Jul
03
2024

Financial Planning Tips for Your 40s

By | Budgeting & Goals, money, Preparing for Retirement | Comments Off on Financial Planning Tips for Your 40s

Your 40s can be a pivotal decade in your life. It’s typically a time of peak earnings, growing family responsibilities, and an increased focus on long-term financial stability. You may have a house, kids, and a busy job. College expenses may be looming. Maybe you’re hatching a plan to start your own business or buy a beach house that’ll one day be your empty-nester home.

To navigate these years successfully, it’s essential to make strategic financial moves that can secure your future and make your plans and dreams a reality. Here are some critical financial planning tips to consider as you move through your 40s.

7 Financial Moves to Make During Your 40s

In your 40s, you’re old enough to know what you want and likely have enough earning years ahead to achieve your goals — if you manage your money right. The following strategies can help you build wealth in your 40s.

1. Maintain or Replenish Emergency Funds

Life is full of unexpected twists and turns. Not all of them are fun, such an expensive car or home repair, a medical emergency, or losing your job. An emergency fund offers financial stability during a stressful time. It also saves you from running up expensive debt that could derail your financial goals.

A general rule of thumb is to have six to 12 months’ worth of living expenses stashed away for the unexpected. If you already have an emergency fund but it has been partly or fully depleted, you’ll want to prioritize replenishing it to maintain financial security.

Consider setting up automatic transfers into savings to build your emergency fund consistently. Keep these funds in a liquid, easily accessible account, such as a high-yield savings account, to ensure you can access the money quickly when needed.

2. Manage Your Debt

Debt management is a crucial aspect of financial planning at any age, but it becomes even more critical in your 40s. Since high-interest debts, like credit card balances, can significantly hinder your ability to save and invest for the future, you’ll want to prioritize paying them off as quickly as possible.

One strategy that can help is the avalanche payoff method. Here, you list your debts in order of interest rate from highest to lowest, then put extra money toward the highest-interest debt, while continuing to pay the minimum on the others. Once that debt is paid off, you put your extra funds toward the debt with the next-highest rate, and so on.

Alternative approaches to paying down high-interest debt include getting a low- or no- interest balance transfer credit card or taking out a personal loan for debt consolidation with a lower rate than you are paying on your cards.

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3. Revisit Retirement Saving

In your 40s, you’re roughly at the midpoint between entering the workforce and traditional retirement age. How you invest and save for retirement at this point in your career can strongly impact your future assets and ability to one day retire comfortably.

If you’re not currently contributing to a retirement plan, such as a 401(k) or individual retirement account (IRA), now’s a good time to start. If you have been, it’s time to assess your progress. Consider how much of a nest egg you will need to retire and, using an online retirement calculator, whether your current plan will get you there.

If you’re behind on your savings, consider stepping up your contributions or, if you’re already contributing the max allowed, making “catch-up” contributions down the road. Starting at age 50, the IRS allows higher maximums designed to help people catch up on their retirement savings goals.

4. Plan for Childrens’ College Expenses

If you have kids, planning for their future education expenses may be top of mind. College costs continue to rise, and early planning can alleviate future financial stress. If you haven’t started saving for college expenses, you may want to explore opening a 529 college savings plan, which offers tax advantages and can be a flexible way to save for educational expenses.

An online college cost estimator can help you determine how much you need to stash away each month or year, based on the year your child will likely attend college and the type of school they might choose.

Just keep in mind that it’s important to balance college savings with other financial goals, like retirement. As kids get closer to leaving the nest, you may also want to encourage them to apply for scholarships and grants, and explore financial aid options.

5. Choose or Reevaluate Insurance Coverage

Insurance is an important component of financial planning in your 40s. You’ll want to evaluate your current insurance coverage and make sure it’s adequate to meet your family’s needs. This includes not only health and home insurance, but also life and disability insurance.

Life insurance provides financial security for your family should you die prematurely. If you don’t currently have a life insurance policy, consider purchasing one. If you do have one, you’ll want to make sure your policy’s coverage amount is sufficient to cover your family’s current living expenses, outstanding debts, and future financial needs, such as college tuition for your children.

It’s also a good idea to review your disability insurance, which protects your income if you’re unable to work due to illness or injury. Many companies provide a policy through work. However, you may want to consider supplementing employer-provided coverage or, if you’re self-employed, getting your own policy. This offers a different, but equally important, safety net for you and your family.

Recommended: Which Insurance Types Do You Really Need? Here Are 6 to Consider

6. Invest Outside of Retirement

While retirement accounts are crucial, investing outside of retirement can diversify your portfolio and help you achieve goals that may be five or 10 or more years away, such as a downpayment on a vacation home or a child’s wedding.

Though investing carries risk and can be volatile in the short term (which is why you generally don’t want to invest funds you’ll need in the next few years), an investment account has the potential to grow more than other types of accounts over the long term. Consider taxable investment accounts that align with your risk tolerance and financial objectives.

7. Meet with a Financial Professional

Getting expert advice on managing your finances can be invaluable at this stage of life. Whether you opt for regular meetings or simply go for a one-time consultation, a financial professional can provide valuable insights and help you navigate complex financial decisions.

