May
20
2024
What Is an Add-On Certificate of Deposit?

Guide to Add-On Certificates of Deposit

By | Budgeting & Goals, Growing Wealth, money | Comments Off on Guide to Add-On Certificates of Deposit

A certificate of deposit (CD) can be a good savings vehicle, and an add-on CD can be even better if you crave more flexibility. Traditional CDs allow you to save money for a set term while earning interest. Typically, when you open a CD, you make a one-time opening deposit and leave it in the account until the end of the term.

But add-on CDs offer a convenient twist on that basic principle: They are CDs which permit you to deposit additional funds after the account is opened.

Banks and credit unions may offer add-on CD accounts alongside other types of CDs. Whether it makes sense to open an add-on CD can depend on your financial goals.

Key Points

•   An add-on certificate of deposit (CD) allows additional deposits after the initial investment.

•   This flexibility can be beneficial for those who want to increase their savings gradually.

•   Add-on CDs typically offer lower initial deposit requirements compared to traditional CDs.

•   Interest rates for add-on CDs might be lower than those for traditional CDs.

•   Early withdrawal penalties may apply, which could affect the total interest earned.

What Is an Add-On CD?

Certificates of Deposit (CDs) are designed to help you save money that you can afford to “lock up” for a period of time. Generally, when you open a CD account, you make an initial deposit. That deposit earns interest throughout the CD’s term until it matures, or becomes accessible again. The term can be anywhere from a month to 10 years, but many people opt for several months or a few years.

Once the CD matures, you can withdraw your initial deposit and the interest earned, or you can opt to roll the entire amount into a new CD. CDs typically pay a higher interest rate than a traditional savings account but still keep your money safe, since these accounts are federally insured.

Add-on certificates of deposit, sometimes referred to as add-to CDs, give you the option to make additional deposits to your CD after opening the account. So, for example, you might open an add-on CD with an initial deposit of $500. You might then choose to deposit $100 per month into the CD account for the remainder of the maturity term.

The bank or credit union with which you open the add-on certificate of deposit account might require additional deposits to be made via automatic transfer. There may also be a minimum amount that you’re required to deposit monthly or bimonthly.

💡 Quick Tip: Help your money earn more money! Opening a bank account online often gets you higher-than-average rates.

How an Add-On CD Works

An add-on certificate of deposit account works much the same as any other CD, with one exception: You can make additional deposits to the account. Opening an account for a CD add-on starts with choosing a CD term. This is the length of time you’ll leave the money in your account.

Choosing the right term for an add-on CD matters for two reasons. First, it can determine how much interest you’ll earn on deposits. The longer the term, the more time your money has for compound interest to accrue. Banks and credit unions may also reward you with a higher interest rate and annual percentage yield (APY) for choosing a longer add-on CD term.

Second, you need to be fairly certain that you won’t need to withdraw money from an add-on CD account before it matures. Banks can impose penalties for early CD withdrawals, which can be equivalent to some or all of the interest earned. The penalties might even take a bite out of your principal.

Once you choose an add-on CD to open, you can complete the application and make the initial deposit. The amount required to open an add-on certificate of deposit accounts can vary from bank to bank. It’s typically less than for a traditional CD; perhaps $100. You can also decide how much you’d like to contribute to your add-on CD each month going forward.

As you make new deposits to your add-on CDs, that amount gets added to the principal and earns interest. You’ll then earn interest on the principal and interest as the CD compounds over time.

Recommended: How Long Does it Take to Open a New Bank Account?

Can You Add Money to a CD Before It Matures?

Generally, you cannot add money to a traditional CD beyond the initial deposit you make when you open the account. Once the CD reaches maturity, your bank may allow you a grace period of seven to 10 days in which you can make new deposits to the account. You might choose to add money during the grace period if you plan to roll the funds into a new CD account.

Add-on CDs give you more flexibility since you’re not bound by such strict rules for deposits. You can set up additional deposits to your CD to continue growing your balance, based on an amount that fits your budget and savings goals. You could even take investing in CDs a step further and create a CD ladder.

A CD ladder strategy involves opening multiple CDs, add-on or otherwise, with varying maturity terms and interest rates. Rolling maturity dates mean you may not have to worry about triggering early withdrawal penalties if you need cash. Why? Because with the staggered terms, you can always have a CD getting close to its maturity. This means you’re likely to soon have access to your cash. Laddering also allows you to take advantage of interest rate hikes if they occur.

Recommended: A Beginner’s Guide to Investing in CDs

Add-On CD vs Traditional CD

You might consider add-on CDs and traditional CDs if you’re comparing different types of high-interest accounts. Either type of CD could help you to achieve your savings goals. Before opening an add-on or traditional CD, it helps to know how they compare.

•  Add-on CDs allow you to add money after account opening; traditional CDs do not.

•  Minimum deposit amounts may be lower for add-on certificate of deposits versus traditional CDs.

•  Banks may offer different interest rates for add-on CDs vs. traditional CDs.

•  Different early withdrawal rules and penalties may apply.

When deciding where to open a certificate of deposit account, first consider whether add-on CDs are an option. Then you can look at the interest rates offered and the CD terms available.

Get up to $300 when you bank with SoFi.

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Advantages of Add-On CDs

Opening an add-on certificate of deposit account is something you might consider if you’re looking for something other than a traditional CD or a more flexible financial vehicle. Understanding the benefits of add-on CDs can help you decide if this is the right savings option for you.

