Feb
27
2024
Fixed Expense Vs Variable Expense

Fixed Expenses vs Variable Expenses

By | Budgeting & Goals, Financial Independence, money | Comments Off on Fixed Expenses vs Variable Expenses

A budget can be a great tool for managing your money and making it work harder for you. But typically a budget involves distinguishing between fixed expenses (those that stay constant, month after month) and variable expenses, which change over time.

Understanding where your money is going in these two ways can be helpful as you work to track and optimize how you earn, spend, and save.

What’s important to know is that each kind of expense can be lowered in many cases, and fixed vs. variable expenses don’t necessarily translate as needs vs. wants.

Here, you can learn more about these two ways you spend money and how to pay less. You will likely find smart tips for how you can budget even better.

Key Points

•   A budget helps manage money by distinguishing between fixed expenses (constant) and variable expenses (fluctuating).

•   Fixed expenses include rent, mortgage, insurance premiums, and gym memberships, while variable expenses include groceries, utilities, dining out, and entertainment.

•   Both fixed and variable expenses can be reduced, but cutting fixed expenses may require bigger life changes.

•   Examples of fixed expenses are mortgage payments, car payments, student loan payments, and subscription fees.

•   Examples of variable expenses are utilities, food, dining out, entertainment, and travel.

What Is a Fixed Expense?

Fixed expenses are those costs that you pay in the same amount each month — items like your rent or mortgage payment, insurance premiums (which can be an often-forgotten budget expense), and your gym membership. With fixed expenses, you know the amounts you will owe ahead of time, and they don’t change (or perhaps only annually).

Fixed expenses tend to make up a large percentage of a monthly budget since housing costs, typically the largest part of a household budget, are generally fixed expenses. This means that fixed expenses present a great opportunity for saving large amounts of money on a recurring basis if you can find ways to reduce their costs. However, cutting costs on fixed expenses may require bigger life changes, like moving to a different apartment — or even a different city, where the cost of living is lower.

Keep in mind, too, that not all fixed expenses are necessities — or big budget line items. For example, an online TV streaming service subscription, which is withdrawn in the same amount every month, is a fixed expense. It’s also a want as opposed to a need. Subscription services can seem affordable until they start accumulating and perhaps become unaffordable.

Examples of Fixed Expenses

Here are some examples of fixed expenses:

•   Mortgage payments or rent

•   Car payments

•   Student loan payments

•   Membership and subscription fees

•   Insurance premiums

•   Childcare or tuition payments

•   Internet or mobile phone fees

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What Is a Variable Expense?

Variable expenses, on the other hand, are those whose amounts can vary each month, depending on factors like your personal choices and behaviors as well as external circumstances like the weather.

For example, in areas with cold winters, electricity or gas bills are likely to increase during the winter months because it takes more energy to keep a house comfortably warm. Grocery costs are also variable expenses since the amount you spend on groceries can vary considerably depending on what kind of items you purchase and how much you eat.

You’ll notice, though, that both of these examples of variable costs are still necessary expenses — basic utility costs and food. The amount of money you spend on other nonessential line items, like fashion or restaurant meals, is also a variable expense.

In either case, variable simply means that it’s an expense that fluctuates on a month-to-month basis, as opposed to a fixed-cost bill you expect to see in the same amount each month.

Examples of Variable Expenses

Here are specifics of what can constitute a variable expense:

•   Utilities

•   Food

•   Dining out

•   Entertainment

•   Personal care

•   Travel

•   Medical care

•   Gas

•   Property and car maintenance

•   Gifts

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Fixed vs Variable Expenses

To review the difference between variable vs. fixed expenses:

•   Fixed expenses are those that cost the same amount each month, like rent or mortgage payments, insurance premiums, and subscription services.

•   Variable expenses are those that fluctuate on a month-to-month basis, like groceries, utilities, restaurant meals, and movie tickets.

•   Both fixed and variable utilities can be either wants or needs — you can have fixed expense wants, like a gym membership, and variable expense needs, like groceries.

When budgeting, whether you are calculating expenses for one person or a family, it’s possible to make cuts on both fixed and variable expenses.

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Ways to Save on Fixed Expenses

Just because an expense is fixed doesn’t mean it can’t be downsized. Consider these possibilities.

Review Where Your Money Is Going

Take a look at your fixed expenses with a critical eye. Did your landlord raise your rent a significant sum? It might be time to look for more affordable options or get a roommate.

Has the number of subscription services you pay for crept up over time? You might save on streaming services by dropping a platform or two.

Refinance Your Loans

Interest rates rise and fall. If they are dropping, you might be able to save money by refinancing your loans, such as your mortgage. Check rates, and see if any offers are available that would reduce your monthly spend.

One option can be to get a lower payment over a longer period. You will likely pay more interest over the life of the loan, but it could help you out if you are living paycheck to paycheck right now.

Consolidate Your Debt

If you have a significant amount of high-interest debt, such as credit card debt, you might consider paying it off with a personal loan that offers a lower interest rate. This could save you money in interest and help lower your fixed expenses.

Bundle Your Insurance

Many insurance companies offer a lower premium if you sign up for both automotive and homeowners insurance with them. Check available offers to potentially reduce your costs.

Ways to Save on Variable Expenses

As you delve into variable vs. fixed expenses, here are some possible ways to minimize the ones that vary.

Scrutinize How You Spend

When you track your spending, you may find ways to cut back. For instance, you could look for ways to do your grocery shopping on a budget by planning meals in advance and shopping with a list. You might be able to challenge yourself to go for one month without, say, takeout food and the next without movies and then put the savings towards paying down debt.

Hit “Pause” on Impulse Purchases

If you feel the urge to buy something that isn’t in your spending plan, try the 30-day rule. Mark down the item and where you saw it and the price in your calendar for 30 days in the future. When that date arrives, if you still feel you must have it, you can find a way to buy it. But there is a very good chance that sense of urgency will have passed.

Try Different Budget Methods

If you find you need more help reining in your variable expenses, you might benefit from trying different budgeting tactics. There is the popular 50/30/20 budget rule, which says to allocate 50% of your take-home pay to needs, 30% to wants, and 20% to savings.

