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How Much Should I Contribute to My 401(k)?

Once you set up your retirement plan at work, the next natural question is: How much to contribute to a 401(k)? While there’s no ironclad answer for how much to save in your employer-sponsored plan, there are some important guidelines that can help you set aside the amount that’s right for you, such as the tax implications, your employer match (if there is one), the stage of your career, your own retirement goals, and more.

Here’s what you need to think about when deciding how much to contribute to your 401(k).

Key Points

•   Determining the right 401(k) contribution involves considering tax implications, employer matches, career stage, and personal retirement goals.

•   The contribution limits for a 401(k) are $23,000 in 2024 and $23,500 in 2025 for those under age 50. Those aged 50 and over can make an additional catch-up contribution.

•   Early career contributions might be lower, but capturing any employer match is beneficial.

•   Mid-career individuals should aim to increase their contributions annually, even by small percentages.

•   Approaching retirement, maximizing contributions and utilizing catch-up provisions can significantly impact savings.

401(k) Contribution Limits for 2024 and 2025

Like most tax-advantaged retirement plans, 401(k) plans come with caps on how much you can contribute. The IRS puts restrictions on the amount that you, the employee, can save in your 401(k); plus there is a cap on total employee-plus-employer contributions.

For tax year 2024, the contribution limit is $23,000, with an additional $7,500 catch-up provision for those 50 and older, for a total of $30,500. The combined employer-plus-employee contribution limit for 2024 is $69,000 ($76,500 with the catch-up amount).

The limits go up for tax year 2025. The 401(k) contribution limit in 2025 is $23,500, with an additional $7,500 catch-up provision for those 50 and older, for a total of $31,000. The combined employer-plus-employee contribution limit for 2025 is $70,000 ($77,500 with the catch-up amount).

Also in 2025, there is an extra 401(k) catch-up for those aged 60 to 63. Thanks to SECURE 2.0, these individuals can contribute $11,250 instead of the standard catch-up of $7,500, for a total of $81,250.

401(k) Contribution Limits 2024 vs 2025

2024

2025

Basic contribution $23,000 $23,500
Catch-up contribution $7,500

$7,500(ages 50-59, 64+)

$11,250 (ages 60-63)

Total + catch-up $30,500 $31,000
Employer + Employee maximum contribution $69,000 $70,000
Employer + employee max + catch-up $76,500

$77,500 (ages 50-59, 64+)

$81,250 (ages 60-63)



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How Much Should You Put Toward a 401(k)?

Next you may be thinking, now I know the retirement contribution limits, but how much should I contribute to my 401(k)? Here are some guidelines to keep in mind as you’re deciding on your contribution amount.

When You’re Starting Out in Your Career

At this stage, you may be starting out with a lower salary and you also likely have commitments to pay for, like rent, food, and maybe student loans. So you may decide to contribute a smaller amount to your 401(k). If you can, however, contribute enough to get the employer match, if your employer offers one.

Here’s how it works: Some employers offer a matching contribution, where they “match” part of the amount you’re saving and add that to your 401(k) account. A common employer match might be 50% up to the first 6% you save.

In that scenario, let’s say your salary is $100,000 and your employer matches 50% of the first 6% you contribute to your 401(k). If you contribute up to the matching amount, you get the full employer contribution. It’s essentially “free” money, as they say.

To give an example, if you contribute 6% of your $100,000 salary to your 401(k), that’s $6,000 per year. Your employer’s match of 50% of that first 6%, or $6,000, comes to $3,000 for a total of $9,000.

As You Move Up in Your Career

At this stage of life you likely have a lot of financial obligations such as a mortgage, car payments, and possibly child care. It may be tough to also save for retirement, but it’s important not to fall behind. Try to contribute a little more to your 401(k) each year if you can — even 1% more annually can make a difference.

That means if you’re contributing 6% this year, next year contribute 7%. And the year after that bump up your contribution to 8%, and so on until you reach the maximum amount you can contribute. Some 401(k) plans have an auto escalation option that will automate the extra savings for you, to make the process even easier and more seamless. Check your plan to see if it has such a feature.

As You Get Closer to Retirement

Once you reach age 50, you’ll likely want to figure out how much you might need for retirement so you have a specific goal to aim for. To help reach your goal, consider maxing out your 401(k) at this time and also make catch-up contributions if necessary.

Maxing out your 401(k) means contributing the full amount allowed. For 2024, that’s $23,000 for those 49 and under, and in 2025, it’s $23,500 for those 49 and under. If, at 50, you haven’t been contributing as much as you wish you had in previous years, you can also contribute the catch-up contribution of $7,500 in 2024 and 2025. So you’d be saving $30,500 for retirement in your 401(k) in 2024, and $31,000 in 2025. And if you are aged 60 to 63, you can contribute an additional catch-up of $11,250 in 2025, instead of $7,500, for a total of $81,250. With the potential of compounding returns, maxing out your 401(k) until you reach full retirement age of 67 could go a long way to helping you achieve financial security in retirement.

The Impact of Contributing More Over Time

The earlier you start saving for retirement, the more time your money will potentially have to grow, thanks to the power of compounding returns, as mentioned above.

In addition, by increasing your 401(k) contributions each year, even by just 1% annually, the savings could really add up. For instance, consider a 35-year-old making $60,000 who contributes 1% more each year until their full retirement age of 67. Assuming a 5.5% annual return and a modest regular increase in salary, they could potentially save more than an additional $85,000 for retirement.

That’s just an example, but you get the idea. Increasing your savings even by a modest amount over the years may be a powerful tool in helping you realize your retirement goals.

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Factors That May Impact Your Decision

In addition to the general ideas above for the different stages of your life and career, it’s also wise to think about taxes, your employer contribution, your own goals, and more when deciding how much to contribute to your 401(k).

