money

Fact checked by Skylar Clarine
Reviewed by Doretha Clemon

Loan Officer vs. Mortgage Broker: An Overview

Borrowers commonly have two options for securing a mortgage: a loan officer or a mortgage broker. Both prepare loan applications and process them, but their methods vary.

A loan officer works for a bank, a credit union, or a mortgage lender and generally offers only the programs and mortgage rates available from that institution. A mortgage broker works on a borrower’s behalf to find the best rate and loan from various institutions.

Key Takeaways

• Loan officers work for mortgage lenders such as banks or other financial institutions.
• Mortgage brokers are independent and can recommend the best fit for the borrower’s needs from many institutions.
• A loan officer commonly works on commission.

Loan Officer

Loan officers represent the mortgage lender they work for and help borrowers apply for loans offered by the financial institution. They are knowledgeable about lending products, banking industry rules and regulations, and the required loan documentation to advise their clients.

Loan officers help guide borrowers based on their financial circumstances and assist with the mortgage process. They work with the lender’s underwriter, who reviews the applicant’s creditworthiness and ability to pay the loan. When the loan is approved, the loan officer prepares the mortgage closing documents.

Some loan officers are compensated through commissions. This commission is a prepaid charge and is often negotiable. Commission fees are usually higher for mortgage loans than other types of loans. Large banks commonly work exclusively through their loan officers, and an independent mortgage broker will not offer their products.

Important

Loan officers work for just one financial institution and can only offer loans from their employer. A borrower’s options are limited to the company offerings.

Mortgage Broker

Mortgage brokers represent more than one lender and work with a variety of financial institutions such as banks, credit unions, and mortgage lenders. A mortgage broker acts as a matchmaker to find the best mortgage product for the borrower’s financial situation and connect applicants with the right lenders.

The mortgage broker may gather paperwork from the borrower and pass it along to a mortgage lender for underwriting and approval. Some lenders work exclusively with mortgage brokers, providing borrowers access to loans that otherwise would not be available to them. Brokers may negotiate with lenders to waive application, appraisal, origination, and other fees.

The number of lenders that a broker can access is limited to the institutions that have approved their services. Mortgage brokers earn a commission from the borrower, the lender, or both. These commissions, known as origination fees, are commonly 1% to 2% of the loan amount. Mortgage brokers must be licensed and must disclose their fees upfront.

Key Differences

When borrowers work with a loan officer, they deal directly with the institution that will lend them money. When borrowers work with a mortgage broker, they work with a third party. The broker merely facilitates the process between the borrower and the lender.

Loan officers can only offer loans from their employers. Mortgage brokers deal with many lenders and may be able to find a range of options for their clients.

Whether using a broker or a loan officer, borrowers can find out what fees they’re paying on the loan estimate that they receive when applying for the mortgage, commonly found under “Origination Charges.”

What Is the Benefit of Using a Loan Officer?

There are advantages to applying directly through a loan officer. Because the loan will be considered “in-house,” borrowers may get a break on their rates and closing costs and may have access to any down payment assistance (DPA) programs for which they’re eligible.

What Is a Mortgage Loan Originator?

Mortgage brokers and loan officers are considered mortgage loan originators (MLOs) and meet strict federal requirements to help negotiate mortgage loans.

Why Use a Mortgage Broker Instead of a Bank?

A bank’s loan officers can only recommend their bank’s products. Mortgage brokers work with many lenders and might be able to find a better deal for each borrower.

The Bottom Line

Whether borrowers work with a loan officer or a mortgage broker, they should pay careful attention to the fees and commissions charged. Consumers can also research loan products before choosing a lender and representative.

Reviewed by Samantha Silberstein

What are some things that separate a good trader from a great one? Guts, instincts, intelligence, and, most importantly, timing. Just as there are many types of traders, there is an equal number of different time frames for traders to develop their ideas and execute their strategies.

At the same time, timing also helps market warriors account for factors outside of their control. They can include position leveraging, nuances of different currency pairs, and the effects of scheduled and unscheduled news releases in the market. Timing is always a major consideration when participating in the foreign exchange world.

Want to bring your trading skills to the next level? Read on to learn more about time frames and how to use them to your advantage.

Key Takeaways

• There are different forex trading strategies for each time horizon.
• Day traders seek to profit from small changes in the intraday market.
• Swing traders seek to hold a position for hours or days, anticipating a turn in the market.
• Position traders have the most long-term outlook, and examine government decisions and interest rates to forecast price changes.
• Forex traders should also pay attention to news and interest rates when assessing the market.

Common Trader Time Frames

In the grander scheme of things, there are plenty of names and designations that traders go by. But when taking time into consideration, traders and strategies tend to fall into three broader and more common categories: day trader, swing trader, and position trader.

1. The Day Trader

Let’s begin with what seems to be the most appealing of the three designations, the day trader. A day trader will, for a lack of a better definition, trade for the day. These are market participants that will usually avoid holding anything after the session close and will trade in a high-volume fashion.

On a typical day, this short-term trader will generally aim for a quick turnover rate on one or more trades, anywhere from 10- to 100-times the normal transaction size. This is in order to capture more profit from a rather small swing. As a result, traders who work in proprietary shops in this fashion will tend to use shorter time-frame charts, using one-, five-, or 15-minute periods. In addition, day traders tend to rely more on technical trading patterns and volatile pairs to make their profits. Although a long-term fundamental bias can be helpful, these professionals are looking for opportunities in the short term.

One such currency pair is the British pound/Japanese yen as shown in Figure 1, above. This pair is considered to be extremely volatile, and is great for short-term traders, as average hourly ranges can be as high as 100 pips. This fact overshadows the 10- to 20-pip ranges in slower moving currency pairs like the euro/U.S. dollar or euro/British pound.

2. Swing Trader

Taking advantage of a longer time frame, the swing trader will sometimes hold positions for a couple of hours—maybe even days or longer—in order to call a turn in the market. Unlike a day trader, the swing trader is looking to profit from an entry into the market, hoping the change in direction will help their position. In this respect, timing is more important in a swing trader’s strategy compared to a day trader.

However, both traders share the same preference for technical over fundamental analysis. A savvy swing trade will likely take place in a more liquid currency pair like the British pound/U.S. dollar. In the example below (Figure 2), notice how a swing trader would be able to capitalize on the double bottom that followed a precipitous drop in the GBP/USD currency pair. The entry would be placed on a test of support, helping the swing trader to capitalize on a shift in directional trend, netting a two-day profit of 1,400 pips.

3. The Position Trader

Usually the longest time frame of the three, the position trader differs mainly in their perspective of the market. Instead of monitoring short-term market movements like the day and swing style, these traders tend to look at a longer term plan. Position strategies span days, weeks, months or even years. As a result, traders will look at technical formations but will more than likely adhere strictly to longer term fundamental models and opportunities. These FX portfolio managers will analyze and consider economic models, governmental decisions and interest rates to make trading decisions. The wide array of considerations will place the position trade in any of the major currencies that are considered liquid. This includes many of the G7 currencies as well as the emerging market favorites.

Additional Considerations

With three different categories of traders, there are also several different factors within these categories that contribute to success. Just knowing the time frame isn’t enough. Every trader needs to understand some basic considerations that affect traders on an individual level.

Leverage

Widely considered a double-edged sword, leverage is a day trader’s best friend. With the relatively small fluctuations that the currency market offers, a trader without leverage is like a fisherman without a fishing pole. In other words, without the proper tools, a professional is left unable to capitalize on a given opportunity. As a result, a day trader will always consider how much leverage or risk they are willing to take on before transacting in any trade.

Similarly, a swing trader may also think about their risk parameters. Although their positions are sometimes meant for longer term fluctuations, in some situations, the swing trader will have to feel some pain before making any gain on a position. In the example below (Figure 3), notice how there are several points in the downtrend where a swing trader could have capitalized on the Australian dollar/U.S. dollar currency pair. Adding the slow stochastic oscillator, a swing strategy would have attempted to enter into the market at points surrounding each golden cross.

However, over the span of two to three days, the trader would have had to withstand some losses before the actual market turn could be called correctly. Magnify these losses with leverage and the final profit/loss would be disastrous without proper risk assessment.