Other people prefer the envelope budget method or using a line-item budget to dig into where their money is going. You might also benefit from apps and digital tools to help you track where your money is going. Many banks offer these to their customers.

Check in With Your Money Regularly

The exact cadence is up to you, but it can be helpful to review your money on a regular basis. Some people like to check in on their account balances a few times a week; others prefer to review their accounts in-depth monthly. Find a system that works for you so you can see if your spending is on-target or going overboard.

Benefits of Saving Money on Fixed Expenses

If you’re trying to find ways to stash some cash, finding places in your budget to make cuts is a big key. And while you can make cuts on both fixed and variable expenses, lowering your fixed expenses can pack a hefty punch, since these tend to be big line items — and since the savings automatically replicate themselves each month when that bill comes due again.

Think about it this way: if you quit your morning latte habit (a variable expense), you might save a grand total of $150 over the course of a month — not too shabby, considering it’s just coffee. Even small savings can add up over time when they’re consistent and effort-free — it’s like automatic savings.

But if you recruit a roommate or move to a less trendy neighborhood, you might slash your rent (a fixed expense) in half. Those are big savings, and savings you don’t have to think about once you’ve made the adjustment: They just rack up each month. The savings you reap can help you pay down debt or save more, which can help you build wealth.

Saving Money on Variable Expenses

Of course, as valuable as it is to make cuts to fixed expenses, saving money on variable expenses is still useful — and depending on your habits, it could be fairly easy to make significant slashes.

As mentioned above, by adjusting your grocery shopping behaviors and aiming at fresh, bulk ingredients over-packaged convenience foods, you might decrease your monthly food bill. You could even get really serious and spend a few hours each weekend scoping out the weekly flyer for sales.

If you have a spendy habit like eating out regularly or shopping for clothes frequently, it can also be possible to find places to make cuts in your variable expenses. You can also find frugal alternatives for your favorite spendy activities, whether that means DIYing your biweekly manicure to learning to whip up that gourmet pizza at home. (Or maybe you’ll find a way to save enough on fixed expenses that you won’t have to worry as much about these habits.)

Saving and Budgeting With SoFi

Fixed expenses are those costs that are in the same amount each month, whereas variable expenses can vary. Both can be trimmed if you’re trying to save money in your budget, but cutting from fixed expenses can yield bigger savings for less ongoing effort.

Great budgeting starts with a great money management platform — and SoFi can help you with that, thanks to our dashboard and smart features.

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 4.00% APY on SoFi Checking and Savings.

FAQ

What are examples of variable expenses?

Variable expenses are changeable costs that include such items as groceries, utilities, entertainment, dining out, and credit card debt. They differ month by month.

What are examples of fixed expenses?

Fixed expenses are constant month after month. These can include such things as rent, car payments, student loan payments, and subscription services.

Are utilities fixed or variable?

Utilities may be a need vs. a want in life, but they often vary. For instance, if you live in a cold climate, your heating bill will rise in the winter. Or you might run the dishwasher more over the holiday season, increasing your bill.

Photo credit: iStock/LaylaBird

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 4.00% 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 4.00% 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 4.00% 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 12/3/24. 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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27
2024
All You Need to Know About a Foreign Currency Certificate of Deposit

The Basics of an ACH Hold

By | Family Finances, Life & Career, money | Comments Off on The Basics of an ACH Hold

If you ever see the phrase “ACH hold” when checking on your bank account, it can be helpful to know that this means funds are on hold, anticipating a completed electronic transfer.

ACH, which is short for Automated Clearing House, is a popular kind of ETF (electronic fund transfer). Both businesses and individuals may use this method to move money between bank accounts. When you grant a business or government the right to conduct an ACH debit (which is the electronic removal of funds from your bank account), you may see those words “ACH hold” on funds in your account, telling you that verification is taking place.

This may cause you to wonder if your bank account and financial affairs are in good shape.

Key Points

•   ACH holds refer to funds being placed on hold in anticipation of a completed electronic transfer.

•   ACH stands for Automated Clearing House, a network used for electronic fund transfers.

•   Banks put ACH holds on accounts to verify funds availability before approving transactions.

•   ACH holds can last up to 24 to 48 hours and are typically processed in batches throughout the day.

•   If an ACH hold doesn’t clear within a few days, contacting the bank is necessary to resolve the issue.

What Is an ACH Hold?

So what does ACH hold mean? When a company or institution that you have authorized to make a withdrawal from your account submits an ACH debit, your bank will receive and acknowledge the transaction. At that point, the bank might place an ACH hold on your account. Here’s what is happening:

•   While there is a hold on your account for the amount of the ACH debit, you will not be able to use those funds for a purchase.

•   During the ACH hold, the bank is verifying that you have the funds in your account to cover the requested debit.

•   Once confirmed, your bank will deduct the money from your account.

•   If there are not adequate funds for a transaction, it could be rejected.

In such an instance, the ACH hold simply makes the funds you will owe unavailable before they are actually debited from your account.

On the flip side, you may sometimes notice a pending ACH credit in your account. Here’s a bit of detail about what that may represent:

•   If you open your mobile banking app a day before payday, you might see the pending direct deposit, but the funds are not yet available.

•   This means your employer has sent the money through ACH, but your bank has simply placed a hold until it can verify the transaction and push the funds through to your account.

Get up to $300 when you bank with SoFi.

No account or overdraft fees. No minimum balance.

Up to 4.00% APY on savings balances.

Up to 2-day-early paycheck.

Up to $2M of additional
FDIC insurance.


Understanding Automated Clearing House

ACH stands for Automated Clearing House, a U.S.-based network governed by Nacha (National Automated Clearing House Association). The system enables businesses and individuals to electronically debit (take money from) or credit (put money into) accounts.

ACH credit transfers are quite common today. For instance:

•   Examples of a company or government agency putting funds into an individual’s or company’s account include direct deposit payments from an employer to an employee, social security benefits, and tax refunds.

•   As an individual, you likely utilize ACH debit as well. If you have connected your online bank account to a peer-to-peer or P2P payment app like PayPal, Venmo, or Cash App and you utilize standard transfers, you are likely using ACH debit when you pay friends and family.

