Top 4 Things I Love About Dave Ramsey Baby Steps (And 4 Things I’d Change)

Dave Ramsey has helped thousands of people around the world through the 7 Baby Steps for financial peace and freedom.

The process works.

His book titled the Total Money Makeover has had some impressive sales numbers. The book has sold over 5 million copies and has been on the Wall Street Journal Best-Selling list for over 500 weeks. (That data is from August 2017, over 4 years ago, so it’s sold more by now.)

So, we know that the 7 Baby Steps work. There’s a lot to love above the process, and we will address 4 of those attributes here. We will also cover 4 things that we think could be updated this year (as it has been almost 30 years since the Baby Steps were created).

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7 Baby Steps really do work. There are three great reasons why the plan actual works:

a. The Baby Steps Force You To Get Gazelle Intense When It Comes To Paying Off Debt

I’ll mention this later, but I really appreciate that Dave Ramsey keeps the emergency fund smaller to force you to be gazelle intense. Having such a small emergency fund of $1000 really does force you to get out of debt faster because having too much money in the bank can cause you to stagnate. 

b. Dave Strongly Encourages Your Behavior Modification

Too many financial gurus don’t give it to you straight. They may tell you that you need to invest in real estate or cryptocurrency.  It often feels like a lie that you can achieve financial freedom without putting in a lot of work.

Dave Ramsey comes off as blunt many times, but he forces people to confront that the debt is often our fault (with some exceptions). His bluntness, along with the Baby Steps, forces you to self-reflect.

c. The Plan Is Simple And Shows How You Need To Focus On One Step At A Time

I’ll mention this more below, but it’s evident that his focused intensity on the Baby Steps plan helps you stay focused on the task. You complete the first 3 steps consecutively and the following 4 steps concurrently in a prioritized order. 

You don’t have to multitask. Also, you don’t need to think about another step. You just need to focus on the step at hand.

2) Dave Ramsey Is Right That You Need A Plan

Dave Ramsey has many helpful quotes. One of my favorite of Dave Ramsey’s quotes is, “You must plan your work and then work your plan”. 

Too often we go through life without a plan, but we expect that everything is going to work out just fine. I remember the first time I budgeted.  I thought that I spent a certain amount of money on eating out each month, only to realize that number was much higher.

We need plans. It could be a debt payoff plan to stay on top of your debt. It could also be a budget to understand your income and expenses. Or it could be a plan to pay off your home early as per Baby Step 6.

Dave Ramsey understood that which is why the Baby Steps plan is so useful. You stick to the plan and you get out of debt. Voila.

3) The Baby Steps Get Progressively More Challenging

One thing I noticed early was that the Baby Steps seems to get progressively more challenging. This helps build momentum. It is much easier to save $1000 than to pay off your house early. By starting and taking baby steps, the baby steps themselves actually don’t feel very babyish. 

Paying off your home early per Baby Step 6 feels much more like a big kid step, but it’s still just a Baby Step like the others. It’s impressive how Dave structured these baby steps.

4) The Community Around Dave Ramsey Baby Steps Is Incredible

You don’t have to look far to realize that the community around Dave Ramsey is incredible. You can take a Financial Peace University class at your local church. These classes are excellent to encourage you and help keep you accountable while you eliminate debt. You’ll learn the baby steps inside and out with others in your community. 

You can also be a part of a vibrant Dave Ramsey Facebook Community. Personally, I am a part of many of these communities where I receive a ton of encouragement when sharing wins and losses in the process of debt elimination.

There’s a lot to love about the Dave Ramsey Baby Step method.

Now, let’s cover a few things that could use a refresh.

1) Can Creating A Budget Be Baby Step #1?

I am a budget fanatic. I would love to see a Baby Step dedicated to budgeting. Why? Because budgeting helps you understand where every dollar goes. I used “every dollar” like that on purpose because Dave Ramsey himself created a budget app called EveryDollar for that very purpose.

What better way to understand how much money you have to put towards your emergency fund than starting with a budget.

I am not sure why Dave doesn’t start with a budget, but I would be keen to start the Baby Steps with creating one.

2) Dave Ramsey’s Emergency Fund May Need A Refresh

Dave Ramsey’s emergency fund calls you to save $1,000 in Baby Step 1. Is $1,000 enough? It really depends. 

First, adjusted for inflation, $1,000 in 1990 is now worth $2,043.26 per the US Inflation Calculator.

Dave Ramsey's emergency fund needs to be larger due to inflation

There’s a plethora of questions you can ask yourself when considering whether the emergency fund is big enough, such as:

  1. How much debt do you have to pay off?
  2. Do you own a home?
  3. How old is your car?
  4. How many kids do you have?
  5. Do you have insurance?

Another question I like to ask is, “where do you live?”. Personally, my family and I live in the Bay Area, California where the cost of living tends to be quite high. $1,000 wouldn’t get us very far.

3) Is The Snowball Method The Best Way To Pay Off Debt?

As a refresh, the debt snowball method means that you line up your debts from smallest to largest and pay your monthly extra to your smallest debt first then snowball into higher debts. The debt avalanche method is where you line up your debts from the highest interest rate and use your monthly extra to pay off the highest interest first. The savvy debt method is where you pay off 1-2 of your smallest balances first via snowball before reverting to the avalanche method to save the most in interest.

Dave Ramsey loves the debt snowball method. It has worked for many people, so why wouldn’t he? He feels the opposite for the debt avalanche where he mentions that it doesn’t work.

The challenge is that you could lose thousands in interest if your smallest debts also have the smallest interest rates. This can be possible because higher debt amounts carry a higher risk to the lenders, meaning potentially higher interest rates.

You can see how much the snowball method loses in comparison through this debt payoff calculator which compares interest paid from snowball to savvy methods. For reference, we are comparing 4 debts: $23,000 at 22%, $18,000 at 19%, $12,000 at 9% and $8,000 at 7% interest rate. The monthly payment is $1,825.00

debt snowball versus other debt payoff methods

In this example, you would lose over $3,500 in interest by choosing the snowball method.

Does that mean that the snowball method is always worse? Absolutely not. The snowball method may provide the psychological benefit that you need to exterminate your debt.

You choose the debt payoff app and debt payoff method that is best for you.

4) Should You Follow Dave Ramsey’s Advice And Pay Off Your House Early Or Invest?

Dave Ramsey loves mutual funds and paying off your home early. My question is what if your mutual funds are making so much more in interest than paying off your home would save you?

Wouldn’t the prudent thing be to continue to pay off your home and then get the higher interest from investing in mutual funds?  It’s not a one size fits all solution, but it is something to consider.

There are also often benefits of not paying off your home early such as interest paid being tax-deductible. That said, you would really need to determine whether you would make more money from mutual funds than saving from interest payments to determine what’s best for you.

What Do You Think About The Baby Steps?

The Dave Ramsey Baby Steps have helped thousands around the globe. What do you like about the Baby Steps? Do you agree or disagree with what we would change in 2021?

4 things I love about Dave Ramsey's baby steps and 4 things I'd change

Top 4 Things I Love About Dave Ramsey Baby Steps (And 4 Things I'd Change)

Source: biblemoneymatters.com

Is it Wise to Use Personal Credit for Business Finances?

