What are examples of savings goals to work toward?

An emergency fund, paying off high-interest debt, and saving for retirement.

Budgeting & Goals Archives | Page 24 of 186

Oct

2024

Guide To How Much You Should Save From Each Paycheck

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

Sure, you know you should be saving money, but, if you’re like many people, you’re not sure exactly how much to be stashing away. Some people put $100 per paycheck away and feel pretty proud of that; others will be able to set aside 10 times that amount. Still others will use a percentage, typically saving 10% to 30% of their salary.

In this guide, you’ll learn more about how much of your paycheck you should save. Many experts recommend 20% of your paycheck toward your total savings, which includes retirement, short-term savings, and any other savings goals. But exactly how much you should save each month, however, will depend on a number of factors, including your goals, current income, and living expenses.

Key Points

• Financial experts recommend saving between 10% and 30% of your salary, with 20% being a common figure.

• The 50/30/20 rule suggests allocating 20% of your take-home income to savings, including retirement, short-term savings, and other goals, such as debt repayment beyond the minimum due.

• The amount to save from each paycheck depends on factors like goals, current income, and living expenses.

• Saving for an emergency fund, retirement, and other goals are important savings objectives.

• Cutting spending, automating savings, and choosing the right savings account can help increase savings.

How Much of Your Paycheck Should You Save?

When it comes to what percentage of income to save for future expenses, financial advice can vary depending on where you look. Some experts suggest saving as little as 10% of each paycheck, while others might suggest 30% or more.

For some people who are living paycheck to paycheck, the answer to “How much of my income should I save?” may be lower still. It may be wiser to simply come up with a set amount (say, $25 to $50) to deposit into savings in your bank account.

Rules of Thumb

According to the 50/30/20 rule of budgeting, 50% of your take-home income should go to essentials, 30% to nonessentials, and 20% to saving for future goals (including debt repayment beyond the minimum).

The right amount for you to save from each paycheck will depend on your income, your fixed expenses, as well as your short- and long-term financial goals.

If, for instance, you are a recent grad living at home for a while and your living expenses are very low, you may be able to save a much higher percentage for the time being.

Or, if you have a sizable credit card balance, you might pump money towards paying that off. In this situation, you might minimize or even pause the amount saved while getting that debt eliminated.

Calculating Percentages From Your Paycheck

To figure out how much to save from each paycheck, you’ll need to consider a few factors. The right amount will depend on your income, your fixed expenses, as well as your short- and long-term financial goals.

• For example, if the cost of living is high in your state or local area, you may need to spend more than half of your take-home pay on living expenses, making it hard to put 20% of each paycheck into savings.

• On the other hand, if your goal is to buy a home in two years, you may need to put more than 20% percent of your paycheck into savings in order to have your down payment in that timeline.

• If you want to retire early, you may need to put more of your income towards retirement every month than the average worker.

Recommended: Check out the 50/30/20 budget calculator to see a breakdown of your money.

4 Important Savings Goals to Work Toward

While it’s widely recognized that saving can be a good idea, it can be helpful to really think about what it is you are saving for. Having a few specific goals in mind can help you determine how much you should save from each paycheck as well as motivate you.

Here are some common savings goals that can help you build financial wellness.

1. Emergency Fund

Yes, it can be hard to save money, but one of the most important priorities is to sock away money (even if just a little) regularly into an emergency fund. In SoFi’s April 2024 Banking Survey of 500 U.S. adults, 77% of respondents with a savings account said they use the account to save for emergencies.

An emergency fund is a bundle of easily accessible cash that could help you handle a financial curveball, such as a job loss, medical emergency, or big ticket car or home repair.

Having this back-up fund in place can help ensure that you never have to rely on credit cards to make ends meet.

Ideally, an emergency fund will contain enough money to cover your living expenses for three to six months, but how much you’ll want to put aside will depend on your situation.

• If you are married with an employed spouse and with no children, for example, you may only need to cover three months’ worth of expenses.

• If you have kids or you’re single, you may want to have an emergency fund that could cover at least six months’ worth of expenses.

It can help to keep the money in an account that earns more interest than a standard savings account, but allows you to easily access your money. Some good options include a high-yield savings account or money market account.

💡 Need help determining your emergency fund amount? Check out this emergency fund calculator for help.

2. Paying Off High-Interest Debt

Another important thing you could consider doing with your savings is paying off any high-interest debt (or “bad” debt) you may have. Typically, this is credit card debt, which currently has an average rate of well over 20%.

• One debt payoff strategy you may want to consider is the debt snowball method. With this approach, you start by paying off the debt with the smallest balance and put all your extra payments towards that until it’s paid off (while continuing to pay the minimum on your other debts).

You then put extra payments toward the debt with the next highest balance, and so on. This can give you a sense of accomplishment which can help motivate you to continue your aggressive repayment.

• Another approach is the debt avalanche method. This Involves putting all your extra payments towards the debt with the highest interest rate, while paying the minimum on the others.

When that debt is paid off, you then focus on the debt with the next-highest interest rate. Since you are concentrating on the debt with the highest interest rate, this strategy can end up being the most cost-effective.

3. Saving for Retirement

Another reason why saving money is important: It can secure your future by providing for your retirement. Exactly how much of your paycheck should go to retirement savings will depend on your age and when you want to retire. Some pointers:

• If your company offers a 401(k) with matching contributions, it can make sense to put aside at least as much of your paycheck as your company will match (since this is essentially free money).

• If you don’t have access to a 401(k) or want to contribute beyond that fund, you may want to open a Roth or Traditional IRA. Both types of IRAs have different tax benefits.

• When you invest in a Roth IRA, the money is taxed at the time of contribution but then in retirement, you can withdraw it tax-free. Contributions made to a traditional IRA might not be taxed at the time they are made but are taxed when they are withdrawn in retirement.

When choosing how much of your paycheck to put into retirement savings, you may want to keep in mind that the IRS sets restrictions on how much you can contribute to your retirement funds each year. IRS retirement guidelines are published and updated regularly.

4. Saving for Other Goals

After establishing plans for debt repayment, an emergency fund, and retirement savings, you may also want to consider working toward your other financial goals, like buying a house, saving for your kids’ future education, or affording a great vacation. This is a popular option for savings account usage, according to SoFi’s data.

• 52% of respondents in SoFi’s survey reported using their savings account to save for a specific goal

• 40% of them are saving equally for long-term and short-term goals

• 35% said they’re saving for short-term goals like a vacation or holiday shopping

• 26% are saving for long-term goals like a house or a child’s education.

