Financial Topics Archives | Page 29 of 791

Q: What Is a Call Option?

A call option is a contract that allows an investor to buy 100 shares of an underlying stock or other security at a prearranged price (known as the “strike price”). A call option can be appealing because it gives an investor a way of profiting from a stock’s increase in price without having to pay for the full price of 100 shares. What one pays is known as the “premium” on each share, which is typically much less than the current price of the stock.

Q: What Is a Put Option?

There’s a key difference in call vs put options: If call options are a way to profit from a stock going up in price without having to own the stock itself, than put options are a way to profit from the fall of a stock’s price without having to short the stock (i.e. borrow the shares and then buy them back at a lower price). Of course, in cases where an investor sells their option, the opposite is true: they would benefit from the opposite movement of the stocks.

Oct

2024

Call vs Put Option: The Differences

By Matthew Zeitlin | Growing Wealth, invest, Investing | Comments Off

Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.

While most investors are familiar with buying and selling shares of stock directly, investing in options is another way to put money behind stock price movements.

Options are a type of derivative contract that allows the investor to buy (or sell) a stock, or some other asset, at a certain price within a specific time period. The two basic types of options are known as “puts” and “calls.”

Options trading is a popular strategy for day traders, because it offers the potential to make profits within a shorter time frame, as opposed to owning shares of stock outright, and waiting for the price to move in the desired direction. Options trading can potentially generate returns, but it can also amplify losses, making it a risky strategy.

Key Points

• Buying a call option gives an investor the right, but not the obligation, to buy shares of an underlying asset at a specific price and by a specific date, to potentially profit from a price increase.

• Buying a put option gives an investor the right, but not the obligation, to sell shares of an underlying asset at a specific price and by a specific date, to potentially profit from a price decrease.

• The buyer of a call or put option must pay the seller a premium for the options contract, assessed per share.

• The price at which an option can be exercised, as specified in the option contract, is called the strike price.

• Options trading involves risks, including potentially substantial losses.

Overview: What Are Options?

In options trading, an option contract is a derivative instrument that’s based on an underlying asset: e.g., stocks, bonds, commodities, or other securities. Thus, the buyer of an options contract doesn’t purchase the asset directly, but a contract with an option to buy or sell that security. For example, with stocks, also called equity options, one contract represents 100 shares.

Options come in two flavors, as noted above: calls and puts. For the sake of simplicity, this article will refer primarily to stock or equity options.

Options Buyers vs. Options Sellers

An options buyer, also called the holder, has the right, but not the obligation, to buy or sell the underlying asset at the agreed-upon price (the strike price) by a specific date (the expiration). Buyers pay a premium for each option contract, which is assessed per share. If there is a $1 premium per share, at 100 shares, the total cost of the option is $100.

The potential upside for an options buyer could be unlimited, depending on their strategy. And since an options buyer is not obligated to exercise their option — meaning to actually buy or sell the underlying stock at the price agreed to in the option contract — the most they stand to lose is the premium paid for the option.

An options seller, also called the options writer, is on the other side of the trade. In this case, if the options holder exercises the contract, the option seller has an obligation to buy or sell the underlying asset at the strike price.

The potential upside for an options seller is the option’s premium. Their potential downside depends on whether they’re selling a put option or a call option. More on this below.

Trading options requires familiarity with options terminology, since these strategies can be complex and come with the potential risk of steep losses, depending on the strategy.

💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.

Finally, user-friendly options trading is here.*

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

*Check out the
OCC Options Disclosure Document.

What Is a Call Option?

When purchased, a call option gives the options buyer the right, but not the obligation, to buy 100 shares of the underlying asset at the strike price, by the expiration of the contract.

Buying a call option can be appealing because it gives a buyer a way of profiting from a stock’s increase in price without having to pay what could be the current market price for 100 shares.

If the price of the underlying asset rises above the strike price, then the buyer may choose to exercise their option, paying less than what it’s worth on the market and potentially selling shares for a profit.

For a call option buyer, the profit is determined by the premium they pay and if, and by how much, the price of the security rises above the option’s strike price before it expires. The maximum potential upside is unlimited since, theoretically, the price of the underlying asset could continue to rise. The maximum potential downside is limited to the premium paid for the option.

Conversely, the seller, or writer, of the call option has the obligation to sell the underlying shares to the buyer, if the buyer exercises the option. The seller’s maximum potential gain is limited to the option’s premium. Their potential downside is unlimited, since they must sell shares at the option’s lower strike price, no matter how high the market price has risen.

Example of Buying a Call Option

If an investor buys an option with a strike price of $50 for a stock that’s currently worth $40, the option will be “out-of-the-money” until the stock rises to $50. If the premium is $1/share — meaning they only pay $1 up front — then the investor will only be risking $100, not $4,000.

If the stock is trading at $55 on or before the expiration date, it would make sense to “exercise” the option and buy the stock for $50, thus giving the investor shares with built-in profit thanks to the difference between the strike price of $50 and the value of $55. In this case the profit would be $4/ per share (or $400), minus the premium paid: a strike price of $50 gives the investor the right to buy 100 shares of a stock worth $55, with a premium of $1 per share.

On the other hand, if the stock has not risen enough in price, the investor can just let the option expire, having only lost the price of the premium, rather than being saddled with shares they can’t profit from.

Recommended: A Beginner’s Guide to Options Trading

What Is a Put Option?

A put option gives the investor buying the contract the right, but not the obligation, to sell the underlying security at the agreed-upon strike price, by the expiration date of the option.

If buying call options are a way to profit when the price of a stock or other underlying asset moves in the right direction, buying put options can be a way to profit from the fall of a stock’s price, without having to short the stock (i.e. borrow the shares and then buy them back at a lower price).

Purchasing a put option contract gives its buyer the right, but not the obligation, to sell shares at a certain price, at or by a specified time in the future. The key difference between buying a put vs. a call option is that the put option becomes increasingly valuable as the price of the underlying asset decreases. A put option buyer is hoping they can sell the underlying asset at a strike price that’s higher than the market price.

For the put option buyer, the maximum potential upside is the difference between the option’s higher strike price and the price at which the option is exercised (minus the premium), while the maximum potential downside is limited to the premium paid.

Again, the put option seller is on the other side of the trade, and is obligated to buy the shares from the put buyer, if the buyer decides to exercise the put option. The put option seller’s maximum upside is the option’s premium. Their potential downside extends to the difference between the option’s higher strike price and the lower market price at the time the option is exercised.