Low Minimum Deposit

CDs impose a minimum deposit requirement; otherwise, you’d have no money to earn interest on. These minimums are often around $500 or $1000 or more. Banks may offer lower initial deposits for add-on CD accounts to get you to open them and continue depositing money later. You might find ones in the $100 range. That can be an advantage if you want to save with CDs but you don’t have a large amount of money in your bank account to deposit up front.

Guaranteed Return

If you’re looking for safe investments, it doesn’t get much safer than CDs. Add-on CDs can offer a guaranteed return for your money since you’ll know what the interest rate and APY are before opening the account. You can then use a CD calculator to estimate how much of a return you’ll get for your money over the maturity term.

Flexibility

Perhaps the biggest advantage of add-on CDs is the flexibility they offer. With a traditional CD, you make one deposit and that’s it. You can’t add anything else until the CD matures. An add-on CD, however, gives you the option to continue saving at a pace you can afford.

Disadvantages of Add-On CDs

Add-on CDs have some attractive features but they aren’t necessarily right for everyone. There are few potential drawbacks to keep in mind if you’re debating whether an add-on CD account might fit into your savings plan.

Lower Rates

Banks may offer lower interest rates for add-on CDs and reserve higher rates for traditional CDs. When comparing add-on CDs, consider the different rates you might get at traditional banks vs. online banks. An online bank may be the better choice if you’re hoping to get the highest rate possible for add-on CDs. Or, check and see what kinds of interest rates are being offered on high-yield savings accounts. You might find you fare better with one of those.

Early Withdrawal Penalties

Add-on CDs allow you to add money on your own terms but there are restrictions on when you can take money back out. Remember, the bank can charge an early withdrawal penalty if you decide to pull money from your CD before maturity. Penalties could cost you some or all of the interest earned.

Guaranteed Return

An add-on CD can offer a guaranteed return but it might not match the return you could get by investing your money elsewhere. Trading stocks, exchange-traded funds (ETFs), or IPOs, for example, could yield a better return on your money but there’s risk involved — you could also lose your money.

💡 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.

Example of an Add-On CD

Now that you know the pros and cons of add-on CDs, let’s zoom in on how exactly one might be set up to help you save. Let’s say you open an add-on 12-month CD that earns 5% APY and make an initial deposit of $1,000. At the six-month point, you’ve earned $24.70 in interest and your balance is now $1,024.70. You decide to deposit another $1,000. That extra cash earns the same 5% APY. When the CD matures, you’ll have around $2,075.

The Takeaway

Add-on CD accounts can help you reach your savings goals while offering more flexibility than other CDs. Before opening an add-on CD, it’s helpful to shop around to see which banks or credit unions offer them and how much interest you might be able to earn. You may also want to compare rates to what you could earn in a high-yield savings account (which offers even more flexibility). Also check into the minimum deposit required and different term lengths to find the best match for your needs and financial goals.

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

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

FAQ

What is an add-on CD?

An add-on CD is a certificate of deposit account with more flexibility. It allows you to make additional deposits after the CD has been opened. Banks may impose a minimum deposit requirement, and you may need to automate deposits to add-on CDs.

Can you add additional funds to a CD?

CDs typically do not allow you to make additional deposits once your CD account has been opened. Add-on CDs, however, are designed to allow additional deposits before the CD matures.

Photo credit: iStock/Atstock Productions

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

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

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

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

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

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

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

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

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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May
20
2024
Can a Certificate of Deposit (CD) Lose Value?

Can a Certificate of Deposit (CD) Lose Money?

By | Budgeting & Goals, Growing Wealth, money | Comments Off on Can a Certificate of Deposit (CD) Lose Money?

While it’s unlikely, a certificate of deposit (CD) could lose money if you withdraw funds before you’ve earned enough interest to cover the penalty charged. Typically, CDs are safe time deposits that guarantee an interest rate for the term that you agree to keep money at a financial institution. In fact, CDs are considered one of the lowest-risk savings vehicles available. But, if you pull your money out before the maturity date, you might take a loss.

Here’s a closer look at this topic, so you can decide if a CD is the right way to grow your money.

Key Points

•   A Certificate of Deposit (CD) could lose money if funds are withdrawn early, incurring penalties that may exceed earned interest.

•   CDs are generally low-risk and guarantee a fixed interest rate for the term.

•   Early withdrawal penalties can sometimes reduce the principal, not just the interest.

•   CDs offer higher interest rates compared to regular savings accounts, especially for longer terms.

•   CDs are insured up to $250,000 by FDIC or NCUA, providing additional security against bank failures.

What Is a Certificate of Deposit (CD)?

A certificate of deposit is a savings account offered by banks or credit unions that holds a certain amount of money for a fixed period of time. Some specifics:

•   This time frame can typically range from six months to five years, but you might find even shorter- or longer-term products.

•   There may be a minimum deposit amount, too, of possibly $1,000 or a similar sum.

•   The bank pays you interest over the term of the CD. At the end of your CD’s term (you may hear this referred to as when your CD matures), you receive the money you originally put in along with the interest earned from having your money locked away.

•   CDs can be a more attractive savings vehicle than an ordinary savings account because they may offer higher annual percentage yields (APYs).

•   Typically, the longer your money is in the CD, the higher the rates offered.

•   If you get a CD from a bank that is insured by the FDIC (Federal Deposit Insurance Corporation) or NCUA (National Credit Union Administration), you are typically covered up to $250,000 per account holder, per account ownership category, per insured institution in the very rare event of a bank failure.


