Investopedia

Reviewed by David Kindness
Fact checked by Vikki Velasquez

For an auditor, inherent risk is the risk of a material mistatement at the assertion and financial statement levels. Assertions are claims made by business owners or executives that state information provided during an audit is accurate. There is always a risk of financial statement inaccuracy, even when controls are implemented.

Key Takeaways

• Auditors work to ensure that corporate controls exist and that financial statements are free from errors, fraud, and misstatements.
• Inherent risk is inevitable, and occurs even when there are controls in place.
• An auditor’s knowledge and judgment of the industry, corporate transactions, and company assets can help determine inherent risk.
• Companies with complicated business structures and transactions tend to have more inherent risk.
• Lowering inherent risk often involves reevaluating existing internal controls and implementing new practices.

How Inherent Risk Is Assessed

The Public Company Accounting Oversight Board oversees the audits of publicly traded companies, brokers, and dealers and publishes standards for auditors to follow. According to the standards published, “The auditor assesses inherent risk using information obtained from performing risk assessment procedures and considering the characteristics of the accounts and disclosures in the financial statements.”

An auditor’s risk assessment procedures must include:

• Obtaining an understanding of the company and its environment (events, conditions, and activities in the industry, and regulatory concerns)
• Obtaining an understanding of internal control over financial reporting
• Considering information from the client acceptance and retention evaluation, audit planning, activities, past audits, and other engagements performed for the company
• Performing analytical procedures
• Conducting a discussion among engagement team members regarding the risks of material misstatement
• Inquiring of the audit committee, management, and others within the company about the risks of material misstatement

The auditor must also be very familiar with:

• The industry as a whole
• The types of transactions that occur within a particular company
• The assets the company owns
• Generally accepted accounting principles

Note

Material misstatements are errors or fraudulent entries in financial statements that can impact people who use the statements to make decisions.

Based on their assessment, an auditor regards each audit area as either low, medium, or high in inherent risk (some use only high and low, normal and high, or other combinations). Inherent risk is high whenever there is a higher chance of material misstatements. It can also increase for companies with complex and dynamic day-to-day operations.

Why Inherent Risk Matters

There are risks present even if an auditor clears a company’s financial statements of any material misstatements. This is known as audit risk. Despite being given the all-clear, statements may still have some inconsistencies. Audit risk can be divided into three categories: control risk, detection risk, and inherent risk.

The risk that a company’s internal practices and controls don’t prevent any misstatements is called control risk. Detection risk, on the other hand, is the risk of an auditor failing to detect any risks. Inherent risk is any risk of error or fraud that occurs naturally when inadequate risk management is in place to mitigate it. Put simply, there is a risk of material misstatements happening when preparing financial statements.

Important

While companies can’t prevent inherent risk altogether, they can lower its level. Implementing or increasing internal controls is one of the best ways that companies have to reduce the level of inherent risk in their statements.

Examples of Inherent Risk Factors

Assessing inherent risk tends to be a more subjective process than other components of the audit. However, there are often clear and observable factors to consider, such as the economy, the industry, and previously known misstatements that help the auditor arrive at an assessed level of inherent risk for each audit area.

Here are a few examples of inherent risk that exist within the corporate world. The following are types of factors that auditors consider as they assess inherent risk:

• Financial transactions that require complex calculations are inherently more likely to be misstated than simple calculations.
• Cash on hand is, by nature, more susceptible to theft than a large inventory of coal.
• Rapid technological developments may create a higher risk of inventory becoming obsolete more quickly than in other industries.
• A struggling company may inherently have a greater incentive to misstate financial information to meet certain covenants.
• A company that has improperly reported a particular balance in the past may be inherently more likely to misstate it again.

What Best Describes Inherent Risk?

Inherent risk is the chance that a material misstatement exists due to a lack of controls that would prevent the error or fraud.

What Is a Simple Example of Inherent Risk?

A simple example of inherent risk is an internal accountant who makes fraudulent or erroneous entries that create account misstatements on a company’s financial reports.

What Is Meant by Inherent Risk?

Inherent risk is the unavoidable risk of material misstatements on financial statements due to a lack of appropriate controls.

The Bottom Line

Auditors assess inherent risk using their experience and knowledge of accounting procedures to expose material misstatements in a company’s financial statements. The misstatements may be erroneous or fraudulent, but the risks of it occurring are inherently inevitable without implementing controls, and sometimes risks exist even when controls are in place.

Fact checked by Vikki Velasquez
Reviewed by David Kindness

Your 401(k) plan’s rate of return is directly correlated to the investment portfolio you create with your contributions and the current market environment. Each 401(k) plan is different but the contributions accumulated within your plan are generally diversified among stock, bond, and cash investments.

They can provide an average annual return that usually ranges from 5% to 8%. The return can depend on how you allocate your funds to each investment option. The five-year average was a comfortable 9.7% in 2024.

Key Takeaways

• Your 401(k) account’s performance depends on its asset allocation.
• Different assets offer different returns. The greater the growth potential, the greater the risk.
• An individual with a long time horizon typically takes on more risk within a portfolio than someone who is near retirement.
• You can compare your 401(k) holdings’ performances to those of similar funds or a benchmark index.
• A moderately aggressive portfolio composed of about 60% stocks and 40% fixed-income vehicles and cash posts an average annual return in the 5% to 8% range.

How 401(k) Plans Work

An employer-sponsored retirement plan such as a 401(k) can be a valuable tool in accumulating savings for the long term. Each company that offers a 401(k) plan provides an opportunity for employees to contribute a percentage of their employee’s wages on a pretax basis through paycheck deferrals or on an after-tax basis for Roth 401(k)s. Employers often match employee contributions up to a certain percentage, creating an even greater incentive to save.

They vary according to the company and the plan provider but each 401(k) offers several investment options to which individuals can allocate their contributions. They usually include mutual funds and exchange-traded funds (ETFs). Employees benefit from systematic savings and reinvestment and their investments’ tax-free growth and employer-matching contributions. They also gain from the economies-of-scale nature of 401(k) plans and the variety of investment options.

It’s All About Asset Allocation

How your 401(k) account performs depends entirely on your asset allocation: the type of funds you invest in, the combination of funds, and how much money you’ve allocated to each.

Investors experience different results depending on the investment options and allocations available within their specific plans and how they take advantage of them. Two employees at the same company could participate in the same 401(k) plan but experience different rates of return based on the type of investments they select.

Different assets perform differently and meet different needs. Debt instruments like bonds and certificates of deposit (CDs) provide generally safe income but not much growth and not as much of a return. Real estate that’s available to investors in a real estate investment trust (REIT) or a real estate mutual fund or ETF offers income and often capital appreciation as well. Corporate stock like equities has the highest potential return.

The equities universe is a huge one, however, and returns vary tremendously. Some stocks offer good income through their rich dividends but little appreciation. Blue-chip and large-cap stocks of well-established, major corporations offer steady returns but on the lower side. Smaller, fast-moving firms are often pegged as “growth stocks.” They have the potential to offer a high rate of return as the name implies.

The greater a stock’s potential for aggressive growth, the greater its chances of big tumbles become, too, however. This is referred to as the risk-return tradeoff.

