Mar
18
2025
What Is Discretionary Income?

What Is Discretionary Income? How Do You Calculate It?

By | Budgeting & Goals, Financial Independence, money | Comments Off on What Is Discretionary Income? How Do You Calculate It?

Discretionary income is defined as the cash you have available to spend after your necessary payments are covered. Those necessities are typically made up of basic living expenses, such as housing, utilities, food, healthcare, insurance costs, as well as minimum payments on debt.

So what does discretionary income equal in daily life? It’s the post-tax money you can put toward things like eating out, entertainment, travel, clothing, electronics, and gym memberships. You might think of discretionary income as paying for the wants in life vs. the needs.

Read on for a closer look at the meaning of discretionary income, including examples, how to calculate discretionary income, plus tips on how to make the most of your discretionary income.

Key Points

•   Discretionary income is the money left after paying for necessary expenses like housing, utilities, food, healthcare, and insurance.

•   Common uses for discretionary income include nonessential spending, saving/investing, and paying down debt.

•   Calculating discretionary income involves subtracting necessary expenses from take-home pay.

•   Your income, cost of living, debts, and tax rate all impact how much discretionary income you have.

•   Effective management of discretionary income involves monitoring spending, setting goals, increasing income, and avoiding lifestyle inflation.

What Is Discretionary Income?

Discretionary income is defined as the amount of post-tax income that is left over after you have paid for all your essential expenses. Essential expenses include your mortgage or rent, utilities, car payments, as well as food, healthcare, and occasionally clothing (if it is needed, not just wanted). To phrase it another way, no, a Netflix subscription or your AM latte isn’t a “necessity.”

Also worth noting (warning, buzzkill ahead): Discretionary income isn’t just to be spent on cool stuff and fun experiences. It’s also important to put at least some of this money towards savings and making extra payments on any debt. This can help you build wealth and financial security over time.

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7 Examples of Discretionary Income and Expenses

Discretionary expenses are the things people buy with their discretionary income. Here are some examples:

Entertainment and Eating Out

This category includes such expenses as dining out, getting drinks, splurge-y takeout food (pizza delivery, we’re looking at you!), and fancy coffees. In terms of entertainment, the following is typically considered discretionary: Concert, play, and movie tickets, as well as museum admission, books, magazines, streaming services, and similar costs.

Recommended: How to Save on Streaming Services

Vacations and Travel

Taking a vacation, whether you go to the other side of the planet or an hour’s drive away, is not a necessity, despite how you may feel about it.

Luxury Items

These expenses could be anything from a pricey sports car to designer clothes to jewelry to wine. While clothing and a car may be necessities in life, when you pay extra for top-notch prestige brands, you enter the realm of discretionary expenses.

Memberships and Hobbies

Yes, joining a gym or taking up a musical instrument are admirable pursuits. But they are not essential. For this reason, things like yoga or Pilates classes, crafting supplies, and similar expenses are considered discretionary.

Personal Care

A basic haircut or bottle of shampoo may not be discretionary, but pricey blowouts, manicures, massages, skincare items, and the like are.

Upgrading Items

If your current phone is functional but you still decide to buy the latest one, that’s a discretionary expense. The same holds true for being bored with your couch and getting a new one or remodeling your bathroom just because.

Gifts

Of course you want to show you care for your loved ones. But buying presents for others isn’t something you absolutely have to do, so this should be earmarked as a discretionary expense.

How Is Discretionary Income Used?

In addition to making the types of purchases listed above, discretionary income can also be used to save for future purchases and getting ahead on long-term financial goals.

Common Uses of Discretionary Income

Here’s a more detailed look at some of the different ways you can use discretionary income:

•   “Fun” spending: Many people use discretionary income to purchase goods or experiences that they can enjoy right away.

•   Saving for short-term goals: Another common use of discretionary income is to put it in a high-yield savings account earmarked for goals like taking a vacation or making a down payment on your dream house.

•   Paying down debt: While minimum payments on debts are generally considered necessary expenses, making extra payments is a common — and potentially smart — way to use discretionary funds.

•   Investing: Another way many people use discretionary income is to invest it in the market for long-term goals like retirement or a child’s future college education.

•   Charitable donations: Doing good with your discretionary dollars is another common and positive way to spend discretionary income.

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How to Calculate Discretionary Income

The formula for calculating discretionary income is:

Discretionary Income = Gross Income − Taxes − Essential Expenses

Start by assessing your average monthly take-home income (gross income − taxes). You can do this by scanning the last several months of financial statements. Or if your only source of income is your paycheck, you can simply look at your paystubs.

Next, you’ll need to tally up your essential expenses. These may include:

•   Rent/mortgage payment

•   Utilities

•   Internet/phone bills

•   Groceries

•   Minimum debt payments (credit cards, student loans or car loans)

•   Insurance premiums

•   Medical expenses

•   Transportation costs

Once you know how much you’re spending on essentials, you can subtract that number from your monthly take-home income. The result is your monthly discretionary income.

Factors That Affect Discretionary Income Calculation

A number of things can influence the amount of discretionary income you have to spend, such as:

•   Income level: Higher earnings generally increase discretionary income, provided you don’t increase your living expenses as your income goes up.

•   Living costs: Living in an area with a high cost of living raises essential costs and, in turn, lowers discretionary income.

•   Debt level: Needing to make monthly payments on loans, credit cards, and other financial obligations reduces funds available for discretionary spending.

•   Tax rates: Higher income and/or property taxes lowers your take-home pay, resulting in less discretionary income.

•   Inflation: Rising prices for goods and services increases essential expenses, which shrinks discretionary income.

What Is a Good Amount of Discretionary Income?

Generally, a good amount of discretionary income means you have enough funds after covering your essential expenses to be able to save, invest, and still enjoy the pleasures of life. The 50/30/20 budgeting formula offers one way to allocate your income. It suggests using 50% of your take-home pay on needs, 30% on wants (discretionary purchases), and 20% on goals (saving and paying more than the minimum on debts).

For example, if your monthly take-home income is $5,000, $2,500 would be siphoned off for necessities, $1,500 would be allotted for wants, and $1,000 would go toward goals like saving and investing.