1. The Tax Effect

The key fact to remember about 401(k) plans is that they are tax-deferred accounts, and they are considered qualified retirement plans under ERISA (Employment Retirement Income Security Act) rules.

That means: The money you set aside is typically deducted from your paycheck pre-tax, and it grows in the account tax free — but you pay taxes on any money you withdraw. (In most cases, you’ll withdraw the money for retirement expenses, but there are some cases where you might have to take an early 401(k) withdrawal. In either case, you’ll owe taxes on those distributions.)

The tax implications are important here because the money you contribute effectively reduces your taxable income for that year, and potentially lowers your tax bill.

Let’s imagine that you’re earning $120,000 per year, and you’re able to save the full $23,500 allowed by the IRS for 2025. Your taxable income would be reduced from $120,000 to $96,000, thus putting you in a lower tax bracket.

2. Your Earning Situation

One rule-of-thumb is to save at least 10% of your annual income for retirement. So if you earn $100,000, you’d aim to set aside at least $10,000. But 10% is only a general guideline. In some cases, depending on your income and other factors, 10% may not be enough to get you on track for a secure retirement, and you may want to aim for more than that to make sure your savings will last given the cost of living longer.

For instance, consider the following:

•   Are you the sole or primary household earner?

•   Are you saving for your retirement alone, or for your spouse’s/partner’s retirement as well?

•   When do you and your spouse/partner want to retire?

If you are the primary earner, and the amount you’re saving is meant to cover retirement for two, that’s a different equation than if you were covering just your own retirement. In this case, you might want to save more than 10%.

However, if you’re not the primary earner and/or your spouse also has a retirement account, setting aside 10% might be adequate. For example, if the two of you are each saving 10%, for a combined 20% of your gross income, that may be sufficient for your retirement needs.

All of this should be considered in light of when you hope to retire, as that deadline would also impact how much you might save as well as how much you might need to spend.

3. Your Retirement Goals

What sort of retirement do you envision for yourself? Even if you’re years away from retirement, it’s a good idea to sit down and imagine what your later years might look like. These retirement dreams and goals can inform the amount you want to save.

Goals may include thoughts of travel, moving to another country, starting your own small business, offering financial help to your family, leaving a legacy, and more.

You may also want to consider health factors, as health costs and the need for long-term care can be a big expense as you age.

4. Do You Have Debt?

It can be hard to prioritize saving if you have debt. You may want to pay off your debt as quickly as possible, then turn your attention toward saving for the future.

The reality is, though, that debt and savings are both priorities and need to be balanced. It’s not ideal to put one above the other, but rather to find ways to keep saving even small amounts as you work to get out of debt.

Then, as you pay down the money you owe — whether from credit cards or student loans or another source — you can take the cash that frees up and add that to your savings.

The Takeaway

Many people wonder how much to contribute to a 401(k). There are a number of factors that will influence your decision. First, there are the contribution limits imposed by the IRS. In 2024, the maximum contribution you can make to your 401(k) is $23,000, plus an additional $7,500 catch-up contribution if you’re 50 and up. In 2025, you can contribute a maximum of $23,500, plus an additional $7,500 catch-up contribution if you’re 50 or older. And if you are aged 60 to 63, in 2025, you can contribute $11,250 instead of $7,500, thanks to SECURE 2.0

While few people can start their 401(k) journey by saving quite that much, it’s wise, if possible, to contribute enough to get your employer’s match early in your career, then bump up your contribution amounts at the midpoint of your career, and max out your contributions as you draw closer to retirement, if you can.

Another option is follow a common guideline and save 10% of your income beginning as soon as you can swing it. From there, you can work up to saving the max. And remember, you don’t have to limit your savings to your 401(k). You may also be able to save in other retirement vehicles, like a traditional IRA or Roth IRA.

Of course, a main determination of the amount you need to save is what your goals are for the future. By contemplating what you want and need to spend money on now, and the quality of life you’d like when you’re older, you can make the decisions that are best for you.

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FAQ

How much should I contribute to my 401(k) per paycheck?

If you can, try to contribute at least enough of each paycheck to get your employer’s matching funds, if they offer a match. So if your employer matches 6% of your contributions, aim to contribute at least 6% of each paycheck.

What percent should I put in my 401(k)?

A common rule of thumb is to contribute at least 10% of your income to your 401(k) to help reach your retirement goals. Just keep in mind the annual 401(k) contribution limits so you don’t exceed them. For 2025, those limits are $23,500, plus an additional $7,500 for those 50 and up. In 2025, those aged 60 to 63 may contribute an additional $11,250 (instead of $7,500).

Is 10% too much to contribute to 401(k)? What about 20%?

Contributing at least 10% to your 401(k) is a common rule of thumb to help save for retirement. If you are able to contribute 20%, it can make sense to do so. Just be sure not to exceed the annual 401(k) contribution limits. The contribution limits may change each year, so be sure to check annually.


Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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.

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.

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INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.


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Investment Strategies By Age

Your age is a major factor in the investment strategy you choose and the assets you invest in. The investments someone makes when they’re in their 20s should look very different from the investments they make in their 50s.

Generally speaking, the younger you are, the more risk you may be able to tolerate because you’ll have time to make up for investment losses you might incur. Conversely, the closer you are to retirement, the more conservative you’ll want to be since you have less time to recoup from any losses. In other words, your investments need to align with your risk tolerance, time horizon, and financial goals.

Most important of all, you need to start saving for retirement now so that you won’t be caught short when it’s time to retire. According to a 2024 SoFi survey of adults 18 and older, 59% of respondents had no retirement savings at all or less than $49,999.

Here is some information to consider at different ages.

Investing in Your 20s

In your 20s, you’ve just started in your career and likely aren’t yet earning a lot. You’re probably also paying off debt such as student loans. Despite those challenges, this is an important time to begin investing with any extra money you have. The sooner you start, the more time you’ll have to save for retirement. Plus, you can take advantage of the power of compounding returns over the decades. These strategies can help get you on your investing journey.