How much of your paycheck you should save for these goals will depend on what you want to accomplish and when you want to accomplish it.

When you’re saving for a big purchase, for example, you may want to start by determining how much money you’ll need and when you want to have the money.

You can then break that dollar amount down into the amount you need to save each year and each month. This can help you determine how much of each paycheck you may want to put aside to help you achieve that goal.

• For savings goals you want to accomplish in the next three to five years, you may want to consider putting the money in a safe account that earns higher-than-average interest (such as a high-yield savings account, checking and savings account, or a CD).

• Longer-term savings goals, such as your children’s college education, can be invested more aggressively, since you’ll have more time to ride out the ups and downs of the markets (yes, there is risk involved). For college savings, you may want to consider opening a 529 savings plan.

Reducing Your Costs to Save More

You can help ramp up your savings by cutting your spending. Here are some ideas for saving money daily:

• Review your monthly bills and see if there’s anything you can cut. You might have signed up for a couple of subscriptions and then forgotten about them, or you might see that your restaurant spending is surging lately.

• Learn how to save on food. You might try planning your meals weekly, so nothing goes to waste; joining a warehouse or wholesale club to lower your grocery bill; and using coupons and discount codes to downsize your food costs.

• Bundle up: If you get your auto and home (or renters) insurance from one provider, you may save on your premiums.

• Fight off FOMO (fear of missing out). Just because your friends are upgrading to a luxury car or a social media influencer is frolicking on the French Riviera, that doesn’t mean you have to too.

• Pause, for a day or a month, before making pricey impulse buys to make sure you really and truly want or need them.

• Pay in cash. Plastic, whether a credit or debit card, can make it easy to overspend. If you take out the cash you need for the week ahead and use only that to pay for purchases, you may be able to rein in your purchasing.

• Use budgeting tools to help stay on track. Twenty-three percent of people in SoFi’s survey use budgeting tools offered by their bank, and 20% have knowingly used AI to manage their budget or finances.

Where to Put Your Savings

Once you’ve committed to saving money, you’ll have some options about where to keep it. Some good ideas for funds that you want secure and accessible, as opposed to long-term savings like retirement accounts, include:

• A high-yield savings account. These pay significantly more than a standard account and are often found at online banks vs. traditional ones. Just be sure to read the fine print and make sure you are aware of and comfortable with any account fees or minimums that might be involved.

• A certificate of deposit (CD) is an account in which you commit to keeping your money at the bank for a specific term and you know what rate you will earn. Typically, there is a penalty for early withdrawal. The terms for CDs can range from a few months to several years, so you can pick what works best for you. Longer terms will often have higher interest rates.

• Another option is a money market account (not to be confused with a money market fund, which is an investment) These MMAs offer features of both a checking and a savings account and your money may earn more than with a standard savings account.

Recommended: Plug in APY, deposits, and time to grow into this savings account interest calculator to see how much your money can grow.

Saving With SoFi

Looking for a bank that helps your money grow and gives you tools to take control of your spending and saving? See what SoFi offers.

Interested in opening an online bank account? 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 4.00% APY on SoFi Checking and Savings.

FAQ

Is saving 10% of my paycheck enough?

How much of your paycheck should you save? Most financial experts advise saving between 10% and 30% of your salary, with 20% being a common figure. Based on this, 10% is an adequate amount for some, but if you can ramp that up in the future, so much the better.

Is 20% of your salary enough to save?

According to the 50/30/20 budget rule, saving 20% of your salary is a good goal to have; that’s the 20 in the name of the guideline. This amount can then be divided to address different needs, such as saving for the down payment on a house, for your child’s college education, and for retirement.

How much of a $1,000 paycheck should I save?

Typically, financial experts recommend saving between 10% and 30% of your paycheck, with 20% being a good figure to aim for. For $1,000, that would mean between $100 and $300, with $200 being the 20% figure. However, if you are earning a lower salary and money is tight, it would be understandable if you save less until your salary increases.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer 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 Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% 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 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 a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% 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 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 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 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 Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% 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 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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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.

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Oct

2024

The Importance of Saving Money

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

Whether from parents, friends, or financial advisors, you have probably heard plenty of people say that you should be saving money. But did you ever stop and consider why exactly saving money is so important?

Saving money is truly a smart move: It can help you achieve your financial aspirations, prepare for the future, and weather unexpected events. It can even help you earn money without doing anything at all. When you look at it in a big-picture way, saving can relieve a lot of money stress from your life.

Granted, there are vacations to be taken, loans to be paid off, and all kinds of other uses for cash that could leave you without any to stash in savings. But by making saving a priority, you can really enhance your financial standing.

Here, you’ll learn more about this topic, including:

• The reasons why saving money is important

• How to start saving (as painlessly as possible)

• Where to store the cash you save.

Reasons Why Saving Money is Important

It can be hard to get motivated to save money just because it’s the “responsible” thing to do. But you may see the appeal once you understand the huge advantages that saving offers. Here are a few.

Peace of Mind

If money is tight, you may find yourself worrying how you will pay the rent or other critical bills if an extra unexpected expense were to suddenly come up, as they often do. After all, cars break down, and dental work can crop up. Or what if your kid discovers a passion for soccer and wants to go to a pricey summer camp.

Having savings in the bank can provide the sense of security that comes with knowing you can get through these kinds of moments without hardship. You’ll be able to have that back-up money to afford many of life’s expenses that crop up. By saving, you may also worry less about tomorrow, knowing that you have stashed away some cash. That means you can breathe a little easier.

Avoiding Debt

When you have money in the bank, you can make purchases, planned or not, with your money that’s in the bank. That means you can avoid using high-interest credit cards or potentially taking out a personal loan or a home equity line of credit (HELOC) to pay for things.

That can help you side-step debt, which can help save a significant amount of cash in the long run.

Expanding Your Options

Generally, the more money you have saved, the more control you can have over your life and your financial security.

If you’re unhappy with where you live, for instance, having some savings can open up the possibility of moving to a more desirable location or putting a downpayment on a new home.

If you dislike your job, having a cushion of savings might afford you the option of leaving that job even before you have another one lined up.

Money certainly does not solve all problems, but having savings can give you a little bit of breathing room and allow you to take positive steps in your life.

Having Financial Freedom

Another benefit of savings is that you are on a program that can give you financial freedom. If you stick to a plan of stashing 10% or 20% into savings, as many financial experts recommend, you can avoid always living paycheck to paycheck and have more financial freedom.

For example, with adequate savings, you might be able to take a sabbatical from work and pursue a passion project. You might have enough cash to start your own business or retire early. Or you might plan a luxe anniversary celebration somewhere tropical. Savings can enable your dreams.