•   You may also use ACH when you enable autopay for bills each month, such as your mortgage, rent, or utilities. When you sign up for this kind of payment, those companies are using ACH debit to withdraw the necessary funds to cover your monthly payment.

But money does not go directly from one account to another. Before your direct deposit paycheck reaches your bank account — or your automatic payment reaches your landlord or the electric company — it goes through the clearing house, which batches payments multiple times a day. That means ACH payments are not immediate, though they can be same-day.

How Does an ACH Hold Work?

When an ACH hold turns up in your account, here are the steps that are typically going on behind the scenes:

1.    The ACH request is sent to your bank to debit funds from your account.

2.    The bank receives the request and begins work.

3.    The bank puts a hold on the funds.

4.    The bank ensures the funds are available.

5.    The transaction is completed.

Recommended: ACH vs. Check: What Are the Differences?

How Long Does an ACH Hold Last?

There is not a set time that an ACH hold will last. ACH transfers are often processed in batches throughout the day, so if a transfer misses one batch, it likely waits for the next one. For this reason, ACH transfers typically occur in one or two business days.

For this reason, it’s unlikely a hold would last any longer than 24 to 48 hours.

Tracking Your ACH Hold

But what happens if the days are passing and an ACH hold doesn’t clear? This can be a major inconvenience, whether the transaction involved is an incoming paycheck or an outgoing bill payment.

Unfortunately, as the customer, you will not be able to resolve this on your own. You will need to to contact the bank and make an inquiry, giving them the pertinent details. This will likely include your account number, the amount of the ACH, and how long you have seen the hold in your account. If you are able to see any other specifics under a section such as “transaction details,” those can be helpful as well.

Tracking an ACH hold can be a wise move if a couple of days have passed (say, you are on day three) and the funds in question still have not cleared. Usually, by this point, the transfer would either have taken place or been rejected.

Why Do Banks Perform an ACH Hold?

ACH holds allow banks to verify that funds are in place before approving the transaction. For example, say your account has $100 in it, but a bill collector has initiated an ACH debit for $500. It will be in the bank’s best interest to place the hold on your account. Once the bank realizes that your account does not have the funds to complete the transaction, it will likely reject the ACH transfer.

This protects the bank’s assets, but it means you have an unpaid bill. In this example, you may also have to pay late fees in addition to the funds you owe. What’s more, the bank might charge you an ACH return fee. These fees can certainly add up.

It is a good idea to monitor your account closely and set up low-balance alerts. As a best practice, you might want to keep track of scheduled automatic payments via calendar reminders so your account balance is always high enough to cover charges.

Unauthorized ACH Holds

ACH holds can benefit you as well as your bank. For example, if you monitor your checking account closely and notice a pending ACH transaction that you weren’t expecting, you can contact your bank to learn more about the transaction.

If a person or entity is attempting to debit your account without your authorization, this could mean that your banking details have been compromised. Your bank will be able to help you with next steps to protect you from fraud.

Another scenario to consider: The Consumer Finance Protection Bureau (CFPB) advises that you can stop electronic debits via ACH by payday lenders. These payday loans are a way to get an advance on your paycheck. To curtail unauthorized account deductions, you must revoke their payment authorization (or ACH authorization) by calling and writing to the loan company and your financial institution or by issuing a stop payment order. Visit the CFPB website for sample letters .

Note: Stopping payment via ACH debit does not cancel your contract with payday lenders. You must still pay off the full balance of your loan, but you can work with the lender to determine an alternate method.

An ACH hold is typically part of a financial institution’s processing protocol. The end user (you) likely isn’t able to intervene.

However, if you’d like to try to remove the hold or cancel the transaction, you may contact your bank’s customer service representative to see if anything can be done.

Also, you can follow the steps above to revoke ACH authorization if the hold reflects an unauthorized transaction. That step may or may not cancel the pending transaction but can help curtail future debits that you don’t want to take place.

Recommended: How to Open a Bank Account

The Takeaway

ACH (or Automated Clearing House) holds work to protect banks during transfer processing. While delays may seem annoying at times, there are pros and cons to them in this situation. When a company initiates an ACH debit from your account, the hold allows the bank to confirm that funds are available to complete the transaction, which can ensure good flow of finances. Such holds also give you an opportunity to identify any unauthorized ACH debits, which is definitely a plus.

Having a bank that looks out for your best interests is another thing that’s usually a big plus. Which is why SoFi makes sure you can manage all your automatic payments seamlessly so your finances can stay on-track and organized. But that’s not all. When you open an online bank account with direct deposit, you’ll earn a competitive annual percentage yield (APY) and pay no account fees, both of which can help your money grow faster.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.00% APY on SoFi Checking and Savings.

FAQ

How long can a bank hold an ACH transfer?

When an entity, such as your employer or the government, issues you a direct deposit via ACH transfer, your bank must generally make the funds available for withdrawal by the next business day. However, weekends and bank holidays do not count as business days, so it may take a few days to get your money even after an ACH transfer has gone through.

How long does it take an ACH check to clear?

Financial institutions may be able to process ACH transfers in one to two business days or on the same day. However, a bank or credit union might hold onto transferred funds once it receives them, generally until the next business day.

What is the ACH hold check order fee?

In your banking life, you might encounter the phrase “ACH hold check order fee.” It typically just means that your financial institution charges a fee for ordering checks, which may be automatically deducted from your account. The “ACH hold” is the pending fee that’s been debited and the “check order” tells you why the fee is being deducted.

Photo credit: iStock/max-kegfire

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 4.00% 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 4.00% 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 4.00% 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 12/3/24. 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.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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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27
2024
wallet on green background

10 Personal Finance Basics

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

Though money is a very important aspect of life, the topic of personal finance (or financial literacy) isn’t part of most people’s education, neither in school nor at home.

Not knowing financial basics can leave you to wing it when it comes to your money management, meaning you might wind up living paycheck to paycheck, having too much debt, or not saving enough for retirement.

To help you avoid those situations, read up on personal finance basics — the smart and simple steps to budgeting wisely, saving well, and spending sensibly.

These 10 personal finance basics can put you on the path to taking control of your cash and achieving your money goals.