Managing Your Discretionary Income for Financial Success

Making the most of your discretionary income involves thoughtful planning and smart money management. Here are some strategies to consider:

•   Track your spending: “It’s the last thing that many people want to do on their precious weekends, but tracking spending is essential. There is real truth to the saying ‘What gets measured gets improved,’” says Brian Walsh, CFP® and Head of Advice & Planning at SoFi. You may find some easy places to cut back, freeing up more money for saving.

•   Slash necessary expenses: Consider ways you might be able to reduce the cost of essentials, such as switching to a more affordable insurance, cell phone, or internet provider; meal-planning to cut food spending; or moving to a less expensive location.

•   Set financial goals: Having specific goals — like purchasing a home, funding a child’s future education, or retiring early — can help you stay focused and use your discretionary income wisely.

•   Grow your income: To boost discretionary income, you might ask for a raise at work or look into side jobs, freelance work, or ways to earn passive income.

•   Avoid lifestyle creep: As your income rises, try to resist the temptation to increase spending. Consider funnelling the extra funds into savings or investments to build wealth and strengthen your financial future.

Discretionary vs Disposable Income

The terms “discretionary income” and “disposable income” are often used interchangeably but they are not the same thing.

Key Differences

While discretionary and disposable income both refer to income left over after certain financial obligations are met, they differ in scope.

•   Disposable income refers to the money you have left from your earnings after taxes are taken out but before any other deductions are removed. It’s the total amount you have available to spend, which is typically a much higher number than your discretionary income.

•   Discretionary income is a subset of disposable income — it’s the amount of money left after your taxes and all necessary expenses are paid. You use it for “extras” like entertainment, savings, and investments.

It’s important to note that the government and courts may have slightly different definitions of these terms. In bankruptcy cases, for example “disposable income” is the amount that remains after subtracting allowed bankruptcy expenses from your monthly gross income.

If you have student loans, the federal government uses a discretionary spending formula to set your repayment amount under income-driven repayment plans. For many plans, they define “discretionary income” as the difference between your annual income and 150% of the poverty guideline for your family size and state.

Get Ready to Bank Better with SoFi

Once you know how much discretionary income you have, it’s a good idea to set some of it aside in a savings account that pays an above-average interest rate.

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.


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FAQ

What is the meaning of discretionary income?

Discretionary income is defined as the amount of money you have left after covering essential expenses like taxes, rent or mortgage, utilities, and groceries. It represents the portion of your income that can be used for nonessential spending, such as entertainment, dining out, and vacations.

What is an example of discretionary income?

Discretionary income is the money left after paying for essentials like rent, groceries, and utilities. So, for example, if you earn $4,000 a month after taxes, spend $2,500 on necessities, and have $1,500 left, that’s your discretionary income. You could use that $1,500 for dining out, entertainment, and/or saving for a vacation. How you spend this money reflects your financial priorities and lifestyle choices.

What is the difference between discretionary and disposable income?

Disposable income is the money left after paying taxes and is used to cover both essential and nonessential expenses. Discretionary income, on the other hand, is the portion of disposable income left after covering necessities, like housing, food, and utilities. You can use this money for entertainment, shopping, or saving.

How does discretionary income impact financial planning?

Discretionary income is the money you have left after covering all of your essential expenses. It plays a key role in financial planning because it determines how much you can save, invest, and spend on nonessentials each month. Higher discretionary income gives you more flexibility in your budget, allowing you to save for emergencies and other goals, invest for future growth, and enjoy life’s pleasures.

Can discretionary income be invested?

Yes, discretionary income can be invested to grow your wealth over time. After covering essential expenses, you can allocate discretionary income to stocks, bonds, mutual funds, or retirement accounts. Investing part of your discretionary income can help you build financial security, generate passive income, and achieve long-term goals like sending a child to college or retiring comfortably.

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SoFi members with Eligible Direct Deposit activity can earn 3.80% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Eligible 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 (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below).

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

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

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

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

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

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

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

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

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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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12 Things to Consider When Choosing A Bank

By | Budgeting & Goals, money | No Comments

If you’re looking to open a new checking and/or savings account, you’ll likely have loads of options and offers to consider. The question is, how do you choose the right bank?

The best bank for you will depend on a number of factors, including your needs, priorities, and personal preferences. Whether you’re more comfortable with a small local financial institution or prefer the expansive resources of a national bank, this list of key things to look for in a bank will help you make the right choice.

Key Points

•   When choosing a bank, consider factors like security, bank fees, interest rates, location, ease of deposit, and digital banking capabilities.

•   Other important considerations include minimum requirements, availability of funds, customer service, investment account options, and perks offered by the bank.

•   Security is crucial, so ensure the bank is insured by the FDIC or NCUA.

•   Bank fees can eat into your savings, so be aware of ATM charges, maintenance fees, and overdraft protection fees.

•   Interest rates vary, so compare rates and consider online banks that offer higher rates on savings and checking accounts.

Importance of Finding a Good Bank

It can be valuable (literally and figuratively) to find the right banking partner for a few good reasons:

•   It provides a home base for the money you earn.

•   It can provide security, knowing that your cash is safe and you have a team of professionals to assist you with your money management.

•   It can pay you interest on your funds so your cash grows.

•   It can help you build your financial security and literacy.

•   It may be flexible enough to grow and change with you as you move through the stages and phases of your life. (If not, you can always switch as your needs evolve.)

•   It can offer you additional benefits, like a cash back debit card or a lower mortgage rate.

What to Look for in a Bank

There are thousands of options in terms of banking in the United States. So how do you narrow the choices down to the one bank that’s right for you? There’s no right or wrong answer; it’s all about finding what works best for you.

Consider the following 12 factors that can help you find the right bank account for your current needs. You might create a comparison chart (Excel can be your friend here) so you can tick off the most important factors to you as you delve into this topic. Then use the process of elimination to find your perfect financial institution match.

Sure, it can be smart to take friends’ suggestions into consideration, but the final choice should be the one that is all about you and your needs… not what works for someone else or just what has a good marketing gimmick. Here are key things to consider when choosing a bank.

1. Security

Whether you choose to put your money in an online bank vs. a traditional bank vs. a credit union, it’s vital to make sure your funds are safe. Check to make sure any bank you’re considering is insured by the Federal Deposit Insurance Corporation (FDIC) or if you’re looking at a credit union, that it is insured by the National Credit Union Administration (NCUA).

