Dec
13
2024
15 Low-Cost Valentine’s Day Gifts Your Sweetie Will Love

15 Low-Cost Valentine’s Day Gifts Your Sweetie Will Love

By | Budgeting & Goals, money | Comments Off on 15 Low-Cost Valentine’s Day Gifts Your Sweetie Will Love

Here comes Valentine’s Day, when your heart may be full of love but your bank account could be low on cash. How can you mark the day with a great gift that won’t further deplete your funds? You’re in the right place to find out.

Typically, February 14 triggers a spending frenzy. In 2024, spending on all things red, heart-shaped, or otherwise lovey-dovey was projected to hit $25.8 billion, according to the National Retail Federation. But to stick to a budget, consider this list of 15 sweet but affordable Valentine’s gift ideas.

Key Points

•   To express their love, many people splurge on Valentine’s Day gifts and celebrations, but lower-cost or free festivities can be just as meaningful.

•   Create a small bag of your partner’s favorite candy bars with a handmade card.

•   Gift a low-maintenance potted succulent as an alternative to expensive roses.

•   Cook a special meal at home to enjoy a personal dining experience.

•   Craft a personalized Valentine’s Day card with heartfelt sentiments.

Valentine’s Day Gifts on a Budget

Valentine’s Day has been celebrated for hundreds of years now, with the first messages declaiming love appearing in the 1500s. Commercially produced valentines swept across the U.S. in the mid-1800s and have been going strong ever since. The image of Cupid, the Roman god of love, with his bow and arrow, has been a long-time favorite representation, and birds (who often mate in February) also became a symbol of love.

These days, there’s no need to stick with those icons. Expressing your devotion can be done in an array of ways, often for very little cash that won’t blow your budget, as you’ll see in this list.

1. Sweet Treats

You could easily spend a bundle on top-tier chocolate truffles, but candy bars from the impulse rack at the checkout line can be equally satisfying. Put together a small bag of your honey’s favorite treats. Add a handmade card noting, “I’m sweet on you!” for a thoughtful and cute Valentine’s Day gift without going overboard or depleting your checking account.

2. Plant Power

While roses are a classic V-Day gift, price gouging can kick in around the holiday, making this a very expensive way to say “I love you.” Instead, why not avoid credit card debt and buy an adorable (and low-maintenance) potted succulent instead? It can show your affection and brighten your honey’s home. Look for them on Amazon or at The Home Depot or Lowe’s; they can cost just $7 each. Add tissue paper and some ribbon, and you’re good to go.

3. A Favorite Home-Made Meal

Skip the $100 dinner, and opt for a delicious meal at home. (Stash the money saved in an emergency fund or start a travel account with it.) Maybe that’s a chef’s recipe for three-cheese mac and cheese and a nice bottle of red wine or a good steak and salad with French vinaigrette. Choose something you don’t normally make that feels first-class but stays within a sensible budget.

4. S’mores

Here’s another affordable luxury that won’t bust your line-item budget on Valentine’s Day: While chocolates and fancy candy are delicious, sometimes a good old-fashioned treat from your childhood can feel more fun and meaningful. Grab a bag of marshmallows, graham crackers, and bar chocolate to roast over a fire.

Don’t have access to an open flame? No problem. Heat an oven to 350 degrees and layer a small baking dish with graham cracker squares, chocolate, and marshmallow halves. Repeat with another layer, topping it off with remaining marshmallow halves. Bake for nine to 11 minutes until marshmallows are puffed and golden brown on top.

5. An Over-the-Top Valentine’s Day Card

What’s an extravagant Valentine’s Day card? You know the splurge-y ones: Maybe they are three-dimensional, cut-paper pop-ups or encrusted with dried flowers. Some play music when you open them. Others are embossed with metallic designs. Whatever the details, even at their most expensive, they are likely to give you change on a $10 or $20 bill and put a smile on your sweetheart’s face.

6. A Handmade Valentine’s Day Card

On the other hand, what could be more wonderful than a handmade card? You might make a collage with magazine images or doodle a little drawing. When a heartfelt sentiment is added, that can be quite the Valentine’s Day keeper. And the money you saved vs. buying a major gift can go into your savings account for that vacation you two are planning.

7. Cupid Coupons

Show your appreciation for your significant other through cupid coupons to be cashed in for loving gestures. These money-saving coupons don’t skimp on thoughtfulness. You can make them for a 10-minute massage, cooking dinner one night, doing their laundry, or watching their favorite reality show (which you really don’t like) together.

Come up with different coupon ideas and place them in a decorative jar or envelope. Your partner can then redeem these gifts throughout the year.

Recommended: 5 Ways to Achieve Financial Security

8. Low-Cost Local Activities

There are plenty of fun, free activities that you can take advantage of locally. Head back to your favorite spot in the park for a stroll, or drive up to a local scenic overlook. Search your city for free museums (many museums have times or days when you can visit at no cost) or points of interest that you haven’t been to together.

