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May

2024

The Most Important Components of a Successful Budget

By Jackie Lam | Budgeting & Goals, Family Finances, money | Comments Off

Financial gurus, your money-savvy friend, and personal finance books and articles all say the same thing: You need a budget. Why? Because without any guardrails to guide your spending decisions, you can end up overspending (and, in turn, running up debt). You may also find it difficult to reach important financial goals, such as building an emergency fund, going on vacation, or buying a home.

The main characteristics of any budget are estimates of how much money you’ll make and how much you’ll spend over a certain period of time, typically a month. Trouble is, it can be hard to predict every expense that may come up in a given month. That can make it hard to know what to include in your budget. But don’t give up — read on. What follows are eight key components of a successful and realistic budget.

Key Points

• A successful budget includes estimates of income and expenses over a specific period, typically monthly.

• Emergency funds are crucial, ideally covering three to six months of expenses.

• Budgets should account for irregular and one-off expenses by setting aside funds monthly.

• Debt repayment is a key component, with strategies like the 50/30/20 rule guiding spending.

• Accurate tracking of monthly income is essential for effective budget allocation.

The Importance of Budgeting

While a budget may sound restrictive, it’s really nothing more than a plan for how you will spend your money. Why bother making one? Here’s a look at some of the benefits of putting together a basic budget:

• Lets you know if you’re spending more than, less than, or about the same as you’re earning each month.

• Gives you a birds-eye view at where exactly your money is going each month.

• Helps you avoid spending more than you have or want to spend.

• Alerts you to subscriptions or services you’re paying for but may no longer need.

• Ensures you stay on top of debt payments.

• Allows you to make adjustments in your spending and saving so you can align your financial habits to reach your goals.

• Can prevent you from going into debt should there be an unexpected, emergency expense or if you get laid off

• Helps you feel more secures and less stressed about money

💡 Quick Tip: Want to save more, spend smarter? Let your bank manage the basics. It’s surprisingly easy, and secure, when you open an online bank account.

Key Characteristics That Make a Budget Successful

While there are many ways you can approach managing your money, all budgeting styles share some of the same key elements. Let’s take a look at the main characteristics of a budget that can help you stay on track and boost your overall financial wellbeing.

Emergency Funds

The bedrock of any type of budget is an emergency fund. Without a cash reserve set aside specifically for unplanned expenses or financial emergencies, any bump in the road — say a car repair, trip to the ER, or a loss of income — can force you to run up credit card debt. This can lead to a debt spiral that can take months, potentially years, to recover from.

A general rule of thumb is to keep three to six months’ worth of basic living expenses in a separate savings account earmarked for emergencies. If you’re self-employed or work seasonally, however, you might want to aim for six or 12 months of expenses to feel secure and protected.

Recommended: Where to Keep Emergency Funds

Irregular Expenses

When creating a budget, you likely won’t overlook your recurring monthly expenses, such as rent, utility bills, and food. What’s easy to forget about are your one-off and irregular expenses.

To set up an accurate budget, you’ll want to be sure to jot down any annual or seasonal expenses you anticipate, such as membership dues, holiday gifts, insurance payments, car and registration fees, or kid’s camp expenses. Scanning through your monthly checking account statements for a year should help you suss out your irregular expenses.

To adequately account for these expenses, determine the annual cost, divide by 12, and build that amount into your monthly budget. You may want to transfer that money into a separate account so you can pay those expenses when they’re due.

Repaying Debt

For a budget to be successful, you want to make sure you’re accounting for debt repayment, including minimum monthly payments and (if you’re carrying high-interest debt) additional payments. The 50/30/20 budgeting rule, for example, recommends putting 50% of your money take-home income toward needs (including minimum debt payments), 30% toward wants, and 20% toward savings and debt repayment beyond the minimum.

Once you’ve paid off your balances, the money you were spending on debt/interest each month can now go towards other goals, such as a vacation, large-ticket purchase, or down payment on a house.

Recommended: See how your money is categorized using the 50/30/20 Budget Calculator.

Monthly Savings

Even if you tend to live paycheck to paycheck, a key element of a budget is putting at least something into savings each month. For example, with the “pay yourself first” approach to budgeting, you set up a recurring transfer from your checking account into your savings account on the same day each month, ideally right after you get paid.

Once you’ve fully funded your emergency saving account, you can funnel this extra money into a high-yield savings account to work towards your short-term savings goals.

And it’s fine to start small. If you save $20 a week, in a year you’ll have accumulated $1,040. If you commit to the 52-week savings challenge, where you save $1 the first week, $2 the second week, and so forth for an entire year, you’ll have stashed away $1,378 by week 52.

💡 Quick Tip: Most savings accounts only earn a fraction of a percentage in interest. Not at SoFi. Our high-yield savings account can help you make meaningful progress towards your financial goals.

Accurate Monthly Income

Without knowing exactly how much money hits your bank account each month, you won’t be able to allocate your funds accordingly and create an accurate budget. Besides your paycheck, you’ll want to factor in any other income streams, such as freelance work, government benefits, alimony, or child support.

If you’re self-employed and your income varies from month to month, determining your monthly income can be a bit trickier. One solution is to use your lowest monthly income over the past year as your baseline income (minus any taxes you will owe). This gives you a margin of safety, since you will likely make more than that.

Money for Vacations and Free Time

While it’s important to save for an emergency fund and pay off your debt, a key component of budgeting is money for fun and leisure. Without it, you likely won’t stick to your budget at all.

Think about what activities bring you the most joy and offer the most value in your life. What hobbies would you like to invest more time, energy, and resources in? Where would you like to vacation next? From there, you can set some “fun” savings goals. Consider how much you will need and when you want to reach your goal to determine how much to set aside for fun each month.

Recommended: 15 Creative Ways to Save Money

Retirement

Retirement might seem far off but failing to start saving early can put you in a tough predicament later on. Thanks to compound interest — the interest earned on your initial savings and the reinvested earnings — it’s much easier to amass a comfortable nest egg when you start early. Even if you’re still paying off your student loans, retirement is an important element of a budget that can make a huge difference in your future.