Important

Past returns of funds within a 401(k) plan are no guarantee of future performance.

Your asset allocation should be determined based on your specific appetite for risk, also known as your risk tolerance, and the time you have until you must begin taking withdrawals from your retirement account.

Investors with a low appetite for risk are usually better served by placing investments in less volatile allocations that could result in lower rates of return over time. Investors with a greater risk tolerance are more likely to choose investments with more potential for higher returns but with greater volatility.

Balancing Risk and Returns

That 5% to 8% range is an average rate of return based on the common moderately aggressive allocation among investors participating in 401(k) plans: 60% equities and 40% debt/cash. A 60/40 portfolio allocation is designed to achieve long-term growth through stock holdings while mitigating volatility with bond and cash positions.

The 60/40 portfolio is in the middle. You might expect higher, double-digit returns over time if you invest in a more aggressive portfolio of perhaps 70% equities, 25% debt/fixed-income instruments, and only 5% cash. The volatility within your account may also be much greater, however.

Your portfolio would have a pretty smooth ride if you chose one that was more conservative, perhaps 15% equities, 75% debt/fixed-income instruments, and 10% cash but offering returns of only 2% to 3% depending on the prevailing interest rates.

An individual with a long time horizon typically takes on more risk within a portfolio than one who is near retirement. It’s commonly prudent for investors to gradually shift the assets within their portfolios as they get closer to retirement.

Target-date funds have become a popular choice among 401(k) plan participants as a one-stop-shopping way to accomplish this. These mutual funds allow investors to select a date near their projected retirement year such as 2028 or 2050.

Funds with more distant target dates focus on investment allocations more aggressively than funds with a near-term date. Rates of return on target-date funds vary from company to company but these one-fund allocations offer a hands-off approach to asset allocation within a 401(k).

$131,700

The average 401(k) plan balance as of Q4 2024 at Fidelity Investments, provider and administrator for nearly 26.7 million such accounts.

How Is Your 401(k) Doing?

You can’t ever be 100% certain of the returns your 401(k) will generate. That’s what separates investing from generic saving. You can and should make comparisons, however, if you want a sense of how your portfolio is performing.

You can compare the investments in your account to other mutual funds or ETFs that invest in similar assets or have similar objectives such as aggressive growth, balanced income, or appreciation. You can also see how a fund is doing compared to an index of its asset class, sector, or security type.

You might want to see whether it’s underperforming or outperforming the Dow Jones U.S. Real Estate Index (DJUSRE) which tracks REITs and real estate companies if you own a real estate fund. You can even compare them to the stock market itself if you own broad-based equity funds.

Don’t be surprised if your return lags the index by 1% to 2%, however. This is caused by the fees charged by both your individual funds and by the 401(k) plan itself. This sort of expense is pretty much beyond your control and is to be expected.

What’s the Average Rate of Return on a 401(k) Over 30 Years?

The average rate of return for a typical 401(k) over several decades is between 5% and 8%.

Is a 7% Return on a 401(k) Good?

A 7% return on a 401(k) falls within the average rate of return for most 401(k)s.

Can I Retire at Age 60 with 300K?

The 4% rule which estimates how much you can safely withdraw per year from your savings in retirement indicates that a $300,000 nest egg would give you $12,000 per year to live on. This is likely too little to retire on at age 60.

The Bottom Line

It isn’t possible to predict your rate of return within your 401(k) but you can use the basics of asset allocation and risk tolerance in conjunction with your time horizon to create a portfolio to help you reach your retirement goals. Look carefully at the fees different choices entail.

Each of these factors influences the overall rate of return within your 401(k) account and should be reviewed regularly to ensure that your account meets your investment preferences and nest-egg accumulation needs.

Your 401(k)’s rate of return isn’t outside your control. You pinpoint what you’ll need in retirement plus the time frame until you retire and then determine what you expect from your 401(k) from there.

Disclosure: Investopedia does not provide investment advice. Investors should consider their risk tolerance and investment objectives before making investment decisions.

Some annuities will continue to pay a spouse or other beneficiary

Fact checked by Vikki Velasquez
Reviewed by Marguerita Cheng

When you die, your annuity will either end, continue for a specified period for your beneficiary, or continue making payments to the surviving person (if it is a joint annuity), depending on the options you chose when you purchased it.

Key Takeaways

• Income annuities have many different payout options, ranging from stopping payments to continuing to pay regardless of whether you’re living or not.
• Deferred annuity payments are determined by the type of annuity and the phase you’re in.
• If you die during a deferred annuity accumulation phase, your beneficiaries receive the accumulated value.
• If you die after the deferred annuity payout phase begins, the type of annuity determines if payments continue or stop.

Types of Annuities

There are two broad categories of annuity:

• Income: These are annuities designed to provide income streams for long periods.
• Deferred: These annuities are designed to provide different growth options, with lump sum or regular payments in the future.

Income Annuities

There are two types of income annuities:

• Immediate Income: Payouts begin within one year of purchase, premium paid in one installment
• Deferred Income: Payouts begin at a future date (longer than one year), premium paid in one installment, designed to deliver higher payouts

Immediate and Deferred Income Annuity Payout Options

Income annuities can be purchased with different payout and beneficiary options, which apply to both Single Premium Income Annuities and Deferred Income Annuities:

• Life-Only: The insurance company pays out only as long as the owner, called the annuitant, is alive. Once the annuitant dies, the payments stop, no matter how much money is left over.
• Period Certain Only: The insurance company makes payouts to a beneficiary for a specific period, whether the annuitant is living or not.
• Certain and Life: Similar to the Period Certain Only option. This option makes payments during a specific period, but if the annuitant dies, payments continue to a beneficiary until the period ends.
• Installment Refund: Similar to the Certain and Life payout option, this option sets the payout period based on the desired monthly payments and total premium paid. The total is divided by the monthly payments to give the annuitant the payout period, and the payout continues to the beneficiary until the period ends.
• Cash Refund: Similar to the Installment Refund option, but if the annuitant dies, a lump sum is given to the beneficiary equaling the leftover amount in the annuity.
• Joint and Survivor: This plan provides income for a couple, with payments remaining steady as long as one of them is alive. The couple also has the option to have the annuity payment adjusted to lower amounts if desired.

Deferred Annuities

Deferred annuities do not immediately begin making payments; instead, they wait for a specific time to start. The buyer usually contributes over a period of years, and the contributions grow through interest credited and compounding interest.

There are four types of deferred annuities:

• Fixed: The buyer’s contributions grow at a fixed annual interest rate
• Fixed indexed: The buyer’s contributions are credited interest based on changes in a stock market index
• Variable: Contributions are invested in various equity or bond funds or fixed-interest accounts. Returns will depend on the performance of the funds in which the contributions are invested.
• Structured variable: Also called a Registered Index-Linked Annuity (RILA), contributions are invested in various funds, but they generally follow strategies that provide market upside crediting and market downside protection.

Deferred annuities have two distinct phases that affect payout if you die: the accumulation phase and the payout (distribution) phase. The accumulation phase starts when you begin contributing and ends when you receive a lump sum payment or begin receiving a series of payments. If you die in this phase, your beneficiaries will receive the accumulated amount.

