money

Reviewed by Margaret James
Fact checked by Yarilet Perez

A stock-for-stock merger occurs when shares of one company are traded for another during an acquisition. Shareholders can trade the shares of the target company for shares in the acquiring firm’s company when and if the transaction is approved. These transactions are typically executed as a combination of shares and cash and they’re cheaper and more efficient because the acquiring company doesn’t have to raise additional capital.

Key Takeaways:

• A stock-for-stock merger occurs when shareholders trade the shares of a target company for shares in the acquiring firm’s company.
• This type of merger is cheaper and more efficient because the acquiring company doesn’t have to raise additional capital for the transaction.
• A stock-for-stock merger doesn’t impact the cash position of the acquiring company.
• Acquisitions can be made with a mixture of cash and stock or with all-stock compensation.

What Is a Stock-for-Stock Merger?

An acquiring company can pay for the assets it will receive for a merger or acquisition in various ways. Acquisitions can be made with a mixture of cash and stock or with all stock compensation which is referred to as a stock-for-stock merger.

The acquirer can pay cash outright for all the equity shares of the target company and pay each shareholder a specified amount for each share or it can provide its own shares to the target company’s shareholders according to a specified conversion ratio. The shareholder will receive X number of shares of the acquiring company for each share of the target company owned by a shareholder.

Example of a Stock-for-Stock Merger

A stock-for-stock merger can take place during the merger or acquisition process.

Company A and Company E might form an agreement to undergo a 1-for-2 stock merger. Company E’s shareholders will receive one share of Company A for every two shares they currently own. Company E shares will stop trading and the outstanding shares of Company A will increase after the merger is complete. The share price of Company A will depend on the market’s assessment of the future earnings prospects for the newly merged entity.

Important

It’s uncommon for a stock-for-stock merger to take place in full. A portion of the transaction is typically completed through a stock-for-stock merger and the remainder is completed through cash and other equivalents.

Stock-for-Stock Mergers and Shareholders

The acquiring company proposes payment of a certain number of its equity shares to the target firm in exchange for all the target company’s shares when the merger is stock for stock. The offer will include a specified conversion ratio. The acquiring company issues certificates to the target firm’s shareholders provided the target company accepts the offer.

This entitles them to trade in their current shares for rights to acquire a pro-rata number of the acquiring firm’s shares. The acquiring firm issues new shares to provide shares for all the target firm’s converted shares, adding to its total number of shares outstanding.

This action causes the dilution of the current shareholders’ equity because there are now more total shares outstanding for the same company. The acquiring company obtains all the target firm’s assets and liabilities, however, effectively neutralizing the effects of the dilution. The current shareholders will gain in the long run from the additional appreciation provided by the target company’s assets should the merger prove beneficial and provide sufficient synergy.

What Is Outstanding Stock?

Outstanding stock is the shares a company has issued to date and that are currently owned by shareholders. The total number of a company’s outstanding shares should appear on its balance sheet.

What Is Shareholders’ Equity?

Shareholders’ equity is the remaining value of a company’s assets after accounting for and subtracting its liabilities and debts owed. Shareholders maintain a claim to equity.

What Are Preferred Shares?

Preferred shares are a percentage of ownership in the issuing company. These shareholders have a proportional claim to the company’s assets and earnings based on the number of shares they hold. They have a claim that’s superior to the assets in the event the company must liquidate and it’s superior to that of common shareholders. They have no say in company operations, however.

The Bottom Line

Taking over a company can be expensive. The acquirer may have to issue short-term notes or preferred shares if it doesn’t have enough capital and this can affect its bottom line. Initiating a stock-for-stock merger prevents a company from taking those steps, saving both time and money. It doesn’t impact the acquiring company’s cash position so there’s no need to go back to the market to raise more capital.

A stock-for-stock merger is attractive for companies because it’s efficient and less complex than a traditional cash-for-stock merger. The costs associated with the merger are well below traditional mergers.

Fact checked by Yarilet Perez
Reviewed by Somer Anderson

An IPO, or initial public offering, is the process a private company undergoes to sell shares of its stock to the public for the first time and become a public company. When a company makes this transition, it is no longer in the hands of the private owners and investors but is now under public ownership. Every public company has had an IPO, from small businesses listed on the exchanges to the biggest companies, such as Apple and Amazon.

Key Takeaways

• An initial public offering (IPO) is when a private company becomes public by selling its shares on a stock exchange.
• Private companies work with investment banks to bring their shares to the public, which requires tremendous amounts of due diligence, marketing, and regulatory requirements.
• Purchasing shares in an IPO is difficult as the first offering is usually reserved for large investors, such as hedge funds and banks.
• Common investors can purchase shares of a newly IPO-ed company fairly quickly after the IPO.

How an Initial Public Offering (IPO) Works

IPO is one of the few market acronyms that almost everyone is familiar with. Before an IPO, a company is privately owned—usually by its founders and maybe the family members who lent them money to get up and running. In some cases, a few long-time employees might have some equity in the company, assuming it hasn’t been around for decades.

The founders give the lenders and employees a piece of the action in lieu of cash. They know that if the company falters, giving away part of the company won’t cost them anything. If the company succeeds and eventually goes public, theoretically everyone should win. A stock that was worth nothing the day before the IPO will now have value.

However, because those private owners’ shares don’t trade on an open market, their stakes in the company are hard to value. Contrast that with an established company like IBM; anyone who owns a share knows exactly what it’s worth with a quick look at the financial pages.