9. A V-Day Party

Why not do a group Valentine’s Day happy hour at home? Ask friends to BYOB, and celebrate together with simple snacks. Whether you make it a surprise for your beloved or not, you’ll have fun as a group, and you won’t have to worry about spending a ton of money.

Recommended: 23 Ways to Make Quick Cash

10. Selfcare Supplies

Who can resist a little pampering? Head to a shop like Ulta or Sephora or look online at Amazon and other e-tailers for not-too-pricey moisturizers, masks, or shower gels. These often come in cleverly packaged sets for the Valentine’s Day holiday. These low-cost gifts are not only a treat for the recipient; their affordability can also make them a form of financial self-care for the gift giver.

11. A Love Letter

The written word goes a long way. If it’s been a while since you’ve confessed your love or you have yet to do so, express your feelings in a handwritten letter. Reflect on the past year with your bae, and tell them why they are so special.

If you’re short on words, write the top reasons why your partner makes you smile. Put each reason on a Post-it note, and leave them throughout their house or in their car.

12. DIY Roses

They may not smell as sweet as what Mother Nature makes, but LEGO Roses ($13) can be a fun gift. You can pre-assemble, or let your love go crazy building the 100-plus-piece blooms.

13. Scavenger Hunt

If you’re really crafty, come up with a scavenger hunt. You can make it themed according to your loved one’s favorite book, TV show, or movie. There’s nothing better than solving a Harry Potter-themed riddle that leads your partner to the Gryffindor House Cup or Tom Riddle’s diary.

Try coming up with four to five clues that lead to a small gift. A gift card to a local coffee shop feels more significant when you put together a scavenger hunt with your honey’s favorite things in mind.

14. Movie Night for Months

Research and write up a list of movies you’d love to watch together. Maybe they’ve never seen your favorite Hitchcock flicks or the “Lord of the Rings” saga. Leave a bunch of blank lines on your list for your love to fill in the movies they would like to stream with you, and have fun sharing together time while checking off each entry.

Trying to save money on streaming services? Check out services like Hoopla and Kanopy that can allow library-card holders to watch films for free.

15. Class Gift

Embark on an adventure together. Check your local library, community center, or arts organization for free or low-cost one-time classes, and sign both of you up. For instance, you might take a memoir-writing workshop, calligraphy tutorial, or strength-training class to spark a new hobby.

Valentine’s Day Explained

Curious about this holiday that’s all about love and how it got its name? Here’s a bit of history: Valentine’s Day may have been so named in honor of a priest who was martyred around the year 270. He was said to have signed a letter to his jailer’s daughter “from your Valentine” as that was his name. Legend has it that he befriended the young woman and healed her from blindness. His example may have helped to inspire today’s tradition.

Other versions of the day’s history also exist; no one is 100% certain of the origin.

Valentine’s Day by the Numbers

Here are a few interesting statistics related to the Valentine’s Day holiday and gift shopping:

•   Men spend $235, or almost twice as much as women do at $119, on average for Valentine’s Day.

•   In a recent year, Americans spent $6.4 billion on jewelry, $2.6 billion on flowers, and $4.9 billion on an evening out for Valentine’s Day, according to the National Retail Federation.

•   Online dating activity tends to be busiest on the first Sunday of the New Year (messaging on Tinder has seen a 22% surge in years past) and can stay strong until Valentine’s Day, perhaps signaling that many people don’t want to be alone on that holiday.

If you do decide you want to splurge this holiday, you might think of how to finance it. Cash back rewards could help, or perhaps you can get a bonus when opening a new checking or savings account at an online bank or elsewhere.

The Takeaway

You are now armed with great Valentine’s Day ideas that maximize the moment without blowing your budget. You might try writing an old-fashioned love letter, hosting a scavenger hunt, or even giving your sweetie some everlasting toy roses. With these tactics, being financially savvy doesn’t have to take a holiday while you celebrate.

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Dec
13
2024
Differences and Similarities Between Home Equity Lines of Credit (HELOCs) vs Personal Lines of Credit

Home Equity Lines of Credit (HELOCs) vs Personal Lines of Credit

By | Credit, Financial Independence, Home Ownership, personal_loan | Comments Off on Home Equity Lines of Credit (HELOCs) vs Personal Lines of Credit

If you’re looking for a tool you can use to borrow money when you need it, you may be wondering which is the better choice: a personal line of credit or a home equity line of credit (HELOC).

In this guide we’ll compare these two types of credit lines — both of which function similarly to a credit card but typically have a lower interest rate and a higher credit limit. We’ll also cover some of the pros and cons of using a personal line of credit vs. a HELOC.

Key Points

•   A personal line of credit and a HELOC are both flexible borrowing options.

•   HELOCs generally have lower interest rates than personal lines of credit due to being secured.

•   Both options typically require a minimum credit score of 680.

•   Personal lines of credit are unsecured, providing flexibility but often at higher rates.

•   HELOCs may provide tax benefits for home improvements, though defaulting could risk home loss.

What Is a Personal Line of Credit?