Strategy 1: Participate in a Retirement Savings Plan

One of the easiest ways to start saving for retirement is to enroll in an employer-sponsored plan like a 401(k). Your contributions are generally automatically deducted from your paycheck, making it easier to save.

If possible, contribute at least enough to qualify for your employer’s 401(k) match if they offer one. That way your company will match a percentage of your contributions up to a certain limit, and you’ll be earning what’s essentially free money.

Those who don’t have access to an employer-sponsored plan might want to consider setting up an individual retirement account (IRA). There are different types of IRAs, but two of the most common are traditional and Roth IRAs. Both let you contribute the same amount (up to $7,000 in 2024 and 2025 for those under age 50), but one key difference is the way the two accounts are taxed. With Roth IRAs, contributions are not tax deductible, but you can withdraw money tax-free in retirement. With traditional IRAs, you deduct your contributions upfront and pay taxes on distributions when you retire.

Strategy 2: Explore Diversification

As you’re building a portfolio, consider diversification. Diversification involves spreading your investments across different asset classes, such as stocks, bonds, and real estate investment trusts (REITs). One way twentysomethings might diversify their portfolios is by investing in mutual funds or exchange-traded funds (ETFs). Mutual funds are pooled investments typically in stocks or bonds, and they trade once per day at the end of the day. ETFs are baskets of securities that trade on a public exchange and trade throughout the day.

You may be able to invest in mutual funds or ETFs through your 401(k) or IRA. Or you could open a brokerage account to begin investing in them.

Strategy 3: Consider Your Approach and Comfort Level

As mentioned, the younger an individual is, the more time they may have to recover from any losses or market downturns. Deciding what kind of approach they want to take at this stage could be helpful.

For instance, one approach involves designating a larger portion of investments to growth funds, mutual funds or ETFs that reflect a more aggressive investing style, but it’s very important to understand that this also involves higher risk. You may feel that a more conservative approach that’s less risky suits you better. What you choose to do is fully up to you. Weigh the options and decide what makes sense for you.

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Investing in Your 30s

Once you’re in your 30s, you may have advanced in your career and started earning more money. However, at this stage of life you may also be starting a family, and you likely have financial obligations such as a mortgage, a car loan, and paying for childcare. Plus, you’re probably still paying off your student loans. Still, despite these expenses, contributing to your retirement should be a top priority. Here are some ways to do that.

Strategy 1: Maximize Your Contributions

Now that you’re earning more, this is the time to max out your 401(k) or IRA if you can, which could help you save more for retirement. In 2024, you can contribute up to $23,000 in a 401(k) and up to $7,000 in an IRA. In 2025, you can contribute up to $23,500 in a 401(k) and up to $7,000 in an IRA. (If you have a Roth IRA, there are income limits you need to meet to be eligible to contribute the full amount, which is one thing to consider when choosing between a Roth IRA vs. a traditional IRA.)

Strategy 2: Consider Adding Fixed-Income Assets to the Mix

While you can likely still afford some risk since you have several decades to recover from downturns or losses, you may also want to add some fixed-income assets like bonds or bond funds to your portfolio to help counterbalance the risk of growth funds and give yourself a cushion against potential market volatility. For example, an investor in their 30s might want 20% to 30% of their portfolio to be bonds. But, of course, you’ll want to determine what specific allocation makes the most sense for your particular situation.

Strategy 3: Get Your Other Financial Goals On Track

While saving for retirement is crucial, you should also make sure that your overall financial situation is stable. That means paying off your debts, especially high-interest debt like credit cards, so that it doesn’t continue to accrue interest. In addition, build up your emergency fund with enough money to tide you over for at least three to six months in case of a financial setback, such as a major medical expense or getting laid off from your job. And finally, make sure you have enough funds to cover your regular expenses, such as your mortgage payment and insurance.

Investing in Your 40s

You may be in — or approaching — your peak earning years now. At the same time, you likely have more expenses, as well, such as putting away money for your children’s college education, and saving up for a bigger house. Fortunately, you probably have at least 20 years before retirement, so there is still time to help build your nest egg. Consider these steps:

Strategy 1: Review Your Progress

According to one rule of thumb, by your 40s, you should have 3x the amount of your salary saved for retirement. This is just a guideline, but it gives you an idea of what you may need. Another popular guideline is the 80% rule of aiming to save at least 80% of your pre-retirement income. And finally, there is the 4% rule that says you can take your projected annual retirement expenses and divide them by 4% (0.04) to get an estimate of how much money you’ll need for retirement.

These are all rough targets, but they give you a benchmark to compare your current retirement savings to. Then, you can make adjustments as needed.

Strategy 2: Get Financial Advice

If you haven’t done much in terms of investing up until this point, it’s not too late to start. Seeking help from financial advisors and other professionals may help you establish a financial plan and set short-term and long-term financial goals.

Even for those who have started saving, meeting with a financial specialist could be useful if you have questions or need help mapping out your next steps or sticking to your overall strategy.

Strategy 3: Focus on the Your Goals

Since they might have another 20-plus years in the market before retirement, some individuals may choose to keep a portion of their portfolio allocated to stocks now. But of course, it’s also important to be careful and not take too much risk. For instance, while nothing is guaranteed and there is always risk involved, you might feel more comfortable in your 40s choosing investments that have a proven track record of returns.

Investing in Your 50s

You’re getting close to retirement age, so this is the time to buckle down and get serious about saving safely. If you’ve been a more aggressive investor in earlier decades, you’ll generally want to become more conservative about investing now. You’ll need your retirement funds in 10 years or so, and it’s vital not to do anything that might jeopardize your future. These investment strategies by age may be helpful to you in your 50s:

Strategy 1: Add Stability to Your Portfolio

One way to take a more conservative approach is to start shifting more of your portfolio to fixed-income assets like bonds or bond funds. Although these investments may result in lower returns in the short term compared to assets like stocks, they can help generate income when you begin withdrawing funds in retirement since bonds provide you with periodic interest payments.