Whether you want to start a business or to finance one that is already functioning, you may find your financing options reduced to taking a loan. In such a case, you have the option of taking either a personal or a business loan.

Given the unpredictable nature of businesses, it may not be wise to mix your personal and business finances. This advice notwithstanding, there are some circumstances in which using personal credit for business finances makes sense.

When to use personal credit for business finance

Starting a BusinessStarting a BusinessWhen your personal credit is more attractive

Credit score is among the main factors that determine the amount and rate of a loan. If your venture hasn’t established a good credit, a business loan may not be advisable.

Such a loan will probably be denied or approved under restrictive terms and high rates. On the other hand, you can still access finances by going for a personal loan if your credit score is more attractive.

When you are setting up

Lenders will require proof of the revenue generated by the business to determine its capability in repaying the loan. This requirement puts you at a disadvantage when you’re setting up. Without any experience or books to show, a personal loan maybe the only way to go.

When you have no collateral

Business loans are mostly offered as secured loans. This means that collateral is required before approval. When starting a business you probably have no asset that can be tied to the loan or may not want to risk other existing assets due to the risk associated with businesses.  In such a scenario, a personal loan will do since it requires no collateral.

When the loan is within personal credit limit

Business loans attract higher interest rates than personal credit. However, personal credit comes with a lower limit compared to that of a business. The question you should ask yourself is; how much do you need and what will it cost you?

When the amount you need can be covered by personal credit, then go for it. You will avoid paying heftier interest that could run into thousands of dollar if you were to take a business loan.

When you don’t have a business plan

Another requirement for a business loan is an elaborate business plan. That’s easier said than done. The passion and hard work that you are ready to put into your venture cannot be captured on paper. What lenders want to see is an actionable plan that shows how capital will be utilized and the expected returns; to the last dollar!

In addition to this, lenders set stringent measures on how a business loan is to be utilized. Instead of allowing these requirements and terms to curtail your venture, you can tap into your personal credit as you get a feel of the business environment.

That said,

Personal credit might be cheaper and a good alternative to a business loan, but there are a few things to consider;

The major drive of setting up of a business is to generate profit. You inject part of the returns back into the business, and with time it grows into greater heights. If successful; what started out as a small business will one day grow into a huge venture.

To achieve that major boost, you may find yourself in need of a sizable amount. When self-funding can’t cover this, you may have to turn to lenders for a business loan.

Lenders will be more willing to finance your business if they have taken part in its growth. The point here is that, your bank needs to recognize your business as separate entity.

This kind of recognition is only possible if you take and manage business loans with them. Not only will this push your loan applications to the top of the pile, but you will get financial advice from the bank.

Final Take

Using personal credit for business finances is wise if it makes business sense to your specific venture. If it comes down to letting your business go under or abandoning your dream business for lack of financing, you have a winner. However, you should also be aware that personal credit does not elevate your business credit, something which may come in handy for future financial needs.

Source: creditabsolute.com

Which Bills to Pay Off First (or Cancel) When Money Runs Tight

Whether it’s from job loss due to a recession, a drop in income, or an unexpected major expense, there may come a time when you struggle to pay your bills. What can you do when your income and expenses don’t match up?

It’s essential you prioritize your bill payments and what you owe, paying the most important bills first.

Bills to Prioritize When You’re Low on Money

The most important bills are those that cover the necessities: shelter, food, water, and heat, for example.

The next most important are bills that cover things that make it possible for you to get where you need to go, such as your vehicle expenses.

Last on the list are bills that can ding your credit history, but not much else, if you fall behind on them.

Although you can make some adjustments to the order you pay bills based on your circumstances, it’s usually best to focus on paying your housing bills first, then paying what you can with the money you have remaining.

1. Mortgage or Rent

If you fall behind on mortgage payments, you risk having the lender foreclose on your home. If you fall behind on rent, your landlord can evict you.

Even though the foreclosure or eviction process can take months, it’s not something you want to risk happening. Keeping up with your housing payments is a must if you want to stay in your home.

When money is really tight and you’re not sure you can pull together enough to make a payment one month, the best thing to do is talk to your landlord or lender.

Many mortgage lenders have programs in place to help homeowners who are facing financial hardship. Your lender can review your options, such as forbearance or loan modification, with you.

During forbearance, you stop making payments on your loan, but interest continues to accrue. If a lender agrees to modify your loan, they adjust your interest rate or otherwise make changes to lower your monthly payment.

The United States Department of Housing and Urban Development (HUD) also has programs available to homeowners struggling with their mortgage payments. You can contact HUD to connect with an approved counseling agency. The counselor can work with you to create a plan to help you avoid foreclosure.

If you’re a renter, talk to your landlord as soon as you know you’ll have difficulty paying rent. Explain the situation to them in detail, including whether you think you’ll be late with payment, won’t be able to pay all your monthly rent, or won’t be able to pay at all.

Many landlords are willing to work with you to come up with a solution. You can help the situation by suggesting solutions.

For example, if you’re going to pay late, tell the landlord when you plan to make the payment. If you can’t pay the full amount this month, tell the landlord how you’ll make up the difference. For example, you can add an extra $100 or so to subsequent payments until you pay off the balance.

If you’re renting and your landlord can’t or won’t be flexible about payments, you might have more wiggle room than a homeowner.

Depending on how much time you have left on the lease, you can simply wait it out, then look for a less expensive place to live. Another option is to try to find someone to take over your lease so you can move somewhere that costs less.

2. Utilities

After your mortgage or rent payment, the next most important bills are your utility bills: gas, water and sewage, and electricity. Although some people count TV and the Internet as utilities, those services aren’t essential for everyone.

Fortunately, many programs exist to help people who need emergency financial assistance paying bills. The first place to look is your local utility provider. Many utility companies have programs to help people pay their bills.

Another option is the Low Income Home Energy Assistance Program (LIHEAP), a federally funded program that provides financial assistance to help people pay energy bills. LIHEAP has specific income requirements and is grant-funded, meaning only a set amount of money is available each year.

If you think you qualify for LIHEAP, the sooner you apply for it, the better your chances of receiving aid.

3. Insurance Premiums

Having insurance is always a good idea, as it provides financial protection against the worst things life can throw your way, such as illness, fire, or accidents. Paying your insurance premiums even when money is tight is a smart move. Without insurance, medical bills can easily add up.

If you’re struggling to afford your premiums, you do have some options, particularly when it comes to health insurance.

If you purchased a plan from the Healthcare.gov marketplace, you qualify for a special enrollment period if you’ve recently lost your job and associated coverage, if you’ve had a change in income, if you’ve gotten divorced, and for a few other reasons.

During the special enrollment period, you can apply for Medicaid or CHIP if your income is below the threshold or a credit on your insurance premiums based on your income. Doing so can lower the cost of your health insurance considerably.

4. Food & Household Necessities

Food, soap, and paper products are up there with shelter, heat, and hot water on the list of essentials.

Luckily, you have more wiggle room when it comes to adapting your food and household supply costs compared to your mortgage or rent payments and utility bills.

