Investopedia

Provide advice and set rules as a child gets their first credit card

Reviewed by Chip Stapleton
Fact checked by Ryan Eichler

Getting a minor a credit card can help them learn healthy money habits and learn how to manage credit card debt.

Giving your child a credit card can come with risks, including the risk they will overspend. But when they have a credit card they can learn important lessons about how revolving debt works. You can help teach your child the pros and cons of having a credit card. Learn whether getting a credit card may be right for your child, and be sure to consider kids’ debit cards as well.

Key Takeaways

• Having access to a credit card can help a minor develop healthy spending habits and begin to build a credit history.
• Adding your teen as an authorized user on one of your accounts can help them start building credit.
• You can explain why good credit is important with real-life examples.
• Have kids research different credit card terms and how interest rates work.

Building Credit History

One major advantage of a minor having a credit card is that they can build credit and establish a credit history. The length of credit history accounts for 15% of a credit score. Payment history, or whether you have regularly paid your bills on time, accounts for 35%.

Consider adding a child as an authorized user to one of your credit cards that has a history of on-time payments with a low utilization percentage (meaning a high limit and a low balance). This is one of the easiest ways to help your teen have good or excellent credit.

One risk with adding a child as an authorized user is you would be responsible for their spending. Before adding a minor as an authorized user, have a conversation about spending expectations. If you are worried about their spending, you may want to simply add them as a user but not provide them with the card to spend.

You could help a minor set up a monthly auto-draft from their bank account that pays off their spending limit every month. Explore kids’ debit cards to find an option that works for you and your child.

Lesson in Good Credit

You can teach minors that a main benefit of using a credit card responsibly is that it can help improve your credit score. Show them how much money they can save on a house or a car if they have excellent credit versus poor credit.

For example, you can ask them to choose their dream car. Then plug in the purchase price of that car in an auto loan calculator like the one below.

You can use the calculator to illustrate the difference between the monthly payment for someone with a 740+ credit score and a good interest rate versus someone with a poor credit score of 580.

Remind teens that bad credit can prevent you from getting a job or renting housing.

Instilling Healthy Habits

Teaching good spending habits and a healthy mindset around credit cards are advantages to getting them a credit card.

As they use the card, you can educate them about the difference between needs and wants, and between impulse buys and planned purchases.

Before you give your child a credit card or add them as a user, establish rules. You might want to set a time to review their purchases each month or require that the child will pay for their purchases.

Avoiding Impulse Purchases

Reviewing a child’s monthly purchases with them and discussing the rationale behind each one can help them gain awareness about impulsive purchases.

By enforcing timely payments for their spending, you’ll help them avoid the two things that can hurt their credit score: late payments and high balances.

Providing a Safety Net 

Part of becoming an adult is making mistakes and learning from them. Unfortunately, this kind of learning opportunity can stay on a credit report for years.

Another reason to give a credit card to a child instead of waiting until they become an adult is that you can provide a safety net for them if they make mistakes.

Best Credit Cards for Kids

Before giving them a credit card, you may want to provide a debit card that deducts money directly from their bank account. That way, they can adjust to the responsibility of carrying a card and not buying more than they can afford. Then, you can help them transition to a credit card.

Here are some options:

Secured credit card

A secured credit card limits how much you can charge based on how much you deposit with the card issuer. You will still be responsible for paying a portion of the balance each month.

Service station or gas card

When a minor starts driving, consider helping them get them their first gas credit card, which provides revolving credit. More likely than not, the card will have to be in your name. Many gas stations now have mini-marts, so they may be able to make small purchases beyond gas.

Low-limit credit card

An ideal credit card for a new credit card user will have a low limit such as $500 to help the user avoid overspending. A new credit card user may not fully understand how difficult it would be to pay off a large balance that accrues interest. Starting with a lower limit will provide a lesson in how credit cards work.

Emergency-use credit card

Consider getting a family “emergency card” in your name but with your child listed as an authorized user. This is a card that could be safely stored and used on in case of an emergency.

Researching the Best Credit Cards

You can ask the child to research credit cards and discuss them with you. They can learn to evaluate rewards and analyze rankings. You can ensure they know the importance of understanding all the terms and how they compare.

Make sure they understand how credit card interest rates work. Most kids do not have a concept of how quickly compound interest can double a credit card balance or how a lower credit score can affect the total cost of borrowing.

The Financial Finish Line

Consider establishing a deadline, after which they will handle their credit affairs independently. Otherwise, they may become overly dependent on you as a source of financial stability. For example, you may want to cut credit ties with your child when they turn 21.

How Old Should Kids Be for a Credit Card?

Kids can be added as authorized users on some credit cards including the Chase Freedom Unlimited with no published age limit. Other cards like the Blue Cash Everyday from American Express have a minimum age of 13 to be added as an authorized user. The minimum age to be issued a stand-alone credit card is 21.

What Are Good Credit Card Alternatives for a Child?

A debit card is a great way to start teaching your child how to manage their budget and avoid overspending. Some apps, like Greenlight, include parental controls that make it easy to track your teen’s spending. If you want your kids to have access to money you can track, but don’t want them to have a full bank account, then a product like Apple Cash may be a good choice.

How Do I Know My Child Is Ready for a Credit Card?

Kids who seem to understand wants versus needs and consistently have more money coming in than going out every month may be ready for a credit card.

Can Adding My Child as an Authorized User Hurt My Credit?

If you add your child as an authorized user on one of your credit cards and they use that credit irresponsibly by racking up a high balance (raising your utilization percentage) or failing to pay at least the minimum monthly payment, then your credit can go down. You can prevent this by setting up auto-pay on the monthly minimum and keeping track of the balance on the card.

The Bottom Line

A credit card is a financial tool that can be used to build credit and establish a healthy credit score. Helping kids learn to use a credit card wisely can help them with their long-term finances. Ensure children who are using credit understand the benefits of using it responsibly and the downsides of using it irresponsibly.

Fact checked by Vikki Velasquez

You’ve lost your job, and money is tight. Should you contact your family for help, or tap into your 401(k) retirement plan? There are pros and cons to each money decision.

Key Takeaways

• After a job loss, withdrawing money from your 401(k) can be an expensive choice. You may pay a 10% penalty and state and federal taxes.
• You can avoid this big tax bill by returning the money to your 401(k) plan within 60 days.
• Reaching out to family for financial help could be beneficial if your family is in a position to assist you financially.

Dipping Into Your 401(k)

The advantage to getting the money you need out of a 401(k) is it’s your plan, in your name, and you are free to do with it what you wish. No one has to know you are short on cash and tapping your 401(k) retirement plan early to make up the difference.

But there are some pretty serious financial downsides for withdrawing early from a 401(k).