If you work for a traditional employer, you likely have a company 401(k) you are eligible to participate in. If your employer offers a company match, it’s wise to contribute at least up to match — otherwise you’re leaving free money on the table.

Realistic Goals

While many people don’t write down specific goals when creating a budget, this is actually an important element of budgeting. By setting realistic goals, such as building an emergency fund, saving for a downpayment on a car or a home, getting out of debt, or saving for retirement, you can begin to find ways to save for those goals and track your progress towards achieving them.

Having specific and realistic money goals can give you the motivation to take control of your spending. It also gives all the money that comes into your account a purpose.

Keep in mind, though, that goals and budgets are ever-evolving. When changes arise in your situation, you can tweak your goals accordingly. For instance, maybe you suffered a financial setback. In that case, you might want to put your foot off the pedal on aggressively paying off debt, and focus on replenishing your emergency fund.

Tips on Starting a Budget

If the idea of creating a budget feels overwhelming, here are some stimple steps that help jump start the process.

• Determine your after-tax income. If you get a regular paycheck, the amount you receive is probably just that, but if you have automatic deductions, such as 401(k) contributions or health and life insurance, you’ll want to add those back in to give yourself an accurate picture of your earnings.

• Tally your monthly expenses. You can scan your bank and credit card statements for the past three to six months to get an idea of what you typically spend each month and on what. You can then make a list of spending categories, how much (on average) you spend on each per month, and then break down those expenses into two main categories: “needs” and “wants.”

• Make adjustments. If your average monthly income is less than your average monthly spending (meaning you are going backwards) or is about the same (meaning you aren’t saving anything), you’ll want to look for places to cut back. You likely find it easier to cut back spending in your “wants” categories, such as cooking a few more times a week (and getting take-out less often) or cutting the cord on cable and opting for cheaper streaming services.

• Choose a budgeting plan. Once you’ve done the basics, you can take it a step further by selecting a budgeting plan. Any budget must cover all of your needs, some of your wants and — this is key — savings for emergencies and the future. The 50/30/20 budget (mentioned above) often works well for beginners. But there are many different types of budget — including the envelope system and zero-based budget. You might choose a budgeting app, such as YNAB or Goodbudget, to automate the process.

Banking With SoFi

Knowing exactly what elements go into a successful budget can help you create a spending plan that’s in step with your goals and help you do a lot more with the money you have.

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 do I stick to a budget?

The best way to stick to a budget is to never spend more than you have. Running up high-interest debt can be a vicious cycle that is tough to get out of. You also end up spending a lot more on your purchases than if you have held off and saved up.

If you can’t afford something you want right now, it’s generally a good idea to put it off until you can. If you want to go on vacation or buy new furniture, for example, plan for it and save regularly so it doesn’t throw off your budget.

What is the best budgeting method?

The best budgeting method is the one you’re most likely to stick with. If you prefer to not worry so much about where you’re spending each dollar, you might prefer the 50/30/20 budget. If you like to get granular with your spending, then a zero-sum budget might be a good choice.

What are the benefits of budgeting?

Budgeting is a tool that helps ensure you’re spending your money in a way that aligns with your priorities. If you simply spend here and there without any type of plan, you can end up spending on things you don’t care all that much about, and never saving up enough for the things that you do — such as buying a car, going on vacation, or putting a downpayment on home.

Budgeting also helps ensure you can pay all your bills, have a cushion for the unexpected, and avoid running up expensive debt.

Photo credit: iStock/AndreyPopov

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May

2024

17 Tips for Surviving on Minimum Wage

By Marcy Lovitch | Budgeting & Goals, Financial Independence, money | Comments Off

There’s no doubt about it, trying to live on minimum wage is no easy feat. This is especially the case with the cost of living consistently increasing while the federal minimum wage hasn’t budged since 2009. And, according to the Economic Policy Institute, the value of the federal minimum wage is now at the lowest point since 1956, when it was 75 cents an hour, which is equal to $7.19 today.

However, if you are making minimum wage, don’t despair. How to survive on minimum wage can be difficult, but it’s not impossible. The key is not only keeping track of your spending and cutting costs where necessary but also creating and sticking to a realistic, doable budget.

If you’re living on minimum wage, learn how you can stretch your dollars and even manage to sock some money away for that rainy day fund.

Key Points

• Living on minimum wage is challenging due to stagnant federal rates and rising living costs.

• Budgeting and tracking expenses are crucial for managing finances on a low income.

• Saving small amounts regularly can build a financial cushion over time.

• Government assistance programs can help cover essential costs like food and healthcare.

• Additional income through side jobs or higher-paying positions can alleviate financial strain.

What is Considered Minimum Wage?

The federal minimum wage, created by Congress in 1938 under the Fair Labor Standards Act (FLSA), establishes a base hourly rate at which employers are required to pay their employees. The current federal minimum wage is $7.25, and as noted earlier, that’s an amount that’s remained the same since 2009.

Many states, cities, and municipalities have realized the federal minimum wage is extremely low. They have therefore passed their own minimum wage laws, offering a higher amount, generally ranging from about $10 to $16 an hour. In addition, many companies (such as Amazon, Costco, Target, and Walgreens) have also enacted their own higher minimum wage, eclipsing the federal minimum wage.

In situations where an employee is subject to both federal and state minimum wage laws, the worker is entitled to the higher of the two minimum wages. For instance, Georgia’s basic minimum wage is $5.15 per hour, but since the federal rate is higher, employers must pay the federal wage of $7.25.

What about tipped employees, such as waitstaff? According to the U.S. Department of Labor, employers may pay the employee no less than $2.13 an hour in direct wages. There is a condition, though. If that amount plus the tips don’t add up to at least the federal minimum wage, the employer must make up the difference. In a number of states, the direct wage for tipped employees is higher than $2.13 per hour to help ensure a livable wage. Worth noting: When an employee is subject to both the federal and state wage laws, they are also entitled to the provisions providing the greater benefit.

Is Minimum Wage Livable?

The term living wage refers to the amount of earnings a person or family needs to cover basic expenses. These can include groceries, utility bills, housing, healthcare, transportation, and childcare. The goal of paying employees a livable wage is to prevent people from falling into poverty and allow them to have a decent, satisfactory standard of living.