When money’s tight, there are many ways you can trim your food and supplies bill:

  • Limit Shopping Trips. Plan your meals for the week, make a list of the ingredients you need, and go to the store once. The more you go to the store, the more likely you are to buy things you don’t need.
  • Buy Store-Brand Items. Store-brand products usually taste the same as or similar to their brand-name counterparts, but they cost a lot less. If you typically purchase branded foods and supplies, try switching to the store brand. It’s likely the only place you’ll notice a difference is in your wallet.
  • Limit Packaged Products. Packaged foods, such as grated cheese, bagged salads, and prechopped vegetables are convenient, but that convenience comes at a cost. You can save a lot if you buy whole, unprocessed foods and prepare them at home.
  • Skip Bottled Water. If you live in the U.S., it’s highly likely your tap water is safe to drink. According to the CDC, the U.S.’s water supply is among the safest in the world. Bottled water is expensive and terrible for the environment and is often little more than repackaged municipal water.
  • Buy In-Season Produce. Pay attention to seasons when shopping for fresh produce. Fruits like strawberries and blueberries are usually in season and inexpensive during the summer but cost more in the winter. You can cut your grocery costs if you buy what’s in season.
  • Grow Your Own. Another way to cut your food bill is to grow your own fruits and vegetables. Herbs and green vegetables are usually the most cost-effective edible plants to grow, as you can get an entire plant for the price of a handful of herbs or greens at the grocery store. You don’t need a ton of outdoor space to start a garden. You can grow plants in containers on a small balcony or patio.
  • Use Your Freezer. Frozen vegetables and fruit often cost less than fresh, so it pays to purchase those when money is tight. You can also prep double batches of meals to freeze for later. That way, if you run out of money before the end of the month, you have a supply of ready-to-eat meals waiting for you.

Note too that depending on your income, you can qualify for financial assistance with groceries. The Supplemental Nutrition Assistance Program, aka food stamps, helps to cover the cost of groceries for people with income below certain thresholds.

Pro tip: Make sure you’re saving as much money as possible on your grocery trip. Apps like Fetch Rewards and Ibotta allow you to save money on purchases by simply scanning and uploading your receipts.

5. Car Loan & Other Expenses

Your car gets you to and from work and other important places, such as your kids’ school, the grocery store, and the doctor. If you have a monthly car payment, it’s crucial to find a way to pay it.

Just as you can call your mortgage company to work out a deal, you can call the lender behind your car loan to see if you can come to an agreement. Like mortgage companies, these lenders can also offer you loan modifications, refinancing, or forbearance.

Loan modification or refinance can lower the amount of your monthly payments, making it easier for you to afford the car. Forbearance means you don’t make payments for a set period.

Another option is to sell your current vehicle, use the proceeds to pay off the loan, then purchase a less expensive model. If you decide to sell, look for a replacement car that has a low cost of ownership to keep your expenses low. Some vehicles are more reliable than others, meaning you don’t have to worry about expensive repair or maintenance bills.

6. Unsecured Debts

Although you should make every effort to repay your debts, when money is tight, unsecured debt, such as credit card debt and personal loans, should move to the back burner. While these debts typically have the highest interest rates, they also have the lowest impact on your daily life.

You don’t go hungry if you miss a credit card payment, nor can your credit card company take your home or car if you pay late.

That said, it’s still best to pay what you can toward unsecured debts, such as the minimum due on a credit card. If even that is too much for you right now, contact the card company or lender. Sometimes, credit card companies are willing to work with you to create a debt repayment plan or let you temporarily pause payments.

7. Student Loans

While you should make every effort to pay your student loans when money’s tight, the loans often have the most flexibility when it comes to repayment, particularly federal loans.

If you have federal student loans and you’re struggling to keep up with payments, you have multiple options. You can request a deferment or forbearance from your loan servicer, or you can switch to an income-driven repayment plan, which adjusts the amount you pay each month based on your income.

The situation with private student loans is a bit different, as they don’t have the same protections as the federal student loan program.

If you’re having trouble affording private student loan payments, your best option is to contact the lender to see if it offers forbearance, repayment plans, or loan modification.


What to Cancel When Money Is Tight

While some monthly bills are essential, others are considerably less so. Budgeting often involves deciding what you need to spend money on and what you can live without.

When it’s a struggle to make ends meet, here’s what you can consider cutting:

Subscription Services

Netflix, print or digital newspapers, and meal kits are all things that can go. In many cases, you can find free alternatives to the subscriptions you were paying for. For example, some local libraries give you access to streaming movies and local or national newspapers for free.

Make sure you don’t miss any subscriptions that you might have forgotten about. Services like Truebill will find subscriptions and either cancel them or negotiate lower rates for you.

Cable and Internet Service

You may not want to disconnect your Internet completely, but see if you can switch to a slower, less expensive plan.

If you have data on your phone, some providers, like Xfinity Mobile, let you use your phone as a hotspot to get online. In this case, you wouldn’t need a separate home Internet plan.

Phone Service

While you do need your phone to stay connected, you most likely don’t need both a landline and a cellphone. You probably don’t need the most expensive cellphone plan, either.

Shop around with companies like Mint Mobile or Ting to see if you can get a better deal.

Gym Memberships and Wellness Services

Maintaining your well-being is important, especially when money is tight. But if you’re worried about having enough money to pay your most important bills, you shouldn’t have to worry about paying for a monthly gym membership or studio pass.

There are plenty of ways to work out for free from the comfort of your home. For example, you can find workouts available for free on YouTube.


Final Word

When money is tight, it’s vital you focus on paying for the things that can help you sustain your life and well-being, such as food and shelter, when times are tight.

While a missed payment can affect your credit history, in desperate situations, your health and safety are more important than your credit score.

Along with prioritizing your monthly bills, talk to your lenders and service providers. Many companies have programs in place to keep you from sinking deeper into debt and to help you avoid repossession of your home or vehicle. Keep the lines of communication open, and remember you’ll get through it.

Source: moneycrashers.com

Converting Hotels to Housing

The National Association of Realtors (NAR) has released new research on the conversion of hotels and motels into housing. While the study was spurred by a 37% drop in hotel occupancy rates driven by the pandemic, the findings have broader implications. Hotel conversions provide a means to simultaneously create renewed profitability and help address the national housing shortage.

Commercial members surveyed

A survey was sent to 75,000 commercial members of the NAR between February and March of 2021. 168 reported being engaged in the sale, leasing, development, property management or appraisal of converted hotels/motels between 2018 and 2020. Of the reported conversions:

  • 79% were for housing.
  • 12% were for homeless shelters, either temporary or permanent.
  • 6% were for healthcare or quarantine facilities.
  • 3% were for retail, industrial, ranch land or other development.

Success stories

The report ends with five case studies detailing acquisition, zoning, renovations and expected final property values. For those interested in engaging in hotel/motel conversions, they’ll find an excellent road map in this report.

Source: century21.com

Retail Arbitrage Guide – Definition & How to Make Money Buying & Selling

The concept of arbitrage has been around since humans invented the concept of money. It’s best known by the adage “buy low, sell high.” Arbitrage involves buying a good or service for a certain price and then reselling it at a higher price to take advantage of market pricing discrepancies.

You might be familiar with the concept of arbitrage when you picture day trading stock brokers or people who flip houses. Or, perhaps you’re familiar with geoarbitrage, which involves taking advantage of your currency by moving to a country where your dollar has more power.