You may also want to consider lower-risk investments like money market funds at this stage of your investment life.

Strategy 2: Take Advantage of Catch-up Contributions

Starting at age 50, you become eligible to make catch-up contributions to your 401(k) or IRA. In 2024 and 2025, you can contribute an additional $7,500 to your 401(k) for a total contribution of $30,500 for 2024, and $31,000 for 2025 if you max out your plan.

In 2024 and 2025, the catch-up contribution for an IRA is an additional $1,000 annually for a total maximum contribution of $8,000 for each year. This allows you to stash away even more money for retirement.

Strategy 3: Consider Downsizing

Your kids may be out of the house now, which can make it the ideal time to cut back on some major expenses in order to save more. You might want to move into a smaller home, for instance, or get rid of an extra car you no longer need.

Think about what you want your retirement lifestyle to look like — lots of travel, more time for hobbies, starting a small business, or whatever it might be — and plan accordingly. By cutting back on some expenses now, you may be able to save more for your future pastimes.

Investing in Your 60s

Retirement is fast approaching, but that doesn’t mean it’s time to pull back on your investing. Every little bit you can continue to save and invest now can help build your nest egg. Remember, your retirement savings may need to last you for 30 years or even longer. Here are some strategies that may help you accumulate the money you need.

Strategy 1: Get the Most Out of Social Security

The average retirement age in the U.S. is 65 for men and 63 for women. But you may decide you want to work for longer than that. Waiting to retire can pay off in terms of Social Security benefits. The longer you wait, the bigger your monthly benefit will be.

The earliest you can start receiving Social Security Benefits is age 62, but your benefits will be reduced by as much as 30% if you take them that early. If you wait until your full retirement age, which is 67 for those born in 1960 or later, you can begin receiving full benefits.

However, if you wait until age 70 by working longer or working part time, say, the size of your benefits will increase substantially. Typically, for each additional year you wait to claim your benefits up to age 70, your benefits will grow by 8%.

Strategy 2: Review Your Asset Allocation

Just before and during retirement, it’s important to make sure your portfolio has enough assets such as bonds and dividend-paying stocks so that you’ll have income coming in. You’ll also want to stash away some cash for unexpected expenses that might pop up in the short term; you could put that money in your emergency fund.

Some individuals in their 60s may choose to keep some stocks with growth potential in their asset allocation as a way to potentially avoid outliving their savings and preserve their spending power. Overall, people at this stage of life may want to continue the more conservative approach to investing they started in their 50s, and not choose anything too aggressive or risky.

Strategy 3: Keep investing in your 401(k) as long as you’re still working.

If you can, max out your 401(k), including catch-up contributions, in your 60s to sock away as much as possible for retirement. In 2025, those aged 60 to 63 can take advantage of an extra catch-up provision, thanks to SECURE 2.0: They can contribute $11,250, instead of $7,500, for a total of $34,750. This can be especially helpful if you didn’t invest as much as you ideally should have at earlier ages. Contributing to your 401(k) could also help lower your taxable income now, when you may be in a higher income tax bracket than you were in previous decades.

Also, you can continue to contribute to any IRAs you may have — up to the limit allowed by the IRS, which is $8,000 in 2024 and 2025, including catch-up contributions. If you have a Roth IRA, you will need to meet the income limits in order to contribute.

The Takeaway

Investing for retirement should be a priority throughout your adult life, starting in your 20s. The sooner you begin, the more time you’ll have to save. And while it’s never too late to start investing for retirement, focusing on investment strategies by age, and changing your approach accordingly, can generally help you reach your financial goals.

For instance, in your 20s and 30s you can typically be more aggressive since you have time to make up for any downturns or losses. But as you get closer to retirement in your 40s, 50s, and 60s, your investment strategy should shift and take on a more conservative approach. Like your age, your investment strategy should adjust across the decades to help you live comfortably and enjoyably in your golden years.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).


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SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.


Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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.

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.

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Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

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Should I Open a Backup Bank Account?

A backup bank account is a secondary account that can be used for a variety of purposes, such as added security and better financial organization. Opening a secondary account can also be a great way to tap additional banking perks, like a sign-up bonus or a higher interest rate, being offered by a different institution.

That said, it’s not always a matter of “the more, the merrier.” Multiple bank accounts can make it harder to keep track of your income and expenses and result in unwanted bank fees. Read on to understand the pros and cons of having a backup bank account so you can decide what’s best for you.

Key Points

•   A backup bank account is typically a checking or savings account that is secondary to an account holder’s primary account.

•   Backup accounts can assist in organizing finances, establishing emergency funds, and accessing perks from different banks.

•   Managing multiple accounts can be overwhelming and may complicate financial management or result in added fees.

•   Other potential drawbacks of backup accounts include spreading finances thin and increasing security concerns.

•   It’s important to consider whether backup accounts will enhance your financial wellness and, if so, to choose the option with the benefits you need most.

Understanding the Concept of a Backup Bank Account

A backup bank account is an account that is typically secondary to your main bank account. It could be held at a different institution or the same one where you already have an account. You might use a backup account to hold your emergency funds, manage secondary income, or combine the benefits of online banks (like higher interest rates) with those of a traditional bank (such as easy cash deposits).

Benefits of Having a Backup Bank Account

Opening a backup bank account offers a number of advantages. Here are some to consider.

Increased Financial Security

If you keep a sizable amount of cash on deposit in the bank, you might open a backup account to boost your insurance coverage. The Federal Deposit Insurance Corporation (FDIC) and National Credit Union Administration (NCUA) cover up to $250,000 per depositor, per insured institution, in the rare event of a bank or credit union failure. One way to insure more than $250,000 in deposits, is to open accounts at more than one institution.