Example of Buying a Put Option

As an example, let’s say a stock is worth $50 today. If an investor thought the stock’s value could go down, they might buy a put option with a strike price of $40. Let’s say the premium for the option is $1, and they buy a contract that gives them the right to sell 100 shares at $40. The premium, then, is $100.

At the time the investor buys the put option, it’s out-of-the-money. If the price remains above $40 until it expires, the investor will not be able to exercise the option and they will lose the premium.

But if the stock has dropped from, say, $50 to $35, the option is in-the-money and if they were to exercise the option, they’d profit from being able to sell shares for $40 that are worth $35, pocketing $5 per share or $500, minus the $100 premium, leaving them with $400, minus any brokerage fees.

Risks of Options Trading

Option trading can be a useful way to manage risks in a volatile market and potentially profit from movements in stocks one doesn’t own. Again, an investor buying options only stands to lose the premium they pay for an options contract, though the cost of premiums can accrue if purchasing multiple options contracts over time.

However, an investor selling call options or put options, who is obligated to either buy or sell an option’s underlying assets per the terms of the options contract, could potentially see substantial losses. This is especially true if they don’t understand the potential downside to the trades they’re executing.

The Takeaway

Option trades may appeal to individual investors because they offer a way to potentially see a gain from movements in a stock price, without having to own the underlying shares. If an investor isn’t able to exercise the call or put option they purchased, they’ll lose the premium they paid for that contract. However, selling a call or put option can be high risk, potentially leading to significant losses.

Investors who are ready to try their hand at options trading despite the risks involved, might consider checking out SoFi’s options trading platform. The platform’s user-friendly design allows investors to buy put and call options through the mobile app or web platform, and get important metrics like breakeven percentage, maximum profit/loss, and more with the click of a button. Currently, investors can not sell options on SoFi Invest®.

Plus, SoFi offers educational resources — including a step-by-step in-app guide — to help you learn more about options trading. Trading options involves high-risk strategies, and should be undertaken by experienced investors.

Explore user-friendly options trading with SoFi.

SoFi Invest®

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

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

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Oct

2024

What Is an Online Savings Account and How Does It Work?

By Jacqueline DeMarco | Budgeting & Goals, Financial Independence, money | Comments Off

Savings accounts at online-only banks — often referred to simply as online savings accounts — function similarly to traditional savings accounts, except you will manage your account entirely online or by app. Not only can these savings accounts be one-click convenient, they may offer you a healthier interest rate than accounts held at a brick-and-mortar bank.

If you’re trying to decide whether an online savings account or traditional savings account would suit you best, here are the details you need.

Key Points

• Online savings accounts are managed digitally, and often provide higher interest rates and lower fees than traditional banks with brick-and-mortar locations.

• Online savings accounts typically provide 24/7 access and a broad range of online banking tools; however, they lack in-person interactions and may not offer as many banking services or products.

• To deposit money into or withdraw it from an online savings account, a customer may use an ATM in the bank’s ATM network, sign up for direct deposit, transfer funds between accounts, use a check, or complete a wire transfer.

• While cash deposits are not possible at every online bank, some banks enable customers to make deposits at ATMs in their ATM network or at certain retailers.

• Opening an online savings account typically involves filling out an online application, choosing an account type, designating beneficiaries, making an initial deposit, and creating an account login.

What Is an Online Savings Account?

An online savings account functions similarly to one offered by a traditional bank, except you manage your banking needs digitally. With an online savings account, you won’t have the option of walking into a bank when you need support, but you will be able to quickly click your way ahead and complete most transactions.

Many traditional banks also typically offer online banking, and this feature tends to be widely used by members across different types of banks. According to SoFi’s April 2024 Banking Survey of the bank usage of 500 U.S. adults, 48% of people reported they use online banking daily.

Since the principle is that your money will sit and grow in these accounts, rather than flow in and out constantly, banks pay you interest on these funds. They get to use your money, and they give you interest in return for that privilege. As your cash grows in the account, you can achieve different goals, such as building up an emergency fund, saving for a vacation, or getting a down payment together for a house. SoFi’s survey found that 77% of respondents with a savings account use it to save for emergencies, and 52% use it to save for a goal like a vacation or a house.

Of the percentage using a savings account to save for a goal, the survey showed that they are saving for different things:

• 40% are saving equally for long-term and short-term goals

• 35% are saving primarily for short-term goals like a vacation or for holiday spending

• 26% are saving primarily for long-term goals like a house or a child’s education

How Does an Online Savings Account Work?

You start an online savings account with an opening deposit, and then you’re ready to start saving. With an online savings account, you can manage your savings from anywhere in the world at any time of day. While there are plenty of banks and credit unions that have online account management services, purely online savings accounts often come with unique perks. For example, online banks usually don’t have a minimum balance requirement like traditional banks do. They often pay a higher interest rate, too.

You can transfer funds in and out as needed, as with any savings account. Typically, savings accounts had only allowed six or fewer transfers per month. Initiate more than that, and you might have to pay a fee. However, many banks have stopped following this guideline in recent years. Check with your bank to know the details.

It’s also worth mentioning that with an online account, you won’t be able to deposit or withdraw cash from your account by strolling into a branch. There aren’t physical banking locations to visit. You’ll need to transfer funds in and out electronically, or you may be able to use ATMs. There’s a silver lining, though. In exchange for not having to pay for the overhead that comes with running an in-person bank, online banks often offer lower fees and higher interest rates.

Depositing Funds Into an Online Savings Account

As mentioned above, it’s not possible to deposit cash into an online savings account by visiting a branch. Instead, you can deposit money in the following ways:

• Transfer money from a linked account into your online savings account. (If you’re really committed to saving, you may want to automate recurring transfers). SoFi’s survey found that 63% of people said they frequently transfer funds between accounts using online banking.

• Use a check; this deposit can be done by mobile deposit, which 43% of respondents in SoFi’s survey said they do frequently, or by mail.

• Complete a wire transfer into your online savings account.

• Set up direct deposit of funds (say, your paycheck or other benefits) to go into the account.

Withdrawing Money From an Online Savings Account

Next, consider withdrawing and spending money from a savings account. When you have an online savings account, here are your options:

• Transfer funds into another account (say, one held at a traditional bank), and then take out cash in person.

• Use an ATM. Some online banks allow you to link your savings to a debit card, which makes this possible.

• Initiate a wire transfer.

• Put in a check request.

• Digitally send money to other people (say, by a P2P transfer) so you don’t need to take out cash.