While these forms of arbitrage might seem extreme, there’s also a more accessible option: retail arbitrage.

If you want to make money by buying and reselling everyday merchandise, learning how to start your own retail arbitrage business is the perfect business model to try.

What Is Retail Arbitrage?

Retail arbitrage involves buying products and reselling them for profit. This sounds simple on paper, but like any flipping business, your success comes down to selecting products that sell quickly and knowing your margins so you can turn a profit.

Typically, people make money with retail arbitrage by buying products that are heavily discounted through clearance sales. Buying products on sale helps widen the price discrepancy between your initial purchase and your resale price.

For example, you might buy a pair of men’s swimming trunks on sale at Walmart for $12.99 and then resell it on websites like eBay or Amazon for $19.99, netting a $7 return on investment before any selling and shipping fees.

This is a basic example of making money with retail arbitrage, but swimming trunks are just one example. Popular product categories for retail arbitrage sellers include:

  • Apparel and shoes
  • Books
  • Baby toys and supplies
  • Electronics
  • Jewelry and accessories
  • Personal care products
  • Sports equipment and apparel

The key is to find products on sale that have consistently high demand.

At the end of the day, it doesn’t matter whether you’re reselling running shoes or makeup — successful retail arbitrage means selling your inventory for a profit, and it’s the math that matters.


Advantages and Disadvantages of Starting a Retail Arbitrage Business

If you’re considering making money with retail arbitrage but aren’t sure if it’s the right business model to pursue, consider these pros and cons.

Advantages of Retail Arbitrage

Some benefits of retail arbitrage worth considering include:

1. Existing Market

When you sell on marketplaces like Amazon and eBay, you’re accessing millions of global buyers. This is a faster route-to-market than starting your own online storefront or retail business where you have to attract customers yourself.

2. Easier Product Selection

Business models like dropshipping often have high failure rates because finding a product that catches people’s attention is critical.

By contrast, retail arbitrage sellers generally sell a variety of everyday products, like apparel and household essentials.

This means it’s the arbitrage math that matters for your profit margin, not finding the next trending product that sells well through Facebook ads like with a dropshipping store.

3. Consistent Demand

Because you mostly sell staple products with retail arbitrage, there’s consistent demand for your inventory.

4. Niche Variety

With retail arbitrage, you don’t have to brand your business or pick one niche to focus on. You can sell anything if you believe the buy price is low enough for you to turn a profit when reselling.

5. Scalability

It generally takes time to learn how to source inventory for retail arbitrage and what products sell quickly. But once your business is operational, the main growth constraint is how fast you can source cheap inventory.

Online sales channels like Amazon have practically endless demand, and retail arbitrage businesses can generate millions in revenue.

Disadvantages of Retail Arbitrage

Retail arbitrage is largely a case of getting the math right and leveraging demand on existing online marketplaces. But this side hustle still requires work and patience to scale.

Plus, there aren’t any guarantees you can make money, and there are several other downsides to consider:

1. Starting Costs

When you start a retail arbitrage business, it’s important to test several products so you learn what sells well and how to properly price your listings. But this also means spending money on inventory before making any sales.

If you want to try retail arbitrage, anticipate spending a few hundred dollars on initial inventory to test the waters.

2. Operational Expenses

Upfront inventory costs aren’t your only expenses for running a retail arbitrage business.

Depending on your selling platform, you’re potentially paying seller membership fees, listing fees, and shipping costs. Additionally, resupplying your store with products is an ongoing cost.

3. Inventory Risks

Putting money into a retail arbitrage business isn’t a safe investment. This is because the money you tie up in inventory isn’t very liquid. You can’t simply turn boxes of clearance merchandise back into cash if you need your money back.

Slow-moving inventory or products that simply never sell are an inevitable downside of this business model.

4. Not Passive

If you want to earn passive income, retail arbitrage isn’t the right business model. Between sourcing inventory and managing your listings, there’s a lot of work that goes into a retail arbitrage side hustle.

You can eventually outsource these tasks if you generate enough revenue, but expect a lot of shopping hours and administrative work unless your business takes off.


How To Make Money With Retail Arbitrage

Like other online business ideas, it’s helpful to follow a game plan when starting a retail arbitrage business. There’s a steep learning curve and it takes time to grow your inventory and monthly revenue.

But if you stick to a process, it’s possible to turn your retail arbitrage business into a significant side hustle or even full-time business.

1. Research Products to Sell

Before you spend money on your first batch of inventory, spend time researching products that sell well online. This provides a foundation of product knowledge you can refer to when shopping in-store for deals.

One useful resource for product research is Amazon’s best sellers list. This page highlights top-selling products based on sales volume across dozens of Amazon categories.

As you scour each category, make note of details like:

  • Price Points. Many retail arbitrage sellers stick in the $10 to $40 range for products. This price range lets sellers buy in bulk. Staying above $10 also means you’re making meaningful profit per sale and not selling cheap dollar store products for $0.25 in profit per sale. There are exceptions, but prioritize products with reasonable entry prices and profit potential of a few dollars per sale.
  • Product Ratings. Always check Amazon ratings for products you’re considering. Negative reviews and a low rating can turn away potential customers or mean more product returns, all of which hurt revenue. Ideally, look for four- to five-star ratings.
  • Size and Weight. Selling bulky, heavy products means expensive shipping. Shipping costs are a major, downward pressure on your profit margin, so review shipping rates for the platform you sell on. As an example, Amazon has a comprehensive shipping fees table that you can use to factor shipping costs into your profit margin before buying a product.
  • Seasonality. Christmas lights might be a top seller during the holidays, but this is a poor retail arbitrage buy unless you capitalize early on seasonal demand. As a general rule of thumb, don’t invest too much money into seasonal inventory to avoid holding products for a long time.
  • Expiration Dates. If you’re selling products with expiration dates like groceries or personal care products, factor this risk into your purchasing decisions. Marketplaces usually have rules for selling products with expiration dates. For example, Amazon has specific shelf-life requirements for different product categories, and eBay requires delivering orders to buyers before product expiration dates.
  • Durability. If your product breaks during shipping, it’s a complete loss for your business. Online marketplaces generally side with buyers in the event of damage or disputes, meaning they get a complete refund.

2. Source Products From the Right Retailers

Once you have an idea of top-selling products and product buying tips, you’re ready to source inventory.

Low everyday prices and clearance sales are your best bet to find products ripe for arbitrage. Some popular retailers for sourcing inventory include:

  • Best Buy
  • Bed Bath & Beyond
  • Big Lots
  • CVS
  • Home Depot
  • Kmart
  • Kohl’s
  • Lowe’s
  • Office Depot
  • Old Navy
  • Rite Aid
  • Target
  • T.J. Maxx
  • Walgreens
  • Walmart

You can also try flipping products from thrift stores, provided product condition is good enough to sell as used online. Similarly, garage sales can also have gems like clothing, toys, and books that are excellent resale candidates.

Local stores and bargain hunting at garage sales are in-person shopping options. You can also try sourcing products from online retailers with low prices. Popular online stores that resellers often use include wholesalers like Alibaba and AliExpress.

Wholesalers are beneficial for retail arbitrage because you typically get a lower per-unit price the more you buy.