A privately held company’s value is largely a guess, dependent on its income, assets, revenue, growth, etc. While those are certainly much of the same criteria that go into valuing a public company, a soon-to-be-IPO-ed company doesn’t have any feedback in the form of a buyer willing to immediately purchase its shares at a particular price.

Important

An IPO is a form of equity financing, where a percentage ownership of a company is given up by the founders in exchange for capital. It is the opposite of debt financing.

The IPO process works with a private firm contacting an investment bank that will facilitate the IPO. The investment bank values the firm through financial analysis and comes up with a valuation, share price, a date for the IPO, and a tremendous amount of other information.

A business that plans an IPO must register with the stock exchanges and the Securities and Exchange Commission (SEC) to ensure it meets all the necessary criteria. Once all of the required processes are completed, a company will be listed on a stock exchange and its shares will be available for purchase and sale. This is one of the main ways a business raises capital to fund its growth.

Anonymity vs. Fame

The vast majority of NYSE and Nasdaq-listed companies have been trading in anonymity from day one. Few people are concerned with every company listed on an exchange, especially ones that don’t make a splash or control a significant amount of market share.

When most companies offer shares to the public, initially the news barely registers with anyone outside of the securities industry; however, when a highly publicized Meta—formerly Facebook—or Google walks into the room, most people take notice.

That’s because such companies operate on the retail level or its equivalent. They’re ubiquitous. There aren’t hundreds of millions of people logging into their Cisco account to post photos multiple times a day, and no one makes a Hollywood feature film about people and companies that most of the population isn’t interested in.

Fame can be a positive attribute as it requires little marketing to bring attention to the IPO and will more often than not result in high demand for the shares. Fame also comes with a lot more pressure, as investors, analysts, and government bodies all scrutinize every move of the popular company.

Can You, and Should You, Buy?

When a company sells shares during its IPO, it is known as the primary distribution. So why doesn’t every investor, regardless of expertise, buy IPOs the moment they become available? There are several reasons.

The first reason is based on practicality, as IPOs aren’t that easy to buy. Placing a “buy newly issued stock X” order is harder than it sounds.

The company that’s about to go public sells its shares via an underwriter, an investment bank tasked with the process of getting those shares into investors’ hands. The underwriters give the first option to institutions, large banks, and financial services firms that can offer the shares to their most prominent clients.

Note

If you invest in an exchange-traded fund (ETF) or a mutual fund, they may purchase the shares of an IPO, which is an easier way for you to gain exposure to the IPO.

When a stock goes public, the company insiders who owned the stock in the first place may be subject to a lockup agreement that prevents them from selling their shares for a fixed period (usually 180 days). Up until that point, the insiders are rich only on paper.

The moment they can sell, they usually do—all at once. This, of course, depresses the stock price. It’s at that point, with a glut of shares entering the market, that ordinary investors often get their first crack at what is now an IPO well along in its infancy.

Is Buying an IPO a Good Idea?

Buying an IPO can be a good idea. It’s a regular practice of crossover investors who get in on the ground floor of a stock with high upside potential. They may reap the rewards at some point in the future as the stock appreciates over time. This would have been the case, for example, if an investor bought the IPO of Apple or Netflix. That being said, there is also a downside: The IPO may be overvalued and the stock does not appreciate at all and even depreciates from the IPO price.

How Can I Buy an IPO?

Buying an IPO starts with having a brokerage account. From there, you must ensure you meet the eligibility requirements of the IPO. You will then need to request the shares from your broker. A request does not ensure that you will have access to the shares as brokers typically get a set amount. If you do have access, then the final step is placing the order. Most IPOs are not accessible to the average retail investor but rather only to institutional investors.

Do IPOs Always Have a Profit?

No, IPOs do not always have a profit. Many times a company is overvalued or valued incorrectly and its stock price falls after the IPO. It never reaches the IPO value that investors paid for, and they therefore don’t make any money but rather lose money.

The Bottom Line

The late and legendary Benjamin Graham, who was Warren Buffett’s investing mentor, decried IPOs as being for neither the faint of heart nor the inexperienced. They’re for seasoned investors; the kind who invest for the long haul, aren’t swayed by fawning news stories, and care more about a stock’s fundamentals than its public image.

For the common investor, purchasing directly into an IPO is a difficult process, but soon after an IPO, a company’s shares are released for the general public to buy and sell. If you believe in a company after your research, it may be beneficial to get in on a growing company when the shares are new.

Fact checked by Kirsten Rohrs Schmitt
Reviewed by Ebony Howard

It takes a lot of time and discipline to become money-smart. It doesn’t happen overnight. Some people go through life never saving and living paycheck to paycheck. Learning to handle your money at an early age may not seem necessary, but it will certainly put you down the right path to financial security.

But if you think you have enough time to become serious about your finances, think again. You may still feel young and invincible even when you hit your 30s, but the scary truth is that you are halfway to retirement. It is time to put the financial foolhardiness of your 20s behind you and become more frugal with your cash by mastering these top financial habits.

Key Takeaways

• When you hit your 30s, it’s important to remember that you are halfway to retirement.
• Remember to prepare and stick to a budget, and stop spending your entire paycheck.
• Be aware of and write down all your goals, and learn everything you need to know about your student loans.
• Get your debt under control and start an emergency fund.
• Even though it’s still in the future, make sure you sock away some money for your retirement.