Unfortunately, the cost of living in the U.S. has risen over the decades, especially during recent inflationary times, and the minimum wage has failed to keep up with the prices of goods and services. According to a 2021 report from Drexel University, individuals working full-time at minimum wage cannot afford the above mentioned basic necessities in any location across the country. The bottom line: For most people, earning $7.25 an hour doesn’t cut it as providing a living wage.

For instance, before taxes, a full-time employee working 40 hours a week on federal minimum wage takes home only $15,080 a year, falling $4,640 well below the $19,720 poverty line for a family of two. A full-time worker getting minimum wage with a family of four falls $14,920 below the poverty line of $30,000.

The report also says a true living wage, one that supports a basic standard of living without housing or food insecurity, would fall between $20 and $26 or higher per hour, depending on the state.

Raising the federal minimum wage to $15 an hour has been an ongoing hot-button issue. The Raise the Wage Act of 2021 is a bill that proposes increasing the minimum wage for regular employees over a five-year period. While the bill is currently being debated in Congress, many companies (as noted above) have taken it upon themselves to pay their workers a higher wage.

17 Tips for Living on Minimum Wage

So, how to live on minimum wage? Here are 17 ways that can make it easier to survive on a minimum wage salary and even set aside some money for savings:

1. Evaluate Your Overall Spending

A first step to getting a hold on your finances is to know how much you’re bringing in per month versus how much is going out. One way to do this is to record all of your expenses. Begin tracking your spending for 30 days. Include everything, including the change you put in the tip jar at a coffee shop.

Doing so will give you an overview of exactly where your money is going and help you determine where you may need to make some cuts. Seeing a spending pattern may also pinpoint any causes of overspending, like not being able to say no to a restaurant invite when you really can’t afford it.

2. Create and Stick to a Budget

Having a budget provides you with a structure so you can organize your finances and live better within your means. When you’re not bringing home a lot of bacon, it’s vital to make sure you know exactly where your money is being spent each month. A line-item budget can help you track your spending in various categories and make adjustments as needed.

One common budgeting method to consider is the 50/30/20 rule. With this, you allocate 50% of your income to your needs (essentials), 30% for wants (nonessentials), and the remaining 20% towards savings. This guideline can help you manage your money better.

3. Put Some Money Towards Savings

The thought of saving when you’re barely scraping by can seem impossible. But if you’re making minimum wage, even putting $5, $10, or $20 a paycheck towards savings can add up over time. You might even set up an automatic transfer from your checking account into savings a day or two after every payday. It’s as effortless as automatic bill payments and can help you build up a nest egg.

Doing so can also get you in the habit of saving and even help improve mental health. One University of Arizona study found people who save money report less psychological distress and have improved financial satisfaction.

4. Look Into Government Benefits

Another “how to survive on minimum wage” tip: Millions of low-wage earners in the U.S. qualify for federal and state government assistance benefits. This aid can help lower costs of food, healthcare, housing, and more for those surviving on minimum wage.

Some of the most popular programs include Medicaid and Child’s Health Insurance Program (CHIP), Supplemental Nutrition Assistance Program (SNAP) or food stamps, Temporary Assistance for Needy Families (TANF), and more. To see what benefits you might qualify for, visit benefits.gov .

5. Save on Food

Obviously, minimizing dining out and ordering takeout will lower your food bill. Some other ideas:

• People and families living on minimum wage can qualify for SNAP or food stamps to help offset grocery costs.

• Consider shopping at less expensive supermarkets, using coupons, buying the store or generic brand, and if applicable, ask if the store has a customer club card so you can get additional discounts.

• Buying in bulk and stocking up on frozen foods and pantry staples such as bread, milk, eggs, peanut butter, pasta, beans, rice, tuna, and canned soups can help when money is particularly tight.

• Food banks or pantries can be another resource. You can search for one in your area at FeedingAmerica.org .

6. Find Additional Ways to Increase Your Income

If you are struggling to make ends meet, you might also think about how you could bring in more income.

• This might be the time to look for a higher-paying job or simply ask your boss for a raise.

• Investigate getting a side hustle on your off hours like driving for Uber, Lyft or delivering food for DoorDash, GrubHub, or Instacart. You could also consider house cleaning, babysitting, dog walking, or pet sitting for extra money.

• Have a marketable craft or hobby? Try selling your creations on Etsy or at a craft fair.

• If you have unwanted stuff that others might want, put it up for sale on Facebook Marketplace, eBay, or your community’s neighborhood group. A garage or yard sale can also bring in some bucks if you’ve got enough to peddle.

7. Lower Your Housing Costs

Housing is where Americans spend the largest share of their paycheck, according to the U.S. Bureau of Labor Statistics. With the prices to rent or own a home consistently rising across the country, this can be a major issue for those living on minimum wage.

A 2022 report by the National Low Income Housing Coalition found that the average minimum-wage worker must work 79 hours per week (the same as approximately two full-time jobs) to afford a one-bedroom rental home at the fair market rent.

If you’re paying more than you can afford for housing, there are ways to cut the costs.

• Consider downsizing to a smaller home or apartment, moving to a more affordable area in your town or city, getting a roommate, or living with a friend or family member while you save.

• Look into applying for affordable public housing in your area, specifically established for eligible low-income people. The U.S. Department of Housing and Urban Development (HUD) oversees public housing agencies in your state or city. You can find your local housing authority office at hud.gov or by calling 800-955-2232.

8. Work Towards Reducing Your Debt

When you’re not bringing in a lot of money, it’s easy to accumulate debt, especially by using credit cards to get by till the next paycheck. This can leave you with high credit card bills due at the end of the month and increase the chance of a minimum payment you can’t afford. You can tackle the problem in a few ways:

• Consolidate your debt by rolling multiple debt payments into one.

• Consider a balance transfer onto one credit card with a zero or low-interest promotional rate. These can provide a period of time during which you can pay down debt before the interest rate rises.