In the very rare event of a bank or credit union closure, either FDIC or NCUA would be a safety net. You would be covered for up to $250,000 per depositor, per insured institution, for each account ownership category.

2. Bank Fees

This is an important factor. Fees can eat away at the money you have on deposit and the savings you are trying to build up. Some banks charge minimal or no account fees, but in other cases, you may be faced with a deluge. A few of the obvious fees are ATM charges, maintenance fees, and overdraft protection, and they can add up quickly.

What are ATM fees? They can run a few dollars per out-of-network withdrawal and sometimes even more. And how about overdraft? These often range from $30 to $35, and while they’re a good way to avoid negative balances, they can cost you hundreds of dollars if you fall behind.

Returned deposits, foreign transactions, low balances, lost cards, and sometimes even interacting with a human can also incur fees. If you want to avoid monthly maintenance fees and more, be sure to read through the terms and conditions carefully so you aren’t unpleasantly surprised. You may just want to choose an account that’s fee-free instead.

3. Interest Rates

While some banks might still offer the standard — and very low — interest rates on savings accounts, it doesn’t mean you’re stuck with that.

Especially with online-only banks, where overhead is typically much less than traditional brick-and-mortar banks, customers often benefit from annual percentage yields (APYs) that are many times the average interest rates offered by savings accounts. Some online banks even offer high-interest checking accounts.

Get up to $300 when you bank with SoFi.

No account or overdraft fees. No minimum balance.

Up to 3.80% APY on savings balances.

Up to 2-day-early paycheck.

Up to $3M of additional
FDIC insurance.


4. Location

Consider whether you’re the kind of person who likes to visit brick-and-mortar branches often. If you do, you may want to bank with a financial institution that has physical locations close to your home, your workplace, or both.

You might also want to check out if your bank has ATMs or a partner network of no-fee machines near you and the neighborhoods where you typically spend time. This can be important for avoiding ATM fees, such as non-network fees and ATM operator fees. These can add a few or several dollars to every transaction.

5. Ease of Deposit

Along the same lines, you may want to consider how easy it is to deposit funds in a particular financial institution. Many banks offer the benefit of mobile deposit, which allows you to add a check to your account by snapping a photo with your cell phone and uploading it. Check to see what’s available.

Also, if you are looking at online banks, suss out how you might deposit cash, if that’s something you frequently do, and make sure it’s a convenient process for you.

6. Digital Banking

Building on the topic of mobile deposits, it’s likely worth your while to check out a potential bank’s app and online services. Are they easy to navigate? Do they offer the features you’re most likely to use? Comparing a couple of financial institutions’ user experiences can reveal important nuances.

See if you can download a demo or find one on YouTube. Ratings and reviews can also be a great way to find out other customers’ experiences — the good, the bad and the ugly — as opposed to trusting a commercial to be honest with you.

Linking to an outside bank account can help you lower overdraft fees.

For instance: Can you activate push alerts for low balances, or can you link your account to another financial institution? (Life hack: Linking to an outside bank account can help you lower overdraft fees — you’ll still get charged if your bank has to pull from the external account, but it’s typically less than if you didn’t have any other account to pull from at all.)

7. Minimum Requirements

Explore whether your potential bank has a minimum deposit and minimum account balance requirement. If so, that means you must initially put in a certain amount of cash to open your account or to start it and earn a certain APY. Then, with minimum balance requirements, if you dip below a given level, you’ll likely pay a monthly account charge.

With online banks, you may not have a minimum opening deposit or balance requirement; however, you may not earn the top APY unless you maintain a certain level of funds in the account, make a certain number of debit card transactions per month, or set up a direct deposit of your paycheck. Read the details when considering a bank.

8. Availability of Funds

Few people like waiting for funds to clear. When evaluating prospective financial institutions, find out how quickly funds clear. Some banks may offer early paycheck access, for instance, for qualifying accounts.

9. Customer Service

Here’s another dimension to consider when choosing a bank: What kind of customer service do they offer and when? If you are the type of person who likes to interact in-person, you may prefer a traditional bank with branches.

But even if that isn’t a big plus for you, also consider the availability of support by phone and chat during non-business hours. What if you have a pressing financial problem at 9 AM on a Sunday? Would help be there for you?

10. Investment Account Options

If you’re looking for more than just checking and savings, consider a bank that also has investment account options. Having everything you need within the same financial system can make deposits, withdrawals, transfers, and automatic saving a breeze.

11. Perks

Some banks may offer perks that appeal to you, so see what’s out there. For instance, some financial institutions may offer a cash bonus when you open an account; others may have cash back options that suit your spending style. Still others may offer educational events to boost financial literacy or might provide special passes that allow clients to visit local cultural institutions for free.

12. Your Banking History

One last factor to consider when choosing a bank: If you have some less-than-perfect aspects of your financial life, see if you will be penalized for that. For instance, some banks may scrutinize your banking history. If you have enough overdrafts in your history or other issues, they may not approve your account application. Or you might need to open what’s known as a second chance checking account until you prove that you’re a reliable client. It’s wise to consider this as you go bank shopping.

Banking with SoFi

If you’re in the market for a banking partner, come take a look at all that SoFi offers. We think you can bank smarter when you open an online bank account with us. Our Checking and Savings account lets you spend and save in one simple spot; you’ll earn a competitive APY, and you won’t pay any account fees. That means managing your money may be simpler and your cash can grow faster. What’s more, qualifying accounts with direct deposit may get paycheck access up to two days early.

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The Takeaway

Choosing the right bank depends on your needs and financial goals. In general, you’ll want to look for low (or no) fees, competitive interest rates, and convenient access, whether through local branches, ATMs, or online banking.

Also consider your personal banking preferences. For example, if you want to have the option of meeting with bank staff in person, you might choose a bank or credit union with nearby branches. If, on the other hand, you prioritize digital convenience and user-friendly interfaces, you might consider an online bank. Either way, be sure to compare your options, read reviews, and choose a bank that aligns with your lifestyle and financial priorities.

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 3.80% APY on SoFi Checking and Savings.

FAQ

What should I do if a bank does not have what I am looking for?

If a bank doesn’t have the features you are looking for, it’s wise to shop around. There are thousands of banks and credit unions in America, and one or more are likely to suit your needs.