Recommended: Guide to Improving Your Money Mindset

Saving for Big Purchases

Having a savings account is a great way to afford big purchases without racking up credit card debt and the high interest that goes along with it or turning to other expensive financing options.

Let’s say you want to take your kids on a Disney vacation or you really need that second car. Or maybe there’s a designer bag that you’re totally in love with. By putting money aside in a savings account and earning interest on those funds, you can be in a position to buy your wish-list item outright, rather than borrowing funds to do so.

Saving Money for Emergencies

Here’s another reason why it is important to save money: Life has its twists and turns. One minute, everything is humming along nicely, the next, your car needs $2,000 worth of repairs. Or the hot water heater conks out or you lose your job. These situations and others can put a real strain on your finances.

That’s why financial experts generally recommend building up an emergency fund of at least three to six months’ worth of living expenses to prepare for any financial surprises.

It can be hard to prioritize this, but saving for an emergency fund is important. To help make it happen, you might set up an automatic transfer from your checking into savings the day after payday. This can painlessly, seamlessly whisk money to your emergency fund so it doesn’t sit in savings, tempting you to spend it. Whether the amount is $15 or $150, just do it. Every bit helps.

Earning Interest

Savings accounts come with interest, which is the bank’s way of thanking you for keeping your money with them, where they can use it until you withdraw it.

Granted, the average savings accounts aren’t currently paying that much interest. The average rate is 0.45% APY as of October 21, 2024. However, if you look into an online savings account, you will likely find a much higher rate. Online banks, which don’t have to fund bricks-and-mortar branches, typically pass those savings along to their clients. They may offer a 3.00% APY or even higher.

That can help your savings along. If you have $5,000 in a savings account with a 3.00% APY earning compound interest monthly, that would give you an extra $152 at the end of the year. Add $20 per month to the account and let it sit for five years, and you’ll have $7,101. Nice! That’s cash in your account for doing absolutely nothing.

Reducing Your Taxes

Here’s the part about how saving money makes you money, beyond interest you’ll earn. If you save money into certain tax-advantaged retirement vehicles, not only do you have that nest egg for later in life, but you can lower your tax liability.

By putting money into your employer’s 401(k), if available, you can lower the income on which taxes are assessed. If you are self-employed, there are various IRA (individual retirement accounts) that may allow you to put pre-tax dollars away for the future.

When you save money this way, you could even challenge yourself to put the tax savings back into a savings account. That’s a way to increase your money in the bank another notch or two.

Giving Back

Another reason why saving money is important is it can enable you to give back to others. When you have a cash cushion and aren’t living paycheck to paycheck, you have the opportunity to help those around you.

That might involve sending a few hundred dollars to a relative who has a big dental bill and is struggling to pay it. Or you might donate to a medical research cause, a disaster fund, or a local after-school program that you love. The choice is yours, but having a healthy savings account can make it possible.

Benefiting from Compound Interest

Another big incentive to save, as mentioned above, is the power of compound interest.

Compound interest means you earn a return not just on the amount you originally put away, but also on the interest that accumulates.

Over time, that means you can end up with much more than you started with. And the earlier you start saving, the more your money grows, since compound interest is able to work its magic over a longer time horizon.

You saw an example above that involved putting money into a savings account at a bank. Now, consider investing: A person who starts putting $100 per month towards retirement at age 25 will wind up putting $12,000 more of their money into their retirement fund by age 65 than the person who started saving $100 per month at age 35.

But because of compound interest (and assuming a 7.00% annual rate of return), the person who started at 25 will wind up with over $120,000 more at age 65 (way more than the extra $12,000 they invested). Please note that this is a hypothetical scenario and does not represent an actual investment. All investing involves risk.

How to Get Started with Saving

If you’re convinced that saving is the right move, how do you actually do it? The key is to make a budget and make sticking to it easy.

This doesn’t have to be intimidating. The key is to get familiar with what you spend, what you earn, and what your goals are.

Here are some steps you could take to help get started.

Figuring Out What You’re Saving For

Is it a long-term goal, like retirement or your kids’ college tuition? A short-term goal, like an emergency fund? Or a medium-term goal, like a wedding or home renovation? It can help to get a sense of how much you need to stash away and by when.

The point of this is twofold:

• First, you can divide the amount you need by the months left until your deadline to get a clear picture of how much you’ll need to save each month.

• Second, you will know where to put your money. If your goal is less than a couple of years away, you may want to keep your savings in an online savings account, a certificate of deposit (CD), or money market account.

These options can help you earn more interest than a standard savings account but still allow you to access your money when you need it.

If your goal is in the distant future, you might want to invest the money in a retirement account, 529 college savings plan, or brokerage account so that it has the chance to grow over time.

Sticking to a Budget

You don’t really know where your money is going unless you track it. That’s why for a month or two, you may want to take note of all your daily and monthly expenses.

Next, you’ll want to tally up your net monthly income, meaning what goes into your account after the different types of taxes and deductions are taken out.

The difference between your monthly income and your expenses (everything from rent to student loan payments to food and dining out) is what you have left over to save. If there’s not enough left over, you can work on finding ways to cut spending or increase your income. You might try following the 50/30/20 budget rule to help guide your spending and saving.

Putting Savings on Autopilot

If you’re manually putting cash away every month, it can be easy to fall behind.

For one thing, you may forget to move money into savings regularly amid your busy schedule. And, unless you protect the money in advance by transferring it to a different account, you may accidentally spend it.

One way to avoid this is to set up automated savings through your bank account or retirement plan.

If you’re putting away the amount you identified you need for your goal, you may get there without even thinking about it.

Recommended: The Different Types of Savings Accounts

Common Places to Save Your Money

Where to put your money as you save? Consider these options:

• Savings account: You could put your money in a savings account at a financial institution, like your local bank branch. However, as outlined above, you may not earn the highest possible interest.

• Online savings account or high-yield savings account: These accounts are likely to pay a much higher interest rate than a conventional savings account while offering the same convenience and security as a traditional savings account.

• CD: A CD gives you a specific rate of interest but you must agree to keep your money in the account (that is, not withdrawing any of it) for a specific term, whether months or years. Withdrawing earlier could trigger penalties.

• Investments: There are many options here, such as Treasury bills and bonds. These can earn healthy returns and are typically considered safe places to keep money.

The Takeaway

Why is it important to save money? For a variety of reasons. It can provide peace of mind, open up options that improve your quality of life, increase your wealth due to compound interest and possibly lower your tax liability, and may even allow you to retire early. Many people earn wealth through a combination of working and savvy saving.