Cash Deposits

Not all online banks enable you to deposit cash, as they have no physical banking locations of their own. However, many online banks allow you to deposit cash at participating retail locations, typically for a fee. Some may also have options for depositing cash at select in-network ATMs. See above for some of the other ways you can move your funds around so your cash gets where you want it to go.

Benefits of Using an Online Savings Account

Here are some of the key benefits you may enjoy with an online savings account.

• Higher interest rates and lower fees. This means your savings can likely grow faster. These higher interest rates are possible because the financial institution doesn’t have to pay for expensive brick-and-mortar banking locations.

• Manage accounts anywhere, anytime. It’s possible to do all of your basic savings account management whenever and wherever you like. The only requirement: a good, secure wifi connection.

• Helpful mobile banking apps. Plenty of traditional banks have mobile apps, but online banks tend to have high-tech apps with more features.

• More accessible customer service. You are likely to be able to get all of the banking support you need from the comfort of your own home or on the go. Online banks were built to be responsive in this way.

Disadvantages of Using an Online Savings Account

On the flip side, there are some disadvantages when you only bank online. Here are some of the cons of using an online savings account.

• No face-to-face interaction. With online savings accounts, you can’t go into a physical banking location, ask questions, or sit down with a bank representative. For those who like face-to-face interaction, this can be a disadvantage.

• Can lose account access. When a savings account is entirely online, you may lose account access temporarily in the rare event of the bank’s system going down.

• ATM access can be limited. Some online banks don’t have their own ATMs. They may try to provide greater access with some independent ATM networks or by reimbursing customers for ATM fees incurred when using out-of-network ATMs.

• Fewer financial services. Some online banks offer more limited product selections than larger traditional banks. If you’re looking to manage your savings account, loans, and other financial products in one place, you may find that an online savings account doesn’t meet your needs.

Pros of Online Savings Accounts	Cons of Online Savings Accounts
• Higher interest rates and lower fees • Ability to manage accounts anywhere, anytime • Helpful mobile banking apps • Accessible customer service options	• No face-to-face interaction • May lose account access temporarily • ATM access may be limited • Fewer financial services

Pros of Online Savings Accounts

Cons of Online Savings Accounts

• Higher interest rates and lower fees

• Ability to manage accounts anywhere, anytime

• Helpful mobile banking apps

• Accessible customer service options

• No face-to-face interaction

• May lose account access temporarily

• ATM access may be limited

• Fewer financial services

Opening an Online Savings Account

If you decide you want to open an online savings account, here are the steps you will likely take.

1. Fill out the application. This process typically happens entirely online. Generally, you will be expected to provide such information as your name, proof of address, Social Security number, and government-issued photo ID (say, a driver’s license or a passport).

2. Choose an account type. There may be an option to choose between different savings account types, such as an individual account or a joint account that you can share with a family member.

3. Designate beneficiaries. Next, you will need to choose a beneficiary to whom the savings account would go if you were to die.

4. Deposit funds. Some online banks won’t require a minimum initial deposit or will only request $1. Whatever the amount may be, you will need to make that minimum deposit. (There’s no typical online savings account minimum balance to maintain, by the way. Check with banks to understand their particular guidelines.)

5. Create login information. All online savings accounts will need a username and password. It’s important to make the password a secure one that includes one or more capital letters, numerals, and symbols. Also, it bears repeating: Don’t reuse passwords. Unique passwords will help keep you secure from hackers. This is a big issue if you are wondering whether or not online savings accounts are safe.

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

Online Savings vs Traditional Savings: Which Is Best for You?

There are both advantages and disadvantages to consider when choosing between an online savings account and a traditional savings account. Being aware of the unique advantages and disadvantages of each can make it easier to find the right fit.

Online Savings	Traditional Savings
• May offer better rates and low or no fees • Tend to have more robust digital tools and features • Offers the convenience of banking from just about anywhere, at any time • Potentially minimal ATM access in certain areas • May have fewer options for depositing and withdrawing cash • No face-to-face customer support	• Provide in-person banking locations • May provide broader ATM access • May offer a broad range of products • May have fewer online resources • May have lower interest rates and higher fees • May not provide perks that many online banks offer, such as sign-up bonuses

Online Savings

Traditional Savings

• May offer better rates and low or no fees

• Tend to have more robust digital tools and features

• Offers the convenience of banking from just about anywhere, at any time

• Potentially minimal ATM access in certain areas

• May have fewer options for depositing and withdrawing cash

• No face-to-face customer support

• Provide in-person banking locations

• May provide broader ATM access

• May offer a broad range of products

• May have fewer online resources

• May have lower interest rates and higher fees

• May not provide perks that many online banks offer, such as sign-up bonuses

The Takeaway

Online savings accounts vs. traditional ones can be more convenient, have more digital features, and offer lower fees and better interest rates. Traditional banks, however, may have more options for withdrawing and depositing funds, and they can be the right choice for people who like face-to-face interaction when it comes to their finances. Figuring out the right fit can depend on your money style and 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

How do I use an online savings account?

With access to a computer or a smartphone, you can access your online savings accounts from anywhere at any time simply by logging in.

What is the typical minimum balance for an online savings account?

That depends: Some online savings accounts have minimum balance requirements while others don’t. Check at the banks you are considering.

Is my money insured in an online savings account?

Your money should be safe in an online savings account, as long as the online savings account is insured by the FDIC. If so, your account is automatically insured for up to $250,000 per depositor, per account category, per insured institution.

What is the typical interest rate for an online savings account?

Interest rates vary over time and from bank to bank. Generally, online savings accounts offer higher interest rates than traditional savings accounts. High yield savings accounts at online banks may be 8x or more the national average rate for savings accounts.

How can online banks offer such good interest rates?

Because online banks don’t have the expensive overhead that comes with managing in-person banking locations, they can afford to pass their savings to their customers in the form of higher interest rates.

Photo credit: iStock/m-imagephotography

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
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SoFi members with direct deposit activity can earn 4.20% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

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

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

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

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

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

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

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

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

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Oct

2024

How Much Should I Have in Savings?

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

If you’re wondering how much you should have in savings, you may know that many financial experts feel three to six months’ worth of living expenses is vital. That said, you might also be curious if more cash in the bank may provide a greater sense of security and well-being.

Despite the saying that money can’t buy happiness, research indicates that having cash can indeed enhance one’s sense of well-being. A study conducted at the Wharton School of Management at the University of Pennsylvania found having more money does boost your positive feelings.

So with that in mind as well as your financial security, here’s a closer look at how much you should have in savings to get those good vibes going and give you a sense of security during uncertain times.