Different Currency Pairs

In addition to leverage, currency pair volatility should also be considered. It’s one thing to know how much you may potentially lose per trade, but it’s just as important to know how fast your trade can lose. As a result, different time frames will call for different currency pairs. Knowing that the British pound/Japanese yen currency cross sometimes fluctuates 100 pips in an hour may be a great challenge for day traders, but it may not make sense for the swing trader who is trying to take advantage of a change in market direction. For this reason alone, swing traders will want to follow more widely recognized G7 major pairs as they tend to be more liquid than emerging market and cross currencies. For example, the euro/U.S. dollar is preferred over the Australian dollar/Japanese yen for this reason.

News Releases

Finally, traders in all three categories must always be aware of both unscheduled and scheduled news releases and how they affect the market. Whether these releases are economic announcements, central bank press conferences, or the occasional surprise rate decision, traders in all three categories will have individual adjustments to make.

Short-term traders will tend to be the most affected, as losses can be exacerbated while swing trader directional bias will be corrupted. To this effect, some in the market will prefer the comfort of being a position trader. With a longer-term perspective, and hopefully a more comprehensive portfolio, the position trader is somewhat filtered by these occurrences as they have already anticipated the temporary price disruption. As long as the price continues to conform to the longer-term view, position traders are rather shielded as they look ahead to their benchmark targets.

A great example of this can be seen on the first Friday of every month in the U.S. non-farm payrolls report. Although short-term players have to deal with choppy and rather volatile trading following each release, the longer-term position player remains relatively sheltered as long as the longer-term bias remains unchanged.

Which Time Frame Is Right?

Which time frame is right really depends on the trader. Do you thrive in volatile currency pairs? Or do you have other commitments and prefer the sheltered, long-term profitability of a position trade? Fortunately, you don’t have to be pigeon-holed into one category. Let’s take a look at how different time frames can be combined to produce a profitable market position.

Warning

Forex markets are more volatile than equities markets. This can be a potential source of profit, but it also comes with higher risks.

Like a Position Trader

As a position trader, the first thing to analyze is the economy—in this case, in the U.K. Let’s assume that given global conditions, the U.K.’s economy will continue to show weakness in line with other countries. Manufacturing is on the downtrend with industrial production as consumer sentiment and spending continue to tick lower. Worsening the situation has been the fact that policymakers continue to use benchmark interest rates to boost liquidity and consumption, which causes the currency to sell off because lower interest rates mean cheaper money.

Technically, the longer term picture also looks distressing against the U.S. dollar. Figure 5 shows two death crosses in our oscillators, combined with significant resistance that has already been tested and failed to offer a bearish signal.

Like a Day Trader

After we establish the long-term trend, which in this case would be a continued deleveraging, or sell off, of the British pound, we isolate intraday opportunities that give us the ability to sell into this trend through simple technical analysis (support and resistance). A good strategy for this would be to look for great short opportunities at the London open after the price action has ranged from the Asian session.

Although too easy to believe, this process is widely overlooked for more complex strategies. Traders tend to analyze the longer term picture without assessing their risk when entering into the market, thus taking on more losses than they should. Bringing the action to the short-term charts helps us to see not only what is happening, but also to minimize longer and unnecessary drawdowns.

How Do You Get Started Day Trading?

The first step to day trading is to learn some of the beginner day trading strategies, while acquainting yourself with the rules and regulations of the market. It also helps to try paper trading to test your knowledge of these trading strategies. When you are ready, find an appropriate trading platform and begin trading with an amount of capital that you would feel comfortable about losing.

What Are the Risks of Day Trading in the Forex Market?

Forex traders typically need to borrow large amounts of money on margin in order to make profitable trades. While the stock market has a maximum margin requirement of 50%, margins in forex markets can be as low as 1%. This means that a tiny adverse movement in the market could be enough to wipe out your entire position.

How Do Forex Traders Make Money?

Forex traders speculate on the relative prices of major global currencies with respect to one another. In addition to betting on spot rates, they can also profit from the relative interest rates of different currencies. For example, traders may sell a currency with a low interest rate to buy one with a higher interest rate, thereby profiting from the difference.

The Bottom Line

Time frames are extremely important to any trader. Whether you’re a day, swing, or even position trader, time frames are always a critical consideration in an individual’s strategy and its implementation. Given its considerations and precautions, the knowledge of time in trading and execution can help every novice trader head toward greatness.

The process is relatively simple, but watch out for prepayment penalties

Fact checked by Timothy Li
Reviewed by Doretha Clemon

You can refinance a home equity loan just as you would a regular mortgage. But there are some special considerations to think about before you proceed. You might want to refinance a home equity loan if interest rates have dropped, a different repayment term would suit you better, or you need more money but don’t wish to repay two home equity loans at the same time. Before you refinance, it helps to determine how much equity you currently have in your home. You’ll also want to determine if there are prepayment penalties before refinancing.

Key Takeaways

• You might want to refinance your home equity loan if you can get a substantially better interest rate on a new one.
• Before you refinance, check to see if your loan imposes a prepayment penalty for ending it ahead of schedule.
• One alternative to refinancing a home equity loan is to refinance your main mortgage with a cash-out refinance.

How Refinancing Works

When you refinance a home loan—whether it’s your principal mortgage or a home equity loan—you take out a new loan for at least enough money to pay off the old one. After that, you make payments on the new loan. At some point, you might even refinance the new loan by taking out yet another one.

Why would you want to refinance a loan? A common reason is that you can get a lower interest rate and reduce your payments. Another is to obtain a loan with different terms—for example, switching from a 30-year mortgage to a 15-year one or vice versa.

Refinancing is rarely free, however. You are likely to face closing costs and other fees, just as you did with the earlier loan. Therefore, it’s important to consider how much you’ll save by refinancing vs. how much you’ll have to pay upfront to do so. For example, if you can save $200 a month by refinancing, but your closing costs add up to $5,000, it will take you 25 months to break even.

Refinancing also requires some work on your part, such as rounding up all the documentation that a lender may ask you to supply. If you value your time, you might also want to think twice.

Refinancing a Home Equity Loan

As with a regular mortgage, there are several reasons why you might consider refinancing an existing home equity loan. One is if interest rates have fallen substantially since you took out your loan. Another is if you would prefer a different term or repayment period. For example, you might have a home equity loan that has to be paid off in five years, but you would rather stretch your payments over 10 or 15 years. Another is if you need to borrow additional money but don’t want to make payments on two home equity loans at the same time.

You can refinance your home equity loan at the bank, credit union, or other financial institution that issued your current one or with another lender. You might want to start with your current lender, which has an incentive to keep your business after you’ve paid off the old loan and may be more open to negotiating with you.

Before you commit yourself to refinancing, check to see whether your current home equity loan imposes a penalty for paying it back early. If it does have a prepayment penalty, you’ll need to assess whether it would make more sense to simply ride out the old loan until the end of its term, even if its interest rate is higher than you could get on a new one.

Note

Under current tax laws, the interest on a home equity loan is deductible only if it’s used “to buy, build, or substantially improve the taxpayer’s home that secures the loan,” the Internal Revenue Service says.

What to Expect When You Refinance a Home Equity Loan

As with your current home equity loan, you’ll need to prove to the lender that you have enough equity in your home and that you’re a good risk. If neither of those has changed for the worse since you got your original loan, you should be OK, but you still may have to provide a lot of documentation.

Lenders typically use what’s known as a combined loan-to-value (CLTV) ratio to determine whether to offer you a home equity loan and, if so, for how much. The CLTV ratio takes into account all of the outstanding debt you have on the property, including the first mortgage, as well as what the property is currently worth. For example, a lender might balk at issuing a new loan if those debts in total would exceed 80% of your home’s value. To verify your home’s value, the lender will usually bring in a professional appraiser.

In addition to your home, the lender will want information about you. To assure itself that you’ll have the means to repay the loan, the lender will likely request an assortment of documents, including your pay stubs, W-2 forms, recent tax returns, bank statements, and 1099-DIVs reporting your investment income.

To check on your creditworthiness, the lender will most likely pull your credit reports from one or more of the three major national credit bureaus and look up your credit score. Typically, you’ll need a FICO score of at least 680 to qualify, according to Experian, one of the bureaus.

Before you even apply, you might want to check your credit reports for accuracy. You can obtain free copies more or less instantly from each of the three major credit bureaus on AnnualCreditReport.com, the official website for that purpose. If you find any inaccurate negative information, you can challenge it with the credit bureau. Your credit score is not included on your credit reports, but there are also ways to obtain your credit score free of charge. 