1. Actually Stick to a Budget

Most 20-somethings have played around with the idea of a budget, have used a budgeting app, and have even read an article or two about the importance of creating a budget. However, very few individuals actually stick to that budget or any budget at all.

Once you turn 30, it’s time to ditch the wishy-washy process of budgeting and start allocating where every dollar you earn goes. This means if you only want to spend $15 a week on coffee runs, you’ll have to cut yourself off after your third latte for the week. 

The overall point of budgeting is to know where your money goes in order to make sound decisions. Keep in mind that one dollar here and one dollar there adds up over time. It’s fine to spend money on shopping or fun trips, as long as these purchases fit into your budget and don’t detract from your saving goals.

Knowing your spending habits will help you discover where you can cut expenses and how you can save more money in a retirement fund or money market account. 

Here’s a complimentary tip for setting up and sticking to a budget: Document all your spending. Make sure you write down where and how much you spend, and what that does to your budget.

This may require you to keep your receipts and cross-check everything in your checking account. Over time, you’ll end up doing away with all the frivolous, spur-of-the-moment purchases and really be able to keep yourself in line.

2. Stop Spending Your Whole Paycheck

The wealthiest individuals in the world didn’t get where they are today by spending their entire paycheck every month. In fact, many self-made millionaires spend their income modestly, according to Thomas J. Stanley’s book “The Millionaire Next Door.”

Stanley’s book found that the majority of self-made millionaires drove used cars and lived in average-priced housing. He also found that those who drove expensive cars and wore expensive clothing were actually drowning in debt. The reality was that their pricey lifestyles could not keep up with their paychecks.

Start by living off of 90% of your income and save the other 10%. Having that money automatically deducted from your paycheck and put into a retirement savings account ensures you will not miss it.

Gradually increase the amount you save while decreasing the amount from which you live. Ideally, learn to live off of 60% to 80% of your paycheck, while saving and investing the remaining 20% to 40%. 

3. Get Real About Your Financial Goals

What are your financial goals? Really sit down and think about them. Envision by which age and how you’d like to achieve them. Write them out and figure out how to make them a reality. You are less likely to achieve any goal if you don’t write it down and create a concrete plan.

For example, if you want to vacation in Italy, then stop daydreaming about it and make a game plan. Do your research to discover how much the vacation will cost, then calculate how much money you will have to save per month. Your dream vacation can be a reality within a year or two if you take the right planning and saving steps.

Important

If you can afford one, a financial advisor would be extremely helpful in guiding your financial hand, especially if you aren’t familiar with investing and managing debt.

The same is true for other lofty financial goals like paying off your debt or something more long-term like buying a home. You really need to be serious and have a plan if you’re going to get into real estate.

After all, it’s one of the biggest investments you can ever make in your life and it comes at a huge cost with a lot of extra considerations. There are a lot of things you have to think about when it comes to buying a home—a down payment, financing your mortgage, how much you can afford, interest payments, and other expenses.

4. Educate Yourself About Your Student Loans 

With the high cost of college that is only increasing, student loans are sometimes the only way for many students to pay for their education. After graduating, when loan payments start coming due, it’s critical to understand the nature of your loans, the best way to pay them back, ways to reduce rates, or if you qualify for any forgiveness. Student loans can be crippling and more so if not managed correctly.

5. Figure Out Your Debt Situation

Many individuals become complacent about their debt once they hit their 30s. For those with student loans, mortgages, credit card debt, and auto loans, repaying debt has become another way of life. You may even view debt as normal.

The truth is that you don’t need to live your whole life paying off debt. Assess how much debt you have outside of your mortgage and create a budget that helps you avoid gaining any more debt.

There are many methods to eliminate debt, but the snowball effect is popular for keeping individuals motivated. Write down all of your debts from smallest to greatest, regardless of the interest rate. Pay the minimum payment for all of your debts, except for the smallest one. For the smallest debt, throw as much money as you can at it each month. The goal is to get that small debt paid off within a few months and then move on to the next debt.

Paying off your debts will have a significant impact on your finances. You will have more breathing room in your budget, and you will have more money freed up for savings and financial goals.

One important point to note. Pay down your debt, but don’t get yourself back in over your head. It can be very tempting to see low balances on your credit cards and think it’s okay to go ahead and start spending again.

That will only put you back in a rut. Control yourself and keep your credit card usage to a minimum. You may want to consider lowering your credit limits or canceling cards you may not necessarily need over time. Anything to help you keep yourself above water.

6. Establish a Strong Emergency Fund

An emergency fund is important to the soundness of your finances. If you don’t have an emergency fund, then you are going to be more likely to dip into savings or rely on credit cards to help you pay for unplanned car or home repairs.

The first step is to build your emergency fund to $1,000. This is the minimum amount your account should have. By putting $50 from each paycheck in your emergency fund, you will hit the $1,000 emergency fund goal within 10 months.

After that, set incremental goals for yourself depending on your monthly expenses. Some financial advisors recommend having the equivalent of three months of living expenses in the fund, while others recommend six months. Of course, how much you are able to save will depend on your financial situation.

7. Don’t Forget Retirement

Many people either enter their 30s without having a single dime contributed to their retirement, or they are making the minimum contributions. If you want that million-dollar nest egg, you have to put in the savings now.

Stop waiting for a promotion or more wiggle room in your budget. In your 30s, you still have time on your side, so don’t waste it. Make sure that you take advantage of your company’s matching contribution.

Many companies will match your contributions up to a certain percentage. As long as you stay with your company long enough to become vested, this is basically free money for your retirement. The earlier you start, the more you’ll earn in interest!