What are some banking red flags?

Banking red flags will vary depending on what your needs are. For instance, is that enticing annual percentage yield (APY) offered just a promotional rate that will drop considerably lower in a short period of time? Do you notice that your bank’s ATM network is getting smaller? Focus on the most important features you’re looking for and read the fine print to prevent disappointment and dissatisfaction.

What is the most important thing to look for in a bank?

Depending on your particular financial style and goals, the most important things when choosing a bank may be interest rates and fees; convenience; and additional features it may offer (such as budgeting tools, cash back, competitive mortgage rates, and the like).

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2025 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
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SoFi members with Eligible Direct Deposit activity can earn 3.80% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Eligible 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 (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below).

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

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

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

Interest rates are variable and subject to change at any time. These rates are current as of 1/24/25. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet.
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We do not charge any account, service or maintenance fees for SoFi Checking and Savings. We do charge a transaction fee to process each outgoing wire transfer. SoFi does not charge a fee for incoming wire transfers, however the sending bank may charge a fee. Our fee policy is subject to change at any time. See the SoFi Checking & Savings Fee Sheet for details at sofi.com/legal/banking-fees/.
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Swing Trading Explained

By | Growing Wealth, invest, Investing, Terminology | Comments Off on Swing Trading Explained

What Is Swing Trading?

Short-term price fluctuations in the market are known as swings, and swing trading aims to capitalize on these price movements, whether up or down.

The swings typically occur within a range, from a couple of days to a couple of weeks. Traders may try to capture a part of a larger price trend: for example, if a price dips, but a rebound is expected.

While day traders typically stay in a position only for minutes or hours, swing traders typically invest for a few days or weeks. Swing trading can be profitable, but it’s higher risk, and it’s important to bear in mind the potential costs and tax implications of this strategy.

Key Points

•   Swings in the market are short-term price fluctuations that typically occur over a couple of days or a couple of weeks.

•   Swing traders aim to capitalize on these price movements, whether up or down.

•   Swing trading is distinct from day trading, which takes place during an even shorter time frame — minutes or hours.

•   Swing trading can be profitable for experienced traders, but it’s extremely high risk.

•   Would-be swing traders also need to bear in mind the fees and tax implications of this strategy.

How Swing Trading Works

Swing trading can be a fairly involved process, and traders employ different types of analysis and tools to try and gauge where the market is heading. But for simplicity’s sake, you may want to think of it as a method to capture short-to-medium term movements in share prices.

Investors are, in effect, trying to capture the “swing” in prices up or down. It avoids some day trading risks, but allows investors to take a more active hand in the markets than a buy-and-hold strategy.

With that in mind, swing trading basically works like this: An investor uses an online brokerage (or a traditional one) to buy a stock, anticipating that its price will appreciate over a three-week period. The stock’s value does go up, and after three weeks, the investor sells their shares, generating a profit.

Conversely, an investor may want to take a short position on a stock, betting that the price will fall.

Either way there are no guarantees, and swing trading can be risky if the stocks the investor holds move in the opposite direction.

Generally, a swing trader uses a mix of technical and fundamental analysis tools to identify short- and mid-term trends in the market. They can go both long and short in market positions, and use stocks, exchange-traded funds (ETFs), and other securities that exhibit pricing volatility.

It is possible for a swing trader to hold a position for longer than a few weeks, though a position held for a month or more may actually be classified as trend trading.

Cost and Tax Implications

A swing trading strategy is somewhere in between a day-trading strategy and trend-trading strategy. They have some methods in common but may also differ in some ways — so it’s important to know exactly which you plan to utilize, especially because these shorter-term strategies have different cost and tax factors to consider.

Frequent trades typically generate higher trading fees than buy-and-hold strategies, as well as higher taxes. Unless you qualify as a full-time trader, your short-term gains can be taxed as income, rather than the more favorable capital gains rate (which kicks in when you hold a security for at least a year).

Recommended: Stock Trading Basics

Day Trading vs Swing Trading

Like day traders, swing traders aim to capture the volatility of the market by capitalizing on the movements of different securities.

Along with day traders and trend traders, swing traders are active investors who tend to analyze volatility charts and price trends to predict what a stock’s price is most likely to do next. This is using technical analysis to research stocks — a process that can seem complicated, but is essentially trying to see if price charts can give clues on future direction.

The goal, then, is to identify patterns with meaning and accurately extrapolate this information for the future. The strategy of a day trader and a swing trader may start to diverge in the attention they pay to a stock’s underlying fundamentals — the overall health of the company behind the stock.

Day traders aren’t particularly interested in whether a company stock is a “good” or “bad” investment — they are simply looking for short-term price volatility. But because swing traders spend more time in the market, they may also consider the general trajectory of a company’s growth.

Pros and Cons of Swing Trading

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Pros:

•   May be profitable

•   Strategy can be used with a range of securities

•   Strategy is flexible, can help traders avoid unwanted price movements

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Cons:

•   Expenses & taxes can be high

•   Time intensive

•   Best for experienced traders

Pros of Swing Trading

To understand the benefits of swing trading, it helps to understand the benefits of long-term investing — which may actually be the more suitable strategy for some investors.

The idea behind buy-and-hold strategies is quite simply that stock markets tend to move up over long periods of time, or have a positive average annual return. Also, unlike trading, it is not zero-sum, meaning that all participants can potentially profit by simply remaining invested for the maximum amount of time possible.

1. Time and Effort

Further, long-term investing may require less time and effort. Dips in the market can provide the opportunity to buy in, but methodical and regular investing is generally regarded higher than any version of attempting to short-term time the market.

Swing trading exists on the other end of the time-and-effort continuum, although it generally requires much less effort and attention than day trading. Whereas day traders must keep a minute-by-minute watch on the market throughout the trading days, swing trading does not require that the investor’s eyes be glued to the screen.

Nonetheless, swing trading requires a more consistent time commitment — and an awareness of external events that can impact prices — than buy-and-hold strategies.

2. Income

Compared to long-term investing, which comes into play with retirement accounts like a 401(k), traditional IRA or Roth IRA, swing trading may create more opportunity for an investor to generate income.

Most long-term investors intend to keep their money invested — including profits — for as long as possible. Swing traders are using the short-term swings in the market to generate profit that could be used as income, and they tend to be more comfortable with the risks this strategy typically entails.