A personal line of credit, sometimes shortened to PLOC, is a revolving credit account that allows you to borrow money as you need it, up to a preset limit.

Instead of borrowing a lump sum and making fixed monthly payments on that amount, as you would with a traditional installment loan, a personal line of credit allows you to draw funds as needed during a predetermined draw period. You’re required to make payments based only on your outstanding balance during the draw period.

In that way, a PLOC works like a credit card. Generally, you can pay as much as you want each month toward your balance, as long as you make at least the minimum payment due. The money you repay is added back to your credit limit, so it’s available for you to use again.

You can use a personal line of credit for just about anything you like as long you stay within your limit, which could range from $1,000 to $100,000, and possibly more.

A PLOC is usually unsecured debt, which means you don’t have to use collateral to qualify. The lender will base decisions about the amount you can borrow and the interest rate you’ll pay on your personal creditworthiness.

Can a Personal Line of Credit Be Used to Buy a House?

If you could qualify for a high enough credit limit — or if the property you want to buy is being sold at an extremely low price — you might be able to purchase a house with a personal line of credit. But it may not be the best tool available.

A traditional mortgage, secured by the home that’s being purchased, may have lower overall costs than a personal line of credit. There are several different types of mortgage loans to choose from.

A variable rate, which is typical of personal lines of credit, might not be the best option for a large purchase that could take a long time to pay off. Your payments could go lower, but they also could go higher. If interest rates increase, your loan could become unaffordable. With a traditional mortgage, you would have the option of a fixed rate or a variable one.

Another consideration: If you use all or most of your PLOC to make a major purchase like a home, it could have a negative impact on your credit score and future borrowing ability. The amount of revolving credit you’re using vs. how much you have available — your credit utilization ratio — is an important factor that affects your credit score. Lenders typically prefer this number to be less than 30%.

What Is a HELOC?

A HELOC is a revolving line of credit that is secured by the borrower’s home. It, too, usually has a variable interest rate.

Lenders typically will allow you to use a HELOC to borrow a large percentage of your home’s current value minus the amount you owe. That’s your home equity.

A lender also may review your credit score, credit history, employment history, and debt-to-income ratio (monthly debts / gross monthly income = DTI) when determining your borrowing limit and interest rate.

Recommended: Learn More About How HELOCs Work

Turn your home equity into cash with a HELOC from SoFi.

Access up to 90% or $500k of your home’s equity to finance almost anything.

Personal Line of Credit vs HELOC Compared

If you’re comparing a personal line of credit with a HELOC, you’ll find many similarities. But there are important differences to keep in mind as well.

Similarities

Here are some ways in which a personal line of credit and a HELOC are alike:

•   Both are revolving credit accounts. Money can be borrowed, repaid, and borrowed again, up to the credit limit.

•   Both have a draw period and a repayment period. The draw period is typically 10 years, with monthly minimum payments required. The repayment period may be up to 20 years after the draw period ends.

•   Access to funds is convenient. Withdrawals can be made by check or debit card, depending on how the lender sets up the loan.

•   Lenders may charge monthly fees, transaction fees, or late or prepayment fees on either. It’s important to understand potential fees before closing.

•   Both typically have variable interest rates, which can affect the overall cost of the line of credit over time. (Each occasionally comes with a fixed rate. The starting rate of a fixed-rate HELOC is usually higher. The draw period of a fixed-rate personal line of credit could be relatively short.)

•   For both, you’ll usually need a FICO® score of 680. Your credit score also affects the interest rate you’re offered and credit limit.

Differences

The biggest difference between a HELOC and a personal line of credit is that a HELOC is secured. That can affect the borrower in a few ways, including:

•   In exchange for the risk that HELOC borrowers take (they could lose their home if they were to default on payments), they generally qualify for lower interest rates. HELOC borrowers also may qualify for a higher credit limit.

•   With a HELOC, the lender may require a home appraisal, which might slow down the approval process and be an added expense. HELOCs also typically come with other closing costs, but some lenders will reduce or waive them if you keep the loan open for a certain period — usually three years.

•   A borrower assumes the risk of losing their home if they default on a HELOC. A personal line of credit does not come with a risk of that significance.

Personal Line of Credit vs. Home Equity Line of Credit
Personal LOC HELOC
Flexible borrowing and repayment ✓ ✓
Convenient access to funds ✓ ✓
Annual or monthly maintenance fee Varies by lender Varies by lender
Typicaly a Variable interest rate ✓ ✓
Secured with collateral ✓
Approval based on creditworthiness ✓ ✓
Favorable interest rates ✓* ✓*
*Rates for secured loans are usually lower than for unsecured loans. Rates for personal lines of credit are generally lower than credit card rates.

Recommended: Credit Cards vs. Personal Loans

Pros and Cons of HELOCs

A HELOC and personal line of credit share many of the same pros and cons. An advantage of borrowing with a HELOC, however, is that because it’s secured, the interest rate may be more favorable than that of a personal line of credit.

