What is the simplest way to budget?

A basic budget typically requires the following: knowing your take-home pay, evaluating your “musts” (spending on basics like housing, food, and debt), tracking your spending on “wants” (dining out, clothes, travel), and allocating for savings. In this popular proportional budget strategy, you divide your take-home pay into three buckets: 50% for the “needs” in your life (housing, utilities, food, debt); 30% for the “wants” (dining out, shopping for clothes and other items, entertainment); and 20% for savings (for, say, your emergency fund or retirement).

Budgeting & Goals Archives | Page 20 of 189

Q: What’s the best budget plan?

The best budget plan is one that works for you. In order to choose the best fit, consider your goals and needs.

Mar

2025

Types of Budgeting Strategies and Methods

By Janet Siroto | Budgeting & Goals, money | No Comments

Budgets come in all shapes and sizes, from the old-fashioned, “write down everything you spend” approach to using apps that automatically track and categorize your expenses. There is likely at least one method out there that can help you gain insight and manage your finances effectively. Once a budget is up and running, it can help you wrangle your spending and reach your savings goals, too.

Below, we break down seven popular budgeting strategies, including their benefits and potential drawbacks so you can choose the best fit for your needs and lifestyle.

Key Points

• Budgets can provide insight into your spending habits and help you better manage your money.

• Line-item budgets track detailed monthly expenses, aiding in precise financial control.

• The 50/30/20 budget rule splits income into needs, wants, and goals, promoting balanced financial management.

• The envelope system uses cash for categories, making it easier to manage and reduce spending, while the zero-sum budget assigns every dollar a purpose.

• Tech tools, including those provided by financial institutions, can also play a role in effective budget management.

Line-Item Budget

A line-item budget is what you may first imagine when you think of a “typical” type of budgeting. They’re commonly used by small businesses, but individuals can also benefit from keeping close tabs on cash flowing in and out of their checking accounts.

You can set up a basic line-item budget using pen and paper, or you might find it easier to use a spreadsheet on your computer. Either way, you’ll want to list income and expenses vertically in the first column, then make columns for each month of the year. It’s also a good idea to set spending targets for each category. As you log actual spending numbers into your budget, you can see how they line up to your targets.

Benefits and Drawbacks of Line-Item Budgeting

Pros:

• For new budgeters, this method is relatively easy to create and intuitive.

• Due to its detail, a line-time budget can be a good starting place for tracking expenses.

• This method is well-suited for someone who needs more control over their spending.

Cons:

• It can be time-consuming to set up and requires a high level of commitment to stick with.

• It may feel restrictive for those who prefer more flexible spending.

• It does not easily accommodate unexpected expenses.

Recommended: How to Make a Budget in Excel

Proportional Budgets

A proportional budget divides your after-tax income into several broad spending categories (or buckets) and allocates a set percentage for each. This budgeting strategy helps ensure you cover all of your needs, wants, and savings goals without having to account for every penny you spend.

How to Divide Your Income Proportionally

• 50/30/20 Rule (50% needs, 30% wants, 20% savings)

• 60/40 Rule (60% expenses, 40% savings/extras)

• Custom variations based on individual priorities and financial situations

Proportional budgeting offers a structured yet flexible financial plan. You might try one method of allocating funds for a month or two, then adjust the proportions to better fit your living expenses and goals. (Read on for more details on how to set up a 50/30/20 and 60/40 proportional budget.)

Paying Yourself First

The “pay yourself first” approach is a simple budgeting method that prioritizes savings before anything else. Rather than wait to see what’s left over after covering all of your expenses, you siphon off a predetermined amount for savings as soon as your paycheck hits your bank account. This keeps the money out of sight and (hopefully) out of mind, so you’re less likely to spend it on something else.

Prioritizing Savings With the Pay Yourself First Method

Some tips for using this method effectively:

• Put savings on auto pilot: Consider setting up an automated transfer from checking to savings for a set amount on the same day each month, perhaps the day after you get paid.

• Set up a split direct deposit. Another way to automate savings is to ask your employer to do a split direct deposit, where most of your paycheck goes into checking but a portion goes directly into your savings account.

• Watch your spending. You may need to adjust nonessential (discretionary) spending to ensure you can cover all of your fixed expenses, like rent, utilities, and debt payments, once saving has been deducted.

Envelope Budget

Also known as “cash stuffing,” the envelope budgeting method involves dividing your expenses into categories (such as rent, groceries, transportation) and assigns an envelope to each one. You then decide how much you can spend on each category and stuff your envelopes with the allotted amount.

You use your envelope money to spend throughout the month. Once an envelope is empty, no more spending is allowed in that category until the next month.

To update this approach for today’s digital world, many budgeting apps allow you to create digital “envelopes” and follow the same principals as the original envelope system.

How to Effectively Use the Envelope Budgeting System

Here’a how to get started with the envelope system:

• Consider the types of expenses you have and sort them into categories. You can be highly specific (such as “eating out”) or more broad (like “discretionary spending”).

• Decide how much you will spend on each category, or envelope, per month and portion out the money.

• Once an envelope is empty, you’ll want to stop spending in that category.

• If you have remaining funds in an envelope at the end of the month, you could roll over the funds into the same envelope for the next month, move them to a different envelope, or put them in a savings account.

This budgeting method can work well for those who need a tangible way to control their spending. However, it may not be practical unless you’re using a digital tool.

Zero-Sum Budgeting

The idea here is to spend every dollar that you have. That doesn’t mean going on a shopping spree, however. Instead, you assign a specific purpose to each dollar that you earn, whether it’s expenses, savings, debt repayment, or discretionary spending.

It’s called a zero-sum budget because the goal is to have income minus expenses equal zero, meaning there is no unaccounted-for money. This budgeting strategy not only ensures all of your needs are met, but that you also have room in your budget for future needs and fun.

Balancing Income and Expenses With Zero-Sum Budgeting

To create a zero-sum budget:

1. Go through the past three to six months of financial statements to determine your average monthly take-home income and typical expenses.

2. Assign dollars to each of your non-negotiable bills, such as rent, insurance, student loan payments, and groceries.

3. Assess how much money you have left for saving, paying more than minimum on debts, and discretionary spending, then assign where your remaining money is going to go.

Though this approach requires meticulous tracking, it can be ideal for those who want complete control over their finances and ensure they are using their money efficiently.

50/30/20 Budget

The 50/30/20 budget is type of proportional budget that divides your monthly income into three buckets:

• 50% for “needs:” This includes essential expenses like housing, food, transportation to work, as well as minimum payments due on debt.

• 30% for “wants:” This is anything that you buy for personal enjoyment, such as eating out, traveling, and shopping for clothes (beyond basic needs). You may also hear these called discretionary expenses.

• 20% for goals: This category includes saving for short-term goals like building an emergency fund, saving for long-term goals like retirement, as well as paying more than minimum on debts.

This budgeting method can be a great fit for someone who likes a simple framework or just beginning to budget. However, others may crave more structure, such as pre-assigned spending limits for individual categories.

60/40 Budget

Another type of proportional budget, the 60/40 budget divides your monthly income into only two buckets:

• 60% for expenses: This includes fixed costs like rent, utilities, and nonessential bills (like streaming services or a gym membership). The idea is that 60% of your budget goes to regular spending, rather than out-of-the-ordinary expenses like concert tickets or a vacation.

