Feb
24
2025
Exercising in Options? What Does It Mean & When to Exercise

Exercising in Options Trading: What It Means

By | Growing Wealth, invest, Investing | Comments Off on Exercising in Options Trading: What It Means

Editor's Note: Options are not suitable for all investors. 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. Please see the Characteristics and Risks of Standardized Options.

Investors in stock option contracts have the right to buy or sell underlying stocks (or other assets) at a predetermined price within a certain time period. When an investor decides they want to take action on their right to buy or sell, it’s called exercising. There are a number of ways investors can choose to exercise their options contract, depending on their individual goals and financial situation.

Option contracts are complex investment vehicles. They’re a multi-faceted tool that involves precise timing and strategizing. While options are not for all investors, if handled by experienced traders, options could be beneficial for those who understand the risks involved.

Key Points

•   Exercising an option involves buying or selling the underlying security at the strike price.

•   Call options allow underlying assets to be purchased at a potentially lower price; put options allow underlying assets to be sold at a potentially higher price.

•   Options contracts have a limited lifespan; unexercised options contracts expire without value.

•   Consider transaction costs, time value, intrinsic value, and risk tolerance before exercising.

•   Many options are sold before expiration to capture remaining time value or to avoid exercise costs, but those that remain unexercised by expiration will expire worthless.

What Does Exercise Mean in Options Trading?

Exercising a stock option means that a trader purchases or sells the underlying stock associated with the options contract at the price set by the contract, which is called the strike price. This price may differ from the current market price of the stock.

Options contracts are valid for a certain amount of time in options trading. So if the owner doesn’t exercise their right to buy or sell within that period, the contract expires worthless, and the owner loses the right to buy or sell the underlying security at the strike price.

There is also an upfront fee in options trading, called a premium, that gets paid when a trader enters into an options contract. If the trader doesn’t exercise the contract, they forfeit that fee along with any other brokerage fees. Most options contracts never get exercised. Some contracts are sold instead of exercised, because the contract itself has value if it has the potential to be exercised later.

There are two main choices of types of options contracts, call options and put options. Purchasing a call option gives the buyer the right, but not the obligation, to purchase the underlying security at the strike price. Purchasing a put option gives the buyer the right, but not the obligation, to sell the underlying security at the strike price.

Each contract is different, and there are also different types of options. American-style options let traders exercise them at any time up until and on the contract’s expiration date, while European-style options can only be exercised on the expiration date itself.

Finally, user-friendly options trading is here.*

Trade options with SoFi Invest on an easy-to-use, intuitively designed online platform.

*Check out the
OCC Options Disclosure Document.

How Exercising a Call or Put Option Works

Generally, traders have several choices when it comes to exercising their stock options. When a trader is ready to exercise an option, they can let their brokerage firm know. The broker will create an exercise notice to the Options Clearing Corporation (OCC) to let the individual or entity buying or selling the underlying stock know that the trader wants to execute a trade on a particular date. The option seller is required to fulfill the obligations of the contract.

The OCC assigns the exercise notice to one of their clearing members, often the trader’s brokerage firm. The broker then assigns the option to one of their customers who has written an option contract that they have not yet covered. Depending on the broker, the customer they choose may either be chosen randomly or picked on a first-in-first-out (FIFO) principle.

Exercise a Call


Exercising a call option means buying the underlying stock at the option’s strike price. If the stock’s market price is higher than the strike price, you can purchase it at a discounted rate. The key benefit of exercising a call is potential access to those lower rates, especially if the stock has risen significantly. Transaction costs, such as brokerage commissions, can erode potential profits — so consider these factors when deciding to exercise.

For example, say that an investor buys a call option with a strike price of $50. If the stock’s market price rises to $60, they can exercise the option to buy shares at $50 instead of the higher market price. This gives them a $10 per share gain before factoring in the cost of the option and fees. If they don’t want to buy the shares, they could sell the option for a profit instead.

Exercise a Put


Exercising a put option means selling the underlying stock at the strike price. This can be beneficial if the market price falls below the strike price. You can then sell the stock at a higher price than the market price in order to see a profit. Bear in mind that selling a put obligates the seller to buy the underlying asset at the strike price if the option is exercised. There are also brokerage fees associated with exercising a put to consider, as there are with calls.

Say an investor buys a call option with a strike price of $50. If the stock’s market price rises to $60, they can exercise the option to buy shares at $50 instead of the higher market price. This gives them a $10 per share gain before factoring in the cost of the option and fees. If they don’t want to buy the shares, they could sell the option for a profit instead.

How Do You Know Whether to Hold or Exercise an Option?

It can be difficult to know when and whether to exercise an option. There are different options trading strategies that can prove beneficial to exercising early, or to waiting or even selling the option contract itself. Many factors come into play when making the decision to exercise an option, such as:

•   Time Value: Understanding how options pricing works is essential, as time value plays a key role in deciding whether to hold or exercise an option. Time value is a critical aspect of options pricing and significantly impacts the decision to. Options may lose value as they approach expiration due to the time decay. If there’s still significant time left on the option, it may be beneficial to hold the option rather than exercising it since it has the potential to be profitable over time. On the other hand, selling could help you capitalize on the remaining time value, since an option with, say, two months left to expiration would have more time value than an option with two weeks left to expiration.

