Feb
27
2024
What Does It Mean If the Fed Is Hawkish or Dovish?

What Does It Mean If the Fed Is Hawkish or Dovish?

By | Financial Independence, invest, Terminology | Comments Off on What Does It Mean If the Fed Is Hawkish or Dovish?

The Federal Reserve has two primary long-range goals: controlling inflation (hawkish) and maximizing employment (dovish). But these two aims can be at odds, and thus the Fed is often called hawkish or dovish.

While you may be thinking that monetary policy is for the birds, the Fed’s posturing, be it hawkish or dovish at any given time, is incredibly important for setting expectations and determining economic outcomes. That’s critical for investors to understand.

Key Points

•   The Federal Reserve has two primary goals: controlling inflation (hawkish) and maximizing employment (dovish).

•   Monetary policy decisions are made by the Federal Reserve, which can take a hawkish or dovish stance based on its goals.

•   Hawkish monetary policy focuses on low inflation and may involve raising interest rates, while dovish policy prioritizes low unemployment and may involve lowering rates.

•   The Federal Open Market Committee (FOMC), consisting of 12 members, is responsible for deciding monetary policy.

•   Hawkish and dovish policies can impact savers, spenders, and investors through changes in interest rates and economic outcomes.

Who Decides Monetary Policy?

The Federal Reserve, the central bank of the United States, decides monetary policy. And, as mentioned, it can take different postures in achieving its goals. In fact, the Fed is striving to balance what can seem like opposing scenarios. For example:

•   A monetary hawk is someone for whom keeping inflation low is the top concern. So if the Federal Reserve seems to be embracing a hawkish monetary policy, it might be because it’s considering raising interest rates to control pricing and fight inflation.

•   A dove is someone who prioritizes other issues — especially low unemployment over low inflation. If the Fed seems to tilt toward a dovish monetary policy, it could signify that it plans to keep rates where they are — at least for the time being — because growth and employment are doing fine. Or it may plan to lower rates to stimulate the economy and add jobs.

It’s important to note that the Federal Reserve’s decisions on monetary policy aren’t left to just one person.

People often blame the sitting president or the chairman of the Federal Reserve if they don’t like the way interest rates are going — whether that’s up or down. But the Fed’s direction is determined by a group of central bankers, not by the Fed chair alone.

The 12 members of the Federal Open Market Committee (FOMC), who typically meet eight times a year to review economic conditions and vote on the federal funds rate, are responsible for deciding the country’s monetary policy. And they may have varying opinions about what the economy needs. So you might hear that the Fed is hawkish or dovish, or you may hear that an individual policymaker — or policy influencer — is a hawk while another is a dove.

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Why Would the Fed Take a Hawkish Stance?

fed hawkish stance

When fiscal policy advisors in the government or banking industry are described as favoring a hawkish or “contractionary” monetary policy, it’s usually because they want to tighten the money supply to protect the economy from inflation and promote price stability.

If the price of goods and services rises due to inflation, consumers can lose their purchasing power. A moderate inflation rate is considered healthy for the economy. It encourages people to spend or invest their money today, rather than sock it away in a low-interest savings account where it could slowly lose value. The FOMC has determined that an inflation rate of around 2% is optimal for employment and price stability.

If inflation rises above that level for a prolonged period of time, the Fed may decide to pump the brakes to control inflation and keep the U.S. economy on track.

The Fed has several tools for controlling inflation, including raising its federal funds rate and discount rate, selling government bonds, and increasing the reserve requirements for banks. When access to money gets more expensive, consumers and businesses typically borrow less and save more, economic activity slows, and inflation stays at a more comfortable level.

Recommended: Is Inflation Good? Who Benefits from Inflation?

Why Would the Fed Take a Dovish Stance?

A dovish or expansionary monetary policy is the opposite of hawkish monetary policy.

If the Fed is worried about the economy’s growth, it may decide to give it a boost by lowering interest rates, purchasing government securities by central banks, and lowering the reserve requirements for banks. Or, if it thinks employment and growth are on track, it might keep interest rates the same.

With lower interest rates, businesses can borrow more money to expand and potentially hire more workers or raise wages. And when consumers are in a low-interest rate environment created by a dovish monetary policy, they may be more likely to borrow money for big-ticket items like cars, homes, home improvements, and vacations. That increased consumption can also create more jobs. And doves tend to prefer low unemployment over low inflation.

Is It Possible to Be Both Hawkish and Dovish?

Yes. Some economists (and FOMC members) don’t take a completely hawkish or dovish attitude toward monetary policy. They are sometimes referred to as neutral or “centrists,” because they don’t appear to prioritize one economic goal over another. Fed Chair Jerome Powell, for example, has been called a hawk, a dove, a “cautious hawk,” a “cautious dove,” neutral, and centrist in various media reports.

And the media frequently pondered where Powell’s predecessor, U.S. Treasury Secretary Janet Yellen, stood on the hawk-dove continuum.

The current (as of 2023) FOMC includes members who have been identified as hawkish, dovish, and neutral. That mix of viewpoints can make it difficult to guess the group’s next move — so anxious investors are keeping a close eye out for clues as to what could happen next.

How Do Hawkish vs Dovish Policies Affect Savers, Spenders, and Investors?

Interest rates frequently rise and fall as the economy cycles through periods of growth and stagnation, and those fluctuations impact everyone. Whether you’re a saver, spender, or investor — or, like most people, all three — you can expect those rate changes to eventually impact your bottom line.

For Savers

Savings account rates are loosely connected to the interest rates the Fed sets, so you might not see a difference right away if there’s a cut or a hike.

When the Fed lowers the federal funds rate, however, financial institutions may move to protect their profits by lowering the interest paid on high-yield savings accounts, money market accounts, and certificates of deposit (CDs). That can be frustrating, and it may be tempting to give up on saving or move money to riskier investments. But specialists generally recommend keeping an emergency fund with at least three to six months’ worth of living expenses stashed in a low-risk account that’s easy to access and isn’t tied to the markets.