💡 Quick Tip: Typically, checking accounts don’t earn interest. However, some accounts do, and online banks are more likely than brick-and-mortar banks to offer you the best rates.

How Standard Certificate of Deposits Work

A CD is similar to a standard bank account, but the difference is CDs have a “lock-in” period where you cannot access the money during that time (the CD’s term). In exchange, you earn interest on the account.

When you open a certificate of deposit, you have to determine how long you are able to keep your money stowed away. This term length generally ranges from six months to several years.
If you need to access the money before the term ends, you will usually pay a penalty for withdrawing the money before the account’s maturity. There are CDs that allow early withdrawal without penalties; these are typically called no-penalty CDs, and the trade-off for this flexibility may offer a lower APY.

Get up to $300 when you bank with SoFi.

No account or overdraft fees. No minimum balance.

Up to 4.20% APY on savings balances.

Up to 2-day-early paycheck.

Up to $2M of additional
FDIC insurance.


Can You Lose Money on a CD?

The risk of having a CD is very low. Unlike how the stock market or a Roth IRA can lose money, you typically cannot lose money in a CD.

There is actually no risk the account owner incurs unless you withdraw money before the account reaches maturity. In this case, the early-withdrawal penalty kicks in and typically may eat up some or all of the interest earned. (Read your account’s terms or check a bank’s website for the specifics.)

But to answer “Can CDs lose money?”: In rare cases, an early withdrawal fee might take a bite out of your principal, too. If, say, you deposit $1,000 in an IRA and earn $15 in interest and then decide to withdraw the funds, hypothetically you could be assessed a $25 fee. In this case, you would wind up with $990 vs. the $1,000 you deposited.

Pros of Investing in a CD

Investing in CDs can be a convenient way to grow your money. High-yield checking and savings accounts can be as well, though. Or perhaps you’re tempted by other investments and wonder how CDs vs. bonds perform. Here, consider some of the benefits specific to certificates of deposit, so you can decide what will work best for you.

•   Security. You can count on a CD for its safety. Make sure to open a CD from a federally insured bank or credit union so your money is secure up to the limits of the insurance ($250,000).

•   Dependability. Instead of having your money sit in a bank and not be sure what returns you will receive as interest rates fluctuate, you can expect to get fixed returns from your CD deposit over a specific period of time.

•   Flexible terms. When opening a CD, account holders get to select from a wide range of term lengths. If you prefer a CD with a shorter maturity date, you can choose a term of a couple of months. Looking for a longer duration? Some CDs may be offered with a 10-year term.

Recommended: CDs vs. Bonds: What’s Smart for Your Money?

Cons of Investing in a CD

As with most financial products (and things in life), there are pluses and minuses to certificates of deposit. Here’s a look at the potential downsides of putting your money in a CD.

•   Lack of access. Once you add money to a CD, you won’t be able to access it until the term is over. During this time, you are not able to add money either.

•   Possible penalties. When you open a CD, you are making a commitment with a financial institution that you will not access that money until the CD matures. (Unless you opt for a no-penalty CD, that is.) If you break that commitment and withdraw money from your CD prior to its maturity date, you will incur early CD withdrawal penalties. This could mean the financial institution withholds an amount of interest on the money you withdraw or could even take some of your principal.

•   Low returns. Yields on a CD can be competitive, but when comparing their returns to those historically earned in the stock market, they’re relatively low. That said, remember that risk plays a role in the market. If you are wondering, “Can you lose money with an index fund or other investment?” keep in mind that the answer may well be “yes.”

When you are investing in stocks and exchange-traded funds, investors take on additional risk and are compensated for that risk. But when putting money in a CD, you aren’t taking any risk, which means the returns are lower.

Recommended: What Does Private Banking Offer?

When CDs Work Best

CDs work best when you are able to put away money for a period of time and accumulate interest over the term. There are different scenarios in which a CD can be a great option, such as the following:

Saving for a Purchase in the Near Future

If you are saving up for a big future purchase, such as a home or a car, you can put your money in a CD to help protect it against inflation until you are ready to access those funds.

Building Short-Term Wealth Before You Invest

If you are new to investing and want to build up your funds to have a more consistent strategy, a CD can help. You can often use a short-term CD to steadily grow your cash position before you invest it in the stock market.

Ensuring Returns Without Stock Market Risk

Opening a CD can be a way to grow your wealth, slowly and steadily with low risk. You might consider building a CD ladder to have funds come available regularly in case you need access. This can be a good balance if you are also investing in the market.

The Takeaway

A certificate of deposit is an account you can open at a bank or credit union to lock away your cash for a certain amount of time while earning a predetermined annual percentage yield. CDs are usually considered very safe. If, however, you withdraw your funds before the maturity date, in rare cases, the penalty for doing so could possibly eat into your principal, meaning you’d lose money.

Another way to grow your funds without this kind of potential access issue could be with a high-yield checking and savings account.

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

Are CDs safe if the market crashes?

Putting your money in a CD doesn’t involve putting your money in the stock market. Instead, it’s in a financial institution, like a bank or credit union. So, in the event of a market crash, your CD account will not be impacted or lose value.

Is a CD guaranteed to make money?

In return for allowing the bank or credit union to hold your money for a fixed period of time, the bank pays you interest. These payments are guaranteed.

What determines CD rates?

CD rates are determined by a combination of a few factors, such as the CD’s maturity (or term) and what the current interest rate environment is (banks will likely use an index rate, typically that of the federal funds rate). Search online to review the best options.