Looking for a smart way to save? Consider opening an online bank account with SoFi. Our FDIC-insured Checking and Savings account earns a competitive APY, and charges no account fees, both of which can help your money grow faster. And with Vaults and Roundups, you can track and grow your savings, assisting you as you aim for your personal financial goals.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.00% APY on SoFi Checking and Savings.

FAQ

What are the benefits of saving money?

There are many benefits of saving money: It helps you save for your future, cover unexpected expenses, make major purchases, and have financial freedom. What’s more, the money you save can help make you more money, thanks to compounding interest and lowering your tax bill.

What are common things to save money for?

Common things to save money for are an emergency fund, retirement, a big purchase (like a car, a vacation, or the down payment on a home), and educational expenses, among others.

What happens if you don’t save money?

If you don’t save, you may lack financial security and the ability to meet certain aspirations. For instance, you won’t have a retirement fund and would therefore have to keep working indefinitely. You wouldn’t have money for a big purchase like a car or a home or your child’s education. Plus you wouldn’t be able to handle some expenses, whether planned or unexpected, and might have to take out a loan or use credit cards, which means you are paying for the privilege to borrow funds. That takes away from your earnings.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer 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 Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% 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 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 a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% 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 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 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 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 Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% 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 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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Oct

2024

Is Mobile Banking Safe?

By Austin Kilham | Budgeting & Goals, money, Terminology | Comments Off

Mobile banking is getting more popular as consumers embrace what can be a quick, convenient, and safe way to do their everyday banking. In fact, a recent survey by the American Bankers Association and Morning Consult found that 48% of respondents said that a banking app is their top way to manage the money in their accounts.

As usage climbs, you may wonder, is mobile banking safe? You’re not alone. According to SoFi’s April 2024 Banking Survey of 500 U.S. adults, 42% of people are somewhat or very concerned about the security of their online bank accounts. For the most part, the answer is yes. Online banks typically do everything they can to keep your data safe. But you can protect yourself by learning about key security risks and simple ways to protect yourself from fraud and other threats. Read on to learn the details.

Key Points

• Mobile and online banking both leverage standard, sophisticated security technology — such as data encryption, multi-factor authentication, firewalls, and biometrics — to protect members’ information and money.

• Nothing is 100% safe from fraud or hackers: An individual could potentially fall victim to a device theft, phishing scam, hacking attempt, or a data breach.

• A bank may require a PIN or biometrics, such as a face ID or fingerprint, to authenticate customers.

• To further safeguard their information, bank customers should use strong passwords, avoid using public wifi for online banking, and be sure to download the bank’s official app.

• A bank customer should actively monitor their accounts for suspicious activity, including signing up for automatic activity alerts.

Is Mobile Banking As Safe As Online Banking?

At its simplest, mobile banking consists of financial transactions made through the use of a mobile device, such as a cell phone or tablet. Transactions range from simple ones, like signing up to have your bank send you informational text messages, to the more complex, such as paying bills, sending money to other people, receiving funds, and others.

Not all internet-based banking transactions are mobile ones. The difference between mobile banking and online banking is that mobile banking is a form of online banking — however, it’s not the only type. You could, for example, conduct financial transactions on your home computer as well. That would be known as online banking, which has become quite popular — 74% of people in SoFi’s survey use online banking at least several times a week.

Whether conducting transactions via an app on your phone or web page on your laptop, it’s important to know that typically both forms of digital financial management employ state-of-the-art security protocols. Online and mobile banking should keep you well protected (as is true for mobile payment apps). For instance, they use encryption to protect sensitive data, make regular software updates, and may offer biometric authentication (especially true for mobile banking), among other security measures.

Mobile Banking Risks To Be Aware Of

Mobile banking is typically simple, convenient, and safe, but it’s important to consider potential issues, as well.. Being aware of them is often the first step in avoiding them.

Your Device Could Be Stolen

Sadly, it’s a common occurrence for mobile devices to be stolen. If this happens, it’s possible that your banking apps could be accessed, especially if you don’t have adequate security features enabled or use an obvious password, such as “password123.”

Your Account Could Be Hacked

Another risk is that hackers could access your bank accounts. This can happen via a malware download or other methods. Once this occurs, the hackers can remotely gain information like your passwords and get into your cash.

There Could Be a Data Breach

There could be a security issue in which hackers tap find a security vulnerability at a particular financial institution or network of them and then access your personal information. While most financial institutions prioritize their clients’ security, this kind of event can still occur.

You Could Be Scammed

You may have heard about the kinds of bank fraud and scams circulating. They change frequently, but you might receive a text message, phone call, or email from your financial institution that looks valid, asking you to authenticate your account or change a password. If it’s from a scammer, they can get access to your accounts this way. Unfortunately, these scams have gotten very sophisticated, and it can be extremely difficult to discern what’s a fake form of outreach from what is legitimate.

Mobile Banking Safety Tips

To make sure you’re using your bank’s mobile tools in the safest way possible, follow these safety tips:

1. Create a Strong Password

Use strong passwords to protect your personal information. Passwords should be long — the longer, the better — so hackers have a harder time using code-breaking software to crack it. Strong passwords should contain a random mix of letters, numbers, and special symbols. They should also use a mix of capital and lowercase letters, and they should not contain any personal information or words you’d find in the dictionary.

Weak passwords are those that are easy to guess. As an obvious example, don’t use the word “password” as your login. Another example of a weak password would be your name and birth year, which is information that hackers can easily find. Also, don’t reuse your passwords. Come up with a fresh one every time.

2. Avoid Using Public Wifi

Another important mobile banking security tip is to be very cautious about using public wifi. If you must use it, try to use a secured network whenever possible that requires a password to sign in. If a secured network is unavailable, the next best thing is an unsecured network that requires login information of some sort.

That said, whenever you’re using public wifi, do not access your bank account or any other sensitive personal information. You could be jeopardizing the security of those credentials.

Also, turn off settings on your devices that allow automatic connectivity, which could permit your computer or mobile device to connect to a network that you would otherwise want to avoid. Be sure to monitor your Bluetooth connections as well, since Bluetooth can allow other devices to connect directly to yours.

3. Use Your Bank’s Official App

Another tip to stay safe with mobile banking is to download your bank’s official app versus logging in via your browser. When you do so, be on the lookout for possible fakes. Pay attention to the developer of the app, and also look to see if there are any other apps with the same or similar names. If possible, download the app directly from your bank’s website. Otherwise, use a reliable app store.