A 401(k) plan is meant for retirement savings, and you’ll pay a 10% penalty for withdrawing money before the age of 59½. For example, if you withdraw $5,000 from your 401(k), you’ll pay a $500 penalty on your next tax return plus state and federal taxes—and having a hefty tax bill hanging over your head while you are job searching is not a good place to be.

“It will count as earned income and, therefore, will be taxed as ordinary income. Depending on your tax bracket, that could be quite expensive,” says Chris Chen, a certified financial planner with Insight Financial Strategists.

Another downside to raiding your 401(k) is it may be difficult to get back on track with your retirement savings.

“This is money that you would need in retirement. Perhaps you are even counting on it. People tell themselves that they will return it eventually. That happens rarely,” Chen says.

But if you are lucky enough to get back on your feet fairly quickly, you may be able to avoid a big tax bill by returning money to your 401(k).

“If you return the money within 60 days, you may avoid these additional taxes,” Chen says.

Reaching Out to Family for Money

Asking a loved one, like a parent or other family member for financial help is another alternative. This involves sharing the extent of your financial troubles with your family. So be honest about how bad your financial circumstances have become.

Also, be clear about how they can help. How much money do you need to get by as you look for a new job? Is the money from a family member a loan? Or are you unsure if you will be able to pay them back? Be truthful about what you can handle financially.

Financial help from a family member will be less expensive than withdrawing money from your 401(k) plan, but there are emotional elements to consider.

“If you don’t pay (the money) back, your family will remember that for a long time, whereas the 401(k) has no such emotions,” Chen says.

So, tread carefully when approaching parents or other family members for help.

“Relationships can get complicated, especially when they add a financial dynamic,” says Alissa Maizes, a financial planner with Amplify My Wealth. “I recall asking a client how they felt about borrowing money from their parents, with whom they had a fantastic relationship. They were confident, too, that their parents would say yes, but they responded that that was not how they wanted their parents to see or think of them. Ideally, borrowing money from your family would be a last resort.”

If your family is able to help, have a plan for repaying their assistance.

“Consider an agreement to pay it back when you gain employment, or if you are in the family member’s estate plan for it to decrease your inheritance by that amount,” Maizes says.

If family members are unable to help financially, they may be able to provide an affordable place for you to live for a while.

“With rent and homeownership often being a person’s most significant monthly expense, consider whether temporarily living with your family can help set you up for success in getting your next ideal position,” Maizes says.

The Bottom Line

Choosing between withdrawing money from a 401(k) and reaching out to family for financial support can be a tough decision.

If a family member is doing well financially, then a few thousand dollars to you may not be much of a hardship, especially if you plan to pay them back once you get a new job. Family members without cash to spare could allow you to live with them for a while eliminating your housing expenses for a few months.

Withdrawing money from a 401(k) plan gives you an immediate injection of cash, but with a 10 percent penalty and federal and state taxes to pay, this is an expensive way to go. To avoid the big tax hit, return the money to your 401(k) plan within 60 days.

Reviewed by Margaret James
Fact checked by Vikki Velasquez

Who Was Henry Ford?

Henry Ford was an American inventor and business magnate and the founder of Ford Motor Co. He invented several vehicles, most famously the Model T automobile, and changed the auto industry forever by introducing the moving assembly line to car production.

His industrial innovations were so economically impactful that the term “Fordism” came to refer to the mass production and consumption that they enabled, which then more broadly characterized the pace and nature of the postwar era’s capitalist economy.

Key Takeaways

• Henry Ford was an American businessman and inventor.
• The son of Irish immigrants, Ford grew up on a farm in Michigan but had an early penchant for mechanics and invention, which spurred his career as an innovator.
• Henry Ford founded Ford Motor Co. and invented the famous Model T car.
• Ford introduced several innovations to the car industry, including the moving assembly line method of production, which had a major impact on vehicle manufacturing as well as the American economy more broadly.
• Ford also invented the five-day, 40-hour workweek, implementing it for his workforce in 1926.

As a powerful business figure, Ford himself was also quite impactful, publishing several books over his lifetime that featured his views on industry, society, and innovation. Unfortunately, this impact also had its dark sides. In 1922, he took over ownership of The Dearborn Independent, his local newspaper, and for many years wrote and issued a series of antisemitic articles in which he scapegoated Jewish people and claimed they were conspiring to run the world. Ford later released a formal apology regarding the series after being sued for libel.

Early Life and Career

Born in Springwells Township, Wayne County (now part of southwest Detroit), Michigan, in 1863, Henry Ford was the eldest of six children. His father, an Irish immigrant, settled in America in 1847 on a farm in Wayne County. He showed an interest in mechanics and machinery from a young age, spending much of his time in a self-built machine shop. By the age of 15, he had built a steam engine.

His career began with an apprenticeship in Detroit in 1879, which lasted until 1882. Afterwards, he repaired Westinghouse steam engines in southern Michigan. But by 1891, had a job as an engineer at Detroit’s Edison Illuminating Co., founded by Thomas Edison (who would go on to mentor Ford and become his lifelong friend). In November 1893, he was appointed their chief engineer.

In 1888, Henry Ford married Clara Jane Bryant, whose father was also a farmer from Wayne County. In 1893, their first and only son, Edsel Bryant Ford, was born.

Inventing Motor Vehicles

Ford’s first vehicle-related invention was a one-cylinder, gasoline-fueled internal combustion engine that he built in 1893. The engine would later power his first vehicle, finished in 1896. The quadricycle, a sort of horseless carriage, comprised four bicycle wheels and a four-horsepower engine and could only drive forward, not in reverse.

In 1899, Ford left Edison Illuminating Co. to become one of the founders of Detroit Automobile Co. The company went bankrupt about 18 months after its founding.

In 1901, Ford founded Henry Ford Co. (which later became Cadillac Motor Car Co.) and again left after about a year. Meanwhile, Ford had been working on a series of racing cars, which turned out to be quite successful at winning races and even setting speed records.

Ford Motor Co.

June 1903 saw the founding of Ford Motor Co., which sold its first car in July, turned a profit in its first year, and expanded internationally over the years to follow.

The famous Model T was introduced in 1908, and by 1927, 15 million of them had been sold, setting all-time car sales records. Known as “Tin Lizzie,” the Model T was reliable, cheap, and easy to maintain—aspects that contributed to its major mass-market appeal. In 1913, the introduction of the moving assembly line method of production and its introduction to the Model T factory revolutionized the car industry and manufacturing more broadly.

Though the moving assembly line was incredible for the Model T, making it possible to produce one in just 90 minutes, workers hated it. The new production method had made work boring and repetitive, but it also strictly timed due to its requirement that workers finish their tasks before the vehicle could move along down the production line. Many workers left to find jobs with competitors.

This high turnover led Ford to introduce the “$5 Day” in 1914. At the time, $5 was double what a factory worker could expect to earn in a day. Ford also reduced the shift length to eight hours, an hour less than the previous standard. Though favorable to workers, the change also allowed Ford to run three shifts per day, making the factory operations substantially more efficient.