3. Avoidance of Dips

Finally, it may be possible for swing traders to avoid some downside. Long-term investors remain invested through all market scenarios, which includes downturns or bear markets. Because swing traders are participating in the market only when they see opportunity, it may be possible to avoid the biggest dips.

That said, markets are highly unpredictable, so it’s also possible to get caught in a sudden downturn.

Cons of Swing Trading

Though there is certainly the potential to generate a profit via swing trading, there’s also a substantial risk of losing money — and even going into debt.

1. Expenses & Taxes

It can be quite expensive to swing trade, as noted above. Although brokerage or stock broker commissions won’t be quite as high as they would be for day traders, they can be substantial.

Also, because the gains on swing trades are typically short-term (less than a year), swing investors would likely be taxed at higher capital gains rates.

In order to profit, traders will need to out-earn what they are spending to engage in swing trading strategies. That requires being right more often than not, and doing so at a margin that outpaces any losses.

2. Time Intensive

Swing trading might not be as time-consuming or as stressful as day trading, but it can certainly be both. Many swing traders are researching and trading every day, if not many times a day. What can start as a hobby can easily morph into another job, so keep the time commitment in mind.

3. Requires Expertise

Within the investing community, there is significant debate as to whether the stock market can be timed on any sort of regular or consistent basis.

In the short term, stock prices do not necessarily move on fundamental factors that can be researched. Predicting future price moves is nothing more than just that: trying to predict the future. Short of having a crystal ball, this is supremely difficult, if not impossible, to do, and is best suited to experienced investors.

Swing Trading Example

Here’s a relatively simple example of a swing trade in action.

An investor finds a stock or other security that they think will go up in value in the coming days or weeks. Let’s say they’ve done a fair bit of analysis on the stock that’s led them to conclude that a price increase is likely.

Going Long

The investor opens up a position by purchasing 100 shares of the stock at a price of $10 per share. Obviously, the investor is assuming some risk that the price will go down, not up, and that they could lose money.

But after a week, the stock’s value has gone up $1, and they decide to close their position and sell the 100 shares. They’ve capitalized on the “swing” in value, and turned a $100 profit.

Of course, the trade may not pan out in the way the investor had hoped. For example:

•   The stock could rise by $0.50 instead of $1, which might not offer the investor the profit she or he was looking for.

•   The stock could lose value, and the investor is faced with the choice of selling at a loss, or holding onto the stock to see if it regains its value (which entails more risk exposure).

Going Short

Swing traders can also take advantage of price drops and short a stock that they think is overvalued. They borrow 100 shares of stock from their brokerage and sell the shares for $10 per share for a total of $1,000 (plus any applicable brokerage fees).

If their prediction is correct, and the price falls to $9 per share, the investor can buy back 100 shares at $9 per share for $900, return the borrowed shares, and pocket the leftover $100 as profit ($1,000 – $900 = $100).

If they’re wrong, the investor misses the mark, and the price rises to $11 per share. Now the investor has to buy back 100 shares for $11 per share for a total of $1,100, for a loss of $100 ($1,000 – $1,100 = -$100), not including fees.

Swing Trading Strategies

Each investor will want to research their own preferred swing trading strategy, as there is not one single method. It might help to designate a specific set of rules.

Channel Trading

One such strategy is channel trading. Channel traders assume that each stock is going to trade within a certain range of volatility, called a channel.

In addition to accounting for the ups and downs of short-term volatility, channels tend to move in a general trajectory. Channels can trend in flat, ascending, or descending directions, or a combination of these directions.

When picking stocks for a swing trading strategy using channels, you might buy a stock at the lower range of its price channel, called the support level. This is considered an opportune time to buy.

When a stock is trading at higher prices within the channel, called the resistance level, swing traders tend to believe that it is a good time to sell or short a stock.

MACD

Another method used by swing traders is moving average convergence/divergence, or “MACD.” The MACD indicator looks to identify momentum by subtracting a 26-period exponential moving average from the 12-period exponential moving average, or EMA.

Traders are seeking a shift in acceleration that may indicate that it is time to make a move.

Other Strategies

This is not a complete list of the types of technical analysis that traders may integrate into their strategies.

Additionally, traders may look at fundamental indicators such as SEC filings and special announcements, or watch industry trends, regulation, etc., that may affect the price of a stock. Trading around earnings season may also present an opportunity to capitalize on a swing in value.

Similarly, they may watch the news or reap information from online sources to get a sense of general investor sentiment. Traders can use multiple swing trading methods simultaneously or independently from one another.

Swing Trading vs Day Trading

Traders or investors may be weighing whether they should learn swing trading versus day trading. Although the two may have some similarities, day trading is much more fast-paced, with trades occurring within minutes or hours to take advantage of very fast movements in the market.

Swing trading, conversely, gives investors a bit more time to take everything in, think about their next moves, and make a decision. It’s a middle ground between day trading and a longer-term investing strategy. It allows investors to utilize some active investing strategies, but doesn’t require them to monitor the markets minute by minute to make sure they don’t lose money.

Swing Trading vs Long-Term Investing

Long-term investing tends to be a lower risk strategy in general. Investors are basically betting that the market will trend higher over the long term, which is typically true, barring any large-scale downturns. But this strategy doesn’t give investors the opportunity to really trade based on market fluctuations.

Swing trading does, albeit not as much as day trading. If you want to get a taste for trading, and put some analysis tools and different strategies to work, then it may be worth it to learn swing trading.

Is Swing Trading Right for You?

Whether swing trading is a smart investing strategy for any individual will come down to the individual’s goals and preferences. It’s good to think about a few key things: How much you’re willing to risk by investing, how much time you have to invest, and how much risk you’re actually able to handle on a psychological or emotional level — i.e., your risk tolerance.

If your risk tolerance is relatively low, swing trading may not be right for you, and you may want to stick with a longer-term strategy. Similarly, if you don’t have much to invest, you may be better off buying and holding, effectively lowering how much you’re putting at risk.

The Takeaway

Swing traders invest for days or weeks, and then exit their positions in an effort to generate a quick profit from a security’s short-term price movements. That differentiates them from day traders or long-term investors, who may be working on different timelines to likewise reap market rewards.