Key Points

• Financial experts generally recommend having at least three to six months’ worth of living expenses in savings.

• Savings recommendations vary by age, starting with $500 for young adults and increasing to six months of expenses for older adults, not including savings for long-term goals, such as retirement.

• Many Americans lack sufficient savings, according to a 2024 SoFi survey, with 45% having less than $500 in their emergency funds.

• Outside of savings accounts, you may consider putting your savings in retirement accounts and investment accounts — though higher risk, these options may help your money grow over time.

• Budgeting, tracking spending, and cutting unnecessary expenses may help you build savings more effectively.

Why Should I Have Savings?

You want to be financially savvy, right? Most people do. But a startling 12% of Americans have no savings, according to a recent YouGov survey. Another 13% say they have less than $100 and 14% indicate they have between $1,000 and $4,999.

A savings account helps you avoid going into more debt and prepare for unexpected emergencies. Imagine if your car had a major breakdown, or your cell phone was trampled on during a weekend outing. How would you afford the unpredictable repairs?

An emergency fund stocked with extra cash can help you avoid taking out personal loans or using a credit card to cover an unexpected expense. And while emergencies are never fun, it might help you feel a little bit better knowing that you’re prepared. In SoFi’s April 2024 Banking survey of 500 U.S. adults, 45% of respondents said they have less than $500 in an emergency fund.

How Much Money Should I Have in Savings?

If you don’t have much in savings, where exactly do you start? A general rule of thumb is to have three to six months of living expenses saved up, not including money you’re setting aside for long-term planning, such as retirement funds. But keep in mind that your living expenses may increase as you age, as you start growing your family, have mortgage payments, or are saving for retirement, so you might need more in a checking and savings account.

But that is still a good figure to aim for. Once you figure out your bare minimum monthly expenses and multiply it by three or six, you can calculate how much to aim for and get that sum saved.

It’s worth noting that some money experts say 10 times your monthly expenses may be a wiser amount of a cash cushion to stash away.

However, many Americans are not yet stashing away enough for emergencies, according to our survey data.

Amount in emergency savings	People who have saved that amount
Less than $500	45%
$500 to $1,000	16%
$1,000 to $5,000	19%
$5,000 to $10,000	9%
More $10,000	10%

Source: SoFi’s April 2024 Banking Survey of 500 U.S. adults

How Much Money Should I Have in Savings by Age?

Now, here’s a look at how much to sock away in savings based on your age.

18-24: At Least $500 in Savings

Being a college student or recent grad is expensive. It’s hard to keep up with tuition and rent. However, as a college student, you can try starting with $500 in emergency savings and working your way up.

A $500 emergency fund is a great place to start for young people whose expenses are typically less than older Americans. Even just saving $10 per week can help you reach your goal in about a year.

20s: 3-6 Months of Expenses in Savings

After graduation, you’re figuring out the real world for the first time. Most post-graduates are determining how to pay back student loans, and maintain new living expenses. It may help to break down your larger goal of three to six months’ worth of living expenses into first saving $1,000 in your emergency fund.

This can help you feasibly achieve your savings goal while preparing for most emergencies with a sum of cash on hand. You might want to try automating your savings and having a small amount transferred from your checking account on payday to build up your reserves.

30s: 6+ Months of Expenses in Savings

By the time you reach your thirties, ideally you’d have at least six months of expenses saved. At this point, you may even be questioning if you should invest more or continue to save. An easy way to determine how much you need to save is to create a budget of your basic living expenses. Twenty-three percent of people in SoFi’s survey report using budgeting tools offered by their bank.

How much do you need to survive in the case of job loss or a medical emergency? A savings account of at least six months of your usual expenses can help you feel safe enough to cover rent, utilities, and food while you get back on your feet.

40s: 6+ Months of Expenses in Savings

How would you survive if faced with a job loss? According to the Center on Budget and Policy Priorities, unemployment benefits vary state-to-state, but many states give up to 26 weeks in benefits.

However, the amount you receive might not be on par with what you are earning, so consider alternative safety nets. As an example, in New York, which can have a high cost of living, unemployment benefits may range from $100 to $500 a week.

When you’re in your 40s and 50s, replacing your income may prove to be more difficult as you search for positions with more work experience. If the government covers roughly six months of unemployment, then you’ll likely want to have at least that much and then some in your own savings.

50s: 6+ Months of Expenses in Savings

If you are in your 50s and wondering how much to have in savings, the answer again is at least six months’ worth of living expenses and ideally significantly more. For many people, this is their period of peak earnings. They may have multiple expenses as well, such as a mortgage, children’s education, and eldercare. Yet only 10% of people in SoFi’s Banking survey have more than $10,000 in their emergency savings.

Given these pressing concerns, you want to make sure you have a cushion if you were to face an emergency like job loss. What’s more, you don’t want to tap your retirement savings, which can trigger steep early-withdrawal penalties.

Where Should I Put My Savings?

If you’re building up an emergency fund, then placing your savings in an account that can be easily accessed, like a savings account, is probably ideal. That said, there are different options for putting your savings, depending on your goals.

Retirement Accounts

Putting your near-term or emergency savings into a 401(k) or mutual fund might not be the best place for this purpose because these accounts are not very liquid. In other words, you can’t easily access the money when you need it.

Plus, withdrawing early from accounts specifically set up for retirement may come with penalties and hefty fees if you are under the age of 59.5. In addition, these funds may not be insured, depending on the type of account.

That said, a retirement account is an important tool for long-term savings, since they may help grow your funds over time to help provide you with the money you’ll need later in life.

Investments

Investments can offer a place to grow your savings at a healthy rate of return over time. However, this money will not be insured, and you could face losses if the market drops. That could leave you vulnerable if you needed to access money at that moment. You might look into short-term vs. long-term investments to see how you may want to balance different types of savings plans.

Savings Account

A savings account can provide a secure place to store your savings. There are different kinds of savings accounts to consider, and you may find varying rates of return depending on the annual percentage yield (APY) offered and how often compounding occurs. For instance, there are high-yield savings accounts that offer higher APYs, which 23% of the SoFi survey respondents said they have.

When comparing traditional vs. online banks, you may find that the latter, since they don’t have brick-and-mortar locations, may offer better rates and lower fees.

Recommended: Use SoFi’s savings account interest calculator to see how much your money can grow over time.