Photo credit: iStock/MicroStockHub

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
20
2024
Tips on Managing a Checking Account

7 Tips for Managing a Checking Account

By | Budgeting & Goals, Financial Independence, money | Comments Off on 7 Tips for Managing a Checking Account

Managing a checking account can be a simple process, thanks to all the tools at your disposal today. You can set alerts to let you know if your balance is dipping too low and use your financial institution’s app to see where your funds are flowing, among other conveniences. Doing so can set you up to avoid fees and charges while maximizing rewards and interest you may earn.

Here, you’ll learn seven simple steps to help you manage your checking account with ease.

Key Points

•   Regularly monitoring your account balance helps avoid overdraft fees and supports budget adherence.

•   Utilizing a mobile banking app can facilitate easy monitoring and managing of transactions.

•   Avoiding extra fees is possible by meeting certain bank criteria like setting up direct deposits.

•   Automating deposits and payments ensures timely transactions and helps in achieving financial goals.

•   Taking advantage of checking account perks can offer additional benefits like identity theft protection and cash back on purchases.

Why Is It Important to Manage Your Checking Account?

Knowing how to manage a checking account effectively will help you with many aspects of your financial life such as meeting your savings goals and protecting your money. If you don’t know where your money goes, how effective will you be when it comes to creating a budget or assessing whether you can take that last-minute weekend getaway with a friend?

Plus, having good account-management skills will protect you against fraud. For instance, let’s say someone stole your debit card and used it to make purchases. You’d want to detect that ASAP before a bad situation got any worse. If you report any losses within two business days, you’re only on the hook for a maximum of $50 according to Federal laws.

Otherwise, you could lose up to $500 if you report it after two business days but within 60. If you don’t notice the fraudulent charges until after the 60 business-day limit, you’re on the hook for all fraudulent transactions unfortunately.

To recap, good checking account management will help you:

•   Keep tabs on your bank account balance and activity

•   Allow you to better fund savings goals

•   Avoid fraudulent activity and potential money loss.

Now, here are the seven steps that answer the question, “How do you manage a checking account?”

💡 Quick Tip: Don’t think too hard about your money. Automate your budgeting, saving, and spending with SoFi’s seamless and secure mobile banking app.

1. Know Your Account Balance

Keeping track of your account balance gives you a clearer picture of where you stand financially. Doing so can help you with tasks such as planning for occasional and unexpected expenses, paying off your student loans on time, as well as simply sticking to your budget.

Plus, monitoring your account can help you avoid overdraft fees by preventing your balance from dipping into negative territory. It’s easy to make an online payment or swipe that debit card and forget about it, so figuring out how often to check your balance is a wise idea. (A couple times a week works well for many people.)

You can log into your account online or through the bank’s mobile app, but other ways to check your balance include:

•   Receiving automated text alerts

•   Speaking to a teller at a branch

•   Calling your bank’s customer service hotline

•   Requesting your checking account balance at an ATM.

2. Download Your Bank’s Mobile Banking App

Here’s another idea for how to manage your checking account: If your bank offers a mobile app, it can be a smart idea to download it. Yes, mobile banking is very secure most of the time. By adopting mobile banking, you can easily keep an eye on your checking account. What’s more, you can conduct an array of transactions with just a few clicks, such as paying bills, depositing checks, setting up automated alerts, and transferring money between accounts.

Depending on the mobile app’s features, you may be able to link your debit and credit cards to your account, which makes it easier to purchase and pay for things. There may be other features such as a budgeting section, money management tools, insights into your credit score, and even access to discounts at your favorite retailer.

3. Avoid Paying Extra Fees

Many checking accounts charge monthly maintenance fees, but you may be able to have them waived if you can meet certain requirements. Most commonly, you can skip the monthly fees if you set up direct deposits or maintain a certain account balance.

Perhaps you want to drill down on one kind of fee in particular: those overdraft fees. Those charges can really add up, and if they are left unpaid, they can harm your credit score. Take a bit of time to understand how your bank handles overdraft fees — will it waive it if your account is in good standing, will it charge you a fee and process the payment, or will it reject the transaction totally and assess you a fee?

Plenty of banks also offer options such as overdraft protection. Typically, this means if you’re at risk of having a negative bank balance, they will transfer the overdrawn amount from a linked savings account to your checking account automatically, without any charges. Still, you’ll probably want to set an alert so you’re notified when your checking account reaches a certain balance or hits zero. That way, you can quickly remedy the situation.

💡 Quick Tip: Bank fees eat away at your hard-earned money. To protect your cash, open a checking account with no account fees online — and earn up to 0.50% APY, too.

4. Automate Deposits and Payments

Automation can make your life so much easier. Letting technology assist you with your banking can help you keep on top of tasks such as depositing your paycheck, paying bills, or meeting savings goals.

•   In terms of how to manage a bank account, direct deposit is a great way for your employer to deposit paychecks automatically. In some cases, banks will even give you early paycheck access.

•   Your bank may have automatic bill payment or transfer tools as well. Consider using these for recurring payments to be made automatically, such as ones for subscription services, auto loans, or your mortgage payments. Doing so can prevent missed payments and may be able to help build your credit score.

•   Also, automatically transferring a certain amount each month into a separate account can help you reach your short- and long-term savings goals.