• Seek out help from a reputable non-profit organization such as the National Foundation for Credit Counseling (nfcc.org ), a professional credit counselor, or certified financial planner who can help you create a plan to start tackling your debt.

9. Minimize Healthcare Costs

Healthcare can take a big bite out of a tight budget. These moves may help lower those expenses:

• Medicaid and the Children’s Health Insurance Program (CHIP) are among the government programs providing free or low-cost health care to some low-income families and individuals. To determine if you’re eligible, go to Healthcare.gov where you can also fill out an application.

• Work towards saving on prescription drug costs at participating pharmacies with a discount card or coupons offered by companies such as GoodRx, SingleCare, or America’s Pharmacy.

• Try a variety of free things you can do to stay healthier. Take a walk, ride your bike, pick up a basketball game, or do free workout videos on YouTube.

10. Look to Save on Transportation

Owning a car and maintaining it can be costly. Here, some ways to lower expenses:

• Consider the alternatives to car ownership, such as public transportation, carpooling, walking, or riding a bike.

• When you drive, try to limit extraneous trips to reduce mileage and wear and tear on your car.

• Save money on gas by comparison shopping at your local fuel stations.

• See if you can lower your car insurance payment with good driver discounts or by skipping extras that you don’t really need, like car rental coverage or emergency roadside assistance.

11. Make the Most of Tax Breaks

When it comes time to file your taxes, make sure you’re taking advantage of whatever tax credits and deductions are offered for low-to-moderate-wage employees, such as the Earned Income Tax Credit, Child Tax Credit, or the Child and Dependent Care Credit. If you qualify, you can use the credits to help reduce the amount of taxes you owe and possibly increase your refund.

Recommended: What Tax Bracket Am I In?

12. Check Your Paycheck Withholding Amount

When you start a new job as a regular employee, your employer will have you fill out a W-4 form to determine how much tax money should be withheld from your pay and sent to the IRS for you. This is determined by what your tax filing status is (single or married, for example) and whether you have any dependents.

If you choose to have too much money taken from each paycheck, yes, you’ll get it back in the form of a tax refund, but it might be more useful to have that extra money during the year. You can change or update the withholding information on your W-4 form with your employer at any time. What’s more, you should do so if you experience any type of personal life change, such as marriage, divorce, or having a child.

13. Mind Your Utility Usage

Americans pay up to $613.00 a month for utility costs, according to a study from Move.org. This can add up to half a minimum wage-earner’s monthly paycheck.

Fortunately, there are many ways to lower your utility bills that can help with the challenge of how to live on minimum wage.

• Switch to using more energy-efficient light bulbs and you can save on average $225 a year, recommends the U.S. Department of Energy.

• Avoid phantom energy usage: Turn off or unplug any appliances not in use, even those sitting idle still drain some energy from the outlet.

• Save up to 10% on heat and cooling costs by setting your thermostat back seven to 10 degrees back from its normal setting for eight hours a day (such as when you are out at work).

• Switching to doing cold water washes can save on gas and electricity needed to heat water.

• If you need new appliances, opt for ENERGY STAR labeled machines that use less water and energy than standard ones.

• Get rid of any extra cable channels you don’t watch or downsize to a more basic plan.

• If you’re having trouble making payments, call your utility companies and see if you can negotiate rates or be put on a financial assistance payment plan.

14. Take advantage of any employer-sponsored benefits

Make sure you use any plans your employer offers, such as health insurance, retirement accounts like a 401(k), daycare services, or paid time off. These things can be priceless to any employee but especially if you’re surviving on minimum-wage.

15. Look for Cheap or No Cost Things to do

Living on a low-income salary doesn’t mean you have to sit home and give up on fun. But instead of pricey entertainment and eating out, consider these ideas.

• Check to see if any museums have a day where admission is free.

• Grab a slice of pizza with a friend for a cheapie lunch.

• Take a walk or bike ride; visit the library to check out free books and DVDs.

• Host a potluck gathering with friends.

16. Check Out Your Local “Buy Nothing” Groups

Neighborhood “buy nothing” groups, where people post things they want to give away, have become popular. These community networks can be a great way to get clothing, food, toys, appliances, and furniture absolutely free.

Not sure where to start? Visit BuyNothingProject.org or search Facebook to see if there’s a buy nothing group near you.

Recommended: 15 Creative Ways to Save Money

17. Be Kind to Yourself

Living on a minimum wage income can be a constant source of anxiety and stress. But think about thriving rather than just surviving on minimum wage. Be sure to practice self-care. There are lots of low-cost or free ways to reward yourself, from camping out to treating yourself to a fancy coffee to finding free live music in your area.

The Importance of Having a Savings Account

When you’re living paycheck to paycheck, saving money can feel like an impossibility. But opening a high APY savings account is a wise move. It’s a place where your money can securely grow over time, thanks to the interest it earns. It’s also a place that may be less tempting to tap into than your checking account, and it’s less risky than, say, investing in the stock market.

You can save for a specific financial goal, such as moving to a bigger apartment, or let it build as a nest egg for your retirement. Another reason it’s important to have some savings? You need an emergency fund for life’s unexpected and expensive moments, such as having a sick pet, needing a car repair, or suddenly losing your job.

Financial experts generally advise having at least three to six months’ worth of living expenses socked away. This cash can help prevent your using credit cards or money in your checking account slated for bills when an urgent need crops up.

Can You Open a Bank Account While Earning Minimum Wage?

Yes. You don’t have to have a high-paying job in order to open a bank account. Anyone in the U.S. who is 18 years old or older can open a bank account on their own, and that includes people who are unemployed or have no income at all.

It’s important to know that many traditional banks require you to make a minimum deposit when opening a bank account, which can be anywhere between $25 and $100. However, some banks, especially online ones, will allow you to open an account with no minimum balance required.

What to Look for in a Bank on a Minimum Wage Salary

If you earn a minimum wage, you’ll likely want a bank that doesn’t have a lot of hurdles to opening an account or charge a lot of fees. Look for these features:

• No extra fees: Some banks tack on extra fees for different reasons, such as using an ATM not in their network, overdraft fees for having to cover for insufficient funds, or a monthly maintenance or service fee. Look for a bank that doesn’t charge these fees.