One Alternative to Consider: Cash-Out Refinancing 

Depending on your goals in refinancing your current home equity loan, you might consider a cash-out refinance instead. In a cash-out refinance, you take out a new mortgage large enough to pay off your old mortgage and provide you with a lump sum in cash. You could use some of that cash to pay off your existing home equity loan and the rest for other purposes. This way, you would have just one loan to repay, and rather than needing to pay some of it back over five, 10, or 15 years, you might have 30 years.

However, be sure to compare the interest rates on the old and new loans—including both your original mortgage and the home equity loan—as well as any closing costs involved. In a time of rising interest rates, you could end up with more debt and a higher interest rate on all of your debt.

What Are the Closing Costs on a Home Equity Loan?

Many lenders estimate closing costs at 2% to 5% of the loan amount. Some lenders advertise no closing costs, but they may make up the difference with a higher interest rate. One way to compare costs from lender to lender is by checking the annual percentage rate (APR) that each charges. The APR incorporates some, though not necessarily all, of the closing costs into the rate that you’ll actually pay.

Can You Have More Than One Home Equity Loan?

In general, yes, if you have enough equity in the home and satisfy the lender’s other requirements. However, the state where you live may have a say in the matter. For example, Texas prohibits residents from having more than one home equity loan on the same property at the same time.

Can You Refinance a Home Equity Line of Credit?

Yes, as with a home equity loan, you can refinance a home equity line of credit (HELOC).

The Bottom Line

You can refinance an existing home equity loan with a new one, and it may be advantageous if you can get a substantially lower interest rate. But check whether your current loan has a prepayment penalty, which could negate any benefit you would get by switching.

Reviewed by JeFreda R. Brown
Fact checked by Vikki Velasquez

The financial services industry comprises a variety of companies involved in lending, managing, and investing money. It includes banks and credit unions, credit card companies, brokers, asset managers, insurance companies, and payday lenders. Each of these business types has a separate risk profile, which can affect its profit margins.

Key Takeaways

• The financial services industry includes banks and credit unions, insurance companies, asset managers, and a variety of other businesses involved in lending and investing money.
• There are different types of financial services businesses, with margins ranging from 5% to over 24%.
• The average profit margin for financial services businesses is around 10% as of 2024.

Understanding the Financial Services Industry

The financial services industry has served as common ground for investors seeking steady growth and income for decades, despite the 2008 economic downturn spurred by its mismanagement. Organizations that facilitate banking and insurance services, asset management services, lending and credit services, and brokerage operations have continued to increase their contribution to gross domestic product (GDP) each year, and they have a lasting impact on total stock market performance.

The financial services industry includes a large group of businesses that manage money. This includes banks, credit unions, investment groups, credit card companies, insurance companies, financial technology companies, financial advisors, and even mobile financial services. Profit margin for all these various subsectors of the financial services industry varies; whereas many financial services companies generate a revenue by charging a fee for their services, some more personalized services rake in a higher profit margin.

10.53%

The average profit margin for the financial services industry as of year-end 2024.

Financial Services Industry Profit Margin

Companies in the financial services industry have a strong history of consistency in return as well as steady dividend payments to investors, but not all companies within the sector are created equal. This can be seen in the wide range of profit margins from subsectors and specific companies. For example, although the average profit margin for the financial services industry may be 10.53% (as of Dec. 2024), the profit margin for the industry’s more concentrated subsectors ranges from 5.6% to 24.6%.

To determine whether an investment in the financial services industry is suitable in terms of the tradeoff between risk and return, analyze the sector’s management of cost by reviewing its profit margin. A company’s profit margin is calculated by dividing a company’s net income by its total revenues and is expressed as a percentage.

Most investors view a higher profit margin as more desirable, while a lower percentage may mean a company is not generating enough revenue to cover its operating costs. Analyzing a company’s profit margin is not the only way an investor can determine profitability, but this metric does provide more insight than a review of net earnings alone.

How Much Do Financial Services Professionals Make?

The financial services industry spans a variety of careers, with different levels of qualifications and compensation. Accountants and auditors can expect an average annual income of around $80,000, with higher incomes for those with the valuable CPA designation. Financial planners and investment advisers can earn an average salary between $120,000 and $150,000 per year or higher.

How Do You Get a Career in Financial Services?

Almost all career pathways in the financial services require a four-year degree, with actuarial sciences and finance being among the more common academic majors. In addition, an MBA or other professional certification may be required for higher-level financial careers. Some jobs, especially those that involve trading securities on behalf of clients, may require special certification from FINRA or other government regulators.

What Are the Biggest Challenges for the Financial Services Sector?

According to a survey of 501 key decision-makers at British financial companies, the biggest challenge facing the sector was economic turbulence. 44% of respondents said that this was among the largest difficulties, with regulatory compliance following at 43%. Cybersecurity, technological disruptions, and talent retention were also major concerns.

The Bottom Line

The financial services sector covers a whole ecosystem of businesses involved in handling money, from lenders and credit card companies to asset managers and retirement funds. Each of these lines of business has its own advantages and risk profile. Although profit margins range widely, the average profit margin is typically higher than other industries.

How LIFO and FIFO accounting methods impact a company’s inventory outlook

Fact checked by Suzanne Kvilhaug
Reviewed by Natalya Yashina

All companies must determine how to record the movement of their inventory. The amount a company pays for raw materials, labor, and overhead costs is continually changing. For this reason, the amount it costs to make or buy a good today might be different than one week ago. 

For many companies, inventory represents a large, if not the largest, portion of their assets. As a result, inventory is a critical component of the balance sheet. Inventory can be valued using a few different accounting methods, including first In, first out (FIFO) and last in, first out (LIFO). Inventory accounting methods are used to track the movement of inventory and record appropriate and relevant costs.

Serious investors must understand how to assess the inventory line item when comparing companies across industries—or companies in their own portfolios.

Key Takeaways

• The last-in, first-out (LIFO) method assumes that the last unit to arrive in inventory is sold first.
• The first-in, first-out (FIFO) method assumes that the oldest unit of inventory is sold first.
• LIFO is not realistic for many companies because they would not leave their older inventory sitting idle in stock.
• FIFO is the most logical choice since companies typically use their oldest inventory first in the production of their goods.
• Deciding between these two inventory methods has implications for a company’s financial statements as this decision impacts the value of inventory, cost of goods sold, and net profit.

Understanding Different Inventory Accounting Methods

Inventory refers to a company’s goods in three stages of production:

• Raw materials are basic goods used in production to generate finished products.
• Work-in-progress are goods being manufactured but not yet complete.
• Finished inventory is goods ready for sale that can be bought and delivered to consumers.

You can take the goods that the company has at the beginning of any given period, add the materials that it purchased to make more goods, subtract the goods that the company sold—also called cost of goods sold (COGS)—and the result is the company’s ending inventory.

Inventory accounting assigns values to the goods in each production stage and classifies them as company assets because inventory can be sold—thus turning it into cash in the future. Assets need to be accurately valued so that the company as a whole can be accurately valued. The formula for calculating inventory is:

$begin{aligned} &text{BI} + text{ Net Purchases } – text{COGS} = text{EI}\ &textbf{where:}\ &text{BI = Beginning inventory}\ &text{EI = Ending Inventory}\ end{aligned}$​BI+ Net Purchases −COGS=EIwhere:BI = Beginning inventoryEI = Ending Inventory​

There are different inventory accounting methods, including first in, first out (FIFO) and last in, first out (LIFO). Companies often try to match the physical movement of inventory to the inventory method they use. The accounting method that a company uses to determine its inventory costs can have a direct impact on its key financial statements: balance sheet, income statement, and statement of cash flows.

First In, First Out (FIFO)

The first in, first out (FIFO) method assumes that the first unit making its way into inventory–the oldest inventory–is sold first. For example, let’s say that a bakery produces 200 loaves of bread on Monday at a cost of $1 each and produces 200 more on Tuesday at $1.25 each. According to the rules of FIFO, if the bakery sells 200 loaves on Wednesday, the COGS (on the income statement) is $1 per loaf because that was the cost of each of the first loaves in inventory. The $1.25 loaves would be allocated to ending inventory on the balance sheet.