•   Intrinsic Value (In-the-Money or Out-of-the-Money): The decision to exercise is often influenced by whether the option is in-the-money. A call option, for example, is in-the-money when the underlying asset’s price is above the strike price. Exercising in such a case allows the trader to buy the underlying asset at a discount. On the other hand, out-of-the-money options hold no intrinsic value and are unlikely to be exercised.

•   Transaction Costs and Fees: Exercising an option comes with transaction costs, which can include brokerage commissions and fees. These fees can erode profits, so it’s important to weigh them against potential gains from exercising. In some cases, the cost of exercising an option may outweigh the benefit, especially when the option is close to expiration and there are minimal profits to be gained.

•   Risk and Margin Exposure: There can be a significant amount of capital needed to purchase underlying assets, especially with high-priced stocks. This may also involve using a margin account, which increases your exposure to risk and any potential costs associated with holding the position. Be sure to assess your risk tolerance and available capital before deciding to exercise an option.

The Takeaway

When deciding to hold or exercise an option, the top factors are time value, intrinsic value, and your appetite for risk. Holding options could offer the potential for greater returns, but exercising options can provide profits if they are in-the-money. There are also fees and capital gains to consider.

While investors are not able to sell options on SoFi’s options trading platform at this time, they can buy call and put options to try to benefit from stock movements or manage risk.

Investors who are ready to try their hand at options trading despite the risks involved, might consider checking out SoFi’s options trading platform offered through SoFi Securities, LLC. The platform’s user-friendly design allows investors to buy put and call options through the mobile app or web platform, and get important metrics like breakeven percentage, maximum profit/loss, and more with the click of a button.

Plus, SoFi offers educational resources — including a step-by-step in-app guide — to help you learn more about options trading. Trading options involves high-risk strategies, and should be undertaken by experienced investors. Currently, investors can not sell options on SoFi Active Invest®.

Explore SoFi’s user-friendly options trading platform.

FAQ

How are early-exercise options different from exercise options?

Early-exercise options refer to American-style option contracts only, which can be exercised on and at any point before their expiration date. European-style options can only be exercised on their expiration date.

What is a cashless exercise in options?

A cashless exercise occurs when an investor purchases stock without paying cash to do so. The option holder pulls from some of the exercised shares to cover the cost of purchasing the stock. This is more common with employees exercising stock options, rather than in options trading.

What happens when you exercise an option?

Exercising an option means taking action on the right granted by your options contract. For call options, this means buying the underlying stock at the strike price. For put options, this means selling the underlying stock at the strike price. Exercising an option is a commitment to follow through with the contract’s terms: If you choose not to exercise the option, it will expire worthless, and you lose the premium paid to acquire it.

What happens to premium when you exercise a call option?

You do not keep your option premium when you sell a call option. The premium is part of the cost of acquiring the option, and is considered a sunk cost once the option is exercised.

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.
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.
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.

Photo credit: iStock/whyframestudio
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Feb
24
2025

Guide to Automatic Investment Plans

By | Budgeting & Goals, Financial Independence | No Comments

An automatic investment plan (or AIP) can refer to various options: an automatic investment plan might be part of a retirement account, or it could be an investing platform, like a robo advisor, that enables you to make regular investments, automatically.

Automatic investment plans can help you save and invest steadily over time. You can set up your plan in advance, and then leave it more or less to run on its own — until your needs or goals require a change.

Key Points

•   An automated investment plan refers to a range of methods for automating savings and investing.

•   You might use an automated investment plan to make automatic transfers that fund a retirement account or a college savings account.

•   Robo advisors are also a type of automated investment account. Here, the investment portfolio is pre-set and managed by an algorithm.

•   Automated investment plans tend to be low- or no-cost, and they can be helpful for those who don’t want the hassle of managing an investment portfolio.

•   Investors can work with a human advisor as well as using an automated plan.

What Is an Automatic Investment Plan?

An automatic investment plan might include making regular deposits into a retirement plan like an IRA or 401(k), using a robo advisor (or automated portfolio), participating in a dividend reinvestment plan, as well as other options.

What these programs have in common is they give investors the ability to choose an amount they want deposited, the timing of the deposits (e.g. weekly, quarterly), and in many cases which types of investments to fund.

The rise of sophisticated technology and algorithms have helped make automatic investment plans more accessible and secure, as well as more customizable, especially when investing online. Investors can direct money to be withdrawn from their paycheck or from a personal account on a biweekly basis, for example, and invested in a retirement portfolio.

It’s all part of the growing trend around automating your personal finances.

Types of Automatic Investment Plans

While using automatic investment plans for retirement is a common scenario, there are others — including the option to choose more- or less-automated types of investment products or preset portfolios.

Among the different types of automatic investment accounts, or accounts that can be funded automatically:

•   Automatic transfers to a 401(k), 403(b), or personal IRA accounts

•   Automatic transfers to a 529 college savings plan

•   Micro-investing platforms (or spare-change savings accounts). These use very small amounts of cash, typically rounded up from purchase amounts, to make deposits in an investment portfolio that may grow over time.

•   A dividend-reinvestment plan (DRIP) which helps investors reinvest their cash dividends automatically

Types of Automated Investment Products

There are also different types of mutual funds as well as automated portfolios (sometimes called robo advisors) which investors can use as part of an automatic investment plan.

•   Target date funds can provide investors with a long-term retirement or college savings portfolio. These funds are typically based on an allocation of different asset classes that adjust automatically to become more conservative over time, until the person needs to withdraw the funds.