Key Points

•   Personal finance basics include budgeting, saving, investing, managing debt, and understanding credit.

•   Budgeting involves tracking income and expenses, setting financial goals, and making informed spending decisions.

•   Saving is important for emergencies, future goals, and retirement. It involves creating a savings plan and automating contributions.

•   Investing helps grow wealth over time. It involves understanding risk tolerance, diversifying investments, and considering long-term goals.

•   Managing debt requires understanding interest rates, making timely payments, and prioritizing high-interest debt repayment. Understanding credit involves monitoring credit scores and maintaining good credit habits.

Personal Finance Definition

Personal finance is a term that involves managing your money and planning for your future. It encompasses spending, saving, investing, insurance, mortgages, banking, taxes, and retirement planning.

Personal finance is also about reaching personal financial goals, whether that’s having enough for short-term wants like going on a vacation or buying a car, or for the longer term, like saving enough for your child’s college education and retirement.

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Top 10 Basics of Personal Finance

Here, learn about 10 of the most important foundations of mastering personal finance.

1. Budgeting Is Your Friend

Budgeting and learning how to balance your bank account can be key to making sure what’s going out of your account each month isn’t exceeding what’s coming in. Winging it — and simply hoping it all works out at the end of the month — can lead to bank fees and credit card debt, and keep you from achieving your savings goals.

You can get a quick handle on your finances by going through your statements for the past several months and making a list of your average monthly income (after taxes), as well as your average monthly spending.

It can be helpful to break spending down into categories that include basic needs (e.g., rent, utilities, groceries) and discretionary spending (e.g., shopping, travel, Netflix). To get a real handle on where your money is going every day, you may want to track your spending for a month or so, either with a diary or an app on your phone.

Once you know everything that typically comes in and goes each month, you can see if you’re going backward, staying even, or ideally, getting ahead by putting money into savings each month.

If you aren’t living within your means, or you’d like to free up more cash for saving, a good first step is to go through your budget and look for ways to cut back discretionary spending. Can you cook more instead of going out? Buy less clothing? Cut out cable? Quit the gym and work out at home?

You can also consider ways to bring in more income, such as asking for a raise or starting a side hustle from home.

Recommended: Input your monthly income to find out how much to spend on essentials, desires, and savings with our 50/30/20 Monthly Budget Calculator.

2. Building an Emergency Fund

You can’t predict when your car will break down or when you’ll have to make an emergency trip to the dentist. If you don’t have money saved up for what life throws at you, you can risk racking up high-interest credit card debt or defaulting on your bills.

To avoid this, you may want to start putting some money aside every month to build an emergency fund. A common rule of thumb is to keep three to six months of basic living expenses set aside in a separate savings account.

It can be a good idea to choose an account where the money can earn interest, but you can easily access it if you need it. Good options include: a high-yield savings account, online savings account, or a no-fee bank account.

Recommended: Ensure you’re prepared for the unexpected by using our emergency fund calculator.

3. Avoiding a Credit Card Balance

When you have a credit card at your disposal, it can be tempting to charge more than you can afford. But carrying a balance from month to month makes those purchases considerably more expensive than they started.

The reason is that credit cards have some of the highest interest rates out there, often over 20%. That means a small charge carried over several months can quickly balloon into a much larger sum. The same is true for other high interest debt, such as some private or payday loans.

If you already have high-interest debt, however, you don’t need to panic. There are ways to pay off that debt.

The avalanche method, for example, requires paying the minimums to all your creditors and putting any extra money toward the debt with the highest interest rate first. Once that’s paid off, the borrower puts their extra cash toward the debt with the next highest rate, and so on.

4. Paying Your Bills on Time

If you miss bill payments or make late payments, your creditors might impose late payment penalties. If you delay payment for a prolonged period, your account could go into delinquency or be sent to collections.

Late payments can also affect your credit score — the number lenders use to help judge whether to give you loans and credit.

Your payment history accounts for 35% of your credit score, so a history of late and missed bill payments can be a major strike against your score. A poor credit score can make it difficult for you to get loans, and the loans you do get are likely to have higher interest rates.

To make sure you never miss a due date, it can be helpful to make a list of your bills and their due dates, set up auto payments when possible, and sign up for reminders.

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5. Starting Early to Save for Retirement

When you’re young, retirement can feel far away. But putting money away as early as possible means you’ll have more years to save, spreading the savings across your life rather than racing to catch up.

Perhaps the biggest reason to start as early as you can, however, is the power of compound interest.

Because you earn interest not only on your contributions, but also on accumulated interest, small amounts can grow over time. If you have an employer-sponsored plan, such as a 401(k), you may want to consider contributing, especially if your employer offers to match your contributions.

Depending on your situation, you may be able to open a traditional IRA, Roth IRA, or SEP IRA, as well.

6. Investing

Saving for retirement may not be enough for you to have what you need to live comfortably after you stop working. Plus, there may be things you want to be able to afford later in life but before you reach retirement age.

If you have children, for example, you may want to start a 529 plan to help you invest for their college educations.

For other long-term savings goals, you may want to invest additional money, keeping in mind that all investments have some level of risk and the market is volatile, meaning it moves up and down over time.

To get started with investing, you can choose a financial firm you want to work with and then open a standard brokerage account. From there, you can put your money in a mutual fund or an exchange-traded fund (which bundle different types of investments together), or, if you’re prepared to do a fair amount of research, pick and choose your own stocks and bonds.

7. Getting Insured

When it comes to insurance, sometimes it’s best to prepare for the worst. That means making sure you have health insurance and car insurance (which is required by law). You also may want to consider renters or homeowners insurance to protect your home and belongings.

If you have children or other people who are dependent on you financially, it can be a good idea to get long-term disability insurance and term life insurance. Many people can purchase health and disability insurance through their employers. If you don’t have that option, it’s possible to go through an insurance agent, broker, or the insurance company directly.

8. Taking Advantage of Credit Card Rewards

If you have a decent credit score, you can look into getting a credit card with rewards that may give you travel miles or cash back on your purchases. If travel is your priority, you may want to look for a flexible travel rewards credit card, meaning their rewards can be applied to many different airlines and hotels.