Note

Some annuity contracts include a guaranteed minimum death benefit, which pays a minimum amount to a beneficiary if something happens to the annuitant.

If you die after the payout phase begins, whether the payments continue or not depends on the annuity type you’ve chosen. If it is a Joint and Survivorship (joint income for life) annuity, the spouse or partner continues receiving the benefit. If it is a Life-Only (income for life) annuity, once you die, the payments stop, and the insurance company keeps any leftover funds.

Who Gets the Money In an Annuity When You Die?

It depends on how the annuity is structured. In some annuities, a beneficiary or joint owner keeps receiving payments. In others, the leftover money might be given to a beneficiary or kept by the insurance company.

Do Annuities Pass to Heirs?

It can pass to heirs if it is structured to pass leftover money or payments to a beneficiary. If a family trust is named as the beneficiary and the proper type of annuity was chosen, the trust could distribute the remaining money to heirs. There are many factors that can affect how this might work, so it’s best to speak to a lawyer or advisor familiar with annuities and trusts about your circumstances.

Does an Annuity Ever End?

Annuities are not perpetual, so each type has criteria for ending. Depending on the type, the stopping point could be the annuitant’s or joint owner’s death or the end of a payout period.

The Bottom Line

There are many types of annuities, each with different methods for distributing money or stopping payments after the annuitant(s) die. Before purchasing an annuity, it’s best to do your research and evaluate your circumstances and criteria, then speak to a financial advisor or lawyer about your choices.

Reviewed by Margaret James
Fact checked by Vikki Velasquez

For frugal shoppers, shopping means buying clothes when you can get the very best prices, which can often take a bit of pre-planning. You can follow a few simple timing guidelines to get the best deals on new clothing, such as knowing that Thursday night may be the best day of the week to go to the store.

Key Takeaways

• Paying attention to the best times to shop can lead to the best deals on clothing.
• This could be anything from choosing the right day of the week to the right time of day or night.
• The end of the season is often ideal for shopping for clothing that you won’t need until the following year.

Thursday Evenings

Stores typically reorganize their racks on weekdays in order to replenish stocks for the weekend rush. They will also mark down items that will be on sale over the weekend.

If you want to beat the rush and get to those sales items, Thursday night’s a great time for bargain shoppers to hit the malls. You won’t have to compete for the bargains like you would during the busy weekend either.

Each store has its own schedule, though, so it’s worthwhile to learn when your store restocks.

Six Weeks into the Season

If you’re in need of clothes for this season, try to avoid giving in to the urge to buy all the exciting new arrivals when they’re first in the store. Most stores start marking down prices for seasonal items when the season is on its way out.

Assuming there are three months to a season, you can start looking for discounts after about six to eight weeks. If you can wait a measly six weeks, you’re likely to get a better price than if you buy immediately.

One of the downsides is that some very popular items might sell out over the six-week period. However, if you’re purchasing from a chain store, you can always ask a sales associate to phone other locations to see if your item might be in stock elsewhere. Another great perk of waiting to buy is that it helps curtail impulse spending. If you’ve completely forgotten about that item before the time is up, chances are you didn’t really need it anyway.

End of (or Out of) Season

If your clothing size doesn’t change much from year to year, stocking up on clothing at the end of the season is a great way to save money, and to have a good supply of new clothing available for next year. This works well for many classic or staple items, like suits, pants, jeans, or cardigans that aren’t prone to going out of style too quickly. Trendy items may be a bit riskier as they tend to become passé after a season or two.

Keep in mind that fashion seasons are different than the seasons marked on your calendar. When it comes to fashion, the new season usually begins a few months prior to the official change of season. Given this fact, if you wait until the end of the season, you should still be able to get a little bit of wear out of a new item before having to pack it away for next year.

In January or February, you can start looking for cold-weather clothing. Jackets and winter accessories often start to go on sale around this time. August is when you’ll find bathing suits, summer clothes, and sandals on sale as the summer starts to come to a close. Athletic footwear often goes on sale in January when people are looking to get going with New Year’s resolutions, though you’ll often find sneakers on sale again in April. Jeans go on sale in October after the back-to-school rush has subsided.

Note

Other ways to get great deals on clothing include joining newsletters online and checking off-price retailers.

Scout the Sales Online

Many popular clothing retailers allow consumers to subscribe to their newsletters online. Stores will often send out advance notice to their subscribers of big sales, or perhaps even allow subscribers to pre-shop at special events. If you get the newsletter, you’ll know when all the promotions are happening at your favorite stores so you’ll know when and how you can save on those clothing items you’ve been admiring. You may also find that some stores offer discounts at their online stores that may not be available at the brick-and-mortar stores.

Discount and Off-Price Retailers

Not interested in planning your shopping trips according to seasons and sales? Discount and off-price clothing stores can be a great choice. These stores typically buy large volumes of clothing from stores that have excess inventory, are clearing space for new merchandise, or have gone out of business.

You may not always be able to find what you need, and you might find that some of the clothes on sale in these shops are completely out of season. But if you’ve got the time to spend and the desire to dig, you might find a few gems. Keep in mind that many of these discount retailers also sell staples like socks, hosiery, t-shirts, activewear, and other items that are not as prone to seasonal changes.

What Are the Best Times to Go Thrifting?

Although thrift stores are usually a matter of luck, there are some periods when you can improve the likelihood of a successful haul. Experienced thrifters recommend going on weekdays rather than weekends, because stores will be less busy. In addition, spring and summer seasons tend to offer the best hauls because that’s when people declutter their garages and attics.

When Is the Best Time to Buy Electronics?

Most experts say that the best time to buy electronics is in the lead up to the Black Friday/Cyber Monday holiday deals. Other good times to shop are mid-January (when last year’s models go on sale) and August, when items go on sale for the back-to-school season.

When Is the Best Time to Buy a Car?

The best time to buy a car is at the end of the year, when dealerships are trying to clear inventory for next year’s models. Three-day weekends are also popular, as dealerships often offer special rates on vehicles or financing.

The Bottom Line

Whether you find shopping for clothes to be the most entertaining activity in existence or whether you detest it more than anything, we all need clothing. Not only is it a good idea to buy once a season’s already started, it’s typically best to avoid buying too close to a major holiday when many clothing items are purchased as gifts.

On the other hand, once these major holidays have passed, clothing items usually go on sale to liquidate the excess stock (sales after Christmas, for example). Though it’s prudent to follow these guidelines for frugal clothes shopping, keep in mind that bargains can be found at any time during the year, and in every season. It’s just a matter of scoping out the sales and having the courage to battle the crowds.

Reviewed by Ebony Howard
Fact checked by Suzanne Kvilhaug

The cost basis of an investment or asset is the amount of the initial investment, or the original purchase price. It’s an important number in tax planning for individual investors, business owners, and heirs receiving inheritances.

The cost basis determines how much capital gains tax must be paid once an investment or other asset is sold. For certain assets, such as real estate or stocks that have been owned for many years, a very low basis can result in a heavy tax burden when they are sold.

