Jan
26
2025

How to Stop Online Shopping

By | Budgeting & Goals, money, Money & Life | Comments Off on How to Stop Online Shopping

Since it’s so easy to do and omnipresent, online shopping can sometimes lead to debt. If this is the case for you, there are steps you can take to rein in your digital purchases, such as identifying triggers, deleting your card info from apps and websites, and trying other strategies.

Online shopping can give you access to a multitude of retailers with just a click or two, and its popularity continues to grow. The number of Americans using e-commerce is expected to grow by almost 22% between 2024 and 2029, adding 60 million online shoppers to the current estimate of 273.5 million. To help you curb excessive online shopping, try these tactics for spotting bad spending habits and building better ones.

Key Points

•   Online shopping can lead to debt; identifying triggers and removing saved card information can help curb spending.

•   Developing new hobbies can replace time spent online shopping, and unsubscribing from retailer emails can help avoid temptation.

•   Setting specific financial goals and sharing them with others can provide accountability and motivation.

•   Creating a realistic budget using methods like the 50/30/20 rule can help manage spending effectively.

•   Using apps and tools to track spending can help maintain progress towards financial goals.

Understanding Your Online Shopping Habits

It’s easy to ignore poor online shopping habits and assume they’re no big deal. Until, that is, you see how low your checking account is or how high your credit card balance has risen. That can quickly bring you back to reality.

When those moments occur (or, better still, before they do), it can be wise to evaluate whether you need to cut back on online shopping.

Identifying Triggers and Patterns

If you’re wondering whether it’s time to cut back on shopping and spending, here are a few signs to watch for:

•   You’re spending a lot of your free time and money on online shopping.

•   Your online shopping is making it hard to stick to your budget.

•   Buying items online is causing you to have credit card debt or owe a higher balance than in the past.

•   It’s tough to resist making purchases, even when you know it might hurt your finances or lead to debt.

•   You may be prioritizing shopping over other important responsibilities.

•   You feel uneasy or tense when you’re not shopping.

•   There’s a sense of guilt or regret about your online spending habits.

•   After a tough day, you often turn to online shopping to lift your mood.

•   You often buy something just because it’s on sale.

These can be signals that it’s time to stop online shopping and develop better financial habits.

Recommended: How to Combine Bank Accounts

Assessing the Impact on Your Finances

Do you know that around 40% of Americans say they have a budget for online shopping, but about 32% admit they often go over it, according to Badcredit.org? While going over budget now and then might not hurt your finances too much, doing so regularly can lead to debt and make it harder to get back on track to reaching your money goals.

If you want to see how much you’re really spending online, here are some ways you might track your purchases and check if you’re overspending:

•   Keep your receipts: Holding onto your receipts (whether paper or emailed) can make it easier to remember and review what you’ve spent at the end of the month.

•   Check credit card and bank statements: Many credit cards and banks have built-in budget trackers on their online platforms and in their apps. Some even break your spending into categories so you can easily see where your money is going.

•   Record your transactions: Even small buys, like toothpaste from Amazon, count as online spending. Keep your eyes peeled for these items which are easy to overlook. Budgeting apps, whether from your bank or a third party, or a little notebook can help you easily track your transactions.

By keeping an eye on your online spending with one of these methods, you can see if you’re going over your budget and determine if you need to cut back on your spending habits.

Strategies to Curb Online Shopping

Whether your spending habits are big or small, using a few smart tactics can help you reduce your online shopping and make the most of your money. Here’s how.

Creating a Realistic Budget

Creating a budget (and sticking to it) is one of the best ways to manage your spending habits more effectively. While there’s no one-size-fits-all solution, there are plenty of strategies you can use to find what works best for you. A few to consider:

•   50/30/20 Rule: This budgeting method has you split your monthly take-home income into three categories: 50% for needs (like rent or mortgage, groceries, utilities, and minimum debt payments), 30% for wants (like dining out, travel, or movies), and 20% for savings or additional debt payments. Say you net $5,000 a month. If you use this method, you’d set aside $2,500 for needs, $1,500 for wants, and $1,000 for savings. You can use an online 50/30/20 budget calculator to do the math.

•   70/20/10 Rule: This strategy is similar to the 50/30/20 rule, but you allocate 70% for needs and wants, 20% for savings, and 10% for paying off debt or charitable donations. This is a good option if debt repayment is one of your main focuses or if you have big savings goals.

•   Zero-based budgeting: With this strategy, you assign every dollar to a job or expense, like dining out, health care, or clothes. Start with your monthly income and subtract all your expenses — including savings — until you reach zero. This approach helps you stay aware of where every dollar is going.

•   Envelope budget system: Set aside a specific amount of cash divided into envelopes for each spending category, like $3,000 for housing or $600 for food. Once the money in each category is gone, you either wait until next month or adjust by borrowing from another category, like cutting back on streaming services to fund your grocery bill.

Developing Healthier Shopping Habits

If you find that impulse buying is becoming a bad habit, there are ways to start building healthier spending patterns. Here are some tips to help you get started:

•   Try the 24-hour rule. When you find something you want to buy that isn’t a necessity, try waiting at least 24 hours before buying it. This gives you more time to think about whether you really need it. If you still want it after waiting, shop around to find the best deal, as different sites usually offer different prices and deals. Some people find that the 24-hour period isn’t long enough to have the “I’ve got to have it” feelings potentially subside. You could extend it to a week or even a month.

•   Delete your saved credit card details. Today’s digital tools can make life more convenient, as with online banking and hotel reservation apps. But online shopping can lower the barrier to purchase and make it easy (some might say too easy) to buy items with just one click. By removing your saved card info, you add an extra step to the purchase process. This also gives you more time to decide if the purchase is really necessary.

•   Pick up a new hobby. Instead of browsing shopping sites when at loose ends or bored, try picking up a new inexpensive hobby like reading, photography, or learning coding or social media strategy online. Swapping out your old shopping habit for a new hobby can help reduce the temptation to shop online.

•   Unsubscribe from retailer and merchant emails. Stores love to tempt you with emails about their latest deals. Unsubscribing from these emails can help you avoid the urge to make impulse purchases. If you don’t know about the deal, you won’t be tempted to buy.