Checking Account

While a checking account is a secure, typically FDIC-insured place to store your savings, it’s really designed to be more of a place for paying bills and for everyday needs. You likely won’t earn much interest. In SoFi’s survey, 88% of the respondents with bank accounts have checking accounts, while 71% have savings accounts.

Cash

While cash is perhaps the most liquid of ways to store your money, it can’t promise security. You could be robbed or could lose your money. That’s not what you want to happen to your nest egg!

This chart helps you compare the different places to put your savings.

Location of Savings	Rate of return	Insured
Retirement	Variable	Maybe
Investments	Variable	No
Savings	Low to moderate	Yes
Checking	No to low	Yes
Cash	None	No

How Much Does the Average American Have in Savings

While you’ve now read the advice to have three to six months’ worth of living expenses stashed away, many Americans are not hitting that goal.

According to the Federal Reserve’s Board Survey of Consumer Finances, here are the average savings:

• Under 35: $11,200

• Age 35-44: $27,900

• Age 45-54: $48,200

• Age 55-64: $57,800.

Building Up Savings More Quickly

Convinced you need more savings, and a traditional savings account just won’t cut it? Here are a couple of ways to help build up your savings faster than a savings account alone.

Selling Your Stuff

Take inventory of things in your garage or closet that you can sell. There are several buy/sell apps out there that can make it easier to sell your unwanted items, and many places where you can sell your stuff and recoup some money.

Any money you make off of your items can be thrown into your savings account. This method is a win-win because you get rid of things you aren’t using, and you can build up your savings without changing your spending habits.

Cutting Out Unnecessary Spending

Want to make significant strides with your savings habit? It might be time to look at your expenses and cut out unnecessary spending.

There are several things you could change, even if it’s just temporary. Replace your $100 per month gym membership by exercising with free, full-length workout videos online. Cut out your cable expense and go all-in with a cheaper Netflix subscription.

How a Budget Can Help You Save

Yes, the dreaded budget. Actually seeing how much you spend each month in a written budget can help you save. When you track your monthly income and expenses, you can quickly identify what areas of life are costing the most so you can make adjustments.

An online budgeting tool like SoFi’s can help you track your spending, which can help you see where you might be able to trim some fat from your expenses.

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 should a 30 year old have in savings?

How much money you should have in savings at age 30 will vary, but an individual should have at least three to six months’ worth of basic living expenses saved. Some financial advisors suggest that you should have the equivalent of one year’s salary (gross) saved.

How much does the average person have in savings?

Savings vary person to person, and with age. Currently, the average American under age 35 has approximately $11,200 saved.

Is $20000 a good amount of savings?

Whether $20000 is a good amount to have saved will depend on a few factors. If you are a single recent college grad, it could be a very good starting point for an emergency fund. However, if you have several dependents and are taking retirement savings into account, then you may consider strategies for increasing your savings.

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Oct

2024

Guide To How Much You Should Save From Each Paycheck

By Janet Siroto | Budgeting & Goals, money | Comments Off

Sure, you know you should be saving money, but, if you’re like many people, you’re not sure exactly how much to be stashing away. Some people put $100 per paycheck away and feel pretty proud of that; others will be able to set aside 10 times that amount. Still others will use a percentage, typically saving 10% to 30% of their salary.

In this guide, you’ll learn more about how much of your paycheck you should save. Many experts recommend 20% of your paycheck toward your total savings, which includes retirement, short-term savings, and any other savings goals. But exactly how much you should save each month, however, will depend on a number of factors, including your goals, current income, and living expenses.

Key Points

• Financial experts recommend saving between 10% and 30% of your salary, with 20% being a common figure.

• The 50/30/20 rule suggests allocating 20% of your take-home income to savings, including retirement, short-term savings, and other goals, such as debt repayment beyond the minimum due.

• The amount to save from each paycheck depends on factors like goals, current income, and living expenses.

• Saving for an emergency fund, retirement, and other goals are important savings objectives.

• Cutting spending, automating savings, and choosing the right savings account can help increase savings.

How Much of Your Paycheck Should You Save?

When it comes to what percentage of income to save for future expenses, financial advice can vary depending on where you look. Some experts suggest saving as little as 10% of each paycheck, while others might suggest 30% or more.

For some people who are living paycheck to paycheck, the answer to “How much of my income should I save?” may be lower still. It may be wiser to simply come up with a set amount (say, $25 to $50) to deposit into savings in your bank account.

Rules of Thumb

According to the 50/30/20 rule of budgeting, 50% of your take-home income should go to essentials, 30% to nonessentials, and 20% to saving for future goals (including debt repayment beyond the minimum).

The right amount for you to save from each paycheck will depend on your income, your fixed expenses, as well as your short- and long-term financial goals.

If, for instance, you are a recent grad living at home for a while and your living expenses are very low, you may be able to save a much higher percentage for the time being.

Or, if you have a sizable credit card balance, you might pump money towards paying that off. In this situation, you might minimize or even pause the amount saved while getting that debt eliminated.

Calculating Percentages From Your Paycheck

To figure out how much to save from each paycheck, you’ll need to consider a few factors. The right amount will depend on your income, your fixed expenses, as well as your short- and long-term financial goals.

• For example, if the cost of living is high in your state or local area, you may need to spend more than half of your take-home pay on living expenses, making it hard to put 20% of each paycheck into savings.

• On the other hand, if your goal is to buy a home in two years, you may need to put more than 20% percent of your paycheck into savings in order to have your down payment in that timeline.

• If you want to retire early, you may need to put more of your income towards retirement every month than the average worker.

Recommended: Check out the 50/30/20 budget calculator to see a breakdown of your money.

4 Important Savings Goals to Work Toward

While it’s widely recognized that saving can be a good idea, it can be helpful to really think about what it is you are saving for. Having a few specific goals in mind can help you determine how much you should save from each paycheck as well as motivate you.

Here are some common savings goals that can help you build financial wellness.

1. Emergency Fund

Yes, it can be hard to save money, but one of the most important priorities is to sock away money (even if just a little) regularly into an emergency fund. In SoFi’s April 2024 Banking Survey of 500 U.S. adults, 77% of respondents with a savings account said they use the account to save for emergencies.

An emergency fund is a bundle of easily accessible cash that could help you handle a financial curveball, such as a job loss, medical emergency, or big ticket car or home repair.

Having this back-up fund in place can help ensure that you never have to rely on credit cards to make ends meet.

Ideally, an emergency fund will contain enough money to cover your living expenses for three to six months, but how much you’ll want to put aside will depend on your situation.

• If you are married with an employed spouse and with no children, for example, you may only need to cover three months’ worth of expenses.