• 40% for everything else: This represents the rest of your income and it goes towards savings goals and spending that is outside your usual lifestyle.

Adjusting for Savings and Spending Needs

You can take the 40% bucket and allocate it however you wish. One allocation you might consider is:

• 20% for retirement/other long-term goals

• 10% for short-term savings goals, such as building an emergency fund, saving for a vacation, or making a major purchase.

• 10% for “fun” spending, like going out to dinner, seeing a show, or other occasional splurges.

The simplicity of the plan can be a positive for people who don’t like complicated, time-consuming budgets, but it may not provide enough guidance for those who really need to take control of their finances.

Sticking to a Budget

Whatever approach you pick, a budgeting method only works if you stick with it. Here’s a look at some ways to make it sustainable.

Overcoming Mental Barriers

Having financial discipline and sticking to a budget can be difficult. If you are struggling with discipline, you might try these tactics:

• Acknowledge the issue that is holding you back. Out loud. You can only fix a problem if it’s been identified.

• Create space for yourself to succeed. For example, you might put a 20-minute block on your calendar to look over your budget every week.

• Anchor the task of budgeting to another activity that you do regularly and enjoy (such as making coffee on Sunday morning). This way, you’ll start to associate the two tasks and think about them in tandem.

Setting Realistic Expectations

A common pitfall when setting a budget is to be too restrictive in your spending targets right out of the gate. While it’s great to be ambitious, it’s unlikely that you’ll make sweeping changes in your spending just because you set lofty targets. And in fact, missing big targets could be disheartening.

Instead, try to set yourself up for success by choosing realistic goals for the upcoming months. You can gradually decrease spending and increase saving as you get used to budgeting.

Considering Irregular Expenses

No matter what type of budget you choose, there will always be the issue of irregular expenses. Irregular expenses may be expected (like annual membership fees or holiday gifts) or unexpected (like car repairs). Some solutions:

• Turn irregular expenses into monthly expenses. To account for occasional or seasonal expenses, add up the total expected cost for the year, divide that number by 12, then factor it into your monthly budget.

• Set up an emergency fund for unexpected expenses. It’s a good idea to have three to six months’ worth of living expenses set aside in a separate savings account to cover any unexpected costs or financial bumps in the road.

Staying Out of the Weeds

To avoid getting overwhelmed by the details when budgeting, consider these tips:

• Steer clear of strategies that feel complicated or require hours of effort. You need a budget you will stick with, and that is likely one that suits your style and feels manageable.

• Test-drive a couple of budgets to see which works best.

• Recognize that a budget is never going to be perfect. And that’s okay! If you forget a category or overspend here and there, it may feel like a failure when it’s not.

Tips for Maintaining Motivation

These strategies can help ensure you stick with your budget long-term:

• Set clear, meaningful goals: Budgeting can feel easier when you have a purpose behind it. Instead of just tracking expenses, consider setting specific goals like saving for a vacation or buying a car.

• Make it fun: If budgeting feels like a chore, you’re less likely to stick with it. You might use an app that makes tracking finances fun or gamify the experience by setting challenges, such as a no-spend challenge or the 52-week savings challenge.

• Celebrate your successes: Even small wins, like saving an extra $50 a month, deserve recognition. Reward yourself in non-financial ways, such as a relaxing day off or a favorite activity.

Leveraging Technology

Budgeting apps and tools can simplify financial management and automate tracking, making it easier to stick with a budget.

Apps to Simplify Budgeting

Your bank may offer a free spending tracker as part of their mobile app. If not, consider downloading a separate budgeting app. Some popular options include:

• Goodbudget: A digital version of the envelope system, this app helps you divide up your salary into spending categories, then tracks your spending and helps you stick to the plan.

• YNAB (You Need A Budget): YNAB helps you create a budget then monitors your spending and charts your progress as you work towards your goals.

• PocketGuard: This tool connects to all of your financial accounts and syncs transactions in real-time, helping you stick to your budget.

The Takeaway

Budgeting is a system that can help you track and manage your money better, which in turn can optimize your spending and saving. There are many different budgeting methods. Popular ones include the 50/30/20 budget rule, the zero-sum system, and the envelope technique. Take some time experimenting to find the system that works best for you. A good budget and the right banking partner can help you along the path to financial wellness.

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FAQ

What’s the best budget plan?

The best budget plan is one that works for you. To find the best fit, consider your goals and personal preferences. Some people want to control their spending and like a really detailed budget, such as a line-item budget. Other people are more focused on making sure they allocate funds towards savings, in which case a 50/30/20 rule could be a good option.

What are the simplest ways to budget?

A simple way to start budgeting is to look at the past several months of financial statements, then determine the average amount of money you have coming and going out of your bank account each month. If you see that monthly outflows are close to (or, worse, exceed) monthly inflows, you’ll want to comb through your nonessential expenses and find places to cut back. Any funds you free up can be funnelled into saving and, if you have debt, paying it down.

What is the 50/30/20 rule budget?

The 50/30/20 rule is a simple budgeting framework that recommends putting 50% of your money toward needs (like housing, food, and utilities); 30% toward wants (including entertainment and dining out); and 20% towards goals (savings, investments, and debt repayment beyond the minimum).

This budgeting method can work well for beginners and those who are looking for a simple approach to personal finance. However, you may need to adjust percentages based on your needs and goals.

What tools can help with sticking to a budget?

All you really need to start budgeting is a pen and a notebook, where you keep track of income and expenses. But tech tools can simplify and streamline the process. Spreadsheets, like Microsoft Excel or Google Sheets, are easy to update and offer built-in formulas for automatic calculations. Budgeting apps, on the other hand, can link to outside accounts, track spending in real time, and categorize expenses automatically, which can save time.

How can budgeting methods be adapted for families?

You can adapt any budgeting method for a family by coming up with your total monthly household income and expenses. Plan for essential costs like housing, food, and childcare first, then set aside savings for emergencies and future expenses. You can involve children by teaching financial literacy through allowances and savings goals.

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Mar

2025

Are Student Loans Tax Deductible? What You Should Know About the Student Loan Interest Deduction

How the Student Loan Interest Deduction Works & Who Qualifies

By Austin Kilham | Budgeting & Goals, Fresh Out of School, Student Loans, student_loan | No Comments

If you paid interest on your qualified student loans in the previous tax year, you might be eligible for the student loan tax deduction, which allows borrowers to deduct up to $2,500 in interest paid.

Here are some important things to know about the student loan interest deduction and whether you qualify.

Table of Contents

How the Student Loan Tax Deduction Works
Who Qualifies for the Student Loan Tax Deduction
What Are the Income Requirements for Student Loan Tax Deduction?
Other Tax Deduction for Students
Look for Form 1098-E
Calculating Your Student Loan Interest Deduction
Common Mistakes to Avoid
Strategies to Reduce Student Loan Payments and Interest

Key Points

• Borrowers can deduct up to $2,500 in student loan interest annually.

• Eligibility requires being legally obligated to pay interest on a qualified student loan and not filing as married separately.

• Income limits for full deduction are based on a borrower’s modified adjusted gross income (MAGI), and MAGI limits are typically changed annually.

• Form 1098-E reports student loan interest a borrower paid over the year and is required for claiming the student loan interest deduction.

• Other education-related tax benefits include 529 Plans, the American Opportunity Tax Credit, and the Lifetime Learning Credit.