An advisor will typically look at your whole financial picture and assist you with creating a comprehensive financial plan. This may include optimizing your investment strategy and ensuring you’re on track to meet your goals, including retirement, investments, and college savings.

The Takeaway

It’s never too late to take control of your finances. In your 40s, you are likely entering your prime earning years, so it’s a good time to focus on paying down debt, preparing for the next chapter of your children’s lives, and saving and investing for your future retirement. With some wise money moves, you’ll be set to make the most of this decade and beyond.

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

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.20% APY on SoFi Checking and Savings.

FAQ

What financial goals should a 40-year-old have?

Ideally, a 40-year-old will want to focus on several financial goals. These include:

•   Establish or maintain an emergency fund with three to six months’ worth of essential living expenses.

•   Reduce financial burdens by paying off high-interest debt.

•   Ensure you’re on track with retirement savings by maximizing contributions to retirement accounts.

•   Start or continue saving for children’s college expenses through plans like 529s.

•   Consider investing outside of retirement to diversify your portfolio and build wealth.

How much should a 40-year-old have saved?

By age 40, financial advisors often recommend having three times your annual salary saved for retirement. This benchmark ensures you’re on track to meet long-term financial goals and maintain your desired lifestyle in retirement.

In addition, you’ll want to maintain an emergency fund with three to six months’ worth of living expenses.

Savings outside of emergency and retirement, such as investments in taxable accounts, can further enhance financial security. The exact amount can vary based on individual circumstances, income, lifestyle, and future goals.

How can I build my wealth in my 40s?

To build wealth in your 40s, you’ll want to focus on several strategies:

•   Maximize retirement account contributions, taking full advantage of employer matches.

•   Pay off high-interest debts to free up resources for savings and investments.

•   Establish or maintain an emergency fund to cover unexpected expenses without derailing financial goals.

•   Consider additional income streams, such as side businesses or rental properties.

•   Diversify investments across stocks, bonds, real estate, and other assets to balance risk and growth potential.

Photo credit: iStock/shapecharge

SoFi members with direct deposit activity can earn 4.20% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.20% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

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

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/31/2024. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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

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.

*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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Jul
02
2024
Guide to Budgeting and Saving for a Gap Year

Should I Take a Gap Year? The Impact It Has on Your Money

By | Budgeting & Goals, Financial Independence, money | Comments Off on Should I Take a Gap Year? The Impact It Has on Your Money

Gap years are less popular in the U.S. than in many other countries, but still, data shows that 3% of students take a gap year between high school and college. The idea of taking a break before, during, or after college is likely one that many students can relate to.

Obtaining an education involves a lot of hard work. From long days in the classroom to late-night study sessions, the rigors of academia can take their toll. And college can carry a hefty price tag. It’s understandable that someone might want to take a gap year before they start college or after they finish college to regroup before they begin working.

There are a lot of benefits associated with taking a gap year, but getting ready for a year off requires quite a lot of financial planning to make this choice sustainable.

What Is a Gap Year?

Before diving into how much to save in your bank account for a gap year, it’s helpful to understand exactly what a gap year is. Essentially, a gap year involves taking a year off from school or work to travel, do an internship, take on a temporary job, volunteer, develop a skill, or do a combination of those activities. Some students design their own program; others sign up with an organization that, say, leads them on travel or volunteer projects.

More often than not, people take a gap year between when they graduate high school and start college, but it is possible to take a gap year during college or after graduation but before starting a job or going to graduate school.

A gap year can give someone the time they need to discover what they want their next move to be, to rest, to learn about an area of interest, or to simply get out of their comfort zone.

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What Are the Benefits of Taking a Gap Year?

Some parents may look down on the idea of a gap year, fearing that their child won’t get “back on track” with their studies or post-grad life. But there are many benefits associated with taking a gap year.

•   Time to rest and recharge. After many years of academic pressure, some students need a year off to recover from burnout before they start their next big endeavor.

•   Room for discovery. Students who aren’t sure what path they want to take next may find that taking a gap year gives them the opportunity to discover or deepen their interests and formulate next steps.

•   Can explore passions. If a person knows they’re interested in a certain industry or job role, they can spend some time interning, pursuing a fellowship, or researching that career path before they pursue a degree toward that job.

•   Develops independence. A gap year can provide the opportunities young adults need to become more self-sufficient. That could mean traveling solo or taking on a job in a new town, not to mention getting better with money.

Is a Gap Year Beneficial Financially?

If you’re contemplating taking a gap year, it’s natural to wonder how much to save to make it a reality. You may also be curious if a gap year could be a boost or a bust for your finances. In truth, a gap year can be beneficial financially and in other cases it can be financially damaging — it just depends on how the person chooses to spend that year. For instance, if you are working at a local business while living at home, you might open a high-yield savings account and really plump it up with your earnings. If, on the other hand, you go on a gap-year guided tour of another continent, that could cost $10,000, $20,000, or more.

There is some concern that gap years can hurt someone’s overall lifetime earnings. By pushing off entering the working world with a college degree in hand by a year, they can lose a year’s earnings as well as a year’s progress towards a higher paying job.