Having a second account can also serve as a back-up should your primary account become temporarily inaccessible due to technical glitches, identity theft, or fraud. This separation can limit the impact of any problems or security breaches and enable you to continue your banking activities without any disruption.

Access Additional Perks

A backup account allows you to enjoy extra perks and services that may not be available with your primary account. For example, some banks offer higher interest rates, sign-up bonuses, cash-back rewards, or fee-free options for specific account types. By strategically choosing a backup bank that offers additional benefits, you can potentially boost your earnings or reduce your banking costs.

Emergency Fund Access

Having a backup bank account can be a good way to protect yourself financially in emergency situations. Financial advisors often recommend having an emergency fund equal to three to six months’ worth of basic living expenses. If you try to stash that away in your primary savings account, you may find that the money has a way of getting spent instead of sitting there for a rainy day.

Instead, you might want to open a secondary savings account earmarked specifically for building your emergency fund, then set up small recurring transfers from your checking account. This can be a relatively simple and painless way to build up your cash reserves. Then if you get hit with a major home or car repair, or an unexpected medical bill, your secondary account can save the day.

Easier Money and Budget Management

Having multiple bank accounts can also make it easier to manage your finances. For example, you might open a second checking account to separate earnings from a sideline or freelance business. This can help with budgeting, accounting, and tax preparation. Or, you might use one checking account for essential expenses (like rent, utilities, and groceries) and another for discretionary (a.k.a., “fun”) spending. This setup provides a clear breakdown of your budget, making it easier to track spending and avoid overspending in specific categories.

Similarly, having multiple savings accounts can help you reach your savings goals. You might have one savings account earmarked for a downpayment for a home and another for your next vacation. Having this type of separation can make it simpler to see how you are progressing towards your short-term goals.

For some couples, it can be helpful to have a joint account to pay for shared living expenses, along with secondary individual accounts that offer each partner a degree of financial independence and privacy.

Recommended: How to Open a Bank Account for Someone Else

Get up to $300 when you bank with SoFi.

No account or overdraft fees. No minimum balance.

Up to 4.00% APY on savings balances.

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Potential Drawbacks to Consider

There are also some potential downsides to backup bank accounts. Keep the following in mind as you consider if additional accounts are right for you.

Account Confusion

Ever notice how the more streaming platforms you have, the harder it can be to keep track of which shows you’re watching where? In a similar vein, more bank accounts can mean more things to get jumbled: account numbers, passwords, balances, fees, and more.

You might forget which account you’re using for autopay, for example, and wind up overdrafting. Or, you might accidentally send your payment for a house-sitting gig to your primary checking account instead of the secondary one. In other words, having multiple accounts can require additional organizational moves to stay on top of your money.

Spreading Finances Thin

Another potential con to having different types of bank accounts is that it can divide up your wealth in ways that may not serve you well. For example, some bank accounts require a minimum balance to avoid monthly fees. If your funds are split between multiple accounts, it could be harder to meet that minimum.

In addition, some financial institutions offer savings accounts with tiered interest rates; these accounts pay different rates of interest depending on the amount of funds held in the account, and the rate increases with the size of the account. If you transfer some of your funds on deposit into a backup account elsewhere, you might lose out on the APY you were counting on.

Recommended: APY Calculator

Security Concerns

While financial institutions work hard to achieve top-notch security, bank fraud does occasionally happen. The more accounts you have, generally the greater the risk of phishing scams or data breaches, as each account/institution represents a potential security vulnerability. Having multiple accounts also means keeping track of multiple login details; if these are not securely managed, it increases the risk of unauthorized access.

To secure your accounts from hackers, you’ll want to use strong, unique passwords and enable two-factor authentication on all accounts. Also be sure you never share your account details with people you don’t know or click on links in potentially fraudulent emails or texts. Regularly monitoring your accounts for suspicious activity can also help you catch and respond to security concerns promptly.

How To Choose the Right Backup Bank Account

If you do opt for a backup bank account, you’ll want to consider what will best suit your needs. Some factors worth mulling over:

•   Account fees: You’ll want to look for accounts with low or no fees, especially if you plan to use the account infrequently. Many online banks offer fee-free accounts, which can be a great option for a backup account.

•   Interest rates: If you’re opening a backup savings account, consider one with a high-interest rate to maximize savings. Some online savings accounts offer competitive rates that can make a significant difference in long-term savings growth.

•   Accessibility: Evaluate how easy it is to access your funds in the backup account. Consider whether the bank offers convenient options like online banking, a mobile app, or ATMs in your area. For emergency funds, quick and easy access is essential.

•   Perks and rewards: Compare perks like sign-up bonuses, cash-back rewards, or other incentives when choosing a backup bank. Some banks offer attractive benefits that can add value to your account and make opening a second account more worthwhile.

•   Account types: Consider what type of account would best suit your needs. If your backup account is for budgeting, a checking account may be most appropriate. For emergency funds, a high-yield savings account is often a better fit.

•   Bank reputation: Research the bank’s reputation and customer service quality. Reading customer reviews can give you insights into the bank’s reliability, responsiveness, and online banking experience.

The Takeaway

Backup bank accounts have several upsides: They can help you organize your finances and reach your goals; they may help grow your money; and they can enhance your financial security. However, there are also some potential disadvantages to contend with, such as the risk of confusion among your accounts, spreading your money too thin, and possibly increasing some safety risks. By considering these pros and cons, you can decide if a backup bank account is the right next step for you.

Whether you are considering opening a primary or backup account, take a look at all that 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

What are the main reasons to open a backup bank account?

One common reason for opening a backup bank account is added financial security. Should your primary account become inaccessible due to technical issues or fraud, you’ll still have access to funds. A backup account can also help you better organize your finances. For example, you might open a second checking account to separate your personal and business finances, or a backup savings account to keep your emergency funds separate from other savings. This structure can help you keep track of spending and savings more effectively.