How the Student Loan Tax Deduction Works

With the student loan tax deduction, a borrower can deduct a certain amount of interest they paid on their student loans during the prior tax year.

The interest applies to qualified student loans that were used for tuition and fees; room and board; coursework-related fees like books, supplies, and equipment, and other necessary expenses such as transportation.

So how much student loan interest can you deduct? If you qualify for the full deduction, you can deduct student loan interest up to $2,500 or the total amount of interest you paid on your student loans, whichever is lower. (You don’t need to itemize in order to get the deduction.)

Who Qualifies for the Student Loan Interest Deduction?

To be eligible to deduct student loan interest, individuals must meet the following requirements:

• You paid interest on a qualified student loan (a loan for you, your spouse, or a dependent) during the tax year.

• Your modified adjusted gross income (MAGI) is less than a specified amount that is set annually.

• Your filing status is anything except married filing separately.

• Neither you nor your spouse can be claimed as a dependent on someone else’s return.

• You are legally required to pay the interest on a student loan.

The student loans in question can be federal or private student loans, as well as refinanced student loans.

What Are the Income Requirements for Student Loan Tax Deduction?

The income requirements for the student loan tax deduction depend on your MAGI and your tax-filing status. The eligible MAGI ranges are typically recalculated annually.

For tax year 2024 (filing in 2025), the student loan interest deduction is worth up to $2,500 for a single filer, head of household, or qualifying widow/widower with a MAGI of $80,000 or less.

For those who exceed a MAGI of $80,000, the deduction begins to phase out. Once their MAGI reaches $95,000 or more, they are no longer able to claim the deduction.

For married couples filing jointly, the phaseout begins with a MAGI of more than $165,000, and eligibility ends at $195,000.

If you have questions about your eligibility, consider consulting a tax professional to make sure you can take advantage of the deduction.

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Other Tax Deductions for Students

In addition to the student loan interest rate deduction, there are other tax breaks that may be available to you if you’re a student, or you’re saving for college or paying for certain education expenses for yourself, a spouse, or a dependent. Here are three other tax benefits to consider:

529 Plans

A 529 college savings plan is a tax-advantaged plan that allows you to save for qualified education expenses — like tuition, lab fees, and textbooks — for yourself or your children. In 2024, you could contribute up to $18,000 per year without triggering gift taxes (the amount you can contribute in 2025 is $19,000), and other family members can contribute to the fund, as well.

Savings can be invested and grow tax free inside the account. And while the federal government doesn’t offer any tax deductions, some states provide tax benefits like deductions from state income tax. Withdrawals must be used to cover qualified expenses; otherwise you will face income taxes and a 10% penalty.

American Opportunity Tax Credit

The American Opportunity Tax Credit (AOTC) helps offset $2,500 in qualified education expenses per student per year for the first four years of higher education. Unlike a tax deduction, tax credits reduce your tax bill on a dollar-for-dollar basis. And if the credit brings your taxes to zero, 40% of whatever remains of the credit amount can be refunded to you, up to $1,000.

To be eligible for the AOTC, you must be getting a degree or another form of recognized education credential. And at the beginning of the tax year, you must be enrolled in school at least half time for one academic period, and you cannot have finished your first four years of higher education at the beginning of the tax year.

Lifetime Learning Credit

The Lifetime Learning Credit (LLC) helps pick up where the AOTC leaves off. While the AOTC only lasts for four years, the LLC helps offset the expense of graduate school and other continuing educational opportunities. The credit can help pay for undergraduate and graduate programs, as well as professional degree courses that help you improve your job skills. The credit is worth $2,000 per tax return, and there is no limit to the number of years you can claim it. Unlike the AOTC, it is not a refundable tax credit.

To be eligible, you, a dependent or someone else must pay qualified education expenses for higher education or pay for the expenses of an eligible student and an eligible educational institution. The eligible student must be yourself, your spouse or a dependent that you have listed on your tax return.

Look for Form 1098-E

If you’re wondering how to get the student loan interest deduction, keep an eye out for Form 1098-E, which you will need to file with your tax return. It will be sent out by your loan servicer or lender if you paid at least $600 in interest on your student loans for the tax year in question.

On Form 1098-E, your loan provider reports information on the interest you paid on your student loans throughout the year. The form goes out to student loan borrowers when the tax year ends, typically by mid-February. You can also check for the form on your loan servicer’s website and download a copy.

Note that you won’t receive this student loan tax form if you paid less than $600 in interest on your loan during the tax year.

Calculating Your Student Loan Interest Deduction

To figure out how much of a student loan interest deduction you can claim, start with your MAGI. If your MAGI is in the range to qualify for the full deduction, you’ll be eligible for $2,500 or the amount you paid in interest on your student loans during the tax year, whichever amount is less. (As you are calculating your MAGI, if you’re wondering, do student loans count as income, no, they do not.)

However, if your MAGI falls into the range where student interest deduction is reduced (which is more than $80,000 for single filers and $165,000 for joint filers in 2024), you can generally follow the instructions on the student loan interest deduction worksheet in Schedule 1 of Form 1040 to figure out the amount of your deduction when filing your federal income taxes. Then you can enter the calculated interest amount on Schedule 1 of the 1040 under “Adjustments to Income.”

One thing to note: For loans made before September 1, 2024, loan origination fees and/or capitalized interest may not be included in the amount of interest Form 1098-E says you paid. In this case, Box 2 on the form will be checked. If that applies to you, to calculate the full value of the interest deduction, start with the amount of interest the form says you paid, and then add any interest you paid on qualified origination fees and capitalized interest. Just make sure these amounts don’t add up to more than the total you paid on your student loan principal.

You can consult IRS Publication 970 for more information about how to do this, or consult a tax professional.

Common Mistakes to Avoid

Taking the student loan interest deduction can be somewhat complicated because there are a number of requirements involved. These are some common mistakes to watch out for.

• Misreporting your income. Be sure to calculate your modified adjusted gross income (MAGI) correctly. It’s critical to use the right MAGI when determining if you are eligible for the student loan interest deduction and how much you can claim.

• Deducting too much. The deduction is capped at $2,500 a year, no matter how much you paid in interest.

• Deducting interest paid by someone else. If another person made some of your student loan payments for you — your parents, say — you cannot deduct the interest they paid. You can only deduct the interest you paid.

• Failing to take the deduction. If you are eligible for the student loan interest deduction, be sure to take it. It can sometimes be easy to overlook this deduction in the hustle to get your tax information together.

Strategies to Reduce Student Loan Payments and Interest

Tax credits and deductions are one way to help cover some of the cost of school. Finding ways to lower your student loan payments is another cost-saving measure. Here are a few potential ways to do that.

• Put money toward student loans by making additional payments to pay down your principal. Doing this may help reduce the amount of interest you owe over the life of the loan. Just make sure your loan does not have any prepayment penalties.

• Make interest-only payments while you’re still in school on loans for which interest accrues, such as unsubsidized federal loans.

• Find out if your loan provider offers discounts if you set up automatic payment. Federal Direct Loan holders may be eligible for a 0.25% discount when they sign up for automatic payments, for example.

• Consider refinancing student loans. When you refinance, you replace your current student loan with a new loan that ideally has a lower interest rate or more favorable terms.