Your bank should also be able to offer you information about their app, including the app’s security features and what information you’ll need to access it. Once you’ve downloaded the official app, conduct your mobile banking on the app instead of through a web browser, which may be less secure.

4. Don’t Save Login Information in Your Browser

Some web browsers give you the option to save your username and password within the browser — never do this for your online and mobile banking. If your phone is ever lost or stolen, this could make it easy for hackers to access your bank account.

If you’re worried about remembering your password — especially if you’re being safe and you’ve come up with a complicated one — consider using a reputable password manager. These apps can manage usernames and passwords for multiple websites and applications, and have safety features in place to protect this information from hackers.

5. Use Two-Factor Authentication

One security measure being used by many financial institutions today is two-factor authentication, which requires users to provide at least two forms of identification, such as their password and a fingerprint, when accessing their account.

Alternatively, in addition to a password, the second piece of authentication could be a numeric code that the user requests and receives via text. This code can only be used one time, preventing it from having value to hackers in the future.

Two-factor authentication vastly improves security on your phone, though it’s still possible that hackers and those intent on committing bank fraud could intercept authentication information sent to you via text or email.

6. Use Activity Monitoring

Your bank may offer you the ability to sign up for alerts for all sorts of account activities, from mobile deposits and withdrawals to wire transfers. This type of activity monitoring or user activity tracking can also boost security.

Your bank can send you quick alerts when they detect possible fraudulent activity. They may be able to send your alert via text, email, or even directly through the bank’s app. You’ll then have the opportunity to confirm or dismiss potentially fraudulent activity, allowing your bank to act swiftly on your behalf if necessary.

7. Beware of Phishy Links

Phishing scams are one of the most common forms of cyber fraud. They work by tricking individuals into giving away private information. For example, scammers might send an email that looks like it’s from your bank or a business you’ve recently been in contact with. These emails might include a link that, once clicked upon, will install a virus on your device that can gather personal data.

As noted above, these can be very convincing. Gone are the days of easy giveaways, such as typos. Be wary of phishing scams, and never open links in email or text if you aren’t 100% sure of their origin. Remember, you can always call your bank or other places of business, and should do so if you suspect a phishing scam. They can let you know whether or not they sent the email.

8. Always Log Out

When you’re done using your mobile banking app, be sure to log out to protect your information. Luckily, many banking apps will do this for you automatically; say, after you monitor your checking account to make sure the balance isn’t too low. That said, you also may want to log out of any app that might contain personal information, such as your email, social media, or mobile wallet, when you’re done using them. If your phone got lost or stolen, you’d want to make it as difficult as possible for criminals to access this information.

Recommended: How to Avoid ATM Fees

Mobile Banking Safety Measures

Here’s a little more intel about mobile banking that may be reassuring if you have concerns about security. Whether traditional or online banks, most of these institutions have invested hundreds of millions of dollars into cybersecurity in an effort to protect consumers’ accounts. They’ve put into place security measures such as Secure Socket Layer (SSL) encryption, automatic logout, antivirus and anti-malware programming, firewalls, multi-factor authentication, and biometric and/or facial recognition technology.

Using these measures is also an effort to protect themselves from cyber threats. Under the Federal Reserve’s Regulation E, consumers are only liable for the first $50 lost due to unauthorized access to their account, as long as they report the activity within two days. Their bank is responsible for any loss over that amount.

If you’re unsure what measures your bank takes to protect your data, it’s reasonable to ask for more information. If you’re not satisfied with the answer, you may consider exploring other options.

Recommended: 7 Ways to Make Money With Interest

The Takeaway

As you can see, banks make an effort to make mobile banking safe. Plus, you can take additional steps yourself to further ensure mobile banking security, such as creating a strong password, using your bank’s official app, and keeping an eye out for any phishing attempts. When you’re choosing a bank, however, it’s still important to consider what security measures it has in place, along with other features such as fees and interest rates.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.00% APY on SoFi Checking and Savings.

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Oct

2024

What Is a Loan?

By Jamie Cattanach | Budgeting & Goals, Family Finances, personal_loan | Comments Off

A loan is a sum of money that is borrowed and then paid back, both principal and interest, within a specific time frame. The interest you pay is for the privilege of getting that lump sum of cash in hand.

Whether it’s to continue your education or buy a house, borrowing money can be the key to meeting longer-term goals, both financial and personal. There are many different kinds of loans available, including unsecured personal loans, secured mortgages, and many other options in between.

Here, you’ll learn the basics of lending, including a few of the most common types of loans, what you’ll need to successfully apply for them, and what you should know before making the significant and at times risky decision to borrow money.

Definition and Basic Concepts

As soon as you start shopping for loans of any kind, there are a few terms you’re likely to hear, some of which may be unfamiliar. Get up to speed with this glossary of words commonly used to define and describe loans.

• The principal is the amount of money you’re borrowing from the lender. For instance, if you take out a loan for $17,500, then the principal amount is $17,500. However, every time you make a payment, you’ll pay both principal and interest, which is why you’ll end up paying back more than $17,500 altogether. (It may also be possible to make additional, principal-only payments, which can help you pay the loan off more quickly and pay less interest overall.)

It’s worth noting that this concept of principal is a key way that loans vary from credit lines: With a loan, you typically get a lump sum of cash, while with a line of credit (such as a home equity line of credit, or HELOC, or a credit card), you borrow varying amounts as you need funds.

• Interest is the money you pay to the lender for the privilege of taking out the loan — or the cost of the loan. Interest is often expressed as an annual percentage rate (APR), which includes any additional fees as well as the interest itself.

• A loan’s term is the lifespan of the loan, or the length of time you’ll have to pay it back. For example, a personal loan might have a 60-month (five-year) term, meaning you’ll make 60 monthly payments to repay the loan in full (unless you pay it off early). Mortgages tend to have longer terms: typically 15 or 30 years.

• Collateral refers to an asset that, as part of the loan agreement, the lender can seize in the event you fail to repay what you owe. A loan with collateral is known as a secured loan, and common collateral items include vehicles (as with an auto loan) and houses (as with a mortgage).

• Your lender might be a bank, credit union, or an online financial institution. It’s whichever business is lending you the money and collecting your payments.

• The borrower is the person or entity borrowing money and paying it back as outlined in the loan agreement.

Types of Loans

While there are many different kinds of loans out there — home loans, auto loans, personal loans, and even holiday loans — they can all be separated into two main categories: secured loans and unsecured loans.

Secured Loans

As briefly mentioned above, secured loans are those that are backed by collateral.