Savers may want to check out the more competitive rates offered by online accounts. Because online-only financial institutions have a lower overhead, they typically out-yield brick-and-mortar banks’ savings accounts, regardless of what the Fed is doing with its rates.

For Spenders

An increase or decrease in the federal funds rate can indirectly affect the prime rate banks offer their most credit-worthy customers. And it is often used as a reference rate, or base rate, for other financial products, including car loans, mortgages, home equity lines of credit, personal loans, and credit cards.

If interest rates go down, and borrowing gets cheaper, it can encourage consumers to go out and make those purchases — both big and small — that they’ve been wanting to make.

If those interest rates go up, on the other hand, consumers tend to be deterred from borrowing and spending. They might decide to wait for rates to drop before financing a house, a car, or an expensive purchase like an appliance or home renovation.

Impulse spending also can be affected. Spenders might choose to save their money instead — especially if the interest rate goes up on CDs, money market accounts, and other savings vehicles. Or consumers may focus on paying down credit card debt and other loans to avoid paying high interest on big balances, especially if those obligations carry a variable interest rate.

For Investors

There are no guarantees as to how any investment will react to changes in interest rates made by the Fed. Some assets (like bonds) can be more directly impacted than others. But nearly every type of investment you might have could be affected.

One way to reduce your risk exposure is to create a diversified portfolio, with a mix of assets — from stocks and bonds to real estate and commodities, and so on — that won’t necessarily react in the same way to changes in the interest rate (or other economic factors). If your investments all trend up or down together, your portfolio isn’t properly diversified.


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The Takeaway

The Federal Reserve has two primary goals: overseeing U.S. monetary policy in order to stabilize prices and control inflation — a stance that’s considered hawkish or contractionary — and maximizing employment, which is considered dovish. While these two aims can seem at odds, the Fed has been striving to take a mostly dovish or neutral stance in recent years.

A recent bout of inflation, however, forced the Fed to change its stance in 2022 and raise interest rates. It’ll likely change its stance again when inflation cools. It’s a never-ending game of posturing, all with the goal of maintaining low unemployment and stable prices.

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Feb
27
2024
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Are 401(k) Contributions Tax Deductible? Limits Explained

By | Growing Wealth, invest, Investing | Comments Off on Are 401(k) Contributions Tax Deductible? Limits Explained

As you’ve been planning and saving for retirement, you may have heard that there’s a “401(k) tax deduction.” And while there are definitely tax benefits associated with contributing to a 401(k) account, the term 401(k) tax deduction isn’t accurate.

You cannot deduct your 401(k) contributions on your income tax return, per se — but the money you save in your 401(k) is deducted from your gross income, which can potentially lower how much tax you owe.

This is not the case for a Roth 401(k), a relative newcomer in terms of retirement accounts. These accounts are funded with after-tax contributions, and so tax deductions don’t enter the picture.

Key Points

•   401(k) contributions are not tax deductible, but they lower your taxable income.

•   Roth 401(k) contributions are made with after-tax money and do not provide tax deductions.

•   Contributions to employer-sponsored plans like 401(k) or 403(b) are taken out of your salary and reduce your taxable income.

•   401(k) withdrawals are taxed as income, and early withdrawals may incur additional penalties.

•   Making eligible contributions to a 401(k) or IRA can potentially qualify you for a Retirement Savings Contributions Credit.

How Do 401(k) Contributions Affect Your Taxable Income?

The benefits of putting pre-tax dollars toward your 401(k) plan are similar to a tax deduction, but are technically different.

•   An actual tax deduction (similar to a tax credit) is something you document on your actual tax return, where it reduces your gross income.

•   Contributions to an employer-sponsored plan like a 401(k) or 403(b) are actually taken out of your salary, so that money is not taxed, and thus your taxable income is effectively reduced. But this isn’t technically a tax deduction.

People will often say your 401(k) contributions are tax deductible, or you get a tax deduction for saving in a 401(k), but it’s really that your 401(k) savings are deducted from your salary, and not taxed.

The money in the account also grows tax free over time, and you would pay taxes when you withdraw the money.

Example of a 401(k) Contribution

Let’s say you earn $75,000 per year. And let’s imagine you’re contributing 10% of your salary to your 401(k), or $7,500 per year.

Your salary is then reduced by $7,500, an amount that is noted on your W2. As a result, your taxable income would drop to $67,500.

Would that alone put you in a lower tax bracket? It’s possible, but your marginal tax rate is determined by several things, including deductions for Social Security and Medicare taxes, so it’s a good idea to take the full picture into account or consult with a professional.

Recommended: IRA vs 401(k): What’s the Difference?

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Do You Need to Report 401(k) Contributions on Your Tax Return?

The short answer is no. Because 401(k) contributions are taken out of your paycheck before being taxed, they are not included in taxable income and they don’t need to be reported on a tax return (e.g. Form 1040, U.S. Individual Income Tax Return or Form 1040-SR, U.S. Tax Return for Seniors).

Your employer does include the full amount of your annual contributions on your W2 form, which is reported to the government. So Uncle Sam does know how much you’ve contributed that year.

You won’t need to report any 401(k) income until you start taking distributions from your 401(k) account — typically after retiring. At that time, you’ll be required to report the withdrawals as income on your tax return, and pay the correct amount of taxes.

When you’re retired and withdrawing funds (aka taking distributions), the hope is that you’ll be in a lower tax bracket than while you were working. In turn, the amount you’re taxed will be relatively low.

How the Employer Match Works

When an individual receives a matching contribution to their 401(k) from their employer, this amount is also not taxed. A typical matching contribution might be 3% for every 6% the employee sets aside in their 401(k). In this case, the matching money would be added to the employee’s account, and the employee would not owe tax on that money until they withdrew funds in retirement.

How Do 401(k) Withdrawals Affect Taxes?

The tax rules for withdrawing funds from a 401(k) account differ depending on how old you are when you withdraw the money.