5. Embrace Potential Earnings

Sure, having a nice big cushion of cash in your checking account can make you feel flush. However, keeping excess cash in your checking account could mean you’re losing out on the opportunity to get more out of your funds. Specifically, that money could be earning you more money. As you balance your bank account, you may find there are better ways to make your money work for you.

For instance, there are plenty of ways to earn interest even if you want your cash to remain more liquid. For instance, high-yield savings accounts linked to your checking account can earn you a bit of extra cash while still being very accessible.

6. Take Advantage of Checking Account Perks

To remain competitive, many banks are starting to offer additional perks with their checking account such as:

•   Identity theft protection and assistance

•   Discounts at shopping and dining retailers

•   Extended warranties on purchases

•   Buyer’s protection

•   Health savings cards

•   Cash back on qualifying debit card purchases.

When shopping around for a checking account, consider your financial habits. If you shop frequently at certain retailers, it may be worth taking advantage of an account that offers discounts. Or if you use the ATM frequently, looking for a checking account that reimburses you for third-party ATM fees may be a smart choice.

7. Consider Consolidating

Do you have multiple checking accounts? It’s not uncommon for people to have, say, their main checking account, one that they opened to get some reward or perk, and the one that their parents opened with them in high school. If you can relate, you might benefit from simplifying your finances and consolidating all of them into one main checking account.

That way, all you have to do is log into a single checking account and monitor your finances. Why overwhelm yourself with many accounts to check on and keep track of?

The Takeaway

Managing your checking account is an important path to staying on top of your finances. It will help you keep on your budget, avoid unnecessary fees, and reach your financial goals. Plus, with all the tech tools and alerts available today and the rewards being offered, it can be faster and more profitable than ever.

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

Why is it important to manage your checking account?

It’s important to manage your checking account so that you can see where your money is coming from and going to. It can help you understand how you can budget better, reach your savings goals, and even detect fraud.

How often should you manage your checking account?

For many people, checking their bank account once or twice a week works well. You can also take actions like establishing alerts when your account balance falls below a certain threshold or setting up automatic transfers for recurring payments to help save you time.

How should you keep track of what’s in your checking account?

The usual ways to keep track of what’s in your checking account are to use your bank’s app, check your balance online, call customer service, or use an ATM to see how your money is tracking.

Photo credit: iStock/jroballo

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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How Much Money Is Needed to Start a Bank Account?

How Much Money Do You Need to Open a Bank Account?

By | Budgeting & Goals, Financial Independence, money | Comments Off on How Much Money Do You Need to Open a Bank Account?

Opening a checking and savings account, whether at an online bank, a brick-and-mortar one, or a credit union, can be a major step towards good money management. With an account set up, you’ll likely be able to receive your paycheck as a direct deposit, swipe a debit card to pay for purchases, and access tools to help you save towards some short-term goals.

But you may worry that you need a chunk of change to open an account. The truth is, though, that you may be able to start an account with zero cash deposited.

While each bank can set its own minimum deposits, some will let you open an account with a single dollar or even no money at all. Or you might encounter certain financial institutions or account types that require $100, $500, or more. You might even find that the account with the higher deposit minimum is the better fit for you.

To better understand minimum deposit and minimum balance requirements, read on.

Key Points

•   Opening a bank account can be a significant step towards effective money management.

•   Some banks allow opening an account with as little as $1 or even no money at all.

•   Online banks often have lower or no minimum deposit requirements due to the absence of physical branches.

•   Traditional brick-and-mortar banks might require a minimum deposit of $25 or more to open an account.

•   Credit unions typically offer minimum opening deposits ranging from zero to $25.

What Is a Minimum Initial Deposit?

A minimum initial deposit is the amount of money that a financial institution requires you to deposit in order to open an account. In some cases, this can be as little as $1 or even nothing at all; in other cases, it could be $100 or considerably higher.

Requirements for Opening a Checking Account

The requirements for opening a checking account can vary from bank to bank. If you’re interested in how to open a bank account online or in person, you’ll typically need to provide these things to get started:

•   Your name

•   Date of birth

•   Address

•   Phone number and email

•   Social Security number

•   Government-issued photo ID.

If you’re opening a bank account with someone else, a.k.a. a joint account, you’ll need the same information for them. And if you’re a student opening a student account, you may need to bring proof of enrollment at a qualifying school.

You may well be wondering, “Do I need money to open a bank account?” Possibly, but it may not be a significant sum. Banks can require an initial deposit to open your account. Here’s how to get the cash into a new account:

•   If you’re funding your new account online, you’ll need to give the new bank the routing number and account number for where the money will be coming from.

•   If you are at a bricks and mortar bank or credit union, you might use a check to make an initial deposit.

Bank Minimum Initial Deposit vs. Minimum Balance Requirement

When thinking about how much money you need to start a bank account, it’s important to understand the difference between your initial deposit and your ongoing balance requirement. If a deposit requirement is in place, that is separate from the minimum balance requirement that you may also need to meet to avoid a monthly service fee.

For example, you might need to deposit $100 to open your account. However, in order to avoid a $10 monthly maintenance fee, you may need to keep an average daily balance of $500 there.

A free checking account that doesn’t charge a monthly fee may not have a minimum balance requirement. Check with the bank up front so you are familiar with the terms and aren’t surprised by any fees being deducted.

How Much Does It Cost to Open a Bank Account?

Let’s get down to the dollars and cents of this topic: How much money do you need to open a bank account?