You may want to look for a card that not only offers rewards but also offers a nice signup bonus for spending a certain amount within the first few months. One with no annual fee would be ideal, too.

Whichever card you pick, it’s a good idea to familiarize yourself with its rewards program: the value of its rewards units (points, miles or cash back), how to redeem them, whether your rewards expire, and any minimum redemption amounts.

You may also want to keep in mind that credit card interest rates are typically a lot higher than credit card rewards rates. So, to avoid seeing your earnings swallowed up by finance charges, it can be wise to make sure to pay your full statement balance by the due date every month.

9. Checking Your Credit Reports Regularly

You can request a credit report for free each year from the three main credit reporting agencies — Equifax, Experian, and TransUnion — at AnnualCreditReport.com.

It can be a good idea to periodically order a copy of your report and then scan it for any errors or signs of fraudulent activity. If you see anything that isn’t right, it’s wise to contact the credit reporting agency or the account provider as soon as possible and file a formal dispute if needed.

Checking your report can help you spot — and quickly address — identify theft. It can also help you make sure there aren’t any errors on the report that could negatively affect your credit score. If you ever want to obtain a lease, mortgage, or any other type of financing, then you’ll likely need a solid credit report.

10. Choosing Your Bank Wisely

There are lots of financial institutions out there, so it can be a good idea to shop around and make sure you find a place that really suits your financial needs. Choices include:

A Traditional Bank. These typically have physical locations throughout the country and offer a wide range of financial products and services. If you want to know you can have an in-person chat about your money, this option might work well for you.

Credit Union. These are non-profit organizations owned by the members of the union. They’re similar to a traditional bank, but membership is required to join, and they’re often smaller in scale and have fewer in-person locations. However, they may have lower fees and higher interest rates than a traditional bank.

Online Bank. These institutions don’t usually have any in-person locations — everything happens online. Because of this, they often have very competitive fees and interest rates. If you don’t necessarily need in-person money talk and would prefer to handle your money at home (or on the go), an online bank could be a great option.

When making a bank choice, it can be a good idea to make sure the bank you choose has a user-friendly website and app, as well as conveniently located ATMs that won’t charge you a fee for accessing your money.

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3 Personal Finance Rules to Know

Once you’ve established some fundamental procedures, you can start thinking about some overarching rules that can help you make better money decisions. Three rules you may want to keep in mind include:

•   Keep your goals in mind. Without a clear set of goals, it can be difficult to do the hard work of budgeting and saving. Defining a few specific goals — whether it’s buying a home in five years or being able to retire at 50 — gives you a picture of what personal financial success looks like to you, and can keep you motivated.

•   Learn to distinguish wants from needs. Merging these two concepts can wreak havoc on your personal finances. Needs generally include food, clothing, shelter, healthcare, reliable transportation, and minimum debt payments. Everything else is likely a want. This doesn’t mean you can’t have wants, but it can be important not to trade financial security in pursuit of these things.

•   Always pay yourself first. This means taking some money out of each paycheck right off the bat and putting it towards your future goals. Setting aside money in a savings account, IRA, or 401K plan via automatic payroll deductions helps reduce the temptation to spend first and save later.

The Takeaway

Being good with your money requires a set of basic skills that many of were never actually taught in school. Fortunately, It’s never too late to educate yourself about personal money management.

Learning personal finance basics like how to choose a bank, set up a budget, save for retirement, monitor your credit, avoid (and deal with) high-interest debt, and invest your money are key to reaching your goals and building wealth over time.

One simple way to become more organized with your money is to open the right bank account.

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stock market amsterdam

A Brief History of the Stock Market

By | Growing Wealth, Investing | No Comments

The stock market history dates back hundreds of years to 13th-century Europe, but the U.S. stock market didn’t become an established part of economic life until much later, during the 18th century.

Today, the performance of various stock markets in the U.S. and around the world is used daily to gauge the health of different parts of the economy. But the history of the stock market is a long, winding road, with many twists and turns.

Key Points

•   The stock market has a long history dating back to 13th-century Europe and became established in the U.S. during the 18th century.

•   The stock market works by facilitating transactions between buyers and sellers of financial securities.

•   Stock market indexes, such as the Dow Jones Industrial Average and the S&P 500, measure the performance of specific portions of the market.

•   The U.S. stock market has experienced significant events throughout history, including crashes, such as the one in 1929, and recoveries.

•   Stock markets exist worldwide, with major exchanges in cities like London, Tokyo, and Shanghai.

When Did the US Stock Market Start?

Although the first stock market began in Amsterdam in 1611, the U.S. didn’t get into the stock market game until the late 1700s. It was then that a small group of merchants made the Buttonwood Tree Agreement. This group of men met daily to buy and sell stocks and bonds, which became the origin of what we know today as the New York Stock Exchange (NYSE).

Although the Buttonwood traders are considered the inventors of the largest stock exchange in America, the Philadelphia Stock Exchange was America’s first stock exchange. Founded in 1790, the Philadelphia Stock Exchange had a profound impact on the city’s place in the global economy, including helping spur the development of the U.S.’s financial sectors and its expansion west.

In 1971, trading began on another stock exchange in America, the National Association of Securities Dealers Automated Quotations or otherwise known as the NASDAQ. In 1992, it joined forces with the International Stock Exchange based in London. This linkage became the first intercontinental securities market.

Unlike the NYSE, a physical stock exchange, the NASDAQ allowed investors to buy and sell stocks on a network of computers, as opposed to in-person trading. In addition to the NYSE and the NASDAQ, investors were able to buy and sell stocks on the American Stock Exchange or other regional exchanges such as the ones in Boston, Philadelphia, and San Francisco.

These days, almost anyone can open an investment account on their computer or smartphone — a far cry from the days of in-person trading in specific exchanges.

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How Was the US Stock Market Created?

The New York Stock Exchange took centuries to become what it is today. In 1817, the Buttonwood traders observed and visited the Philadelphia Merchants Exchange to mimic their exchange model, creating the New York Stock and Exchange Board.

The members had a dress code and had to gain a seat in the exchange. They also had to pay a fee, which increased from $25 to $100 by 1837.