There are also different methods and strategies that swing traders can use. There is no one surefire method, but it might be best to find a strategy and stick with it if they want to give swing trading an honest try. Be aware, though, that it carries some serious risks — like all stock trading.

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).


Invest with as little as $5 with a SoFi Active Investing account.

FAQ

Is swing trading actually profitable?

Swing trading can be profitable, but there is no guarantee that it will be. Like day trading or any other type of investing, swing trading involves risk, though it can generate a profit for some traders.

Is swing trading good for beginners?

Many financial professionals would likely steer beginning investors to a buy-and-hold strategy, given the risks associated with swing or day trading. However, investors looking to feel out day trading may opt for swing trading first, as they’ll likely use similar tools or strategies, albeit at a slower pace.

How much do swing traders make?

It’s possible that the average swing trader doesn’t make any money at all, and instead, loses money. It depends on their skill level, experience, market conditions, and a bit of luck.

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SoFi Invest may waive all, or part of any of these fees, permanently or for a period of time, at its sole discretion for any reason. Fees are subject to change at any time. The current fee schedule will always be available in your Account Documents section of SoFi Invest.

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
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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Robo-Advisor Fees: Comparing Costs and What You Need to Know

By | Growing Wealth, invest, Investing | Comments Off on Robo-Advisor Fees: Comparing Costs and What You Need to Know

Robo-advisor services are known for offering lower fees than traditional wealth managers, but the cost of investing with an automated platform also includes underlying expenses investors need to consider. In addition, different robo platforms may charge different fees.

Typical management fees range between about 0.20% to 0.30% annually, and investment costs add on roughly another 10 to 50 basis points. The amount of money an investor puts into the robo-advisor, or the minimum balance, also often dictates how much the fee rate is.

Key Points

•   Robo-advisors offer lower fees compared to traditional financial services.

•   Fees include management, expense ratios, and brokerage costs.

•   Management fees typically range from 0.20% to 0.30% annually.

•   Minimum balance requirements affect costs and access to services.

•   Additional services like automatic rebalancing and tax-loss harvesting may incur extra fees.

Understanding How Robo-Advisors Work

Robo-advisors are computer algorithms that generate automated portfolios for consumers. Robo-advisor fees are listed as a percentage of the assets under management, but also include the expense ratios of the funds in the portfolio, as well as any brokerage fees.

Here’s how robo-advisors work: While the term robo-advisor can mean different things depending on the company that offers the service, investors usually fill out an online questionnaire about their financial goals, risk tolerance, and investment time frames.

On the back end, a computer algorithm then recommends a portfolio of different securities based on those parameters. The portfolio is pre-set, typically with an allocation that’s either more aggressive or more conservative based on the person’s preferences.

A portfolio for someone nearing retirement age would typically have a different allocation versus a portfolio for someone in their 20s, for example. Depending on these details, the service might automatically rebalance the portfolio over time, execute trades, and may even conduct tax-loss harvesting. SoFi’s automated portfolio does offer automatic rebalancing, but not automatic tax-loss harvesting.

First launched in 2008 or 2009, the robo-advisor industry has expanded rapidly in the last 15 or so years.

How Robo-Advisor Fees Work

Robo-advisor fees are calculated using the expense ratios of the underlying funds, and the percentage of assets subtracted each year for costs associated with managing the investment.

In recent years, expense ratios in the asset-management world have been pressured lower as cheaper index-tracking competitors have flooded the market. That’s arguably a benefit of ETFs that some investors have experienced.

Today’s robo-advisor platforms generally charge management fees of around 0.25% to 0.5% on an annual basis, which is typical for the industry. But investors will encounter a wide range of fees from robo advisors, owing to the investments used by that company to build their portfolio offerings.

Expense ratios can range from a few basis points to half a percentage point on top of the management fee.

Minimum balance requirements, as well as additional features like automated rebalancing or access to a live advisor, can also play into the cost you’re going to pay.

💡 Recommended: What Are ETFs and How Do They Work?

Other Factors to Consider About Robo-Advisors

When picking a robo-advisor, investors can consider several factors like minimum balance, historical performance returns, as well as benefits such as automated rebalancing, and access to a human advisor (which is typically limited on these platforms, or depending on how much money you’ve invested).

In addition to the management fees, some robo-advisors typically charge a brokerage and a set-up fee as well. The ETFs within each portfolio have their own expense ratios that add to the cost of investing.

Tax implications may also be a consideration. Some robo platforms offer automatic tax-loss harvesting, which may help a portfolio to be more tax efficient. (Note that SoFi does not offer tax-loss harvesting at this time.)

Why Are Robo-Advisor Minimum Balances Important?

Minimum balances are important in the asset-management industry because they can be the gate-keeper to individuals who want to entrust money with a financial advisor. Traditional asset management firms often have large minimum balance requirements for clients. At the high end, private wealth managers could require minimums of $5 million.

The reason being that traditional wealth management advisors offer their clients a well-coordinated team of professionals (e.g. tax accountants, estate planners, and so on).

The opposite is true of automated platforms. Robo advisors rely on an algorithm, charge lower fees and have lower minimums, but they provide few, or very limited additional services other than the automated portfolio itself.

The lower minimum balances of robo-advisors have opened the door for newer or younger investors who may not have yet grown their investable assets, and whose financial needs may not be complex.

The minimum balances are also intrinsically tied to how robo-advisors make money, since the annual management fees is a percentage taken from an investor’s assets under management. The automated portfolio, which is usually made up of low-cost index funds and ETFs, also includes the expenses of those underlying funds.

Robo-Advisor Fee Comparison

Here are the fees and tiered fee structures of some robo-advisors compiled from the latest Robo Report, published by Condor Capital, as of March 2025.