•   Limit your shopping time. The more time you spend looking at online retail sites or being served ads on social media, the more enticing objects you’ll be exposed to. Try to limit how much time you spend browsing to help reduce the temptation to shop. You might use a browser extension (such as Pause) to limit access to shopping sites as an easy way to save money.

Seeking Support and Accountability

Setting financial goals is a great way to help you stay accountable. Start by creating specific savings or spending goals. For example, you might want to build your emergency savings fund to cover three to six months’ worth of income or save money for that dream beach vacation. Whatever your goals are, make them specific, set a deadline, and create a savings plan.

You may also want to share your goals with friends or family members who can support you and hold you accountable. You can even schedule regular check-ins to track your progress, make adjustments if needed, and recommit to your money goals. Having someone to share this process with can keep you motivated and on track. Plus, isn’t it more fun when you have someone cheering you on?

Dealing with Setbacks and Maintaining Progress

Even after you’ve created a budget, set goals, and built healthy spending habits, setbacks are bound to happen — and that’s okay. It’s not about being perfect 100% of the time. It’s about making progress and continuing to move toward your goals.

Here are a few tips to help you handle those bumps in the road when it comes to reducing online shopping:

•   Review your budget and make adjustments. Set aside time to regularly review your budget, perhaps weekly and monthly. By tracking your spending, you can see where you stand. If something isn’t working, don’t be afraid to tweak it to fit your current needs.

•   Set up automatic bank transfers. Setting up automatic transfers between bank accounts (say, from your checking to savings right after you’re paid) can simplify the saving process for you. This way, you can stay consistent without having to think about it, which can help you stay on track to achieve your goals. Also, having money whisked out of your checking account can be a good thing. You won’t be feeling as rich and therefore tempted to start shopping.

•   Build an emergency fund. Unexpected expenses pop up all the time. Not having an emergency fund can leave you vulnerable to going into debt when surprise costs arise — like pricey car repairs or plane tickets for holiday travel. This cushion will help ease the stress when life throws you a curveball.

•   Use budgeting tools. Plenty of apps and tools are available to help you track spending and savings. One of these can keep you on top of your spending habits and help you avoid going over budget. You might start by seeing what your financial institution offers and then research third-party apps, if needed.

The Takeaway

If your spending habits have become a problem and you’re wondering how to stop online shopping, there are plenty of ways to tackle it. Start by creating a budget, blocking access to your favorite shopping sites, and focusing on positive spending habits. You may find that you need new hobbies to fill the time you used to spend shopping online, or that you can delete your banking details saved on websites and in apps, thereby discouraging impulse buys.

The right banking partner can also help make it easier to monitor your money and stay on track.

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 some effective strategies to curb impulse online purchases?

Some of the best ways to curb your online impulse buying are to create a budget, stick to shopping lists, limit time spent online, and delete financial information saved online or in apps (that could lead to impulse buying). You can also try delaying gratification, where you wait at least a period of time before making a purchase. This gives you time to think it over, and often you’ll realize you don’t really need the item.

How can I block or limit access to online shopping sites?

One way to limit your online shopping is by using a browser extension like Pause, which blocks distracting sites (it comes preloaded with some; you can add more) for a brief, programmable period of time. This gives you time to think before diving in. You can also block specific sites directly through your browser’s privacy and security settings. Deleting saved financial details (such as credit card numbers) from sites and in apps can also slow down the online shopping process and give you time to reconsider a purchase.

Are there apps that can help control online shopping habits?

Yes, there are apps like Stop Impulse Buying and the Daily Bean (a diary-style log) that can help you reduce those online shopping urges by tracking your spending habits. You can also try budgeting apps and tools provided by your financial institution to keep a closer eye on where your money is going.

About the author

Ashley Kilroy

Ashley Kilroy

Ashley Kilroy is a seasoned personal finance writer with 15 years of experience simplifying complex concepts for individuals seeking financial security. Her expertise has shined through in well-known publications like Rolling Stone, Forbes, SmartAsset, and Money Talks News. Read full bio.


Photo credit: iStock/Bevan Goldswain

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.

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Jan
26
2025

How to Beat Inflation

By | Budgeting & Goals, Family Finances, money | Comments Off on How to Beat Inflation

A small, steady amount of inflation is considered good for the economy. But when prices rise faster than wages, the value of your money goes down. This can have a negative impact on quality of life, especially for those with middle and lower incomes. It can also complicate saving for emergencies and investing for retirement. Fortunately, there are steps you can take to fight the effect of rising prices on your household finances. Read on to learn what inflation is and how to stay ahead of it.

Key Points

•   Inflation refers to a general rise in the price of goods and services over time.

•   Inflation erodes your money’s purchasing power, meaning you can buy less with your money than you could previously.

•   High-yield savings accounts and diversified investments, including TIPS and I-Bonds, can help protect your finances against inflation.

•   Cutting back on nonessential spending, lowering monthly bills, and paying down high-interest debt are other ways to fight inflation.

•   Career moves such as negotiating a raise, changing jobs, or starting a side hustle can offset inflation’s impact on your income.

•   As a response to inflation, the Federal Reserve generally raises interest rates to slow borrowing and spending and cool the economy.

Understanding Inflation

Here are key things to know about your money’s purchasing power and how it changes over time.

Inflation Definition and Causes

Inflation refers to the rising cost of goods and services over time. If the price of one or two items spike, however, that’s not inflation True inflation occurs when costs generally increase across the board, making the things consumers normally spend money on more expensive. Some inflation is the sign of a healthy economy. In fact, the Federal Reserve (a.k.a., “the Fed”) likes to see an annual inflation rate of around 2%. But sometimes inflation runs much higher, as it did in the years following the Covid-19 pandemic, which can lead to financial strain.

While inflation has multiple causes, it often stems from a mismatch between demand for goods and services and the supply of those goods and services. Events that raise production costs or disrupt the production of goods in the economy (such as a pandemic, war, or natural disaster), can also lead to an increase in prices. Inflation can also be influenced by monetary policies, such as the Fed deciding to adjust benchmark interest rates or print more money.