A HELOC may offer a tax benefit if you itemize and take the mortgage interest deduction. But there are potential downsides, too.

Pros and Cons of HELOCs
Pros Cons
Flexibility in how much you can borrow and when. Your home is at risk if you default.
Interest is charged only on the amount borrowed during the draw period Variable interest rates can make repayment unpredictable and potentially expensive.
Generally lower interest rates than credit cards or unsecured borrowing. Lenders may require a current home appraisal for approval.
Interest paid is tax deductible if HELOC money is spent to “buy, build, or substantially improve” the property on which the line of credit is based. A decline in property value could affect the credit limit or result in termination of the HELOC

Pros and Cons of Personal Lines of Credit

Because you draw just the amount of money you need at any one time, a personal line of credit can be a good way to pay for home renovations, ongoing medical or dental treatments, or other expenses that might be spread out over time.

You pay interest only on the funds you’ve drawn, not the entire line of credit that’s available, which can keep monthly costs down. As you make payments, the line of credit is replenished, so you can borrow repeatedly during the draw period. And you don’t have to come up with collateral.

But there are other factors to be wary of. Here’s a summary.

Pros and Cons of Personal Lines of Credit
Pros Cons
Flexibility in how much you borrow and when. Variable interest rates can make repayment unpredictable and potentially expensive.
Interest charges are based only on what you’ve borrowed. Interest rate may be higher than for a secured loan.
Interest rates are typically lower than credit cards. Qualification can be more difficult than for secured credit.
You aren’t putting your home or another asset at risk if you default. Convenience and minimum monthly payments could lead to overspending.

Alternatives to Lines of Credit

As you consider the pros and cons of a HELOC vs. a personal LOC, you also may wish to evaluate some alternative borrowing strategies, including:

Personal Loan

As you’re thinking about a personal loan vs. a personal line of credit, the big difference is that, with a personal loan, a borrower receives a lump sum and makes fixed monthly payments, with interest, until the loan is repaid.

Most personal loans are unsecured, and most come with a fixed interest rate. The rate and other terms are determined by the borrower’s credit score, income, debt level, and other factors.

You’ll owe interest from day one on the full amount that you borrow. But if you’re using the loan to make a large purchase, consolidate debt, or pay off one big bill, it may make sense to borrow a specific amount and budget around the predictable monthly payments.

Personal loan rates and fees can vary significantly by lender and borrower. You can use a loan comparison site to check multiple lenders’ rates and terms, or you can go to individual websites to find a match for your goals.

Auto Loan

If you’re thinking about buying a car with a personal loan, you may want to consider an auto loan, an installment loan that’s secured by the car being purchased. Qualification may be easier than for an unsecured personal loan or personal line of credit.

Most auto loans have a fixed interest rate that’s based on the applicant’s creditworthiness, the loan amount, and the type of vehicle that’s being purchased.

Down the road, if you think you can get a better interest rate, you can look into car refinancing.

Beware no credit check loans. Car title loans have very short repayment periods and sky-high interest rates.

Mortgage

A mortgage is an installment loan that is secured by the real estate you’re purchasing or refinancing. You’ll likely need a down payment, and borrowers typically pay closing costs of 2% to 5% of the loan amount.

A mortgage may have a fixed or adjustable interest rate. An adjustable-rate mortgage typically starts with a lower interest rate than its fixed-rate counterpart. The most common repayment period, or mortgage term, is 30 years.

Your ability to qualify for the mortgage you want may depend on your creditworthiness, down payment, and value of the home.

Credit Cards

A credit card is a revolving line of credit that may be used for day-to-day purchases like groceries, gas, or online shopping. You likely have more than one already. Gen X and baby boomers have an average of more than four credit cards per person, Experian has found, and even Gen Z, the youngest generation, averages two cards per person.

Convenience can be one of the best and worst things about using credit cards. You can use them almost anywhere to pay for almost anything. But it can be easy to accrue debt you can’t repay.

Because most credit cards are unsecured, interest rates can be higher than for other types of borrowing. Making late payments or using a high percentage of your credit limit can hurt your credit score. And making just the minimum payment can cost you in interest and credit score.

If you manage your cards wisely, however, credit card rewards can add up. And you may be able to qualify for a low- or no-interest introductory offer.

Credit card issuers typically base a consumer’s interest rate and credit limit on their credit score, income, and other financial factors.

Student Loans

Federal student loans typically offer lower interest rates and more borrower protections than private student loans or other lending options.

But if your federal financial aid package doesn’t cover all of your education costs, it could be worth comparing what private lenders offer.

The Takeaway

A HELOC or a personal line of credit can be useful for borrowers whose costs are spread out over time, especially those who don’t want to pay interest from day one on a lump-sum loan that may be more money than they need.

SoFi now offers flexible HELOCs. Our HELOC options allow you to access up to 90% of your home’s value, or $500,000, at competitively low rates. And the application process is quick and convenient.

Unlock your home’s value with a home equity line of credit brokered by SoFi.

FAQ

What is better, a home equity line of credit or a personal line of credit?