While there are advantages of refinancing student loans, such as possibly lowering your monthly payments, there are disadvantages as well. One major caveat: If you refinance federal loans, they are no longer eligible for federal benefits or protections. Also, you may pay more interest over the life of the loan if you refinance with an extended term. Weigh the options to decide if refinancing is right for you.

The Takeaway

Qualified student loan borrowers can take a student loan interest deduction of up to $2,500 annually. This applies to federal and private student loans as well as refinanced student loans.

You should get a form 1098-E from your loan servicer if you paid at least $600 in interest on your qualified student loans. Before you file for the deduction, make sure you qualify for it, and then figure out whether you are eligible for a full or partial deduction, based on your MAGI.

Whether you qualify for the student loan interest deduction or not, there are a number of ways to lower your monthly student loan payments, including putting additional payments toward your loan principal, signing up for automatic payments, and refinancing your student loans.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.

FAQ

How much student loan interest can I deduct?

The amount of student loan interest you can deduct is the lesser of up to $2,500 annually or the amount of interest you paid on your student loans. However, to qualify for the full deduction in 2024, you must have a MAGI of $80,000 or less if you are a single filer, or $165,000 or less if you are filing jointly. You will be eligible for a partial deduction if your MAGI is less than $95,000 for single filers and less than $195,000 for joint filers. Keep in mind that the MAGI limits typically change yearly.

Do I need to itemize my deductions to claim the student loan interest deduction?

No, you do not need to itemize your deduction to claim the student loan interest deduction. The deduction is considered an adjustment to your income, according to the IRS, so there is no need to itemize. You can simply report the amount on Form 1040 when you file your taxes, and include a copy of your Form 1098-E, which shows the student loan interest you paid for the tax year.

Can parents deduct student loan interest if they pay for their child’s loans?

Parents who pay for their child’s student loans can deduct student loan interest only if they are legally obligated to repay the loan — meaning that the loan is in their name or they are a cosigner of the loan. However, if the loan is in the child’s name only, parents cannot take the deduction, even if they paid for their child’s loans. The rules can be confusing, so parents may want to consult a tax professional.

What happens if I refinance my student loans?

Refinanced student loans are eligible for the student loan tax deduction as long as the refinanced loan was used for qualified education expenses and your MAGI falls within the set limits.

Are private student loans eligible for the student loan interest deduction?

Yes, private student loans are eligible for the student loan tax deduction, as are federal loans and refinanced loans. As long as you paid interest on a qualified student loan, your MAGI is less than the specified limit for the year, your filing status is anything except married and filing separately, and you (or your spouse if applicable) can’t be claimed as a dependent on someone else’s return, you are eligible for the deduction as a private student loan borrower.

SoFi Student Loan Refinance
Terms and conditions apply. SoFi Refinance Student Loans are private loans. When you refinance federal loans with a SoFi loan, YOU FOREFEIT YOUR EILIGIBILITY FOR ALL FEDERAL LOAN BENEFITS, including all flexible federal repayment and forgiveness options that are or may become available to federal student loan borrowers including, but not limited to: Public Service Loan Forgiveness (PSLF), Income-Based Repayment, Income-Contingent Repayment, extended repayment plans, PAYE or SAVE. Lowest rates reserved for the most creditworthy borrowers. Learn more at SoFi.com/eligibility. SoFi Refinance Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).

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Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOSL0623007

Mar

2025

How to Calculate Interest in a Savings Account

By Janet Siroto | Budgeting & Goals, money | Comments Off

In a world where it can seem hard to make and stretch a dollar (hello, inflation!), isn’t it nice to know that there’s a way to earn money without any effort? That would be by collecting interest on a savings account. Your financial institution pays you for the privilege of using the cash you have on deposit, pumping up your wealth without the least bit of work on your part.

Knowing how to calculate interest can help you more effectively compare savings accounts. It also helps you understand exactly how much money you can earn on your money over time by keeping it in the account. What follows is a simple guide to how interest on savings accounts works.

Key Points

• Understanding interest helps individuals compare savings accounts and determine potential earnings, enhancing their financial decision-making process.

• Simple interest is calculated using the formula: Simple Interest = Principal x Rate x Time, allowing for straightforward calculations of earnings.

• Compound interest accelerates wealth growth by allowing interest to earn interest, thereby increasing the principal over time and enhancing overall returns.

• The annual percentage yield (APY) simplifies the comparison of different savings accounts by incorporating both the interest rate and the effects of compounding into a single rate of return.

• Various factors, including Federal Reserve rates and promotional offers, influence the interest rates banks provide, making it essential to shop around for the best savings account.

What Is Interest?

Interest is the amount of money that a bank pays a depositor for storing money at their institution. While the money you have on deposit remains accessible to you, the bank uses that money for other purposes, such as lending it out for a mortgage loan. One way banks can make money is via the differential between the interest they pay for money on deposit (say, 3%) and the interest they charge when someone else borrows it (say, 6% on a home loan).

Simple Interest Formula

Calculating interest on a savings account involves some not-too-complex math; in fact, it’s primarily multiplication you need to use. The formula for simple interest looks like this:

Simple Interest = P x R x T

Where:

• P stands for the principal, or the amount on deposit.

• R stands for the interest rate, expressed as an annual rate usually, in decimal form.

• T stands for time, or how long the money is held by the bank.

How Do You Calculate Interest in a Savings Account?

Now, consider how this formula could be used to calculate the interest earned on savings you deposit at a financial institution.

If you deposited $5,000 in a bank for one year at a 3.00% interest rate, the simple interest after one year would be, using the PxRxT formula:

5,000 x .03 x 1 = $150

So, by calculating savings interest, you see that you’ve earned $150. To put it another way, at the end of one year, your $5,000 would have grown to $5,150.

This, of course, represents simple interest. When putting your money in the bank today, you may well earn compound interest.

Simple vs Compound Interest

When you earn interest on the principal amount alone, such as in the example above, it’s called “simple interest.”

But the reason savings accounts can be such an effective tool for growing money is that not only is interest earned on the amount deposited, but the interest also earns interest. This is called compounding.

Depending on the account, interest may be calculated and added (or compounded) daily, monthly, or quarterly. Each time this happens, the interest earned to date becomes part of the principal, and the interest earned moving forward will be based on both the principal plus the interest earned to date. You might think of it as accelerating your money’s growth as time passes.

Example

Here’s what compound interest looks like in action, using the same $5,000 initial deposit, but a 3.00% interest that compounds on a monthly basis.

• After one month, the account would have $5,000 plus interest totalling one-twelfth of the 3.00% annual interest, or $12.50.

• The next month, the interest would be calculated on $5,012.50 ($5,012.50 plus $12.53). The month after that, the interest would be calculated on $5,025.03, and so on.

• At the end of one year, the account would have $5,152.08.

• After 10 years, monthly compounding will grow that initial $5,000 to $6,746.77, without adding a single penny more to the account.

With simple interest, you would only earn 3.00% on the original amount ($5,000) each year, or $150. With compounding, you earn interest on your principal plus any interest you’ve already earned.

Here’s a chart showing the difference simple vs. compound interest can make at a rate of 3.00% on $5,000 deposit:

Time	Simple Interest	Interest Compounded Monthly
Account opened	$5,000	$5,000
1 year	$5,150	$5,152.08
5 years	$5,750	$5,808.08
10 years	$6,500	$6,746.77
20 years	$8,000	$9,103.77

It may not seem like compounding could make a huge difference, but adding to the principal regularly can grow your money faster. In addition, seeking out a higher interest rate can of course boost your cash faster as well.