How Inflation Affects Your Purchasing Power

When the cost of things you normally buy goes up, your purchasing power (the amount you can get in return for every dollar you spend) goes down. In other words, your money doesn’t stretch as far as it used to.

At the same time, investments and savings accounts that don’t offer returns above the inflation rate may actually lose value in real terms. For instance, if you put $500 in a savings account paying an annual percentage yield (APY) of 0.01%, you’ll have $500.05 at the end of a year. Even at the Fed’s target 2% inflation rate, $500.05 will buy you less than $500 did a year ago, so your purchasing power has declined. Fortunately, many online savings accounts offer APYs that beat inflation, so your money grows rather than shrinks over time.

Strategies for Protecting Your Money

Inflation is a fact of life — even when inflation is low, prices tend to creep over time. So how can we fight inflation? Here are a few strategies to consider.

Earn More on Your Savings

Savings accounts offer liquidity (meaning you can easily access your funds when you need them), making them a good place to stash any cash you may need in the next few months or years. On the downside, traditional savings accounts typically don’t keep up inflation. To ensure your funds don’t lose value over time, you’ll want to look for a savings account with APY that’s close to or beats the current rate of inflation, such as a high-yield savings account.

Other Options to Consider to Outpace Inflation

Having a diversified portfolio (including stocks, bonds, and short-term investments) can help protect you from periods of hyperinflation. Some options to consider:

•   I-Bonds: Series I Savings Bonds are U.S. government-backed securities that adjust their interest rate with inflation. They offer a fixed rate plus an inflation-adjusted rate, making them a low-risk way to protect your money’s value over time. Just keep in mind that this isn’t a short-term saving strategy — you need to leave your money deposited in the bond for at least five years to avoid forfeiting some interest.

•   Real estate: This area can be another strong inflation hedge, as property values and rental income tend to increase with inflation (though this will depend on local market conditions). Investing in real estate investment trusts (REITs) can offer exposure to real estate without the need to own physical properties.

•   Inflation-protected securities: With Treasury Inflation-Protected Securities (TIPS), the principal, called the par value, goes up with inflation, providing some stability in times of rising prices. When a TIPS matures, you get either the increased (inflation-adjusted) price or the original principal, whichever is greater. These can be a safer investment compared to traditional bonds, which may lose value when inflation rises.

Adjusting Your Budget and Spending Habits

To make up for the higher costs of goods and services, you may want to check in on your budget and look for places where you can cut back on spending. It’s generally easiest to do this with nonessential expenses, like dining out and entertaining. But you may also be able to find ways to trim the cost of essentials. Some ideas:

•   Shop for generics at the grocery store and use coupons whenever possible.

•   Make adjustments to your energy consumption to lower your utility bills.

•   If you rent, ask your landlord if you can trade services — such as cutting the grass or shoveling the sidewalk during the winter — for a rate reduction.

•   Reduce your driving and use an app to find the cheapest gas prices near you.

•   Buy non-perishable items in bulk — this allows you to lock in current prices before they rise further.

Recommended: Is Inflation Good or Bad?

Career Moves to Combat Inflation

Increasing your income can help offset inflation’s impact on your finances. While this may be easier said than done, you might have more options than you think. Here are some career moves to consider during inflationary times:

•   Negotiate for a raise: If it’s been a while since your last raise, now may be a good time to ask for one, citing either the high inflation rate or the added value you bring to the company — or both.

•   Find a new job: In some cases, changing jobs may provide a quicker path to a higher salary than waiting for a raise.

•   Invest in skill development: Acquiring new skills or certifications can make you more valuable to employers, increasing your potential for higher wages.

•   Explore side hustles: Freelancing, consulting, or starting a small business on the side can provide additional income streams to help combat rising costs.

Government Programs and Policies

The government can (and typically does) take a number of actions to combat inflation and help American consumers deal with rising costs. Here are some of the tools they have in their arsenal:

•   Raising the federal funds rate: One of the most common ways the Fed will fight inflation is by raising the federal funds rate, which is a benchmark interest rate that influences other interest rates. Raising the federal funds rate generally makes borrowing for businesses and consumers more expensive. This slows down spending, which can cool off the economy and lower inflation.

•   Tax adjustments: The government may also adjust tax brackets and standard deductions to prevent “bracket creep,” where inflation pushes taxpayers into higher tax brackets.

•   Stimulus programs: In times of economic difficulty, stimulus checks or other government support measures may be provided to help individuals manage higher living costs.

Recommended: How the Federal Reserve Rate Impacts Your Savings

Smart Borrowing in Inflationary Times

As mentioned above, the Fed will often raise interest rates during times of high inflation. While this can help tamp down rising prices, it also makes borrowing money more expensive.

For many people, the biggest impact of these rate increases is on credit cards, which have a variable interest rate. When rates are high, you want to be careful not to carry a balance from month to month. If you already have credit card debt, it’s a good idea to focus on paying it down.

If you’re in the market for a new mortgage during a time of high inflation, you might benefit by choosing a variable rate loan. That way, if rates begin to fall, your mortgage’s rate will likely also go down. On the other hand, if inflation (and rates) appear to be on the rise, you may be better off with a fixed-rate mortgage to lock in current rates.

Long-Term Planning for Inflation

When saving and investing for future goals, such as retirement, it’s important to factor in inflation. Rising prices can affect your long-term financial plan in two main ways:

•   The real return on your investments: You’ll need to consider not just the interest rate you expect to receive but also the real rate of return, which is determined by figuring in the effects of inflation. Your financial advisor can help you calculate your expected real rate of return on your investments.

•   Future costs: When calculating how much money you’ll need to comfortably retire, it’s important to estimate future living expenses with inflation in mind. This may mean adjusting your target retirement savings to account for an increased cost of living. There are online calculators that can help you model out what inflation-adjusted numbers would look like.

The Takeaway

Inflation is an inevitable part of economic life. Ideally, the Fed tries to limit the inflation rate to 2% annually, but sometimes a shift in supply and demand and other factors can lead to a spike in the inflation rate.