Can having multiple accounts affect my credit score?

Banks typically don’t report your banking activity to the credit bureaus, so having multiple bank accounts won’t directly impact your credit score. However, if any of your accounts are linked to overdraft protection (a form of credit) and you miss payments on those accounts, it could impact your score. Your bank could send your overdue payment to a collections agency, and the collections agency would report your unpaid debt to the credit bureaus. To avoid potential issues, you’ll want to avoid overdrafts and properly manage any credit-linked accounts to protect your credit rating.

What features should I look for in a backup bank account?

Which features to look for in a backup bank account will depend on your particular needs and wants. Perhaps a sign-up bonus is attractive to one person, while another wants to go with the account that offers the lowest fees or highest interest rates. Some people might choose to have their primary account at an online bank and use a traditional bank for their backup one, or vice versa.

Photo credit: iStock/SDI Productions


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.

*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.

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.

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.

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What Is an Apprenticeship? Do They Pay? Pros & Cons

What Is an Apprenticeship? Complete Guide to Apprenticeships

An apprenticeship program pairs paid on-the-job training with classroom instruction to produce skilled workers, who get a foot in the door of their preferred field without going to college for four years or more.

More than 646,000 apprentices were taking part in nearly 27,000 registered apprenticeship programs in 2024, according to the U.S. Department of Labor’s Office of Apprenticeship.

Here are details about finding an apprenticeship, how much you might earn, the commitment required, and more.

Key Points

•   Apprenticeships offer a blend of hands-on training, work experience, classroom education, and mentorship in a particular trade. This combination enables apprentices to develop both practical skills and theoretical knowledge.

•   The length of an apprenticeship varies depending on the trade and program, typically ranging from one to six years.

•   Apprenticeships are paid positions, allowing individuals to earn a salary while they learn. The average apprentice salary is $22 per hour.

•   Successful completion of an apprenticeship often leads to stable, in-demand jobs with opportunities for advancement. Many apprentices receive promotions or raises during their training period.

•   Unlike traditional college education, apprenticeships provide direct entry into the workforce, practical experience, and financial compensation, reducing or eliminating student debt.

Apprenticeship 101

An apprenticeship is a way to acquire hands-on training, work experience, classroom instruction, and mentorship in a particular trade. Not only is an apprenticeship paid, but it’s also a doorway to a stable and in-demand job.

Most apprentices are promoted or receive a raise during their apprenticeship. The average starting salary is $80,000 after an apprentice completes an apprenticeship program.

Apprentices receive a nationally recognized credential in their industry upon completion of the program, and may even earn academic credit toward a college degree. Ninety-three percent who cross the finish line retain employment, according to the Labor Department.

There are several places to look for an apprenticeship. You can use the federal agency’s Apprenticeship Finder to search by keyword and location, contact your state’s apprenticeship agency, check out trade or labor unions in your area, or use traditional job search engines. If you need more guidance, find an American Job Center near you.

Recommended: Why College Isn’t for Everyone

How Does an Apprenticeship Work?

The majority of apprenticeships are registered either with the Department of Labor or a state apprenticeship agency. Upon entering a program, apprentices receive training under the guidance of an experienced mentor. Many are also required to take academic courses related to that career.

The eligible starting age is 16, but some occupations require apprentices to be at least 18 years of age. Some apprentices may also have the option to enter a pre-apprenticeship program, which aims to better prepare workers for the apprenticeship program.

Upon completion of the program, a nationally recognized credential, certificate, or degree is awarded.

How Long Does an Apprenticeship Last?

An apprenticeship program usually lasts four years. Some take as little as one year, and some take as many as six. Whatever the length, most apprentices must complete at least 2,000 hours of on-the-job learning plus 144 hours of classroom work.

How Much Do Apprentices Make?

The average apprentice salary is $22 per hour, with starting earnings around $15–$20 per hour. Typically, wages increase each year as they gain skills and experience. By the end of their apprenticeship, many earn between $25–$35 per hour or more. Earnings vary based on the industry, location, and whether the apprenticeship is unionized.

Do You Have to Pay for an Apprenticeship?

Apprenticeship training is typically offered by the employer at no cost to the apprentice, but apprentices may need to cover certain expenses, such as tools or educational materials.

Employers may pay for the instruction but specify that if an apprentice leaves the program before completion, related costs must be paid back to the employer.

What Types of Careers Offer Apprenticeships?

If construction jobs come to mind when you think of apprenticeships, that’s logical. Many apprenticeships are in the construction trades, but not all are.

Here’s a sample of jobs and the number of active, registered apprentices:

Occupation

Active apprentices in 2022

Median annual wage*

Electrical power line installers and repairers 15,249 $85,420
Heavy truck and tractor-trailer truck drivers 9,944 $54,320
Heating, AC, and refrigeration mechanics and installers 8,535 $57,300
Nursing assistants 4,033 $38,130
Firefighters 2,306 $57,120
Registered nurses 2,281 $86,070
Food service managers 1,820 $63,060
Barbers and hairstylists 1,751 $35,080
Software developers 1,219 $132,270
*2023 Bureau of Labor Statistics wage data for the occupation as a whole

What About College or Trade School?

Alternatives to apprenticeships include attending a four-year college or a trade school. There, you’ll be provided with a broader set of knowledge along with the key skills required for your area of study.

Trade school costs less than college but still can cost thousands of dollars a semester. As an apprentice, you can learn to do something you enjoy while getting paid. What’s the catch? Trade school degrees often take about two years to complete. Many apprenticeships last longer, and even getting one can be tough.

Then there’s the traditional college route. But is college worth it?

More than half of college students take out student loans, usually federal student loans but in some cases private student loans. The average borrower leaves school owing just over $35,000.