•   A robo advisor, or automated portfolio, is a preset portfolio typically of low-cost exchange-traded funds (ETFs). Investors use an online platform to fill out a questionnaire about their preferences, goals, risk tolerance, and time horizon.

The securities and the allocation in each portfolio are generally fixed, but investors can typically choose from different portfolios that match their preferences.

Recommended: Automated Investing 101

How Does an Automatic Investment Plan Work?

The “automatic” part of an automatic investment plan can refer to the automated deposit of funds, usually on a regular schedule. But it’s not just a way to automate your savings. It can also refer to stock dividends being reinvested automatically, or automated mutual funds (like target-date funds), or robo portfolios, as noted above.

The foundation of almost all automatic investment plans is the use of sophisticated technology to ensure the allocation of funds in a portfolio reflects an investor’s needs and goals. While some people might view these options as “hands-off” or “set it and forget it” — and they can simplify a number of investment choices for investors — using an AIP doesn’t mean your money is on autopilot.

Investors will always need to pay some attention to any kind of investment plan, but that said many AIPs do offer investors some advantages.

Benefits of an Automatic Investment Plan

Most brokerages and workplace plans offer some kind of automated options for investors these days. The reason being that behavioral research has repeatedly shown that investors are prone to make emotional choices under certain circumstances (for example, when the market is volatile).

Automated plans provide basic guardrails that can help keep investors on track, investing steadily over time, rather than reacting impulsively to trends or headlines and trying to time the market.

Dollar Cost Averaging

Another benefit of automated plans is that they are designed so that you invest the same amount at regular intervals. This strategy, known as dollar cost averaging, is important for a couple of reasons:

•   Automating deposits may help build savings over time, because you’re less likely to spend that money once it’s invested.

•   Dollar cost averaging is the practice of investing consistently over time, whether the market is up or down, which can lower the average cost of your investments.

Time Savings

Another advantage of using an AIP is that it can save you time and energy, especially if researching or managing investments is not your strong suit.

Types of Investments to Automate

These days automatic investment plans are available for a range of goals. As discussed earlier, you can choose to automate your retirement savings, your personal investment portfolio in a taxable account, a 529 plan, stock dividends, and other options such as micro-investment accounts as well.

These kinds of AIPs can compliment other aspects of financial automation that you may already be using: from budgeting and saving to paying bills.




💡 Quick Tip: Can you save for retirement with an automated investment portfolio? Yes. In fact, automated portfolios, or robo advisors, can be used within taxable accounts as well as tax-advantaged retirement accounts.

Is Automated Financial Planning Right for You?

In general, automatic investment plans may work for people who want to be on top of their finances, but may not have the time or the inclination for detailed investment management.

In that way, the convenience and lower cost of many automated investment plans and robo platforms can help newer investors (or less involved investors) get started.

Investors who aren’t comfortable with relying on technology may not want to invest using automated systems.

Human Advice and Automation

That said, automated investing isn’t a strategy for avoiding money management or financial planning completely. Most investors’ portfolios and financial plans include details or circumstances that require human insight or input. Estate planning, owning a small business, or prioritizing among multiple goals, for example, can be complicated.

Although it can be simpler to automate some parts of the investing or financial planning process, a human advisor can help ensure that you aren’t missing anything. Also, investors who use automated portfolios typically have less control over their investments.

Fortunately, automation here can also work in your favor: You can set alerts to remind you when certain withdrawals are being made.

Recommended: Robo Advisor vs. Financial Advisor: Which Should You Choose?

Starting an Automatic Investment Plan

Starting an automatic investment plan is pretty straightforward. Start by identifying the primary goal for using an automated platform.

•   Do you want to save for retirement at work, or is this a personal retirement account?

•   Do you want an automated investment portfolio that’s preset, like a robo advisor? Or do you want to set up your own portfolio?

•   Do you own dividend stocks, and does it make sense to set up a dividend reinvestment plan?

•   Are you setting up a college-savings plan for a student?

Then, as you explore a few different options, you want to consider the following:

•   Is it a reputable platform, account, or app? Hint: Most online brokerages and financial firms offer a few automated options, so it may be possible to stay with your current provider.

•   Is the platform easy to use? Can you easily make adjustments to your deposits, as needed?

•   What are the fees?

What are the requirements?

•   Is there a minimum amount required to open the account, or for each deposit?

•   How much flexibility do you have when choosing investments (and is that important to you)?

Using an Automatic Investing Plan

Using an AIP is generally self-explanatory because generally these programs were created for investors who want a streamlined experience. Once your account is open, you typically set up a direct deposit of funds, and select the investments you want in your plan.

If you’re working with a financial advisor, they can help insure that the platform you choose will support the rest of your financial plan. If you’re flying solo, you can begin to do research into how your automatic investment plan works together with other goals.

The Takeaway

One of the best things about automated financial planning is that in most cases you can be as hands-off (or hands-on) as you choose. Using an automatic investment plan these days provides a number of options, including active investing, retirement, and robo advisor options. Automated doesn’t mean you can literally “set it and forget it”; it always pays to track your investment portfolio, and think about your long-term plans.

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.


Open an automated investing account and start investing for your future with as little as $50.

FAQ

How do you automate an investment strategy?

You can find an automatic investment plan (AIP) that will match your goals and help you set up or fund a portfolio. That said, you can’t automate your entire investment strategy: Ideally, an AIP would be a tactical piece that fits into your overall strategy.