Government programs and policies can offer support when inflation gets too high. There are also steps you can take on your own to make your finances more inflation-resistant. These include spending less, boosting your annual income, avoiding high-interest debt, and choosing investments and savings accounts that protect the value of your cash so it grows (rather than shrinks) over time.

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 types of investments typically perform well during inflation?

During inflation, certain investments tend to perform better because they can keep pace with or outgrow rising prices. Stocks, especially in sectors like consumer goods and energy, may see gains as companies pass higher costs onto customers. Real estate often appreciates, and rental income may rise with inflation. Lower-risk investment options include: Treasury Inflation-Protected Securities (TIPS), which adjust with inflation and help safeguard your purchasing power, and I Bonds, which have a variable interest rate that adjusts for inflation.

How can I adjust my budget to cope with inflation?

To cope with inflation, it’s a good idea to review your budget and identify areas where you may be able to cut back on spending, such as dining out, entertainment, and gym memberships. This can free up funds to cover the rising cost of essential monthly expenses, like groceries, rent, utilities, and gas. Other smart moves to beat inflation include: paying down debt (especially high-interest credit cards), boosting your income, and adjusting your emergency savings fund to account for a higher cost of living.

Does increasing my savings rate help combat inflation?

Yes, increasing your savings rate can help combat inflation. If you put your money in a savings account that pays more than the current rate of inflation, it will offset the loss of purchasing power and ensure your savings grow despite inflationary pressures. Increasing your savings also helps you build a larger financial cushion to cover rising costs.

Photo credit: iStock/shutter_m

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.

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.

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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Jan
26
2025

How Much Should You Contribute to Your HSA?

By | Budgeting & Goals, Family Finances, money | Comments Off on How Much Should You Contribute to Your HSA?

Health savings accounts (HSAs) offer a tax-advantaged way to save for healthcare expenses. You may have access to an HSA if you have a high-deductible health plan at work or purchased an HDHP as a self-employed individual.

For those who have HSAs, it can be common to wonder just how much to contribute. Maxing out your annual contribution limit can help you get the most tax benefit from an HSA. However, your personal finances may not allow you to sock that much away. Here, important insights that can help you determine the right amount for your budget.

Key Points

•   HSAs provide tax benefits for funds earmarked for medical expenses by those with high-deductible health plans.

•   Maxing contributions enhances tax benefits, though financial limits may apply.

•   Contribution limits depend on insurance coverage type and age, with catch-up options for 55+.

•   Employer contributions can enhance savings but impact personal limits; excess contributions can face penalties.

•   Unused HSA funds roll over annually, unlike FSAs, supporting long-term growth.

Understanding Health Savings Accounts (HSAs)


There are several types of medical expense accounts recognized by the IRS (Internal Revenue Service), including Health Savings Accounts. Several characteristics distinguish HSAs from other options, such as Flexible Spending Arrangements (FSAs), Health Reimbursement Arrangements (HRAs), and Archer Medical Savings Accounts (MSAs).

The differences between an HSA vs. FSA, or an HSA vs. HRA lie in who can contribute, how much you can contribute, how your contributions grow, and what happens if you don’t spend down those contributions year-over-year. Here’s a closer look at what HSAs involve.

What Is an HSA?


The IRS defines an HSA as a tax-exempt trust or custodial account you set up with a qualified HSA trustee to pay or reimburse certain medical expenses you incur. To put it more simply, an HSA is a special type of savings account for those with HDHPs and is funded with pre-tax dollars that is designed to help you pay for healthcare.

Here are the main benefits of an HSA:

•   Contributions are tax-deductible, unlike money you put in a savings account.

•   Amounts contributed to an HSA grow tax-deferred.

•   Funds roll over from year to year, so you don’t have to “use it or lose it” in terms of funds that haven’t been spent at the end of the year.

•   Most HSAs include a debit card, similar to what you get with a checking account, that you can use to conveniently pay for healthcare expenses.

•   Withdrawals for qualified medical expenses are tax-free.

Once you turn 65, you can withdraw money from your HSA for any reason, healthcare-related or otherwise. You’ll pay ordinary income tax on withdrawals that are not for medical expenses.

IRS Publication 502 outlines which medical and dental expenses you can use HSA funds to cover. The list is extensive, though it excludes health insurance premiums.

Eligibility Requirements


There’s one simple eligibility requirement you’ll need to meet to contribute to an HSA. You must be enrolled in a high-deductible health plan.

These healthcare plans must, by law, set a minimum deductible and a maximum limit on out-of-pocket costs for covered individuals. Deductibles for HSA-eligible plans are typically much higher than standard health insurance plans, but you get the benefit of a tax-advantaged savings account built in.

Here are the most recent guidelines, according to the IRS:

•   In 2024, the minimum annual deductible for HDHP was $1,600 for self-only coverage and $3,200 for family coverage.

•   For 2025, the minimum is to $1,650 for self-only coverage and $3,300 for family coverage.

Note that just because you have an HSA through your high-deductible health plan doesn’t mean you have to make contributions. But you could be missing out on some valuable tax breaks if you don’t contribute and instead just keep the cash in a bank account.

Recommended: Beginner’s Guide to Health Insurance

HSA Contribution Limits


Both employers and employees can contribute to an HSA, similar to the way your job might offer a company-matching contribution to your 401(k).

But that doesn’t mean the sky’s the limit. The IRS sets the annual contribution limits, adjusted for inflation. Your limit is determined by whether you have individual or family coverage.

Here are the HSA contribution limits for 2024:

•   Individual coverage: $4,150 maximum contribution

•   Family coverage: $8,300 maximum contribution

•   An additional $1,000 catch-up contribution is allowed if you’re aged 55 or older.

For 2025, the limits increase to:

•   Individual coverage: $4,300 maximum contribution

•   Family coverage: $8,550.

•   An additional $1,000 catch-up contribution is allowed if you’re aged 55 or older.

Contribution limits apply to both employer and employee contributions. So, if you have individual coverage and your employer contributes $1,150 to your HSA for the year, you could only contribute up to $3,000 in 2024.