Last-In, First-Out (LIFO)

The last-in, first-out (LIFO) method assumes that the last unit making its way into inventory–the newest inventory–is sold first. Therefore, the older inventory is left over at the end of the accounting period. Now, suppose the scenario is the same for this bakery—it produces 200 loaves of bread on Monday at a cost of $1 each and produces 200 more on Tuesday at $1.25 each. If the bakery sells 200 loaves on Wednesday, the COGS—on the income statement—is $1.25 per loaf. The $1 loaves would be allocated to ending inventory on the balance sheet.

LIFO vs. FIFO: Inventory Valuation

LIFO

Since LIFO uses the most recently acquired inventory to value COGS, the leftover inventory might be extremely old or obsolete. As a result, LIFO doesn’t provide an accurate or up-to-date value of inventory because the valuation is much lower than inventory items at today’s prices. Also, LIFO is not realistic for many companies because they would not leave their older inventory sitting idle in stock while using the most recently acquired inventory.

For example, a company that sells seafood products would not realistically use their newly-acquired inventory first in selling and shipping their products. In other words, the seafood company would never leave their oldest inventory sitting idle since the food could spoil and lead to losses.

LIFO isn’t practical for many companies that sell perishable goods and doesn’t accurately reflect the logical production process of using the oldest inventory first.

FIFO

FIFO can be a better indicator of the value for ending inventory because the older items have been used up while the most recently acquired items reflect current market prices. For most companies, FIFO is the most logical choice since they typically use their oldest inventory first in the production of their goods, which means the valuation of COGS reflects their production schedule.

For example, the seafood company—from the earlier example—would use their oldest inventory first (or first in) when selling and shipping their products. Because the seafood company would never leave older inventory in stock (because it could spoil), FIFO accurately reflects the company’s process of using the oldest inventory first in selling their goods.

LIFO vs. FIFO: Impact of Inflation

If inflation were nonexistent, then all inventory valuation methods would produce the same results. Inflation is a measure of the rate of price increases in an economy. When prices are stable, the bakery from our earlier example would be able to produce all of its bread loaves at $1, and LIFO and FIFO would both give us a cost of $1 per loaf. However, in the real world, prices tend to rise over the long term, which means that the choice of accounting method can affect the inventory valuation and profitability for the period.

Assuming that prices are rising, inflation would impact LIFO and FIFO as follows:

LIFO

When sales are recorded using the LIFO method, the most recent items of inventory are used to value COGS and are sold first. In other words, the older inventory, which was cheaper, would be sold later. In an inflationary environment, the current COGS would be higher under LIFO because the new inventory would be more expensive. As a result, the company would record lower profits or net income for the period. However, the reduced profit or earnings means the company would benefit from a lower tax liability.

FIFO

When sales are recorded using the FIFO method, the oldest inventory—that was acquired first—is used up first. FIFO leaves the newer, more expensive inventory in a rising-price environment, on the balance sheet. As a result, FIFO can increase net income because inventory that might be several years old—which was acquired for a lower cost—is used to value COGS. However, the higher net income means the company would have a higher tax liability.

LIFO vs. FIFO: Financial Reporting

LIFO

Companies outside of the United States that must adhere to International Financial Reporting Standards (IFRS) are not permitted to use the LIFO method. Public companies in the U.S. are required to adhere to the generally accepted accounting principles (GAAP)—accounting standards set forth by the Financial Accounting Standards Board (FASB). GAAP permits the use of LIFO and FIFO.

Though the LIFO inventory method does require a robust inventory management system to track different inventory transactions, LIFO systems often require less demand on historical data because the most recent purchases are sold first. For this reason, companies must be especially mindful of the bookkeeping under the LIFO method; once early inventory is booked, it may remain on the books untouched for long periods of time.

FIFO

In addition to being allowable by both IFRS and GAAP users, the FIFO inventory method may require greater consideration when selecting an inventory method. Companies that undergo long periods of inactivity or accumulation of inventory will find themselves needing to pull historical records to determine the cost of goods sold. Though many accounting systems can automate this process, the bookkeeping requirements under the FIFO method result in transactions that continually turn over and do not remain on the books for as long (compared to the LIFO method).

Warning

While U.S. generally accepted accounting principles allow both the LIFO and FIFO inventory method, the LIFO method is not permitted in countries that use the International Financial Reporting Standards (IFRS).

LIFO vs. FIFO: Taxes

LIFO

During a period of rising prices, the most expensive items are sold with the LIFO method. This means the value of inventory is minimized, and the value of COGS is increased. Under the LIFO method, expenses are highest. So taxable net income is lower under the LIFO method, as is the resulting tax liability.

FIFO

In contrast, taxes are usually higher using the FIFO method. Assuming that prices are rising, this means that inventory levels are going to be highest because the most recent goods (often the most expensive) are being kept in inventory. This also means that the earliest goods (often the least expensive) are reported under the COGS. Because the expenses are usually lower under the FIFO method, net income is higher—resulting in a potentially higher tax liability.

LIFO and FIFO: Advantages and Disadvantages

When a company selects its inventory method, there are downstream repercussions that impact its net income, balance sheet, and its requirements for tracking inventory. The pros and cons listed below assume the company is operating in an inflationary period of rising prices.

LIFO

Assuming that prices tend to rise over an accounting period, the LIFO method results in a lower value for the cost of goods sold (COGS), resulting in a lower tax liability at the end of the accounting period. It may also be easier to implement if recently-purchased inventory is more accessible.

However, the LIFO method may not represent the actual movement of inventory. Many companies try to move older inventory first. Depending on the actual shelf life, this may not reflect the real value of the company’s inventory.

FIFO

While LIFO produces a lower tax liability, the FIFO method tends to report a higher net income, which can make the company more attractive to shareholders. It also reports a higher value for current inventory, which can strengthen the company’s balance sheet.

However, if inventory has been stagnant for some time, this method may not reflect the actual cost of materials, especially in an inflationary environment.

LIFO

• Results in lower tax liability compared to other methods

• May be easiest to implement if inventory is easily accessible because it has been recently purchased

• Often does not represent the actual movement of inventory (i.e., many companies try to move older inventory)

• Results in lower net income compared to other methods

FIFO

• Results in higher net income compared to other methods

• Often results in higher inventory balances compared to other methods, strengthening a company’s balance sheet

• Results in a higher tax liability compared to other methods.

• May not accurately communicate the true cost of materials if inventory has been stagnant while prices are rising.

Example of LIFO vs. FIFO

In the tables below, we use the inventory of a fictitious beverage producer, ABC Bottling Company, to see how the valuation methods can affect the outcome of a company’s financial analysis.

The company made inventory purchases every month during Q1, resulting in a total of 3,000 units. However, the company already had 1,000 units of older inventory; these units were purchased at $8 each for an $8,000 valuation. So, the beginning inventory was 4,000 units for Q1.

The company sold 3,000 units in Q1, which left an ending inventory balance of 1,000 units or (4,000 units – 3,000 units sold = 1,000 units).

COGS Valuation

• LIFO: COGS was $37,000 because the 3,000 units that were purchased most recently were used in the calculation of the January, February, and March purchases ($10,000 + $12,000 + $15,000).
• FIFO: COGS was $30,000 because FIFO uses the oldest inventory first and then the January and February inventory purchases. In other words, the 3,000 units were comprised of (1,000 units for $8,000) + (1,000 units for $10,000 or January) + (1,000 units for $12,000 or February)

Below are the Ending Inventory Valuations:

• LIFO Ending Inventory: 1,000 units x $8 = $8,000. The last units (the newest ones) are sold first; therefore, we leave the oldest units for ending inventory.
• FIFO Ending Inventory: 1,000 units x $15 each = $15,000. The first units (the oldest ones) are sold first; therefore, we leave the newest units for ending inventory.

LIFO or FIFO: Which One Is Best?

The difference between $8,000, $15,000, and $11,250 is considerable. In a complete fundamental analysis of ABC Company, we could use these inventory figures to calculate other metrics: for example, factors that expose a company’s current financial health and enable us to make projections about its future. The inventory figure a company starts with when valuing its inventory matters. And, companies are required by law to state which accounting method they use in their published financials.

Although the ABC Company example above is fairly straightforward, the subject of inventory—and whether to use LIFO or FIFO—can be complex. Knowing how to manage inventory is critical for all companies, no matter their size. It is also a major success factor for any business that holds inventory because it helps a company control and forecast its earnings. For investors, inventory is an important item to analyze because it can provide insight into what’s happening with a company’s core business.