Generally, all traditional 401(k) retirement plan distributions are eligible for income tax upon withdrawal of the funds (note: that rule does not apply to Roth 401(k)s, since contributions to those plans are made with after-tax dollars, and withdrawals are generally tax free).

If you withdraw money before the age of 59 ½ it’s known as an “early” or “premature” distribution. For these early withdrawals, individuals have to pay an additional 10% tax as a part of an early withdrawal penalty, with some exceptions, including withdrawals that occur:

•   After the death of the plan participant

•   After the total and permanent disability of the plan participant

•   When distributed to an alternate payee under a Qualified Domestic Relations Order

•   During a series of substantially equal payments

•   Due to an IRS levy of the plan

•   For qualified medical expenses

•   Certain distributions for qualified military reservists called to active duty

For individuals looking to withdraw from their 401(k) plan before age 59 ½, a 401(k) loan may be a better option that will not result in withdrawal penalties, but these loans with their own potential consequences.

How Do Distributions From a 401(k) Work?

Once you turn 59 ½, you can withdraw 401(k) funds at any time, and you will owe income tax on the money you withdraw each year. That said, you cannot keep your retirement funds in the account for as long as you wish.

When you turn 72, the IRS requires you to start withdrawing money from your 401(k) each year. These withdrawals are called required minimum distributions (or RMDs), and it’s important to understand how they work because if you don’t withdraw the correct amount by Dec. 31 of each year, you could get hit with a big penalty.

Prior to 2019, the age at which 401(k) participants had to start taking RMDs was 70 ½. The rule changed in 2019 and the required age is now 72. When you turn 72 the IRS requires you to start taking withdrawals from your 401(k), or other tax-deferred accounts (like a traditional IRA or SEP IRA).

If you don’t take the required minimum amount each year, you could face another requirement: to pay a penalty of 50% of the withdrawal you didn’t take.

All RMDs from tax-deferred accounts like 401(k) plans are taxed as ordinary income. If you withdraw more than the required minimum, no penalty applies.

Recommended: Should You Open an IRA If You Have a 401(k)?

What Are Tax Saver’s Credits?

Making eligible contributions to an employer-sponsored retirement plan such as a 401(k) or an IRA can potentially lead to a tax credit known as a Retirement Savings Contributions Credit, or a Saver’s credit. There are three requirements that must be met to qualify for this credit.

1.    Individual must be age 18 or older.

2.    They cannot be claimed as a dependent on someone else’s return.

3.    They can not be a student (certain exclusions apply).

The amount of the credit received depends on the individual’s adjusted gross income.

The credit amount is typically 50%, 20%, or 10% of contributions made to qualified retirement accounts such as a 401(k), 4013(b), 457(b), traditional or Roth IRAs.

For tax year 2023, the maximum contribution amount that qualifies for this credit is $2,000 for individuals, and $4,000 for married couples filing jointly, bringing the maximum credit to $1,000 for individuals and $2,000 for those filing jointly. Rollover contributions don’t qualify for this credit.

Alternatives for Reducing Taxable Income

Aside from contributing to a traditional 401(k) account, there are other ways to reduce taxable income while putting money away for the future.

Traditional IRA: Traditional IRAs are one type of retirement plan that can lower taxable income. Individuals may be able to deduct their traditional IRA contributions on their federal income tax returns. The deduction is typically available in full if an individual (and their spouse, if married) doesn’t have retirement plan coverage offered by their work. Their deduction may be limited if they or their spouse are offered a retirement plan at work, and their income exceeds certain levels.

SEP IRA: SEP IRAs are a possible alternative investment account for individuals who are self-employed and don’t have access to an employee sponsored 401(k). Taxpayers who are self-employed and contribute to an SEP IRA can qualify for tax deductions.

403(b) Plans: A 403(b) plan applies to employees of public schools and tax-exempt organizations, and certain ministers. Employees with 403(b) plans can contribute some of their salary to the plan, as can their employer. As with a traditional 401(k) plan, the participant doesn’t need to pay income tax on any allowable contributions, earnings, or gains until they begin to withdraw from the plan.

Charitable donations: It’s possible to claim a deduction on federal taxes after donating to charities and non-profit organizations with 501(c)(3) status. To deduct charitable donations, an individual has to file a Schedule A with their tax form and provide proper documentation regarding cash or vehicle donations.

To deduct non-cash donations, they have to complete a Form 8283. For donated non-cash items, individuals can claim the fair market value of the items on their taxes. from the IRS explains how to determine vehicle deductions. For donations that involve receiving a gift or a ticket to an event, the donor can only deduct the amount of the donation that exceeds the worth of the gift or ticket received. Individuals are generally required to include receipts when they submit their return.

Earned Income Tax Credit: Individuals and married couples with low to moderate incomes may qualify for the Earned Income Tax Credit (EITC). This particular tax credit can help lower the amount of taxes owed if the individual meets certain requirements and files a tax return — whether or not the individual owes money. Filing a return in this case can be beneficial, because if EITC reduces the amount of taxes owed to less than $0, then the filer may actually get a refund.

The Takeaway

Individuals who expect a 401(k) deduction come tax time may be disappointed to learn that there is no such thing as a 401(k) tax deduction. But they may be pleased to learn the other tax benefits of contributing to a 401(k) retirement account.

Contributions are made with pre-tax dollars, which effectively lowers one’s amount of taxable income for the year — and that may in turn lower the amount of income taxes owed.

Once an individual reaches retirement age and starts withdrawing funds from their 401(k) account, that money will be considered income, and will be taxed accordingly.

Another way to maximize your retirement savings: Consider rolling over your old 401(k) accounts so you can manage your money in one place with a rollover IRA. SoFi makes the rollover process seamless and simple. There are no rollover fees. The process is automated so you’ll avoid the risk of a penalty, and you can complete your 401(k) rollover quickly and easily.

Help grow your nest egg with a SoFi IRA.

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.

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.

