expand or contract operations. For example, an oil and gas company can purchase a piece of land today, and if drilling operations are successful, it can cheaply buy additional lots of land. If drilling is unsuccessful, the company will not exercise the option and it will expire worthless. Since real options provide significant value to corporate projects, they are an integral part of capital budgeting decisions.

Individuals must decide whether or not to purchase the option prior to the project’s initiation. Fortunately, once the probabilities of successes and failures are determined, decision trees help clarify the expected value of potential capital budgeting decisions. Companies often accept what initially seems like negative net present value (NPV) projects, but once the real option value is considered, the NPV actually becomes positive. 

Decision Tree Applications for Competing Projects

Similarly, decision trees are also applicable to business operations. Companies are constantly making decisions regarding issues like product development, staffing, operations, and mergers and acquisitions. Organizing all considered alternatives with a decision tree allows for simultaneous systematic evaluation of these ideas.

This is not to suggest that decision trees should be used to contemplate every micro decision. But decision trees do provide general frameworks for determining solutions to problems, and for managing the realized consequences of major decisions. For example, a decision tree can help managers determine the expected financial impact of hiring an employee who fails to meet expectations and must be fired.

Pricing of Interest Rate Instruments With Binomial Trees

Although not strictly a decision tree, a binomial tree is constructed in a similar fashion and is used for the similar purpose of determining the impact of a fluctuating/uncertain variable. The upward and downward movement of interest rates has a significant impact on the price of fixed income securities and interest rate derivatives. Binomial trees let investors accurately evaluate bonds with embedded call and put provisions using uncertainty regarding future interest rates.

Because the Black-Scholes model is not applicable to valuing bonds and interest rate-based options, the binomial model is the ideal alternative. Corporate projects are often valued with decision trees that factor various possible alternative states of the economy. Likewise, the value of bonds, interest rate floors and caps, interest rate swaps, and other types of investment tools can be determined by analyzing the effects of different interest rate environments.

Decision Trees and Corporate Analysis

Decision trees let individuals explore the ranging elements that could materially impact their decisions. Prior to airing a multimillion-dollar Super Bowl commercial, a firm aims to determine the different possible outcomes of their marketing campaign. Various issues can influence the final success or failure of the expenditure, such as the appeal of the commercial, the economic outlook, the quality of the product, and competitors’ advertisements. Once the impact of these variables has been determined and the corresponding probabilities assigned, the company can formally decide whether or not to run the ad.

Limitations of Decision Trees

One major drawback is their tendency to become overly complex, especially when dealing with a large number of variables and possible outcomes. This is clearly the case with the ‘Corporate Analysis’ example above. As the number of branches increases, this can lead to what is known as the “curse of dimensionality”, meaning too much information may make a decision overly complex.

Another limitation is the reliance on subjective probability estimates. Many financial scenarios, such as predicting market movements or estimating default risk, involve assigning probabilities based on historical data or expert judgment. This may not only materialize or be a reliable function; for example, the causes of past recessions may not necessarily indicate the probability of a future recession.

Decision trees also struggle with handling correlated variables, which are common in finance. For example, things like interest rates, inflation, and stock prices often influence each other. Standard decision tree models do not inherently account for these interdependencies, potentially leading to oversimplified conclusions.

Finally, decision trees may not effectively capture continuous financial data or non-linear relationships between variables. Financial markets often exhibit complex patterns that are better modeled using advanced statistical methods or machine learning approaches like neural networks. For instance, when trying to assign credit risk, there may be too many interconnected variables all reliant on each other to be useful in a tree-analysis structure.

Note

Decision trees work well for structured financial decisions, whereas neural networks might be better in pattern recognition and forecasting.

Pruning Decision Trees For Financial Analysis

Pruning in a decision tree is a primary way to refine the model by removing branches that do not significantly contribute to decision-making. By pruning unnecessary branches, the decision tree becomes more streamlined, improving its ability to make accurate predictions in real-world scenarios.

There are two primary types of pruning: pre-pruning and post-pruning. Pre-pruning, also known as early stopping, involves setting constraints during the tree-building process. For instance, you could limit the maximum depth of the tree or require a minimum number of data points per split. This prevents the model from growing excessively large in the first place.

Post-pruning involves growing the tree fully and then systematically removing branches that do not add substantial predictive value. This is typically done using validation data to determine which branches can be eliminated while maintaining accuracy. Not that this post-pruning stage is where you’re at the most risk to overfit your data.