LIFO

• The newest inventory item is the first item to be sold.

• Net income is often lower.

• Cost of goods sold is often higher.

• Ending inventory on the balance sheet is often lower.

• LIFO often does not represent the actual movement of inventory (because companies try to sell the items at the most risk of obsolescence).

FIFO

• The oldest inventory item is the first to be sold.

• Net income is often higher.

• Cost of goods sold is often lower.

• Ending inventory on the balance sheet is often higher.

• FIFO more closely represents the actual movement of inventory (because companies try to sell the items at the most risk of obsolescence).

Is FIFO a Better Inventory Method Than LIFO?

FIFO has advantages and disadvantages compared to other inventory methods. FIFO often results in higher net income and higher inventory balances on the balance sheet. However, this also results in higher tax liabilities and potentially higher future write-offs—in the event that that inventory becomes obsolete. In general, for companies trying to better match their sales with the actual movement of product, FIFO might be a better way to depict the movement of inventory.

Does IFRS Permit LIFO?

No, the LIFO inventory method is not permitted under international financial reporting standards (IFRS). Both the LIFO and FIFO methods are permitted under generally accepted accounting principles (GAAP).

What Types of Companies Often Use LIFO?

Companies often use LIFO when attempting to reduce their tax liability. LIFO usually doesn’t match the physical movement of inventory because companies are more likely to try to move older inventory first. However, car dealerships or oil companies may try to sell items marked with the highest cost to reduce their taxable income.

What Types of Companies Often Use FIFO?

Companies with perishable goods—or items heavily subject to obsolescence—are more likely to use FIFO. For example, consider a grocery store selling produce: that grocery store is more likely to sell older bananas as opposed to the most recently delivered inventory. If the store sells the most recent inventory it receives, the oldest inventory items will likely go bad.

In addition, consider a technology manufacturing company that shelves units that may not operate as efficiently with age. For example, a chip manufacturer may want to ensure older units of a specific model are moved out of inventory; more recently manufactured units of the same model may be able to better withhold storage conditions.

The Bottom Line

Companies can choose between different accounting inventory methods, including LIFO and FIFO. Companies that opt for the LIFO method sell their most recent inventory first, which usually costs more to obtain or manufacture. The FIFO method results in a lower COGS and higher inventory. A company’s taxable income, net income, and balance sheet are all impacted by its choice of inventory method.

Every taxpayer contributes

Reviewed by Thomas J. Catalano

Medicare and its means-tested sibling, Medicaid, are the only forms of health coverage for millions of Americans today. They represent some of the most successful social insurance programs ever, serving tens of millions of people including older adults, younger beneficiaries with disabilities, and those with low incomes or limited resources. Everyone in the workforce must contribute to fund these programs, either through payroll deductions or when they file taxes each year. So just how much are Americans paying for Medicare and Medicaid, and how big a bite from your paycheck should you expect?

Key Takeaways

• Medicare and Medicaid are government-sponsored health insurance plans.
• Medicare is federally administered and covers older or disabled Americans, while Medicaid operates at the state level and covers low-income families and some single adults.
• Funding for Medicare comes from payroll taxes and premiums paid by recipients.
• Medicaid is funded by the federal government and each state.
• Both programs received additional funding as part of the fiscal relief package in response to the 2020 economic crisis.

Medicare and Medicaid Costs

Medicare is administered by the Centers for Medicare & Medicaid Services (CMS), a component of the Department of Health and Human Services. CMS works alongside the Department of Labor (DOL) and the U.S. Treasury to enact insurance reform. The Social Security Administration (SSA) determines eligibility and coverage levels.

Medicaid is administered at the state level. Although all states participate in the program, they aren’t required to do so. The Affordable Care Act (ACA) increased the cost to taxpayers—particularly those in the top tax brackets—by extending medical coverage to more Americans.

According to data from the CMS, national healthcare expenditure (NHE) grew by 7.5% to $4.9 trillion in 2023. That’s $14,570 per person. This figure accounted for 17.6% of gross domestic product (GDP) that year. If we look at each program individually, Medicare spending grew 8.1% to $$1,029.8 billion in 2023, which was 21% of total NHE, while Medicaid spending grew 7.9% to $871.7 billion in 2023, which was 18% of total NHE.

The CMS projects that healthcare spending is estimated to grow by 5.6% each year between 2023 and 2032. Projections indicate that health spending will grow 1.4% faster than the country’s GDP in 2023. This projection in growth is primarily due to higher Medicare enrollments. The projected healthcare spending estimates by the CMS do not take into account costs related to the coronavirus pandemic.

Medicaid Expansion

President Joe Biden’s American Rescue Plan of 2021 provided incentives for states to expand their Medicaid programs. These expansions would cover adults up to age 65 who have incomes at or below 138% of the federal poverty level, which is $36,777 for a family of three in 2025. Forty states plus Washington, D.C., adopted the Medicaid expansion; the ten states that did not are Alabama, Florida, Georgia, Kansas, Mississippi, South Carolina, Tennessee, Texas, Wisconsin, and Wyoming.

Under the plan, the states were offered additional federal funding if they expanded Medicaid for eligible low-income adults. They could also earn an additional five-percentage-point federal match on their regular Medicaid expenditures for two years—not including costs for those newly eligible, disproportionate share hospital payments, and some other expenses—to help defray state matching costs. More valuable, they would also gain the ACA’s 90% federal matching funds to pay for the costs of covering newly eligible adults.

CARES Act Funds

On March 27, 2020, President Donald Trump signed the CARES Act—a $2 trillion coronavirus emergency relief package—into law. A sizable chunk of those funds—$100 billion—was earmarked for healthcare providers and suppliers for expenses related to COVID-19, including:

• A 20% increase in Medicare payments to hospitals for COVID-19 patients
• Eliminating a scheduled payment reduction for hospitals treating Medicare patients from May 1, 2020, through Dec. 31, 2020
• An increase in Medicaid funds for states

Medicare Taxes

Taxpayers who receive wages, salaries, or self-employment income are required to pay Medicare tax on all of their wages. Once there was a limit on the amount of income on which Medicare tax was assessed, but this was eliminated in 1993. Now all earned income of any kind is assessed a 2.9% tax. Employers who pay their employees W-2 income cover half of this amount, 1.45%, and the employee pays the other half.

In most cases, the employer withholds the amount the employee owes so no balance is owed at tax time. Self-employed taxpayers must pay the entire amount themselves but are allowed to deduct half of this cost as a business expense. This amount is coded as a deduction for adjusted gross income (AGI), so taxpayers don’t have to itemize.

On Jan. 1, 2013, the ACA also imposed an additional Medicare tax of 0.9% on all income above a certain level for high-income taxpayers. Single filers have to pay this additional amount on all earned income they receive above $200,000 and married taxpayers filing jointly owe it on earned income over $250,000. The threshold is $125,000 for married taxpayers who file separately.

Unearned Income Medicare Contribution Tax

There is also an additional tax on unearned income, such as investment income, for those with AGIs higher than the thresholds mentioned above. It is known as the unearned income Medicare contribution tax or the net investment income tax (NIIT).

Taxpayers in this category owe an additional 3.8% Medicare tax on all taxable interest, dividends, capital gains, annuities, royalties, and rental properties that are paid outside of individual retirement accounts or employer-sponsored retirement plans. It also applies to passive income from taxable business activity and to income earned by day traders.

This tax is applied to the lower of the taxpayer’s net investment income (NII) or modified AGI over the listed thresholds. This tax is also levied on income from estates and trusts with income exceeding the AGI threshold limits prescribed for estates and trusts. Deductions that can reduce the amount of taxable net investment income include early withdrawal penalties, investment interest and expenses, and the amount of state tax paid on this income.

Note

When the NIIT legislation was enacted in 2010, the IRS noted in the preamble to its list of regulations that this was a surtax on Medicare. The Joint Committee on Taxation specifically stated: “No provision is made for the transfer of the tax imposed by this provision from the General Fund of the United States Treasury to any Trust Fund.” This means that the funds collected under this tax are left in the federal government’s general fund.