APY vs Monthly Interest Rate

Calculating compound interest can get complex; the equation involves more complicated math. But some banks simplify an account holder’s potential earnings into a single rate called the annual percentage yield, or APY. The APY factors in both the interest rate and the effect of compounding into an actual rate of return over the course of one year. To calculate how much interest will be earned on a savings account using the APY, simply multiply the principal by the APY.

This simplicity makes APY a more helpful rate to use when comparing interest rates for different accounts or banks, because it includes the effect of compounding. Banks will usually post this information because the APY is higher than the stated interest rate. A savings account interest calculator can be helpful when calculating how much interest you’ll earn over multiple years. It also allows you to see how adding to your savings account each month can impact your earnings.

Understanding Interest Rates

In comparing savings accounts at different banks (or even within the same bank), consumers may notice that interest rates can vary with the type of account. What’s more, interest rates posted by the Federal Reserve (aka “the Fed”) may vary considerably from the interest rates banks offer their customers.

Tasked with maintaining economic stability, the Fed uses signals such as employment data and inflation to determine its rates. During economic slowdowns, the Fed typically lowers rates to reduce the cost of borrowing and incentivize individuals and businesses to spend more, stimulating the economy. Conversely, when the economy appears to be growing too quickly, the Fed may raise rates, increasing the cost of borrowing in order to slow spending.

How does this play into the interest rate consumers might earn on their own savings? There are a number of factors that determine the interest rate a bank posts:

• The target federal funds rate, set by the Fed, is one such cue.

• Banks, however, set their own interest rates and these may vary depending on factors such as promotions the bank may have in place to attract new customers or incentivize greater account balances, as well as how much work an account takes to administer.

This last factor is why checking accounts, which are often used for a higher volume of everyday transactions, often pay less interest than savings accounts, where customers are more likely to let their money sit and accrue.

• Interest rates also change over time, so the posted rate when an account is opened may not remain the same.

• Banks may also have tiered interest rates, where account holders earn different rates of interest depending how much they have in their account, or balance caps, in which an interest rate can only be earned up to a certain amount.

Recommended: Basics of a High-Yield Savings Account

What Is a Good Savings Account Interest Rate?

What is a good savings account interest rate will vary with the times. During the 1980s, the interest rates on savings accounts were around 8.00%, while from 2018 to 2021, the average was barely one-tenth of one percent, which could hardly keep pace with inflation.

As you shop around for the right account at the right rate, you may find that online banks offer some of the most competitive APYs. Since they don’t have brick-and-mortar locations, they can pass their savings on to their customers. Savings account rates are averaging 0.41% APY as of December 16, 2024, according to the FDIC. A high-yield account at an online bank, however, may pay 3.00% APY or higher.

Questions to Ask When Considering a Savings Account

It’s hard to dispute the appeal of earning money on savings. But in addition to knowing how to calculate interest on a savings account, there are other considerations that could affect the flexibility and ease with which that account will help you achieve your goals. Some account holders may find they need multiple bank accounts to meet both their everyday and long-term financial needs and goals.

Here are some things to consider.

Will You Be Penalized for Everyday Transactions?

Savings accounts typically provide higher interest rates than checking accounts because they require less work for the bank to administer since they’re not meant to be used for everyday transactions.

But savings accounts may limit the number of transactions you can make in a month, and charge a fee if you exceed the limit. The Federal Reserve’s Regulation D, which imposed a six-transaction-per-month limit, was loosened during the COVID-19 pandemic. Even so, some banks have opted to continue to impose limits on savings account transactions to six or, sometimes, nine per month. Inquire at a potential new home for your funds before opening a savings account.

Is There a Minimum Balance?

Some banks incentivize or penalize customers to encourage them to keep more money in their accounts. For example, an account may be subject to fees unless the balance is maintained above a certain amount. Tiered savings accounts provide a higher rate of interest on bank balances above certain levels.

Can the Money Be Accessed Easily?

Some types of savings accounts provide higher interest rates but limit access to your money for a predetermined earnings period. For example, a certificate of deposit (CD) is a savings vehicle that holds an investor’s money for a certain period of time. At the end of that term, the account holder is paid the original principal plus the interest earned. There may be penalties imposed on early withdrawals from a CD.

Can the Account Help Achieve Money Goals?

Earning interest is a key way a savings account can help you achieve your financial goals. If you’re saving for multiple goals at the same time — say building your emergency fund and saving for an upcoming vacation — it can be helpful to be able to know at a glance how much progress you’re making towards each goal. At some banks, you might need to open separate accounts to track each savings goal, while others may provide tools to organize your savings goals within a single account.

The Takeaway

The easiest way to calculate how much interest you’ll earn on a savings account is to multiply the account’s APY by your balance. This tells you what you’ll earn on your money over one year if you don’t make any withdrawals or deposits during that time. An online APY calculator makes it easy to calculate how much interest you’ll earn in a savings account over multiple years, taking your bank’s compounding frequency into account.

When shopping for a savings account, it’s important to not only compare APYs but also read the find print to find out if there are any balance requirements to earn the advertised APY and/or any fees that could eat into your earnings.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 3.80% APY on SoFi Checking and Savings.

SOBNK-Q125-054

Mar

2025

man shopping bags with bread and umbrella

Navigating Needs vs Wants: Your Guide to Smart Budgeting

By Julia Califano | Budgeting & Goals | No Comments

Budgets typically require you to categorize your expenses by “needs” versus “wants.” While that sounds straightforward enough, it’s not always easy to do. There may be times when you want something so badly (say, a leather jacket or trendy sneakers), it feels like a need. Or, you might dismiss a real need, like taking a week off work, as a want by not fully grasping its importance to your mental health.

Distinguishing between wants and needs, however, is key to your financial well-being — it provides the framework for a budget, allows you to make the most of the money you have, and can help you reach your future goals.

Read on to learn the real difference between needs versus wants, and how to fit both into your budget.

Key Points

• Differentiating between needs and wants is essential for effective budgeting, as it helps manage essential living expenses while allowing for enjoyable purchases.

• Needs typically include essential items for survival and functionality, such as food, housing, transportation, and healthcare, while wants enhance quality of life.

• The distinction between needs and wants can be subjective, as individual circumstances may influence whether an expense is categorized as essential or indulgent.

• Implementing a budgeting method like the 50/30/20 rule helps allocate finances into needs, wants, and savings, promoting better financial management.

• Regularly reviewing and adjusting budgets ensures they remain relevant to changing financial situations and goals, fostering long-term financial health.

What Is a Need vs a Want?

Both wants and needs are factors that drive your spending behavior. Understanding the difference between wants and needs is key for setting up a budget that allows you to meet your basic needs, enjoy your life, and still work towards your future goals.

• Needs are usually defined for budgeting purposes as your essential living expenses, things necessary for your health, and expenses that are required for you to do your job.

• Wants, on the other hand, are generally defined as desires for things that go beyond the basic necessities. They can range from small indulgences like a fancy coffee or a new hardcover book to luxurious items like a premium car or designer clothes.