That being said, someone may spend their gap year interning, working as a fellow, or finding other ways to earn income or boost their resume. They may find their efforts propel them forward financially or at least help them break even. On the other hand, if a person spends the year traveling and relaxing, their finances might take a major hit if they don’t plan and budget appropriately.

Typical Expenses to Prepare for During a Gap Year

Parents may not be able to (or eager to) fund a child’s gap year, so a student can benefit from preparing to pay some or all of their expenses. Saving in advance or working part-time during the gap year can help make it a reality. (Planning for a gap year can actually be a great way to get your finances in order and learn how to budget.)

Here are some of the expenses to consider:

•   Rent and utilities or other housing (say, youth hostels if you are traveling)

•   Transportation

•   Travel costs

•   Food

•   Entertainment (movies, concerts)

•   Clothing

•   Personal-care products

•   Health insurance

•   Medical costs

•   Car insurance

•   Cell phone/data plan; internet access

•   Student loan payments, if applicable

•   Credit card debt payments

•   Gym membership/fitness costs

Financial Tips to Save for a Gap Year

The very act of planning and saving for a gap year can be a great exercise in money management for college students; it will definitely give you a new perspective on saving and spending.

Budgeting While Planning a Gap Year

Budgeting for a gap year takes quite a bit of forethought and planning regarding your personal finances. It’s a good idea to plan for a gap year a full 365 days in advance to make it easier to build up a savings fund. It can be helpful to put your cash into either a savings account, money market account, or CD to gain interest and help build your funds.

You might want to determine how much you need to save over the next year, divide that amount by 12, and then add that amount into your budget so you can set the money aside each month. This can be a great time to familiarize yourself with different budgeting techniques (like the envelope system or the 50/30/20 budget rule) and see which one suits you best.

Getting a Job or Internship

Getting a part-time job or a paid internship while in school can make it easier to save for a gap year. Your school may have an online board where you can scan for opportunities. You might also consider a side-hustle, whether that means selling photographs you took while hiking or doing a weekend shift at a local coffee shop.

Cutting Unnecessary Expenses

As mentioned, it’s a good idea to budget for a gap year. Now it’s time to up the ante. You can take a cold, hard look at your budget to see where you can cut your spending (hello, subscription services and those pricey daily smoothies). The money you save can be put towards your gap year fund.

Selling Items You No Longer Use

From clothes to workout equipment to electronics, most of us have things we simply no longer use. If you’re trying to fund a gap year, you can cut the clutter and make some extra cash by selling this stuff. You might offer items up online (eBay and the like) or organize a yard or stoop sale.

Reduce Credit Card Spending

Credit card debt has a way of snowballing and getting very expensive. With credit card interest rates at 24.62% as of mid June 2024, owing money on your plastic can be an expensive thing. Aim to only use your credit card for purchases you can afford to pay off right away. That way, you can use any cash-back and travel-point bonuses to help fund your gap year without carrying a balance. It’s wise to focus on managing your money in a way that doesn’t require relying on a credit card.

Consolidate Credit Card Debt

The above strategy may not be possible if you’ve already racked up a good deal of credit card debt and are feeling as if you are in financial trouble. (Yes, this can happen quickly, even if you’re a student who’s only had a card for a short time.) You may find that consolidating multiple sources of credit card debt can help you get a lower interest rate (which could save money) and streamline your debt, making it easier to pay off.

For instance, you might find a balance-transfer card that offers breathing room thanks to an introductory, interest-free period. Or perhaps you would do better with a credit card consolidation loan that lets you pay off the debt and then pay back the funds at a lower interest rate. If you need guidance, consider talking with a debt counselor at the non-profit National Foundation for Credit Counseling (NFCC).

Cook at Home

Eating out will almost always cost more than eating at home. To save extra cash, get comfortable in the kitchen and build your meal-prep repertoire. In addition, you might start making your own lunch; those popular salad bars can be a budget-breaker if you go often.

Recycle, Reuse, Rewear

One way to save big is to be planet-friendly. Did you know the average American spends about $100 per year on bottled water? Buy yourself an insulated reusable water bottle in a color or design you love, and use it.

Also consider that each of us typically spends almost $2,000 on clothes per year. Commit to wearing what you own or perhaps shopping second-hand (there are plenty of cool things to be found at thrift and vintage stores) to whittle that expense way down.

Think Carefully About Big Purchases

If you’re planning for a gap year, you may want to slow your roll when it comes to making big purchases. Upgrading to the latest mobile phone or buying a premium mattress as you enter adult life may seem enticing right now. However, if you delay gratification, you may be closer to making your gap year dreams a reality. Better money management can sometimes mean knowing how to say “no” to things you think you have to have.

The Takeaway

A gap year can be a great way to intern, explore, volunteer, destress, and more. But it typically isn’t free. If you want to enjoy this kind of experience, you likely need to save more in your bank account and spend less. Yes, this can help your gap year become a reality, but it has another bonus: It teaches you money management skills that can last a lifetime.

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


Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.20% APY on SoFi Checking and Savings.