In 1926, Henry Ford introduced the five-day workweek, shutting down his factories on Saturdays and Sundays. After the initial tumult, these changes turned out to be remarkably competitive in the contemporary labor market, eventually giving the company a significant hiring advantage as well as increasing employee retention and quality of life (in part by making Ford’s cars affordable to their own employees and offering employees more leisure time).

Henry Ford was replaced as president of Ford Motor Co. in 1919 by his son, Edsel. He remained one of the sole owners of the business, along with his wife, Clara, and Edsel, having bought out his investors on the same day he was succeeded as president of the company. However, in 1943, upon the death of his son, Henry Ford once again assumed the presidency of Ford Motor Co. until his grandson, Henry Ford II, took over in 1945.

Later Life and Recognition

In 1946, Henry Ford was recognized by several major industry organizations for his achievements, including the first-ever Gold Medal award from the American Petroleum Institute.

During his life, Ford wrote several books together with collaborator Samuel Crowther: “My Life and Work” (1922), “Today and Tomorrow” (1926), “Moving Forward” (1930), and “Edison, As I Know Him” (1930). “Moving Forward” discussed his thoughts on industrialism and society.

Ford died of a cerebral hemorrhage at the age of 83 in Dearborn, Michigan, on April 7, 1947. His body is buried at St. Martha’s Episcopal Church in Detroit.

Legacy and Controversies

‘Fordism’ and the Moving Assembly Line

Ford did not invent the assembly line, but in borrowing the conveyor belt and production processes from industries such as meatpacking, he did revolutionize it. Rather than workers needing to move around the factory and the vehicle as they built it, the vehicle was built as it literally moved along the production line.

The introduction of increased wages, leisure time, and access to the affordable Model T are often cited as influential in the creation of America’s middle class. Ford famously increased wages for his employees, paying them enough that they were able to afford to buy his cars and creating a workspace that was more likely to retain workers for longer.

The term “Fordism” speaks to the impact of Ford’s industrial innovations and refers to the contemporary era’s feverish pace of mass production and consumption in the postwar era. It is no coincidence that Aldous Huxley chose Ford’s name to signify a sort of religious figure in his 1932 science fiction novel, “Brave New World.” References to “Ford,” “fordliness,” and “Our Ford” throughout accent Huxley’s dystopian portrayal of mass culture.

Stance on War, and Antisemitism

During World War I, Ford was an active pacifist, funding a ship in 1915 called the Oscar II that journeyed to neutral European countries in an effort to mediate and promote peace. However, Ford’s pacifism had a troubling expression in terms of his larger worldview. In 1918, he purchased the local newspaper, The Dearborn Independent, and in 1920, started publishing a series of antisemitic articles, which would continue over the next several years.

The newspaper campaign portrayed Jewish people as scapegoats for World War I, as well as anything and everything he came to take issue with, from modern music to economic upheaval. Though Ford’s views might seem to be situated within his contemporary context and the atmosphere of xenophobia in late 19th and early 20th century America, he went to great lengths to publish and participate in antisemitic discourse. He collected the series of articles into a four-volume set titled “The International Jew” and printed and distributed half a million copies, some via subscription.

Ford also reprinted “The Protocols of the Elders of Zion” in The Dearborn Independent. The piece was a forged document claiming to reveal a conspiracy of Jewish world domination, but Ford printed it as if it were a factual article. The reach and influence of his newspaper were immense for what would otherwise have been a small-town publication, given Ford’s reputation and the fact that his network of dealerships across the country carried the paper. He was even considered as a candidate for the American presidency in the 1920s.

In 1924, Ford was sued for libel by a Jewish American activist, Aaron Sapiro, regarding an article Ford had published in The Dearborn Independent. Shortly before the trial, Ford closed the newspaper and settled the case outside of court with Sapiro, paying him a cash settlement and releasing a formal apology written by a mediator and the president of the American Jewish Committee, Louis Marshall.

For What Is Henry Ford Best Known?

Henry Ford founded Ford Motor Co. and invented the Model T car. He also introduced the moving assembly line method of production to car manufacturing.

Did Henry Ford Invent the Car?

Henry Ford was not the first person to invent a car, but he did invent one of the most famous vehicles of all time: the Model T.

Did Henry Ford Invent the Assembly Line?

Henry Ford did not invent the concept of the assembly line (that is credited to Adam Smith in “The Wealth of Nations”), but he did introduce it to the car manufacturing industry, borrowing the idea of a conveyor belt from the meatpacking industry to make it into a moving production line.

Was Henry Ford Antisemitic?

Yes. Henry Ford was vocally antisemitic and for many years published a series of articles in his newspaper The Dearborn Independent that blamed Jews for anything with which he took issue. In his newspaper, he also reprinted “The Protocols of the Elders of Zion,” a forged document that claimed to uncover an international Jewish conspiracy, presenting it as an authentic exposé.

Did Henry Ford Invent the 40-Hour Workweek?

Yes. Henry Ford introduced the 40-hour workweek to his factory staff in May 1926 and to his office staff in August 1926.

The Bottom Line

By introducing the moving assembly line, Henry Ford was hugely influential in changing the way that we manufacture not only cars but all types of goods. His innovations in the structure of work also contributed to the post-World War II rise of the American middle class, changing the economic landscape of the country.

Synchrony Bank offers CD accounts with APYs as high as 4.40%

Fact checked by Hans Daniel Jasperson

Synchrony Bank is an online bank that offers a wide variety of financial services, including certificates of deposit (CDs) with terms that range from three months to five years. Synchrony Bank CD rates of up to 4.35% are competitive with some of the best CDS for some term lengths.

Another benefit is the fact that Synchrony’s CDs feature no minimum balance requirements. Synchrony Bank also has two specialty CDs available for savers who are interested in bump-up CD accounts and no-penalty CD options.

Synchrony CD Overview

Synchrony CD Rates Overview
	CD Term	APY
Standard CD	3 months-60 months	0.25%-4.35%
Bump-up CD	24 months	3.00%
No-penalty CD	11 months	0.25%
IRA CD	3 months-60 months	0.25%-4.15%

Compare Synchrony Bank CD Rates

Before you open a new CD, it’s wise to shop around and compare offers from multiple banks. As you research the best CD interest rates, account features, balance requirements, and benefits that several financial institutions have to offer, you’ll be in a better position to decide if a CD from Synchrony Bank is right for you. 

Synchrony Bank CD: Key Features

Synchrony CDs Key Features
	CD Term	APY	Minimum Balance
Standard CD	3 months-60 months	0.25%-4.35%	None
Bump-up CD	24 months	3.00%	None
No-penalty CD	11 months	0.25%	None
IRA CD	3 months-60 months	0.25%-4.15%	None

In addition to competitive annual percentage yields (APYs), especially on its long-term CD products, Synchrony Bank CDs feature no minimum balance requirements. Outside of the no-penalty CD, you will incur an early withdrawal penalty if you attempt to withdraw some or all of the principal funds from your account prior to its maturity date. Early withdrawal penalties range from 90 to 365 days’ worth of simple interest at the current APY, depending on the terms of your account.