If you qualify for both, a HELOC will almost always come with a lower interest rate.

Can I use a HELOC for personal use?

Yes. HELOC withdrawals can be used for almost anything, but the line of credit is best suited for ongoing expenses like home renovations, medical bills, or college expenses. Some people secure a HELOC as a safety net during uncertain times.

How many years do you have to pay off a HELOC?

Most HELOCs have a “draw period” of 10 years, followed by a repayment period.

What happens if you don’t use your home equity line of credit?

Having a HELOC you don’t use could help your credit score by improving your credit utilization ratio.

How high of a credit score is needed for a line of credit?

Personal lines of credit are usually reserved for borrowers with a credit score of 680 or higher. A credit score of at least 680 is typically needed for HELOC approval, but requirements can vary among lenders. Some may be more lenient if an applicant has a good debt-to-income ratio or accepts a lower loan limit.

Does a HELOC increase your mortgage payments?

The HELOC is a separate loan from your mortgage. The two payments are not made together.

Photo credit: iStock/KTStock

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This content is provided for informational and educational purposes only and should not be construed as financial advice.

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Understanding a Taxable Brokerage Account vs an IRA

By | Growing Wealth, invest, Investing | No Comments

Tax-sheltered accounts like the IRA and 401(k) have long been the go-to investment accounts for retirement planning. These types of accounts offer ways to build up tax-advantaged savings for the future. However, investing in taxable brokerage accounts is another common way to build wealth for the short or long term.

The most notable difference between an IRA and a taxable brokerage account can be seen around tax season. With taxable brokerage accounts, you typically pay taxes on your capital gains and dividends each year. In contrast, tax-advantaged accounts generally only involve paying taxes when you make your contribution or withdraw your money, depending on the type of account.

Investors should know the similarities and differences between IRAs and taxable brokerage accounts. Learning the ins and outs of these accounts can help you decide which is right for you to build wealth and meet your financial goals.

Key Points

•   Taxable brokerage accounts and IRAs serve different purposes, with brokerage accounts focusing on general investment and IRAs designed specifically for retirement savings.

•   Taxable brokerage accounts require annual taxes on capital gains and dividends, while IRAs allow for tax-deferred growth until funds are withdrawn.

•   Different types of IRAs, such as Traditional and Roth, offer unique tax advantages and rules regarding contributions and withdrawals tailored to individual financial situations.

•   A combination of both account types can provide flexibility and diversification, allowing investors to meet both short-term and long-term financial goals.

•   Each account type has its pros and cons, making it essential to evaluate personal financial objectives before deciding on the appropriate investment strategy.

What Are Taxable Brokerage Accounts?

Think of taxable brokerage accounts as “traditional” investment accounts — brokerage-offered investment accounts with stocks, bonds, exchange-traded funds (ETFs), and mutual funds. Investors who utilize these accounts, including online brokerage accounts, invest and trade to build short- or long-term wealth, but not necessarily for retirement.

The investments within a taxable brokerage account are subject to tax on any capital gains, dividends, or interest earned. Brokerage account holders pay taxes each year based on investment income.

It’s also important to note that tax liability can vary based on variables like the types of investments held within the brokerage account, the length of time they are held, and an individual’s tax bracket. For example, short-term capital gains, which are gains on investments held for less than a year, are taxed at the same rate as ordinary income. In contrast, long-term capital gains, which are gains on investments held for more than a year, are typically taxed at a lower rate.

Recommended: Capital Gains Tax Guide

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What Is an IRA?

An IRA, or individual retirement account, is an investment account designed specifically to save for retirement. Contributions to an IRA may be tax-deductible or tax-deferred, and the accounts’ investments can grow tax-free until they are withdrawn at retirement age.

There are several different types of IRAs, including Traditional IRAs, Roth IRAs, and SEP IRAs, which have different rules for contributions, taxes, and withdrawals. An IRA can be a helpful tool for saving for retirement and taking advantage of potential tax benefits.

Taxable Brokerage Accounts vs IRA Accounts

Tax-sheltered, or tax-deferred, investment accounts like IRAs differ from taxable brokerage accounts because they generally offer tax advantages and have restrictions on contributions and withdrawals. The tax advantages make them designed for long-term retirement saving and investing. Besides having money invested for retirement, the most notable benefits of IRAs are no yearly tax burden and, in some cases, tax-deductible contributions.

Here’s a breakdown of what each tax-deferred account may offer compared to a brokerage account.

Traditional IRAs vs Taxable Brokerage Accounts

The traditional IRA has no income limits; as long as someone has a taxable income, they can contribute to a traditional IRA. The gains, dividends, and interest earned in IRAs grow tax-deferred during contributing years. Contributions to a traditional IRA may be tax-deductible, though the benefits phase out if you have a high enough income.

With a few exceptions, IRA withdrawal rules say account holders will have to pay a 10% early withdrawal penalty if they take a distribution before reaching age 59 ½. Additionally, account holders are required to start making withdrawals the year they turn age 73 (if they reach age 72 after December 31, 2022) that are taxed as income.