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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Feb
27
2024
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19 Budgeting Categories For Your Budget

By | Budgeting & Goals, money | No Comments

Building a budget can pay off quite literally: It provides guidelines for your money and helps you wrangle your spending and saving to achieve financial health. With smart planning, you can make your cash work harder for you and grow.

Many people think that a budget is all about deprivation, but it’s really about organization. A key step in developing a good budget is knowing how to categorize both your spending and saving. That can help you get a handle on where your money is going and how to make the most of it.

In this guide, you’ll learn how to divide your expenses into three main categories (namely, needs, wants, and savings), and then further separate things into smaller groups. This can help you truly understand your spending habits and optimize your finances.

Whether you’re just starting out on your independent financial life or if you’re looking to tweak your existing budget, this advice can help you better manage your budget categories and direct your spending goals.

Key Points

•   Personal budget categories help organize and track expenses for better financial management.

•   Common budget categories include housing, transportation, food, utilities, healthcare, debt payments, savings, entertainment, and personal care.

•   It’s important to customize budget categories based on individual needs and priorities.

•   Tracking expenses within each category helps identify areas for potential savings and adjustments.

•   Regularly reviewing and adjusting budget categories can help maintain financial balance and achieve financial goals.

9 Budget Categories for Needs

Of course, you probably are wondering what actually constitutes budgeting categories. First, focus on the needs of life.

This category, which represents the largest chunk, includes expenses that you must pay in order to live and work. You might think of these as things you actually need to survive — they’re sort of like the air, water, and food of your budget.

So, for instance, a fancy dinner out or a caramel latte are definitely food, but they wouldn’t necessarily go in this category. Groceries would though.

A good rule of thumb is to have this category take up about 50% of your after tax income. Housing and utilities are likely to take up the biggest chunk, but ideally no more than 30% of income.

The percentages, however, are just guidelines. Because the cost of living in different states varies across the country, you may need to adjust your budget according to where you live.

Recommended: How to Make a Budget in 5 Steps

1. Housing

Whether you pay rent or have a home mortgage, paying to keep a roof over your head is definitely a need. In addition, you may have property taxes to pay if you are a homeowner, and home maintenance costs can be part of this category for renters and owners alike.

2. Utilities

Depending on your living situation, you might pay for electricity, WiFi, heating fuel, telephone service, water, sanitation services, and other necessities.

3. Insurance

Having car, health, life, homeowners or renters insurance and possibly pet insurance can be important. You don’t want to wing it with this kind of protection (and auto insurance is required).

4. Groceries and Personal Care Items

Of course, you need food and toiletries as part of daily living. So the food you purchase to make meals and items like toothpaste go into your budget as “needs.” However, buying that $7 pack of cookies or $40 hair conditioner? Those might be better deemed “wants.”

5. Transportation

Car ownership expenses, public transportation, and the occasional Uber to get to urgent care can all be considered necessities.

6. Clothing

Yes, you need a warm winter coat if you live in the climates that get chilly, plus boots. And you need basic garments to wear to work and on your off-hours. However, if you buy a cool jacket because you love it or yet another pair of cute shoes since they are on sale, those are not vital to your survival and should go in the “wants” category.

7. Debt

Minimum payments on outstanding debts like credit cards, student loans, auto loans, or personal loans would also go into the 50% needs portion.

8. Parenting Expenses

Child care, as well as child support or alimony payments, go into the “must” bucket of your budget. Those are not discretionary expenses.

9. Healthcare

Depending on your insurance coverage, you may have expenses related to staying well, such as copays, prescription costs, and the like. Treating yourself to a massage that isn’t medically required? That’s not a “need” but a “want.”



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

6 Spending Categories for Wants

These are expenses that don’t qualify as needs and don’t include your savings and payments towards debt. Though it can sometimes be tricky to separate needs from wants, if you can live and earn your income without it, then it’s probably a want.

If you can live and earn your income without it, then it’s probably a want.

This is where you could put spending on clothing outside of what you need on a day-to-day basis, dinner and drinks out with friends, going to the movies, gym memberships, personal care, and miscellaneous spending.

As a general guideline, this category shouldn’t take up more than 30% of your spending. While you may need to give and take depending on your situation, seeing how much you are spending on wants in black and white may cause you to start thinking more carefully about these expenditures.

1. Clothing and Personal Care

Treated yourself to a new but unnecessary shirt as part of a little retail therapy? Took yourself to the spa for a day? Or bought yourself a fancy watch since you got a promotion? Those are all wants. They aren’t necessarily bad things, but be clear that they are not vital to your survival.

2. Dining Out and Drinking

It’s part of life to meet friends and loved ones for happy hour or a nice meal, or to get a bubble tea while running errands on the weekend. Or maybe you don’t feel inspired to cook so you order some Pad Thai for pickup or delivery. These are all discretionary food expenses vs. those that are vital to your survival.

3. Entertainment

While entertainment can definitely enrich your life, it goes into the “wants” category. This includes things like concert, play, and movie tickets; books and magazines; cable and streaming services; downloading music; and attending festivals and fairs.

4. Gym Memberships, Self-care, and Grooming

You could just workout for free at home while watching a Youtube video, so health club memberships, yoga or Pilates classes are “wants.” Same goes with self-care and grooming: Facials, manicures, and the like are considered discretionary. That $50 hair conditioner you can’t live without? That isn’t a “need” either.

5. Travel Expenses

If you are traveling for business purposes to pitch a new account, that’s more of a “need,” but otherwise, a getaway is a “want.” So tally up any airfare, rental car costs, hotel or Airbnb, food, and tour/attraction tickets, and consider them “wants.”

6. Home Decor

If your mattress bites the dust and you replace it, that is a “need,” but deciding to buy a new couch because your home could use a spruce-up is a “want.”

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Categorizing Your Savings

Under the 50/20/30 rule, it’s suggested that savings take up 20% of your post-tax income. This is the money you’re putting toward your retirement, emergency fund, and other savings. You can also put payments against debt above minimums here since this can ultimately save money on interest, it’s considered savings.