Collateral gives the lending institution a guarantee that they’ll get a valuable asset out of the deal if the borrower fails to repay the loan in full. That means the loan is less risky for the lender, which may have slightly less stringent qualification requirements or might charge a lower interest rate.

Unsecured Loans

Unsecured loans, by contrast, are those that are not backed by collateral. Unsecured loans, like personal loans, are sometimes also called “signature loans,” since all you’re offering as collateral is your signed promise to repay the loan. Because they’re riskier for lenders, unsecured loans may have higher interest rates as well as more stringent eligibility requirements.

Unsecured loans can usually be used for just about any legal purpose, from home renovations to wedding costs. Many people take out personal loans for debt consolidation; say, as a path to paying off high-interest credit card debt.

Common Loan Terms

While the specific agreement of your loan will depend on multiple factors, including your lender and the type of loan you’re taking out, there are a few features that many different types of loans share.

APR

Your interest rate will likely be expressed as an APR percentage. APR includes not only the interest itself but also the other costs associated with the loan, such as origination fees.

APRs can vary tremendously depending on an array of factors, including the economy, the size of the loan, the type of loan, your credit score and history, and more. At the low end, some people who took out a mortgage in late 2020 or in 2021 may have an APR below 3.00%. Others who have less-than-stellar credit scores might currently have an APR of 30.00% if they are seeking out a personal loan on the larger, riskier side.

The higher your APR, the higher the cost of the loan. People with higher credit scores and positive financial profiles are more likely to qualify for lower-APR loans, which can save them substantial amounts of money in interest over time.

💡 Recommended: What Is A Personal Loan?

Fixed vs Variable Interest Rates

Along with APR, you should also understand the difference between fixed and variable interest rates.

• As the name implies, fixed interest rates don’t vary over the entire lifetime of the loan. That means you can enjoy regular, predictable payments in the same amount every month.

• Variable-rate loans, on the other hand, can fluctuate with the market (though are usually governed by caps that keep the rate from rising over a certain percentage). Variable-rate loans may have lower rates at first, making them attractive, but payments can rise substantially over the lifetime of the loan. Or in some economic climates, they might fall lower. In either scenario, a variable rate can make budgeting more difficult.

Amortization

Amortization describes the way a loan is gradually paid off (both principal and interest) over time. Payments are typically made over a particular schedule, such as monthly for a certain number of years.

For example, with a fixed-rate home loan, you’ll typically find that the mortgage amortization occurs so that, toward the beginning, the bulk of your payment is going toward interest rather than principal. (This helps ensure the bank gets paid for their service up front.) Over time, a greater and greater percentage of the payment will go toward principal. However, the actual amount you’re paying each month will never change.

You can see the effect of amortization for yourself using a mortgage calculator.

Prepayment Penalties

Prepayment penalties refer to costs the lender might charge if you pay off a large portion of your loan early or repay the entire loan before the term has elapsed. Prepayment penalties help lenders make money on loans where they won’t receive the full term’s worth of interest. Prepayment penalties can help compensate the bank for this loss of interest income.

For borrowers, though, these charges can feel like punishment for what is generally a positive financial behavior: paying off your debt early. Whenever possible, it can be wise to look for loans that don’t charge prepayment penalties.

Loan Process

So, now that you understand a bit more about how loans work, consider how you go about getting one.

While each lender will have their own specific procedures and policies, the basic loan process can be broken down into four basic steps.

• Application. The lender will collect information from you about your employment history, income, and other financial factors, as well as verify your identity. These days, loan applications can usually be filled out online, though you may also be able to apply in person or over the phone.

• Approval. Once your lender verifies all your information — usually including a hard credit check — they will either approve or deny your application. If you’ve been approved, you’ll be informed about the approval, though it still may take some time for the money to come through.
Timing on these steps can vary greatly; a personal loan might get same-day approval, while a home equity loan, which typically involves a home appraisal, could take weeks.

• Disbursement refers to the money you’ve borrowed actually hitting your account. You may be able to set up direct deposit so the funds can find their way into your bank account without any additional steps, but in other cases the lender might cut you a physical check. With a home loan, a closing with various parties and/or their lawyers present might be required.

• Repayment is the phase of the loan where you pay back the funds borrowed (the principal) and interest and fees over time. This typically reflects the agreement drawn up when your application was approved. As discussed above, the repayment period, or term, could be as short as a year or two or as long as several decades.

Factors Affecting Loan Approval

Applying for a loan doesn’t guarantee you’ll be approved. After all, before transferring a large sum of money, your lender is going to want to feel confident that you can repay the debt.

Some of the most important factors that affect loan approval are your credit score and credit history, income, debt-to-income ratio (DTI), and the value of any collateral you put on the table. Here’s a closer look.

• Your credit score is the three-digit number (typically between 300 and 850) that summarizes your credit history and how well you have repaid debts in the past. You may actually have multiple credit scores due to different scoring models and the fact that each of the three major credit bureaus may report somewhat different information. Credit score monitoring can help you understand the health of your credit file over time.

• Your income is the amount of money you have coming in, usually from employment (but also potentially from investment interest or other sources). Lenders generally want to see a reliable flow of income to help ensure borrowers will be able to continue making payments over the entire lifetime of the loan.

• Your debt-to-income ratio or DTI is an expression of the amount of income you have every month compared to the amount of money that’s already promised to other creditors. Depending on the loan and the lender, you may be able to qualify for certain loans with a DTI of up to 50%, but generally, the lower, the better. Some mortgage lenders won’t offer a mortgage to borrowers with a DTI higher than 36%, for instance.

• For secured loans, the value of your collateral, such as the car or home you’re financing, is also considered as part of the calculus. A high-value asset or collateral makes the deal substantially less risky for banks, since they’ll still get some value out of the loan even if you don’t repay it.

Pros and Cons of Borrowing

Sometimes, borrowing money really can be a smart financial move, but it almost always comes with costs, so it’s important to think through the decision carefully. Here are some of the basic pros and cons of borrowing money.

Pros:

• Loans can help you access longer-term goals, like homeownership or college education, that might not be possible if you had to pay out of pocket.

• In some cases, debt in the short term can help you increase your financial standing in the long term. For example, student loans can help you gain skills that increase your earnings; mortgages can allow you to own an asset that can appreciate over time; and personal loans used for loan consolidation could help you improve your overall financial standing faster.

• With unsecured personal loans, you can use funds for just about any purpose — making them flexible and convenient.

• Some loans are quick and convenient; certain types can send money your way in just days.

• Making on-time payments can help build your credit score over time.