• If you have kids or you’re single, you may want to have an emergency fund that could cover at least six months’ worth of expenses.

It can help to keep the money in an account that earns more interest than a standard savings account, but allows you to easily access your money. Some good options include a high-yield savings account or money market account.

💡 Need help determining your emergency fund amount? Check out this emergency fund calculator for help.

2. Paying Off High-Interest Debt

Another important thing you could consider doing with your savings is paying off any high-interest debt (or “bad” debt) you may have. Typically, this is credit card debt, which currently has an average rate of well over 20%.

• One debt payoff strategy you may want to consider is the debt snowball method. With this approach, you start by paying off the debt with the smallest balance and put all your extra payments towards that until it’s paid off (while continuing to pay the minimum on your other debts).

You then put extra payments toward the debt with the next highest balance, and so on. This can give you a sense of accomplishment which can help motivate you to continue your aggressive repayment.

• Another approach is the debt avalanche method. This Involves putting all your extra payments towards the debt with the highest interest rate, while paying the minimum on the others.

When that debt is paid off, you then focus on the debt with the next-highest interest rate. Since you are concentrating on the debt with the highest interest rate, this strategy can end up being the most cost-effective.

3. Saving for Retirement

Another reason why saving money is important: It can secure your future by providing for your retirement. Exactly how much of your paycheck should go to retirement savings will depend on your age and when you want to retire. Some pointers:

• If your company offers a 401(k) with matching contributions, it can make sense to put aside at least as much of your paycheck as your company will match (since this is essentially free money).

• If you don’t have access to a 401(k) or want to contribute beyond that fund, you may want to open a Roth or Traditional IRA. Both types of IRAs have different tax benefits.

• When you invest in a Roth IRA, the money is taxed at the time of contribution but then in retirement, you can withdraw it tax-free. Contributions made to a traditional IRA might not be taxed at the time they are made but are taxed when they are withdrawn in retirement.

When choosing how much of your paycheck to put into retirement savings, you may want to keep in mind that the IRS sets restrictions on how much you can contribute to your retirement funds each year. IRS retirement guidelines are published and updated regularly.

4. Saving for Other Goals

After establishing plans for debt repayment, an emergency fund, and retirement savings, you may also want to consider working toward your other financial goals, like buying a house, saving for your kids’ future education, or affording a great vacation. This is a popular option for savings account usage, according to SoFi’s data.

• 52% of respondents in SoFi’s survey reported using their savings account to save for a specific goal

• 40% of them are saving equally for long-term and short-term goals

• 35% said they’re saving for short-term goals like a vacation or holiday shopping

• 26% are saving for long-term goals like a house or a child’s education.

How much of your paycheck you should save for these goals will depend on what you want to accomplish and when you want to accomplish it.

When you’re saving for a big purchase, for example, you may want to start by determining how much money you’ll need and when you want to have the money.

You can then break that dollar amount down into the amount you need to save each year and each month. This can help you determine how much of each paycheck you may want to put aside to help you achieve that goal.

• For savings goals you want to accomplish in the next three to five years, you may want to consider putting the money in a safe account that earns higher-than-average interest (such as a high-yield savings account, checking and savings account, or a CD).

• Longer-term savings goals, such as your children’s college education, can be invested more aggressively, since you’ll have more time to ride out the ups and downs of the markets (yes, there is risk involved). For college savings, you may want to consider opening a 529 savings plan.

Reducing Your Costs to Save More

You can help ramp up your savings by cutting your spending. Here are some ideas for saving money daily:

• Review your monthly bills and see if there’s anything you can cut. You might have signed up for a couple of subscriptions and then forgotten about them, or you might see that your restaurant spending is surging lately.

• Learn how to save on food. You might try planning your meals weekly, so nothing goes to waste; joining a warehouse or wholesale club to lower your grocery bill; and using coupons and discount codes to downsize your food costs.

• Bundle up: If you get your auto and home (or renters) insurance from one provider, you may save on your premiums.

• Fight off FOMO (fear of missing out). Just because your friends are upgrading to a luxury car or a social media influencer is frolicking on the French Riviera, that doesn’t mean you have to too.

• Pause, for a day or a month, before making pricey impulse buys to make sure you really and truly want or need them.

• Pay in cash. Plastic, whether a credit or debit card, can make it easy to overspend. If you take out the cash you need for the week ahead and use only that to pay for purchases, you may be able to rein in your purchasing.

• Use budgeting tools to help stay on track. Twenty-three percent of people in SoFi’s survey use budgeting tools offered by their bank, and 20% have knowingly used AI to manage their budget or finances.

Where to Put Your Savings

Once you’ve committed to saving money, you’ll have some options about where to keep it. Some good ideas for funds that you want secure and accessible, as opposed to long-term savings like retirement accounts, include:

• A high-yield savings account. These pay significantly more than a standard account and are often found at online banks vs. traditional ones. Just be sure to read the fine print and make sure you are aware of and comfortable with any account fees or minimums that might be involved.

• A certificate of deposit (CD) is an account in which you commit to keeping your money at the bank for a specific term and you know what rate you will earn. Typically, there is a penalty for early withdrawal. The terms for CDs can range from a few months to several years, so you can pick what works best for you. Longer terms will often have higher interest rates.

• Another option is a money market account (not to be confused with a money market fund, which is an investment) These MMAs offer features of both a checking and a savings account and your money may earn more than with a standard savings account.

Recommended: Plug in APY, deposits, and time to grow into this savings account interest calculator to see how much your money can grow.

Saving With SoFi

Looking for a bank that helps your money grow and gives you tools to take control of your spending and saving? See what SoFi offers.

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 saving 10% of my paycheck enough?

How much of your paycheck should you save? Most financial experts advise saving between 10% and 30% of your salary, with 20% being a common figure. Based on this, 10% is an adequate amount for some, but if you can ramp that up in the future, so much the better.

Is 20% of your salary enough to save?

According to the 50/30/20 budget rule, saving 20% of your salary is a good goal to have; that’s the 20 in the name of the guideline. This amount can then be divided to address different needs, such as saving for the down payment on a house, for your child’s college education, and for retirement.

How much of a $1,000 paycheck should I save?

Typically, financial experts recommend saving between 10% and 30% of your paycheck, with 20% being a good figure to aim for. For $1,000, that would mean between $100 and $300, with $200 being the 20% figure. However, if you are earning a lower salary and money is tight, it would be understandable if you save less until your salary increases.