It’s worth noting that the grace period on CDs with Synchrony Bank lasts for a short 10 days after your maturity date arrives. During this window you can add additional cash to your account, renew your CD, transfer the cash to a different account, or withdraw your money.

If you don’t take any action, the online bank will automatically renew the CD on your behalf at the end of the 10-day grace period and mail you a renewal notice. This isn’t an unusual practice where CDs are concerned, but it’s still important to be aware of and to have a plan for what you want to do with your money when your CD matures.

Below are more key features to consider regarding CDs from Synchrony Bank. 

When you’re shopping for a new certificate of deposit, it’s important to look beyond the interest rates a bank offers you. Although earning a high return on your savings does matter, it’s also important to pay attention to other account features when you open a CD and understand how those details might impact you. 

Pros and Cons of Synchrony Bank CDs

Pros

• Some competitive rates

• No minimum balance requirement

Cons

• Some non-competitive rates

• Early withdrawal penalties

Pros Explained

• Some competitive rates: You can find rates of up to 4.35% with Synchrony Bank, which is higher than many other CDs.
• No minimum balance requirement: Unlike with many CDs, Synchrony Bank CDs do not have minimum balance requirements.

Cons Explained

• Some non-competitive rates: While some of Synchrony’s CDs have fairly high rates, others are as low as 0.25%. You can easily find higher rates by shopping around.
• Early withdrawal penalty: Though many CDs have an early withdrawal penalty as Synchrony CDs do, you can find some CDs that do not have this if the flexibility is important to you.

About Synchrony Bank

As an online bank, Synchrony Bank offers competitive interest rates on its savings, money market, and CD accounts. The bank also partners with hundreds of retailers to provide co-branded credit cards specific to each retailer.

Synchrony Bank has financing for healthcare procedures and purchases available through its CareCredit product. It does not offer checking accounts, mortgages, investments, or other products that you may find at other financial institutions.

Synchrony Bank offers the following banking products:

• Savings Account
• Money Market Account
• CDs
• Credit Cards

Alternatives to Synchrony Bank CDs

• High-yield savings accounts: If you’re willing to open an online savings account elsewhere, you may be able to earn higher rates than what Synchrony Bank offers. See the best high-yield savings account rates to compare how much you could earn.
• High-yield checking accounts: You may find relatively high rates with some checking accounts. Be aware of their requirements and limits. The best high-interest checking accounts give you easy access to your money.
• Certificates of deposit (CDs): Synchrony Bank offers fairly competitive rates on its CDs. You can also choose from a range of CDs from other financial institutions.
• Money market account: Money market account can also provide a return on your savings. Check the best money market account rates to see how it compares.
• Treasury securities: These government-backed bills, notes, and bonds sometimes offer even higher rates than CDs and may be more liquid. 

Frequently Asked Questions (FAQs)

Are Synchrony Bank CDs Worth It?

CDs may be worth considering, and Synchrony Bank CDs in particular, under the following circumstances:

• You prefer a (virtually) risk-free way to grow your savings. 
• Keeping your cash locked in a CD for a set period of time isn’t an inconvenience.
• The CD rates at Synchrony Bank, combined with its benefits (like no minimum deposit) seem like a good fit for your financial goals.

Are Synchrony Bank CDs FDIC-Insured?

Synchrony Bank is a member of the Federal Deposit Insurance Corporation (FDIC). Therefore, deposit accounts with the bank (including CDs) are insured up to $250,000 per ownership category.

Should I Get a Synchrony Bank CD?

CD rates at Synchrony Bank are pretty competitive compared to other online banks and credit unions. While the highest rate CD at Synchrony Bank might not be the highest APY available on any CD, the bank does offer higher APYs than many of its competitors where long-term CDs are concerned. 

If you’re looking for a bank that doesn’t require a minimum deposit, Synchrony stands out. Furthermore, the financial institution offers a wide range of CD terms and specialty CD products that can give savers added flexibility when looking for low-risk ways to save money.

Your Guide to CDs

• What Is a Certificate of Deposit (CD)?
• What Is a Brokered CD?
• What Is a CD Ladder?
• Pros and Cons of CDs
• How to Invest With CDs
• How to Open a CD
• How to Close a CD
• CDs vs. Annuities
• CDs vs. Stocks
• CDs vs. Mutual Funds
• CDs vs. ETFs
• CDs vs. Savings Accounts
• Short-Term vs. Long-Term CDs
• CD Rates News
• Best 1-Year CD Rates
• Best 18-Month CDs
• Best Jumbo CD Rates
• Best 6-Month CD Rates
• Best 3-Month CD Rates
• Best Bank CD Rates

We independently evaluate all recommended products and services. If you click on links we provide, we may receive compensation.

Fact checked by Vikki Velasquez

Buying a home is an exciting milestone, but it comes with financial responsibilities that may be new to you. Once you’ve settled in, it’s important to focus on how to manage this life change effectively.

With careful planning and consideration, you can ensure that you’re not only protecting your investment but also building a stable foundation for your future, allowing you to enjoy homeownership without compromising your financial goals.

Key Takeaways

• After buying a home, you’ll have to adjust how you handle your finances.
• Creating a budget can help you properly manage your new home expenses.
• An emergency fund with three to six months of living expenses provides a financial safety net and keeps you prepared for the unexpected.
• Ensure your insurance coverage is adequate, and reevaluate your retirement plan to stay on track for long-term goals.

Create a New Budget

As a new homeowner, you’ll now have additional financial responsibilities, and a budget can help you properly manage these expenses. Unlike renting, the cost of owning a home involves mortgage payment, property taxes, homeowners association (HOA) fees, and ongoing maintenance and repair. And you’ll still cover the cost of utilities, including electricity, water, natural gas, sewer, and trash, which is an average of $583 per month.

“It’s also a good idea to open up a separate account for all of your home expenses—mortgage, escrow, utilities, internet. This can make it easier to keep track of and set up automatic deposits,” said Kim Yencheske, Realtor at Shorewest Realtors.

In addition to your new home costs, your budget should prioritize debt repayment, such as high-interest loans or credit cards. Paying down these debts will eventually free up funds for you to save for your home’s long-term needs, preventing financial strain in the future. This may mean putting renovations and upgrades on hold.

“You don’t have to remodel or renovate everything. It doesn’t need to be the HGTV dream home right away; take your time,” Yencheske said.

Also, remember to regularly review your budget to account for any changes in income and expenses.

Start an Emergency Fund

Your budget should allocate funds to your emergency savings, which ensures you’re prepared for unexpected minor or major home-related emergencies without sacrificing other financial priorities.