How Can I Start Saving for Retirement?

One of the best ways to start saving for retirement is to contribute to a work retirement plan, such as a 401(k). This is a tax-advantaged plan that invests the money you contribute. Additionally, many employers offer a matching component, in that they will match the amount you’ve contributed up to a point. That’s free money. If your work doesn’t offer such a retirement plan, you can start one on your own by investing in an IRA.

How Can I Avoid Credit Card Debt?

You should only spend within your means to avoid credit card debt. Credit cards only charge interest on the balance you don’t pay off each month. So if you pay off your entire credit card bill each month without carrying any over, you will not incur credit card debt. That’s why it’s important to spend within your means so you can ensure you’re paying off your balance every month.

How Much Money Do You Need to Start Investing?

You can start investing with very little money. If your work offers a retirement plan, you can start contributing any part of your salary. If work doesn’t offer a plan, you can contribute any amount to an IRA. You can also open up a brokerage account and invest as little as how much it costs to buy one stock of a company you are interested in. Don’t think you need a lot of money to start investing; the earlier you start, with even as little as possible, the better it is as long as your investments appreciate.

The Bottom Line

With so many different facets to personal finance, from saving to budgeting to investing to planning for retirement, it can be tough to know where to start and to keep up constantly. These seven tips should help you along your financial journey and set you up for the different financial milestones in life.

ETFs track an index, but measuring your returns is still vital

Fact checked by Ryan Eichler
Reviewed by Andy Smith

Exchange-traded funds (ETFs) have changed investing by offering diversification, low costs, and market access in a single investment vehicle. While many ETFs are designed to track specific indexes, simply owning an ETF doesn’t eliminate the need to measure its performance.

That’s where benchmarks come in. They help you assess the risk and returns of any fund you are considering. This guide will explore how to select and use them as you assess different ETFs.

Key Takeaways

• Benchmarking is essential for evaluating the performance of exchange-traded funds (ETFs) versus the standards set by the fund managers.
• Most fund managers identify the benchmark they think is key—typically an index—in their fact sheets.
• The S&P 500 index serves as a common benchmark for U.S. large-cap ETFs, while specialized ETFs often have more narrowly targeted benchmarks.
• Passive ETFs aim to match their benchmarks’ performance, while active ETFs attempt to beat them.

Understanding ETF Benchmarks

A benchmark serves as a standard against which you can measure your ETF’s performance, helping you determine whether your investment is delivering the results you should expect. For example, if your ETF gained 8% last year, that might sound impressive—until you learn that similar ETFs averaged 12% during the same period. Conversely, a 3% return might seem disappointing until you discover that comparable investments lost ground in the same period.

Effective benchmarking involves more than just comparing raw returns. Risk assessment is equally important. A diversified ETF portfolio might be compared with a broad market index like the S&P 500 index for both the return captured and relative risk. Metrics like beta , commonly found on most investment sites today, help quantify this relationship—a beta of 1.0 indicates your ETF moves in tandem with its benchmark, while a beta of 0.7 suggests it will likely move up or down only 70% as much as the benchmark.

Types of Benchmarks

Here are the major benchmarks you’ll encounter:

Broad Benchmarks

S&P 500: The most widely followed benchmark today, the S&P 500 index measures the performance of 500 large U.S. companies weighted by market capitalization. It is used for broad-based U.S. large-cap ETFs like the SPDR S&P 500 ETF (SPY), which tracks it. In addition, many actively managed large-cap ETFs use the S&P 500 as their benchmark, hoping to outpace it.

An investor considering an actively managed large-cap ETF would typically compare its historical performance against the S&P 500 to determine if the fund’s strategy and management justify its higher expense ratio. This helps answer the question: Does the active management provide enough extra in returns to overcome the typically higher fees?

Dow Jones Industrial Average: Often referred to as “the Dow,” this price-weighted index consists of 30 large, blue-chip U.S. companies (see below). The Dow serves a benchmark for ETFs focusing on established American industrial leaders.

Nasdaq Composite: This technology-heavy index represents all companies listed on the Nasdaq stock exchange—over 3,000 constituents spanning technology, biotech, and growth-oriented companies. Unlike the S&P 500, the Nasdaq Composite includes many smaller and mid-sized companies alongside large-caps.

The Nasdaq serves as the primary benchmark for technology-focused ETFs like the Invesco QQQ Trust (QQQ), which tracks the Nasdaq-100 Index (the 100 largest nonfinancial companies on the Nasdaq). Many actively managed tech funds and growth-oriented ETFs also measure their performance against this index.

Small-Cap Benchmarks

Russell 2000: This index comprises 2,000 of the smallest companies within the broader Russell 3000 Index. If you’re holding small-cap ETFs, the Russell 2000 provides a good comparison, reflecting the performance of smaller firms with higher growth potential but greater volatility.

The table below includes other specialized and international equity benchmark indexes.

Fixed-Income Benchmarks

Bloomberg U.S. Aggregate Bond Index (AGG): This is the most widely used to check the performance of the U.S. investment-grade bond funds. It includes government, corporate, and mortgage-backed securities, making it suitable for ETFs like the iShares Core U.S. Aggregate Bond ETF (AGG).

In addition, those choosing among types of funds might compare benchmarks like the AGG against the S&P 500 index to see which types of funds—large-cap stocks or bonds—have done better over time.