However, the Internal Revenue Service (IRS) allows for assets and investments to be adjusted up or down for a number of reasons, resulting in the adjusted cost basis and less capital gains tax owed.

Key Takeaways

• The cost basis of a home or any other asset must be reported to the Internal Revenue Service (IRS) when you sell it.
• The cost basis is subtracted from the profit that will be taxed.
• The basis may be adjusted to reflect the costs of improvements you paid for and expenses you incurred while you owned the asset.

Calculating Additions to Cost Basis

The cost basis of an asset or an investment may be adjusted upwards by adding the initial cash basis used to purchase the asset to the costs associated with increasing the value of the asset.

For a business, these costs may include capital expenses such as substantial repair or rehabilitation expenses for equipment or facilities.

For a homeowner, a renovation or room addition can be added to the original cost basis, adjusting the amount up. Legal fees associated with the purchase or sale of the asset, title fees, transfer fees, and sales tax all may be used to adjust the cost basis up.

The owner of an asset may also use the costs associated with selling it to reach an adjusted cost basis. Common expenses related to the sale of some assets can include broker fees, seller commission, and costs for shipping the item to a buyer.

The addition of any of these expenses to the original purchase price of the asset results in a higher adjusted cost basis, reducing the amount of capital gains taxes owed at the time of sale.

When the Asset Is a Gift

Figuring your cost basis when you sell property that you received as a gift is more complicated. You need to know: a) its adjusted basis to the owner just before it was given to you; b) its full market value at the time it was given to you, and c) the amount of gift tax, if any, that you paid.

Calculating Deductions to Cost Basis

Cost basis can be adjusted downward by subtracting any capitalized costs directly related to the asset. Common expenses that reduce an asset’s cost basis include depreciation, damage to the asset, or theft. Depletion or amortization can also be used to adjust the cost basis of an asset downward.

Business owners have the option of receiving the tax benefit of these deductions at the time of purchase or at the time of sale.

An adjusted cost basis that includes deductions to the value of an asset can be particularly beneficial to investors or business owners when the sale results in a loss. These losses can be used to reduce taxable income up to a certain amount each year, and excess losses can be carried forward in future years.

What Can I Deduct From My Cost Basis When I Sell My Home?

Many of the costs associated with purchasing and upgrading your home can be deducted from the cost basis when you sell it. These include most fees and closing costs and most home improvements that enhance its value. It does not include routine repairs and maintenance costs.

What Can I Deduct From My Cost Basis When I Sell Stocks or Bonds?

The IRS defines the cost basis of the stock shares or the bonds as their purchase price plus any costs related to the transaction, such as broker fees. When you sell shares of mutual funds, you can, in some cases, use an average cost basis.

What Are Increases to Cost Basis vs. Decreases to Cost Basis?

Increases to your cost basis include improvements, such as a new roof on a house and the cost of local tax assessments for water connections or roads.

Examples of decreases to cost basis include insurance deductions, subsidies for energy enhancements, and depreciation.

The Bottom Line

Additions and subtractions to the cost basis of an asset can dramatically change the amount you owe in taxes when the asset is sold. That’s the best argument for good recordkeeping. Hold onto receipts and other documents that detail improvements you have made to your home over time in order to accurately record its real cost to you.

Reviewed by Robert C. Kelly
Fact checked by David Rubin

On May 8, 2021, The Coca-Cola Company celebrated its 135th anniversary. With a history that spans more than a century, it is no surprise that the brand has seen many changes since it first was founded. From selling nine drinks a day at Jacobs’ Pharmacy in Atlanta, Georgia to selling more than 2.2 billion servings in more than 200 countries around the world daily as of 2024, here is how the Coca-Cola Company has changed over the years and how the evolution has affected its business.

Key Takeaways

• The Coca-Cola Company was founded in 1886 in Atlanta, Georgia. The company sells more than 2.2 billion beverages in more than 200 countries around the world daily as of 2024.
• When the company first started in 1886, it used coupons for free drinks to raise interest in the product, advertising on painted wall signs, napkins, and clocks.
• By 1911, the company’s advertising budget had skyrocketed to more than $1 million.
• As of early 2025, Coca-Cola was ranked the sixth most valuable brand in the world by Forbes.
• For more than a century, Coca-Cola has managed to retain its popularity and keep up with the times while still remaining entrenched in nostalgia.

Advertising Strategies

Coca-Cola might be one of the best-known brands in the world today. However, that wasn’t always the case. When the company first started in 1886, it used coupons for free drinks to raise interest in the product. In 1892, marketer Asa Candler finalized the purchase of Coca-Cola from inventor Dr. John Pemberton. Candler’s original advertising budget was $11,000. He used items such as calendars, soda fountain urns, painted wall signs, napkins, pencils, and clocks to advertise Coca-Cola. By 1895, Coca-Cola reports that the beverage is sold and drunk in every U.S. state and territory, beginning its market saturation around the world.

1900-1950s

The first celebrity to ever endorse Coca-Cola was music hall performer Hilda Clark in 1900. Since then, numerous celebrities such as Joan Crawford, Ray Charles, The Supremes, Aretha Franklin, Arnold Palmer, and Joe Namath have attached themselves to the brand. By the beginning of the 1900s, the marketing budget for the soft drink has already multiplied ten-fold to $100,000.

Coca-Cola purchased space in national magazines for the first time in 1904. By 1911, the company’s advertising budget had skyrocketed to more than $1 million. In the 1920s, Coca-Cola added outdoor billboards and radio program sponsorships into its advertising mix. The famous Coca-Cola Christmas advertising campaigns began in 1931 with illustrations of St. Nicholas drinking Coca-Cola.

1950s-1990s

The first television commercial for Coca-Cola premiered on Thanksgiving Day in 1950. By this point in time, advertising already accounts for a significant portion of the company’s expenses. In 1956, McCann-Erickson, Inc. replaced the D’Arcy Advertising Company as the official ad agency. The latter had a history of more than 50 years advertising Coca-Cola, marking a shift in strategy. Sales outside the U.S. accounted for about 33% of revenue by 1957.

By the 1960s, the company had begun to diversify its product lines, acquiring The Minute Maid Corporation in 1960 and introducing Sprite in 1961. In 1971, the famous “I’d Like To Buy the World a Coke” television commercial was launched. To this day, it remains one of the most popular and successful ads for Coca-Cola.

1990s-Present

One of the most memorable Coca-Cola TV commercials was 1993’s “Northern Lights,” which marked the debut of the Coca-Cola polar bears. However, not all of Coca-Cola’s marketing ideas have been hits. In 1985, in an effort to compete with Pepsi, the company decided to change the formula for Coke for the first time in 99 years. The new drink was called “New Coke.” The reaction to the new flavor was overwhelmingly negative, and Coca-Cola went back to the original recipe in just 79 days.

Joe Tripodi, chief marketing and commercial officer for Coca-Cola, said the company spent more than $4 billion on marketing in 2013, according to Forbes. It spent over $3.2 billion on advertising in 2011. The major spending paid off as Coca-Cola was named Marketer of the Year in 2011 by AdAge.