These limitations make a traditional IRA different from a taxable brokerage account, as taxable brokerage accounts do not have withdrawal restrictions and penalties.

With a traditional IRA, as with taxable brokerage accounts, account holders will need to manage it independently or with a financial planner’s help.

A traditional IRA might be a good option for investors who think they will be in a lower tax bracket when they retire. In theory, these investors would save money on taxes by paying them in retirement compared to paying taxes now.

For 2024, account holders can contribute up to $7,000 per year (or up to $8,000 if they are age 50 or older). For 2025, the total contributions investors can make to a traditional IRA remains the same — up to $7,000 (or up to $8,000 if they are 50 and up).

Roth IRAs vs Taxable Brokerage Accounts

Like taxable brokerage accounts, Roth IRA contributions aren’t tax-deductible. Investors contribute with post-tax dollars, but that also means they won’t be subject to taxes when they withdraw funds in retirement.

However, income limits exist for those who can contribute to a Roth IRA account. If you make more than the income limits, then the amount of money you can contribute to a Roth IRA may be reduced, and high earners may not be able to contribute to a Roth IRA at all. For 2024, income limits start at $146,000 per year for single tax filers and $230,000 for married couples filing jointly. For 2025, income limits start at $150,000 per year for single tax filers and $236,000 for married couples filing jointly. You can use a Roth IRA calculator to help determine your contribution limit.

As with brokerage accounts, Roth IRA account holders can contribute to their accounts at any age. Investors who want to make retirement contributions can do so even after they’ve retired.

Rules around Roth IRA withdrawals are less stringent than those for a traditional IRA. Roth account holders can also begin to take the account’s growth starting at age 59 ½ with no penalty as long as the account has been open for five years.

For those eligible to contribute to a Roth IRA, these accounts make the most sense if the account holder thinks they will be in a higher tax bracket in retirement. Since account holders pay taxes on the contributions in the year they were made, it makes the most sense to pay income taxes when in a lower tax bracket.

Recommended: Traditional vs Roth IRA: How to Choose the Right Plan

401(k)s vs Taxable Brokerage Accounts

Similar to an IRA, 401(k) accounts are one of the most common tax-sheltered accounts. The big difference between an IRA and a 401(k) account is that the 401(k) is employer-sponsored, and employees and employers can contribute to the account.

Employees can contribute to their 401(k) up to $23,000 per year in 2024 and up to $23,500 in 2025. Employees over 50 can make additional catch-up contributions of $7,500 annually in both 2024 and 2025, and in 2025, those 60 to 63 can make a higher catch-up contribution of up to $11,250 under the SECURE 2.0 Act. Many employers offer employees 401(k) plans, some even matching contributions up to a certain percentage.

The 401(k) is one of the most common ways to build a retirement nest egg because the contributions are automatic and come out of the employee’s paycheck, so employees may not even notice the money is gone.

Tax Advantages of an IRA vs Taxable Brokerage Account

As noted above, IRAs offer several tax advantages compared to taxable brokerage accounts. Investors generally use IRAs for tax efficient investing.

Here are some of the main differences:

•   Contributions to traditional IRAs may be tax-deductible: Contributions to a traditional IRA may be tax-deductible, depending on your income and whether a retirement plan at work covers you or your spouse. This means that the money you contribute to a traditional IRA can be deducted from your taxable income, potentially reducing the amount of tax you owe.

•   Earnings in an IRA grow tax-free or tax-deferred: The money you earn in an IRA, including interest, dividends, and capital gains, grows tax-deferred or tax-free until you withdraw it in retirement. In a taxable brokerage account, you would have to pay taxes on any capital gains and dividends you earn each year.

•   Withdrawals from traditional IRAs may be taxed at a lower rate: When you withdraw money from a traditional IRA in retirement, it is taxed as ordinary income at your marginal tax rate. However, if you are in a lower tax bracket in retirement than when you made the contributions, your withdrawals may be taxed at a lower rate.

•   Contributions to a Roth IRA are not tax-deductible: Contributions to a Roth IRA are not tax-deductible, but the money you withdraw in retirement is tax-free, provided you meet specific requirements. This can be a good option if you expect to be in a higher tax bracket in retirement than you are now.

Which Type of Account Is Best for Me?

Brian Walsh, Certified Financial Planner™ at SoFi, says ultimately, you’ll have a mixture of accounts. However, what’s right for you depends on your situation. “It depends if you have access to a 401(k) and an employer match … it depends on what you’re eligible for.” Here are a few considerations that can help you assess your situation.

Think About Investing in a Traditional IRA If…

•   You want to take advantage of tax-deferred contributions.

•   You expect to be in a lower tax bracket in retirement.

•   You’ve maxed out your 401(k) contributions and make too much to contribute to a Roth account.

Think About Investing in a Roth IRA If…

•   You expect to be in a higher tax bracket in retirement.

•   You want the option to pass on the account easily to your heirs.