After the Great Fire of 1835 wiped out 700 buildings in lower Manhattan, Wall Street suffered a significant property loss. Fortunately, Samuel Morse opened a telegraph demonstration office, which allowed brokerages to communicate remotely.

In 1903, the doors of NYSE opened with hundreds of stock certificates held underground in vaults.

The stock market surged and hit a 50% high in 1928 despite indications of an economic downturn. In 1929, the market dropped 11% in an event known as Black Thursday. The drop in the market caused investors to panic, and it took all of the 1930s to recover from the crash. This period is known as the Great Depression.

Since then, the market has experienced several other crashes, such as the subprime mortgage crash in 2008.

Although the NYSE was created by a few merchants centuries ago, many investors, exchange executives, companies, and regulators have contributed to its growth and what it is today.

World Exchanges

The NYSE is the largest stock exchange in the world. Yet, there are now exchanges in major cities across the globe trading domestic and international stocks.

These include the London and Tokyo Stock exchanges. Some of the other world’s largest exchanges are located in China, India, Canada, Germany, France and South Korea.

Stock Market History: A Timeline

Here is a timeline of major events in the stock market’s history:

•   Late 1400s: Antwerp, or modern-day Belgium, becomes the center of international trade. Merchants buy goods anticipating that prices will rise in order to net them a profit. Some bond trading also occurs.

•   1611: The first modern stock trading was created in Amsterdam. The Dutch East India Company is the first publicly traded company, and for many years, it is the only company with trading activity on the exchange.

•   Late 1700s: A small group of merchants made the Buttonwood Tree Agreement. The men meet daily to buy and sell stocks and bonds, a practice that eventually comes to form the New York Stock Exchange.

•   1790: The Philadelphia Stock Exchange is formed, helping spur the development of financial sectors in the U.S., and the country’s expansion west.

•   1896: The Dow Jones Industrial Average is created. It initially had 12 components that were mainly industrial companies.

•   1923: The early version of the S&P 500 was created by Henry Barnum Poor’s company, Poor’s Publishing. It begins by tracking 90 stocks in 1926.

•   1929: The U.S. stock market crashes after the decade-long “Roaring 20s,” when speculators made leveraged bets on the stock market, inflating prices.

•   1941: Standard & Poor’s is founded when Poor’s Publishing merges with Standard Statistics.

•   1971: Trading begins on another U.S. stock exchange, the National Association of Securities Dealers Automated Quotations, otherwise known as the NASDAQ.

•   1987: Corporate buyouts and portfolio insurance helped prices in the market run up until Oct. 19, what became known as “Black Monday.”

•   2008: The stock market crashes after the boom and bust of the housing market, along with the proliferation of mortgage-backed securities in the financial sector.

•   2020: The COVID-19 pandemic reaches the U.S. in early 2020, and the stock markets see a large decline and subsequent recovery.

Where Were Stocks First Created?

The concept of trading goods, which laid the foundation for where stocks were first created, dates back to the earliest civilizations. Early businesses would combine their funds to take ships across the sea to other countries. These transactions were either implemented by trading groups or individuals for thousands of years.

Throughout the Middle Ages, merchants assembled in the middle of a town to exchange and trade goods from countries worldwide. Since these merchants were from different countries, it was necessary to establish a money exchange, so trading transactions were fair.

As mentioned, Antwerp, or Belgium today, became the center for international trade by the end of the 1400s. It’s thought that some merchants would buy goods at a specific price anticipating the price would rise so they could make a profit.

For people who needed to borrow funds, wealthy merchants would lend money at high rates. These merchants would then sell the bonds backed by these loans and pay interest to the other people who purchased them.

Who Invented the Stock Market?

The first stock exchange in the world was created in Amsterdam when the Dutch East India Company was the first publicly traded company. To raise capital, the company decided to sell stock and pay dividends of the shares to investors. Then in 1611, the Amsterdam stock exchange was created. For many years, the only trading activity on the exchange was trading shares of the Dutch East India Company.

At this point, other countries began creating similar companies, and buying shares of stock was popular for investors. The excitement blinded most investors and they bought into any company that began available without investigating the organization. These days, this scenario is commonly referred to as a stock market bubble.

This resulted in financial instability, and eventually in 1720, investors became fearful and tried to sell all their shares in a hurry. No one was buying however, so the market crashed.

Another financial scandal followed in England shortly after — the South Sea Bubble. But even though the idea of a market crash concerned investors, they became accustomed to the idea of trading stocks, while keeping the risks of the market in mind.

How Does the Stock Market Work?

what determines stock price

The stock market works by pairing buyers and sellers, who want to trade financial securities, and helping facilitate transactions. Or, in other words, a stock exchange or stock market is a physical or digital place where investors can buy and sell stock, or shares, in publicly traded companies, among other securities.

More stock market basics: the price of each share is driven by supply and demand, as well as investor sentiment, and domestic and global economic trends. Investors need to know what they’re willing to pay for a security (bid) and what a seller is willing to sell it for (ask). There are spreads between those two prices, but in the end, if the two come to an agreement, securities trade hands.

The U.S. stock market is volatile, too. The more investors want to buy shares (or, as demand rises), the higher the price goes. When there’s less demand, the price of a share drops. Prices or values of securities are almost always in flux, even when the markets are not officially open for trading.

And as for how investors make money? Generally, through asset appreciation, which is when an investor buys a security, that security increases in value, and then is sold. As such, investors can make money off of stock market fluctuations, though there are other ways to generate returns.

What Are Stock Market Indexes?

stock market index definition

A stock market index measures the performance of a certain portion or subset of the overall market. Market indexes have many uses, and can come in many forms — there are indexes for assets from different parts of the world, from different industries, and so on. There are widely-followed market indexes, too, such as the Dow Jones Industrial Average, and the S&P 500.

History of Stock Market Indexes

As mentioned, the Dow Jones Industrial Average and the S&P 500 Index are two of the stock market’s most famous benchmarks, or barometers that try to capture the performance of the whole market and even the whole economy.