How often should I auto-invest?

You want to keep up a steady cadence of deposits to make progress toward your goals, and to reap the benefits of dollar cost averaging. You might consider auto investing once a month to start and see how it goes.

What are the benefits of starting an automatic investment plan?

There are a number of advantages to using an automatic investment plan, including the fact that it can help keep your investment plan on track, even if you’re tempted to make changes when markets fluctuate. In addition, an AIP can save time and may help lessen the impact of market volatility.

Photo credit: iStock/GarryKillian

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

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.

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.

SOIN-Q125-048

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Feb
24
2025
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How to Create a Savings Plan For a Year

By | Budgeting & Goals, money | Comments Off on How to Create a Savings Plan For a Year

A year may seem like a short period of time, but you can accomplish a lot, including developing a one-year savings plan that can help you hit some significant financial goals. A plan that lasts 365 days can give you, as an earner, the opportunity to save and feel a sense of accomplishment.

In other words, a year from today, you could be richer than you are now or potentially have a better emergency fund. Or, if you are diligent, you may be on your way to funding a European vacation or finally redoing that dated bathroom. Learn the how-tos.

Key Points

•   To create a 1-year savings plan, define clear, specific financial goals to prioritize and save effectively.

•   Track all expenses, fixed and variable, for accurate budgeting.

•   Automate savings to avoid spending intended savings.

•   Regularly review progress and adjust budget as needed.

•   Break goals into smaller, manageable milestones for motivation.

Why You Need a One-Year Savings Plan

Before you even glance at your budget, it’s important to get clear about exactly what you’re saving for. Creating a specific objective can give you the information you need to create a solid plan to make it happen — it might also help motivate you to stick to that plan once you’ve made it.

For a one-year saving plan, consider factors like your income and current cost of living to settle on something that will likely be achievable in just a year.

The Importance of Setting Clear Financial Goals

Setting clear financial goals allows you to prioritize properly, save responsibly, and achieve your aspirations. It’s important to be specific about your goals. For instance, saying “I want to save for the down payment on a house someday” is very different from committing to having $100 per paycheck automatically transferred into a high-yield savings account.

You may be familiar with the idea of SMART goals — that objectives are most easily met when they’re:

•   Specific

•   Measurable

•   Achievable

•   Relevant

•   Time-bound

In the world of yearly savings plans, that means coming up with a specific dollar figure for your goal and making sure it’s relevant enough to your life to keep you motivated.

•   You probably also want to consult your earnings and expenses to ensure that it’s a realistic goal; it’s going to be a lot harder to save up $5,000 if you’re making $30,000 than it is if you’re making $90,000 or more. (You’ll learn more about budgeting and cuts in just a second.) Divide your total goal by 12 to see how much it would require you to set aside each month, which will give you better insight as to how achievable it really is.

•   Once you’ve got your goal worked out, write it down. Studies have shown that you’re more likely to reach your financial goals if you take this simple action, so it’s worth picking up your pen!

Decide What are You Saving For

A vital step in the saving process is deciding what you are saving for. It’s not necessarily just one thing. Many people sock away cash for different purposes and in separate accounts. Often, these are for a mix of short-term and long-term goals.

Short-Term vs Long-Term Savings Goals

For instance, maybe you want to accumulate cash within a year for the following reasons:

•   A summer vacation

•   A down payment for a new car

Those are short-term goals. Examples of other dreams you may be saving for simultaneously could include:

•   A down payment (or significant portion thereof) for a new home

•   Long-awaited home improvements

•   Your child’s education

•   Your own retirement

These are longer-term goals, ones which you may not expect to realize for, say, a number of years or perhaps even decades from now.

•   A vacation you’ve been dreaming of for years (pending pandemic complications, of course).

•   A down payment for a new car.

•   A down payment (or significant portion thereof) for a new home.

•   Long-awaited home improvements.

•   Putting extra money away for retirement.

Steps to Build a Successful One-Year Savings Plan

Now that you’ve got a goal or multiple goals in mind, you need to figure out how to execute your savings plan, focusing on the year at hand.

Start with Your Existing Budget

You can’t make any big changes to your finances if you don’t know what they look like in the first place. And that means the first step toward revamping your budget is to take a closer look at how it looks right now.

If you don’t have a budget yet, there are many different budgeting methods to consider. Most will benefit from you taking a month to track exactly where all your money is going.

Be sure to include both regular, fixed expenses, like rent and insurance, as well as more flexible, discretionary spending like dining out and entertainment. Be brutally honest. Tacking every cent of fixed vs. variable expenses will give you the best chance at figuring out how to spend less.

Which leads us to our next step…

Get Creative with Budget Cuts

As you work on your 1-year savings plan, remember that there are really only two ways to save money: Make more of it, or spend less of it. And while asking for a raise or starting a side-hustle might be smart moves, you may only have so much leeway with your boss and time in your day. In other words, you likely have more control of how much you spend than how much you earn.

There are simple ways to cut down monthly expenses and save money daily. For instance, could living without streaming services be possible? Or could you quit dining out for one month and then vow not to buy any new clothes the next? A challenge like that can engage some people’s competitive spirit.

Even without these measures, how can you dial down your own living expenses? You might quit buying overpriced convenience foods or find ways to get creative with ramen. Maybe you can start doing your own oil changes rather than taking the car in for service. Think of this as an opportunity to learn some new life skills while also stashing some extra cash. It can help propel you forward on your annual savings plan.