Coca-Cola Packaging Evolution

Coca-Cola was only served as a fountain drink until 1899 when Candler sold the U.S. bottling rights to Benjamin F. Thomas and Joseph B. Whitehead for $1. The Coca-Cola contour bottle went into production in 1916. The unique shape of the bottle was designed to distinguish Coca-Cola from its imitators. The 6.5-ounce contour bottle was the only packaging Coca-Cola used until 1955 when the king-sized package was introduced. Consumers had the option to purchase Coke in 10-, 12-, 16- and 26-ounce bottles in addition to the standard 6.5-ounce bottle. In 1960, Coca-Cola introduced 12-ounce steel cans to make its drinks more portable.

Coca-Cola went green in 2009 with 100% recyclable bottles made partially from plant-based materials and moved to reduce its use of new plastic by 20% across North America in 2021. In 2011, Coca-Cola’s seasonal holiday packaging was met with disdain by consumers. For the first time, regular Coke was put in white cans that customers said looked similar to the silver Diet Coke cans. The white cans were supposed to stay on shelves until February 2012 but were discontinued in December 2011 in favor of the classic red cans. In October 2012, Coca-Cola announced that it would stop the production of 6.5-ounce glass bottles because they are no longer profitable.

History of the Coca-Cola Logo

The trademark Coca-Cola script logo was created in 1886 by Frank M. Robinson. A red and white graphic that represents two adjacent contour bottles, called the Dynamic Ribbon Device, was added to the logo in 1970. A shock of yellow and floating bubbles was added to the white twist in 2003 as part of the Coca-Cola Real campaign. Those enhancements were removed by 2007. For its 125^th birthday, the company created a special logo that featured bubbles coming out of the contour bottle.

The Bottom Line

Coca-Cola was ranked sixth on the Forbes list of the World’s Most Valuable Brands in 2020. Competitor Pepsi followed well behind at 36th. For more than a century, Coca-Cola has managed to retain its popularity and keep up with the times while still remaining entrenched in nostalgia. Despite the competition, Coca-Cola is still one of the most successful and well-known brands in the world.

Plan so you’re covered for emergencies, college, retirement, and more

Reviewed by Charlene Rhinehart
Fact checked by Suzanne Kvilhaug

Spending comes naturally for many of us but saving can take a little practice. How and where to save requires strategies for best success whether it be for financial emergencies, college, or retirement. Your strategies and options can vary depending on what you’re saving toward.

Start by taking a look at your outstanding debts. It makes little sense to pay 17% in interest on credit card debt while earning 1% on a savings account or even lower in some cases. Consider tackling the two in tandem, putting some money toward savings and some toward your credit balances. The sooner you can pay off that high-interest debt, the sooner you’ll have more to put into your savings.

Key Takeaways

• Employer-sponsored retirement plans like 401(k)s make saving for retirement easy and automatic and some employers even match your contributions.
• State-run 529 college savings plans let you withdraw money tax-free as long as you use it for qualified education expenses.
• You can find ways to reduce your spending and boost your savings by tracking your expenses manually or with an app.
• Strategies and options can vary depending on what you’re saving toward.

Building Emergency Savings

The goal for most individuals and families should be an emergency fund that’s large enough to handle serious, unexpected expenses such as a costly car repair or medical bill. A rainy-day emergency fund can also tide you over for a while if you lose your job and need time to hunt for a new one.

How much should you save?

Your take-home pay is often a fair approximation of your monthly living expenses and it’s easily found on your pay stubs or bank statements. Financial planners commonly recommend setting aside at least three months of living expenses but others say you should put away between six months to a year’s worth of expenses.

These figures work for retirees as well but it’s always a good idea to make a few extra calculations. Consider all your monthly expenses and contrast that with your monthly income including Social Security, pensions, liquid assets, and investment income. You’ll also want to factor in the risk associated with any stocks or other volatile investments you have in a bear market.

Where to park your cash?

The best place to keep money you’ll want to access quickly in an emergency is in a liquid account. This might be a checking, savings, or money market account at a bank or credit union or a money market fund at a mutual fund company or brokerage firm. All the better if the account earns a little interest.

These accounts will allow you to write a check, pay a bill online, or use an app on your phone in most cases. You can also move money by electronic wire transfer from your account to someone else’s account if you need to do so. You’ll be able to withdraw cash from an automated teller machine (ATM) if you get a debit card when you open your account.

Funding your account

Consider saving all or part of any money you earn outside of your usual paycheck. This may be a tax refund, a bonus, or income from a side gig. Try to contribute at least a portion of that to your account as well if you receive a raise.

Another time-honored tip is to pay yourself first. Treat your savings like any other bill and earmark a certain percentage of every paycheck to go into it. Consider direct deposit to avoid the temptation of spending the money instead. You can have it deposited to your checking account and then transferred automatically to your emergency fund.

Saving for a rainy day or emergency is easier said than done for many of us. Someone who nets $50,000 a year would have to set aside from $12,500 to $25,000. It would take two and a half to five years if they devoted 10% to emergency savings not counting any additional contributions or interest the account might earn.

Important

Make sure to replenish it as soon as possible if you ever have to take money out of your emergency fund.

Saving for Retirement

Retirement is the single largest savings goal for many of us and the challenge can be daunting. Fortunately, there are several smart ways to set money aside for this goal and many of them come with tax advantages as an added incentive.

There are individual retirement accounts (IRAs) for just about anybody. Tax-advantaged accounts include 401(k) plans for private-sector employees and 403(b) plans for employees of schools and nonprofits.

Employer-sponsored plans

The easiest, most automatic way to save for retirement is through an employer plan such as a 401(k). The money automatically comes out of your paychecks and goes into whatever mutual funds or other investments you’ve chosen.

You don’t have to pay income tax on that money or your 401(k) gains or on any dividends your plan earns until you eventually take the money out. You can put up to $23,500 a year into a 401(k) plan in 2025, up from $23,000 in 2024. You can contribute an additional $7,500 if you’re age 50 or older in both 2024 and 2025.

Many employers will match your contributions up to a certain level. A $10,000 investment on your part would be worth $15,000 if your employer kicks in an additional 50%.

This table shows how compounding works with your retirement savings assuming that you invested the full $23,000 in 2024 and were guaranteed a 5% return each year.

Year	Total Amount Contributed	Year-End Value
1	$23,000	$24,150
2	$46,000	$49,507.50
3	$69,000	$76,132.87
4	$92,000	$104,089.52
5	$115,000	$133,443.99

No 401(k)? No problem!

Consider an IRA If you’re fortunate enough to have even more than the 401(k) maximum to set aside or you don’t have an employer-sponsored plan available. You can invest in either the traditional variety where you get a tax break at the time you contribute or a Roth IRA where the money you withdraw in retirement can be tax-free.

Saving for College

College may be the second biggest savings goal for many and the easiest way to save for it automatically, just like retirement.

529 plans

Each state has its own 529 plan and some states have several. You don’t have to use your own state’s plan but you’ll generally get a tax break if you do.

Some states allow you to deduct your 529 plan contributions up to certain limits on your state income tax return. They won’t tax the money you take out of your plan as long as you use it for qualified education expenses such as college tuition and student housing.

The federal government doesn’t offer any tax breaks for the money you put into one of these plans but it won’t tax the money you take out provided that it goes to qualified expenses.