Founded in 1896 by Charles Dow and Edward Jones, the Dow is a price-weighted average. That means stocks with higher price-per-share levels influence the index more than those with lower prices. The Dow is made up of 30 large, U.S.-based stocks. It was designed as a proxy for the overall economy.

The Dow’s 12 initial components were mainly industrial companies, such as producers of gas, sugar, tobacco, oil, as well as railroad operators. It has since gone through many changes and now includes technology, healthcare, financial and consumer companies. General Electric was one of the original Dow members. Meanwhile, Procter & Gamble was added in 1932 and remains in the benchmark today.

Meanwhile, the S&P 500 index was created in 1923 by Henry Barnum Poor’s company, Poor’s Publishing. It began by tracking 90 stocks in 1926. Standard & Poor’s was founded in 1941, when the company merged with Standard Statistics.

Today, the S&P 500 is a market-cap-weighted index, meaning companies whose market value is larger have a bigger influence. Market value or market cap is calculated by multiplying the price-per-share by the number of shares outstanding. More so than the Dow or other gauges like the Russell 2000 Index, the S&P 500 has become synonymous among investors with the stock market.

💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.

What Are Stock Market Cycles?

Speaking of markets being up or down, stocks and the market can fluctuate on any given day. The U.S. stock market has historically gone through larger market cycles in which the market expands and shrinks over the course of weeks or even years.

There are typically four stages to a market cycle: accumulation, mark-up, distribution and the mark-down phase, which can also be reflected in the performance of cyclical stocks. The accumulation phase happens when a market is at a low and buyers begin to snap up stocks at discounted prices.

At the beginning of the mark-up phase prices have been stable for a while, and more buyers start jumping on the bandwagon driving up the price of stock. At the end of this phase, as buyers jump in en masse, the market makes a final spike as it nears the top of a bubble. During the distribution phase sentiment becomes mixed, and in the mark-down phase, prices typically plunge.

Here are some of the most famous U.S. stock market cycles:

1.    During the decade-long “Roaring 20s,” speculators made leveraged bets on the stock market, inflating prices. The rise in share prices was followed by the stock market crash of 1929. Share prices took years to recover.

2.    Corporate buyouts and portfolio insurance helped prices in the market run up until Oct. 19, 1987 — what became known as “Black Monday” among stock traders and investors. Panic selling, along with computerized trading, caused the Dow to fall 23% in a single day.

3.    Investors flocked to technology stocks during the Internet boom of the late 1990s and early 2000s. However, some of these companies weren’t profitable and didn’t have promising business models, causing the bubble to burst until 2002.

4.    A rapidly growing housing market, along with the proliferation of mortgage-backed securities in the financial sector, helped cause years of stock market gains from the early 2000s to 2008. The market then crashed, leading to a deep recession. Shares didn’t start to recover until March 2009.

The Takeaway

The modern-day stock market actually evolved over many centuries. Early brokers traded commodities as well as various types of debt starting in the 12th or 13th centuries. By the 1600s, it became more common for companies to raise capital by selling shares of their stock to finance new enterprises as well as global exploration.

Today, investors enjoy access to a robust array of different markets and types of securities. And technology has made it possible for investors to trade online — or even right from their smartphones.

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Feb
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2024
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How Much Should I Spend on Groceries a Month?

By | Budgeting & Goals, money | Comments Off on How Much Should I Spend on Groceries a Month?

How much you spend on groceries each month will depend on the number of people in your household, your lifestyle, even your dietary preferences. There’s no way around the fact that food is a significant line item in any budget, but there are ways to spend less at the store without resorting to beans and rice or ramen noodles every day (getting takeout doesn’t count).

Whether eating at home or in a restaurant, it’s helpful to give yourself some guidelines so that you and your bank accounts are on good terms. We cover several rules of thumb for how much to spend on food a month so you can better ensure you’re staying on track with your budget.

Key Points

•   The average U.S. household spends $7,316 on food annually, which is about $609.67 per month.

•   The U.S. Department of Agriculture provides monthly food budgets at different price levels to help determine your own grocery spending.

•   Household size, age, and dietary restrictions can affect the amount spent on groceries each month.

•   The USDA budgets assume all meals are prepared at home, and costs vary by age, gender, and family size.

•   Strategies like meal planning, using coupons, freezing meals, and shopping at discount grocery stores can help reduce food spending.

What Is the Average Cost of Groceries Per Month?

The average U.S. household spends $7,316 on food every year, according to a recent Bureau of Labor Statistics (BLS) consumer expenditure survey. That amount — about $609.67 a month, or $152.42 each week — represents nearly 12% of consumers’ income.

A note on inflation: The BLS report used data from 2021. The subsequent year saw food prices increase by a staggering 11% (typically, food prices rise about 2% annually). Over the next year, food prices are projected to rise between 5% and 10% — something to keep in mind as you compare your grocery bill to the national average.

Of course, the amount people spend on sustenance can vary widely, depending on age, household size, dietary restrictions and where they live. For instance, the consumer expenditure survey noted that single-parent family households with children spent more on food compared to single folks. Your eating habits, including how often you dine out or order in as well as a penchant for impulse grocery buys, also affect your bottom line.

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What Should My Monthly Grocery Budget Be?

When it comes to how much you should spend on groceries each month, the answer will depend on your situation. However, you can use the following guidelines to help you develop a reasonable monthly allowance for your grocery budget.

By USDA Guidelines

The U.S. Department of Agriculture offers a series of monthly food budgets that represent the cost of a healthy diet at four price levels: thrifty, low cost, moderate cost and liberal. These budgets can serve as a benchmark against which you can measure your own monthly spending on food.

Keep in mind that the USDA assumes that all meals and snacks will be prepared at home, and that costs will vary by age, gender, and family size. It updates each plan to current dollars every month using the Consumer Price Index for food.

For example, in March 2023, the USDA pegs the monthly cost of food for a female who is 20 to 50 years old at $241 for the thrifty plan. For females ages 19 to 50, it’s $257 for the low-cost plan, $313 for the moderate-cost plan and $401 for the liberal plan.

The USDA budgets more for couples within the same age ranges. For instance, a household of two might spend $530 on a thrifty plan, $565 on a low-cost plan, $689 on a moderate-cost plan and $882 on a liberal plan.