Regardless of how you get there, your goal is to be able to set aside the monthly amount you’ll need to meet the one-year savings goal you wrote down and pinned to your bulletin board. So get out your calculator, and don’t be afraid to get creative.

Get up to $300 when you bank with SoFi.

No account or overdraft fees. No minimum balance.

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Prioritize High-Interest Debt

A good way to free up money for savings is to reduce your high-interest debt (typically credit card debt). This way, the money you are spending on interest disappears and you can put those funds toward your goals.

There are a number of ways you may be able to pay off your debt, including:

•   The avalanche method, in which you focus on paying off the highest-interest debt first while making minimum payments on your other accounts

•   The snowball method, in which you focus on paying off the smallest debt first while making minimum payments on other debts

•   A debt consolidation loan, which is a form of a personal loan that allows you to combine multiple credit card debts into one more convenient payment, potentially at a lower interest rate.

•   You might get a balance transfer card, which will allow you to pay 0% interest for a period of time, during which you can focus on eliminating your debt.

Make a Plan for Your Money

No matter how much money you save, it won’t go as far as it could if you just stash it under your mattress. Figuring out where to put your savings is an important step in your planning.

Different kinds of accounts are used to help individuals save for different goals.

•   For example, a long-term goal like retirement may be best suited for an investment vehicle like a Roth IRA, which can offer some tax advantages. (Keep in mind that investments are not insured and carry risk.)

•   For shorter-term goals like starting an emergency fund, an account that offers more flexibility and has fewer restrictions, like a high-yield savings account, may be a better option.

Recommended: Savings Calculator

Keep it Simple

Having a plan is one thing. Sticking to it is another. But if you keep a simple savings plan, you’ll stand a much better chance of actually making it work.

For instance, automating your finances by setting up recurring transfers can direct a portion of each paycheck into your savings account. This makes saving seamless — and ensures you don’t get stuck in that all-too-familiar situation at the end of the month where you accidentally spent what you intended to set aside.

And building in systemic cuts that you don’t have to think about (like ditching some monthly subscription services, for example) can be a lot easier than poring over the coupons that have flooded your email inbox and may just entice you to spend more.

Recommended: Money Management Guide

Tips for Staying on Track With Your Savings Plan

Regularly Review Your Progress

Given that you are implementing a yearly savings plan, it can be wise to check in frequently on your progress. Reviewing your progress at least once a month can help you see how much you’re saving and tweak your budget if needed.

Also, your financial institution, whether you bank at a traditional or online bank, may offer tools to help you track your money. See what they have that could help in your savings journey.

Automate Your Savings

As mentioned above, having money whisked out of your checking account into savings can be a valuable way to make the process seamless and effort-free.

You don’t need to remember to make a transfer, nor do you see the money sitting in checking, possibly tempting you to spend it: That’s the beauty of automatic savings.

The Takeaway

As with most money goals, embracing a 1-year savings plan is going to take some planning and energy. But by being clear about your aspirations, breaking them down into manageable chunks, and having the right banking tools and partner to help you make progress, you can likely be on the road to success.

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 are common challenges in sticking to a savings plan?

Common challenges to sticking with a savings plan include not having budgeted well (and therefore running out of cash for essentials), not automating the process, and experiencing unexpected expenses. These and other factors can derail a savings plan

How much should I aim to save in a year?

How much you should aim to save in a year depends on a variety of factors, such as your income, expenses, and cost of living. That said, the popular 50/30/20 budget rule recommends that people spend 50% of their take-home pay on necessities and 30% on wants (discretionary spending), and 20% of their earnings should go toward savings and additional debt payments. That can help you determine the right amount to save.

What’s the best way to track my savings progress?

The best way to track your savings progress will likely be a personal decision. Some people like to check in with their money (say, by a banking app) daily. Others like to sit down monthly or quarterly to review where they stand. There are also a variety of tools that can highlight your savings progress and even gamify it. See what your financial institution offers, or you might consider third-party options.

How do I adjust my savings plan for unexpected expenses?

When unexpected expenses occur, you might use funds in your emergency fund. If so, you will need to earmark money to gradually rebuild what you deducted. Or you might temporarily lower the amount you are saving in order to cover the costs that cropped up and then return to your previous level of savings at a later date.

How can I stay motivated to reach my savings goals?

You can stay motivated to reach your savings goals in a few different ways. First, breaking down goals into smaller, manageable chunks can help you see your progress, which can build confidence and motivation. You might also celebrate your successes in a low-cost way or let a trusted friend or family member know that you’ve hit a goal so they can offer congratulations. In general, having a savings buddy to encourage you can be a smart step.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2025 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 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.

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

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


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.

Third Party Trademarks: Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

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24
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What Is Bankruptcy? – Is It Ever the Right Option?

By | Debt Payoff, personal_loan | No Comments

Filing for bankruptcy is a legal proceeding when a person or business cannot pay their debts. It can be a chance to eliminate a great deal of financial stress, put an end to collection calls and letters, and provide an opportunity to remake your financial life. Even so, declaring bankruptcy is not something you should take lightly.

While bankruptcy can, in some cases, reduce or eliminate your debts, it can also have serious consequences, including long-term damage to your credit score. That, in turn, can hamper your ability to obtain new lines or credit, and even make it difficult to get a job or rent an apartment.