“A high-yield savings account will be your best friend and should house your emergency fund,” said Yencheske. “Financial experts typically recommend three to six months of necessary living expenses in your emergency fund, but don’t let that number scare you; just start putting away as much as you can. Set up an automatic transfer. Put your tax refund in there.”

Average maintenance costs range from $4,000 to $22,000, but the cost of maintenance may only account for a portion of what you could pay if a repair is needed.

“Take care of small issues before they become a major problem. A small leak in your faucet can lead to bigger problems if you ignore it. Regular home maintenance can save you thousands down the road,” Yencheske said.

If repair is eventually needed, confirm if the warranty is still in effect and whether or not it will cover all or a percentage of the repair or replacement cost.

Update Your Insurance Coverage

After buying a new home, ensure you have adequate home insurance to protect your investment. It’s also a smart idea to explore insurance bundles. Many providers offer discounts when you bundle homeowners insurance with other policies, like life insurance, which can also be a good investment.

“You should get a life insurance policy, if you don’t already have one, now that you have a major asset,” Yencheske recommended.

Term life or whole life insurance policies can provide long-term security in the event of your death, offering peace of mind for both you and your loved ones. Disability insurance provides added protection in case of illness or injury.

When you consider how little you could pay for coverage and what you get in return, it’s an investment that makes sense.

Reevaluate Your Retirement Plan

Reassessing your retirement plan will keep you on track for the future. Ideally, as you review your budget to account for the new expenses, such as mortgage payments and maintenance, this will be when you determine if you need to adjust your savings strategy to meet your retirement goals.

If you’re feeling overwhelmed or are unsure how to approach things, a financial advisor can help you navigate this uncharted territory.

“New homeowners should absolutely be working with a financial planner/advisor if they don’t already have one,” said Yencheske.

If they help you determine the ideal amount to contribute to your retirement accounts, such as a 401(k) or an IRA, they can ensure you’re maximizing employer matches, taking full advantage of tax benefits, and setting a solid foundation for a financially secure future.

The Bottom Line

Although buying a home comes with new financial responsibilities, a thoughtful approach is a must to confidently navigate this change. Take the time to review your budget, start an emergency fund, update your insurance, and reevaluate your retirement plan. By following these steps, you can stay on top of your finances and make homeownership a rewarding and manageable experience.

Pre-wedding planning can avoid problems down the road

Reviewed by Doretha Clemon
Fact checked by Vikki Velasquez

When two people marry later in life, there is more to sort through than wedding gifts. A marriage between two people with longer histories requires decisions concerning finances, children, assets, housing, and retirement planning—to name just a few issues.

Here are five issues you will want to work through with your intended spouse to ensure your financial interests as individuals and as a couple are protected.

Key Takeaways

• Older couples who plan to marry need to share information on their finances, assets, and retirement accounts.
• It’s best to be open about everything, from debts to your investment strategies and retirement plans.
• Be sure to update your tax information, determine your filing status, and update your benefit status with the Social Security Administration (SSA).
• Review your estate planning decisions to see that your family’s financial needs are met, and update beneficiary information for wills, life insurance policies, and retirement accounts.
• Consider a prenuptial agreement to ensure that your financial assets are protected in the event of a divorce and to clarify property division if one of you dies.

1. Combining Finances After Marriage

Older people have had more time to accumulate significant assets. They also have adopted a money management style. This can make it harder to merge finances, especially if one partner is a spender and the other is thrifty, or when one partner has considerably more resources than the other.

If either partner has young children from a previous relationship, another set of issues needs to be discussed. There may be child support or alimony to consider and issues of inheritance to clarify.

Some smart planning can help you ease this transition. Here are some pointers:

• Discuss each other’s credit histories by reviewing credit reports and scores together.
• Determine each partner’s current indebtedness and comfort level with debt.
• Reach an agreement about how to handle paychecks, savings, and bill payments.
• Set up one joint banking account and an individual account for each partner.
• Decide who will be the primary breadwinner or whether both will be contributing more or less equally.
• Compare investment strategies and styles, such as whether you have been an aggressive or conservative investor.
• Decide what savings goal you’ll have as a couple.
• Discuss how you envision retirement if you’re still working.
• Talk about where you hope to live—now and in the future.
• Discuss how you will handle everyday child expenses and college tuition for kids from a previous partnership.
• Prepare a formal agreement with any ex-spouses about the children.

2. Updating Tax Filing Information

The Internal Revenue Service (IRS) advises newlyweds to ensure that the names on their tax returns match the names registered with the Social Security Administration (SSA). If not, any tax refund could be delayed.

You also need to consider whether it makes more sense financially to file a joint tax return or to file as married filing separately.

Make sure each of you straightens out any tax issues with a previous spouse before remarrying. If your spouse dies and you remarry before the end of that tax year, you can file a joint return with your new spouse.

3. Estate Planning With a New Spouse

Estate planning is imperative to meet your family’s financial needs and goals after you die. Estate planning is especially important when children from previous relationships are involved because it ensures they will receive what is rightfully theirs.

Keep in mind that state laws regarding estates vary.

Make sure the following documents have up-to-date beneficiary designations:

• Wills
• Life insurance policies
• Retirement accounts
• Investment funds
• Any other financial accounts

Prenuptial Agreements

Many financial planners, estate planners, and accountants advise considering a prenuptial agreement when you marry or remarry later in life. In most states, marriage makes all assets and income community property, even if the assets are held in one person’s name.

A prenuptial agreement is a written contract (to which both parties voluntarily agree) that outlines the terms and conditions associated with dividing up financial assets and responsibilities if the marriage dissolves. A prenup is especially important when there are large disparities in income or resources between the two.

The agreement should be discussed and finalized with a lawyer before the marriage (because state laws don’t always recognize postnuptial agreements). The prenuptial agreement can help determine what will be left for each of your respective families to inherit if you divorce or when you die.

A prenup addresses only financial issues. Generally speaking, a prenup cannot address matters dealt with in divorce agreements, such as child support, visitation rights, or custody. You also can’t use it to make your spouse promise to make lasagna every Friday night.

Important

Many of the same details that go into drafting a prenup are required for an estate plan. It’s a good way to ensure you are providing for your spouse and managing your children’s inheritance at the same time.

Trusts and Wills

A prenup can prevent your spouse from challenging your will or any existing trusts. Whether or not a trust is affected will depend on who the beneficiary or beneficiaries are and how the trust was set up, such as whether it was within the context of a divorce agreement or a child support agreement, which could make the trust less flexible.

Some trusts, such as a qualified terminable interest property trust (QTIP), offer both support for your spouse after your death and protections for your first family. A QTIP provides income for your spouse but ensures that when your spouse dies, the assets inherited from you will go to the children from your first marriage or other heirs you choose rather than to your spouse’s heirs.