Example of a Medicare Tax Bill for a High Earner

The total tax bill for Medicare that could be paid by a high-income taxpayer could look something like this:

Jerry is single and has inherited several pieces of land that produce oil and gas income at the wellhead. He also works as a salesman for a local technology company and earned $225,000 of 1099 income this year. His oil and gas royalties for the year total $50,000, and he also realized capital gains of about $20,000 from the sale of stock.

Jerry will owe 2.9% on his $225,000 of earned income, which equals $6,525. He also will owe another 0.9% on the amount of his earnings in excess of $200,000, which in this case is $25,000. This comes to $225. Finally, he must pay 3.8% of his $70,000 of combined investment income, which is an additional $2,660. The grand total he will pay to Medicare for the year is $9,410 ($6,525 + $225 + $2,660).

How Medicare Is Funded

Medicare is funded by two trust funds that can only be used for the program. The hospital insurance trust fund is funded by payroll taxes paid by employees, employers, and the self-employed. These funds are used to pay for Medicare Part A benefits.

Medicare’s supplementary medical insurance trust fund is funded by Congress, premiums from people enrolled in Medicare, and other avenues, such as investment income from the trust fund. These funds pay for Medicare Part B benefits, Medicare Part D benefits, and program administration expenses.

Benefit payments made by Medicare cover the following services:

• Home healthcare
• Skilled nursing facilities
• Hospital outpatient services
• Outpatient prescription drugs
• Physician payments
• Hospital inpatient services
• Medicare Advantage Plans, also known as Part C Plans, which are offered by Medicare-approved private companies
• Other services

The CARES Act expanded Medicare’s ability to cover treatment and services for those affected by COVID-19 including:

• Providing more flexibility for Medicare to cover telehealth services
• Authorizing Medicare certification for home health services by physician assistants, nurse practitioners, and certified nurse specialists

How Medicaid Is Funded

Medicaid is funded by the federal government and each state. The federal government pays states for a share of program expenditures, called the Federal Medical Assistance Percentage (FMAP). Each state has its own FMAP based on per capita income and other criteria.

The average state FMAP is 57%, but FMAPs can range from 50% in wealthier states up to 75% for states with lower per capita incomes. FMAPs are adjusted for each state on a three-year cycle to account for fluctuations in the economy. The FMAP is published annually in the Federal Register.

As mentioned above, the CARES Act provided additional funds to states for costs related to COVID-19.

What Percentage of Healthcare Spending Goes to Medicaid?

Medicaid represents $1 out of every $6 spent on healthcare, and the program is the major source of financing for states to provide coverage of health and long-term care for low-income residents.

What Percentage of Healthcare Spending Goes to Medicare?

Medicare spending often plays a major role in federal health policy and budget discussions, since it accounts for 21% of national health care spending and 12% of the federal budget.

How Does Medicaid Expansion Affect State Budgets?

Expansion has produced net savings for many states, according to the Center on Budget and Policy Priorities. That’s because the federal government pays the vast majority of the cost of expansion coverage, while expansion generates offsetting savings and, in many states, raises more revenue from the taxes that some states impose on health plans and providers.

The Bottom Line

Medicare and Medicaid constitute a major segment of the health insurance market for tens of millions of Americans. Although Medicare and Medicaid funding is projected to fall short at some point, the CARES Act was designed to address costs related to the coronavirus outbreak.

Reviewed by Michael J Boyle
Fact checked by Michael Logan

During the 2020 and 2024 presidential races, Joe Biden campaigned on economic platforms that included strategies to support the middle class, extend health care, raise taxes on the wealthy, and invest trillions of dollars in green energy infrastructure.

As President, Biden won major economic victories by enacting the American Rescue Plan Act of 2021 and the Inflation Reduction Act, passed in August 2022.

Key Takeaways

• Joe Biden’s 2020 and 2024 campaigns included commitments to student debt relief, COVID-19 recovery, taxation of the wealthy, and investments in clean energy.
• President Biden signed into law the $1.9 trillion American Rescue Plan in 2021.
• Student loan relief and Federal Trade Commission proposals faced challenges.

Campaign Promises

During the 2020 presidential race, Biden ran on an economic campaign aimed at delivering relief in response to the COVID-19 pandemic; spurring investments in technology, infrastructure, and research and development; boosting domestic manufacturing; raising the corporate tax rate; canceling student loan debt; and lowering medical costs.

President Biden sought re-election in the 2024 presidential race, before dropping out on July 21, 2024. Throughout his campaign, the Biden campaign emphasized the progress and milestones reached under his administration’s economic plan, Bidenomics.

Biden’s proposals included increasing the corporate tax rate and restoring the expanded Child Tax Credit. The president had also proposed a first-time homebuyer credit to lessen the burden of housing costs on families. He opposed cuts to Social Security and Medicare while proposing a minimum 25% tax on billionaires.

Successes and Challenges

The American Rescue Plan

President Joe Biden formally announced his $1.9 trillion COVID-19 stimulus plan on January 14, 2021, and it passed on March 11, 2021. It included $1,400 stimulus checks, extended unemployment benefits, and a vaccine rollout.

• Direct Aid: Worth $1 trillion, aid included stimulus checks, eviction or foreclosure moratoriums that expired on July 31, 2021, $21.5 billion in emergency rent, almost $10 billion in mortgage assistance, and $5 billion in emergency assistance for people experiencing homelessness. Child care and food program funding and the child care tax credit were expanded.
• Public Health Efforts and Schools: The American Rescue Plan included $20 billion for a national vaccination program, $50 billion for an expansion of testing, $30 billion for the Disaster Relief Fund for personal protective equipment, and $130 billion to open most schools.
• Front-Line Relief: The funding helped governments deal with revenue shortfalls to keep front-line public workers on the job, small business grants and loans, and $20 billion for public transit agencies.
• IT Modernization: Congress also approved almost $2 billion to modernize and secure federal information technology.

Note

President Joe Biden’s Build Back Better agenda included the American Jobs Plan and the American Families Plan, but neither was enacted.

Health Care

Biden supported the Affordable Care Act and campaigned to protect health care policies. Through the Inflation Reduction Act, Medicare could negotiate drug prices. Additionally, through the American Rescue Plan, healthcare plans became more affordable, driving enrollment for middle-income people and reducing the uninsured rate.

Student Debt

In August 2022, Biden called for forgiving up to $20,000 in student loan debt for borrowers whose income is less than $125,000 and who were Pell Grant recipients. For those who were not Pell Grant recipients, the cancellation amount was up to $10,000. However, the Supreme Court struck down President Biden’s attempt to forgive more than $430 billion in student loan debts.

In response, President Biden initiated the Saving on a Valuable Education (SAVE) Plan, an income-driven repayment (IDR) plan for student loan borrowers. Its benefits included setting monthly payments, changing the discretionary income formula, and halting the capitalization of unpaid interest.

On July 18, 2024, a federal appeals court blocked the SAVE plan and the Department of Education moved borrowers enrolled in SAVE into an interest-free forbearance while the litigation is ongoing. As of Jan. 2025, eligible borrowers may only enroll in PAYE (Pay As You Earn) and ICR (Income-Contingent Repayment) Plans.

Workers’ Rights

In April 2024, the Federal Trade Commission approved a broad ban on non-compete clauses in employment contracts. On Aug. 20, 2024, a district court stopped the FTC from enforcing the rule. As of Feb. 2025, an appeal is pending.

Made in America

President Biden signed the CHIPS and Science Act of 2022, which invested $250 billion in domestic semiconductor manufacturing and research. The Inflation Reduction Act also spurred private sector investment in U.S. clean energy manufacturing. In March 2024, the Department of Energy announced $6 billion in funding for projects aimed at decarbonization and domestic job creation in the manufacturing sector.

Infrastructure and Climate Change

The $1.2 billion Infrastructure Investment and Jobs Act provided $550 billion for rebuilding roads and bridges, improving public transit, replacing lead pipes, addressing drinking water contamination, and expanding access to high-speed internet. Biden had promised to rejoin the Paris Agreement, which he did in January 2021.

Important

In Jan. 2025, President Trump withdrew the United States from the Paris Agreement.

The American Middle Class

Revitalizing the middle class and making it more inclusive was a cornerstone of Biden’s campaign. “The country wasn’t built by Wall Street bankers, CEOs, and hedge fund managers. It was built by the great American middle class,” he said at a rally kicking off his 2020 campaign.