Key Points

•   Bankruptcy is a legal proceeding when a person or business cannot pay its debts, with options tailored to different financial situations.

•   Chapter 7 bankruptcy typically involves liquidating nonexempt assets to pay off debts, with remaining debts discharged.

•   Chapter 13 bankruptcy generally requires a court-approved repayment plan over three to five years.

•   Specific eligibility criteria must be met to file for either Chapter 7 or Chapter 13 bankruptcy.

•   Both bankruptcy types aim to provide a fresh financial start, despite differing approaches, requirements and resulting decreases in credit scores.

Bankruptcy Defined

For individuals, there are two main kinds of bankruptcy:

Bankruptcy is defined as a legal proceeding that is triggered when a person or a business is unable to repay its debts or obligations. This process can offer a hard reset for people who can’t pay their bills.

When the bankruptcy procedure gets underway, the debtor’s assets are assessed (and this can range from money in bank accounts to real estate and beyond) and may be used to pay back some of what the person or business owns.

What Are the Types of Bankruptcy?

For individuals, there are two main different kinds of bankruptcy:

•   Chapter 7 Also known as “liquidation bankruptcy,” this is bankruptcy in its most basic form. With this type of bankruptcy, your nonexempt possessions, such as homes and cars, are sold to repay existing debts. After this, many (if not all) of your debts are canceled outright in a four- to six-month process.

•   Chapter 13 Chapter 13 Also known as a “reorganization bankruptcy,” this is a court-approved plan in which you use your income to make payments on your debts over a three- to five-year period. Some of your debts may also be discharged.

The main difference between the two options is that Chapter 7 allows the debtor to eliminate all dischargeable unsecured debt, whereas Chapter 13 allows for payments to be made on those debts. Here are a few more points to consider:

•   You may be prevented from filing for Chapter 7 bankruptcy if you earn enough income to repay your debts in a Chapter 13 bankruptcy plan. On the other hand, you may not qualify for Chapter 13 bankruptcy if your debts are too high or your income too low.

•   If you have substantial equity in your home, you could potentially lose your home if you file for Chapter 7. If you file for Chapter 13, you can keep your home and pay off any mortgage arrears through your repayment plan.

•   Chapter 13 bankruptcy stays on your credit report for seven years, while Chapter 7 bankruptcy stays on the report for 10 years.

•   Some debts, like child support obligations, alimony, student loans, and some tax obligations, cannot be wiped out in either type of bankruptcy.

•   Also keep in mind that bankruptcy won’t relieve you of your obligation to pay your mortgage, though it might make your mortgage payments easier to make by getting rid of other debts.

When To Consider Bankruptcy as a Solution

Life circumstances and financial situations can vary significantly from person to person, so there is no hard and fast rule for when to declare bankruptcy.

However, you may want to start by asking yourself the following questions:

•   Are you unclear on exactly how much you currently owe?

•   Are you only able to make minimum payments on your credit cards?

•   Are you getting calls from debt collectors?

•   Do your financial problems make you feel hopeless, out of control, or scared?

•   Are you using your credit card to pay for necessities because you have so little cash in your checking account?

•   Are you thinking about debt consolidation?

If you answered yes to two or more of these questions, you may want to at the very least give your financial situation more thought and attention.

You may also want to start doing some research (or, if possible, speak with a consumer law attorney) to see if your debt qualifies for bankruptcy, as well as how filing for bankruptcy would affect your life and financial situation.

Alternatives to Bankruptcy

While bankruptcy can sometimes be the best way to get out from under crushing financial burdens, it is not the only way. There are alternatives that can often reduce your debt obligations without some of the negative consequences of bankruptcy. Here are a few you may want to consider.

Credit Counseling

A counselor or counseling service specializing in helping people with debt problems might be able to come up with a solution that has not occurred to you, such as a modified payment plan or debt consolidation.

According to the Federal Trade Commission, you’ll want to look for a nonprofit credit counseling program, such as those offered by universities, military bases, credit unions, housing authorities, and branches of the U.S. Cooperative Extension Service. You can also find a nonprofit agency that offers bankruptcy counseling through the National Foundation for Credit Counseling .

Keep in mind that not all not all nonprofit organizations offer free services, so it’s a good idea to do your research before you sign up for any type of credit counseling services.

Negotiating with your Creditors

Creditors would often rather settle a debt with you than have it discharged in bankruptcy. Debt settlement is an agreement between you and your creditors that you will pay a lump sum, possibly far below what you owe, in order to settle the matter.

But it may not be quite as tidy as it sounds. The creditors take a loss, and likely so will your credit score. You’ll also still need to pay taxes on the forgiven amount, because it will be considered revenue (money you’re getting back).

There are debt settlement companies out there to help you negotiate with creditors, but not all are created equal — some of them charge steep fees and can’t guarantee they will get you the settlement that makes the most sense for you.

It’s a good idea to carefully vet any debt settlement company you are considering working with.

Recommended: Money Management Guide

Cutting Back on Expenses

You may want to give some deep thought to the way you live and currently spend your money. Your lifestyle and financial habits may be what inched you toward bankruptcy in the first place. A good way to start is to set up a personal budget, which involves looking at what’s coming in and what’s going out each month, and then looking for places to trim spending.

Even small steps, like making your own lunch, walking instead of burning gas by driving, keeping the heat or air conditioning use to a minimum, and brewing your own coffee could help you free up cash and transfer money to go toward paying your debt.