For example, on Alibaba, a protein shaker bottle costs between $1.70 and $1.99 per unit. But to get the lowest price, you need to order over 1,000 units, which is obviously a lot of money you shouldn’t spend out of the gate when you’re learning.

Buying products online to resell is still viable. But as a beginner, focus on finding clearance items at local retailers that have a higher retail price online.

When you find a product you think you can flip for a profit, double-check what it’s selling for online. One quick way to do this is to use the Amazon seller app for Android or iOS. This app lets you manage your Amazon seller account if you decide to sell on Amazon.

You can also research a product’s current prices, Amazon sales rank, customer reviews, and profit estimates if you sell the same product. The app also lets you scan product barcodes or type in the product name to find data.

Other scanning apps that help you find profitable items include:

For starting out, Amazon’s seller app is more than enough to check potential profit margins for products you’re considering. If you want to dig deeper, Keepa lets you track Amazon prices over time, so you can check if a product you’re considering historically trends upwards or downwards in price in the coming months before buying.

As a final tip, anything you can do to get sale prices even lower helps your retail arbitrage efforts. For example, one popular retail arbitrage trick is to shop at Kohl’s to take advantage of Kohl’s Rewards.

This free loyalty program pays you 5% cash back in Kohl’s Cash for shopping, so you can use cash-back earnings to get even cheaper inventory on future purchases. If you spend $1,000 on inventory over the course of several months, it’s a free $50 discount.

Other stores like Target and Walgreens also have loyalty programs that let you save money, ultimately boosting your retail arbitrage profit margin.

If you can’t use a loyalty program to save, shop with a cash-back credit card. Retail arbitrage is a high-expense business, especially as you scale, so even earning 1% to 2% cash back on everyday spending could be hundreds or thousands of dollars in savings.

3. Resell Products Online

After purchasing inventory, you’re ready to start generating sales.

Many retail arbitrage businesses rely on the Fulfilment by Amazon program, or Amazon FBA, to power sales. This is because as an FBA seller, you’re not responsible for shipping and logistics. Rather, you send inventory to Amazon warehouses so Amazon handles order fulfillment when you make sales.

This lets you focus on sourcing more inventory and managing your listings instead of dealing with endless shipments.

Amazon FBA has various seller fees, warehouse storage costs, shipping expenses, and potential long-term storage fees. But for starters, you pick one of two plans to sell under:

  • Individual Plan: Pay a $0.99 fee for every sale
  • Professional Plan: Pay $39.99 per month regardless of sales volume

Amazon retail arbitrage has a steep learning curve. This is because Amazon has specific packaging requirements, variable fees depending on product categories, and numerous seller rules you have to comply with.

But despite these complexities, Amazon FBA is still one of the best ways to start a retail arbitrage business because it takes logistics off of your plate. Amazon also has comprehensive documentation on its Seller University portal to help you start your own Amazon business.

You can also find affordable Amazon FBA courses on Udemy that provide a step-by-step guide for starting a FBA store. You can also use a product like Jungle Scout to help get started.

Other marketplaces are also viable sales channels. Different platforms you can resell products on include:

Just avoid spreading yourself too thin. If you start with a batch of 10 to 20 products to resell, list everything on one marketplace.

Take multiple, high-quality product photos and write comprehensive product descriptions. Additionally, research competitor prices and price your listings to be the same or similar to the market average.

If you receive questions from potential buyers, answer them in a timely manner and provide the best customer service possible.

Ultimately, you want your seller profile to gain a positive reputation. Websites like Amazon and eBay have seller ratings. Over time, a high rating becomes a competitive advantage for you over beginner retail arbitrage sellers.

4. Use Profits to Replenish Inventory

To keep your retail arbitrage business running, it’s important to reinvest a portion of your profit into new inventory.

It’s often tempting to use extra income to pay off bills or put towards a vacation. But keeping your online listings stocked and growing your inventory is important to drive sales.

This is especially true if a particular listing is selling well and ranking on websites like Amazon when people search for that product. In this case, keep that listing as well-stocked as possible since you’re getting a steady stream of sales.

Once you have a gauge on your monthly revenue, set a percentage of your profit aside specifically for buying more merchandise. After some practice, you can put more money into inventory if you’re confident it will sell quickly.

But for starters, grow your store slowly and avoid dipping into your savings account to continually fund your business.

5. Optimize Your Operation

If you get your retail arbitrage business off the ground and turn a profit, that’s already a significant achievement. But like any business, there’s always room for optimization that can save time and money.

The more time and money you save, the better. A retail arbitrage side hustle is like running a small business, and optimization is a never-ending process that you should always consider. With retail arbitrage, some operational areas you can improve include:

Shopping Speed

When you’re new to retail arbitrage, sourcing products is slow. But as you become better at identifying profitable products, shopping becomes faster.

You should also note which days certain stores in your area typically put products on clearance.

Additionally, get to know store managers and ask them for insight on upcoming sales. If a manager knows you’re going to buy out their clearance inventory, they might give you a heads-up or inside info on when you should swing by the store.

Seller Fees

Fees are often complex with retail arbitrage, especially if you sell through Amazon FBA. This is because there are seller membership fees, shipping and storage costs, and even fees for removing your inventory from Amazon warehouses.

As you get your first sales, pay attention to what fees eat up most of your profits. For example, switching to a professional Amazon seller plan for $39.99 per month is cheaper than an individual plan if you consistently sell more than 40 products per month.

Shipping

Like inventory sourcing, shipping has a learning curve, so you’re slow when you start selling. But shipping is also an area where you can save money.

For example, Amazon FBA offers a package preparation service that ensures products have compliant packaging and labels for shipment. But you pay a per-unit fee for the luxury depending on the product category. Apparel, for example, costs $0.50 to $0.80 per unit in preparation and labeling fees with this service.

As a beginner, rely on Amazon’s prepping services so you have fewer rules to worry about. As you gain experience, you can package and label inventory yourself for significant savings on large shipments.

eBay also has various shipping discounts you can take advantage of, like discounts on UPS, FedEx, and USPS shipping rates that help you cut costs.

Listing Performance

When you list a product on marketplaces like Amazon and eBay, you include images, a product title, and a description. Improving your listings helps get your products in front of more customers since your listings can appear when people search for specific products.

Including more high-quality photos and writing comprehensive product descriptions are two fast ways to optimize your listings. You can also spy on what successful sellers do for their product description writing and apply the same tactics.

6. Experiment With New Products

After several months of growing your retail arbitrage store, you should have a solid understanding of products that sell well. You might even find yourself gravitating toward a few niches you feel comfortable with, like apparel or beauty products.

Part of growing your sales means venturing into uncharted territory. You should still focus on resupplying your storefront with your top-selling products. But don’t be afraid to use some of your revenue to purchase new products you spot on clearance to test new opportunities.

Product diversification also helps mitigate risk. The last thing you want is to have most of your money tied up in inventory for a single product, only to find it stops selling quickly due to changes in consumer preferences or another seller stealing your business.


Considerations

Before jumping into retail arbitrage, there are several other business risks and requirements to consider.

1. Earning Guarantees

Many ways to make money online come with a reliable paycheck.

For example, working as an online English teacher or becoming a virtual assistant both pay an hourly wage. If you need to pay off bills or grow your savings, it’s comforting to know your side hustle efforts yield results.