However, the return on investment can be huge. The ROI for a bachelor’s degree is 134% after 20 years on average, according to the Education Data Initiative.

Major U.S. companies have vowed to change their hiring habits by offering career paths to people without four-year college degrees. Almost two-thirds of U.S. workers do not have a bachelor’s degree, and job screening by college degree hits minorities especially hard. But change has been slow in coming. A bachelor’s degree remains the standard in many cases.

Beyond the cost of college tuition, whether you choose an apprenticeship or a degree, you’ll need to evaluate salary and career potential using either path to find the one that’s right for you.

Student Loans, Grants, and Scholarships

Whether you choose trade school, college, or an apprenticeship with a community college component, you might need financial aid in the form of grants, scholarships, federal student loans, federal work-study, or private student loans.

Private student loans can be helpful, but because they lack the benefits and borrower protections available with federal student loans, they are intended to fill in gaps after other funding sources have been spoken for.

Apprentices in a credit-bearing college program who qualify can receive federal Pell Grants.

And yes, it’s possible to take out student loans for community college.

Do hunt for scholarships. Every year sees $2 billion in unclaimed scholarships, meaning merit- and need-based aid was left on the table.

Recommended: Grants and Scholarships by State

Pros and Cons of an Apprenticeship

Here’s a snapshot of the upsides and potential downsides of apprenticeships.

Pros Cons
Apprentices can earn a salary while avoiding student loan debt. An apprentice will typically start with a relatively low salary.
Apprentices build new skills through hands-on experience and classroom instruction, and may even earn credit toward a college degree. The competition to get an apprenticeship can be fierce, especially in high-paying fields.
It can open the door to a well-paid career. Many occupations still require at least a bachelor’s degree, particularly in the medical and science fields.

Apprenticeship vs Internship

Both apprenticeships and internships aim to help you gain expertise with hands-on training in a certain industry, but several differences should be noted. Here are some of the most common ones.

•   Duration: Internships typically last only one to three months, while an apprenticeship can last up to six years.

•   Pay: Apprentices receive at least the minimum wage specified by the Fair Labor Standards Act for hours on the job. Wage increases are earned as the apprentice gains and uses skills while working for the employer. Internships are usually unpaid, temporary positions.

•   Structure: Apprenticeships have a structured training plan and prepare an apprentice to fill an occupation within the organization. Internships aren’t always structured and only prepare interns through entry-level work.

•   Mentorship: Apprentices work with an experienced mentor. Internships don’t always include mentorship.

•   Credential: After completing an apprenticeship program, nationally accredited certification is awarded. Interns generally don’t receive any type of credential.

•   Job opportunities: Interns are usually in college and get an opportunity for career exploration and skill development. An apprenticeship provides in-depth training, and apprentices can potentially transition into the same role after completing the program and earn a higher salary.

The Takeaway

An apprenticeship can be an excellent way to gain access to a company or a field you wish to work in without going the traditional college route. They aren’t for everyone, though; nor are they available in every field.

While apprenticeships are typically covered by your employer, you may still find you need funding to cover additional costs or living expenses. In that case, you can rely on cash savings, grants, scholarships, and federal and private student loans.

If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.

Cover up to 100% of school-certified costs including tuition, books, supplies, room and board, and transportation with a private student loan from SoFi.

FAQ

What is an apprenticeship?

An apprenticeship is a structured program that combines paid on-the-job training with classroom instruction, allowing individuals to gain practical skills and experience in a specific trade or profession. Apprenticeships are often offered in fields like construction, healthcare, and IT, providing a pathway to industry-recognized credentials or licensure.

How long do apprenticeships typically last?

The length of an apprenticeship varies by field and program but generally ranges from one to six years. Most programs include a set number of hours for on-the-job training and classroom instruction, ensuring participants gain comprehensive knowledge and practical experience in their chosen industry.

What are the benefits of an apprenticeship?

Apprenticeships provide hands-on training, mentorship, and a salary while learning. They often lead to industry-recognized certifications, higher earning potential, and strong job prospects. Unlike traditional education programs, apprenticeships allow participants to “earn while they learn,” reducing or eliminating student debt.


Photo credit: iStock/JohnnyGreig

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Please borrow responsibly. SoFi Private Student loans are not a substitute for federal loans, grants, and work-study programs. We encourage you to evaluate all your federal student aid options before you consider any private loans, including ours. Read our FAQs.

Terms and Conditions Apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. SoFi Private Student loans are subject to program terms and restrictions, such as completion of a loan application and self-certification form, verification of application information, the student's at least half-time enrollment in a degree program at a SoFi-participating school, and, if applicable, a co-signer. In addition, borrowers must be U.S. citizens or other eligible status, be residing in the U.S., and must meet SoFi’s underwriting requirements, including verification of sufficient income to support your ability to repay. Minimum loan amount is $1,000. See SoFi.com/eligibility for more information. Lowest rates reserved for the most creditworthy borrowers. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change. This information is current as of 04/24/2024 and is subject to change. SoFi Private Student loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org).

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

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SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.


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.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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Conventional Loan Requirements

Conventional loans — mortgages that are not insured by the federal government — are the most popular type of mortgage and offer affordability to homebuyers.

Private mortgage lenders originate and fund conventional loans, which are then often bought by Fannie Mae and Freddie Mac, publicly traded companies that are run under a congressional charter.

By buying and selling these mortgages, Fannie and Freddie help to ensure a reliable flow of mortgage funding.

Key Points

•   Conventional loans in 2024 typically require a minimum FICO® score of 620, with better interest rates offered to those with higher scores.

•   A down payment of 20% is ideal to avoid PMI, but first-time homebuyers can qualify with as little as 3% down.

•   A borrower’s loan-to-value ratio and debt-to-income ratio are also important considerations for lenders.

•   Conventional loans above a certain amount set by the Federal Housing Finance Administration are considered nonconforming loans.