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Oct

2024

The Importance of Saving Money

By Janet Siroto | Budgeting & Goals, Financial Independence, money | Comments Off

Whether from parents, friends, or financial advisors, you have probably heard plenty of people say that you should be saving money. But did you ever stop and consider why exactly saving money is so important?

Saving money is truly a smart move: It can help you achieve your financial aspirations, prepare for the future, and weather unexpected events. It can even help you earn money without doing anything at all. When you look at it in a big-picture way, saving can relieve a lot of money stress from your life.

Granted, there are vacations to be taken, loans to be paid off, and all kinds of other uses for cash that could leave you without any to stash in savings. But by making saving a priority, you can really enhance your financial standing.

Here, you’ll learn more about this topic, including:

• The reasons why saving money is important

• How to start saving (as painlessly as possible)

• Where to store the cash you save.

Reasons Why Saving Money is Important

It can be hard to get motivated to save money just because it’s the “responsible” thing to do. But you may see the appeal once you understand the huge advantages that saving offers. Here are a few.

Peace of Mind

If money is tight, you may find yourself worrying how you will pay the rent or other critical bills if an extra unexpected expense were to suddenly come up, as they often do. After all, cars break down, and dental work can crop up. Or what if your kid discovers a passion for soccer and wants to go to a pricey summer camp.

Having savings in the bank can provide the sense of security that comes with knowing you can get through these kinds of moments without hardship. You’ll be able to have that back-up money to afford many of life’s expenses that crop up. By saving, you may also worry less about tomorrow, knowing that you have stashed away some cash. That means you can breathe a little easier.

Avoiding Debt

When you have money in the bank, you can make purchases, planned or not, with your money that’s in the bank. That means you can avoid using high-interest credit cards or potentially taking out a personal loan or a home equity line of credit (HELOC) to pay for things.

That can help you side-step debt, which can help save a significant amount of cash in the long run.

Expanding Your Options

Generally, the more money you have saved, the more control you can have over your life and your financial security.

If you’re unhappy with where you live, for instance, having some savings can open up the possibility of moving to a more desirable location or putting a downpayment on a new home.

If you dislike your job, having a cushion of savings might afford you the option of leaving that job even before you have another one lined up.

Money certainly does not solve all problems, but having savings can give you a little bit of breathing room and allow you to take positive steps in your life.

Having Financial Freedom

Another benefit of savings is that you are on a program that can give you financial freedom. If you stick to a plan of stashing 10% or 20% into savings, as many financial experts recommend, you can avoid always living paycheck to paycheck and have more financial freedom.

For example, with adequate savings, you might be able to take a sabbatical from work and pursue a passion project. You might have enough cash to start your own business or retire early. Or you might plan a luxe anniversary celebration somewhere tropical. Savings can enable your dreams.

Recommended: Guide to Improving Your Money Mindset

Saving for Big Purchases

Having a savings account is a great way to afford big purchases without racking up credit card debt and the high interest that goes along with it or turning to other expensive financing options.

Let’s say you want to take your kids on a Disney vacation or you really need that second car. Or maybe there’s a designer bag that you’re totally in love with. By putting money aside in a savings account and earning interest on those funds, you can be in a position to buy your wish-list item outright, rather than borrowing funds to do so.

Saving Money for Emergencies

Here’s another reason why it is important to save money: Life has its twists and turns. One minute, everything is humming along nicely, the next, your car needs $2,000 worth of repairs. Or the hot water heater conks out or you lose your job. These situations and others can put a real strain on your finances.

That’s why financial experts generally recommend building up an emergency fund of at least three to six months’ worth of living expenses to prepare for any financial surprises.

It can be hard to prioritize this, but saving for an emergency fund is important. To help make it happen, you might set up an automatic transfer from your checking into savings the day after payday. This can painlessly, seamlessly whisk money to your emergency fund so it doesn’t sit in savings, tempting you to spend it. Whether the amount is $15 or $150, just do it. Every bit helps.

Earning Interest

Savings accounts come with interest, which is the bank’s way of thanking you for keeping your money with them, where they can use it until you withdraw it.

Granted, the average savings accounts aren’t currently paying that much interest. The average rate is 0.45% APY as of October 21, 2024. However, if you look into an online savings account, you will likely find a much higher rate. Online banks, which don’t have to fund bricks-and-mortar branches, typically pass those savings along to their clients. They may offer a 3.00% APY or even higher.

That can help your savings along. If you have $5,000 in a savings account with a 3.00% APY earning compound interest monthly, that would give you an extra $152 at the end of the year. Add $20 per month to the account and let it sit for five years, and you’ll have $7,101. Nice! That’s cash in your account for doing absolutely nothing.

Reducing Your Taxes

Here’s the part about how saving money makes you money, beyond interest you’ll earn. If you save money into certain tax-advantaged retirement vehicles, not only do you have that nest egg for later in life, but you can lower your tax liability.

By putting money into your employer’s 401(k), if available, you can lower the income on which taxes are assessed. If you are self-employed, there are various IRA (individual retirement accounts) that may allow you to put pre-tax dollars away for the future.

When you save money this way, you could even challenge yourself to put the tax savings back into a savings account. That’s a way to increase your money in the bank another notch or two.

Giving Back

Another reason why saving money is important is it can enable you to give back to others. When you have a cash cushion and aren’t living paycheck to paycheck, you have the opportunity to help those around you.

That might involve sending a few hundred dollars to a relative who has a big dental bill and is struggling to pay it. Or you might donate to a medical research cause, a disaster fund, or a local after-school program that you love. The choice is yours, but having a healthy savings account can make it possible.

Benefiting from Compound Interest

Another big incentive to save, as mentioned above, is the power of compound interest.

Compound interest means you earn a return not just on the amount you originally put away, but also on the interest that accumulates.

Over time, that means you can end up with much more than you started with. And the earlier you start saving, the more your money grows, since compound interest is able to work its magic over a longer time horizon.

You saw an example above that involved putting money into a savings account at a bank. Now, consider investing: A person who starts putting $100 per month towards retirement at age 25 will wind up putting $12,000 more of their money into their retirement fund by age 65 than the person who started saving $100 per month at age 35.

But because of compound interest (and assuming a 7.00% annual rate of return), the person who started at 25 will wind up with over $120,000 more at age 65 (way more than the extra $12,000 they invested). Please note that this is a hypothetical scenario and does not represent an actual investment. All investing involves risk.

How to Get Started with Saving

If you’re convinced that saving is the right move, how do you actually do it? The key is to make a budget and make sticking to it easy.