Finally, AARP advises those marrying later in life to have separate wills rather than a joint will. Having separate wills eases potential complications with the future distribution of property, especially considering that life circumstances can change throughout the years you are married.

Make sure to update your respective powers of attorney, including your medical powers of attorney or healthcare proxies.

4. Updating Info With the Social Security Administration

Newlyweds should contact the SSA when a name change occurs to make sure their earnings are properly reported.

If you are receiving Social Security benefits and the amount is less than half of your new spouse’s, you can receive an additional amount to bring you up to half of your new spouse’s benefit. This will generally occur one year into the marriage. To be eligible for spouse’s benefits, you must be 62 years of age or older, and your spouse must be already receiving benefits.

If you are receiving any divorced spousal benefits, generally, those benefits end if you remarry.

If you are a widow or widower and you remarry after age 60 (or after 50 if you’re disabled), you will still receive Social Security benefits from your deceased spouse based on their income history. Note that survivor benefits aren’t available to a spouse who remarries before age 60.

5. Reviewing Medicaid Benefits

Marriage can affect benefits paid by Medicaid, the health benefits program for low-income individuals. Medicaid is based mainly on household income, so a person receiving Medicaid benefits who marries someone with a higher income could lose coverage.

Check the eligibility rules for your state to learn how marriage could impact your benefits.

Should I Keep a Separate Checking Account After Marrying?

The wisest course might be to keep your own checking and savings account but open a joint account with your spouse. The two of you can decide on the amount each will contribute to the joint account and what bills it will be used to pay. But you won’t feel you have to justify every minor expenditure or, worse yet, accidentally withdraw cash that your spouse thought was there to pay the electricity bill.

Should We File Taxes Jointly or Separately?

Most couples choose married filing jointly because this tax status makes them eligible for many deductions and credits that are reserved for married couples.

However, some circumstances make filing separately advantageous. If two people have very unequal incomes or one spouse has very high deductible expenses, filing separately can help. If you’re unsure, consult a professional tax preparer.

Is a Prenup a Good Idea?

Many financial planners consider a prenuptial agreement to be a good idea, especially when older people marry. These are people who may have a complicated financial situation. They may have continuing obligations, such as children from a previous marriage or responsibilities for an aging parent. They could have substantial assets, significant debts, or both. The prenup makes it clear what their financial expectations and responsibilities are as individuals and as a couple.

The Bottom Line

Marriage affects every aspect of your financial life. Sit down as a couple to discuss your present financial situation and future goals. Consider keeping most assets and property separate to minimize complications, especially when you have children from a previous marriage.

If you didn’t make a prenup but think that it would have been a good idea, you can still create a postnuptial agreement. A postnup may be considered less valid than a prenuptial agreement, but some legal documentation is better than none. Most importantly, don’t end your discussion at the aisle. Maintain ongoing discussions about finances throughout your married life, for richer or poorer. 

Reviewed by Doretha Clemon
Fact checked by Vikki Velasquez

Hire a Professional, Do It Yourself, or Do Both?

Individuals are not required by law to keep financial books and records (businesses are), but not doing this can be a costly mistake from financial and tax perspectives.

Your bank account and credit card statements may be wrong, and you may not discover this until it’s too late to make corrections. You may forget to pay a bill and hurt your credit score. You may have no clue about allocating income to saving and investing. Or you may overlook expenses that could provide some tax benefits. So keeping track of your personal finances makes sense.

Recording your income and expenses isn’t a difficult task (you don’t need an accounting background or to be “good with numbers”), but it does take time and effort. How you do it depends on your personal preference. You can hire an expert to do it all, do it yourself, or combine the two by using an expert to help you from time to time.

Key Takeaways

• Accountants and bookkeepers can help you keep track of your personal finances and provide help with your taxes.
• A certified public accountant (CPA) is more expensive than hiring an accountant who is not certified.
• Quicken offers accounting software that can help you do it yourself.
• A bookkeeper who reviews your work quarterly can be less expensive than hiring a professional accountant.

Option 1: Use an Expert

If you don’t have the time or believe that your time is worth more than what you’d pay someone else, you can engage professional help. But who, exactly? When people talk about getting a personal accountant, they often use the term loosely to refer to everyone from a bookkeeper to a CPA or tax preparer or even tax advisor. Select the professional who meets your needs:

Bookkeeper

This person may provide concierge services for your personal finances, including paying your bills, balancing your checkbook, and looking over your credit card statements. A bookkeeper may or may not have special training. A bookkeeper can obtain certification from the American Institute of Professional Bookkeepers or National Association of Certified Public Bookkeepers. The hourly rate for a bookkeeper depends on where you are, what services you seek, and what expertise the person offers, but the fee averages to almost $23 per hour.

Important

Whether you need an accountant will most likely depend on a few factors, including how complicated your taxes are to file and how many accounts you have to manage.

Accountant

This is a person who has training (and likely a college degree) in accounting and can handle bookkeeping chores. The hourly rate—which again depends on location, job description, and expertise—for a freelance accountant is about $35 per hour on average but can be considerably more, even up to $125 per hour.

Certified Public Accountant

This is an accountant (with a college degree and perhaps a master’s degree in accounting) who has received certification from the American Institute of Certified Public Accountants (AICPA). While a CPA can provide bookkeeping services, this professional may be too expensive for the task. Hourly fees for CPAs can run about $38 per hour to start and increase from there. (Most CPAs don’t handle bookkeeping services personally but use an employee in their firm—e.g., a bookkeeper—for this task.)

Back to the Bookkeeper

For the tasks described at the beginning, a personal bookkeeper is what you’ll need. Most people do not use an accountant (only wealthy individuals can justify the cost of these tax pros). Your bookkeeper will schedule regular appointments (e.g., weekly, monthly) to input data and perform the tasks you want to be done. Bookkeeping may be done in person (your home or the bookkeeper’s office) or online. Either way, you’ll need to provide access to your bank accounts and credit card statements, so be sure to check the references carefully of anyone you want to engage.

Option 2: DIY

Gone are the days of keeping paper ledgers. Today, user-friendly software and cloud solutions are available for the average consumer, not just professionals. The leading options for personal finances are:

Quicken

This software helps you create a monthly budget and monitor your finances. For an added monthly cost, you can use a bill-paying system to automate your payments so you’ll always be on time and pay the right amount.

Credit Karma

This free cloud-based platform absorbed features formerly on Mint.com in 2024, letting you track your personal finances and pay your bills online. It syncs with your bank account to simplify your personal finances.

Fast Fact

Both Quicken and Credit Karma have mobile apps to record information on the fly.

Option 3: Combine Your Efforts

You can work with a bookkeeper to help you get started with your personal accounting. Look for someone knowledgeable in the software you plan to use. The bookkeeper can set up accounts (which operate like folders) in which you place your information. By creating accounts that resemble the same categories used for tax purposes, you simplify tax return preparation (whether you do this or use a paid professional).