Robo-Advisor Advisory Fees
(does not include expense ratio of underlying funds or other costs)		 Minimum Balance
Acorns $3/month for Bronze
$6/month for Silver
$12/month for Gold		 No minimum
Ally Financial 0.30% annually; no management fee for cash-enhanced portfolio $100
Axos Invest 0.24% $500
Betterment $4/month or 0.25% annually for $20,000 on deposit (or $250 monthly deposits); 0.40% for premium Digital: no minimum; Premium: $100,000
E*Trade Core 0.30% annually $500
Ellevest $5 or $9/month based on tier level Digital: no minimum; Private Client: $500,000
Fidelity Go no fee for balances less than $25,000; 0.35% for balances $25,000 and above No minimum; access to live advisory services: $25,000 min.
FutureAdvisor 0.50% $5,000
Empower (Personal Capital) 0.89%; tiered pricing at higher asset levels $100,000
Schwab Intelligent Portfolios: No fee (digital only); Intelligent Portfolios Premium: $300 initial planning fee, $30/month subscription Intelligent Portfolios: $5,000; Intelligent Portfolios Premium: $25,000
SigFig No fee for first $10,000; 0.25% annually for balance over $10,000 $2,000
SoFi 0.25% annually $50
TD Automated Investing Automated Investing: 0.30% plus minimum account fee of $75/year. Automated Investing Plus: 0.60% plus minimum account fee of $250/year Automated Investing: $1,000; Automated Investing Plus: $25,000
Titan Invest 1% annually for $10,000 or more; $5 monthly for $10,000 or less $100 for Titan Flagship; $10,000 for Titan Opportunities and Titan Offshore
USBank Automated Investor 0.24% $1,000
Vanguard Digital Advisor 0.20% annually [includes underlying fund fees and management fees] $100
WellsFargo 0.35% [discounted pricing may be available] $500
Zacks Advantage 0.70%; discounted tiered pricing with higher deposits $25,000

Source: Backend Benchmarking

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Robo-Investing For High-Net-Worth Individuals

The table above shows several examples of tiered fee structures where robo-advisors have higher minimums. Such robo-advisors may be targeting high-net-worth individuals (HNWI), or investors who have a liquid net worth of $1 million or more.

Traditionally, HWNI have been targeted by private wealth managers but robo-advisors have also marketed to them, particularly millennial HNWI. Robo-advisors can be an automated alternative to the face-to-face tailored financial advice and planning that private wealth managers typically offer to such consumers.

The Takeaway

Robo-advisors are famous for their rock-bottom fees. However, investors will find that there’s actually a wide range in costs and how robo-advisors charge for their services. The minimum balances investors are required to make can determine what sort of fees investors pay. Many robo platforms offer tiered pricing, depending on how much money is on deposit.

Investors will also pay additional fees for the cost of investing in ETFs and a potential set-up payment. Investors often pay extra for services such as portfolio rebalancing, tax-loss harvesting and educational opportunities.

Ready to start investing for your goals, but want some help? You might want to consider opening an automated investing account with SoFi. With SoFi Invest® automated investing, we provide a short questionnaire to learn about your goals and risk tolerance. Based on your replies, we then suggest a couple of portfolio options with a different mix of ETFs that might suit you.

Advisory services provided by SoFi Wealth LLC, an SEC-registered investment advisor.

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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.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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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Mar
17
2025

How Are Employee Stock Options and RSUs Different?

By | Building Your Career, Growing Wealth, invest, Investing | Comments Off on How Are Employee Stock Options and RSUs Different?

Employee stock options (ESOs) are different from restricted stock units (RSUs). They are both types of deferred compensation, and can be used as incentives, but employee stock options are similar to a call option. They give employees the option to buy company stock at a certain price, by a certain date. RSUs simply give an employee shares of stock on a given date.

Generally speaking there are specific terms the employee must meet in order to get either kind of stock. For example, an employee must work for the company for a year, and then obtain shares on a vesting schedule (i.e., shares become available over time, not all at once).

Sometimes, employees get a choice between ESOs and RSUs. Understanding how each stock plan works, how they differ — particularly when it comes to vesting schedules and taxes — can help you make a decision that best aligns with your financial goals.

Key Points

•   Employee stock options (ESOs) and restricted stock units (RSUs) are types of deferred compensation.

•   ESOs allow an employee to buy company stock at a set price, by a certain date, usually according to a vesting schedule.

•   If the employee chooses not to exercise their options to buy the shares, they expire.

•   RSUs give employees a certain number of shares of stock by a certain date.

•   Like ESOs, RSUs can vest gradually or all at once. Employees don’t have to buy RSUs; they own them on the date they’re given.

•   Depending on the type of stock options you get, you may owe income tax and/or capital gains tax if you sell your shares at a profit.

What Are Employee Stock Options (ESOs)?

Employee stock options (ESOs) give an employee the right to purchase their company’s stock at a set price — called the exercise, grant, or strike price — by a certain date, assuming certain terms are met, usually according to a vesting schedule. In this way, they are similar to call options (a type of derivative contract).

If the employee doesn’t exercise their options within that period, they expire.

Companies may offer stock options to employees as part of a compensation plan, in addition to salary, 401(k) matching funds, and other benefits. ESOs are considered an incentive to help the company succeed, so that (ideally) the stock options are worth more when the employee chooses to exercise them.

In an ideal scenario, exercising stock options allows an employee to purchase shares of their company’s stock at a price that’s lower than the current market price — and realize a profit.

Note that while some of the features of employee stock options are similar to trading stock options, these contracts aren’t exactly the same, and you can’t trade ESOs. Also, options are derivatives based on the value of underlying securities, e.g. stocks, bonds, ETFs — they aren’t a type of employee compensation.

How Do ESOs Work?

Generally, ESOs operate in four stages — starting with the grant date and ending with the exercise date, i.e. actually buying the stock.

1. The Grant Date

This is the official start date of an ESO contract. You receive information about how many shares you’ll be issued, the strike price (or exercise price) for those shares, the vesting schedule, and any requirements that must be met along the way.

2. The Cliff

If a compensation package includes ESOs, they’re generally not available on day one. Contracts often include requirements that must be met first, such as working full time for at least a year.

Those 12 months when you are not yet eligible to exercise your employee stock options is called the cliff. If you remain an employee past the cliff date, you get to level up to the vesting period.

Some companies include a 12-month cliff to incentivize employees to stay at least a year. Other companies may have a vesting schedule.

3. The Vest

The vesting period is when you start to take ownership of your options and the right to exercise them. Vesting can either happen all at once or take place after a cliff (as noted above), or gradually over several years, depending on your company’s plan.

One common vesting schedule is a one-year cliff followed by a four-year vest. On this timeline, you’re 0% vested the first year (meaning you aren’t eligible for any options), 25% vested at the two-year mark (you can exercise up to 25% of the total options granted), and so on until you own 100% of your options. At that point, you’re considered fully vested.