Software Tools Commonly Used for Decision Tree Analysis

Financial analysts can use different software tools to construct and analyze decision trees. Microsoft Excel is one of the most widely used tools, particularly for basic decision tree modeling. Analysts can manually build decision trees using Excel’s built-in functions or use add-ins like XLMiner for more advanced analysis.

For more sophisticated decision tree analysis, R is a popular choice. The rpart package in R allows you to build, prune, and optimize decision trees using machine learning techniques. R generally has a better ability to handle large datasets and perform more complex calculations. Python, particularly with the Scikit-learn library, is another option. Scikit-learn allows you to implement decision tree classifiers and regressors. It can also usually be integrated with other financial modeling tools.

In addition to general-purpose programming languages, specialized financial modeling software such as Palantir, SAS, and MATLAB also provide decision tree analysis capabilities. These types of tools might be better suited for institutions needing to not only do more robust analysis but having the analysis at the core of what the company does (i.e. corporate analysis or underwriting).

What Is a Decision Tree in Finance?

A decision tree is a graphical representation of possible choices, outcomes, and risks involved in a financial decision. It consists of nodes representing decision points, chance events, and possible outcomes, helping analysts visualize potential scenarios and optimize decision-making.

How Are Decision Trees Used in Investment Analysis?

Decision trees help investors evaluate various investment opportunities by mapping potential risks and rewards. By assigning probabilities and expected values to different outcomes, investors can compare options and choose the one with the highest expected return. Investors can also compare downside expectations and anticipated potential losses.

How Are Probabilities Assigned in Decision Trees?

Probabilities in decision trees are assigned based on historical data, expert judgment, or statistical models. The probabilities are at the core of how the decision tree works; experts often spend most of their time analyzing the chance of outcomes (i.e. a 40% chance of a recession), as that’s a primary driver of decision tree outcomes.

What Is the Expected Value in a Decision Tree?

The expected value is the weighted average of possible outcomes, factoring in their probabilities. It helps decision-makers compare options and select the one with the highest EV for optimal financial outcomes.

The Bottom Line

These examples provide an overview of a typical assessment, which can benefit from utilizing a decision tree. Once all of the important variables are determined, these decision trees become very complex. However, these instruments are often an essential tool in the investment analysis or management decision-making process.

Fact checked by Vikki Velasquez

High school and college students should be on the road to financial success by learning some basics and following some guiding principles. This ultimate checklist will guide them on their way. And most importantly, time is on their side.

“Young people have perhaps the biggest advantage compared to other investors: time. The earlier you learn and apply key financial skills, the greater your rewards will be over the long term,” says Phillip Durbin, a financial planner with Generational Wealth Development.

Key Takeaways

• You can build a lifetime’s worth of wealth by starting to invest in your 20s.
• By building an accurate budget, you can start finding smart ways to save.
• Compounding interest is your superpower when you’re young.

Financial Checklist for Young People

Young people can build financial success by following the tips on this checklist:

• Start by creating a realistic budget that takes into account wants and needs.
• Start saving and establish an emergency fund to cover unexpected expenses.
• Be smart about credit.
• Don’t be scared of investing in the stock market.

Learn How to Budget

Getting a handle on the money coming in and going out each month is the first step to building a solid financial foundation. So, tally up all bills and expenses as well as income each month and build a budget. Make note of monthly bills and monthly income. How much money is left over after paying bills? Rather than spending it all, this is a great opportunity to begin saving.

Understand Wants vs. Needs

As you build your budget, consider the difference between needs and wants. There are many ways people want to spend their money, but not all of them are essential—these are needs. Take care of needs first and then consider what wants will fit into the budget.

“Prioritize spending on things you need (housing, food, gas) before things you want (new phone, concert tickets, gas station junk). Budget for some fun, but learn to say no,” Durbin says.

Time to Start Saving

“The sooner you learn to budget for your life, the better off you’ll be. Once you control where your money is going, you can start controlling how much you save,” Durbin says. “Pay yourself first by saving a portion of any money you earn or receive before spending it.”

One way to achieve that is to set up automatic savings into a high-yield savings account or a brokerage account.

Learn the Power of Compound Interest

Depending on the account you put your savings into, it’s important to ensure you understand how that money grows. When interest gets applied not only to the principal amount you invest in an account but also to the interest accumulated previously, this is compound interest. And it’s a sort of superpower, particularly when you’re young.