To stay on top of your budget and avoid overspending, it’s important to distinguish between needs and wants. However, you may find that these terms are more fluid than they appear at first. While working through your list of expenses, it may seem like items can fit into both categories, making the process somewhat confusing. It can help to dive deeper into what exactly constitutes a need versus a want.

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Identifying Your Needs

Strictly defined, money management guides will tell you that a need is something that is necessary to live and function. By this definition, a need includes food, clothing, shelter, and medical care.

In budgeting, however, the category gets broader. There are things that you could technically survive without, but which you need in order to operate as a functional, productive member of society — and to keep that job that’s getting you the paycheck you need to buy food and keep a roof over your head.

For example, if you work in a position that requires you to show up at a specific time and place, transportation is going to be a need, not a want. Since insurance offers financial protection, and in some cases is legally required, you can count insurance as a need.

Needs tend to be recurring expenses that, generally, eat up a large chunk of your paycheck.

Examples of Needs

Here are some common budget items that typically count as needs:

• Rent or mortgage payment

• Utilities (e.g., gas, electricity, water, wifi connection)

• Food

• Transportation

• Insurance

• Necessary clothing

• Health care

Recognizing Your Wants

Wants are basically everything that’s not a need. They are expenses that help you live more comfortably and enhance your quality of life.

Wants are the things you buy for fun or leisure. You could live without them, but you enjoy your life more when you have them. For instance, food is a need, but daily lunches out (vs. bringing a turkey on rye sandwich) are likely to be more of a want. Outerwear is definitely essential to protect you from the elements, but if you have two other coats in your closet, that jacket you’re eyeing is probably a want.

Wants are not inherently bad or a poor use of your money. Often, they can help you accomplish important goals like meeting people and socializing with friends, having fun, or staying healthy. Along with needs, they deserve an important place in your budget.

Examples of Wants

Here are some examples of expenses you might classify as wants in your budget:

• Entertainment

• Dining out

• Travel

• High-end clothing

• Luxury cars

• Fitness classes/gym memberships

• Streaming accounts

• The latest smartphone

• Fancy coffees

• Hobby-related expenses

Where the Line Between Needs vs Wants Gets Blurry

Sussing out your financial needs versus your wants might sound like a simple task. But this seemingly black-or-white issue can actually get surprisingly gray, depending on your situation.

One source of confusion is that wants and needs won’t be the same for everyone. For example, two people may both need a car for work. However, one might need a luxury car to drive around important clients, while the other just needs a car that will get them to and from work. In the second case, a basic car will suffice. Recognizing that you don’t need to go for the top-of-the-line car can help free up funds and give you automatic savings on your spending.

Another complicating factor is that some expenses contain both wants and needs. Your grocery bill, for example, is a need because you need to eat. However, some items on the list, like expensive cheeses, soda, and ice cream represent wants rather than needs. You could survive without them.

The Needs vs Wants Test

To determine if something you want to purchase is a want vs. a need, consider:

• Does this fulfill a basic need? (Basic needs typically include shelter, food, water, security, health care, and necessary clothing.)

• Is this essential to living a healthy life?

• Will not having this in your life cause you any sort of harm?

• Will this make you happier or healthier in the long term?

• Is it necessary for you to do your job?

Another good way to differentiate wants vs. needs is to let some time pass before you make a decision about a purchase. Generally, the desire to purchase a need will grow stronger over time, while the desire for a want will wane with passing time.

Another distinguishing characteristic between needs and wants is that needs rarely change over time, whereas wants are often trends that will fade. If you’re trying to rein in unnecessary spending, it pays to consider whether a purchase will make you happy, healthy, or otherwise fulfilled for a long time or if it’s just something you want because it’s currently popular.

While there’s something to be said for retail therapy, you don’t want to fall into the trap of buying things because they make you feel better in the moment (especially if it means running up credit card debt). These purchases tend to get forgotten relatively quickly, sometimes in a just a few days or weeks. If on the other hand, a purchase will likely serve its purpose for at least two years, you can feel better about spending the money.

Practical Strategies for Budgeting

To account for both needs and wants in your budget, you might consider the 50/30/20 budget method.

This approach divides your net income (whether received via direct deposit, mobile deposit, or another way) into three basic categories, spending 50% on needs, 30% on wants, and 20% on savings and paying off debt (beyond the minimum payment). Just keep in mind that those percentages may not be realistic for everyone. If you live in an area with steep housing costs, for example, you may need to spend more than 50% on needs and take some away from the wants and/or savings categories.

• To see how your spending currently measures up, go through your monthly expenses (including online bill pay), create a master list of things you spend your money on, and then create a list of needs and wants.

• The next step is to tally up what you’re spending in each category and see how the totals compare to your monthly take-home income. If you find your current spending is out of line with your chosen breakdown (such as 50/30/20), you’ll want to make some adjustments.

• Next, you’ll want to look for places to cut back. While you may think your needs’ costs are fixed, it may be possible to shop around for a better price on certain monthly essentials, like insurance or a phone plan. Or, maybe you don’t need to drive to work but could spend less by taking public transportation or carpooling with a coworker.

Typically, however, it’s easiest to find places to cut back in the wants category. For example, you might decide to get take-out less often and cook more nights a week, brown bag your lunch, get rid of streaming services you rarely watch, and/or jog outside instead of going to a gym.

• Any savings you uncover can then go towards your savings and debt repayment category. This can help you to get out from under high-interest debt faster (which will free up even more money for saving) and allow you to work towards goals like building an emergency fund, going on a vacation, buying a home, and funding your retirement.

You can use a 50/30/20 rule calculator to take a closer look at using this budgeting method.

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Reviewing and Adjusting Your Budget

Once you’ve rejiggered your spending and created a basic 50/30/20 (or similar) budget, it’s important to track your spending to make sure you’re sticking to your budget and spending an appropriate amount on needs versus wants.

• One easy way to do this is to put a budgeting app on your phone (many are free for the basic service). Budgeting apps typically connect with your financial accounts (including bank accounts and credit cards), track spending, and categorize expenses so you can see exactly where your money is going each month.

• Once you start tracking your spending, you may find that your original budget breakdown isn’t realistic and you’ll need to make some adjustments to your budget. For example, maybe it isn’t feasible to save 20% of your take-home pay right now. You might start with 5% or 10% and increase the percentage as your income grows.

• It’s also a good idea to check in on your budget every six to 12 months. Your needs, wants, and goals will change over time. The key to creating a sustainable budget is to treat it as a living document and periodically evaluate it and adjust it as necessary to ensure that it meets your current financial goals.

The Takeaway

Some things you need — a place to live, electricity in your home, gas in your car to get to work — and some things you just want, like tickets to a concert or a membership to a gym. The key to smart budgeting is making room for both needs and wants, as well as saving. There are several techniques, from budgeting apps to various popular methods, that can help provide guardrails for your spending. A balanced budget can help you live well right now while also getting you closer to your short- and long-term financial goals.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 3.80% APY on SoFi Checking and Savings.

FAQ

How do I determine if something is a true need?

To determine if something is a true need, ask yourself if it is essential to your survival, your wellbeing, and doing your job. If the answer is yes, it’s a true need. Sometimes, however, the line is blurry. For instance, you may need a smartphone in order to do your job, but that doesn’t necessarily mean you need the latest pricey model.

What percentage of my budget should go to wants?