4. The Exercise

This is when you pull the financial trigger and actually purchase some or all of your vested shares.

ESO’s Expiration Date

While the expiration date of stock options isn’t always front and center, it’s important to bear in mind. The strike price you’re given as part of your options package expires on a certain date if you don’t exercise your shares.

One common timeline is 10 years from grant date to expiration date, but specific terms will be in the contract, and it’s important to vet the timing of your ESOs — as part of your career as well as your tax and your long-term financial plan. Again, if you let your stock options expire, you lose the right to buy shares at that price.

Pros and Cons of Employee Stock Options (ESOs)

If you land a job with the right company and stay until you’re fully vested, exercising your employee stock options could potentially lead to gains.

For example, if your strike price is $30 per share, and at the time of vesting the stock is trading at $100 or more per share, you’re getting a great deal on shares.

On the other hand, if your strike price is $30 per share and the company is trading at $10 per share, you might be better off not exercising your employee stock options until the price goes up (when and if it does; there are no guarantees).

That’s why ESOs are considered a form of employee incentive: You may work harder to help the company grow, if you know your efforts could translate to a higher stock price.

Recommended: Stock Market Basics

Tax Implications of Employee Stock Options

Given that stock options can generate gains, it’s important to know how they are taxed so you can plan accordingly.

Generally speaking, employers offer two types of stock options: nonqualified stock options (NSOs or NQSOs) and incentive stock options (ISOs).

Nonqualified Stock Options

NSOs are the most common and often the type offered to the general workforce. NSOs have a less favorable tax treatment, because they’re subject to ordinary income tax on the difference between the exercise price and the market price at the time you exercise your options and purchase the stock, assuming the market price is higher.

NSOs are then taxed again at the capital gains rate when you sell the shares at a profit.

Your individual circumstances, tax filing status, and the terms of your stock options may also play into how you’re taxed, so you may want to consult a professional.

Incentive Stock Options

ISOs are “qualified,” meaning you don’t pay any taxes when you exercise the options — unless you’re subject to the alternative minimum tax (AMT).

You will owe taxes, however, if you sell them at a profit later on. (If you don’t sell, and if the stocks gain or lose value, those are considered unrealized gains and losses.) Any money you make when you sell your shares later would be subject to capital gains tax. If you hold your shares less than a year, the short-term capital gains tax rate equals your ordinary income tax rate, which could be up to 37% for the highest tax bracket.

If you hold your shares less than a year, the short-term capital gains tax rate equals your ordinary income tax rate, which could be up to 37% for the highest tax bracket.
For assets held longer than a year, the long-term rate is lower: 0%, 15%, or 20%, depending on your taxable income and filing status.

What Are Restricted Stock Units (RSUs)?

Restricted stock units, or RSUs, simply grant employees a certain number of shares stock by a certain date. When employees are granted RSUs, the company holds onto the shares until they’re fully vested.

The company determines the vesting criteria — it can be a time period of several years, a key revenue milestone, and/or personal performance goals. Like ESOs, RSUs can vest gradually or all at once. When the employee gets their shares, they own them outright; employees don’t have to buy RSUs.

How Do Restricted Stock Units (RSUs) Work?

RSUs are priced based on the fair market value of the stock on the day they vest, or the settlement date. The company stocks you receive from your company will be worth just as much as they would be if you purchased them on your own that same day.

If the stock is worth $40 per share, and you have 100 shares, you would get $4,000 worth of shares (assuming you’re fully vested and have met other terms).

Again, the main difference between employee stock options and restricted stock units is that you don’t have to purchase RSUs.

As long as the company’s common stock holds value, so do your RSUs. Upon vesting, you can either keep your RSUs in the form of actual shares, or sell them immediately to take the cash equivalent. Either way, the RSUs you receive will be taxed as income.

And, of course, if you later sell your shares you may realize a gain or a loss and there will be tax implications accordingly.

Pros and Cons of Restricted Stock Units (RSUs)

One good thing about RSUs, similar to ESOs, is the incentive to stay with the company for a longer period of time. If your company grows during your vesting period, you could see a substantial windfall when your settlement date rolls around.

But even if the stock falls to a penny per share, the shares are still awarded to you on your settlement date. Since you don’t have to pay for them, it’s still money in your pocket.

In fact, you may only lose out on money with RSUs if you leave the company and have to forfeit any units that aren’t already vested, or if the company goes out of business.

Tax Implications of RSUs

When your RSU shares or cash equivalent are automatically delivered to you on your settlement date(s), they’re considered ordinary income and are taxed accordingly. In fact, your RSU distributions are actually added to your W-2 form.

For some people, the additional RSU income may bump them up a tax bracket (or two). In those cases, if you’ve been withholding at a lower tax bracket before your vesting period, you could owe the IRS more money.

As with ESOs, if you sell your shares at a later date and make a profit, you’ll be subject to capital gains taxes.

ESOs RSUs
Definition An employee can buy company stock at a set price at a certain date in the future. An employee receives stock at a date in the future and does not have to purchase them
Pricing The strike price is set when ESOs are offered to an employee, and they pay that price when they exercise their shares. The share price is based on the fair market value of the stock on the day the shares vest, and employees get the full-value shares.
Tax implications The difference between the strike price and the stock’s market value on exercise is considered earned income and added to your W-2, where it’s taxed as income. If you sell your shares later at a profit, you may also be subject to capital gains tax. RSU shares (or cash equivalent) are considered ordinary income as soon as they are vested, and are taxed accordingly.

If you sell the shares later, capital gains tax rules would apply.

The Takeaway

Employee stock options (ESOs) and restricted stock units (RSUs) are two different types of equity or share-based compensation.

An employee stock option gives an employee the option to buy company stock at a certain price, by a certain date. An RSU is the promise that on a future date the employee will receive actual company stock (without having to purchase the shares).

Because these types of compensation are often considered incentives, they’re designed to encourage employees to stay with the company for a certain amount of time. As such, employees often don’t get their options (in the case of ESOs) or the actual shares (in the case of RSUs) until certain terms are met. There may be a vesting schedule or company benchmarks or other terms.

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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.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.

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.

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
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.

SOIN-Q125-051

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