Here are specifics.

1. Emergency Fund

Financial experts recommend having three to six months’ worth of basic living expenses socked away in case of emergency. This could mean job loss or receiving an unexpected and major medical or car repair bill. You don’t want to have to resort to using your credit card for such things.

Recommended: Use our emergency fund calculator to determine how much you should be savings for an emergency fund.

2. Retirement Savings

If you aren’t offered a 401(k) or something similar at work, you can still contribute to retirement savings account like an individual retirement account (IRA). You might be able to find a low-fee, or no-fee, IRA online.

Recommended: How to Open an IRA: Step-by-Step Guide

3. Other Short- and Long-Term Savings

You’ll also probably want to fund non-retirement savings goals, such as saving for a summer vacation or the down payment on a house. It can be a good idea to open a separate savings account, ideally where you can earn higher interest than a standard savings account, such as a money market fund, online savings account, or a checking and savings account.

To make sure saving happens each month, you may also want to set up an automatic transfer from your checking account into this account on the same day every month, perhaps after your paycheck gets deposited.

4. Additional Debt Payments

If you can pay more than the minimum on your credit card bill or make extra payments on your loans, that can decrease what you are spending on interest. That in turn can help increase your overall financial health and wealth.

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Why Categorizing Your Budget Is Important

Categorizing your budget is important because it can give you a much better sense of where your money goes versus just paying whatever bills turn up.

•   When you see how much cash goes towards the different kinds of “needs,” “wants,” and savings, you can better manage your cash. Tracking your spending can bring greater financial insight.

•   Also, as you categorize and tally your spending, you may see that much more than 30% of your take-home pay is going to ”wants.” That could convince you to recalibrate and cut back.

•   Or you might notice that you are spending way more than 50% on “needs.” This can happen when you are just starting out in your career or if you live somewhere with a high cost of living. Again, you might look to lower costs.

Finalizing Your Budget Categories and Getting Started

Now that you have an idea of how to allocate your income based on standard budgeting categories, you may want to start building out your budgeting plan.

If you find that your monthly expenses (including savings) are higher than your monthly take-home income, you’ll likely want to make some adjustments. One of the easiest places to do this is within the “wants” bucket.

Here, you can scout for unnecessary expenses you may be able to do without. For instance, maybe you would be fine saving on streaming services by dropping one or two platforms, cooking at home a few more times per week, or cutting back on clothing purchases.

If your “musts” are eating up more than 50%, perhaps you want to consider moving to a less expensive home or taking in a roommate. Another option could be to start a side hustle to bring in more income or train up for a higher-paying line of work.

It can help to keep in mind that the 50/30/20 guideline is just that, a guideline. Everyone’s situation is different and your numbers may vary depending on many different factors, including where you live, your income, how much debt you have, and your savings and investment goals. (There are also other budgeting methods to try, if you like.)

The Takeaway

Putting expenses into categories and coming up with a spending plan can bring significant benefits. These include being able to pay off debt, saving up for short-term goals (such as an emergency fund, a vacation, or a down payment on a home), and funding your retirement.

The 50/20/30 rule can give you an general idea of how to allocate your income based on standard budgeting categories and help you start building out your budgeting plan.

Need some help keeping track of spending? Many financial institutions offer tools that can help you see where your money is going and make the most of your savings.

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 the 4 main categories in a budget?

There are different ways to categorize a budget, but commonly, people focus on their take-home pay, their spending on their “wants,” their “needs,” and how much they save.

What categories should you have in a budget?

When building a budget, it’s important to know how much income you have after taxes, what are the expenses that are necessary for your survival, what is your usual discretionary spending (which some people call the “fun stuff” in life), and how much are you saving. Within the last three buckets, you can subdivide into more specific categories.

How do you organize a budget?

One good budgeting technique is the 50/30/20 budget rule. This principle says that 50% of your take-home pay should go towards necessities, 30% to discretionary spending, and the remaining 20% should be saved.

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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.

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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Feb
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Guide to Wealth Advisors & What They Do

By | Growing Wealth, invest, Investing | No Comments

Key Points

•   Wealth management advisors are professionals who offer personalized financial advice and services to individuals with significant assets.

•   These professionals assist clients with various aspects of their financial lives, including investment management, retirement planning, tax strategies, and estate planning.

•   Expertise in multiple areas, such as finance, accounting, and law, enables wealth management advisors to provide comprehensive guidance.

•   By closely collaborating with clients, wealth management advisors gain an understanding of their goals, risk tolerance, and financial situation to develop tailored strategies.

•   Engaging the services of a wealth management advisor grants individuals access to specialized knowledge, ongoing support, and a holistic approach to managing their wealth.

What Is a Wealth Advisor?

Wealth advisors are a subset of the greater financial advisor world, and they typically (but not exclusively) help high-net worth individuals or families manage their assets, and plan for the future.

There are many firms that offer wealth advisory services, including individual wealth management advisors running independent firms. And while their services often mirror or closely resemble those offered by others in the space — such as financial advisors or financial planners — the key difference is that a wealth advisor tends to offer those with high net worth holistic wealth management services.

Wealth advisors, or wealth management advisors, usually work with wealthy people or families with at least $1 million in liquid assets (i.e. not including property, businesses, trusts, and so on). Wealth management can be expensive, because the services are comprehensive, including but not limited to retirement planning, tax planning, estate planning, and investment management.

Wealth Manager vs Financial Advisor

Wealth manager, financial advisor, investment advisor, financial planner — there are many terms and titles in the financial services sector. Because of that, it can be helpful to know which specific type of financial service provider you’re looking for when you’re in need of guidance and advice.

Differences in certifications and licenses are one of the reasons there are so many terms and titles used to describe people who provide advice related to personal finances. So, it pays to do a little research to determine who would work best for you and your specific financial situation.