While it can be tough to live on a budget at first, with time, you may find yourself becoming more solvent and less burdened.

Debt Consolidation

With debt consolidation, you roll all your debts into one new loan account, preferably with a lower interest rate. This can enable you to pay off your debt and make one monthly payment going forward.

Having just one payment may make it easier to manage your existing debt, and could possibly save you on interest as well.

Refinancing or Modifying Your Mortgage

If your credit is still good enough, you may be able to refinance your mortgage to a new rate that could get your monthly payment low enough that it saves you from bankruptcy.

If you’re not able to refinance at a lower rate, you may be able to qualify for a mortgage modification. A mortgage loan modification is a change in your loan terms that could reduce your monthly payment.

If your lender allows it, it could involve extending the number of years you have to repay the loan, reducing your interest rate, and/or forbearing (or reducing) your principal balance.

You’ll want to keep in mind, however, that if you receive a loan modification and you still can’t make the payments, you could be at risk of losing your home.

Life After Bankruptcy

Bankruptcy can be the path forward from overwhelming debt. There are steps to take afterward to help get your finances back on track.

Focus on your credit. Your credit score will typically be negatively impacted and significantly so. You’ll need to be diligent about paying your bills on time and also taking steps to rebuild your score. A secured credit card, which involves you putting down a deposit that serves as collateral and your credit limit, could be a valuable move to make.

Consider cosigners. If you need to buy a car or are planning to buy a house in the near future, investigate having cosigners (perhaps a close relative) on your loans to help you gain approval. Or you might see if a trusted friend or relative would be willing to offer you a loan.

Seek financial counseling. Having a professionally prepared financial plan to move forward with after this difficult experience can be a source of insight, information, and support. Also, skilled guidance can help you steer clear of taking on too much debt in the future. In addition, you can learn some solid financial principles, such as automatic transfers to build an emergency fund to handle future challenges that require a quick infusion of cash.

The Takeaway

Bankruptcy is a legal proceeding that can help you get out from under crushing debt. The process involves either liquidating (or selling off) your assets to pay your debts or adhering to a court-ordered repayment plan. However, bankruptcy information stays on your credit report for seven to 10 years and can also make it difficult to get credit, buy a home, or sometimes get a job.

Before considering bankruptcy, you may want to first explore other debt management options.

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 debts can be discharged through bankruptcy?

In general, credit card debt, medical bills, and personal loans are dischargeable in bankruptcy. However, not all debts can be discharged. For instance, you may still owe child support, alimony, some unpaid taxes, and other debts.

Will I lose all my assets if I file for bankruptcy?

It depends on your specific situation. Here are some of the assets that can be lost when you file for bankruptcy: real property (meaning land and buildings), personal property (such as jewelry, art, clothing), and intangible assets, such as retirement accounts and alimony.

How does filing for bankruptcy affect my credit score?

Filing for bankruptcy can significantly lower your credit score, and it can stay on your credit report for seven to 10 years. There isn’t a specific figure for how much it will drop, but there is a tendency for those with a higher starting score to see a bigger decrease than those whose score was lower from the beginning.

How does one file for bankruptcy?

Typically, you file for bankruptcy by consulting with a lawyer who specializes in this type of proceeding, gathering necessary documents, attending a credit counseling course, filling out the appropriate forms and submitting them with a filing fee, attending a meeting of creditors, and then determining whether a repayment plan is possible or learning about the discharge of debt.

Will I lose my car if I am bankrupt?

Whether you can keep your car after bankruptcy will depend on such factors as the type of bankruptcy, the value of the vehicle, and whether you can pay for it or not.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2025 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 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.

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

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


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.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

This article is not intended to be legal advice. Please consult an attorney for advice.


External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Third Party Trademarks: Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

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24
2025
Guide to Options Spreads: Definition & Types

Guide to Options Spreads: Definition & Types

By | Growing Wealth, invest, Investing | Comments Off on Guide to Options Spreads: Definition & Types


Editor's Note: Options are not suitable for all investors. 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. Please see the Characteristics and Risks of Standardized Options.

Options spreads are trading strategies that involve two or more options designed to manage risk while providing opportunities for profit. Traders using an option spread simultaneously buy multiple options on the same underlying asset with different strike prices, different expiration dates, or both.

Understanding options spreads can help you decide whether these strategies could work for your portfolio, and which one to use in a given situation.

Key Points

•   Options spreads are strategies using multiple options to manage risk and enhance profit potential.

•   Vertical spreads involve options with the same expiration but different strike prices.

•   Horizontal spreads use the same strike prices but different expiration dates, capitalizing on time decay.

•   Diagonal spreads combine different strike prices and expiration dates, offering versatile market positioning.

•   These strategies can be implemented with calls or puts, tailored to bullish or bearish market outlooks.

Credit and Debit Spreads

The difference between credit and debit spreads in options investing is that, in a credit spread, a trader sells one option (receiving a premium) and buys another (paying a lower premium), with the net result being a credit to their account. Conversely, when they buy an option and sell an option with a lower premium, they pay a net premium to open the position, resulting in a debit to their account.

Recommended: What Investors Should Know About Spread

3 Common Option Spread Strategies

Spread strategies occur when a trader buys and sells multiple call or put options pegged to the same underlying asset or security, but with different strike prices or expiration dates.