•   Conforming loan limits vary by location, with higher limits in high-cost areas.

Requirements for Conventional Loans

It can be confusing to know how to qualify for a mortgage.

Just realize, for one thing, that a higher credit score is usually required for a conventional home loan than an FHA loan backed by the Federal Housing Administration, a type popular among first-time buyers.

Here are factors a lender will consider when sizing you up for a conventional loan.

Your Credit Score

You’ll usually need a FICO credit score of at least 620 for a fixed-rate or adjustable-rate mortgage.

The FICO score range of 300 to 850 is carved into these categories:

•   Exceptional: 800 to 850

•   Very Good: 740 to 799

•   Good: 670 to 739

•   Fair: 580 to 669

•   Poor: 300 to 579

In general, the higher your credit score, the better the interest rates you’re offered.

Down Payment

Putting 20% down is desirable because it means you can avoid paying PMI, or private mortgage insurance, which covers the lender in case of loan default.

But many buyers don’t put 20% down. The median down payment on a home is 15%, according to a recent study by the National Association of Realtors®.

Conventional loans require as little as 3% down for first-time homebuyers, and the down payment can be funded by a gift from a close relative; a spouse, fiancé or domestic partner; a buyer’s employer or church; or a nonprofit or public agency. The gift may require a gift letter for the mortgage.

Just keep in mind that the smaller the down payment, the higher your monthly payments are likely to be, and PMI may come along for the ride until you reach 20% equity.

First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.

Questions? Call (888)-541-0398.


Debt-to-Income Ratio

Your debt-to-income ratio (DTI) helps a lender understand your ongoing monthly debt obligations relative to your gross monthly income.

To calculate back-end DTI:

1.    Add up your monthly bills (but do not include groceries, utilities, cellphone bill, car insurance, and health insurance).

2.    Divide the total by your pretax monthly income.

3.    Multiply by 100 to convert the number to a percentage.

In general, lenders like to see a DTI ratio of 36% but will accept 43%.

The Fannie Mae HomeReady® loan, for lower-income borrowers, may allow a DTI ratio of up to 50%.

In any case, the lower your DTI ratio, the more likely you are to qualify for a mortgage and possibly better terms.

Loan-to-Value Ratio

The loan-to-value ratio (LTV) is the amount of the mortgage you are applying for compared with the home value. The higher the down payment, the lower the LTV ratio.

Fannie Mae typically sets LTV limits at 97% for a fixed-rate mortgage for a principal residence (think: 3% down) and 85% for a fixed or adjustable loan for a one-unit investment property.

When LTV exceeds 80% on a conforming loan, PMI will likely apply, although some borrowers employ a piggyback loan to avoid mortgage insurance.

Conventional Conforming Loan Limits

Many loans are both conventional and conforming — meaning they meet the guidelines of secondary mortgage market powerhouses Fannie Mae and Freddie Mac, which buy such mortgages and often package them into securities for investors.

Conventional conforming loans fall below limits set by the Federal Housing Finance Agency (FHFA) every year.
Staying under a conforming loan limit often equates to a lower-cost mortgage because the loan can be acquired by Fannie and Freddie.

The conforming loan limits for 2025 in many counties in the contiguous states, Washington, D.C., and Puerto Rico rose with market prices:

•   One unit: $806,500

•   Two units: $981,500

•   Three units: $1,186,350

•   Four units: $1,474,400

In high-cost areas like Alaska, Hawaii, Guam, and the U.S. Virgin Islands, the 2025 conforming loan limits are:

•   One unit: $1,209,750

•   Two units: $1,472,250

•   Three units: $1,779,525

•   Four units: $2,211,600

If you’re curious about your county’s specific conforming loan limits are, you can check out this FHFA guide.

Nonconforming Loans

Word games, anyone? Nonconforming loans are simply mortgages that do not meet Fannie and Freddie standards for purchase. They usually take the form of jumbo loans and government-backed loans.

A homebuyer or refinancer who needs a mortgage beyond the FHFA limits can seek a jumbo mortgage loan. A jumbo loan is still a conventional loan if it’s not backed by a government agency; it’s just considered a “nonconforming” loan.

FHA, VA, and USDA mortgages — those backed by the Federal Housing Administration, Department of Veterans Affairs, and the U.S. Department of Agriculture — are also nonconforming loans.

Nonconforming mortgage rates for jumbo loans may be higher because the loans carry greater risk for lenders, but when the nonconforming loan is backed by the government, its rate might skew lower than conventional conforming rates.

The Takeaway

Conventional loan requirements are good to know when you’re looking at the most popular type of mortgage around. Would-be homebuyers will want to make sure their credit score, debt-to-income ratio, and down payment numbers are lined up as favorably as possible before pursuing their dream property.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

SoFi Mortgages: simple, smart, and so affordable.

FAQ

Are there any drawbacks to a conventional loan?

The main drawback to a conventional loan is that you will need to make some type of down payment on the property. It doesn’t need to be the 20% down payment that was common in decades past. But even a low down payment of, say, 3.5% could add up to tens of thousands of dollars given today’s home prices.

What’s the main reason I might not qualify for a conventional loan?

The most common reason someone might not qualify for a conventional home loan is usually related to credit — perhaps the applicant has a credit score below 620, or maybe there is some other significant warning sign on the credit report, such as a history of delinquencies or bankruptcy.


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*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

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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¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
Veterans, Service members, and members of the National Guard or Reserve may be eligible for a loan guaranteed by the U.S. Department of Veterans Affairs. VA loans are subject to unique terms and conditions established by VA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. VA loans typically require a one-time funding fee except as may be exempted by VA guidelines. The fee may be financed or paid at closing. The amount of the fee depends on the type of loan, the total amount of the loan, and, depending on loan type, prior use of VA eligibility and down payment amount. The VA funding fee is typically non-refundable. SoFi is not affiliated with any government agency.

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