Minimum Opening Deposit for Online Banks

When opening an online bank account, it’s typical to have low or $0 minimum initial deposits for a checking account. Because online banks don’t have to pay for physical locations, they typically are able to pass the savings along to their clients with lower or no minimum deposit requirements.

They may also offer other perks like an annual percentage yield (or APY) on a checking account or a higher APY than elsewhere on savings accounts.

Minimum Opening Deposit for Brick-and-Mortar Banks

If you were to open a bank account at a traditional bank (also known as a brick-and-mortar bank), on the other hand, you might need $25 or more for the initial deposit. And if you have two checking accounts at the same bank, it’s possible you might have to meet different initial deposits for each one.

Jumbo or premium accounts, which may be interest-bearing checking accounts and offer rewards, can also set the bar higher for how much money is required to get started. For example, a jumbo checking account might pay interest on balances of $1,000, $10,000, or more so you would need at least that much to open one.

Minimum Opening Deposit for Credit Unions

How much money do you need to open a checking account at a credit union? If you prefer to open a checking account at a credit union vs. a bank, you will likely find minimum opening deposits that range from zero to $25.

Get up to $300 when you bank with SoFi.

No account or overdraft fees. No minimum balance.

Up to 4.20% APY on savings balances.

Up to 2-day-early paycheck.

Up to $2M of additional
FDIC insurance.


Can You Open a Bank Account With No Money?

You can probably open a bank account with no money. As mentioned above, you are most likely to find this kind of checking account offered at an online bank vs. a traditional bank.

Before you open this kind of account, though, it can be wise to make sure you understand the terms of the account, including the fine print. Factors to consider include what, if any, fees will be assessed, what balance you may need to maintain, and how and when you need to fund the account.

Recommended: What to Know If You’ve Been Denied a Checking Account

Difference Between Checking & Savings

Checking accounts and savings accounts are both types of deposit accounts. You can find them at online banks, brick-and-mortar banks, and credit unions. But in terms of what they’re designed to do and how they work, they aren’t identical. Here’s a closer look at checking vs. savings accounts.

Checking

Savings

What it’s used forHolding money that you plan to spend or use to pay billsHolding money that you plan to save toward one or more financial goals
Limits on withdrawalsThe number of transactions allowed may be unlimited, though banks can impose caps on how much you can spend/withdraw daily, weekly or monthlyBanks can limit you to six withdrawal transactions per month
Earns interestTypically no (or less than a savings account)Typically yes
Debit card/checksIncluded with most checking accountsTypically not offered with savings accounts

Tips for Opening a Bank Account

Perhaps you have in mind the kind of account you’d like to open or the financial institution that seems to be the best match with your needs. Here’s advice on moving ahead with opening an account.

Helpful Tips for Putting Money Into a Checking Account

Congratulations if you’ve just opened a checking account. Consider taking these steps:

•   Once your checking account is open, you can continue adding money to it. You may be able to make deposits from your mobile device, at the teller window or at ATMs. Setting up direct deposit can be a good move, too: It means you don’t have to worry about manually depositing checks.

•   Determine how much you should keep in your checking account. If your account has a minimum balance requirement to avoid a fee, then you’d need to keep at least that amount in checking, plus a little extra if you want a cash cushion.

If there’s no minimum balance requirement to meet, then you’d still want to keep enough in checking to avoid triggering overdraft fees. Those can hurt! So a rule of thumb you might use is to keep two months’ worth of expenses in the account. That can make it less likely that you’ll run into overdrafts.

•   Wondering how often should you monitor your checking account? It can be a good idea to log in to your online banking or mobile banking at least once a week. If you sign up for convenient automatic payments of bills, such as utilities, that can make it challenging to remember how much money is flowing in and out of your account, and when. You could check your bank accounts daily if you want to keep a closer eye on your transaction history and balances.

•   Consider linking accounts. You might want to link a savings account to your checking account as a backup payment source. If your checking account balance gets low, this can help you avoid bouncing checks or incurring some fees.

Helpful Tips for Putting Money Into a Savings Account

If it’s a savings account that you’ve opened, consider this advice:

•   You may want to earmark a portion of your direct deposit paycheck to go into a savings account to effortlessly build up your cash reserves there.

•   Another way to fund your savings (such as an emergency fund) is to set up automatic transfers from your checking account the day after payday. This can whisk money out of your checking account before you are tempted to spend it.

•   Shop around for the best possible APY. Interest rates are climbing, and you may be able to snag a great deal. Online savings accounts typically pay more than those at brick-and-mortar banks.

The Takeaway

Checking and savings accounts can make your financial life easier, and you may be able to open an account with very little in terms of an initial deposit, even no money at all. When choosing a banking option, it’s important to consider the fees you might pay, the interest you could earn, and any minimum deposit or minimum balance requirements. Whenever possible, you want your bank to pay for the privilege of holding your money, not vice versa.

SoFi: Making Banking Better

If you’re interested in hassle-free online banking, consider opening a SoFi Checking and Savings account. You’ll earn a competitive APY, pay no account fees, receive a debit card with cashback rewards, and have access to a suite of financial tools that can help your savings grow.

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 is needed to open a checking account?

The amount of money needed to open a checking account can vary by bank. At some banks, it may be as low as $1 or even $0; at others, you might need to deposit $25, $50, or more to get started.

Can I open a checking account with no money?

It’s possible to open a checking account with no money if your bank allows you to fund your account later. For example, you may be able to open a bank account online with no money, connect an external bank account, then fund your new account with an initial deposit later.

Can I open a bank account by myself?