There are several types of option spreads. Here’s a look at a few common ones:

1. Vertical Spread Options

A vertical spread is an options strategy in which the options have the same expiration date but different strike prices. There are four types of vertical spread options that investors use depending on whether they are bullish or bearish, and whether the spread is a debit or credit.

Bull Call Spreads

A bull call spread strategy involves buying a call option at a lower strike price and selling another call option at a higher strike price. The call spread options have the same underlying asset and expiration date.

Traders may use this strategy when they expect the price of the underlying asset to increase, but want to limit potential loss by capping both their gains and losses.The trader caps their potential losses to the net premium they paid for the options. Their maximum gain is capped at the differences in strike prices, minus the net premium paid.

For example, a trader buys a call option on a stock at a strike price of $10, for a premium of $2. They then sell a call option with the same expiration date but at a strike price of $12, receiving a premium of $1. Conversely, if the stock price falls below $10 by expiration, the option would expire worthless and the trader’s loss is limited to the $1 premium.

This strategy limits the trader’s maximum loss to the net premium paid for the options. If the stock price rises above the higher strike price, the potential gain is capped at the difference between the strike prices, minus net premium paid. Although this cap limits the upside, it also provides protection against potential losses beyond the premium paid.

Bear Call Spreads

The opposite of a bull call spread, a bear call spread benefits from an underlying asset’s decrease in value.

For example, if a trader using a bear call spread anticipates a stock’s value is going to decrease, they would set up a spread by selling a call option and buying another call option at a higher strike price — the inverse of the bull call spread method. This is a credit spread, meaning the trader maximum gain is limited by the net premium received for the position. Their potential loss is capped at the difference in strike price. For example, a trader sells a call option on a stock at a strike price of $10, and buys another call at a strike price of $12.

Bull Put Spreads

A bull put spread is similar to a bull call spread, but it involves puts rather than calls. Using a bull put spread, a trader anticipates an increase in the underlying asset’s value. In our example, the trader would sell a put option at a strike price of $10, and simultaneously buy another at a lower strike price, which in this example is $8.

If the stock price remains above $10, both options expire worthless. The trader retains the full premium received as their maximum gain. If the stock price falls below $8, the trader incurs the maximum loss. This is capped at the difference between the strike prices minus the premium received.

Bear Put Spreads

A bear put spread is the inverse of a bull put spread. In our example, the trader would buy one put option at a $10 strike price, and simultaneously sell another put at a lower strike price, like $8.

The trader cannot lose more than the net premium the trader paid to take the position (as this is a debit spread) or gain more than the difference in strike prices.

2. Horizontal Spreads

Horizontal spreads (also called “calendar spread options”) involve options with the same underlying asset and same strike prices, but with different expiration dates. The main goal of this strategy is to generate income from the effects of time decay or the volatility of the two options.

There are also two main types of horizontal spreads.

Call Horizontal Spreads

A call horizontal spread is a strategy which a trader would employ if they believed that the underlying asset’s price would hold steady. In this case, the trader would buy a call with an expiration date on January 15th, for example, and sell another call with a different expiration date, like January 30th.

The trader can also reverse these positions by selling a call option that expires on January 15th, and another that expires on January 30th. The two positions’ differing expiration dates act as buffers, limiting potential losses (the premium paid) and gains.

Put Horizontal Spreads

Put horizontal spreads similar to call horizontal spreads except that traders use puts instead of calls.

3. Diagonal Spreads

Diagonal spreads incorporate elements from both vertical and horizontal spread strategies. These spreads involve the same option types and underlying asset (the same as before), but with differing strike prices and differing expiration dates.

Diagonal spreads — with different strike prices and expiration dates — allow for a variety of options combinations, and can be used under different market conditions. For example, they can be bearish and bullish, use calls or puts, and use different time horizons (long or short).

Other Options Spreads

While we’ve covered the main types of options spread strategies, there are a few more you may run into.

Butterfly Spread Options

A butterfly spread incorporates multiple strike prices, and can utilize either calls or puts. It also combines a bull and bear spread across four different options.

An example would be a trader buying a call at a certain strike price, selling two more calls at a higher strike price, and then buying another call at yet an even higher strike price—of equal distance, or value, from the two central calls. This results in a cap on losses and gains, and the trader could realize gains depending on the volatility levels of the underlying asset.

Box Spread Options

A box spread option strategy involves a bear put and a bull call with identical strike prices and expiration dates. Under very specific circumstances, traders employ box spreads when they are looking to capitalize on arbitrage opportunities.

The Takeaway


There are several spread strategies for options trading that traders use to limit their losses and position themselves for potential gains based on their projections about the price of a specific asset.

Investors who are ready to try their hand at options trading despite the risks involved, might consider checking out SoFi’s options trading platform offered through SoFi Securities, LLC. The platform’s user-friendly design allows investors to buy put and call options through the mobile app or web platform, and get important metrics like breakeven percentage, maximum profit/loss, and more with the click of a button.

Plus, SoFi offers educational resources — including a step-by-step in-app guide — to help you learn more about options trading. Trading options involves high-risk strategies, and should be undertaken by experienced investors. Currently, investors can not sell options on SoFi Active Invest®.

Explore SoFi’s user-friendly options trading platform.

🛈 While investors are not able to sell options on SoFi’s options trading platform at this time, they can buy call and put options to try to benefit from stock movements or manage risk.

Photo credit: iStock/damircudic

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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.
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