•   You’ve maxed out your traditional 401(k) and want to offset some of your future tax burden with a Roth IRA.

Think About Investing in a 401(k) If…

•   Your employer offers a plan with a match program.

•   You’re uncertain about your future tax liability, and your employer allows you to split contributions between a traditional 401(k) and a Roth 401(k).

•   You prefer a hands-off approach to investing.

Think About Investing in a Taxable Brokerage Account If…

•   You’ve maxed out all contribution limits to your 401(k) and IRAs.

•   You want to invest in investments not offered in your 401(k) or IRA, like options or cryptocurrency.

•   You want more control over your investments with the opportunity to withdraw funds at your leisure.

Pros and Cons of Taxable Brokerage Accounts

Here are some of advantages and disadvantages of taxable brokerage accounts:

Pros of Taxable Accounts

•   Flexibility: Taxable brokerage accounts allow you to invest in a wide range of assets, such as stocks and bonds, as well as derivatives. This allows you to create a diversified portfolio that may help you meet your investment goals.

•   Growth potential: Taxable brokerage accounts offer the potential for significant growth, as you can earn capital gains on your investments if they increase in value.

•   No contribution limits: Unlike tax-advantaged accounts, taxable brokerage accounts have no contribution limits. This means you can contribute as much as you want to your account, subject to income limits or restrictions.

Cons of Taxable Accounts

•   Taxes: One of the main disadvantages of taxable brokerage accounts is that you will be required to pay taxes on your investment income and capital gains. This can significantly reduce your overall returns.

•   Lack of tax benefits: Taxable brokerage accounts do not offer the same tax benefits as tax-advantaged accounts. For example, 401(k)s and IRA contributions may be tax-deductible, while investments in taxable brokerage accounts are not.

•   Potential for loss: As with any investment, there is a risk of loss in a taxable brokerage account. If your investments decline in value, you could lose some or all of your initial investment.

Is it Smart to Have Both an IRA and a Taxable Brokerage Account?

It may be a consideration to have both an IRA and a taxable brokerage account, as each type has its specific benefits and drawbacks.

An IRA can be a good option if you are looking to open a retirement account and save for retirement and want the potential tax benefits of an IRA. On the other hand, a taxable brokerage account can be a good choice if you are looking to invest for goals other than retirement or if you are not eligible for a tax deduction on your contributions to an IRA.

Having both an IRA and a taxable brokerage account can give you more flexibility and diversification in your investments, which can help you manage risk and improve your overall financial situation.

The Takeaway

Every account — from taxable brokerage accounts to IRAs — has advantages and disadvantages, which is why some investors choose to invest in a few. The old cliche, “don’t put all your eggs in one basket,” is a solid philosophy for financial planning. Investing in several different “baskets” is one way to ensure that your money is working hard for you.

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FAQ

What is the difference between an IRA and a taxable brokerage account?

An IRA is designed specifically to save for retirement. Unlike a taxable brokerage account, which is used for general investing, contributions to a traditional IRA may be tax-deductible, and the investments within the account grow tax-deferred until they are withdrawn at retirement age. There are several other types of IRAs, including Roth IRAs, which have different rules for contributions, taxes, and withdrawals.

Is it better to contribute to an IRA or a taxable brokerage account?

Whether to contribute to an IRA or a taxable brokerage account depends on your circumstances and financial goals. In general, an IRA can be a good option if you are looking to save for retirement and want the potential tax benefits of an IRA. However, if you are not eligible for a tax deduction on your contributions or looking to invest for goals other than retirement, a taxable brokerage account may be a better choice.

How is a taxable brokerage account taxed?

The investments held within a taxable brokerage account may be subject to tax on any capital gains, dividends, or interest earned. Short-term capital gains, which are gains on investments held for less than a year, are taxed at the same rate as ordinary income. Long-term capital gains, which are gains on investments held for more than a year, are typically taxed at a lower rate. Dividends and interest income earned are also subject to tax.

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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.


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Guide to Idle Funds: Where to Put Them

Guide to Idle Funds: Where to Put Them

By | Budgeting & Goals, Growing Wealth, money | Comments Off on Guide to Idle Funds: Where to Put Them

Idle funds are funds that aren’t serving any specific purpose or working for you in any way. This is a term that’s often used when discussing business and government finance. It’s common for government entities and corporations to have idle money sitting in cash reserves until it’s ready to be used for specific expenditures.

It’s also possible for individuals to have idle cash. For example, you might keep a few hundred dollars stashed in your dresser or checking account. That money is technically idle, since it isn’t earning you any interest. The good news is that it’s easy to put idle funds to work so your money has a chance to grow.

Key Points

•   Idle funds is the term used to describe money that is sitting and not growing or building your wealth.

•   Idle funds can be deposited into high-yield savings accounts to earn competitive interest rates while maintaining liquidity.

•   Other options include investing in certificates of deposit (CDs) for fixed interest rates over a set period.

•   Brokerage accounts, which invest in stocks, bonds, or mutual funds based on risk tolerance and investment goals, can be used to grow idle funds.