Also, note that you cannot contribute to an HSA if you:

•   Have a flexible spending account (FSA) or

•   Are enrolled in Medicare or

•   Can be claimed as a dependent on someone else’s tax return1

To clarify, you can have an HSA before and after you enroll in Medicare. You just can’t make new contributions to it once you’re enrolled in Medicare.

Factors to Consider When Determining HSA Contributions


If you have an HSA, you may have questions about where it might fit into your larger financial plan. For example, you may be asking yourself:

•   How much should I put in my HSA if I’m still young and healthy?

•   What if I have an ongoing health condition or am concerned I might develop one later in life?

•   What amount should I save if I also want to contribute to my 401(k)?

•   Will employer contributions affect how much I should contribute to HSA?

•   Would saving in an HSA make a significant difference to my tax filing?

There’s no right or wrong answer for how much to contribute to HSA savings. It’s a personal decision that’s based on a variety of factors (as noted above), such as your plan coverage, age, financial situation, and anticipated healthcare needs. For instance, a healthy single 35-year-old with minimal family history of disease and an annual salary of $75,000 may opt to put less in an HSA than a married 45-year-old parent of three children, who has a family history of heart disease, and earns $175,000.

HSA tax benefits are a strong incentive to contribute something to your account, even if it’s not the full amount you’re eligible for each year. As your income grows, you could gradually increase contributions until you’re consistently maxing out your plan.

Strategies for Maximizing HSA Contributions


If you have an HSA, it helps to know how you can make the most of it. Here are some tips for making sure every penny you contribute counts.

•   Review your plan and IRS guidelines so you know your annual contribution limit.

•   Find out if your employer makes contributions on your behalf and if so, up to what amount.

•   Review your budget and other payroll deductions to determine how much you could contribute to your HSA per pay period.

•   Max out your annual contribution limit, if possible.

•   Take advantage of investment opportunities inside your HSA, which may include individual stocks, bonds, mutual funds, and exchange-traded funds (ETFs).

•   Review your contributions and asset allocations in other tax-advantaged accounts you may have, such as a 401(k) or IRA, to make sure your holdings are well-balanced.

Here’s one more tip. If you have multiple HSAs from previous employers, consider consolidating them into a single account. That can simplify HSA management and you may be able to save on fees or unlock better investments.

HSA Contribution Scenarios


Here’s how you might handle HSA contributions through different life stages.

•   Young, healthy individuals: You might assume that if you’re young and in good health HSA contributions aren’t a must. But consider this: The earlier you begin making contributions, the longer your money has to grow through the power of compounding vs. simple interest.

•   Families with children: If you have kids, you understand the simple truth that they get sick. Sometimes they get hurt. And even if they stay healthy, they still need regular checkups with doctors and dentists. All of that costs money, and an HSA helps you plan for those expenses while enjoying a tax deduction for contributions.

•   Near retirees: As you approach retirement it’s important to think about how your healthcare needs might change. If you’ve faithfully made HSA contributions and invested them you can use those funds to offset any out-of-pocket healthcare expenses you’re responsible for that aren’t covered by Medicare. Using an HSA for retirement can help you avoid having to drain your 401(k), IRA, or other assets.

Calculating Your Ideal HSA Contribution


Online tools, such as savings account calculators, can make it easier to build your financial literacy and manage your money. The same holds true for deciding how much to put in HSA savings. For example, you can use an HSA calculator to estimate how much tax-deferred growth you could realize based on:

•   Coverage type

•   Average yearly contribution

•   Average annual medical expenses

•   Current tax bracket (federal and state)

•   Expected number of years you’ll make contributions

•   Expected rate of return

For example, if you have family coverage and contribute $8,000 a year for 30 years, earning a 5% annual return, your HSA would grow to more than $523,000 over those three decades. That assumes you spend $500 per year on medical expenses.

Playing with the numbers can give you a better idea of how much you could gain from contribution to an HSA.

Common Mistakes to Avoid with HSA Contributions


HSAs offer plenty of benefits, but only when they’re used correctly. Here are some of the most important missteps to avoid if you have access to a health savings account.

Treating an HSA like a savings account at your bank. If you have a high-yield savings account you could technically withdraw money for anything. The worst penalty you might face is an excess withdrawal fee. HSAs aren’t like that and if you’re under 65, you’ll need to stick to withdrawals for healthcare only if you want to dodge a tax penalty.

Not paying attention to employer contributions. If your employer contributes to your HSA, it’s important to know how much they put in. Otherwise, you could be at risk of making excess contributions if you go over the maximum annual limit allowed based on your coverage type. Excess contributions are subject to a 6% excise tax penalty each year they remain in your account.

Not contributing at all. Perhaps the biggest mistake with HSA contributions is not making them if you’re eligible to do so. If you have an HSA at work, it’s an employee benefit, and it makes sense to use all such privileges and perks granted to you. So you might want to go ahead and set up an HSA account and add some funds.

The Takeaway


If you have a high-deductible health plan, it can be wise to consider setting up an HSA. Even if you don’t fully max out your contributions to start, every dollar you contribute and invest can benefit from compounding interest. Over time, your HSA grows in a tax-advantaged way, and those funds come in handy when you need to pay for healthcare spending.

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.

🛈 While SoFi does not offer Health Savings Accounts (HSAs), we do offer alternative savings vehicles such as high-yield savings accounts.

FAQ


What happens to unused HSA funds at the end of the year?


Unused HSA funds are not use-it-or-lose-it. If you have funds remaining in your account at the end of the year, they roll over and remain in your HSA until you spend them. That’s a major difference vs. FSAs, which require you to spend down contributions each year or forfeit them.

Can I contribute to an HSA if I’m self-employed?


You can contribute to an HSA if you’re self-employed provided you have a high-deductible health plan. That’s the only requirement to save in one of these accounts; you’re not limited based on your tax-filing status or income. You are, however, excluded if you have an FSA, are enrolled in Medicare or can be claimed as a dependent on someone else’s tax return.

How do HSA contributions affect my taxable income?


HSA contributions reduce your taxable income for the year, similar to the way that 401(k) contributions do. That means you get an instant tax break when you make contributions, even if you don’t plan to use any of your HSA funds right away.