Commodity Benchmarks

Commodity ETFs track specific tangible goods and require specialized benchmarks. For example, gold bullion prices serve as the benchmark for the SPDR Gold Trust ETF (GLD), designed to track the price of gold.

Cryptocurrency Benchmarks

For cryptocurrency ETFs like the iShares Bitcoin Trust (IBIT) and other spot bitcoin funds, the CME CF Bitcoin Reference Rate (BRR) is the benchmark.

Published by the CME Group, the BRR is calculated once daily at 4:00 p.m. London time, with additional reference points at the same time in New York and Hong Kong to account for global trading. These rates are derived from transaction data across major cryptocurrency exchanges, including Bitstamp, Coinbase, Gemini, and others.

Steps for Benchmarking Your ETF Investments

Follow these steps to effectively check how your ETF investments are performing against the right benchmarks:

1. Identify the Correct Benchmark

Start by determining which benchmark your ETF should be measured against:

• For passive ETFs, which simply mimic a major index, check the fund’s fact sheet to find the tracking index.
• For active ETFs, identify both the stated benchmark and any style-specific indexes that match the fund’s strategy. The fact sheet should generally include a benchmark, too.
• For specialized ETFs (sector, thematic, or alternative assets), look for benchmarks that align with the specific market segment.

2. Gather the Performance Data

Collect performance data for both your ETF and its benchmark:

• Use your brokerage platform or financial websites.
• Gather returns for multiple time frames: one month, three months, one year, three years, five years, and since inception.
• Include reinvested dividends in your calculations (total return).

3. Calculate Relative Performance

Compare your ETF’s returns against the benchmark:

• Subtract the benchmark return from your ETF’s return to find the performance gap.
• Example: If your ETF returned 7.5% and the benchmark returned 8.0%, the relative performance is -0.5%.

For example, someone interested in how well a fund that uses AI to pick stocks might compare the returns for Amplify AI Powered Equity ETF (AIEQ) vs. SPDR S&P 500 ETF Trust.

4. Assess Risk-Adjusted Performance

Look beyond raw returns to understand risk-adjusted performance:

• Find your ETF’s beta relative to its benchmark (available on most financial websites).
• Compare the return captured versus the risk taken (a fund with beta 0.8 capturing 80% of benchmark returns).

5. Account for Expenses and Tracking Error

Factor in costs when evaluating performance:

• Subtract your ETF’s expense ratio from the benchmark’s theoretical return.
• For a passive ETF with a 0.1% expense ratio tracking the S&P 500, expected performance would be the index return minus 0.1%.
• For active ETFs with higher fees, determine if the manager is adding enough value to justify the additional cost.
• For passive ETFs, check the tracking error (how closely it mimics the index’s performance)—the lower the tracking error, the better.

Evaluate how closely your passive ETF follows its benchmark:

• Calculate the standard deviation of the differences between ETF and benchmark returns.
• A lower tracking error indicates better index replication.

6. Review in Context

Interpret your findings within the proper context:

• Short-term underperformance may be insignificant and not warrant action.
• Consistent underperformance over multiple years might signal the need to consider alternatives.
• Compare your ETF against similar funds to determine if the issue is fund-specific or industrywide.

Passive vs. Active ETFs: Benchmarking Differences

Understanding the fundamental differences between passive and active ETFs is crucial for proper benchmarking:

Passively Managed Funds

• Performance expectations: Passive ETFs should deliver returns very close to their benchmark minus expenses. Any significant deviation warrants investigation.

• Tracking: Investors should monitor tracking error—the degree to which the ETF deviates from its benchmark. A lower tracking error indicates more effective index replication.

• Fees: A passive ETF with a 0.05% expense ratio should, all things considered, outperform a similar ETF with a 0.15% fee by about 0.10 percentage points annually.

Actively Managed Funds

• Performance expectations: Active ETFs should deliver returns that exceed their benchmark by enough to justify higher fees.

• Multiple benchmarks: While active ETFs typically state a primary benchmark, comparing performance against multiple relevant indexes provides additional context.

• Time horizon: Active management should be evaluated over full market cycles (three to five years, usually) rather than short periods to account for different market environments.

The Bottom Line

Benchmarking is an essential part of ETF investing, making it clear whether your investments are delivering the value you’re paying for. Select benchmarks that align with your ETF’s specific focus, whether it’s the S&P 500 for large-cap funds, the Nasdaq Composite for tech-heavy portfolios, or specialized indexes for niche investments.

These general tips apply to all

Reviewed by Khadija Khartit
Fact checked by Vikki Velasquez

Keeping a small business afloat in difficult economic times is challenging. Unfortunately, there is no set playbook to follow to ride out the storm. Every small business is different, and each carries its own risks and rewards.

These differences make copying another company’s turnaround strategy to the letter unrealistic. However, there are some general strategies business owners can follow to steady the ship and boost the chances of survival.

Key Takeaways

• Every business is different, which means there is no set playbook to follow for survival.
• Rules that apply to all include keeping a cool head and paying extra attention to detail.
• Look at the big picture, inventory staff, make sure the business has ready access to cash, sweat the small stuff, and avoid sacrificing quality.
• Small business owners must make sure they audit themselves.
• When times are hard, businesses may need to shift their focus from profits to survival.

Look At the Big Picture

People have a tendency to attack the most obvious, immediate problems with vigor and without hesitation. That’s understandable and might make good business sense in some situations.