Cons:

• In almost all cases, loans cost money. High interest rates can mean purchases could cost far more than they would in cash over time.

• If you fall behind on payments or carry large balances of revolving debt, loans could have a negative impact on your credit score.

• Loans payments can stretch your budget, making it difficult to make ends meet each month and accomplish other financial goals, such as saving for retirement.

• Certain kinds of loan applications can be time-consuming and can leave you waiting a long while to learn whether or not you are approved.

• If you have a secured loan, you risk losing your collateral if you cannot keep up with your payments.

• If you have a lower credit score, borrowing money can be more expensive, which can make your loan debt burdensome.

Alternatives to Traditional Loans

While traditional loans from a bank have long been available to borrowers, there are alternative resources worth considering if you need cash.

• Credit cards are a common way for people to pay for things today with money they hope to have tomorrow. However, it’s wise to avoid using a credit card to buy more than you can afford to pay off before the grace period ends. Credit cards tend to have high interest rates (and higher still if you take a cash advance), and compounding can get out of hand fast.

• Lines of credit may be available, such as a personal line of credit or a HELOC, allowing you to borrow funds up to a limit, with interest accruing.

• Cash advance apps can help you access money from your next paycheck early, though the amount available tends to be relatively small.

• Peer-to-peer (P2P) lending platforms are an alternative way to borrow that’s funded primarily by private investors. Some people who’ve been turned down for traditional loans may still qualify for P2P loans.

• Family loans can work in some instances — depending, of course, on your family finances and dynamics. To avoid putting strain on a relationship, it’s often a good idea to formally write up a loan agreement including any required interest, the expected loan term, and what happens if the borrower defaults.

• Buy now, pay later options can allow you to purchase an item and pay it off in installments, sometimes interest-free. This could be a way to snag, say, a new kitchen appliance when you don’t have cash in hand.

• Payday loans allow you to borrow against your next paycheck, but proceed with extreme caution. The APRs on these can add up to 400% in some cases.

The Takeaway

A loan involves accessing a sum of money that you repay over time with interest to the lender, according to the terms of your agreement. Borrowing money can help you achieve your dreams, such as owning your own home or getting a graduate degree — but it usually comes at a cost, so it’s always worth proceeding with caution before signing on the dotted line. Understanding the full cost of the loan and its pros and cons will help you make an informed decision.

Are you considering a personal loan for debt consolidation, travel, home renovations, or another purpose? See what SoFi offers.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.

FAQ

How does interest on a loan work?

Interest is the price you pay for the privilege of borrowing money. With most loans, interest is expressed as an APR, or annual percentage rate, which includes not only the interest rate itself but also any additional costs to the loan, like origination fees.

What’s the difference between a loan and a line of credit?

With a loan, you usually receive a lump sum of money up front which you then repay over the course of months or years. With a line of credit, instead of a lump sum, you receive a credit limit — the maximum amount you can borrow based on your financial credentials. From that amount, you borrow what you need up to your limit, and you can repay the line of credit and borrow again.

How do I choose the right type of loan for my needs?

The first step to choosing the right loan for your needs is to understand that there is a huge array of financial products available. What are loans can vary tremendously. For example, if you need money to buy a vehicle, a secured auto loan may have lower interest rates than a personal loan. If you need funds for a wedding, a personal loan may be the right option. It’s also worthwhile to shop around with different lenders once you know the type of loan you want. That can help you find the best possible loan terms, including the lowest interest rate.

Are there tax implications for taking out a loan?

There may be tax implications. The interest you pay on a mortgage is usually tax-deductible. In the case of personal loans, since they have to be repaid, they’re not considered income, so you won’t have to pay taxes on the disbursement. If the loan is forgiven, though, the cancellation of the debt may be considered its own form of income and may be subject to taxation on that basis. You may want to check in with a tax professional regarding your particular situation.

Photo credit: iStock/efetova

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SOPL-Q324-023

Oct

2024

How to Roll Over Your 401(k): Knowing Your Options

By MP Dunleavey | Budgeting & Goals, Building Your Career, Growing Wealth, invest, Investing, Life & Career | No Comments

It’s pretty easy to rollover your old 401(k) retirement savings to an individual retirement account (IRA), a new 401(k), or another option — yet millions of workers either forget to rollover their hard-won retirement savings, or they lose track of the accounts. Given that a 401(k) rollover typically takes minimal time and, these days, minimal paperwork, it makes sense to know the basics so you can rescue your 401(k), roll it over to a new account, and add to your future financial security.

Whether you’re starting a new job and need to roll over your 401(k), or are looking at what other options are available to you, here’s a rundown of what you need to know.

Key Points

• Rolling over a 401(k) to an IRA or new 401(k) is typically straightforward and your retirement funds will continue to have the opportunity to grow.

• Moving 401(k) funds to another 401(k) is often the simplest option and allows you to continue to have a higher contribution limit.

• Moving 401(k) funds to an IRA may provide more investment choices and control over those investments.

• Leaving a 401(k) with a former employer is an option but may involve additional fees and complications.

• Direct transfers are simpler and generally preferred over indirect transfers, which run the risk of incurring tax liabilities and penalties.

401(k) Rollover Options

For workers who have a 401(k) and are considering next steps for those retirement funds — such as rolling them to an IRA or another 401(k), here are some potential avenues.

1. Roll Over Money to a New 401(k) Plan

If your new job offers a 401(k) or similar plan, rolling your old 401(k) funds into your new 401(k) account may be both the simplest and best option — and the one least likely to lead to a tax headache.

That said, how you go about the rollover has a pretty major impact on how much effort and paperwork is involved, which is why it’s important to understand the difference between direct and indirect transfers.

Here are the two main options you’ll have if you’re moving your 401(k) funds from one company-sponsored retirement account to another.

Direct Rollover

A direct transfer, or direct rollover, is exactly what it sounds like: The money moves directly from your old account to the new one. In other words, you never have access to the money, which means you don’t have to worry about any tax withholdings or other liabilities.

Depending on your account custodian(s), this transfer may all be done digitally via ACH transfer, or you may receive a paper check made payable to the new account. Either way, this is considered the simplest option, and one that keeps your retirement fund intact and growing with the least possible interruption.

Indirect Rollover

Another viable, but more complex, option, is to do an indirect transfer or rollover, in which you cash out the account with the expressed intent of immediately reinvesting it into another retirement fund, whether that’s your new company’s 401(k) or an IRA (see above).

But here’s the tricky part: Since you’ll actually have the cash in hand, the government requires your account custodian to withhold a mandatory 20% tax. And although you’ll get that 20% back in the form of a tax exemption later, you do have to make up the 20% out of pocket and deposit the full amount into your new retirement account within 60 days.