During Biden’s first term, the unemployment rate hit a record low. However, it was tempered by persistent inflation following the pandemic. In response, the Biden administration targeted firms for price-gouging, as well as the practice of charging consumers junk fees.

Rural communities make up 20% of the U.S. population and were part of Biden’s goals. By fighting for fair trade deals, investing $20 billion in rural broadband infrastructure, creating low-carbon manufacturing jobs, reinvesting in agricultural research, improving access to federal resources and funds for farming or small businesses, and expanding health services and medical training programs, Biden ushered in policies to assist those in areas with persistent poverty.

How Did the Biden Administration Help Stimulate the Market for Electric Cars?

Biden’s Infrastructure Investment and Jobs Act invested $7.5 billion to build a national network of 500,000 electric vehicle chargers, to make charging predictable, reliable, and easy. As of 2024, the number of publicly available EV chargers reached 192,000.

Did Biden’s Policies Help Medicare?

The Biden administration bolstered Medicare recipients through the Inflation Reduction Act, which lowered premiums for Medicare Advantage and Medicare Part D prescription drug plans.

What Is a Student Loan Income-Driven Repayment Plan?

Income-driven repayment plans are designed to make a borrower’s student loan debt more manageable by giving them a monthly payment based on income and family size.

The Bottom Line

In the 2020 general election, Biden’s campaign positions included higher taxes on the wealthy, student loan forgiveness, and investments in clean energy. President Biden signed notable legislation such as the American Rescue Plan and the Inflation Reduction Act.

Custodial account fees tend to be low, but can vary among brokerages and financial institutions

Fact checked by Brendan Harkness

A custodial account is a special savings or investment account that one person opens for the financial benefit of another. In many cases, a parent or guardian opens a custodial account to give money to or invest money for a minor. Parents can use it to build savings for a child, to allow other family members to make financial gifts to that same child, or to teach their child about investing at a young age. 

If you’re considering a custodial account, it’s normal to wonder about the potential expenses you might face along the way. Custodial account costs are typically low, but they can vary based on the broker or financial institution you work with and the type of custodial account you choose to open.

There are two common types of custodial brokerage accounts: Uniform Gift to Minors Act (UGMA) accounts and Uniform Transfers to Minors Act (UTMA) accounts. The primary differences have to do with the types of assets you can contribute to each. Here’s what you need to know about custodial accounts for minors and their associated costs.

Key Takeaways

• A custodial account is opened by one person for the benefit of another.
• Fees for a UGMA custodial account, which allows minors to receive financial gifts without a trustee, are similar to deposit and investment accounts.
• Fees for UTMA accounts, which let you transfer different assets to minors, tend to vary based on the provider.
• Both accounts are taxable and come with certain tax benefits.
• While there are no income or contribution limits to these accounts, you cannot change the beneficiary once the account is established.

UGMA Custodial Account

The Uniform Gift to Minors Act is the name of a law that lets minors receive financial gifts without the need for a trustee. You can use a UGMA account to give financial assets to a minor, like a child or grandchild. Some examples of assets you (and other family members or friends) can contribute to a UGMA include cash, stocks, bonds, certificates of deposit (CDs), index funds, mutual funds, and more.

Costs Associated With UGMA Accounts

Custodial accounts, like UGMA accounts, can include fees like any other deposit or investment account you open. So, it’s important to pay attention to the fees that a brokerage firm or financial institution charges to find the best UGMA account for your child’s needs. 

Some of the fees and requirements associated with a UGMA account may include: 

• Monthly maintenance fees
• Annual fees
• Account minimums
• Trade fees
• Commissions
• Transfer fees

Important

The best UGMA account providers generally charge no monthly maintenance fees or annual fees, have no account minimums, and permit the purchase of fractional shares.

UTMA Custodial Account

The Uniform Transfers to Minors Act is another law that gives minors the ability to receive financial gifts and other valuable assets without the need for a special trust fund. The UTMA came after the UGMA, and not only lets minors receive gifts of financial assets (like cash, stocks, bonds, mutual funds, etc.), but also real estate, fine art, and other types of property. 

Costs Associated With UTMA Accounts

The cost of a UTMA account can vary just like any other type of investment account or deposit account you open. Therefore, it’s important to shop around and compare fees from multiple brokerage firms or financial institutions before you open one. 

You should watch out for the same kinds of expenses mentioned above for UGMA accounts. Be sure to read the fine print so you don’t miss any important details that could impact your overall costs. 

Tax Requirements of Custodial Accounts

Fees from your brokerage firm or financial institution aren’t the only expense to consider. It’s also important to understand tax requirements associated with custodial accounts and who’s responsible for paying taxes on any income those assets generate while the beneficiary is still a minor. 

Both UGMA and UTMA custodial accounts are taxable investment accounts, which means they are not tax-advantaged. But, since the child owns the custodial account, the initial earnings it generates should fall under the child’s lower tax rate rather than the parent’s typically higher tax bracket. However, there are limits.

Here are some potential tax benefits of using a UGMA or UTMA account for eligible minors (children under 19 or full-time students under 24 years old):

• Up to $1,350 in custodial account earnings may be exempt from federal income tax.
• Pay federal taxes at the child’s tax rate for the next $1,350 in earnings. 
• Pay federal taxes at the parent’s tax rate for any earnings above $2,600. 

Important

For questions about specific tax situations, you should always consult with a licensed tax professional. 

Pros and Cons of Opening a Custodial Account

If you’re considering opening a UGMA or UTMA account for your child (or anyone else), it’s wise to consider the advantages and disadvantages first. Here are some important facts you should know.

Pros

• No income or contribution limits 

• Flexibility to invest in a variety of assets 

• Less expensive to establish than a trust fund 

• Features special tax benefits 

Cons

• May reduce a child’s eligibility for college financial aid 

• Not tax-deferred 

• Deposits and gifts are irrevocable (they cannot be reversed or changed) 

• Cannot change the account beneficiary

Compare the Best Custodial Accounts

It’s important to research your options before opening a deposit account. Learn more about why we picked the accounts above here: The Best Custodial Accounts.

Is It Worth Opening a Custodial Account?

There are advantages and disadvantages to opening custodial accounts for minors. You can use these accounts to take advantage of certain tax benefits and even to teach your child about investing at a young age.

At the same time, custodial accounts present certain risks, like the chance of impacting the financial aid your child may be eligible to receive at a later date. Therefore, it’s important to do your own research before you decide whether opening a custodial account is the right move for your child.

How Much Money Can a Custodial Account Hold?

There’s no limit to the amount of money a custodial account can hold. However, each donor may only give a beneficiary up to $19,000 per year ($38,000 for married couples filing jointly) if they wish to avoid triggering federal gift tax implications from the IRS.

Who Owns the Money in a Custodial Account?

The beneficiary is the owner of the assets in a custodial account. However, until the beneficiary reaches the age of adulthood in their state, the custodian has control over how to invest the money in the account. 

Once the child turns 18, it’s important to have certain legal paperwork in place (with the child’s consent) so you can continue to offer support with financial matters, medical situations, school, and more. 

What Is the Tax Rate for a UGMA/UTMA?

For 2025, a minor can earn up to $1,350 in unearned income from custodial account investments without having to pay federal income tax on those funds, according to the IRS. In general, the next $1,350 in earnings is subject to the child’s tax rate, and earnings above $2,600 are subject to the parent’s tax rate. However, it’s always wise to speak with a tax professional if you have questions about your specific tax situation.

The Bottom Line

Custodial accounts allow adults to help their kids (or grandkids) start saving without needing a trustee. If you open one, you’re responsible for managing it. This means that you make all the investment decisions and decide how the money will be used. While there are no income or contribution limits, you must keep in mind that the account can only be used for the benefit of the named beneficiary. Once named, you can’t change it to someone else. And if you plan on applying for financial aid for school, the balance in the account could reduce any funding you receive.

Some HELOC loans have repayment penalties

Fact checked by Amanda Jackson

A home equity line of credit (HELOC) is a way of accessing the equity that you’ve built up in your home. With a HELOC, you use your home as collateral for a line of credit. The amount of credit available to you depends on factors like the amount of equity in your home, your credit score, and your debt-to-income (DTI) ratio.

HELOCs can offer several advantages, but they have costs to consider. For example, if you want to pay the balance off early, you could face penalties. Though these charges may not always be labeled as a prepayment penalty, as they are with home equity loans, they function in the same way.