However, it is also advisable to step back and look at the big picture to see what is still working and what might need changing. It’s an opportunity to better comprehend the size and scope of existing problems as well as further understand your company’s business model—and determine how its strengths and weaknesses come into play.

Example 1: Train Rather Than Fire

For example, suppose a small business owner discovers that two employees are consistently making mistakes with inventory that cause certain supplies to be overstocked or understocked. While an initial reaction might be to fire those employees, it could be wiser to examine whether the manager who hired and supervises them has properly trained them.

If the manager is to blame, that person could be fired, but this might not be the best approach. If the manager’s relationships with existing clientele bring in repeat business and substantial revenue, that person is likely someone you’d want to keep. Retraining might be a better alternative than termination.

By thoroughly scrutinizing the strengths and weaknesses of the employees, an owner looks at the issue from a top-down perspective, reducing or eliminating the chance that the problems will recur while avoiding a change that could adversely impact future sales.

Example 2: Is the Business Model Still Up to Scratch?

Fix a similar kind of lens on analyzing how your product or service fits into the marketplace now, how the economic crisis has affected your customers and suppliers, and all the other key aspects of your business. You need to know how well your business model fits the current environment and forecast what various alternative future scenarios might mean for it.

Inventory Your Staff

Spending money wisely is key to running a successful business. However, that doesn’t necessarily mean that spending the least amount possible is always the best option.

Employees are a good example. Every now and then, business owners should conduct a thorough review of the staff—both when a problem arises and during the normal course of business—to make sure the right people are on board and doing their jobs effectively.

Both small business owners and large corporations tend to be penny-wise and pound-foolish when they hire the least expensive workers. Sometimes, the productivity of those workers may be suspect.

Hiring one worker who costs 20% more than the average worker but works 40% more effectively makes sense, particularly during periods of crisis. By constantly seeking resumes and interviews with new people, business owners can make changes to staff when needed to increase efficiency.

Note

Low salaries can be counterproductive if they result in indifferent productivity.

Ensure Access to Cash

Small business owners should take steps to ensure that the company has access to cash, particularly in periods of crisis.

Visiting a bank loan officer and understanding what’s required to obtain a loan is a good first step, as is opening a line of credit in advance to fund possible short-term cash-flow problems. Establishing a good relationship with a banker is always useful for a small business.

Small business owners should have other potential sources of capital lined up as well. This might include tapping into savings, liquidating stock holdings, or borrowing from family members. A small business owner must have access to capital or have a creative way to obtain funds to make it through tough times.

Start Sweating the Small Stuff

Although it is important to keep an eye on the big picture, a small business owner should not overlook smaller things that may have an adverse impact on the business.

A large tree obstructing the public’s view of the business or the company’s signage, inadequate parking, lack of road/traffic access, and ineffective advertising are examples of small problems that can put a big dent in a business’s bottom line.

Considering and analyzing the numerous factors that bring customers in the door can help to identify some problems.

Going through your quarterly expenses line by line may also help. Owners should not be checking for one-time expenses here, as those items were most likely necessary charges. Instead, they should look for recurring small items that seem innocent but are actually draining the accounts.

For example, the cost of office supplies can quickly get out of hand if they are ordered improperly. Similarly, if your supplier increases product prices, you should consider looking around for a cheaper supplier. If that isn’t possible, you may need to consider raising your own prices to cover your extra costs.

Don’t Sacrifice Quality

Keeping a handle on costs is crucial in tough times. Owners need to stay on the offensive and get employees on board with changes that are being made. However, be careful not to sacrifice quality when making these changes.

Business owners seeking to improve profit margins should be wary of making dramatic changes to key components. For example, a pizzeria could seek to expand margins per pie by purchasing cheaper cheese or sauce ingredients. Note that this strategy could backfire if customers become dissatisfied with the taste of the pizza and sales decrease.

Alternatively, a business could seek to boost its bottom line by spending less on customer service. Initially, this move may result in higher profits. However, over time, poorer customer service could lead customers to shop elsewhere.

The key is to ensure that cost cuts don’t compromise the quality of the finished product and/or service offered. In the case of the pizzeria, perhaps there is a way to cut the price of takeout boxes or paper napkins instead.

How Does a Bad Economy Affect Business?

A bad economy can hurt a business in a number of ways. Adjustments to interest rates could affect a business’s ability to borrow necessary funds. People saving their money during a period of economic uncertainty could mean they are spending less, and therefore, the business has fewer customers. Some sectors may come to a relative standstill if the market falls enough.

Can a Small Business Thrive in a Bad Economy?

A small business can thrive in a bad economy, but it depends on the business and how it is structured, which line of business it is in, and if that business has the ability to make necessary adjustments in order to retain profit or simply stay open.

How Do You Survive Hard Times in Business?

Companies can cut costs, which is a common thing to do when facing hard times. This could mean laying off non-essential staff or executives taking a temporary pay cut. Companies making a physical product can change their suppliers, while others may opt to use less expensive materials. Businesses can also issue equity or take on additional debt.

The Bottom Line

When times become difficult for your small business, it is important to retain a cool head. Sometimes, there is a simple solution that may help you keep the business running that you wouldn’t have noticed if you were too stressed or bogged down in tiny details.

Being aware of the big picture and making sure you—as the number one employee—are performing well are the primary priorities during a period of hardship.

They are known for their ease and convenience, but there are pitfalls

Reviewed by Margaret James
Fact checked by Vikki Velasquez

If you’re a small business owner, you’ve probably received numerous offers and applications for a small business credit card. These cards can be a convenient way to increase your company’s purchasing power but should be used with caution.