FAQ

How much money is needed for a gap year?

How much money you need for a gap year depends on your goals. For instance, if you want to travel the world during that year, you will require a lot more money than if you plan to live at home and intern in an industry you’re interested in.

Can taking a gap year help you save money?

Usually a gap year doesn’t help students save money, other than the fact that no tuition will be due that year. The exception would be if you live with your parents during your gap year and work during that time.

How can a gap year hurt?

A gap year can potentially hurt someone’s lifetime earning potential. By delaying entering the working world for a year, the individual misses out on a year’s salary and career growth that can lead to a higher salary down the road. However, a gap year could also be a positive: It could involve an internship or connections that eventually lead to a dream job.

Photo credit: iStock/ijeab

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.

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

4.20% APY
SoFi members with direct deposit activity can earn 4.20% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.20% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

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

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/31/2024. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

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Jul
02
2024
Guide to Sweep Accounts

Guide to Sweep Accounts

By | Budgeting & Goals, Growing Wealth, Investing, money | Comments Off on Guide to Sweep Accounts

A sweep account automatically transfers, or “sweeps,” money from one account into another, with the goal of earning a higher rate of return. This is usually done to prevent excess cash from sitting in a low-rate account, but sweep accounts can also be used to pay off loans.

Sweep accounts are set up to make these transfers automatically, usually at the close of each business day. If you have several different accounts with a particular bank or brokerage, you may be able to take advantage of a sweep account — and it may be worth considering.

Key Points

•   A sweep account automatically transfers excess funds from one account to another to earn a higher rate of return.

•   Sweep accounts are commonly used when individuals or businesses have multiple accounts at the same institution.

•   The excess funds can be swept into a savings account, money market fund, or investment account.

•   Sweep accounts help maximize returns by preventing cash from sitting in low-interest accounts.

•   There are different types of sweep accounts, including individual, loan payback, business, and external sweep accounts.

What Is a Sweep Account?

A sweep account is typically used when you hold more than one account (e.g. personal checking and savings accounts, or different brokerage or business accounts) at a single institution. To utilize a sweep account, you set a threshold — for example, a certain balance in a checking account — and the sweep account will automatically move funds above that threshold into another account that earns a higher return (typically a money market mutual fund).

This helps to ensure that you don’t keep cash parked in low-interest accounts, and that you’re maximizing the total return across all of your accounts.

Ways to Use a Sweep Account

As an example of how someone might use a sweep account, you may keep a predetermined amount in the checking account to pay your bills. Then, at the end of each business day, any excess money is swept into a savings account or money market fund that earns a higher interest rate.

A sweep account may also be used at a brokerage, where your contributions or deposits (as well as dividends or profits from selling securities) are transferred to an investment account like an IRA or a taxable account, at regular intervals.

Benefits of a Sweep Account

Using a sweep account can offer a couple of benefits. It allows you to keep a set amount of money in your checking account, say, to make sure you have sufficient funds to pay your bills without overdrawing the account. It also allows you to take any funds above that amount and put them in an account with a higher return.

You can also set up a sweep account when you open a brokerage account. This can also be valuable because different investments may generate returns or dividends at different times — but the sweep account makes sure the money doesn’t sit in cash, but gets reinvested and put to work.

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💡 Quick Tip: An online bank account with SoFi can help your money earn more — up to 4.20% APY, with no minimum balance required.

How Do Sweep Accounts Work?

One of the golden rules of investing is to try and maximize your returns, subject to your risk tolerance. A sweep account can be a great tool to help you do that because it helps to overcome inertia — a common behavioral finance hurdle for investors.

Using a sweep account allows you to set an amount of money that you always want to keep in your main account. Then, at the close of each business day, any extra money is swept into a savings, money market fund, or brokerage account that may generate higher returns.Depending on where you want to sweep the funds, they can remain fairly liquid and accessible or they can be part of a longer-term tax-efficient investing strategy.

You can also set up a sweep account to help pay off a loan or a line of credit — another potential use of your spare cash. Beware of fees, though. Some sweep accounts are complimentary, but some aren’t. You don’t want the cost of maintaining a sweep account to eat up the extra interest or returns you hope to earn.

Note, too, that there are no particular tax implications for using a sweep account.

Personal Sweeps vs Business Sweeps

Sweep accounts that are linked to your personal accounts work more or less the same as sweep accounts tied to business accounts. They both enable the swift transfer of funds from a low-interest-bearing account to one that potentially generates some income. This can be important for individual investors.

A sweep account is also important for businesses, particularly small businesses, which have multiple accounts to handle various payments and cash flows. By setting up a sweep system, it’s possible to manage different income streams and get more growth, potentially, by investing the cash.

It’s possible to sweep money back into the main account, if cash is needed to cover expenses, but sometimes this process takes more time. As a business owner, be sure to clarify what the holding periods might be.

💡 Quick Tip: Want a simple way to save more everyday? When you turn on Roundups, all of your debit card purchases are automatically rounded up to the next dollar and deposited into your online savings account.

Types of Sweep Accounts

There are a number of different types of sweep accounts. Be sure to inquire at your bank or brokerage about the kinds of sweep accounts they offer, and ask about the terms and any fees that might apply.