The bookkeeper can also review your work periodically (e.g., quarterly) to make sure you’re recording your income and expenses properly and reconciling your bank statement correctly.

What Is the Job Outlook for Bookkeepers?

The job market for bookkeepers is expected to decline 5% through 2033, according to the U.S. Bureau of Labor Statistics (BLS). Despite this, the agency projects almost 175,000 job openings annually through 2033 to replace workers who transfer to other occupations or retire.

What Is the Job Outlook for CPAs and Other Accountants?

The job market for CPAs and other accountants is expected to grow 6% through 2033, according to the BLS. This translates to almost 131,000 job openings each year in that time.

Are There Personal Finance Software and App Alternatives to Quicken and Credit Karma?

Yes. Other options include Banktivity, Empower, Rocket Money, Trim by OneMain, and YNAB (You Need a Budget).

The Bottom Line

However you decide to manage your personal accounting, be sure to separate this from accounting for any business you own. Build the cost of this accounting into your household budget.

GAAP compliant and accurate, but it may be misleading

Reviewed by Somer Anderson
Fact checked by Yarilet Perez

What Is Absorption Costing?

Companies must choose between absorption costing and variable costing in their accounting systems, and there are advantages and disadvantages to either choice.

Absorption costing, also known as full absorption costing or full costing, captures all of the manufacturing or production costs, such as direct materials, direct labor, rent, and insurance. It is required by generally accepted accounting principles (GAAP) for external reporting.

Variable costing includes all of the variable direct costs in the cost of goods sold (COGS) but excludes direct, fixed overhead costs.

Key Takeaways

• The main advantage of absorption costing is that it complies with GAAP and more accurately tracks profits than variable costing.
• Absorption costing takes into account all production costs, unlike variable costing, which only considers variable costs.
• The drawbacks to absorption costing are that it can skew the picture of a company’s profitability and does not help improve operations or compare product lines.

Understanding Absorption Costing

A company’s management can choose to view costs in different ways. Firms that use absorption costing choose to allocate all costs to production. The term “absorption costing” means that the company’s products absorb all of the company’s costs.

Important

Even if a company chooses to use variable costing for in-house accounting purposes, it still has to calculate absorption costing to file taxes and issue other official reports.

Under variable costing, the other option for costing, only the variable production costs are considered. Overhead costs, such as rent and wages, are treated separately.

Advantages of Absorption Costing

Some of the primary advantages of absorption costing are that it complies with generally accepted accounting principles (GAAP), recognizes all costs involved in production (including fixed costs), and more accurately tracks profit during an accounting period.

GAAP Compliance

One of the main advantages of choosing to use absorption costing is that it is GAAP compliant and required for reporting to the Internal Revenue Service (IRS).

Accounting for All Production Costs

Absorption costing takes into account all of the costs of production, not just the direct costs, as is the case with variable costing. Absorption costing includes a company’s fixed costs of operation, such as salaries, facility rental, and utility bills. Having a more complete picture of cost per unit for a product line can help company management evaluate profitability and determine prices for products.

Tracking Profits

Absorption costing also provides a company with a more accurate picture of profitability than variable costing, particularly if all of its products are not sold during the same accounting period as their manufacture. This is significant if a company ramps up production in advance of an anticipated seasonal increase in sales.

Disadvantages of Absorption Costing

The disadvantages of absorption costing are that it can skew the picture of a company’s profitability. In addition, it is not helpful for analysis designed to improve operational and financial efficiency, or for comparing product lines.

Skewed Profit and Loss

Absorption costing can cause a company’s profit level to appear better than it actually is during a given accounting period. This is because all fixed costs are not deducted from revenues unless all of the company’s manufactured products are sold. In addition to skewing a profit and loss statement, this can potentially mislead both company management and investors.

No Influence on Operational Efficiency

Absorption costing fails to provide as good an analysis of cost and volume as variable costing. If fixed costs are a substantial part of total production costs, it is difficult to determine variations in costs that occur at different production levels. This makes it more difficult for management to make the best decisions for operational efficiency.

Not Suited to Product Line Comparison

Variable costing is more useful than absorption costing if a company wishes to compare different product lines’ potential profitability. It is easier to discern the differences in profits from producing one item over another by looking solely at the variable costs directly related to production.

Pros

• Complies with generally accepted accounting principles (GAAP)

• Takes into account all production costs (including fixed costs)

• More accurate picture of profitability during an accounting period

Cons

• Can make a company’s profit level appear better than it actually is

• Not helpful for analysis designed to improve operational and financial efficiency

• Less useful for analysis designed to compare different product lines’ potential profitability

What Are the Cost Components of Absorption Costing?

Absorption costing allocates all manufacturing costs to products, thus ensuring that each unit carries a proportionate share of fixed overhead expenses. The cost components of absorption costing are:

• Direct labor: Wages paid to workers directly involved in manufacturing
• Direct materials: The raw materials used in production
• Fixed manufacturing overhead: Expenses such as equipment depreciation, insurance, and rent that remain consistent regardless of output
• Variable manufacturing overhead: Costs like electricity and indirect materials that fluctuate with production levels

What Is the Formula for Absorption Costing?

The cost per unit under absorption costing is calculated using the formula:

Absorption Cost per Unit = (Direct Materials + Direct Labor + Variable Overhead + Fixed Overhead) ÷ Total Units Produced

Is Absorption Costing Known by Any Other Name?

Yes. Absorption costing is also known as full absorption costing or full costing.

The Bottom Line

Absorption costing is used by any public or private company that needs to produce GAAP-compliant financial statements and report to the IRS. It is required by GAAP for external reporting and by the IRS for tax purposes.

Absorption costing determines the cost of producing a single product, when all manufacturing costs are taken into account, and is considered the best way to determine the true cost of that production. This allows the manufacturer to price its products to ensure covering all manufacturing costs.

Reviewed by Charlene Rhinehart
Fact checked by Vikki Velasquez

Businesses depreciate long-term assets for both tax and accounting purposes. For tax purposes, businesses can deduct the cost of the tangible assets they purchase as business expenses.

Microsoft Excel has built-in functions for multiple depreciation methods, including the:

• Straight-line method (SLN function)
• Sum of the years’ digits method (SYD function)
• Declining balance method (DB function)
• Double-declining balance accelerated method (DDB function)
• Variable declining balance method (VDB function)
• Units of production method, although this method requires a non-branded Excel template

Key Takeaways

• Microsoft Excel has built-in functions for multiple depreciation methods for businesses’ fixed assets.
• The straight-line method (or straight-line basis) uses a built-in function, SLN, which takes the arguments: cost, salvage, and life.
• The sum of the years’ digits method uses the function SYD to calculate a fraction: (years left of useful life) ÷ (sum of useful life).
• Excel can also calculate the declining balance method (DB function), double-declining balance accelerated method (DDB function), variable declining balance method (VDB function), and units of production method (requiring a template outside the Excel brand).