Wealth Manager vs Financial Advisor
Wealth Manager

 Financial Advisor
Subset of financial advising Advise on financial plans or strategies
Usually work with high-earners or high-net-worth individuals Often sell products to earn commissions
Role is more comprehensive, and includes estate planning, tax consulting, and retirement planning Two common types: Financial Planners and Investment Advisors

What Do Wealth Advisors Do?

Wealth management is a subset of financial advising. Wealth managers tend to focus on managing the assets of high earners. A wealth manager’s role is generally far more comprehensive than offering just investment advice. While investment advisors and financial planners focus on one piece of your financial situation, wealth managers combine several areas of financial guidance.

It may be helpful to think of them as a quarterback with a team of professionals behind them, who can provide highly customized services and products.

They might place your assets in markets to enhance returns and shift them out when risk exceeds your comfort levels. Once the parameters are set, and the wealth manager understands your individual needs, you can focus your energy elsewhere.

They are able to provide financial advice that addresses the entirety of a person’s financial life, including investment management, accounting and tax strategy consulting, estate planning, retirement planning, and more. They work closely with you to establish a plan to grow and maintain wealth.

While wealth management is often thought of as a service only for the affluent, there are opportunities to get great advice, service, and solutions from a wealth advisor at very reasonable costs.

There are three areas a wealth advisor can help you:

Investment Management and Risk Management

A wealth advisor will work with you to assess your tolerance for risk and then provide an investment strategy to help you reach your financial goals. For example, if you’re beginning to plan for retirement early in your career, you may be more apt to take on risk than someone who may be nearing the end of their career and is much closer to retiring.

Part of any investment plan also includes managing risk over time. This includes having adequate insurance for your financial investments, and diversifying your portfolio to minimize risk.

💡 Learn more about investment risk.

Tax and Estate Planning

Wealth managers do not offer tax advice, but they can often coordinate with your attorney or accountant to strategize and minimize the taxes you owe by planning for tax efficiency.

Many wealth advisors can also help with estate planning strategies. Estate planning often involves more than just wills. For instance, there are advantages for setting up trusts, especially if you have dependents that will need caring for. Working with a wealth manager for estate planning can help get your affairs in order, and help avoid any surprises or legal snags for your family down the road.

Real Estate

If you own investment property, this is where the wealth manager vs financial advisor debate will be quite impactful. Wealth advisors usually have more experience and skills to help you manage portfolios with valuable real estate. Millions of Americans invest in real estate in one way or another — often by purchasing property, or shares of REITs — and choosing an advisor who can help with financial planning and real estate might make sense.

What Do Financial Advisors Do?

Financial advisor is the broadest of the terms. The phrase can describe anyone who advises you on a financial plan, investments, or tax strategy implications.

How much do these professionals cost? Be aware that some financial advisors are incentivized to recommend certain investments based on the fees they can earn. So, your first step should be to understand which type of financial advisor you’re looking for, as well as what the advisor charges.

Many young investors might not have a good understanding of what financial advisors do. But the two most common types are financial planners and investment advisors.

Financial Planners

It may be easiest to think of financial planners as “lifestyle planners.” They’re most suitable for helping you set up a budget, plan for tax time, save for retirement, or to plan your child’s college education. They should have completed professional requirements for their Certified Financial Planner™ practitioner designation.

Some, usually in larger companies, earn their keep by selling you financial products, rather than just advice or guidance. Those can include insurance, stocks, mutual funds, and more.

Fee-only financial planners don’t sell products, however, as they’re paid for their advice — per hour, or at a certain rate. Fee-based planners may charge a fee but also may earn a commission from certain products, like mutual funds.

It’s always wise to ask how any advisor is being compensated, as taxes and fees quickly eat into profits.

Investment Advisors

Investment advisors also encompass a range of financial professionals. Probably the biggest difference between a financial advisor and an investment advisor is that a Registered Investment Advisor has a fiduciary responsibility to put his or her client’s interests first. And as the name implies, they must register with the SEC, and are subject to various oversight and record keeping rules, among other obligations.

You can even look up individual advisors and review their credentials through a relatively simple internet search. Some financial planners are also Registered Investment Advisors (RIAs).

If you’re unsure of your advisor’s intentions, it’s always best to ask about their priorities before you start working with them. With an investment broker, for example, you’d want to know whether he or she has a fiduciary responsibility.

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How Much Does a Wealth Advisor Cost?

As noted, wealth advisors may charge their clients on a fee-only basis, or as a percentage based on the total asset management load. Ultimately, what clients end up paying will vary drastically based on how much they’re actually putting under management — so, the more a wealth advisor is managing, the more a client might pay.

Fees can vary widely, and as noted above, some advisors are compensated in more than one way. For fee-only or flat-fee wealth advisors, the fees generally land somewhere between $7,500 and can be as high as $55,000 per year.

The typical wealth advisor charging on a percentage basis will likely levy a fee between 0.6% and 1.2%.

The point is that it’s up to the client to ascertain how their advisors charge for their services so they know what they’re paying, and what they’re paying for exactly.

Pros and Cons of Having a Wealth Advisor

Whether the expenses of hiring a wealth advisor, along with the hassle of finding the right person, may prove to be worth it in the end, there are no guarantees. As such, there are pros and cons to hiring a wealth advisor.

On the upside, wealth advisors can shoulder some of the burden of financial decision making, and properly manage one’s assets — which, if you have a lot to manage, can become like a full-time job in and of itself.

Wealth advisors can also act as a sounding board for clients to bounce ideas or strategies off of, offer support during difficult times (death in the family, etc.), and have plans and contingencies in place in case things don’t go to script.

As for some of the potential cons, it’s hard to overlook the expense. If you have a substantial amount of wealth, a 1% management fee can easily amount to tens of thousands of dollars every year.

For some people, it may be worth looking into automated investing platforms rather than hiring a professional. Automated investing, or robo advisors as they’re sometimes called, can be a low-cost way to manage a pre-set portfolio of exchange-traded funds (ETFs). These services are more limited however, and may be more suited to investors with fairly straightforward goals and situations.