You can open a bank account by yourself if you’re 18 or older and have the documentation the bank requires, which can include a government ID and proof of address. If you’re under 18, you’ll generally need a parent or legal guardian to help you open a bank account.

Photo credit: iStock/michellegibson

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

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

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

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

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

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

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

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

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2024
How Do Savings Accounts Work_780x440: Read on to learn about the different types of savings accounts and how they might come into play in a person’s overall financial plan.

What Is A Savings Account And How Does It Work?

By | Budgeting & Goals, Financial Independence, money | Comments Off on What Is A Savings Account And How Does It Work?

Typically, a savings account is a safe, insured place to sock away your cash and earn some interest. You usually don’t use this money for spending, as you do with a savings account, nor is it necessarily the growth vehicle of investments, which also brings risk.

A savings account can be a good place to store funds for future goals. This could mean a short-term goal, like saving for holiday gifts or a beach rental next summer. You might also use a savings account for longer-term goals, like the down payment on a house.

Key Points

•   Savings accounts are secure, interest-bearing deposits where money is stored for future use.

•   They differ from checking accounts by typically restricting withdrawals and offering interest on deposits.

•   Various types of savings accounts include traditional, high-yield, and online, each offering different benefits.

•   Factors to consider when choosing a savings account include interest rates, fees, and transaction limits.

•   Savings accounts are insured by the FDIC, ensuring safety even if a bank fails.

What Is a Savings Account?

Savings accounts can be a great way to diversify a financial strategy. A person might not want to put all their money into a savings account, but a savings account can complement their larger financial plan.

Compared to investments, savings accounts can be a safer spot to put cash away for short-term savings. And, savings accounts typically earn more than checking accounts.

Savings accounts set themselves apart because:

•   They earn interest. Unlike many checking accounts, savings accounts are interest-bearing — that means the bank will pay an annual percentage yield (APY), based on the money in the account.

•   They’re insured. The money in a savings account is insured by the FDIC (Federal Deposit Insurance Corporation). The FDIC was established in 1933 after the stock market crashed. When an account is insured, it guarantees that the customer will be able to get their money even in the rare event that a bank goes out of business. Savings accounts in FDIC-insured institutions are generally a safe place to keep cash.

Savings vs. Checking Account

Are you wondering what the difference is between a savings vs. a checking account?

•   A checking account is designed to be the hub of your financial life, with money flowing in and out.

•   Typically, you will earn no or low interest with checking accounts, but you will not face transaction limits.

•   With a savings account, money typically stays in the bank (or most of it). Since the bank can then use some of it to meet other business needs (such as loans to other clients), it pays you interest for the privilege of using some of your money in this way.

•   Savings accounts typically do pay interest, though it will vary depending on the kind of account and perhaps how much you have on deposit.

•   With a savings account, you may be limited to six outgoing transactions per month, depending on the financial institution. If you go over that number, you may be charged, have your account switched to a checking account, or even have your account closed.

Earn up to 4.20% APY with a high-yield savings account from SoFi.

No account or monthly fees. No minimum balance.

9x the national average savings account rate.

Up to $2M of additional FDIC insurance.

Sort savings into Vaults, auto save with Roundups.


How Does a Savings Account Work?

If you’re wondering, “How do savings accounts work?” know this: They usually work by you depositing funds into a savings account. The bank, as mentioned above, expects you to keep the funds there, where they can use some of the money to make, say, loans to others.

For the privilege to use your money in this way, the bank pays you interest. So, as your money sits there, it is growing. This can help you reach your financial goals sooner.

💡 Quick Tip: Typically, checking accounts don’t earn interest. However, some accounts do, and online banks are more likely than brick-and-mortar banks to offer you the best rates.

How to Use a Savings Account

Generally, a savings account is used for short-term savings goals, like an upcoming vacation or large purchase. This type of account is generally used to save or plan for expenses that don’t come up on a daily basis.

If you have multiple short-term savings goals, you might choose to open multiple savings accounts. You don’t have to open up an account for every goal, but keeping separate savings accounts could make budgeting easier. Watching balances grow could be an excellent motivator to keep saving.

On the other hand, financial minimalists might be overwhelmed by juggling multiple account numbers and balances. In that case, having more than one savings account might cause more confusion than clarity. The important thing is knowing how much you are saving and where.

Some specific reasons a person might open a savings account (or two):

•   An emergency fund. Emergencies crop up when least expected. That means the money always needs to be liquid and available. A savings account can be a good place to build and keep an emergency fund.

•   Short-term saving goals. Many things could fall under this umbrella, including upcoming travel, saving for a downpayment on a home, or putting aside funds to purchase a car. A savings account can be a good place for savings goals you hope to accomplish within the next few months or a year.

These are just a couple of the ways someone could use a savings account when it comes to personal finance.

There’s no one right way to use a savings account, and, depending on a person’s preference and goals, they might keep one or multiple savings accounts.

How Much to Keep in a Savings Account

How much to keep in a savings account will vary depending on a variety of factors, which may include your income level, your expenses and cost of living, and your financial goals.

For starters, experts advise having the equivalent of three to six months’ worth of basic living expenses in an emergency fund, as noted above. This can be a valuable cushion if you have unexpected bills or a job loss.

Otherwise, financial experts typically advise that you save 20% of your pay. Some of this might go towards investments and some might go into a savings account (or a couple of them) at the bank. It’s a personal decision.