About the author

Rebecca Lake

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.


Photo credit: iStock/simonapilolla

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.

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


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


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.

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

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26
2025

ESG Score: Definition, Rating Agencies, How It’s Calculated

By | invest, Investing, Investment Strategy | Comments Off on ESG Score: Definition, Rating Agencies, How It’s Calculated

Given the growth of environmental, social, and governance (ESG) strategies over the last 10 years, investors are increasingly interested in finding ways to evaluate companies based on their ESG scores. There is also concern about companies’ exposure to certain environmental, social, and governance risk factors.

As a result, several third-party scoring agencies have emerged to aggregate and analyze ESG data, and put it into a form investors can use.

The need for outside ESG scoring services stems from the fact that, for now, ESG guidelines are in flux. Some are voluntary, some are mandatory, and some companies have developed proprietary scoring systems to measure their performance, compliance, and risk mitigation in light of ESG standards.

In short, in most cases investors cannot turn to a single type of ESG score, but must become familiar with how different ESG scores work and how they’re applied.

Key Points

•   Investors interested in ESG investing strategies need ESG scoring systems to evaluate companies.

•   Investors are also aware of the ESG risk factors some businesses face and want evidence of risk mitigation.

•   Because ESG standards vary, and companies adhere to different guidelines, hundreds of third-party scoring agencies have emerged.

•   Most ESG scores are composite measures of how well a company is meeting certain standards.

•   Investors need to know how a score is calculated in order to fully understand whether it’s assessing a company in a relevant way.

What Is an ESG Score?

An ESG score consists of aggregated measures of a company’s environmental, social, and governance data, as it pertains to that company’s operations, production, supply chain, workforce, corporate leadership, and more. These ESG metrics can include factors such as:

•   Greenhouse gas emissions

•   Renewable energy use

•   Pollution mitigation

•   Worker safety

•   Fair labor practices

•   Executive compensation

•   Transparency in accounting and security

Although not a part of traditional financial metrics or fundamental analysis, these factors can have a significant impact on a company’s financial performance. If companies put out ESG reports on an annual basis, investors can see how they compare to competitors and whether or not they are making improvements over time to meet ESG goals and mitigate risks.

Currently, in the ESG investing sector there are challenges involved in adopting ESG standards and reporting models. ESG frameworks and metrics can vary by sector, company size, and geographic location. In addition, some are required while others are voluntary. Some proposed regulations have been met with legal challenges. More details on that below.

Examples of ESG Scoring Systems

There are three broad categories of ESG scoring methods.

•   General. These ratings focus on a range of environmental, social, and governance factors.

•   Issue-centric. Issue-focused ESG scores measure the performance of companies based on a single issue like renewable energy use, carbon emissions, or labor standards.

•   Category-specific. Category-specific ESG scores drill down into one of the ESG pillars (environmental, social, or governance). For example, a ratings company might assess companies only along governance lines.

Recommended: What Is Socially Responsible Investing?

What Do ESG Scores Measure?

Just as there isn’t one set of ESG standards that all companies must adhere to, there are also different types of ESG scores. Each ESG score is meant to summarize information that investors and stakeholders committed to green investing can use for decision-making.

Some capture a company’s compliance to external (or proprietary) ESG rules. Some evaluate how much progress a company is making toward certain standards. Others may assess the risk levels a company faces from various environmental, social, and governance factors.

When taken pillar by pillar, ESG scores may include the following:

Environmental:

•   Carbon emissions

•   Climate change risks and planning

•   Water use

•   Biodiversity

•   Land use

•   Energy efficiency

•   Toxic emissions & waste

•   Packaging material & waste

•   Electronic waste

Social:

•   Labor management

•   Worker safety

•   Labor standards (e.g. diversity)

•   Product safety & quality

•   Consumer relations

•   Community relations

Governance:

•   Composition of the board

•   Executive compensation

•   Accounting practices and transparency

•   Business ethics

•   Corruption

•   Cybersecurity

Other Factors to Consider

There can also be other factors within each of the three categories, which rating agencies may take into account when calculating an overall ESG score: e.g., sourcing of environmentally sustainable materials for product development, or addressing ESG risks in the supply chain can come into play.

Ideally, an ESG score helps to flesh out investors’ understanding of companies’ performance, risks, goals, and opportunities. Equally important for investors, an ESG score can provide a way to compare companies more accurately.


💡 Quick Tip: Did you know that opening a brokerage account typically doesn’t come with any setup costs? Often, the only requirement to open a brokerage account — aside from providing personal details — is making an initial deposit.

Which Agencies Calculate ESG Scores?

Some 600 third-party agencies now conduct ESG data gathering, analysis, and scoring. As noted, some agencies specialize in a single ESG pillar, while others do all three.

Some of the most well-known rating agencies include Bloomberg ESG Data Services, Dow Jones Sustainability Index, MSCI ESG Research, Morningstar Sustainalytics, S&P Global, ISS ESG, Moody’s Investors Service, and Thomson Reuters ESG Research Data.

How Are ESG Scores Calculated?

These days, many companies are required to submit ESG disclosures along with their standard annual or quarterly reports. There are inconsistencies here as well — e.g., the SEC’s attempt to require certain types of ESG disclosures in 2024 was challenged in court, and is currently on hold.

But companies that comply with disclosure rules need to adopt reliable ESG frameworks that include specific standards and metrics. ESG frameworks help standardize the criteria employed in ESG disclosures, which serves stakeholders across the board. One of the most common is the Global Reporting Initiative (GRI), a set of voluntary standards that has nonetheless been adopted by 80% of large corporations.

Variations in ESG Scores

Every ESG scoring agency has its own methods for analyzing and reporting performance. Some agencies look at internal data such as voluntary disclosures and reporting, while others look at publicly available data.

Some agencies weigh ESG metrics based on their potential impact. For instance, worker safety may have a higher weight in an overall score because it poses significant financial and legal risks within a short-term time frame for that organization.

The ratings also take into account how the company compares to others in its industry. Some ratings agencies have different scoring frameworks for different industries, weighing factors based on their importance to that industry.