By contrast, retail arbitrage doesn’t guarantee a paycheck.

Plus, earnings can be volatile even if you find success; you can be in the negative or barely break even some months and potentially make hundreds or thousands of dollars the next depending on sales.

The upside is that retail arbitrage can scale as a business whereas freelance income depends on how many hours you work. But if you absolutely need money today, stable online work or gig economy jobs are better choices.

2. No Brand Building

Because retail arbitrage involves reselling products, you don’t build your own brand in the process of building your business.

You can private label products to solve this issue, which involves selling products from manufacturers with your own packaging or slight product modifications to develop your own brand. But private labeling often requires negotiation with manufacturers, which takes time and effort.

If you don’t want to build a brand, this isn’t a downside. But if you like the idea of having an identifiable business that customers recognize and trust, retail arbitrage isn’t for you.

As an alternative, you can make your own products and sell on Etsy or create a storefront on platforms like Shopify.

This usually takes more time to find buyers because you’re offering something new under your own brand versus selling an already-familiar brand to consumers. But the trade-off is that you own everything, and seller fees are lower than Amazon FBA.

3. Competition

E-commerce is immensely competitive. According to Statista, 55% of goods sold on Amazon come from third-party sellers. Similarly, if you search for products on eBay, you often see hundreds of thousands or over a million listing results.

As a beginner in retail arbitrage, you’re competing with larger operations that can squeeze you on pricing because their scale creates better margins. This means it usually takes time to get your first sales and to grow your inventory using profit.

In short, don’t expect to start making thousands of dollars or even getting sales the moment you list your inventory.

4. Time Requirements

Running a retail arbitrage business is like having a part-time job.

Sourcing inventory and shipping can take hours out of your week. Plus, these tasks gradually take more time as your operation scales. When you add in listing optimization and dealing with customer service, the time commitment can become significant.

Successful retail arbitrage sellers use their revenue to outsource time-consuming tasks. But for smaller operations, this probably isn’t an option.

The bottom line is that you have to have enough time to try this side hustle. If you only have a few hours per week to spare, flexible business ideas like starting a blog or YouTube channel are more viable.


Final Word

With the growth of e-commerce, business ideas like retail arbitrage and dropshipping have grown rapidly in popularity. Thanks to technology and changes in shopping habits, new ways to make money online continue to become available.

However, retail arbitrage isn’t a get-rich-quick scheme or for the faint of heart. Immense competition and tight margins make it a tough business model. If you don’t have much free time, it’s also difficult to source products and manage your listings each week.

That said, with time and practice, you can make money with retail arbitrage, even while working a full-time job. The key is to slowly learn the ropes, use your profit to fund additional inventory, and continually optimize your business.

It might take weeks or months to get your first sale, but flipping is a viable business model with high earning potential if you’re willing to put in the work.

Source: moneycrashers.com

What is a balance transfer and how do they help?

What is a Balance Transfer Title Image

A balance transfer happens when you move your debt
from one or more sources to a single credit card with a lower interest rate. By
paying less interest, more of your payment goes toward the principal balance.

Balance transfers aren’t always the best way to get debt relief, however. You should carefully consider the benefits and downsides to balance transfers before initiating the process.  

How a balance transfer works

With a balance transfer, you transition the amount you owe from one card
to another. You can also move other types of debt to a credit card. For
example, some issuers may allow the transfer of auto and personal loans.

Here are the five steps to completing
a balance transfer.

1. Choose a
balance transfer card:
You can either open a new credit card for the transfer or
transition your debt to a card you already have. Look at interest rates,
balance transfer fees and other terms to make the best choice.

2. Decide on your transfer amount: Look at the credit limit you have and ensure the balance will be less than your limit. Ideally, the transfer is much lower than your credit limit and lowers your credit utilization ratio in the process.

You’ll also want to look at balance transfer fees,
which are usually around three percent of the amount you’re transferring. Some
cards also have limits on transfer balance amounts. Check your card details
carefully.

3. Review the
terms and conditions:
Make sure you’ve read all of the terms, fees and official
agreements before transferring the balance. While the fine print can be
lengthy, you need to know exactly what it is you’re agreeing to.

4. Initiate the transfer: There are a few different ways you can initiate a transfer—through your credit card’s online account, or calling the customer service line of your credit card company, for example—but how you do so will depend on the policies of your credit card company.

5. Pay off your debt: Make monthly payments toward your balance transfer. Create a plan to pay your debt off within the introductory period, so you don’t have to pay any interest on it.

Balance Transfer Process Image

How a balance transfer affects credit score

Balance transfers can either improve or lower your
credit score, depending on multiple factors. Here’s how:

Your credit utilization rate: If you’re able to pay off more of your debt due to the lower interest rate, your credit score will improve. By paying off debt, you’re using less of your available credit, which lowers your credit utilization ratio.

Making on-time
payments:
Paying your credit card bill on time boosts your credit
score, as payment history is the most significant factor in scoring models like
FICO®. Balance
transfers can help in this area if the transfer makes it easier to pay.

Number of hard
inquiries:

Your credit score takes a hit when you apply for several credit cards at once
because they each trigger a hard inquiry.

Hard inquiries aren’t bad in and of themselves and are a necessary part of applying for credit. That being said, if you have a large number of hard inquiries on your credit report within a short time frame—if you apply for many credit cards at once, for example—it signals to lenders that you may not be responsible with your credit.

Average age of credit: Your credit score is also based on the average age of your credit. It would be more beneficial to your credit to keep your old accounts open even after you’ve transferred the balance. This will increase the average age of your credit accounts. More open cards also help keep your credit utilization rate low.

Credit Factors Balance Transfer Affect Image

When to consider a balance transfer

A balance transfer can help you pay off debt faster
and pay less overall. Here are the main scenarios when a balance transfer can
help.

You have debt with a high-interest rate: If you have a credit card—or many cards—with high-interest rates, it may be good to transfer the balance to a card with a lower rate. By lowering interest, you’re able to pay more toward the principal balance and pay off debt faster.

It’s difficult
to juggle multiple payments:
You can combine debts by transferring them all to a single
card, which will allow you to only have to keep track of one payment every pay
period.

You can get a good promotional offer: Many credit cards offer low or no interest rates during the introductory period (usually six – 18 months). By transferring your debt, you can save money in the long run.

How to choose the best balance transfer card

Balance transfer credit cards compete with other
credit cards by offering good introductory APRs (annual percentage rates) to
attract new cardholders. Generally, the better your credit, the more options
you have for low introductory rates and no transfer fees.

Here are a few other things to consider when shopping
around.

Balance
transfer fee:
A fee for transferring a balance is common. It’s usually about three
percent of the balance amount (like we stated above). If you have a good credit
score, it’s possible that the balance transfer fee might be waived entirely.

Interest rate: Interest rates vary
significantly between cards. Some promotional incentives may offer introductory
zero percent APR. However, be sure to look at what the APR is after the
introductory period, in case you don’t pay off all your debt in that timeframe.

Length of
promotional period:
The introductory promotional period for balance transfers is
usually six – 18 months. A longer promotional period allows you more time to
pay off the debt before a higher interest rate is applied.