Key Takeaways

• A HELOC is a way to access the equity you’ve built up in your home, using your home as collateral.
• HELOCs usually have lower interest rates than other types of loans, but the downside is that you could lose your home to foreclosure if you fail to repay the loan.
• Most HELOCs have no prepayment penalties, but some lenders may charge a prepayment penalty to compensate for the loss of the interest they would have earned if the loan had been paid through the full term.
• Before agreeing to a HELOC’s terms, you should read the fine print to learn about any prepayment penalties and consult a professional advisor if necessary.

Understanding HELOC Loans

To understand why some HELOC loans have closing costs, we must look back at their history. When HELOC loans were first conceived in the 1980s, they worked as revolving loans, using the borrower’s home equity to secure the loan.

Some states had laws that made HELOCs illegal as revolving loans: if a borrower paid off their loan, then the lender had the obligation to release the lien on their house. Also, mortgages that didn’t come with an explicit term were prohibited in some states. To be legal nationwide, HELOC agreements had to come with a specific payoff date. As a result, the consensus was that HELOCs could have prepayment penalties.

Lenders set prepayment penalties as a way to protect their funds. A lender makes money on the loan through interest paid by the borrower each month throughout the loan term. If a HELOC loan is closed early, the lender won’t earn the expected profit generated by the interest. In other words, lenders use prepayment penalties to compensate for lost interest.

Important

Some people turn to a HELOC to consolidate high-interest debt. However, if you are having trouble paying your bills, consider the downsides. If you cannot make your HELOC payments, you could put your home at risk of foreclosure.

HELOC Prepayment Penalties

Some HELOC loans have some kind of prepayment penalty or a fee associated with paying off your HELOC early.

HELOCs are structured as multiyear contracts, and you can be charged a flat fee when you close your account, regardless of your account balance. This fee will apply if you open a HELOC, then pay it down and close it before the period specified in your loan terms. 

In other cases, the lender’s terms will allow them to recapture closing-cost fees from HELOC borrowers who close their credit line within a specified period, often within two to three years, after the loan begins. Lenders might document the waived closing costs or charge a flat fee that approximates the original costs.

HELOC loans can vary significantly in this regard. Be on guard for unscrupulous lenders that will charge high fees as you read the fine print. The federal Truth in Lending Act (TILA) requires lenders to disclose all the terms and costs of their home equity plans, including prepayment penalties.

You should also seek expert help if you are unsure if a loan is right for you. You can check whether a housing counselor is approved by the U.S. Department of Housing and Urban Development (HUD) or find a HUD-approved housing counselor by visiting HUD’s website or calling HUD’s housing counselor referral line at (800) 569-4287.

Do HELOCs Have Prepayment Penalties?

Most HELOC loan agreements won’t mention prepayment penalties. However, some HELOC loans will charge fees that are essentially an early repayment penalty. Make sure that you read the fine print, and consider consulting a professional advisor before paying off the HELOC early.

Can I Repay a Home Equity Line of Credit (HELOC) Early?

You can repay a home equity line of credit (HELOC) early, but you might have to pay penalties. You should check your loan agreement to see if early repayment penalties apply to you, and whether they will make paying back your loan early more expensive.

Can I Avoid HELOC Prepayment Penalties?

It depends on the terms of your loan. Make sure to read the fine print before taking out a HELOC to avoid any surprises. Talk to a U.S. Department of Housing and Urban Development (HUD)-approved housing counselor if you are unsure whether this type of loan is right for you.

The Bottom Line

Many HELOC loans have no early repayment penalties. However, some loans may have these kinds of fees. It’s important to read the fine print before agreeing to a HELOC and to seek expert advice if you are unsure about the terms that you are being offered.

Cost accounting is a process that measures all of the expenses associated with running a business, including both fixed and variable costs. The results help management make decisions that optimize their operations based on efficient cost management.

Cost accounting covers variable costs, fixed costs, direct costs, indirect costs, operating costs, opportunity costs, sunk costs, and controllable costs.

Key Takeaways

• Cost accounting is an accounting method that takes into consideration a company’s total cost of production by evaluating both fixed and variable costs.
• Managers use cost accounting to help make business decisions based on efficient cost management.
• Cost accounting is not the same as financial accounting and is used primarily for internal decision-making.

Direct Costs

Direct costs are related to producing a product or service. These include raw materials, labor, and distribution costs. Each item in this category can be traced to a product, department, or project.

For example, Ford Motor Company (F) manufactures cars and trucks. A plant worker might spend eight hours building a car. The direct costs associated with the car are the wages paid to the worker and the cost of the parts used to build the car.

Indirect Costs

Indirect costs cannot be easily traced to a product, department, activity, or project. For example, for Ford Motor Co., the indirect costs of building a car include the electricity that is used to power the plant in which the car is built. No one vehicle can be product can associated with the plant’s electric bill. That makes it an indirect cost.

Fixed Costs

Fixed costs do not vary with the number of goods or services a company produces over the short term.

For example, suppose a company leases a machine for two years. The company has to pay $2,000 per month to cover the cost of the lease no matter how many products the machine is used to make.

The lease payment is considered a fixed cost as it remains unchanged regardless of the company’s production numbers.

Variable Costs

Variable costs fluctuate as the level of production output changes. A variable cost increases as production volume increases, and falls as production volume decreases.

For example, a toy manufacturer must package its toys before shipping them out to stores. This is a type of variable cost because the cost increases when the manufacturer produces more toys and decreases when its production level declines.

Businesses may decide to forego a step in the production process to avoid the associated expenses. These are not only variable costs; They are avoidable costs.

Operating Costs

Operating costs are expenses associated with day-to-day business activities but are not traced back to a single product or process. Operating costs may be variable or fixed.

Examples of operating costs, which are more commonly called operating expenses, include rent and utilities for a manufacturing plant.

Operating costs are day-to-day expenses, but are classified separately from indirect costs – i.e., costs tied to actual production.

A company’s operating costs are of interest to its investors. The operating expense ratio is an indication of the company management’s efficiency in managing the business.

Opportunity Costs

Opportunity costs do not show up in a company’s financial statements but they are useful in internal planning. 

An opportunity cost is the theoretical cost of a business decision that was passed up for an alternative.

For example, a company may opt to buy a new piece of manufacturing equipment rather than lease it. Either choice will increase its productivity. But, the purchase requires the company to borrow money and pay interest on the loan. A lease would have allowed the company to save on interest and use that money to pay down other debt. In this case, the opportunity cost is the loss of money that could have been used for another purpose.

The concept of opportunity costs is also relevant to investors, who can calculate the difference in return between an investment they chose and one that was passed up.

Sunk Costs

Sunk costs are unavoidable. They derive from past events and cannot be avoided. Payments for equipment purchased in the past or expenditures on research and development are examples.

For that reason, sunk costs are excluded from future business decisions.

Controllable Costs

Controllable costs are expenses that company managers have the power to increase or decrease.

Common examples of controllable costs are office supplies, advertising expenditures, employee bonus amounts, and charitable donations.

Controllable costs are by nature short-term costs that can be adjusted quickly in response to current business conditions.

What Are the Types of Cost Accounting?

The methods of cost accounting include standard costing, activity-based costing, lean accounting, and marginal costing:

• Standard costing uses estimated costs rather than actual costs for cost of goods sold (COGS) and inventory.
• Activity-based costing takes overhead costs from different departments and pairs them with certain cost objects.
• Lean accounting replaces traditional costing methods with value-based pricing.
• Marginal costing evaluates the impact on cost by adding one additional unit into production.

What Is the Purpose of Cost Accounting?

The main purpose of cost accounting is to make better decisions based on firm data. Based on cost accounting, managers can improve production efficiency, determine selling prices, reduce costs, and evaluate the contribution of each activity involved in the operational process.

What Is the Difference Between Cost Accounting and Financial Accounting?

Financial accounting is focused on tracking and reporting the income, expenses, and profit of a business. Public companies are legally required to report their financial statements to their shareholders on a quarterly and yearly basis.

Cost accounting focuses at the granular level on the costs associated with producing and delivering a product or service. It is used to help company managers streamline their processes and enhance their profitability.

The Bottom Line

Cost accounting assesses the various costs of doing business. It is information that helps a company’s management decide how to improve the business and therefore increase its profits.