•   Individual sweep account — Typically used by a brokerage to store funds from a client until they decide how to invest the money.

•   Loan payback sweep account — Instead of sweeping the money into a money market or savings account, you can sweep excess funds to help pay off a loan.

•   Business sweep account — Allows you to sweep excess money from business accounts.

•   External sweep account — Some institutions can sweep cash into deposit accounts externally, which can increase the amount of FDIC insurance coverage ($250,000 per account).

Pros of Sweep Accounts

As discussed, there are several upsides to sweep accounts, which can include the following.

•   May help you to earn higher interest rates or possibly investment returns.

•   Happens automatically at the close of each business day, so you don’t have to think about it.

•   Some sweep accounts are FDIC-insured (by the Federal Deposit Insurance Corporation), or they may be protected by SIPC (the Securities Investor Protection Corporation).

Cons of Sweep Accounts

There are pros to sweep accounts, and there are cons to sweep accounts. Here are some things to consider about the potential downsides.

•   Your bank or brokerage may charge additional fees for using a sweep account which might cancel out the interest earned.

•   If your money is swept into a brokerage account, it won’t be FDIC-insured (but it could be covered by the SIPC).

The Takeaway

A sweep account can be a great way to maximize the amount of interest that you earn, if you have multiple accounts. When you use a sweep account, you set a threshold amount that you want to keep in a specific account. Then, at the close of each business day, any excess funds are swept into an account that pays a higher interest rate (e.g. a money market fund).

Sweep accounts offer investors a way to leverage their spare cash. Although returns can vary, and with brokerage accounts there is always the risk of loss, sweep accounts provide an important function by putting your cash to work.

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


Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.20% APY on SoFi Checking and Savings.

FAQ

Is a sweep account good?

Sweep accounts can be useful if you have multiple accounts with different cash flows, and you want to make sure your spare cash is always earning the most it can.

Can you lose money in a sweep account?

Not really. A sweep account generally does not hold money itself; it just sweeps funds from one account to another. So a sweep account itself will not lose money, though it is possible to lose money, depending on where you sweep the money to.

What is the benefit of a sweep account?

The main benefit of a sweep account is the ability to automatically control how much money is in your various accounts. With a sweep account, you can set a minimum threshold for your checking account, for example, and then automatically sweep any excess funds into a money market fund at the end of each day.

Photo credit: iStock/Viktor_Gladkov

SoFi members with direct deposit activity can earn 4.20% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.20% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

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

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/31/2024. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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

*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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How to Prepare Your Finances for a Recession

How to Prepare for a Recession: Ways to Protect Your Money

By | Budgeting & Goals, Family Finances, money | Comments Off on How to Prepare for a Recession: Ways to Protect Your Money

Many people are feeling the pain of the current economy, which has made it more difficult to buy a home or a car, and even afford everyday necessities like groceries and gas. While fears of recession have eased, inflation has proven sticky, interest rates remain high, and economic growth slowed in the first quarter of 2024.

Whether we head into an official recession or not, it’s important to understand that downturns are a normal part of economic cycles. There are also steps you can take when the economy is slowing to safeguard your financial health and avoid being significantly affected by a recession. Here are some key strategies to consider taking now, as well as actions you may want to avoid should the economy take a turn for the worse.

What Happens During a Recession?

A recession is a significant decline in economic activity that is spread across the economy and lasts more than a few months. One rule of thumb is that two consecutive quarters of negative gross domestic product (GDP) growth indicates a recession, but a number of formulas are typically used to determine recessions.

During a recession, several economic indicators show a downturn: Employment rates drop, consumer spending decreases, business revenues fall, and overall economic confidence wanes. This environment can lead to higher unemployment rates, decreased consumer confidence, and a general slowdown in economic activity.

Recessions are part of the economic cycle, which is characterized by peaks of growth followed by downturns. These phases of contraction can be triggered by various factors, including high inflation, rising interest rates, decreased consumer spending, or unexpected global events like a pandemic. Understanding the mechanics of a recession can help you take proactive steps to protect your finances and minimize the negative effects.

How to Prepare Your Finances for a Recession

Recessions are an inevitable part of any economy. But you can avoid some of the negative impacts by anticipating challenges early and preparing for the future.

Take Stock of Your Finances

High prices across the board have already forced many consumers to cut back on their budget for basic living expenses, such as groceries and travel. Even if you’ve made some spending adjustments, however, it’s a good idea to check in on your finances. You can do this by scanning the last few months of financial statements and assessing your average monthly spending and average monthly take-home income.

If you find that your spending is close to your earnings (meaning you’re not saving) or it’s higher (meaning you’re going backwards), you’ll want to comb through your discretionary spending and find places to cut. This can free up funds to boost saving and pay more than the minimum on any debt.

Build a Safety Net

Hard as it may be to find extra cash right now, it’s important to make sure you are putting funds aside each month toward building your emergency fund. This fund will serve as a financial cushion if you experience a job loss or get hit with any unexpected expenses. If you already have an emergency fund, consider increasing it to provide extra security during uncertain economic times.