“Take advantage of compound interest by contributing to a 401(k) or Roth IRA as soon as possible. Even small contributions in your 20s can grow significantly over time,” says Daniel Milks, a certified financial planner and founder of the Fiduciary Organization.

Build an Emergency Fund

Not everything that happens to you will fall into a neat budgeting bucket. An unexpected expense, such as a big car repair or getting laid off from a job, can happen to anyone. Be prepared by building a savings cushion to cover these expenses.

“Aim to save three to six months’ expenses in a high-yield savings account. This provides a financial cushion for unexpected expenses like medical bills or job loss,” Milks says.

Use Credit Wisely

Be smart about your credit. Your bank will likely make it easy to set up automatic bill pay to ensure your credit card bills (and other recurring bills) get paid on time. Keep your credit card balances low. And only borrow money for essentials you need. These can help you create a credit history. And a good credit rating can go a long way as you map out your future.

“Build a strong credit history by paying bills on time, keeping credit utilization low, and avoiding unnecessary debt. Good credit helps with securing loans, renting apartments, and even job applications,” Milks says.

Don’t Be Afraid of the Stock Market

Investing early and often when you are a young person is one of the best financial moves you can make. Time and the power of compound interest are on your side. So don’t hesitate to begin investing.

“The stock market can be this big, scary beast, but it doesn’t have to be. You have the biggest advantage of anyone: time,” Durbin says. “Spend the time learning about it now, so it can benefit you for the rest of your life. This knowledge could save you millions of dollars over your lifetime; isn’t that worth the time to learn it now?”

People younger than 18 can get an early start on investing through a custodial account, but you’ll need a parent or guardian’s help to set it up. In a custodial account, an adult controls investments on behalf of a minor until the minor reaches 18 or 21 years of age, depending on the state.

To start, you’ll need to educate yourself about investing. Then, set up your investment goals before selecting your specific investments. Finally, select the right brokerage account for you.

The Bottom Line

These financial tips will set young people on the path to a bright financial future. All are important, so make sure to incorporate all the tips as you build your financial life. Budget, be smart with your credit, save for a rainy day (because they happen to all of us), and understand the difference between a want and a need. The biggest takeaways are the importance of investing and understanding the power of compounding interest.

You can build a lifetime’s worth of wealth by starting to invest in your 20s. So don’t be frightened by the stock market and instead invest in your financial future.

Reviewed by Chip Stapleton
Fact checked by Vikki Velasquez

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

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

Key Takeaways

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

The Repackaging Plan

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

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

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

Important

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

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

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

The Split-Up

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

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

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

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

The Portfolio Plan

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

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

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

The Savior Plan

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

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

What Is a Leveraged Buyout?

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

What Are the Risks of a Leveraged Buyout?

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

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

How Can I Invest in a Leveraged Buyout?

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

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

The Bottom Line

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

Fact checked by Vikki Velasquez
Reviewed by Katie Miller

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

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

Key Takeaways

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

What Are DEI Initiatives?

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

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

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

How Advisory Firms Can Do More in DEI

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

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

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

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

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

Important

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

Examples of DEI Initiatives

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

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

Make it your “why”

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

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

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

Work with diverse suppliers

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

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

Don’t focus on “initiatives”

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

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

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

Benefits of DEI in the Workplace

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

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

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

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

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

Note

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

Measuring DEI in the Workplace

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

What Is DEI?

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

What Are the Benefits of Workplace Diversity?

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

Why Is DEI Important in Nonprofit Organizations?

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

The Bottom Line

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

Homeownership is possible if you rebuild your credit

Fact checked by Betsy Petrick

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

Key Takeaways

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

How Long After Bankruptcy Can You Buy a House?

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

Chapter 7 Bankruptcy Waiting Periods

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

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

Chapter 13 Bankruptcy Waiting Periods

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

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

Waiting Periods for Multiple Bankruptcies

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

Note

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

Types of Mortgage Loans You Can Get After Bankruptcy

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

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

How to Apply for a Mortgage After Bankruptcy

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

Step 1: Repair Your Credit

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

Your credit score could improve if you:

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

Step 2: Write a Bankruptcy Explanation Letter

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

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

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

Step 3: Get Pre-Approved

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

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

Step 4: Respond to Lender Inquiries

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

Warning

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

How Long Does It Take To Rebuild Credit After Bankruptcy?

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

What Is the Waiting Period After Bankruptcy?

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

What Is the Downside to an FHA Loan?

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

The Bottom Line

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