It’s also important to note that not all wealth advisors act as fiduciaries, and may be looking to benefit themselves more than you as a client.

4 Tips for Choosing a Wealth Advisor

If you’re interested in working with a wealth management advisor, it’s important to research options carefully before making a decision. Meeting with different financial professionals can give you an opportunity to ask questions about their background, experience and services, as well as the fees they charge.

These tips can help with selecting an advisor that meets your needs and goals as well as your budget.

1. Determine the Type of Wealth Advisor for You

Again, wealth management advisors aren’t identical when it comes to the types of clients they work with and the advisory services they offer. So, it’s important to consider which one is best suited for helping to guide money decisions.

A wealth management advisor can help you with financial-market investment guidance, some may specialize in taxes, real estate investments, or estate planning. Clarifying what you need and want from an advisor, based on where you are financially and where you want to end up, can help winnow your choices.

It is also important to know who the typical clientele of the wealth management advisor you are considering is. For instance, some advisors may prefer to work with clients who have a certain level of assets.

2. Research Their Credentials

It’s never a bad idea to do some background research on a professional you’re planning to hire, and the same logic applies to choosing a wealth management advisor. Specifically, that means looking at things such as:

•   How many years of experience they have

•   What types of clients they typically work with

•   What professional certifications or licenses they hold, if any

•   Whether they’ve ever been the subject of any disciplinary or legal action

There are several tools you can use to research a financial advisor’s background. The regulatory body known as FINRA, for instance, has a BrokerCheck Tool that allows you to explore the backgrounds of investment advisors who are registered with the Securities and Exchange Commission (SEC).

You can also look at registration information from the SEC, and your state’s securities agency.

3. How Much You Can Afford to Pay?

Not every advisor’s fee schedule will work with your budget, so it’s critical to know the distinction between fee-based and fee-only to understand how advisors structure their fees and what you’ll pay for their services.

You should be able to get a sense of what an advisor charges by reviewing their client brochure. A brochure is essentially a condensed version of Form ADV (which is used by advisors to register with federal and state securities authorities), which details the services an advisor offers, their fees, where they operate, any potential conflicts of interest that exist and past disciplinary or legal actions they were subject to, if any. You may be able to find both their Form ADV and their client brochure on an advisor’s website but they’re also required to furnish you with a copy upon request.

It may also be helpful to cast a wider net and look beyond traditional advisors. Using an online platform like SoFi Invest, for example, allows you to benefit from professional investment guidance without paying commissions, or advisory fees, but other fees apply.

4. Which Questions to Ask

Before committing to a wealth management advisor, take the time to interview them first. This vetting process can help with making a final decision about whether you want to pursue a professional relationship.

During this process, you should ask questions about their background and services. Specifically, consider posing these questions to any advisor you’re thinking of working with:

•   How long have you been a financial professional?

•   What certifications do you hold?

•   Which financial advisory services do you offer?

•   How are you paid for those services?

•   Are you a fiduciary financial advisor?

•   What type of client do you typically work with?

•   What is your approach to or strategy for financial planning?

•   How do you typically communicate with clients?

•   Will I work with anyone besides you? (To determine if the advisor is part of a financial services firm.)

•   Do you have any potential conflicts of interest?

•   Are there any past legal or disciplinary actions on your record?

Do I Need a Wealth Management Advisor?

There’s no right or wrong answer as to whether you need a wealth management advisor — it really comes down to whether you feel hiring one would ultimately be worth the expense, and take the burden of managing your assets and finances off of your shoulders.

Since wealth advisors tend to work with wealthier clientele, they often do provide those clients a valuable service.

That said, if you’re in a lower income bracket or don’t have a vast array of assets to stay on top of, another type of financial advisor may prove to be more beneficial. It really comes down to your specific situation, goals, time horizon, and budget. You can also check out SoFi’s Wealth Investing Guide to try and gauge your needs too.

The Takeaway

Wealth management advisors can help you navigate unforeseen hurdles and ease your investing worries. Plus, they can be a great asset when defining your financial goals, among many other things.

Hiring a wealth management advisor has its upsides, like having someone to discuss strategy with, and to help you keep a cool head and make wise financial decisions during trying times. But they can have their downsides, too, and can be expensive.

With all of that in mind, if you’re ready to prioritize investing and want some guidance, consider opening a SoFi Invest® brokerage account. SoFi offers an Active Investing platform, where investors can trade stocks and ETFs. For a limited time, funding an account gives you the opportunity to win up to $1,000 in the stock of your choice. All you have to do is open and fund a SoFi Invest account.

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

FAQ

Is a wealth advisor worth it?

A wealth advisor is worth it if the client feels that the amount they’re spending on the advisor’s service is getting them what they want. While a wealth advisor may not be worth it for everyone, depending on how wealthy you are, an advisor’s services could be invaluable.

What is the difference between a wealth advisor and a financial advisor?

A wealth advisor is a type of financial advisor, but one who tends to work with wealthier or high-earning clients, and who work to provide custom solutions to their clients’ wealth management issues. They’re more specialized, in many ways, than a financial advisor.

How rich do you need to be to have a financial advisor?

There’s not necessarily a minimum net worth needed to work with a financial advisor, but as a general guideline, once you have around $50,000 in assets, it may be a good idea to get in touch with one and explore the services they offer.

SoFi Invest®

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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.

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.


Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

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
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What Are the Average Monthly Expenses for One Person?

By | Budgeting & Goals, money | Comments Off on What Are the Average Monthly Expenses for One Person?

It’s human nature to wonder how you compare to everyone else. And that goes for money too. For instance, are you spending more or less on housing? Food? Transportation?

The average single person spends about $3,405 per month, according to recent data. But that will vary with where and how you live. Still, knowing where you stand can help you budget better and see how your spending stacks up against other people’s outflow of cash.

Here, you’ll get a sense of how much an average person might spend per month so you can consider how your own budget looks.