For example, say you have $50,000 in your old 401(k). If you elected to do an indirect transfer, your custodian would cut you a check for only $40,000, thanks to the mandatory 20% tax withholding.

But in order to avoid fees and penalties, you’d still need to deposit the full $50,000 into your new retirement account, including $10,000 out of your own pocket. In addition, if you retain any funds from the rollover, they may be subject to an additional 10% penalty for early withdrawal.

Pros and Cons of Rolling Over to a New 401(k)

With all of that in mind, rolling over your money into a new 401(k) has some pros and cons:

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Pros:

• Often the simplest, easiest rollover option when available.

• Should not typically result in any tax liabilities or withholdings.

• Allows your investments to continue to grow (hopefully!), uninterrupted.

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Cons:

• New employer may change certain aspects of your 401(k) plan.

• There may be higher associated fees or costs with your new plan.

• Indirect transfers may tie up some of your funds for tax purposes.

¹Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.

2. Roll Over Your 401(k) to an IRA

If your new job doesn’t offer a 401(k) or other company-sponsored account like a 403(b), you still have options that’ll keep you from bearing a heavy tax burden. Namely, you can roll your 401(k) into an IRA.

The entire procedure essentially boils down to three steps:

1. Open a new IRA that will accept rollover funds.

2. Contact the company that currently holds your 401(k) funds and fill out their transfer forms using the account information of your newly opened IRA. You should receive essential information about your benefits when you leave your current position. If you’ve lost track of that information, you can contact the plan sponsor or the company HR department.

3. Once your money is transferred, you can reinvest the money as you see fit. Or you can hire an advisor to help you set up your new portfolio. It also may be possible to resume making deposits/contributions to your rollover IRA.

Pros and Cons of Rolling Over to an IRA

This option also has its pros and cons, however.

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Pros:

• IRAs may have more investment options available.

• You’ll have more control over how you allocate your investments.

• You could potentially reduce related expenses, depending on your specifications.

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Cons:

• May require you to liquidate your holdings and reinvest them.

• Lower contribution limit compared to 401(k).

• May involve different or higher fees and additional costs.

• IRAs may provide less protection from creditor judgments.

• You’ll be subject to new distribution rules – namely, you’ll need to be 59 1/2 before withdrawing funds to avoid incurring penalties.

3. Leave Your 401(k) With Your Former Employer

Leaving your 401(k) be – or, with your former employer – is also an option.

If you’re happy with your portfolio mix and you have a substantial amount of cash stashed in there already, it might behoove you to leave your 401(k) where it is.

You’ll also want to dig into the details and determine how much control you’ll have over the account, and how much your former employer might.

You might also consider any additional fees you might end up paying if you leave your 401(k) where it is. Plus, racking up multiple 401(k)s as you change jobs could lead to a more complicated withdrawal schedule at retirement.

Pros and Cons of Leaving Your 401(k) Alone

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Pros:

• It’s convenient – you don’t do anything at all, and your investments will remain where they are.

• You’ll have the same protections and fees that you previously had, and won’t need to get up to speed on the ins and outs of a new 401(k) plan.

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Cons:

• If you have a new 401(k) at a new employer, you could end up with multiple accounts to juggle.

• You’ll no longer be able to contribute to the 401(k), and may not get regular updates about it.

4. Cash Out Your Old 401(k)

Cashing out, or liquidating your old 401(k) is another option. But there are some stipulations investors should be aware of.

Because a 401(k) is an investment account designed specifically for retirement, and comes with certain tax benefits — e.g. you don’t pay any tax on the money you contribute to your 401(k), depending on the specific type — the account is also subject to strict rules regarding when you can actually access the money, and the tax you’d owe when you did.

Specifically, if you take out or borrow money from your 401(k) before age 59 ½, you’ll likely be subject to an additional 10% tax penalty on the full amount of your withdrawal — and that’s on top of the regular income taxes you’ll also be obligated to pay on the money.

Depending on your income tax bracket, that means an early withdrawal from your 401(k) could really cost you, not to mention possibly leaving you without a nest egg to help secure your future.

This is why most financial professionals generally recommend one of the next two options: rolling your account over into a new 401(k), or an IRA if your new job doesn’t offer a 401(k) plan.

Pros and Cons of Cashing Out Your 401(k)

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Pros:

• You’ll have immediate access to your funds to use as you like.

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Cons:

• Early withdrawal penalties may apply, and there will likely be income tax liabilities.

• Liquidating your retirement account may hurt your chances of reaching your financial goals.

When Is a Good Time to Roll Over a 401(k)?

If there’s a good time to roll over your 401(k), it’s when you change jobs and have the chance to enroll in your new employer’s plan. But you can generally do a rollover any time.

That said, if you have a low balance in your 401(k) account — for example, less than $5,000 — your employer might require you to do a rollover. And if you have a balance lower than $1,000, your employer may have the right to cash it out without your approval. Be sure to check the exact terms with your employer.

When you receive funds from a 401(k) or IRA account, such as with an indirect transfer, you’ll only have 60 days from the date you receive them to then roll them over into a new qualified plan. If you wait longer than 60 days to deposit the money, it will trigger tax consequences, and possibly a penalty. In addition, only one rollover to or from the same IRA plan is allowed per year.

The Takeaway

Rolling over your 401(k) — to a new employer’s plan, or to an IRA — gives you more control over your retirement funds, and could also give you more investment choices. It’s not difficult to rollover your 401(k), and doing so can offer you a number of advantages. First of all, when you leave a job you may lose certain benefits and terms that applied to your 401(k) while you were an employee. Once you move on, you may pay more in account fees for that account, and you will likely lose the ability to keep contributing to your account.

There are some instances where you may not want to do a rollover, for instance when you own a lot of your old company’s stock, so be sure to think through your options.

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Help grow your nest egg with a SoFi IRA.

FAQ

How can you roll over a 401(k)?

It’s fairly easy to roll over a 401(k). First decide where you want to open your rollover account, then contact your old plan’s administrator, or your former HR department. They typically send funds to the new institution directly via an ACH transfer or a check.

What options are available for rolling over a 401(k)?

There are several options for rolling over a 401(k), including transferring your savings to a traditional IRA, or to the 401(k) at your new job. You can also leave the account where it is, although this may incur additional fees. It’s generally not advisable to cash out a 401(k), as replacing that retirement money could be challenging.

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SOIN-Q324-044

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How to Roll Over Your 401(k): Knowing Your Options

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