Contribution limits

How much you can contribute to a 529 plan depends on your state. There are no annual contribution limits but some states may put lifetime caps on how much you can put into their 529 plans. A 529 plan balance in New York can’t exceed $520,000 per beneficiary as of 2025.

You can also use a 529 plan to pay up to $10,000 a year in tuition at an elementary or secondary public, private, or religious school as of 2025. A lifetime limit of $10,000 from a 529 plan can be used to pay off student loans under the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019.

Saving for Life Goals

Most of us are likely to have more than one savings goal at any given time and a limited amount of money to divide among them. One option to consider is a Roth IRA if you find yourself saving for your retirement and a child’s college education at the same time.

Unlike traditional IRAs, Roth IRAs let you withdraw your contributions although not any earnings on them at any time. You may have to pay a penalty for early withdrawals, however, so be sure to do your research if you’re younger than age 59½ and you haven’t yet held the account for five years.

This means that you can use a Roth IRA to save for retirement and tap into the account to pay them if you come up short when the college bills arrive. The downside is that you’ll have that much less money saved for retirement when you may need it.

The maximum allowable IRA contribution for traditional and Roth IRAs combined is $7,000 in 2024 and 2025. Those who are age 50 and older can contribute an additional $1,000 catch-up contribution which hikes the limit to $8,000.

Tips for Saving Money

Financial planners often suggest a few ideas to consumers who need to save more money than they can easily pry out of their paychecks,

1. Manage your spending

People often find that they’re frittering away funds on things they don’t need and that they could easily live without. Record every penny you spend for a certain period whether it’s a week or a month. You can use a notebook or an expense-tracking app such as Clarity Money or Wally.

Some apps even save for you. The Acorns app links to your payment card, rounding up your purchases to the next dollar and moving the difference into an investment account.

2. Consider cash back

It may make sense to sign up for apps such as Ibotta or Rakuten provided that you’re buying things you truly need. Apps like these offer cash back from retailers on groceries, clothing, beauty supplies, and other items.

You can also use a cash rewards credit card which offers 1% to 6% in cash on each transaction. The Chase Freedom card offers 5% cash rewards on categories that change periodically. This tactic only works if you transfer your savings to a savings account, however, and if you always pay your credit card bill in full every month.

3. Focus on major expenses

Clipping coupons is fine but you’ll save much more money by paring back on the biggest bills in your life. That’s usually things like housing, insurance, and commuting costs. Ask yourself a few questions.

• Could you save by refinancing your mortgage at a lower rate?
• Could you shop around for lower premiums or bundle all your policies with one carrier for a discount?
• Is there a cheaper alternative such as carpooling or working from home once a week if you drive to work?

4. Don’t go overboard

You might want to dine out less often, try to get a few more wearings out of your wardrobe, or drive that old car for another year. Don’t deny yourself every last pleasure in life, however, unless you enjoy living like a miser and some people do. The point of saving money is to build toward a financially secure future, not to make yourself miserable in the here and now.

How Can I Save $1,000 Fast?

Sign up for direct deposit through your employer if you haven’t already and schedule automatic transfers to a savings or other emergency account. You can pad this account by signing up for cash-back apps or credit cards. Take advantage of a 401(k) or automatic withdrawals from your account into an IRA if you want to sock away money for retirement.

What Is the 30-Day Rule?

The 30-day rule is a savings rule that aims to help you move your mindset onto saving rather than spending. Stop if you’re online or walking through the mall and see something you like and are about to check out. Log off or turn around. Delay the purchase for a month and put the money you would have spent into your savings account instead. You can revisit the purchase when you’re beyond the 30 days.

What’s the Best Way to Save Money?

You need discipline and a plan to save money. Know what your goals are and how much you need to set aside. Take advantage of the options available to you whether that’s an employer-sponsored retirement account or an IRA. Make sure you have assets that can be easily liquidated when you need money during emergencies and be sure to consult a financial professional to help point you in the right direction.

The Bottom Line

Saving money is crucial for a secure financial future that involves little debt and allows you to live comfortably and build wealth. Many important situations require spending as life progresses such as paying for school, a house, your child’s schooling, and retirement. Using a variety of saving strategies for each occasion will allow you to approach these expenses from a prudent financial standpoint.

Reviewed by Eric Estevez
Fact checked by Vikki Velasquez

Publicly traded companies who have their shares listed on stock exchanges are required to file regular financial statements and disclosures with regulators, such as the Securities and Exchange Commission (SEC) in the United States.

Among the most widely read of these are a company’s annual report, which tells investors and analysts how the company has performed over the previous fiscal year (FY), how its businesses look going forward and summarizing corporate financials for use in fundamental or ratio analysis through scrutinizing the balance sheet, income statement, and statement of cash flows.

In the old days, shareholders would receive the annual report by mail or through their broker. Thanks to the Internet, finding financial reports is easier and quicker than ever. Nowadays, nearly every reputable company has an easy-to-follow investor relations section on its website that is a wealth of information, including an archive of its annual reports, often going back several years.

Key Takeaways

• Public companies are legally required to file financial reports with the U.S. Securities and Exchange Commission (SEC).
• These reports include annual and quarterly reports that investors use to analyze companies.
• With the Internet, it is simple to access all company financial reports, which are available on their websites, usually under the “Investor Relations” section.
• If you want to dive further into company details and reports, the SEC has a database, known as EDGAR, with all company filings.

Working Example: Walt Disney

Walt Disney Co. is an excellent example of a business that uses its website to get information out to its shareholders, analysts, and prospective investors. It is very easy to find a direct link to its investor relations section.

This part of the Disney website contains a downloadable version of its annual report, as well as stock quotes, an investor newsletter, archived conference calls, and even the opportunity for current shareholders to sign up for electronic reports.

The best part about these online investor relations sections is their extra nuggets of hard-to-find information. For example, most companies will use these spaces to offer detailed info on past acquisitions and stock splits not always available on other financial portals.

If you want to dig deeper and go beyond the slick marketing version of the annual report found on corporate websites, you’ll have to search through required filings made to the Securities and Exchange Commission. All publicly traded companies in the U.S. must file regular financial reports with the SEC. These filings include the annual report (known as the 10-K), quarterly report (10-Q), and a myriad of other forms containing all types of financial data.

Note

In addition to the 10-K and 10-Q, other company filings include the 8-K, the DEF 14A, Form 4, Form 5, and the 13-D.

Filing Reports

Reports are filed through a system known as EDGAR (Electronic Data Gathering, Analysis, and Retrieval system). EDGAR performs automated collection, validation, indexing, acceptance, and forwarding of submissions by companies and others required by law to file forms with the SEC.

Information on EDGAR can be found on the SEC’s website, where you can search through forms as well as familiarize yourself with the system using its EDGAR tutorial.

Be warned; the tools on the SEC’s site are still cumbersome at best. For a more user-friendly site, try EDGAR Online. It is a subscription-based site offering dozens of products on any type of information filed with the SEC. You won’t find anything free, but if you need sophisticated services, EDGAR Online is the site for you.

What Is the Difference Between a 10-K and a 10-Q?