Key Takeaways

• A business credit card gives small business owners easy access to a revolving line of credit with a set limit.
• It has an interest charge if the balance is not repaid in full each business cycle.
• The interest rate on carried charges is usually much higher than the rate on a small business loan.
• A small business owner decides which employees may have a business credit card.

What Is a Business Credit Card?

Small business credit cards provide business owners with easy access to a revolving line of credit with a set credit limit in order to make purchases and withdraw cash. Like a consumer credit card, a small business card carries an interest charge if the balance is not repaid in full each billing cycle.

A business card can be a convenient way to quickly access financing for short-term needs and increase your company’s purchasing power. It is often marketed as an attractive alternative to a traditional line of credit. However, like any source of financing, a business credit card comes at a cost and must be carefully managed.

You may be able to get a credit card through your bank or apply online. Before applying, compare card terms and features and read reviews from credible sources.

There are lots of options out there. Some cards are much more competitive than others, in terms of both fees and benefits, and many specialize in a particular benefit, such as rewards for a certain type of spending or giving customers more time to repay borrowed funds without charging interest. Do some research and choose carefully to ensure you receive the best card possible for your needs.

Note

Don’t just settle for the first credit card you come across. There are many different ones, all with their own features, benefits, and charges.

How to Use a Business Credit Card

Without a good system in place, it can be difficult to keep track of—and keep a handle on—credit card spending, which ultimately affects your bottom line. Certain strategies can be utilized to ensure good credit card practices.

Ensure Accountability

“The most important step a small business can take to make sure credit cards are used effectively is to set up a bomb-proof accountability system,” says John Burton, principal at John Burton Coaching LLC in Bryson City, N.C. “This could mean everything from pre-approval of all credit card spending to rigorous requiring of receipts to pulling credit cards from those who do not report completely and on time with receipts.”

Have a system in place before the first credit card arrives, says Burton, and be consistent, rigorous, and fair while tolerating no exceptions. 

Decide Who Receives a Card

Burton acknowledges the challenges employers may face in deciding who gets a credit card. “I’ve seen businesses that lost control of credit card spending by issuing too many cards to too many people and thinking that all-important officers and travelers needed the convenience of a company credit card,” he says.

While giving everyone a credit card might seem like the right or easy thing to do, it can lead to a “dysfunctional, expensive system and a serious lack of control and accountability,” Burton explains.

Use alternatives and establish rules. “Many companies, especially with salespeople, reimburse for company spending on personal credit cards with excellent accountability—i.e., no receipt, no reimbursement,” Burton says.

It is helpful, however, to have clear rules regarding who gets a card, whether it’s based on seniority, position, or other factors. This can help avoid confusion and mitigate bad feelings from employees who would like a card but are not eligible.

Setting Credit Card Limits

Every business should have clear policies about spending, including which expenses can be put on cards, how much employees can spend, and how often they can use their cards. It’s important to put the policy in writing and have every employee who is issued a card read and sign it. After they do, give each cardholder a copy to use for reference.

Depending on the business card, you may be able to set up restrictions that limit transactions to a certain dollar amount, spending category, and even certain days and times. With some cards, you can set up individual restrictions for each employee.

For example, you may limit one employee to $50 a day any day of the week for gas purchases, while limiting another to $100 for gas and $50 for meals each day, but only on business days.

Keep Tabs on Card Activity

Many business credit cards allow you to set up activity alerts that arrive as text or email messages. The alerts can be set up to notify you each time a transaction takes place or only if an employee uses (or tries to use) a card in an unapproved manner.

Warning

Using a business credit card for large purchases that can’t be fully paid for before the interest charges kick in can be very expensive.

You can also take advantage of online and mobile banking to view up-to-the-minute account activity. Your accounting department should review each statement to make sure each line item is a charge you authorized.

Use the Card Wisely

It’s important to know when a business should use credit. It’s not always the best choice, especially for large expenditures that can’t be paid in full before interest kicks in.

Even though it takes extra effort to secure a loan from a bank or other lending institution, it often makes financial sense to do so, as the interest rate on credit cards is typically much higher than for secured debt instruments.

It’s also possible that a large purchase—or a couple of large expenditures—can max out your credit card and leave you without a source of funds.

Advantages and Disadvantages of a Business Credit Card

Advantages

Business credit cards can offer these advantages:

• Easier way to access credit: It can be easier for business owners who do not have a well-established credit history to qualify for a revolving line of credit with a credit card, especially if it’s secured, rather than a traditional line of credit or bank loan.
• Convenience: Credit cards are the ultimate financing convenience. Business owners can access funds for purchases or cash withdrawal much more quickly and easily than having to find cash and/or use a checkbook.
• Financial cushion: A credit card can provide business owners with a much-needed financial cushion when accounts receivable are behind or sales are slow and the business is short on cash.
• Online ease: Increasingly, business owners make purchases and do business online with vendors, contractors, and suppliers. Using a credit card makes online transactions easier.
• Bookkeeping assistance: In addition to receiving a monthly statement, most cards provide small business cardholders with online record-keeping tools to manage their accounts, including a year-end account summary, which can help a bookkeeper track, categorize, and manage expenses. It can simplify bookkeeping, help when using outside professionals to navigate an audit and pay taxes, and provide an easy way to monitor employee spending.
• Rewards and incentives: Many cards offer business owners rewards programs—including airline miles and shopping discounts—for using the card. Some also provide cash-back incentives, repaying cardholders a percentage of their purchases.
• A tool to build credit: Responsibly using a small business credit card—which means paying the bill on time, paying more than the minimum due, and not going over the credit limit (which can trigger an over-limit fee)—can be an easy way to build up a positive credit report for your business. That, in turn, can boost your chances of qualifying for a loan or line of credit, and at a potentially lower interest rate, in the future. Keep in mind that irresponsible use of the card can damage your credit, however.