• Interest-bearing account: A bank account that allows you to earn money on your deposits can only help your money grow. Many banks don’t pay interest on checking funds, or pay a sliver of a percentage on savings. Shop around for a better annual percentage yield (APY).

• No monthly minimum balance requirements: Many banks charge a monthly fee if you don’t keep a minimum balance in your account. Search for one without any rules on how much money you’re required to have in there.

• Low-to-no minimum deposit requirements: You may find some banks have a minimum amount of money you have to deposit in order to open an account. It could be as low as $10. However, you can also find banks that don’t require any deposit at all to start an account.

Banking with SoFi

People who live on a minimum-wage salary can benefit from creating and sticking to a budget, finding ways to cut costs, knowing about financial assistance programs, and finding a trusted online bank offering zero account fees, no balance or deposit minimums, and no service charges.

Banking with SoFi can help your money grow, whether you’re earning a lot or a little. When you open an online bank account with direct deposit, you’ll earn a competitive APY, have no monthly minimum balance requirements, and pay no account fees. Another plus? Qualifying accounts get paycheck access 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 minimum wage a liveable salary?

It can be, depending on where you live, your expenses, and how much of a minimum wage you’re earning. Many states, cities, and even companies offer a higher minimum wage than the federal wage of $7.25, making it easier for people to survive. That said, in some parts of the country, you would have to work almost two full-time minimum wage jobs just to afford a one-bedroom rental.

What are some tips for lowering expenses when earning minimum wage?

Housing, transportation, and food are the biggest expenses for the average American household. Some ways you can lower these costs is downsizing your housing situation or getting a roommate, limiting restaurant meals, cutting grocery costs, and opting for public transportation. In addition, it can be worthwhile to research local and federal programs that can help you lower expenses and get more for your money, from food stamps to Medicaid.

Can you open a bank account when earning minimum wage?

Yes, you can, but it’s wise to shop around for a bank that doesn’t charge any excess fees or require a monthly minimum balance requirement. Also look for ones that pay a competitive APY on your savings and possibly your checking balance as well.

Photo credit: iStock/AsiaVision

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.

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.

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.

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.

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May

2024

How Much Cash Should I Have on Hand?

By Janet Siroto | Budgeting & Goals, money | No Comments

Are you wondering, “How much cash should I have on hand?” There are two ways to look at this question. One meaning is how much actual currency (say, $20 bills) you should keep in your wallet or at home. Another way to look at that question is how much liquid money should you have available in case of emergency, such as cash in a savings account vs. equity in your home, which can be a challenge to tap into quickly.

This guide will cover both of those scenarios and help you understand the importance of having some cash accessible when it’s needed, whether in case of an emergency or everyday spending. Read on to learn the specifics.

Key Points

• Determining the right amount of cash to keep on hand involves considering both physical currency and liquid assets for emergencies.

• Working individuals should aim to save three to six months’ worth of expenses in an accessible emergency fund.

• For retirees, it’s advisable to have three to six months of living expenses readily available, with some experts recommending up to 24 months.

• Keeping a small amount of cash at home, such as $100-$200, can be practical for immediate needs during emergencies.

• The amount of cash to carry daily might vary, but having around $100 can be useful for minor cash-only transactions or emergencies.

How Much Cash Should You Have If You’re Still Working?

First, consider how much cash the typical person who’s working should have available. You may be at a stage of life when you are putting away money towards certain financial goals, such as retirement or your child’s college education. That’s money you don’t want to touch.

Which is why you also likely need to have money in an emergency fund. This is money you can quickly access if you have an unexpected medical or car repair bill or if you were to lose your job. This money can tide you over and help you avoid resorting to using your credit cards to pay for things. Credit card debt is high-interest debt, with interest rates currently over the 20% mark on average.

Financial experts usually advise that people add up their monthly expenses: housing, food, healthcare, utilities, discretionary spending, etc. Then, you want to sock away three to six months’ worth of those monthly expenditures. That money doesn’t have to be accumulated all at once. You might automate your savings and have a small amount transferred from checking into an emergency savings account every time you get paid.

Recommended: Find out how much you should save for unexpected expenses with our emergency fund calculator.

What’s nice about an emergency fund is that the money is immediately accessible when you need it. Unlike, say, the equity in your home, your invested funds (the value of which can rise and fall), and a valuable family heirloom, the cash is ready and available. A good place to keep it might be in a high-yield savings account, where it will be insured up to the FDIC or NCUA limits.

💡 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 Much Cash Should You Have If You’re Retired?

If you are retired, the same basic thinking holds true about how much cash to have available. Whether you are on fixed income or still bringing in some kind of paycheck, you will want to have at least three to six months’ worth of living expenses available.

Some experts suggest that those who are retired should keep more than that amount in cash available. They believe that 12 to 24 months is a wiser number. That way, if you are hit with a major medical bill that you can’t negotiate down, you will be able to tap your cash vs. sell off investments. That’s an example of why an emergency fund is a priority.

How Much Cash Should I Keep at Home?

Now that you understand how much cash to have available in a liquid form, consider how much literal cash (as in the bills you get when using an ATM) to keep on hand.

Of course, you don’t want too much cash sitting in a drawer when it could be safely in a bank or credit union, earning interest. But it can be wise to keep at least $100 or $200 on hand.

For instance, you might imagine what would happen if a mammoth storm came through and knocked out power to a portion of your town and many businesses were closed. You might need to fill your gas tank to drive to the next town over to get food, or you might have to pay for some emergency supplies or to refill a medication prescription.

While some people may want to keep more than that amount “just in case,” the prevailing wisdom is to have no more than $1,000. If you keep that much cash in your house, you may want a home safe. Otherwise, theft, fire, and simply forgetting where you stashed it could be issues.

How Much Cash Should I Keep in My Wallet?

How much money you need to keep in cash in your wallet will vary. Many people today use their debit card and payment apps for daily spending and carry very little or even no cash. But having some money, perhaps $100 or so, can be a wise move.