If you follow the popular 50/30/20 budget rule, 30% of your take-home pay can go toward wants, such as dining out, travel, and other non-essential spending. In some cases, that amount may vary. If you, say, live in an area with a very high cost of living or you have significant debt (mortgage, student loans, and a car loan), you may reduce that allocation to, say, 20% or less.

How can I reduce spending on wants without feeling deprived?

There are various ways to reduce spending on wants without feeling deprived. A couple of ideas: Instead of paying for a pricey gym membership, you might try different free workouts on YouTube. When you go out to eat with a friend, share a main course or a few appetizers. Or skip the expensive cocktails and after-dinner coffee. You also might create a small bucket in your budget for fun spending: If you know you have $20 a week, it can be a treat to decide whether to go out to lunch or, say, get a manicure with that money.

Is a smartphone a need or a want?

A smartphone is one of those “gray area” items. It’s probably vital for you to have a smartphone and stay connected for work and wellness purposes, meaning it’s a need. However, upgrading to the latest expensive model not because your current phone is broken but because the new version has cool features could be an expense that qualifies as a want.

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Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning 3.80% APY, we encourage you to check your APY Details page the day after your Eligible Direct Deposit arrives. If your APY is not showing as 3.80%, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning 3.80% APY from the date you contact SoFi for the rest of the current 30-day Evaluation Period. You will also be eligible for 3.80% APY on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi members with Eligible Direct Deposit are eligible for other SoFi Plus benefits.

As an alternative to Direct Deposit, SoFi members with Qualifying Deposits can earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Eligible Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving an Eligible Direct Deposit or receipt of $5,000 in Qualifying Deposits to your account, you will begin earning 3.80% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Eligible Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Eligible Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Eligible Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Eligible Direct Deposit or Qualifying Deposits until SoFi Bank recognizes Eligible Direct Deposit activity or receives $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Eligible Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Eligible Direct Deposit.

Separately, SoFi members who enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days can also earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. For additional details, see the SoFi Plus Terms and Conditions at https://www.sofi.com/terms-of-use/#plus.

Members without either Eligible Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, or who do not enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days, will earn 1.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 1/24/25. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet.
*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

We do not charge any account, service or maintenance fees for SoFi Checking and Savings. We do charge a transaction fee to process each outgoing wire transfer. SoFi does not charge a fee for incoming wire transfers, however the sending bank may charge a fee. Our fee policy is subject to change at any time. See the SoFi Checking & Savings Fee Sheet for details at sofi.com/legal/banking-fees/.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

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SOBNK-Q125-075

Mar

2025

Are You a Shopaholic? Signs to Know

By Stacey Leasca | Budgeting & Goals, money | Comments Off

People shop for all kinds of reasons — to acquire the things they need or want, to browse stores for new and interesting finds, and (sometimes) for the little thrill that comes with snagging a great deal.

For some people, however, shopping crosses the line into unhealthy territory. If you tend to hit the stores every weekend, spend the majority of free time planning for and making purchases, and/or have have tallied up some major debt as a result of your frequent shopping, you may actually be addicted to shopping.

Read on to learn more about what it means to be a shopaholic, signs that you may be addicted to shopping, and ways to curb the habit.

Key Points

• A preoccupation with shopping and buying to relieve stress are hallmarks of shopping addiction.

• Spending beyond one’s budget and accumulating unopened goods are common.

• Individuals often hide purchases and feel guilt and regret after shopping.

• Shopping addiction can lead to financial strain and emotional distress.

• Managing compulsive shopping involves tracking triggers, finding alternatives, and seeking professional help.

Definition of a Shopaholic

Known as oniomania or compulsive shopping, shopping addiction is a behavioral disorder that involves frequent, excessive buying as a way to feel good and temporarily relieve feelings of stress, anxiety, or boredom. Like other types of addictions, a shopping addiction can substantially harm a person’s life, including their relationships and financial well-being.

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4 Shopaholic Symptoms

People who are addicted to shopping often get a sense of emotional relief right after buying something. Shopaholics also tend to spend more time and money on shopping than they can afford, and many get into financial problems — such as large amounts of credit card debt — as a result of their overspending.

Below are four signs that you may be addicted to shopping.

1. Experiencing a Rush of Excitement When You Buy

Shopaholics generally shop not because they really need something but rather for the sense of euphoria they experience when they’re shopping.

Similar to a drug addiction, compulsive shoppers will often experience a “high” or an adrenaline rush from the act of purchasing something. The brain then associates shopping with this pleasure and the person wants to try and recreate that feeling over and over again. This pattern can be used by a shopaholic to fill an emotional need or override a negative emotion.

2. Experiencing Post-Shopping Regret

Unfortunately, the high shopaholics experience is typically short-lived and later gets replaced by negative feelings, including shame, remorse, and guilt.

Shopaholics will often feel guilty after spending money, whether they splurged on something expensive or snagged something on clearance. Despite any remorse that follows, though, they tend to be good at rationalizing any purchase if they’re challenged.

Buyer’s remorse can force a shopaholic back into a negative cycle, since they know shopping is a surefire way to chase away negative feelings, at least temporarily.

3. Accumulating Unopened Goods

Though shopaholics enjoy shopping, they often don’t care all that much about their purchases when they get home or when their online orders arrive in the mail. In fact, the items they purchase often end up unopened and shoved in the closet or under the bed.

Those living with a shopping addiction can actually develop hoarding tendencies as they accumulate more goods than they need and yet continue buying.

Recommended: 9 Questions to Ask Before You Buy Something

4. Concealing Shopping Habits

Shopaholics will often try to conceal their shopping habits from their spouses, family members, coworkers, and friends. This is often due to feelings of shame and/or the fact that they are shopping and spending money at the expense of their job or loved ones.

Normal Shopping vs Compulsive Shopping

If you enjoy shopping and make the occasional splurge, does that mean you are a shopaholic? Not necessarily. There are several distinct differences between normal shopping and compulsive shopping. Here’s a side-by-side comparison of normal shopping versus compulsive shopping.

Normal Shopping	Compulsive Shopping
No addictive or compulsive component	Resembles addictive behavior
Purchases are generally needed and used	Purchases are often not needed and go unused
Isn’t followed by negative emotions	Often followed by guilt, remorse, and shame
Does not lead to financial problems	Continues despite negative financial consequences
No secrecy involved	Secrecy is often involved
Occasional shopping sprees	Frequent overbuying

Treating Compulsive Shopping

If you feel like shopping has become your main way of coping with stress, there’s a lot you can do to address the issue and regain control of your spending. Here are some strategies to try.

Understanding Your Triggers

Consider keeping a journal of how you feel when the shopping urge hits: Are you bored? Angry? Anxious? Do you feel the desire to buy new things after you hang out with a certain person, spend time on social media, scroll your email, or watch certain shows?

Tracking your triggers can provide insight into what drives you to want to shop and how you can better manage (or avoid) those triggers in the future. For example, you might seek out other friends, unsubscribe from marketing emails, and unfollow shopping-focused social media accounts.

Developing Other Coping Strategies

Overcoming any addiction typically requires learning alternative ways of handling the stress of everyday life. You might come up with a list of non-shopping activities you find relaxing and enjoyable, such as calling a friend, watching a movie, reading, going for a walk, listening to music, doing yoga, or engaging in a hobby. You can consult your list when you get the overwhelming urge to shop. This can help you break the cycle of using shopping as a way of trying to feel better about yourself.