A 10-K and a 10-Q are both financial reports that are legally required to be filed by public companies with the Securities and Exchange Commission (SEC). The 10-K can be considered the most important one as it is audited by an external party and includes the most detail. It is filled annually at the end of a company’s fiscal year and details a company’s performance for the entire year and future outlook. A 10-Q is filed at the end of every quarter, contains less information, and is not required to be audited.

What Is Included in a Company’s Annual Report?

A company’s annual report is an in-depth look at its performance for the year and its future outlook. It contains a letter from the CEO summarizing the business and how it performed throughout the year. It contains all of the financial statements, including the balance sheet, income statement, and cash flow statement. It also discusses any big performance achievements for the year, changes to the business, future goals, social responsibility progress, business risks, and more. Overall it seeks to provide as much detail about the company for the year.

What Happens If a Company Doesn’t File an Annual Report?

If a company fails to file its annual report, there are a host of possible negative consequences. These include fines, penalties, lawsuits, delisting from stock exchanges, loss of investor confidence, suspension of trading, and more. It’s imperative for companies to file annual reports to remain in good standing and abide by the law.

The Bottom Line

Finding company annual reports and SEC filings is a simple process thanks to the Internet. Almost every public company has an “Investor Relations” section on their website with all of the filings for anyone to access.

Additionally, the U.S. Securities and Exchange Commission (SEC) has its EDGAR database where you can search for all financial filings companies have made with the SEC. These reports provide all the important information that investors and analysts need to know about companies, such as balance sheets, income statements, cash flow statements, business models, ownership, stock splits, and more.

Reviewed by Anthony Battle
Fact checked by Vikki Velasquez

Net worth is what you have of monetary value (assets) after you account for what you owe (liabilities). As a simple example, if you have $1,000 in savings and owe $500 to your credit card company, you have a net worth of $500 ($1,000 – $500).

A positive net worth figure means that you have more assets with monetary value than debt.

When your net worth is positive and it keeps growing year by year, it’s telling you that you are doing well at increasing your financial assets, such as income, savings, investments, and maybe adding a house. You also may be reducing debt.

That’s a great message to receive. From a financial standpoint, you’re in good health.

A net worth calculation is like GPS for your various savings goals, especially retirement. It tells you where you are now and where you need to go to reach your destination.

So, calculating your current net worth on an ongoing basis can help you keep your retirement plans on track.

Key Takeaways

• Your net worth is the total of your assets minus the total of your debts.
• There’s no hard rule for what makes an ideal net worth amount.
• Monitor your net worth to be sure that it’s growing toward providing you with a comfortable future.
• If it’s not, it’s time to increase your income, cut your spending, and reduce your debt.

How to Calculate Your Net Worth

Net worth is simply the total value of all assets minus the total value of all liabilities. It’s a financial benchmark applied to companies and individuals. The formula is a simple one:

$begin{aligned} &text{Net Worth} = text{Assets} – text{Liabilities} \ end{aligned}$​Net Worth=Assets−Liabilities​

Here’s what makes up the assets and liabilities categories.

Assets

There are liquid assets and illiquid assets. Liquid assets are investments or possessions that can be turned into cash relatively quickly with little or no loss of value.

Bank accounts, certificates of deposit, stocks, bonds, mutual funds, and exchange-traded funds (ETFs) fall into this category.

Illiquid assets are investments or possessions that are difficult to convert into cash quickly. Your home (if you own it) is an illiquid asset, as are any other real estate holdings.

The balance in a retirement savings plan (before you turn age 59½) and a business partnership are considered illiquid assets.

Most personal property, such as vehicles, furniture, and clothing, should be left out of your net worth calculation. Even if they cost a lot to acquire, their resale value may be unknown.

However, investment-quality art, jewelry, and collectibles could be assets you’d use in calculating net worth.

Liabilities

Liabilities are debts. Credit card balances, car loans, home mortgages, student debt, and business loans all fall into this category. Personal loans count, too.

Where Do You Stand?

The chart below features the median and mean net worth figures for American households by age group.

The data was compiled by the Federal Reserve Board’s Division of Research and Statistics in its 2022 survey of assets, debts, and financial behavior of U.S. households. The next survey, begun in February 2025, will be published in late 2026.

The median is the figure below which half of families have less net worth, and above which half have more net worth. The mean figure is the average net worth calculated from the net worth for all families in the age group.

Age of Family Reference	Median	Mean
Less than 35	$39.0	$183.5
35-44	$135.6	$549.6
45-54	$247.2	$975.8
55-64	$364.5	$1,566.9
65-74	$409.9	$1,794.6
75 or older	$335.6	$1,624.1

Don’t place too much importance on how your net worth compares to these numbers. They are just meant to give you a sense of the range of national data.

Note the big differences in mean and median net worth in each age category. Remember that the mean is an average. A relatively few affluent families can skew the average. That may be why the mean net worth of American families younger than age 35 tops $183,000.

The Ideal Number

What should your net worth be? Every person has their own lifestyle and individual expectations, so there is no one-size-fits-all, universally agreed-upon number.

That said, Thomas J. Stanley and William D. Danko, authors of “The Millionaire Next Door: The Surprising Secrets of America’s Wealthy” offered this formula as rule of thumb:

$begin{aligned} &text{Net Worth} = frac{ text{Age} times text{Pretax Income} }{ 10 } \ end{aligned}$​Net Worth=10Age×Pretax Income​​

Your annual household pretax income multiplied by your age, then divided by 10, equals “what your net worth should be,” according to Stanley and Danko.

Using this formula with a basic salary of $25,000, we get the following results:

Age	Income	Net Worth
20	$25,000	$50,000
30	$25,000	$75,000
40	$25,000	$100,000
50	$25,000	$125,000
60	$25,000	$150,000

The numbers in the middle-age ranges might look feasible, but the formula is less likely to work for people just starting out in life. Few 20-year-olds have racked up $50,000.

Then again, most professionals, if all goes well, see a steady increase in salary over the years. Below, see the results for the same formula using increasing income:

Age	Income	Net Worth
20	$25,000	$50,000
30	$35,000	$105,000
40	$45,000	$180,000
50	$55,000	$275,000
60	$65,000	$390,000

The net worth estimates are still unrealistic for very young workers, and they’re not great for people approaching their retirement years.

Still, the numbers may provide a benchmark for consideration. At the least, they may help you determine if you are moving in the right direction.

The Marotta Formula

Interestingly, under the scenario where income rises with age, the net worth estimate above delivers results similar to those generated by a formula devised by David John Marotta, a financial advisor.

Marotta recommended following a savings plan that would result in a net worth that, by age 72, was 20 times your annual spending.

Under this plan, the older you get, the more you save. Since most people earn more as they grow older, this is not unrealistic.

Age	Income	Savings Factor	Annual Spending	Net Worth*
30	$25,000	1x	$15,000	$15,000
35	$35,000	2x	$20,000	$40,000
42	$50,000	4x	$35,000	$140,000
51	$55,000	8x	$40,000	$320,000
66	$75,000	16x	$50,000	$800,000

How Do I Calculate Net Worth?

The formula to calculate your net worth is: assets minus liabilities.