The general rule of thumb is to keep at least three to six months’ worth of living expenses in a separate, easily accessible account. But if that feels like an overwhelming goal, it’s fine to start slow — even transferring $50 a month to your safety net can add up significantly over time. To benefit from the upside of the Fed’s multiple rate hikes, choose an account that pays a competitive annual percentage yield (APY), such as a high-yield savings account.

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Pay Down High-Interest Debt

Here’s the bad news about higher interest rates: The national average credit card rate is now 27.70%, which makes credit card balances a significant financial burden. As a result, you’ll want to check rates on all of your credit cards and other debts. Any variable rates may have gone up. Next step? Pay as much as you can on your highest interest rate balances first to whittle down that debt; it’s the kind that can unfortunately snowball during tough economic times.

You might also look into balance transfer credit card offers. They can provide a period of no or low interest, during which you can pay down that debt. Another option is to consolidate high interest debt with a lower interest personal loan. You might also look into a nonprofit debt counseling program.

Once you’ve eliminated high-cost obligations, you’ll be better prepared to manage any potential financial bumps in the road.

Stay Your Investment Course

When it comes to your long-term investments, such as 401(k)s and other retirement accounts, you’ll want to continue making your contributions (or, if you’re not, consider starting), and not worry too much about market volatility. If you have a diversified portfolio, you generally don’t want to change your strategy out of fears of a looming recession.

For perspective, consider the most recent downturn: The Dow Jones fell nearly 3,000 points on March 16, 2020, which was the largest decline in one day in U.S. stock market history. Yet, the market rebounded quickly and set new records in late 2020 and early 2021. Investors who sold in a panic didn’t see any of those record-breaking returns.

If rising expenses are making it impossible for you to keep up with 401(k) contributions, try to contribute at least the minimum necessary to get any matching funds your employer offers. That’s free money, and you don’t want to miss out.

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

Recession-Proof Your Career

Recessions often involve layoffs and a significant rise in unemployment. This is something you’ll want to keep in mind, especially if you work in an industry that typically suffers downturns in a recession. Reducing debt and building emergency savings, as mentioned above, are two important steps you can take to prepare for the financial shock of a layoff.

In addition, you may want to take some steps to recession-proof your career. Start by updating your resume and LinkedIn page. If you notice any gaps in your skill set, you may want to explore getting the extra education, skills, or training you may need to protect your livelihood. It’s also smart to refresh connections within your professional network, looking both within and outside your organization. Having a strong professional network and staying adaptable can provide opportunities even during economic downturns.

What to Avoid Doing During a Recession

Here’s a look at what not to do if the nation slips into a recession.

Panic

While the term “recession” can be panic-inducing, you’ll want to avoid making any rash decisions. Economists use the word recession simply to indicate that the economy is contracting, not growing. Not all recessions lead to double-digit unemployment or severe stock market losses.

That said, the stock market often experiences significant volatility during a recession, which can lead to fear and panic-selling. As mentioned above, selling investments hastily could result in substantial losses. It’s often wiser to focus on your long-term investment strategy and avoid making impulsive decisions based on short-term market movements. Market downturns can also present buying opportunities for long-term investors.

Tap Your Retirement

Withdrawing from your retirement accounts should generally be considered a last resort during a recession. Early withdrawals can incur penalties and taxes, and reduce the funds available for your future. You’ll want to explore other options, such as cutting discretionary spending, picking up a side gig for an extra income stream, or using your emergency fund, before tapping into retirement savings. Protecting your retirement funds is crucial for long-term financial security.

Accumulate New Debt

Taking on new debt during a recession can increase financial stress and vulnerability. Ideally, you want to avoid making large purchases or using credit cards for nonessential expenses. It can also be a good idea to delay significant financial commitments, such as buying a home or car, until the economic situation improves. You’ll likely be better off focusing on maintaining a healthy debt-to-income (DTI) ratio and preserving your financial flexibility.

Become a Cosigner

Cosigning a loan for someone else during a recession can expose you to significant financial risk. If the primary borrower defaults, you will be responsible for the debt, which can strain your finances and damage your credit score. During uncertain economic times, it’s best to avoid taking on additional financial liabilities that are beyond your control.

Take Your Job for Granted

Job security can be fragile during a recession, so it’s important not to take your employment for granted. Stay proactive in your role by demonstrating your value to your employer. Consider taking on additional responsibilities, seeking feedback, and continuously improving your skills. Being an indispensable employee can increase your chances of retaining your job during economic downturns.

Recommended: The History of US Recessions: 1797-2020

The Takeaway

Preparing for a recession involves taking proactive steps to protect your financial health and avoid common pitfalls. Smart moves to take when a downturn may be looming include: building an emergency fund, reducing debt, continuing to save for retirement, and recession-proofing your career. Equally important is knowing what to avoid, such as panic selling, accumulating new debt, and tapping into your 401(k) or IRA.

Economic downturns are never pleasant and often painful. But with some thoughtful planning and the steps outlined above, you can protect your finances and better position yourself when the economy bounces back.

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


Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.20% APY on SoFi Checking and Savings.