Annual fee: Some cards charge a fee each
year to keep the card active. Be on the watch for high annual fees.

Credit limit on
a new card:
A
higher credit limit can help you maintain a lower credit utilization rate. If
you’re transferring a balance, make sure your credit card limit far exceeds the
balance you’re transferring.

Basic requirements: It’s best to apply for a card that you have a good chance of being approved for. When you apply for a credit card and aren’t approved, the hard inquiry will remain on your credit report. As we said above, too many hard inquiries occurring in a short time period can lower your credit score.

Key Balance Transfer Card Features to Compare Image

Generally, if the amount you save with a lower interest rate is higher than the balance transfer fee, it may be worth transferring the balance. It’s also ideal if you can pay off the balance during the zero percent interest period, and avoid paying interest on any of your debt.

What to do after you’ve transferred your balance

After you’ve transferred your balance, there are a few
things you can do to improve your credit score and pay off your debt.

Make timely
payments:

On-time payments boost your credit score. Any late or insufficient payments can
potentially invalidate lower interest rates and harm your credit score.

Note important
dates:
Set
reminders for when the introductory period ends. Any debt you don’t pay off
during that period will be charged with greater interest rates. You’ll also
want to make sure you complete the transfer within the given timeframe.

Create a plan
to pay off debt within the zero percent timeframe:
Design a budget that works for you to
pay off your debt, ideally within the zero percent interest timeframe. This
might include scaling back on expenses or picking up extra shifts at work. In
the long run, it could save you quite a bit.

Don’t make purchases on your new card: When you make a payment, the funds go to your purchases first, then your transfer balance. Try to use a different method of payment to make purchases, so your credit card payments only go toward your older debt.

Keep your old cards open: By keeping other cards open, your total available credit limit is higher—meaning your utilization ratio is lower. Having older cards also increases the average age of your credit accounts.

Why you should check your credit report after a balance transfer

Mistakes sometimes happen when there is a lot of
activity on your credit report, such as data errors and information that should
no longer be on your report.

These inaccuracies can unfairly affect your credit score. For example, some of your credit reports might not reflect the balance transfer properly. Credit repair can help you review your report, identify errors, and work to correct—giving your credit score a boost. Contact the credit repair consultants at Lexington Law to learn how we can help you.

Source: lexingtonlaw.com

What Are Closed-End vs Open-End Mutual Funds – 5 Key Differences

Mutual funds gained popularity among the investing public in the 1980s and 1990s. They began as a way for large institutional investors to pool their money for a common purpose and spread the risk of losses inside a mutually-owned fund, hence the name mutual fund.

Today, mutual funds are a staple of most everyday Americans’ nest eggs and are considered a good way to diversify your retirement plan.

What you may not be aware of is that there are various types of mutual funds. The two main ones are open-end and closed-end. Understanding the differences between them can help you broaden and strengthen your investment portfolio asset allocation based on your investment risk tolerance.

What Are Open-End Mutual Funds?

Like all funds, open-end mutual funds — open-ended funds or OEFs — pool investments from a group of individual investors. The investment company, made up of a fund manager, professional traders, and analysts, will then invest the money pooled from the group of investors according to the prospectus for the fund.

Open-end funds are unique because they don’t have restrictions on the number of shares they can issue to new investors. Instead, when investors want in, these funds simply issue new shares and accept the investment directly.

There is a caveat.

These funds must buy shares back from investors who wish to exit their investment. As a result, the value of each share of these funds is based on the net asset value (NAV) of the fund, or the value of the fund’s assets, rather than on how much investors are willing to pay for it.


What Are Closed-End Mutual Funds?

Closed-end funds, also known as closed-ended funds or CEFs, and open-ended funds appear to be the same type of investment in many ways. They are built on the idea of diversification, pool investment dollars from a large group of individual investors, and are generally managed by a team of Wall Street pros.

But, when you dial into the details, you’ll find that OEFS and CEFS are actually quite different.

Closed-end funds trade on stock market exchanges, so buying and selling shares of these funds takes place in the same way that buying and selling shares of stock does.

Like any publicly traded company, closed-end funds have a fixed number of shares and can’t simply issue new shares because there’s demand. Moreover, closed-end funds don’t repurchase their own shares when an investor wants to exit his position.

From the date of its initial public offering (IPO), closed-end mutual funds trade just like stock for all intents and purposes.


Key Features

When deciding which type of fund is the best fit for your portfolio, there are several factors that need to be taken into account, with your financial goals being foremost.

It’s important to think about your time horizon, how your investing dollars will be used to achieve growth, and what factors play a role in the pricing of these assets.

1. Liquidity

Liquidity describes the amount of time it will take to turn an investment back into cash by selling it to another investor or back to the issuer.

If you’re looking to make short-term investments or think you may need access to your investing dollars from time to time, you’ll benefit from the ability to quickly turn your investments into cash.

If you have a long time horizon and use a buy-and-hold strategy, liquidity may be less of a concern for you.

Open-End Fund Liquidity

Open-end mutual funds are generally liquid assets because fund managers are required to hold a percentage of the fund’s assets in cash for any investors who want to redeem their investments.

As a result, if you want to exit an open-end investment, you’ll be able to do so at the end of each trading day by selling your shares back to the fund management company that issued them to begin with.

Closed-End Fund Liquidity

Closed-end funds aren’t always able to be redeemed at the end of the day. These are exchange-traded funds (ETFs) that are at the mercy of the levels of supply and demand among investors.

When a closed-end fund launches its IPO, it puts a prespecified number of shares up for sale, and it generally doesn’t issue new shares or redeem old shares. Instead, in order for one investor to sell a position in these funds, another investor needs to be willing to buy it.

If there are no buyers wanting into the fund when you’re ready to sell your shares, you won’t be able to sell. Instead, you’ll be forced to hold until a buyer comes along.

As a result, these funds have the potential to be less liquid than their open-end counterparts, especially if you invest in a smaller fund with low levels of trading volume.

2. Pricing

When investing, whether it be in stocks or investment-grade funds, share price is an important factor. After all, you don’t want to overpay and lose the opportunity to generate meaningful gains.

When it comes to closed-end and open-end mutual funds, it’s important to understand how prices are set for these investments and what that means for you if you have them in your portfolio.

Open-End Fund Pricing

The price per share of an open-end fund is based on its NAV at the end of each trading day. After the markets close, the fund’s NAV is divided by the total number of outstanding shares to get the share price of the fund.

For example, if a fund has a NAV of $100 million and there are currently 1 million shares issued, the price for each share will be $100 ($100 million divided by 1 million shares).

As a result of this pricing structure, open-end investments are known to experience lower levels of volatility, making them a safer investment when compared to closed-end opportunities.

Closed-End Fund Pricing

The pricing of closed-end investments works quite differently because they are exchange-traded assets. As with any other asset traded on stock market exchanges, the market price of these funds is determined by the law of supply and demand.

Supply is created by investors who want to sell shares of the fund, while demand is created by those who want to buy shares.

If the buying pressure outweighs the selling pressure, the law of supply and demand stipulates that the price of the asset must rise to curb demand. If supply outweighs demand, prices must fall to increase demand and create a balance.

Although the way closed-end investments are priced creates volatility and increased risk, it also creates opportunity.