Disadvantages

Before rushing to apply for a business credit card, it’s important to consider these potential downsides:

• More expensive: The convenience and ease of business credit cards come at a price: you will typically be charged more to borrow money this way than if you took out a small business loan or fixed line of credit offered by a bank. Interest can add up quickly if card activity is not repaid on time and in full each month. In addition, without a system to regularly and carefully monitor card usage, it can be easy to accidentally overextend your firm financially by going over its credit limit or incurring late fees and penalties. 
• Personal legal liability: Many cards require a personal liability agreement (your personal security) to repay debt. This means that any late or missed payment could result in a negative personal credit report and the inability to personally borrow money. You also may have to pay more with a higher interest rate.
• Security issues: Security measures should be introduced to ensure that cards or card information is not stolen by employees, vendors, contractors, and others who come through the office space. It’s also important to make sure that employees who are authorized to use the card do not use it for personal spending and that they take precautions when making online transactions to avoid being hacked.
• Less protection: Small business credit cards often do not carry the same protection as consumer credit cards. For example, many cards will not provide the same level of assured services when disputing billing errors or needing to make merchandise returns. Be sure to review the level of protection and services a card offers before applying.
• Fluctuating interest rates: Unlike with a loan or fixed line of credit, the company that issues your credit card can reset its interest rate depending on how you use and manage your account. Keep tabs on all communications from the issuer and be aware of how rates work and can change.

Pros

• Easier to qualify for a card than for a loan

• Convenience

• Provides a financial cushion

• Useful online

• Helps with bookkeeping

• Rewards and incentives

• Tool to build credit

Cons

• More expensive than a loan or credit line

• Personal legal liability

• Security issues

• Less protection than consumer credit cards offer

• Fluctuating interest rates

Can I Use an EIN to Obtain a Credit Card?

An employee identification number (EIN) is a tax number that the IRS assigns to your business. You can use it to apply for a small business credit card; however, you will most likely also have to provide your Social Security number to obtain the card.

Can You Get a Credit Card With an LLC?

Yes, many limited liability companies (LLCs) have business credit cards. To apply for and get a credit card with an LLC, you must be an owner, officer, or authorized representative of the LLC. Once approved, you can then, if you wish, get additional cards for employees.

What Is a Corporate Credit Card?

A corporate credit card is a credit card that a business issues to employees. It works in the same manner as a personal credit card but is only meant to be used for business-related expenses, such as business travel, business dinners, and other client-associated expenses. The corporate credit card allows for these expenses to be made so that an employee doesn’t have to pay out-of-pocket and wait to be reimbursed.

The Bottom Line

A business credit card comes with many benefits. It provides easy access to credit, a financial cushion, and a way to separate business expenses from personal credit card expenses. That said, it can also be potentially dangerous and should be used with caution. Interest rates on cards are high, more so than a loan, and business credit cards have less security than personal credit cards.

Photo and video sharing, messenger services, and visual positioning

Reviewed by Margaret James

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

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

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

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

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

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

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

Key Takeaways

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

Instagram

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

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

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

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

WhatsApp

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

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

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

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

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

Fast Fact

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

Scape Technologies

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

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

How Many Acquisitions Does Facebook Have?

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

What Was Meta’s Biggest Acquisition?

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

Who Owns the Most Stock in Meta?

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

The Bottom Line

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

Beware of taking out a pension advance loan

Reviewed by Charlene Rhinehart

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

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

Key Takeaways

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

How Pension Loans Work

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

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

Warning

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

Alternatives to Borrowing Against Your Pension

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

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

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

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

Fact checked by Suzanne Kvilhaug
Reviewed by David Kindness

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

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

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

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

Key Takeaways

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

401(k) Withdrawals Before Age 59½

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

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

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

401(k) Penalty-Free Early Distributions

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

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

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

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

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

401(k) Hardship Withdrawals

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

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

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

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

How to Take 401(k) Withdrawals

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

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

Taxes on 401(k) Distributions

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

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

Keeping Your Money in a 401(k)

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

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

Important

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

Required Minimum Distributions

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

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

Converting a 401(k) to an IRA

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

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

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

How to Roll Over Funds

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

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

Traditional IRA and Roth IRA Withdrawals

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

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

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

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

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

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

What Is a Hardship Withdrawal?

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

What Proof Do You Need for a Hardship Withdrawal?

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

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

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

What Are My 401(k) Options After Retirement?

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

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

The Bottom Line

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

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

Fact checked by Rebecca McClay

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

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

Key Takeaways

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

Estimate Your Monthly Amortization Payment

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

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

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

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

Amortization Calculator Results Explained

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

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

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

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

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

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

What Is an Amortization Schedule? 

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

Important

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

How Can You Calculate an Amortization Schedule on Your Own?

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

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

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

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

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

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

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

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

How to Calculate Amortization with an Extra Payment

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

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

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

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

Mortgage Amortization Isn’t the Only Kind

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

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

How Can Using an Amortization Calculator Help Me?

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

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

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

The Bottom Line

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