Understanding Fixed Asset Depreciation

Suppose company XYZ bought a production machine with a useful life of five years for $5,000 and the salvage value is $500. To calculate the depreciation value, Excel has built-in functions. The first step is to enter the numbers and their corresponding headings in the appropriate cells.

• Type “cost” into cell A1 and “$5,000” into B1.
• Next, type “salvage value” into cell A2 and “$500” into cell B2.
• Type “useful life” into cell A3 and “5” into cell B3.
• Type “period” into cell A5 and enter the number of periods one through five into cells A6 through A10.
• In cell B5, type “straight-line method.”

Straight-Line Basis

To calculate the depreciation value using the straight-line basis, or straight-line method (SLN), Excel uses a built-in function, SLN, which takes the arguments: cost, salvage, and life.

In cell B6, type “=SLN(B1,B2,B3),” which gives a value of $900 for period one. Since this method spreads out the depreciation value over its useful life, you can see that the values from B6 through B10 are $900.

Sum of the Years’ Digits (SYD)

To calculate the depreciation using the sum of the years’ digits (SYD) method, Excel calculates a fraction by which the fixed asset should be depreciated, using: (years left of useful life) ÷ (sum of useful life).

In Excel, the function SYD depreciates an asset using this method. In cell C5, enter “sum of years date.” Enter “=SYD(B1,B2,B3,6)” into cell C6. Calculate the other depreciation values using the sum of the years’ digits method in Excel with this function.

Other Methods

Excel is capable of calculating any depreciation method, including the:

• Declining balance method, using the DB function
• Double-declining balance accelerated method, using the DDB function
• Variable declining balance method, using the VDB function
• Units of production method

Most assets lose more value at the beginning of their useful life. The SYD, DB, DDB, and VDB functions apply this property.

The DB function uses a fixed rate to calculate the depreciation values. In some cases, the salvage is difficult to reach using the DDB function. The VDB function performs the same calculations as the DDB function but switches to a straight line to reach the salvage value. For the straight-line method, the depreciation is the same each year.

Excel templates are available for most depreciation calculations.

What Is Depreciation?

Depreciation is a common accounting method that allocates the cost of a company’s fixed assets over the assets’ useful life. In other words, it allows a portion of a company’s cost of fixed assets to be spread out over the periods in which the fixed assets helped generate revenue.

What Is a Fixed Asset?

Fixed assets are items that a company uses over the long term to operate its business. They commonly appear on a company balance sheet as property, plant, and equipment (PP&E), help generate income, and are subject to depreciation to account for their loss in value over time.

Examples of fixed assets include buildings, computer equipment, furniture, land, machinery, software, and vehicles.

What Is Excel?

Excel is a spreadsheet program developed by Microsoft that allows users to analyze, calculate, format, and organize data in a spreadsheet, a grid-like format of rows and columns. By creating graphs and tables, Excel users can compute and visualize complex datasets.

The Bottom Line

Microsoft not only has built-in functions on Excel for multiple fixed asset depreciation methods, but also offers websites to learn more about fixed asset depreciation and those methods.

The Internal Revenue Service (IRS) also has multiple websites with information about depreciation.

Reviewed by JeFreda R. Brown
Fact checked by Suzanne Kvilhaug

Microsoft (MSFT) was founded by Bill Gates and Paul Allen in 1975 and incorporated six years later. The multinational corporation proved to be a leader in technology and software development. Best known for its Windows operating systems software and Office applications suite, the company also developed tablets and Xbox. In 2025, Microsoft Teams helps individuals meet, chat, collaborate, and conduct business.

Key Takeaways

• Microsoft was founded by Bill Gates and Paul Allen in 1975.
• The company is known as one of the world’s largest tech companies and a leader in software development.
• Microsoft developed Windows, Office, and Xbox.
• As of 2025, Satya Nadella serves as CEO of Microsoft.

Innovation

When Microsoft began, it was considered an innovative company. Its founders and their unorthodox culture flew in the face of a formal, understated business world with limited use for computers. Bill Gates and Paul Allen licensed their BASIC programming language interpreter to a company called MITS, creator of the Altair 8800, the first “personal computer.” The machine was used mainly by hobbyists.

Microsoft was added to the Dow Jones Industrial Average (DJIA) in 1999, joining another technology giant, IBM. Before its popularity waned in 2011, nearly 95% of the world’s internet market used Microsoft’s Internet Explorer. Microsoft shifted its focus to cloud technology, and Microsoft’s Azure cloud computing system had the second-highest market share globally in 2025, second only to Amazon Web Services. 

In 2022, incorporated artificial intelligence (AI), partnering with OpenAI. In 2024, 60% of Fortune 500 companies used the AI-focused Microsoft 365 Copilot to automate business workflows and processes. 

Leadership

Bill Gates resigned as the company’s CEO in 2000 and vacated his seat as chair on the board of directors in 2020. Under the leadership of Chief Executive Officer (CEO) Satya Nadella, who took the reins in 2014, the company moved into services and cloud computing.

In 2024, Microsoft’s revenue was $245 billion, up 16% year-over-year, and it posted over $109 billion in operating income, up 24%. Its 33% profit margin is larger than that of Alphabet (GOOG) and Apple (AAPL).

Important

In 2016, Microsoft acquired LinkedIn for $26.2 billion.

Product Line and Services

As of 2024, Microsoft offered the following products and services through various engineering segments:

• Cloud and Microsoft AI: Targets IT professionals, developers, software vendors, and consumers with the Azure AI platform, online experiences, cloud infrastructure, AI cognitive services, and other business applications.
• Experiences and Devices: End-user experiences across products, services, and devices, including Microsoft 365, Windows, Microsoft Teams, and Surface devices.
• LinkedIn: A service that helps professionals grow their network and connect to businesses that hire and offer educational opportunities.
• Gaming: Develops hardware, content, and services across platforms to help grow the user base through game experiences and social interaction.

Who Are Microsoft’s Competitors?

In 2025, some of Microsoft’s competitors include Apple, Amazon, Oracle, IBM, and Alphabet (Google).

Is Skype a Microsoft Product?

Microsoft is retiring Skype in May 2025 to focus on Microsoft Teams. Users will have access to many of the same features in Skype, such as one-on-one calls and group calls, messaging, and file sharing.

Who Has Served as CEO of Microsoft?

As of 2025, Satya Nadella is Microsoft’s CEO. Microsoft has had two previous CEOs, Bill Gates and Steve Ballmer.

The Bottom Line

Microsoft is synonymous with Windows, Microsoft Office, Microsoft Teams, and Xbox. Founded in 1975, the company celebrates 50 years in 2025. In its first year, the company posted a revenue of $16,000. In 2024, Microsoft’s revenue was $245 billion.