There may be several reasons that supply outpaces demand. Sometimes it’s as simple as investors being unaware that the opportunity exists. In these cases, the price of shares of a closed-end fund can actually fall below its NAV — the value of the underlying assets it owns — meaning you’ll have the opportunity to buy in at a discount.

As a result, closed-end funds make it possible to boost capital appreciation by taking a value investing approach to mutual funds.

3. Capital Structure

The distribution of debt and equity within a publicly traded asset is known as its capital structure. One of the most important factors in this structure is how many shares are outstanding, which can either be a fixed or floating number, depending on the type of fund you invest in.

Open-End Fund Capital Structure

Open-end investments have no restrictions on the number of new shares that can be issued if a new investor or group of investors want to get involved. This means the number of outstanding shares will change on a daily basis as new investors purchase shares and prior investors redeem their shares.

This can create a challenge for fund managers that ultimately increases risk. If a fund becomes too large, the fund manager may decide the total assets have grown too unwieldy to make it possible to meet the fund’s objectives. This can result in the manager closing the fund to newcomers, leading to potentially lower prices and slower growth in the fund.

A fund growing too large can also increase the risk for investors if it means the team managing the investments may be stretched to their limits and more prone to mistakes.

Closed-End Fund Capital Structure

Closed-end investments trade on the open market with a specific number of shares available. Their capital structure is much easier to understand. Moreover, even as demand grows, the net asset value of the fund will remain manageable for the team at the helm.

On the other hand, the downside to this capital structure is that if demand for a fund is high, you’ll have to overpay in relation to the fund’s NAV in order to get involved in the investment.

4. Access

When deciding if you’ll invest in an open-end or closed-end investment, it’s also important to consider the accessibility of the investment. In some cases, funds can come with exorbitant minimum investments, resulting in less accessibility for everyday investors.

Buying and Selling Open-End Funds

The price of open-end shares is set by the fund manager at the end of the day, and you’ll often be required to meet minimum investment amounts to get involved.

Minimum investment amounts generally range from $500 to $5,000, with funds at the higher end of the spectrum being less accessible for new investors with relatively small investment portfolios.

Buying and Selling Closed-End Funds

Closed-end investments are priced based on supply and demand, with the minimum investment amount being no more than the cost of a single share of the fund.

The vast majority of these funds are priced from $10 per share to a couple of hundred dollars per share, making them far more accessible to newer investors with limited capital available.

5. Exposure

When you make an investment, you want 100% of your money to be put to work for you, exposed to the potential gains — or losses for that matter.

However, depending on which type of mutual fund you choose, the money you invest may not be 100% exposed to the assets you’re investing in.

Open-End Fund Investing Capital Exposure

To exit a position in an open-end fund, investors sell their shares back to the issuer. This means the company managing the fund has to hold a percentage of the fund’s assets in cash to the side so that it can afford to purchase shares back when an investor decides to exit their investment.

That cash set aside for redemptions can’t be put to work in the market.

Therefore, when investing in open-end mutual funds, a percentage of your investment will not be exposed to the underlying assets outlined in the fund’s prospectus, limiting your profitability.

Closed-End Fund Investing Capital Exposure

Closed-end investments provide 100% exposure to the underlying assets. That’s because these shares are bought and sold in the open market in transactions between investors, not between the issuer and investors.

Because there is no requirement for the issuer to buy shares back from the investing public, 100% of your investment dollars can be invested based on the objectives of the fund.


The Verdict: Should You Choose Open-End or Closed-End Funds?

Deciding whether you’ll invest in an open-end or closed-end fund is a decision that requires a bit of thought.

How comfortable are you with risk? Are you going to need access to your funds quickly? Do you find solace in being able to access those funds or would you rather enjoy a potential discount when you purchase shares?

You Should Invest in Open-End Assets If…

Consider open-end funds if you prefer investments that have high liquidity and, although growth may be slower, you’re more interested in assets that lack volatility. OEFs may be best for you if:

  • You Have a Shorter Time Horizon. If you aren’t planning on investing for the long haul or may need access to your investing dollars from time to time, open-end investments offer the perfect solution. They are generally redeemable at the end of each trading day, meaning you’ll have access to your money when you need it.
  • You Have Enough Capital to Get Started. Fund managers set minimum investment amounts for open-end funds ranging from $500 to $5,000. Investors in these funds need to have enough money to cover these minimum capital requirements.
  • You’re Risk-Averse. Volatility is exciting for some investors because it offers the opportunity for large gains over a short period of time. On the other hand, it also has a dark side because it increases the risk of sudden, significant losses. Investors with a relatively low appetite for risk will benefit from investing in open-end opportunities because they tend to experience far less volatility than their closed-end counterparts.

You Should Invest in Closed-End Assets If…

Consider closed-end funds if you enjoy doing the research to find undervalued opportunities and sitting on them until their values climb to more realistic levels. You might be a good fit for closed-end funds if you don’t mind moderate levels of risk in exchange for the potential to expand your gains.

Closed-end funds are best if:

  • You Enjoy Volatility. Although fast-paced fluctuations in the price of an asset will result in risk, it also gives you the opportunity to take advantage of discounts when funds are undervalued and cash in on big gains when investors push the values of the funds too high.
  • You Invest With a Long Time Horizon. Closed-end assets are riskier than open-end assets, which is fine for those with a long time horizon. The longer you plan on staying invested, the longer you have to make up for declines should something go wrong.
  • You Aren’t Worried About Liquidity. Closed-end assets are only able to be sold when another investor is interested in purchasing them. If there’s no buyer, you’ll be stuck in the investment until one comes along, making closed-end funds — especially lesser-known funds that are thinly traded — less liquid.
  • You Don’t Have a Large Portfolio. While open-end assets generally come with high minimum investment amounts, closed-end assets only require you to invest as much as a single share of the fund costs, which is often minimal. This makes closed-end funds well-suited for investors with relatively small portfolios.

Both Are Great If…

Some investors own a mix of the two types of mutual funds. These investors usually have relatively large investing portfolios and want access to the potentially market-beating returns of closed-end funds while hedging those bets with the safer open-end funds.

You might consider a mix of the two types if:

  • You Have a Mild Tolerance for Risk. If you want to get your hands on the increased profitability offered by the higher volatility closed-end funds, but aren’t willing to take this higher level of risk across your portfolio, a mix of both closed- and open-end funds will provide balance.
  • You Have a Relatively Large Investing Portfolio. In order to mix closed-end and open-end funds within your portfolio, you’ll have to have enough capital to do so. In general, you’ll need a portfolio with a minimum of $10,000 to properly diversify between the two.
  • You Want Some Liquidity. Say you believe you might need fast access to your money in some cases, but chances are you won’t need to access it all at once. In this case, open-end opportunities can make up the most liquid portion of your portfolio, while the rest of your portfolio can be invested in closed-end assets with a higher earnings potential.

Final Word

By now, you should have everything you need to decide whether an open-end mutual fund, closed-end mutual fund, or a mix of the two is best for your investing portfolio. Now, it’s time to act.

Keep in mind that mutual funds are each unique, offering different rates of return, expense ratios, and investment strategies. As a result, it’s important to do your due diligence by researching every investment opportunity prior to investing your hard-earned money.

Source: moneycrashers.com