You might wind up needing to buy something at a local, cash-only business. Or you might be purchasing something from a store that adds a surcharge for those who use cards or mobile payment apps, to recoup the fees they are charged. Having a bit of money in your wallet could help you out in this and other situations.

Where Should I Store My Cash?

You might consider keeping day-to-day money in a checking account, and emergency money in a separate savings account. That way, you don’t need to battle the constant temptation to spend it. Keeping cash in an account insured by the Federal Deposit Insurance Corporation (FDIC) and that earns a solid interest rate are wise moves as well. Online banks typically offer these features.

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 cash should the average person keep at home?

According to one recent survey, the largest segment of Americans keep less than $100 at home, with between $101 and $500 being the next most common amount. About one in six don’t keep any money at all. That said, it can be helpful to have some cash on hand in case of emergency.

How much cash does the average person carry?

The average American carries $67 in cash, but that figure can vary widely.

Why do people keep large amounts of cash at home?

Some people may feel their money is safest at home, close at hand. Others may be unbanked and not have a bank account in which to stash their cash. Still others may want the reassurance of knowing they have some dollars available if, say, there were an emergency situation.

Is it wise to keep cash at home?

It can be wise to keep some cash at home. Perhaps you want to run to the farmers market and make a purchase in cash without stopping at an ATM. Or maybe there’s an emergency situation, and your local ATM is out of cash. Having cash on hand can be very helpful.

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

SoFi members with direct deposit activity can earn 4.20% 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.

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

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May

2024

6 Advantages of Having a Savings Account

By Timothy Moore | Budgeting & Goals, Family Finances, money | Comments Off

Sure, you could store all the cash you’re likely to need in the near future in a checking account and call it a day. But that would mean missing out on the many benefits of having a savings account.

While savings accounts don’t offer the returns you could potentially get in the market, they pay interest (generally a lot more than you can earn in a checking account), while still keeping your money safe and accessible. This makes them ideal for housing your emergency funds and money you’re saving for shorter-term goals, like buying a car or going on vacation.

Here’s a closer look at the perks of having a savings account and why this type of account likely deserves a place in your financial toolkit.

Key Points

• A savings account safely stores money while earning interest, making it ideal for short-term savings like emergency funds or vacation funds.

• These accounts are insured up to $250,000, providing security against bank failures.

• Savings accounts offer easy access to funds, unlike some investments that may require time to liquidate.

• Opening a savings account doesn’t necessarily require a large initial deposit, making it accessible to start saving immediately.

• Money can be earmarked for specific goals, helping to manage finances effectively by separating funds for different purposes.

What Savings Accounts Are

A savings account is a type of deposit account at a bank, credit union, or other financial institution where you can safely store your money and earn interest. Savings accounts at banks insured by the Federal Deposit Insurance Corporation (FDIC) are typically covered up to $250,000 per depositor. Co-owners of joint accounts at the same bank are typically each insured up to $250,000. Credit unions offer similar insurance through the National Credit Union Administration (NCUA).

Unlike a checking account, which is set up for everyday money management, a savings account is designed to store money you don’t need right away, separate from everyday spending cash. These accounts typically don’t come with checks and debit cards, and some banks may limit you to a certain number of withdrawals per month.

Because savings accounts offer safety, liquidity, and interest, they can be a great place for setting aside money for shorter-term goals, such as:

• An emergency savings fund

• A down payment on a house

• A wedding

• A vacation

• A new car

• A large purchase

• Home renovations

Dive deeper: How Do Savings Accounts Work?

6 Benefits of Savings Accounts

Here’s a look at some of the main advantages of a savings account.

1. You Earn Interest on Your Deposits

Savings accounts earn interest, expressed as an annual percentage yield (APY). That means you’ll earn money just for keeping your funds in the bank, making it a low-risk way to build wealth. Not every savings account offers the same interest rate, however. While the current national average savings yield is 0.57 percent, top-yielding savings accounts are currently earning APYs above 5% percent.

To see how that translates into actual dollars, let’s say you currently have $5,000 sitting in your checking account you don’t need right away, and you transfer it to a 5% APY high-yield savings account. Even if you don’t add any additional money to the account, you could increase your balance in one year to $5,250, just by letting the initial deposit sit in your new savings account.

2. Your Money Is Insured

Savings accounts are typically insured by the FDIC or NCUA, depending on where the account is held. That means your money is protected against major losses (up to $250,000) in the event that the bank or credit union goes out of business. You would either be paid that money directly or, more likely, a new account would be opened for you at another bank with the same balance as before. This makes a savings account safer than keeping your money in a sock drawer or under the mattress, where it is susceptible to theft or loss.

3. It’s Low Risk

Savings accounts don’t offer high returns compared to what you could potentially make in an investment account over the long term. However, these accounts won’t let you down either. With many investments, you can lose money over the course or days, weeks, months, and even years. The balance on a savings account, on the other hand, will typically continue to go up over time (unless, of course, you make a withdrawal).

If you have money you plan to use within the next couple of years that you can’t afford to lose, a savings account can be the perfect place to store it.

4. It Doesn’t Require a Large Initial Investment

Savings accounts are easy to open and typically do not require you to make a big initial deposit. In fact, many online-only savings accounts allow you to open an account with $0, so you can start saving from scratch. Savings accounts at traditional brick-and-mortar banks may require deposits of $25 to $100 to open a new account. By contrast, many investments (such as real estate and mutual funds) often require a significant amount of money as an initial investment, sometimes as much as several thousand dollars.

Keep in mind, though, that some savings accounts do offer higher interest rates and low (or no fees) if your balance stays above a certain minimum threshold or you meet other criteria.

5. You Can Separate Money for Different Goals

If you’re saving for a particular goal, like buying a car or putting a downpayment on a home, it can be helpful to keep that money in a separate savings account. This helps to ensure that you don’t blow the money on something else, like groceries or clothing.

If you have several things you’re saving for, you might even want to open multiple savings accounts, such as one for emergency savings, one for a new car, and one for a vacation. Separating money can help you visualize progress toward each goal. Some savings accounts let you organize your savings into separate buckets or “vaults” so you can save toward multiple goals within one account.