ESG Score Example

The MSCI ESG score is a widely used ESG rating system for thousands of equity and fixed-income companies worldwide. MSCI defines issues that are relevant to specific industries (e.g., carbon emissions may apply more to manufacturers than to banks), and looks at dozens of exposure metrics (which rate a company’s exposure to, say, biohazards or supply chain risks), as well as nearly 300 governance metrics.

Companies are then given a score from 0 to 10, with lower scores indicating that the company may not be mitigating that risk, and higher scores demonstrating a more proactive strategy around risk mitigation.

Those scores are then weighted according to complex, industry specific criteria. MSCI then translates the weighted scores into ratings that range from CCC to AAA.

What Is a Good ESG Score?

It’s important to understand the difference between ESG rating agencies and what metrics they focus on, since there isn’t a global standard for ESG scores. Investors can look at the ESG scores of different companies as part of their comparison prior to or after investing.

Some ESG scores range from 0-100, with 0 being the worst and 100 the best. Sometimes scores also have letter ratings between CCC and AAA.

Score ranges may be categorized as poor, average, good, or excellent. Companies may also be referred to as laggards, average, or leaders.

How Investors Can Use ESG Scores

Investors can look at ESG scores to compare companies they are interested in investing in or are already invested in. A high or rising ESG score may be a good indicator of lower ESG risk.

However, ESG scores shouldn’t be the only thing an investor looks at when making decisions about sustainable investing. There are not many regulations or standards around ESG reporting and ratings, and not all ESG data is of high quality. There can be issues with transparency and a lack of information about how data is collected and analyzed.

Key ways investors can use ESG scores are:

•   As a supplement to traditional financial analysis.

•   As a tool to evaluate potential risks and opportunities.

•   To find companies that match one’s personal values.

•   To evaluate improvements or performance decreases in existing investments.

The Takeaway

Looking at company ESG scores is a useful way to evaluate potential investments in addition to traditional financial metrics. Environmental, social, and governance scores can help identify potential risks as well as investment opportunities. As interest in sustainability continues to increase — as well as the concerns about how ESG risk factors may impact business performance — the accuracy, availability, and transparency of ESG scores is likely to keep improving.

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.

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SoFi Invest®

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

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

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

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.

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2025
The Ultimate Guide to Investing for Retirement at Age 60

The Ultimate Guide to Investing for Retirement at Age 60

By | Growing Wealth, invest, Investing | Comments Off on The Ultimate Guide to Investing for Retirement at Age 60

Retirement is a milestone that many people look forward to with great anticipation. While the freedom of having more time to spend with loved ones, pursue hobbies, or travel is certainly something to be celebrated, it is also important to plan, save, and invest so this future can be a reality.

It’s never too late to start saving and investing for these future goals, even if you’re nearing 60. And if you’ve been saving for years, it’s still smart to continue to invest for retirement when you reach 60. However, your investment strategies may need to change as you near the end of your working years. In this guide, we’ll explore key factors to consider when investing for retirement at age 60, as well as some low-risk investment options that may be suitable for those nearing retirement.

Investing for Retirement at 60

As you approach 60, retirement may be just around the corner. Maybe you’ve been saving for retirement your entire career. Or perhaps you started saving late and need to grow your nest egg quickly for your golden years. No matter the case, as retirement nears, you may wonder what to do to ensure financial stability.

Investing for retirement is critical to help you reach a comfortable financial position. But planning for retirement at age 60 may seem overwhelming. After all, there are several investment accounts you could open or continue to invest in, not to mention the various types of investments you could have in those accounts. With a little bit of research and planning, you can put yourself on the path of living comfortably in retirement.

If you’re beginning your investment journey, it’s better to start immediately rather than putting it off because you’re overwhelmed by the prospect of failing to meet your financial goals. It’s better to save and invest in different types of retirement plans now rather than put it off and have nothing down the road.

Options for Investing for Retirement at Age 60

Investing for retirement at age 60 can be a confusing and daunting process, particularly for those new to investing. But with some planning, retirees can find the best options for their needs. The following are some options to help you invest for retirement at age 60:

401(k)

A 401(k) is an employer-sponsored, tax-advantaged retirement savings plan that can be a valuable tool for someone who is 60 years old and looking to save for retirement. A 401(k) plan allows you to save for retirement on a tax-deferred basis, which means that your contributions could reduce your taxable income for the current year, and your investment earnings grow tax-free until you withdraw the funds in retirement.

If your employer offers a 401(k), it can be particularly advantageous for someone who is 60 years old as it provides several features that can help to maximize your retirement savings:

•   Catch-up contributions: If you are 50 and over, you can make catch-up contributions to your 401(k) plan, which allows you to contribute more money to your account each year than younger participants. In 2024, the annual catch-up contribution is up to $7,500 more than the standard $23,000 contribution limit. In 2025, the annual catch-up contribution is up to $7,500 more than the standard $23,500 contribution limit. Also in 2025, those aged 60 to 63 may contribute an additional $11,250 (instead of $7,500), thanks to SECURE 2.0.

•   Employer matching contributions: Many 401(k) plans offer employer matching contributions, which can help to boost your retirement savings. Maxing out your employer match can be an effective way of increasing savings.

•   Several investment options: A 401(k) plan typically offers a range of investment options, including mutual funds, exchange-traded funds (ETFs), and individual stocks and bonds. These investment options allow you to diversify your portfolio and manage risk.

•   Loan options: Some 401(k) plans allow you to borrow from your account, which can be helpful in times of financial need.

IRA

An individual retirement account (IRA) is a tax-advantaged investment account that provides a way to save for retirement outside of an employer-sponsored plan, such as a 401(k). An IRA can be an option for someone who is 60 years old and looking to save for retirement. There are two main types of IRAs: traditional and Roth.

For someone who is 60 years old, an IRA can offer a number of benefits in terms of retirement savings:

•   Tax benefits: A traditional IRA provides tax-deferred growth on your contributions, meaning that you can deduct your contributions from your taxable income for the current year and pay taxes on the funds when you withdraw them in retirement. A Roth IRA provides tax-free growth on your contributions, meaning you can withdraw the funds in retirement without paying any taxes on the investment earnings.