Key Points

•   The average monthly expenses for one person can vary, but the average single person spends about $3,405 per month.

•   Housing tends to consume the highest portion of monthly income, with the average annual spending on housing at $1,885 per month per person.

•   Transportation costs can vary, but the average household spends around $913 per month on transportation.

•   Health care expenses can vary, with a single adult in New York City paying about $575 to $776 per month for health insurance.

•   Food expenses can range from $300 to $540 per month, depending on factors like age, income, and location.

Average Monthly Expenses in 2023

Housing

Housing tends to consume the highest portion of monthly income. Using U.S Department of Labor statistics, the average annual spending on housing was $1,885 per month per person. Typically, single people living alone (or with others but paying their own) may devote more of their monthly income to housing than those living as a family.

Costs can also vary significantly depending on the cost of living in your area. That’s important to consider when considering costs and making a monthly budget.

A single person living in a studio in New York City, for example, can expect to spend significantly more than someone living in a rural or suburban community. According to RentHop, the average price for a studio (one-room) rental in New York City was $3,450 in spring of 2023.

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Transportation

Transportation costs can vary depending on your mode of transport (i.e., car vs. bus vs train), as well as what region of the country you live in.

But one thing that holds true for many of us: Transportation often accounts for the second-largest budget item, after housing.

The average household shells out around $913 per month on transportation, including car or public transportation, gas, insurance and other related expenses. A single person could expect to pay half or even a quarter of that amount, depending on their particular situation, such as whether they are making car payments or using public transportation.

And, of course, you can take steps to lower those costs as needed, like learning how to save money on gas.

Health Care

Health care expenses can vary depending on each individual’s circumstances, and can also rise and fall from one month to the next.

For example, there may be some months where unexpected medical costs crop up (such as emergency care), and other months where you only need to cover insurance premiums and preventive care appointments.

Cost varies by location as well.

For instance, a single adult living in New York City can expect to pay about $575 to $776 a month for health insurance (or more).

A single adult living in Boise, Idaho, on the other hand, can anticipate shelling out roughly $274 to $422 (depending on specifics) per month for those health insurance costs.

Recommended: How to Save Money Daily

Food

Everyone’s gotta eat, and the average single person spends about $300 to $540 per month.

This figure ranges depending on your age, income, gender, eating habits, and where you live.

The wide variability in spending in this category shows that food can be an area where consumers can find savings if they need to reduce monthly spending (such as getting serious about meal planning and choosing lower cost brands at the supermarket).

💡 Quick Tip: When you overdraft your checking account, you’ll likely pay a non-sufficient fund fee of, say, $35. Look into linking a savings account to your checking account as a backup to avoid that, or shop around for a bank that doesn’t charge you for overdrafting.

Cell Phone

Average monthly wireless fees run about $166 for a plan, which might include multiple lines.

The good news? If your budget is particularly tight, you could spend as little as $10 a month for basic service with no data.

Utility Bills

After you’ve saved up and carefully budgeted to buy a home, you probably don’t want to be surprised by a higher-than-expected utility bill. The average monthly electricity bill was $121 per month recently, but that figure can of course vary.

A number of factors go into utility costs, including home size, where you set the thermostat, type of insulation you have, the climate, as well as what part of the country you live in (since rates vary across the country). For instance, those who live in Utah paid $80.87 a month while those in Hawaii shelled out $177.78 per month on average.

Clothing

The average adult spends about $146 on clothing per month. If your budget is tight, this is one category where you can often pare back spending, whether by shopping your closet, hitting the sales racks, or bringing older clothes that need repairs or fit adjustments to the tailor. A clothing swap with friends can be another option.

💡 Quick Tip: If you’re faced with debt and wondering which kind to pay off first, it can be smart to prioritize high-interest debt first. For many people, this means their credit card debt; rates have recently been climbing into the double-digit range, so try to eliminate that ASAP.

Gym Memberships

The average gym membership runs anywhere from $20 to $60 per person per month, which could be a good deal if you use it regularly.

If, however, you aren’t really using that membership or it’s too pricey for your budget, you could try going outside and hitting the pavement, joining an exercise meetup group, watching YouTube videos, and/or picking up some dumbbells and exercise bands to workout at home.

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Getting Your Monthly Expenses in Check

Knowing the average cost of living can be helpful when you’re trying to determine how much of your budget you may need to allocate to different spending categories. (If you’re thinking, “What budget?” it’s likely a wise move to get busy creating a budget.)

Recommended: Cost of Living per State

These average monthly expenses shared above, though, are just that — averages.

To fine-tune your budget, and make sure your spending is in line with both your income and your goals, it’s a good idea to track your own spending (which means every cash/debit card/credit card payment and every bill you pay) for a month or two.

There are a few options for tracking spending. One easy method is to make all purchases for the month on one debit card or credit card, then, at the end of the month, take note of all the purchases made.

Another option is to use an app (your bank may provide a good one) that can help you log and track your spending. At the end of the month, you can then see everything you spent, as well as allocate each expense into key categories, such as housing, transportation, food, health care, etc.

You can then see how your spending compares to national averages, as well as where you might want to tweak things. For instance, if you don’t have enough at the end of the month to put any money away into your retirement fund, you might want to pare back non-essential spending (such as restaurants, clothing, gym memberships).

The same holds true if you haven’t been able to put money towards an emergency fund, which is an important safety net if you were to endure an emergency such as a job loss.

Recommended: Use our emergency fund calculator to figure out your ideal emergency fund amount.

The Takeaway

Whether you’re creating a new budget or refreshing an old one, you’ve probably noticed how important (and tricky) it is to get your monthly expenses right.

Knowing the average amount people spend to live can help you figure out how your spending stacks up and, if you’re just starting out, help to ensure you’re budgeting enough for each category.

To see how your actual spending compares to national averages, you may want to track your daily spending for a month (or more), and then set up certain spending limits to keep your purchases in line with your income, as well as your savings goals.

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.

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.

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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