6. Easy Access When You Need It

Savings accounts are relatively liquid, meaning you can access your money when you need it by transferring it into your checking account or withdrawing it at an ATM or through a teller at a local branch. That’s not true for many investments, which may take a few days to convert to cash. Some investment products, such as real estate properties, can potentially take months or years to sell off.

That makes a savings account an ideal spot for your emergency fund. When an unexpected expense comes up, you can access your funds immediately — and avoid running up expensive credit card debt — in order to cover it.

That said, the money is not quite as accessible as the money in a checking account. Savings accounts typically don’t come with checks and debit cards, and some banks limit the number of withdrawals you can make to six or nine per month. However, you might see these limitations as benefits, since they encourage saving rather than spending.

Is a Savings Account Right for You?

Savings accounts offer numerous benefits, including insurance on your deposits, higher APYs than checking accounts, and liquidity. Plus, you generally don’t need a large (or sometimes any) initial deposit to get started.

However, the interest you earn on a savings account may not always keep up with inflation, which means your balance could become less valuable over time. As a result, a savings account is generally not the best place to put the money you are saving for a long-term goal, such as retirement or your child’s college education. You might earn a better return if you invest that money in the market.

If you’re interested in opening a savings account, it’s a good idea to research your options and compare APYs, minimum deposits, balance requirements, and any fees. And if you have a savings account but aren’t satisfied with the perks, there’s likely a better fit for you offering the full benefits of a savings account.

Recommended: Perks of Long-Term Savings Accounts

Opening a Savings Account With SoFi

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.

FAQs

What is the benefit of a savings account?

The primary benefit of a savings account is that it allows you to grow your money over time (by earning interest), while still keeping it safe and accessible.

What are the advantages and disadvantages of a savings account?

Advantages of savings account include:

• Earning Interest Savings accounts accrue interest on deposited funds, helping your money grow over time.

• Safety and security Funds in savings accounts are typically insured by the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA), providing protection against loss.

• Liquidity Savings accounts offer easy access to your funds, making them ideal for emergency savings.

Disadvantages of savings accounts include:

• Lower interest rates While savings accounts offer interest earnings, the rates are often lower compared to other investment options.

• Inflation risk Inflation may erode the purchasing power of your savings over time, especially if the interest earned does not keep pace with inflation rates.

• Fees and minimum balance requirements Some savings accounts may have fees or minimum balance requirements, potentially reducing the overall return on your savings.

How is a savings account most useful?

Savings accounts can be most useful for storing your emergency funds and money you plan to spend in the next few months or years, since they pay interest while keeping your funds safe and accessible. However, returns on savings accounts are often lower than what you could potentially earn by investing in the market over time. That makes these accounts less useful for long-term savings goals like retirement or a child’s future college education.

Photo credit: iStock/PeopleImages

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May

2024

Money and Marriage: Making Important Money Decisions in Marriage

By Julia Califano | Budgeting & Goals, Family Finances, Life & Career | No Comments

Financial decisions are difficult enough on your own. But they can get even harder when you bring a significant other into the mix. After all, you both are coming from different life experiences and may have very different (often deep-seated) views on money, including how it should be spent and whether it should be saved.

Not surprisingly, money is a common cause of stress in relationships and, if left unaddressed, it can start impacting more things than just your bank account. Research consistently shows that financial problems and disagreements over money is a leading cause of divorce.

Considering how personal, and therefore complicated, each partner’s relationship with money can be, navigating money conversations can be tricky.

A great first step is to understand that financial decision-making as a couple may not come naturally, and that’s completely fine. These conversations take practice. What follows are a few strategies to try and some ideas to keep in mind when making financial decisions with your partner.

Key Points

• Financial decisions can be more challenging when involving a partner due to differing backgrounds and views on money.

• Common causes of financial disputes among couples include budgeting, spending, and handling past debts.

• Effective strategies for couples include scheduling money discussions, writing down feelings about money, and actively listening to each other.

• Compromise and joint decision-making can strengthen the relationship and improve financial outcomes.

• Implementing a financial plan with clear actions can help couples achieve their shared financial goals.

Common Causes of Couple Money Fights

Whether you and your partner are struggling to make a particular money decision or generally don’t see eye to eye on money, know that money fights are normal and common. Here’s a look at some of the most common hot button issues for couples.

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Sharing Account Information

Some couples struggle with privacy limits and may disagree about what level of access their partner should have to their financial accounts. If one partner feels they don’t have fair access to financial accounts, passwords, and paperwork, resentment can build.

Married couples in particular may find it confusing and challenging to not have a full picture of their complete financial health.

Determining Budgeting and Spending Limits

Maybe one of you likes to spend and enjoy life, while the other prefers to save for a rainy day. This disconnect happens all the time. Not all couples agree on how much they should be spending versus putting aside for the future and this can lead to anger and tension.

Dealing With Past Debt

If one partner brings a sizable amount of debt into the relationship, couples may disagree about who is responsible for paying off the debt.

You might take some solace in knowing that debts brought into a marriage stay with the person who incurred them and are not extended to a spouse. It won’t hurt the other partner’s credit rating (which is linked to their Social Security number and tracked individually). In most states, however, debts incurred after marriage jointly are owed by both spouses.

Saving and Investing

Many couples can’t agree on how much money they should save each month, as well as how they should be saving it. One partner may feel investing is the best path to a stronger financial future, while the other might be more risk averse, preferring to stash extra funds in a high-yield savings account.

7 Tips for Making Financial Decisions as a Couple

Just having a conversation about money with your significant other can be fraught. Coming to an agreement on how to manage your money is often even harder. Fortunately, these eight strategies can help you find common ground.

1. Make a Date to Talk

Your instincts might tell you to dive headfirst into a big money talk in order to get it the heck out of the way. But this may not be your best strategy. No one is their best self when they feel caught off guard. A conversation about a tough financial decision will likely be more productive when there are two calm, prepared people at the table.

Instead of bringing up the topic of money out of the blue, you might give your partner some notice. You can simply set a time to talk about the financial decision at hand. Or, you might want to turn it into a real “date” and treat yourself to a coffee at the local shop or pick up your favorite take-out dinner. Either way, the most important thing is that you have a designated time for the talk. This strategy can be applied to discussing one particular financial decision, or you can utilize it on a regular basis.