Photo credit: iStock/tolgart

SoFi members with direct deposit activity can earn 4.20% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.20% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

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

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/31/2024. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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

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.

*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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Should I Refinance My Federal Student Loans?

By | Fresh Out of School, Student Loans, student_loan | No Comments
Editor's Note: For the latest developments regarding federal student loan debt repayment, check out our student debt guide.

Refinancing federal student loans can either help you pay down your loans sooner (by shortening your term) or lower your monthly payment (by extending your term). However, when you refinance federal student loans with a private lender, you lose federal benefits and protections.

Refinancing is not a simple decision. Keep reading to learn more about federal student loan refinancing and whether or not it’s right for you.

What Is Federal Student Loan Refinancing?

If you graduated with student loans, you may have a combination of private and federal student loans. The latter are loans funded by the federal government. Direct Subsidized Loans and Direct PLUS Loans are both examples of federal student loans.

Interest rates on federal student loans are fixed and set by the government annually. The current rate for the 2024-25 school year is 6.53% for undergraduate students. Private student loan rates are set by individual lenders. If you’re unhappy with your current interest rates, you may be able to refinance your student loans with a private lender and a new — ideally lower — interest rate.

Recommended: Types of Federal Student Loans

Can I Refinance My Federal Student Loans?

It is possible to refinance federal student loans with a private lender. However, you lose the benefits and protections that come with a federal loan, like income-based repayment plans and public service-based loan forgiveness. On the plus side, refinancing may allow you to pay less interest over the life of the loan and pay off your debt sooner.


💡 Quick Tip: Ready to refinance your student loan? With SoFi’s no-fee loans, you could save thousands.

How Are Refinancing and Consolidation Different?

Student loan consolidation and student loan refinancing are not the same thing, but it’s easy to confuse the two. In both cases, you’re signing different terms on a new loan to replace your old student loan(s).

Consolidation takes multiple federal student loans and bundles them together, allowing borrowers to repay with one monthly bill. Consolidation does not typically get you a lower interest rate (you’ll see why in the next paragraph). Refinancing, on the other hand, rolls your old federal and private loans into a new private loan with a different loan term and interest rate.

When you consolidate federal student loans through the Direct Consolidation Loan program, the resulting interest rate is the weighted average of the original loans’ rates, rounded up to the nearest one-eighth of a percent. This means you don’t usually save any money. If your monthly payment goes down, it’s usually the result of lengthening the loan term, and you’ll spend more on total interest in the long run.

When you refinance federal and/or private student loans, you’re given a new interest rate. That rate can be lower if you have a strong credit history, which can save you money. You may also choose to lower your monthly payments or shorten your payment term (but not both).

Recommended: Student Loan Consolidation vs Refinancing

What Are Potential Benefits of Refinancing Federal Student Loans?

Potential Savings in Interest

The main benefit is potential savings. If you refinance federal loans at a lower interest rate, you could save thousands over the life of the new loan.

Plus, you may be able to switch out your fixed-rate loan for a variable rate loan if that makes more financial sense for you (more on variable rates below).

Lower Monthly Payments

You can also lower your monthly payments. That typically means lengthening your term and paying more in interest overall. (Shortening your term usually results in higher monthly payments but more savings in total interest.)

Streamlining Repayments

Refinancing multiple loans into a single loan can help simplify the repayment process. Instead of multiple loan payments with potentially different servicers, refinancing allows you to combine them into a single monthly payment with one lender.

What Are Potential Disadvantages of Refinancing Federal Loans?

When you refinance federal loans with a private lender, you lose the benefits and protections that come with government-held student loans. Those benefits fall into three main categories:

Deferment / Forbearance

Most federal loans will allow borrowers to put payments on hold through deferment or forbearance when they are experiencing financial hardship. Student loan deferment allows you to pause subsidized loan payments without accruing interest, while unsubsidized loans will still accrue interest.

Student loan forbearance allows you to reduce or pause payments, but interest usually accrues during the forbearance period. Some private lenders do offer forbearance — check your lender’s policies before refinancing.

Special Repayment Plans

Federal loans offer extended, graduated, and income-driven repayment plans (such as Pay As You Earn, or PAYE), which allow you to make payments based on your discretionary income. It’s important to note that these plans typically cost more in total interest over the life of the loan. Private lenders do not offer these programs.

Another plan called REPAYE was phased out and replaced by the SAVE Plan, which promises to cut payments in half for low-income borrowers. According to the Department of Education, SAVE is the most affordable repayment plan, with some borrowers not having to make payments at all.

Student Loan Forgiveness

The Supreme Court has blocked President Joe Biden’s mass forgiveness plan for federal student loan borrowers. However, other loan forgiveness options are still available.

•   Public Service Loan Forgiveness (PSLF). Teachers, firefighters, social workers, and other professionals who work for select government and nonprofit organizations may apply for this program. Changes made by the Biden Administration will make qualifying easier — even for borrowers who were previously rejected. Learn more in our guide to PSLF.

•   Teacher Loan Forgiveness. This program is available to full-time teachers who complete five consecutive years of teaching in a low-income school. Find out more in our Teacher Loan Forgiveness explainer.