By Household Size

Your household size should determine how much you spend on groceries each month. As you saw in the USDA guidelines above, different household sizes as well as the ages of individuals affected the amount spent on food each month.

Let’s say you are a family of four with one child aged 6 to 8 and another between the ages of 9 to 11. According to the USDA guidelines, you might spend $979 a month on a thrifty plan, $1,028 on a low-cost plan, $1,252 on a moderate-cost plan and $1,604 on a liberal plan.

The USDA guidelines can provide a starting point for a food budget, but they don’t consider all the variables that can affect cost. That’s why building a personal food budget while using these numbers as a benchmark is best. To do so, you can look at your past monthly spending on food and then compare that number to the USDA food budget guides.

If your spending is much higher than the USDA’s estimates, it’s essential to determine why. It could be due to unavoidable factors like where you live, or it may stem from discretionary decisions, such as eating out at restaurants. If it’s the latter, it may be helpful to look for ways to cut back on spending, so you can redirect money to other goals like building an emergency fund.

How Dining Out Fits Into the Equation

The USDA’s budgets only consider food prepared at home, yet a food budget will likely also need to account for meals eaten at restaurants. The BLS reports that the average household spends $5,259 a year on food at home and $3,030 a year on food away from home.

Eating at restaurants is more costly than preparing food at home, so restaurant spending can be an excellent place to start making cuts when looking for wiggle room in a food budget.

Strategies to Keep Track of Your Food Spending

There are a number of budgeting strategies that can help you keep track of your spending. Here are some to consider if you’re trying to keep better track of your food spending:

The 50/30/20 Rule

The 50/30/20 rule is a simple strategy for proportional budgeting that breaks down a budget into three categories of spending. Here’s how it works:

•   50% goes to essential needs. These are necessary expenses, such as rent, groceries, and health insurance.

•   30% goes to discretionary spending. These are fun purchases that you don’t technically need to survive.

•   20% goes to savings. The 50/30/20 method separates discretionary spending and saving for financial goals, such as retirement, a down payment on a house, or paying off debt faster.

The 50/30/20 rule is a relatively simple form of budgeting, so it can help individuals keep their eyes on the big picture and avoid getting bogged down in minute details. That said, because it isn’t detail-oriented, it can be hard to pinpoint problem areas, such as places where overspending occurs.

Recommended: Input your monthly income to find out how much to spend on essentials, desires, and savings with our 50/30/20 Budget Calculator.

The Envelope Method

The envelope method seeks to make budgeting more concrete by limiting most spending to cash transactions. It works by allocating a set amount of cash each month to different spending categories, such as groceries or entertainment.

At the beginning of the month, write each category on individual envelopes. Decide how much you want to spend in each category for the month, and put enough cash to cover that amount in each respective envelope.

This method takes discipline. You can only use the cash in each envelope to make purchases in that category. When the money’s gone, it’s gone for the month. That means you can no longer do any spending in that category.

Zero-Based Budgeting

A zero-based budget is one in which you assign each dollar of your income a specific purpose. For example, you may decide to spend $1,000 on rent, $325 on food, $200 on student loan payments, $100 on savings and so on, until there are zero dollars left without a job to do. While this type of budget can take a lot of effort, it can help you think carefully about every dollar you spend and be mindful of setting aside savings.

By getting your budget on track with a checking and savings account with SoFi, you’ll have enough to work toward financial goals, like paying off student loans and saving for retirement.

Tips to Help Reduce Your Food Spending

Whether your food budget has gone out of control or you’re interested in spending less in general, there are several ways to lower your food budget.

Try Meal Prep

Shopping at a store without a plan can be a budget-buster, as it can lead to unneeded purchasing. To stay on track, create a meal plan that lays out breakfast, lunch, and dinner for every day of the week.

Once you’ve created a menu, check to see what ingredients are already in the kitchen. Make a list of the items you’re missing and the amounts that are needed. Buy only those items at the store.

Consider planning some meals that have overlapping ingredients, as buying ingredients in larger quantities can be cheaper. You’ll also want to consider preparing meals you like and can cook relatively quickly. That way, you’re not tempted to get takeout one day when you’re tired and don’t feel like cooking.

Take Advantage of Coupons

Using coupons can help buyers save money at the checkout counter. Grocery stores or major brands often offer discounts in coupons — look for them online, in a grocery store flier or in the mail.

Before you buy, however, make sure you actually need the food item. If there isn’t anyone in your household who will drink that carton of oat milk, it’s better to leave it on the shelf than to cash in your coupon.

While taking advantage of an individual coupon may not add up to much savings, using many coupons over time can start to open up space in your food budget. The same is true of buying store brands, which may be a dollar or two cheaper than their name-brand counterparts. Over time, and multiple purchases, those couple of dollars can add up to significant savings.

Freeze Meals

Having meals or ingredients ready in the freezer encourages you to eat at home instead of making the excuse of having nothing to eat in your house. It can be as simple as buying frozen vegetables, some form of protein or straight-up frozen meals (it’s still cheaper than dining out). You can even make your own freezer-ready meals by cooking additional portions of meals — eat some for dinner, then freeze the rest for later.

Shop at Discount Grocery Stores

The cost of food can vary widely from store to store, so consider visiting different stores to find budget-friendly prices. A great way to check if a grocery store offers lower prices is to look at their weekly flier. You’ll be able to find sales and other advertised goods and identify which stores offer the best deals on items you’re most likely to purchase.

Some stores may offer certain foods in bulk, such as grains, nuts, coffee, and dried fruit, which can be cheaper than buying the same packaged food items.

Getting a handle on how much you spend on food can help you build a larger household budget. That way, you may be able to set aside money for savings or other financial goals.

The Takeaway

As you can see, there’s no hard-and-fast rule for how much you should spend on groceries each month, as that varies based on your unique situation. However, everyone can likely benefit from giving their grocery budget a hard look and seeing if there’s anywhere they’re overdoing it.

Envelope and spreadsheet averse? Another way to track your grocery budget is with the SoFi money tracker app, which lets you easily set monthly spending targets and see where you’re spending the most.

See how your current food spending fits into your overall budget.


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