•   Catch-up contributions: Like a 401(k), you are eligible to make annual catch-up contributions to your IRA if you are 50 and over. For 2024, the annual catch-up contribution is $1,000 more than the standard $7,000 contribution limit. For 2025, as well, the annual catch-up contribution is $1,000 more than the standard $7,000 contribution limit.

Recommended: What is an IRA?

Real Estate

Investing in real estate is another option to save for retirement. Real estate investments provide a source of passive income, which may help supplement your retirement savings and hedge against inflation. There are several ways that someone who is 60 years old can invest in real estate, including:

•   Rental property: Investing in rental property can provide a steady stream of rental income, which can help to supplement your retirement savings.

•   Real estate investment trusts (REITs): Some REITs own and manage income-producing properties. Investing in REITs can provide exposure to a diverse portfolio of real estate assets without the responsibility of managing the properties yourself.

Annuities

Annuities may be an attractive investment vehicle for someone saving for retirement. An annuity is an investment product that provides a guaranteed income stream in exchange for a lump sum payment or a series of payments. It’s important to note that there are several types of annuities, each with unique features and benefits.

An annuity can offer many benefits for retirement savings:

•   Guaranteed income: An annuity provides a guaranteed stream of income, which can help to provide financial stability in retirement.

•   Protection from market downturns: Certain types of annuities can provide protection from market downturns, which can help to mitigate the impact of stock market losses on your retirement savings.

Things to Consider When Investing for Retirement at Age 60

Regardless of your financial situation, you can continue or start to invest for retirement at age 60. However, before you start investing at age 60, you should consider the following:

Retirement Goals

You want to figure out your desired lifestyle that you’ll have during retirement and how much money you will need to support it. You may want to travel the world. Or you want to live a low-key life near your family. Depending on your retirement goals, you’ll have much different needs.

Figuring out your retirement goals will help you determine how much you need to save and invest and what types of investments may be most suitable for your needs.

Time Horizon

One of the most important things to consider when investing for retirement at age 60 is your time horizon. With only a few years remaining until retirement, it’s important to consider how much time you have to invest and how long your investments need to last. This may affect the types of investments you choose, as you’ll likely want to focus on more conservative options that have a lower risk of losing your initial capital.

Risk Tolerance

Your risk tolerance may change as you get closer to retirement. At age 60, you may be less willing to take on the risk of losing your initial investment, as you’ll want to ensure that your savings last throughout your retirement. With a risk-averse outlook, you may consider lower-risk investment options such as certificates of deposit (CDs), dividend-paying stocks, or bond funds made up of US Treasuries and high-grade corporate debt.

Current Savings

Another critical factor to consider when investing for retirement at age 60 is your current savings. The amount you have already saved will play a significant role in determining how much you can invest and how much you will need to save. It’s also important to consider whether you have any other sources of retirement income, such as a pension plan or Social Security.

Social Security

Social Security is an important source of retirement income and can help supplement your other investments. When you turn 62, you can start receiving Social Security benefits. However, your benefits may be reduced if you start taking them early. Therefore, you want a holistic view of how your Social Security benefits will fit into your retirement plan.

Health Care Expenses

Healthcare expenses can significantly impact retirement savings, as they can be one of the largest expenses for individuals during their retirement years. Thus, you should factor in the potential for the need to pay for health care in your retirement savings plans.

According to the Fidelity Retiree Health Care Cost Estimate, the average 65-year-old couple retiring in 2022 can expect to spend approximately $315,000 on healthcare expenses throughout their retirement. This amount can quickly eat into an individual’s retirement savings, leaving them with less money for other costs such as housing, food, and entertainment.

Taxes

Some investment options have different tax implications, and it’s important to consider how your investments will be taxed in retirement. For example, traditional IRAs and 401(k)s are tax-deferred, meaning that you won’t have to pay taxes on the money you invest until you withdraw it in retirement. On the other hand, Roth IRAs and 401(k)s are taxed upfront, so you won’t have to pay taxes on the money you withdraw in retirement.

Recommended: 401(k) Tax Rules on Withdrawals and Contributions

Cost of Living

Inflation, or the rise of the cost of living, can erode the value of your investments over time, so you want to factor in how inflation may affect your savings in the future. This can include investing in assets that may appreciate in value, such as stocks, or in assets that generate income, such as bonds and rental property.

Recommended: How Does Inflation Affect Retirement?

Open an Online IRA With SoFi

People may think that by the time they turn 60, they should have enough money to retire and live comfortably. However, like anything in life, things sometimes work out differently than you planned. So if you don’t have the retirement nest egg you envisioned by the time you turned 60, it doesn’t mean you should avoid saving altogether. By assessing your current financial situation, selecting appropriate investments, and taking advantage of retirement plans, you can ensure a secure financial future even if you’re starting at 60.

If you’re ready to start investing for retirement, you can open an online retirement account with SoFi. SoFi offers Traditional, Roth, and SEP IRAs for investors looking to reach their financial goals for retirement. With a SoFi Invest® active IRA, you’ll be able to access a broad range of investment options, like buying and selling stocks, exchange-traded funds (ETFs), and fractional shares with no commission.

Help grow your nest egg with a SoFi IRA.

FAQ

Are you able to invest for retirement at 60?

It is possible to invest for retirement at age 60. However, it is also important to consider other factors, such as your current savings, retirement goals, and overall financial situation, to determine if investing for retirement at 60 is your best course of action.

Can you open a retirement account for investments at age 60?

You can open retirement accounts for investments at age 60. Several options are available, such as a traditional IRA or a Roth IRA. Additionally, these accounts allow catch-up contributions for people aged 50 or over.

How much money does the average 60-year-old invest for retirement?

The average amount a 60-year-old has saved for retirement can vary greatly depending on several factors, such as their current financial situation, savings habits, and overall financial goals. According to a report by Vanguard, the average and median retirement savings balance for individuals between the ages of 55 and 64 in 2021 was $256,244 and $89,716, respectively.

Photo credit: iStock/sureeporn

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.

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