Pros of a Savings Account

Savings accounts yield lots of benefits for their users. Account benefits vary by financial institution, so customers might want to check the fine print for rates and details.

•   Earned interest. How does interest on a savings account work? As money sits in a bank account, it makes more money. The bank pays you a rate because your money provides a service to the bank. In a nutshell, customers open a savings account and deposit cash there, earning some interest. The bank takes that cash and loans it out to other customers at a higher interest rate. But don’t worry, savings account holders can access their savings at any time.

•   Easy access. A savings account is typically more liquid than an investment account, making it a good candidate for short-term savings goals, since account owners can easily and quickly access their money. Typically, a customer can transfer the funds online with the click of a few buttons.

•   Low risk. Since savings accounts are liquid and easy to get to, they’re generally regarded as low risk. Savings accounts don’t have the risk associated with investing. If a person is saving up for a big purchase in the next year or two, they might want to consider keeping the money in a savings account, where they can access it easily without the concern of market volatility.

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

Cons of a Savings Account

While savings accounts have their fair share of benefits, they also have a few drawbacks. Depending on a person’s needs and savings goals, these accounts might not always be the best fit. Here are a few things to keep in mind while mulling over where to deposit extra cash:

•   They might require a minimum balance. Some savings accounts require a minimum balance, depending on the financial institution. That means the account can’t fall below a certain amount. If it does, there could be a fee or extra charges headed the account holder’s way.

•   Limited transactions. With the benefit of higher-than-average interest comes the drawback of potentially limited savings account withdrawals, deposits, and transfers. The Federal Reserve lifted its rule that banks must penalize members who make more than six transactions per month from their savings accounts in 2020. However, banks can still penalize you (with fees) if they want to. It’s a good idea to ask your bank about its policy before making more than six transactions in a month.

•   Setup fees. Depending on the financial institution and type of account, there could be fees associated with opening a savings account. This varies by institution.

•   No tax advantage. If you are thinking about saving for your future, you might get tax breaks with a different kind of retirement vehicle, such as a 401(k) or an IRA.

Types of Savings Accounts

While they follow the same general rules, not all savings accounts are built the same. What follows are some different types of savings accounts you’ll likely find available.

1. Traditional Savings

Consider this a beginner’s savings account. A traditional savings account is offered by most financial institutions, and typically comes tied directly to a checking account. A traditional savings account typically will have a low-interest rate compared to other savings accounts.

2. High-Yield Savings

As the name suggests, a high-yield savings account will have a higher yield than a traditional savings account. The higher APY may come with caveats that vary by bank, such as requiring a large initial deposit and/or monthly balance. The bank might also be more likely to limit transactions to six per month.

3. Online Savings

Online-only banks don’t have to support expensive brick-and-mortar branches, which can enable them to offer annual APYs that are higher than traditional savings accounts. These online savings accounts also tend to have low initial deposit requirements and typically don’t charge monthly maintenance fees.

Alternatives to Savings Accounts

There are other short-term savings options that don’t involve investment risk. Here are a few alternatives.

Certificate of Deposit (CD)

A certificate of deposit (CD) is similar to a high-yield savings account when it comes to interest rates. However, when a person sets up a CD, they have to commit to keeping it there for a certain amount of time, and early withdrawal can lead to penalties. As a general rule of thumb, the longer the length of the CD, the better the interest rate.

Money Market Deposit Account (MMDA)


A money market deposit account (MMDA) is often similar to a high-yield savings account, but account holders typically need to meet requirements and adhere to the transaction limits to see the benefits. These may include a minimum balance, and a limited number of transactions per month (including deposits, withdrawals, and transfers).

Cash Management Account

A cash management account (CMA) functions as both a spending and a savings account and often offers a higher interest rate than a traditional savings account. With many CMAs, account holders can write checks, pay bills, transfer funds, and make deposits. CMAs are offered by both brick-and-mortar and online financial institutions.

What to Consider When Choosing a Savings Account

When choosing a savings account, consider the following factors:

•   Interest rates: There is considerable variation, and your money might earn a fraction of a percent or several percentage points. It can be wise to shop around for the highest rates.

•   Fees. Some financial institutions may hit you with fees, such as monthly account maintenance fees. Ask in advance before signing up.

•   Minimum opening deposit and balance requirements. These can stipulate that you put and then keep a certain amount of money in the account. Make sure you are aware of the guidelines and can adhere to them.

•   Transaction limits. As discussed above, some banks place limits on the number of times you can pull money out of your savings account. Know whether your account would have penalties if you exceed the number.

•   Accessibility. You want to be sure you can reach your bank and your money when you need to. Depending on your banking and lifestyle, this could mean a local vs. a national bank, or an online bank vs. a traditional one.

Opening a Savings Account

A savings account is a bank account that lets you store your money securely typically while earning interest.
Using a savings account separates money you intend to use at a later date, say for a large purchase or upcoming event, from everyday spending money that is kept in your checking account.

High-yield savings accounts and online savings accounts often offer higher interest than traditional savings accounts.

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 exactly does a savings account work?

A savings account is typically a secure, insured way of keeping your money and earning interest.

Can you withdraw money from a savings account?

Yes, you can likely withdraw money from a savings account. Check with your financial institution if they have a monthly limit regarding the number of withdrawals or whether there are fees if your balance falls under a certain amount.

Is a savings account worth it?

For many people, a savings account is a worthwhile financial product. It keeps your money secure and pays some interest as you save towards goals, whether that’s an emergency fund or a travel fund.

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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