Is a Net Worth of 500K Good?

That depends on your age, your income, and your circumstances. It also depends on whether you compare yourself to other people, or to what experts recommend is an ideal net worth. Generally speaking, a $500,000 net worth is good, especially if you’re mid-career. But you’ll want to increase it as much and as long as you can.

Where Should I Be Financially at 35?

Fidelity recommends that you have about two times your salary saved by age 35.

Here’s the breakdown:

By age 30 | Save at least 1x your salary

By age 40 | Save at least 3x your salary

By age 50 | Save at least 6x your salary

By age 60 | Save at least 8x your salary

By age 67 | Save at least 10x your salary

The Bottom Line

A positive net worth is better than a negative one, a higher net worth is better than a lower one, and an increasing net worth is better than a static one. Words to live by.

If your net worth is negative, strive to get it to a positive number. Live within your means and build it by saving and investing, a little at a time. Create a budget, cut your spending, and pay off debts.

Even if you feel your net worth is high, keep increasing it to ensure that you have enough money to live well during your retirement years.

If you have multiple types of student loans, such as different kinds of federal loans along with private debt, trying to figure out how best to tackle all of it can feel overwhelming. In many cases, paying off private student loans before federal loans makes the most sense, due to the former often having less favorable terms. However, there’s no universal solution, as it depends on what your goals are, such as trying to minimize interest, reduce uncertainty, or build momentum toward becoming debt-free.

Key Takeaways

• Because federal student loans often have better terms, it typically makes sense to prioritize paying off private student loans first.
• Loan type is only one factor, as there’s also interest rates and repayment terms to take into consideration.
• The best strategy for paying off student loans ultimately depends on your situation and goals.

4 Things to Consider When Evaluating Repayment Priorities

What Types of Student Loans You Have

Student loans fall into one of two main categories: federal and private loans. Federal student loans have fixed interest rates set at the time the loan is taken out, whereas private student loans can be either fixed or variable.

Federal student loans often have better terms, particularly regarding repayment requirements, such as by offering pathways to loan forgiveness and forbearance options. There are a few private lenders that also offer some repayment flexibility, but in most cases they won’t be as generous as their federal counterparts. As such, it often makes sense to pay off private student loans first, as you want to reserve that flexibility with federal loans in case your circumstances change in the future.

Among federal student loans, there are also different types to consider, and their varying terms can affect your choices. Currently, the United States Department of Education offers the following four loan types:

• Direct unsubsidized: Interest accrues on these loans while you’re in school and during a six-month grace period before you have to start making payments. Because accrued interest increases your loan balance, tackling this debt is more of a priority for some borrowers, though factors like loan size still matter.
• Direct subsidized: The federal government covers the interest on these loans while you’re in school and for the six-month grace period afterward, which means you’d have a lower repayment amount compared to unsubsidized loans of the same size. As such, you might prefer to tackle these loans after unsubsidized loans, if that means the larger balance gets paid down first. That said, some might prefer to start with the lower balance to build momentum.
• Direct PLUS loans: PLUS loans are for parents of undergraduates, or graduate and professional students, who can take these loans out themselves. In both cases, interest accrues as soon as the loan is disbursed, although graduate and professional students don’t have to make payments while in school or for six months after, albeit with interest still accruing. It often makes sense to pay these off before other direct loans, especially because interest rates are generally higher.
• Direct consolidation loans: While you can’t exactly refinance your federal student loans, you can take out a consolidation loan that combines several of them into one. The interest rate for this type of loan is based on a weighted average of your prior loans’ rates. By consolidating your federal student loans, you can sidestep having to decide which one to prioritize. However, if it’s between this option and private loans, you might still prefer to tackle the latter first.

The Interest Rates and Rate Type

Your interest rate is also a big factor in deciding which student loan ought to be repaid as soon as possible. However, there are different ways to approach this aspect. One strategy is to prioritize the loan with the highest interest rate first, as that can mean paying less in interest in the long run. However, if your federal student loans happen to have higher rates than your private ones, you’ll have to weigh whether the interest savings are worth giving up the former’s benefits flexibility sooner.

Another factor to consider is whether the interest rate is fixed or variable. As previously mentioned, federal student loans are fixed, while private loans can be either. If you have both types, you might prefer tackling the variable loan first to limit the window in which rates can increase.

The Loan Terms

Although federal student loans often have more favorable terms, not all borrowers will be able to take advantage of them. For example, if you’re a high-income earner, you might be ineligible for certain benefits like income-driven repayment (IDR) plans. Think carefully about what options you’ll likely have before deciding what loans to prioritize.

The repayment term also matters. Some borrowers prefer to pay more in the long run if it means having a lower monthly payment, thereby providing more room in their monthly budget. If that applies to you, tackling the shortest-duration loan might be best.

Pay attention to your other types of debt and how these accounts might impact your ability to meet other financial goals. In some cases, it might make more sense to put money toward paying down other types of high-interest debt while making the minimum monthly payment on your student loans. Once your other debt is paid off, you can decide whether to start with federal or private student loans.

What Other Debt You Have

A final factor to bear in mind is if you have any other kinds of outstanding debt. Let’s say you have a lot of high-interest credit card debt. One option could be to take out a personal loan to pay off both your student loans and credit card debt, and then just focus on paying off the personal loan. However, this strategy shouldn’t be taken lightly. You need to calculate all costs involved and determine if this is realistically going to save you the most money.

3 Strategies for Prioritizing Your Student Loan Payments

There are different ways to approach paying off your student loans. One isn’t inherently better than the others, as the decision ultimately comes down to your financial situation and preferences.

Prioritize Private Student Loans

A general rule of thumb is to prioritize repaying your private student loans, even if the interest rates and loan terms are more or less the same as your federal loans. The repayment flexibility of federal student loans means you could have a monthly payment as low as $0 under certain IDR plans. Additionally, if you work for the government or a nonprofit, you could be eligible for Public Loan Service Forgiveness (PLSF) after making 120 monthly payments.

Important

The future of the current IDR plans is up in the air following a federal court injunction stopping the Department of Education from implementing the Saving on a Valuable Education (SAVE) plan and parts of other plans. As a result, the Department of Education has closed applications for all IDR plans.

Prioritize Higher-Interest Loans

One common strategy is to simply pay off the highest-interest loans before moving on to the next highest-interest one, and so on and so forth, until all are eventually paid off. This approach is called the debt avalanche strategy, and if you can stick with it, you’ll pay the least amount of interest possible.

Prioritize Smaller Loans

In contrast to the debt avalanche method, some borrowers may prefer to pay off the smallest loans first to build momentum in what’s known as the debt snowball method. This might mean paying more interest in the long run, but the peace of mind that can come with watching the number of loans you have dwindle may be worth that cost.

The Bottom Line

While not everyone will agree on which kinds of student loans ought to be repaid first, the right decision for you will depend on your financial situation and what you feel most comfortable with. For many people, paying off private student loans before their federal counterparts will be the right call. However, before you decide to go down this route, it’s worth considering the amount of interest you’ll pay in the long term, how payments will affect your monthly budget, and whether you can qualify for federal loan forgiveness