Delaying Gratification

Another way to deal with impulsive or compulsive shopping is to establish a waiting time before you spend money on anything nonessential. “Combat the urge to impulse spend by instituting a holding period on all purchases,” suggests Brian Walsh, CFP® and Head of Advice & Planning at SoFi. “Before hitting the buy button, wait 24 to 48 hours. After the holding period, come back to the shopping cart and reevaluate. In some cases, you might not even remember why you wanted it in the first place.”

Seeking Expert Help

If you think you may be addicted to shopping and can’t seem to get a handle on it on your own, it can be worth seeking professional help.
A mental health professional can help you understand the emotional roots and psychological factors contributing to your compulsive shopping. Addiction therapy, including cognitive behavioral therapy (CBT), can help you understand your triggers and come up with coping strategies that don’t involve shopping.

You might also benefit from financial counseling, particularly if your shopping behavior has left you in debt. A financial advisor can help you set up a spending budget that allows you to pay off expensive debt, while also building — or rebuilding — your savings.

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Financial Consequences of Compulsive Shopping

Many compulsive shoppers continue making purchases even when they struggle to pay bills, max out credit cards, or face financial hardship. This behavior can create a cycle of stress and anxiety, reinforcing their shopping addiction.

Key financial consequences of compulsive shopping include:

• Excessive debt: Constant impulsive purchases can quickly accumulate, causing you to spend beyond what you can pay off at the end of the month and mounting overwhelming credit card debt.

• Poor financial decisions: Compulsive shoppers may neglect essential financial planning, fall for scams, or buy unnecessary items instead of prioritizing needs.

• Damaged credit score: High credit utilization and any missed payments can have a negative impact on your credit profile, making it difficult to secure loans, mortgages, or even rent an apartment.

• Depleted savings: Continuous spending on nonessential items can drain your savings account, leaving little to no financial cushion for emergencies.

• Bankruptcy risk: In extreme cases, uncontrolled debt from compulsive shopping may lead to bankruptcy, further complicating financial recovery.

How to Support a Loved One Struggling with Shopping Addiction

Supporting a loved one with a shopping addiction requires patience, empathy, and constructive action. You might start by having an open, non-judgmental conversation about their behavior, expressing concern without blame. You could also offer some helpful suggestions, such as tracking their spending habits, avoiding triggers, and (possibly) seeking professional help like therapy or support groups.

At the same time it’s important to set healthy boundaries and to avoid enabling their behavior by lending money or covering debts. Instead, you might offer alternatives like budgeting together or engaging in non-shopping-related activities. If they’re open to it, you could help them set financial goals and spending limits or offer to be their accountability partner.

Letting Your Savings Grow With SoFi

If your goal is to start saving more and spending less, you’ll want to choose a bank account that helps your money grow faster than it could in a traditional savings account and charges minimal or no fees.

When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 3.80% APY on SoFi Checking and Savings.

FAQ

What are the signs of being a shopaholic?

Signs of a shopping addiction include frequent impulsive purchases, spending beyond one’s budget, hiding purchases from family or friends, feeling guilt or regret after shopping, and using shopping as a way to cope with stress or emotions. Shopaholics may also experience financial strain, accumulate debt, and have difficulty controlling their shopping urges.

What is the root cause of shopping addiction?

Negative feelings, such as stress, anxiety, and loneliness, are often the underlying causes of shopping addiction. Shopping can provide a distraction from these unpleasant emotions and help you feel more in control. It can also elicit a kind of psychological “high,” which is why compulsive shoppers often seek this behavior out again and again.

How do you cure a shopping addiction?

People who are addicted to shopping often respond well to various treatments, including antidepressant medications, talk therapy, cognitive-behavioral therapy (CBT), self-help books, support groups, and financial counseling.

Are there support groups for compulsive shoppers?

Yes, support groups like Shopaholics Anonymous and Debtors Anonymous provide help for compulsive shoppers. These groups are available in-person and online and offer a safe space to share experiences, gain support, and learn coping strategies from others facing similar challenges. These groups can also help you determine when you might need additional help from a mental health professional.

How can I prevent relapse after overcoming shopping addiction?

Preventing relapse involves maintaining strong financial habits, avoiding triggers, and developing alternative coping mechanisms for stress or emotions. Some strategies that can help you stay on track include regularly reviewing your budget, using shopping lists, implementing a waiting period before making purchases to help control impulses, and engaging in non-shopping activities (like hobbies or volunteering). You might also seek out ongoing support from therapy, accountability partners, or support groups.

SOBNK-Q125-082

Types of Budgeting Strategies and Methods

Line-Item Budget

Benefits and Drawbacks of Line-Item Budgeting

Proportional Budgets

How to Divide Your Income Proportionally

Paying Yourself First

Prioritizing Savings With the Pay Yourself First Method

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Envelope Budget

How to Effectively Use the Envelope Budgeting System

Zero-Sum Budgeting

Balancing Income and Expenses With Zero-Sum Budgeting

50/30/20 Budget

60/40 Budget

Adjusting for Savings and Spending Needs

Sticking to a Budget

Overcoming Mental Barriers

Setting Realistic Expectations

Considering Irregular Expenses

Staying Out of the Weeds

Tips for Maintaining Motivation

Leveraging Technology

Apps to Simplify Budgeting

The Takeaway

FAQ

What’s the best budget plan?

What are the simplest ways to budget?

What is the 50/30/20 rule budget?

What tools can help with sticking to a budget?

How can budgeting methods be adapted for families?

How the Student Loan Interest Deduction Works & Who Qualifies

How the Student Loan Tax Deduction Works

Who Qualifies for the Student Loan Interest Deduction?

What Are the Income Requirements for Student Loan Tax Deduction?

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Other Tax Deductions for Students

529 Plans

American Opportunity Tax Credit

Lifetime Learning Credit

Look for Form 1098-E

Calculating Your Student Loan Interest Deduction

Common Mistakes to Avoid

Strategies to Reduce Student Loan Payments and Interest

The Takeaway

FAQ

How much student loan interest can I deduct?

Do I need to itemize my deductions to claim the student loan interest deduction?

Can parents deduct student loan interest if they pay for their child’s loans?

What happens if I refinance my student loans?

Are private student loans eligible for the student loan interest deduction?

How to Calculate Interest in a Savings Account

What Is Interest?

Simple Interest Formula

How Do You Calculate Interest in a Savings Account?

Simple vs Compound Interest

APY vs Monthly Interest Rate

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Understanding Interest Rates

What Is a Good Savings Account Interest Rate?

Questions to Ask When Considering a Savings Account

Will You Be Penalized for Everyday Transactions?

Is There a Minimum Balance?

Can the Money Be Accessed Easily?

Can the Account Help Achieve Money Goals?

The Takeaway

Navigating Needs vs Wants: Your Guide to Smart Budgeting

What Is a Need vs a Want?

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Identifying Your Needs

Examples of Needs

Recognizing Your Wants

Examples of Wants

Where the Line Between Needs vs Wants Gets Blurry

The Needs vs Wants Test

Practical Strategies for Budgeting

Reviewing and Adjusting Your Budget

The Takeaway

FAQ

How do I determine if something is a true need?

What percentage of my budget should go to wants?

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No origination fees, late fees, & insufficient fund
fees when you take out a student loan with SoFi.

Student Loan
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