This doesn’t have to be intimidating. The key is to get familiar with what you spend, what you earn, and what your goals are.

Here are some steps you could take to help get started.

Figuring Out What You’re Saving For

Is it a long-term goal, like retirement or your kids’ college tuition? A short-term goal, like an emergency fund? Or a medium-term goal, like a wedding or home renovation? It can help to get a sense of how much you need to stash away and by when.

The point of this is twofold:

• First, you can divide the amount you need by the months left until your deadline to get a clear picture of how much you’ll need to save each month.

• Second, you will know where to put your money. If your goal is less than a couple of years away, you may want to keep your savings in an online savings account, a certificate of deposit (CD), or money market account.

These options can help you earn more interest than a standard savings account but still allow you to access your money when you need it.

If your goal is in the distant future, you might want to invest the money in a retirement account, 529 college savings plan, or brokerage account so that it has the chance to grow over time.

Sticking to a Budget

You don’t really know where your money is going unless you track it. That’s why for a month or two, you may want to take note of all your daily and monthly expenses.

Next, you’ll want to tally up your net monthly income, meaning what goes into your account after the different types of taxes and deductions are taken out.

The difference between your monthly income and your expenses (everything from rent to student loan payments to food and dining out) is what you have left over to save. If there’s not enough left over, you can work on finding ways to cut spending or increase your income. You might try following the 50/30/20 budget rule to help guide your spending and saving.

Putting Savings on Autopilot

If you’re manually putting cash away every month, it can be easy to fall behind.

For one thing, you may forget to move money into savings regularly amid your busy schedule. And, unless you protect the money in advance by transferring it to a different account, you may accidentally spend it.

One way to avoid this is to set up automated savings through your bank account or retirement plan.

If you’re putting away the amount you identified you need for your goal, you may get there without even thinking about it.

Recommended: The Different Types of Savings Accounts

Common Places to Save Your Money

Where to put your money as you save? Consider these options:

• Savings account: You could put your money in a savings account at a financial institution, like your local bank branch. However, as outlined above, you may not earn the highest possible interest.

• Online savings account or high-yield savings account: These accounts are likely to pay a much higher interest rate than a conventional savings account while offering the same convenience and security as a traditional savings account.

• CD: A CD gives you a specific rate of interest but you must agree to keep your money in the account (that is, not withdrawing any of it) for a specific term, whether months or years. Withdrawing earlier could trigger penalties.

• Investments: There are many options here, such as Treasury bills and bonds. These can earn healthy returns and are typically considered safe places to keep money.

The Takeaway

Why is it important to save money? For a variety of reasons. It can provide peace of mind, open up options that improve your quality of life, increase your wealth due to compound interest and possibly lower your tax liability, and may even allow you to retire early. Many people earn wealth through a combination of working and savvy saving.

Looking for a smart way to save? Consider opening an online bank account with SoFi. Our FDIC-insured Checking and Savings account earns a competitive APY, and charges no account fees, both of which can help your money grow faster. And with Vaults and Roundups, you can track and grow your savings, assisting you as you aim for your personal financial goals.

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 are the benefits of saving money?

There are many benefits of saving money: It helps you save for your future, cover unexpected expenses, make major purchases, and have financial freedom. What’s more, the money you save can help make you more money, thanks to compounding interest and lowering your tax bill.

What are common things to save money for?

Common things to save money for are an emergency fund, retirement, a big purchase (like a car, a vacation, or the down payment on a home), and educational expenses, among others.

What happens if you don’t save money?

If you don’t save, you may lack financial security and the ability to meet certain aspirations. For instance, you won’t have a retirement fund and would therefore have to keep working indefinitely. You wouldn’t have money for a big purchase like a car or a home or your child’s education. Plus you wouldn’t be able to handle some expenses, whether planned or unexpected, and might have to take out a loan or use credit cards, which means you are paying for the privilege to borrow funds. That takes away from your earnings.

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.

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

SoFi Invest®

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

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

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
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SOBK0123032

Call vs Put Option: The Differences

Overview: What Are Options?

Options Buyers vs. Options Sellers

Finally, user-friendly options trading is here.*

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

What Is a Call Option?

Example of Buying a Call Option

What Is a Put Option?

Example of Buying a Put Option

Risks of Options Trading

The Takeaway

What Is an Online Savings Account and How Does It Work?

What Is an Online Savings Account?

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

How Does an Online Savings Account Work?

Depositing Funds Into an Online Savings Account

Withdrawing Money From an Online Savings Account

Cash Deposits

Benefits of Using an Online Savings Account

Disadvantages of Using an Online Savings Account

Opening an Online Savings Account

Online Savings vs Traditional Savings: Which Is Best for You?

The Takeaway

FAQ

How do I use an online savings account?

What is the typical minimum balance for an online savings account?

Is my money insured in an online savings account?

What is the typical interest rate for an online savings account?

How can online banks offer such good interest rates?

How Much Should I Have in Savings?

Why Should I Have Savings?

How Much Money Should I Have in Savings?

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

How Much Money Should I Have in Savings by Age?

18-24: At Least $500 in Savings

20s: 3-6 Months of Expenses in Savings

30s: 6+ Months of Expenses in Savings

40s: 6+ Months of Expenses in Savings

50s: 6+ Months of Expenses in Savings

Where Should I Put My Savings?

Retirement Accounts

Investments

Savings Account

Checking Account

Cash

How Much Does the Average American Have in Savings

Building Up Savings More Quickly

Selling Your Stuff

Cutting Out Unnecessary Spending

How a Budget Can Help You Save

FAQ

How much should a 30 year old have in savings?

How much does the average person have in savings?

Is $20000 a good amount of savings?

Guide To How Much You Should Save From Each Paycheck

How Much of Your Paycheck Should You Save?

Rules of Thumb

Calculating Percentages From Your Paycheck

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

4 Important Savings Goals to Work Toward

1. Emergency Fund

2. Paying Off High-Interest Debt

3. Saving for Retirement

4. Saving for Other Goals

Reducing Your Costs to Save More

Where to Put Your Savings

Saving With SoFi

FAQ

Is saving 10% of my paycheck enough?

Is 20% of your salary enough to save?

How much of a $1,000 paycheck should I save?

The Importance of Saving Money

Reasons Why Saving Money is Important

Peace of Mind

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

Avoiding Debt

Expanding Your Options

Having Financial Freedom

Saving for Big Purchases

Saving Money for Emergencies

Student Loan
Refinancing

Personal
Loans

Online
Investments