•   Income-Based Repayment Plans. With some repayment plans, you may be eligible for forgiveness if your student loans aren’t paid off after 20 to 25 years (and in some cases under the new SAVE plan, after 10 years).

Private student loan holders are not eligible for these programs.

Potential Advantages of Refinancing Federal Student Loans

 Potential Disadvantages Refinancing Federal Student Loans
Interest Rate. Opportunity to qualify for a lower interest rate, which may result in cost savings over the long term. Option to select variable rate, if preferable for individual financial circumstances. Loss of Deferment or Forbearance Options.These programs allow borrowers to temporarily pause their payments during periods of financial difficulty.
Adjustable Loan Term. Get a lower monthly payment, usually by extending the loan term, which could make loan payments easier to budget for, but may make the loan more expensive in the long term. Loss of Federal Repayment Plans.No longer eligible for special repayment plans, such as income-driven repayment plans.
Get a Single Monthly Payment.Combining existing loans into a new refinanced loan can help streamline monthly bills. Loan Forgiveness.Elimination from federal forgiveness programs, including Public Service Loan Forgiveness.

When Should You Consider Refinancing Your Student Loans Again?

You can refinance your student loans for a second time, and in fact, there is no limit to how many times you can refinance. Each time you refinance, you essentially take out a new loan to pay off the old one, ideally with better terms. However, it’s crucial to ensure that refinancing again is beneficial for your financial situation. Here are some key considerations:

Improved Financial Situation

•   Credit Score: If your credit score has improved, you may qualify for a lower interest rate.

•   Income: A higher or more stable income can make you eligible for better loan terms.

•   Debt-to-Income Ratio: A lower ratio can also help secure more favorable terms.

Market Conditions

•   Interest Rates: If market interest rates have decreased since your last refinancing, you might get a better rate.

•   Promotional Offers: Keep an eye out for new promotional rates or special offers from lenders.

Loan Terms

•   Shorter Terms: Refinancing to a shorter loan term can reduce the overall interest paid.

•   Extended Terms: If you need lower monthly payments, extending the loan term can provide relief, though it may increase the total interest paid over the life of the loan.

•   Consolidation: Refinancing multiple loans into one can simplify your payments and possibly offer better terms.

FAQs on Refinancing Your Federal Loans

Who Typically Chooses Federal Student Loan Refinancing?

Many borrowers who refinance have graduate student loans, since federal unsubsidized and Grad PLUS loans have historically offered less competitive rates than federal student loans for undergraduates.

In order to qualify for a lower interest rate, it’s helpful to show strong income and a history of managing credit responsibly, among other factors. The one thing many refinance borrowers have in common is a desire to save money.

Do I Need a High Credit Score to Refinance Federal Loans?

Generally speaking, the better your history of dealing with debt (illustrated by your credit score), the lower your new interest rate may be, regardless of the lender you choose. While many lenders look at credit scores as part of their analysis, however, it’s not the single defining factor. Underwriting criteria vary from lender to lender, which means it can pay to shop around.

For example, SoFi evaluates a number of factors, including employment and/or income, credit score, and financial history. Check here for current eligibility requirements.

Are There Any Fees Involved in Refinancing Federal Loans?

Fees vary and depend on the lender. That said, SoFi has no application or origination fees.


💡 Quick Tip: Enjoy no hidden fees and special member benefits when you refinance student loans with SoFi.

Should I Choose a Fixed or Variable Rate Loan?

Most federal loans are fixed-rate, meaning the interest rate stays the same over the life of the loan. When you apply to refinance, you may be given the option to choose a variable rate loan.

Here’s what you should know:

Fixed Rate Refinancing Loans Typically Have:

•   A rate that stays the same throughout the life of the loan

•   A higher rate than variable rate refinancing loans (at least at first)

•   Payments that stay the same over the life of the loan

Variable Rate Refinancing Loans Typically Have:

•   A rate that’s tied to an “index” rate, such as the prime rate

•   A lower initial rate than fixed rate refinancing loans

•   Payments and total interest costs that change based on interest rate changes

•   A cap, or maximum interest rate

Generally speaking, a variable rate loan can be a cost-saving option if you’re reasonably certain you can pay off the loan somewhat quickly. The more time it takes to pay down that debt, the more opportunity there is for the index rate to rise — taking your loan’s rate with it.

What Happens If I Lose My Job or Can’t Afford Loan Payments?

Some private lenders offer forbearance — the ability to put loans on hold — in cases of financial hardship. Policies vary by lender, so it’s best to learn what they are before you refinance. For policies on disability forbearance, it’s best to check with the lender directly, as this is often considered on a case-by-case basis.

Do Refinance Lenders Allow Cosigners / Cosigner Release?

Many private lenders do allow cosigners and some allow cosigner release options. SoFi allows cosigners, but no option for cosigner release for refinanced student loans. However, if you have a cosigner and your financial situation improves, you can apply to refinance the cosigned loan under your name alone.

The Takeaway

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


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

https://www.sofi.com/signup/slr“>

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.


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

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

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

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

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