2. Write It Out

Sometimes, it’s simply hard to communicate how you feel. This is especially true for topics that affect us deeply and in confusing ways, like money. If you and your partner are people that like to put their feelings down in writing, consider writing each other a letter prior to your financial “date.”

In your letter, you might include some background on how you were raised to think about money, your money stressors, and your financial goals. Focus the letter on yourself and from where your financial beliefs stem.

Not only will this help your partner understand where you are coming from, but it can also provide you with some very useful introspection about money and your system of values.

3. Be Prepared to Listen

When making financial decisions, your main objective should not be to explain your point of view. To have a truly productive conversation, you must be committed to listening, too. This is good practice in all conversations with your partner and loved ones, but especially when talking about financial decisions.

Here’s the thing about making financial decisions: It’s rarely black and white and, generally, there is no right and no wrong. Being open to listening often translates into being open to learning.

Not only is your partner’s perspective important, but you might even be able to learn something from them. We’re all learning as we go anyway, and by listening, you have a chance to learn and evolve as a couple.

4. Be Communicative

One key to having a productive and healthy conversation regarding money or a specific financial decision with your partner is to communicate your feelings, thoughts, and fears. Something that seems obvious to you may not be obvious to them, so give your partner the benefit of explaining yourself in a calm and thorough way.

When you communicate, try to stick with talking about how you feel regarding a matter and avoid making declarations about what your partner has done in the past or what you’re hoping that they will do in the future.

Making comments about how a person is spending can quickly turn accusatory, putting them on the defensive. Even when having tough conversations, do your best to remove judgment from the equation.

Also, it’s best not to assume that just because you have explained something to your partner once, that they understand what you mean and where you are coming from. Don’t lose your cool if you have to remind your partner what’s important or a priority to you, especially if your priorities don’t align on this particular issue.

Recommended: Guide to Improving Your Money Mindset

5. Crunch the Numbers

Sometimes, the numbers help guide financial decision-making within a relationship. It can be worth taking the time to figure out exactly how each financial decision would play out over the short and long term.

By breaking big costs down into monthly numbers, you and your partner can see on paper what is possible (and what isn’t). The exercise may provide a new perspective altogether or, at the very least, get you on the same page regarding the different options with your money.

If you feel at a loss for what you should be focusing on or how to accomplish your goals, you may want to hire a financial expert, such as a credentialed financial planner. Some financial guidance from a person skilled in financial planning could be just what a couple needs to step up their money game.

6. Compromise

If you’re in a partnership, you already know that compromise is key. The good news is that with money, compromising is not only possible but often ideal. For example, you don’t have to pick just one savings goal to work on at a time. Financial decisions don’t have to be one or the other. Indeed, a multi-pronged approach is often the best way to build financial security.

Also, know that there is no perfect formula for how a couple makes financial decisions. Just because your best friend and her spouse divide their finances in a certain way or prioritize certain money goals over others doesn’t mean that you have to do it this way. Part of compromise with your partner is abandoning the idea that your partnership should work like anyone else’s.

7. Put Plans Into Action

Once you’ve hashed out your money goals and fears with your honey, and made some key financial decisions together, it’s a good idea to come up with an actionable plan to make your shared goals a reality.

If you’ve decided that you want to purchase a home in two years, for example, figure out how much of a downpayment you’ll need and, then, how much money you need to siphon into savings each month to reach your goal. You might then set up an automatic transfer from your checking account(s) and into your joint savings account each month.

A fringe benefit of making financial decisions as a couple is that you have a built-in accountability buddy to make sure you follow through on your plan and don’t spend that savings on something else.

Smart Money Decisions Couples Make

Here’s a look at some smart money moves you may want to make as a couple:

• Opening joint accounts: Having at least one joint bank account can simplify your finances and make it easier to work towards your shared goals. That said, you don’t have to merge everything. You might decide to keep individual accounts for personal use — this gives each partner some freedom to spend on themselves without having to explain their expenditures.

• Labeling your savings: Having separate savings accounts for separate goals (even giving them labels, like a “downpayment” or “vacation” account) can help you stay on track and reach your goals sooner. Some savings accounts have a sub-savings account feature, which allows you to split funds in one primary savings account into separate categories.

• Automate your savings: It can be smart to set up recurring automated transfers from your checking account(s) to your savings and investment accounts based on your goals.

• Increasing your emergency reserve: Your emergency fund should be large enough to cover living expenses — for both of you and any dependents — for anywhere from a few months to a year, depending on your situation.

The Takeaway

Talking about money with your partner isn’t always easy, but having honest discussions about your financial situation and goals is critical. This can help you better understand each other, make important financial decisions as a couple, and come up with a plan that can make your shared goals and dreams a reality.

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FAQ

Should married couples make financial decisions together?

Even if you don’t merge all of your money, it can be a good idea to work together on some key financial decisions that will impact both of your futures. Making financial decisions together can have multiple benefits, including increased closeness and trust, less conflict over money, and better financial outcomes.

How should money be split in a relationship?

There are several methods couples can use to manage money and cover their living expenses. One option is to merge all or some of your funds in a joint bank account and use it to pay for shared expenses. Another option is to keep separate accounts, but have each partner make equal payments towards shared expenses.

A third approach you might consider is to split bills proportionally based on each partner’s income. So if one partner makes 70% of the total household income, they would then cover 70% of shared expenses, while the other partner would pay for 30%.

What are financial red flags in a relationship?

Financial red flags are money issues that are either currently causing problems in a relationship or have the potential to do so in the future. While they are not necessarily deal-breakers, they are harbingers of future relationship and financial strain. If you notice any of the following six signs, it’s important to deal with them promptly, ideally before your life is too intertwined with your partner’s.

• Unwillingness to discuss money

• Excessive credit card or other debt

• Flaunting their wealth

• Severe frugality

• Using money to manipulate or shame

• Keeping secrets or telling lies about money

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Common Causes of Couple Money Fights

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