•   Consider cash management accounts at brokerages to earn interest while planning longer-term investments, or I Bonds can be another use for idle funds.

What Are Idle Funds?

In personal finance, idle funds or idle savings refers to money that isn’t being invested or otherwise earning interest. Idle funds may be held in cash or sit in a deposit account, like a checking account, at a bank, credit union, or other financial institution. It can be called idle savings, idle cash, or idle money, but it all means the same thing. It’s money that’s doing absolutely nothing. It’s not appreciating in any way or earning you interest.

Here’s another way to think of idle funds. Imagine you’re in a car that’s idling at a stoplight. You’re not moving forward toward any specific destination and you’re not gaining anything; in fact, you’re just burning gas. When you allow your money to sit idle, you’re not getting closer to your financial goals either.

As mentioned, businesses and governments may keep idle savings on hand that don’t earn any interest. They can do so if they plan to spend that money later for a specific purpose, such as an expansion project or funding government contracts. But it’s possible that you might have idle funds without realizing it, which can be a missed opportunity to build wealth.

How Do Idle Funds Work?

Idle funds work by, somewhat ironically, not working for you. Normally, when you deposit money into a savings account, money market account, or investment account, those funds can grow over time.

The bank typically pays you interest on deposits, and you can end up with more money than you started with thanks to compounding interest.

Compounding means earning interest on your interest. The more often interest compounds and the higher the interest rate earned, the more your money can grow. For example, if you deposit $1,000 into an interest-bearing account and earn a 7% annual rate of return, that initial amount would grow to $7,612 after 30 years, even if you never add another dime.

With idle savings, that doesn’t happen. Your money doesn’t earn interest or any kind of return. If you deposit $1,000 into an idle funds account (or have it sitting in a piggy bank) on Day 1, you’d still have that same $1,000 on day 10,000, assuming you don’t make any withdrawals. Since you’re not putting money into a savings account or another account where it can earn interest, idle funds don’t benefit from the power of compounding.

What Is the Value of Idle Funds?

You might assume that the value of idle funds is the same as the money’s face value. So $100 in idle cash would be worth $100. But it’s important to keep the impact of inflation in mind. Inflation refers to a continuous rise in consumer prices for goods and services for an extended time period. In the U.S., the Consumer Price Index (CPI) is one of the most commonly-used measures for tracking inflation.

When inflation is high (as it was in recent memory), your money doesn’t go as far. If gas goes from $3 a gallon to $5 a gallon, for example, it costs more to fill up your tank. When you have idle funds that aren’t earning interest, your money can’t keep up with the pace of inflation. That’s why personal finance experts recommend keeping some of your money in a savings account or investment account as a hedge against the toll inflation takes.

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Real Life Examples of Idle Funds

Idle money can take different forms but again, it’s all money that isn’t working for your benefit or advantage in some way. Here are some examples of idle funds you might have right now:

•   You get a rebate check in the mail that you forget to deposit. Since this money isn’t being used to grow savings, it’s idle.

•   Every day, you dump out your coins and dollar bills into a jar that you keep in your closet. Even though you’re saving, this is idle savings because you earn a 0% interest rate.

•   Instead of separating some of your money into a savings account, you keep all of your funds in a checking account that doesn’t earn interest. While you might use some of this to pay bills and technically put it to work that way, the rest of your money in the account is idle because it doesn’t grow.

You can also have idle funds if you have money in any type of savings or investment vehicle that doesn’t earn interest. A zero-coupon bond, for instance, doesn’t pay interest to you but instead, allows you to purchase the bond at a deep discount. In that way, when it matures, you enjoy an increase vs. the amount you paid.

Recommended: APY Calculator

Pros of Idle Funds

For governments and businesses, it can make sense to have some idle cash on hand. For example, if there’s a budget shortfall, then a corporation could dip into their idle funds to cover operating expenses.

In terms of why having some idle funds might be a good thing when discussing your personal finances, here are the main pros:

•   Idle funds can be liquid assets, meaning you can access your money when you need it.

•   Keeping idle money in cash at home means you’re not paying bank fees.

•   Waiting to invest idle savings gives you time to research the best investment options for you.

•   There’s generally very little risk of losing money in idle funds.

•   Putting idle funds to work can be as simple as opening an interest-bearing savings account at a traditional or online bank or starting an investment account.

Cons of Idle Funds

While there are some positives associated with idle funds, there are also some drawbacks to keep in mind. Here are some of the biggest cons of idle money:

•   When cash sits idle, it’s not earning interest, and you’re not growing wealth.

•   If you’re keeping idle savings in cash at home, you run the risk of it being lost or stolen.

•   Keeping all of your money in idle funds means you’re not working toward any financial goals.

•   Delaying investment of idle funds can mean missing out on the power of compounding interest.

•   Cash sitting in idle funds can lose purchasing power as inflation rises.

Parking Places for Your Idle Money

If you’d like to put your idle funds to good use, there are several places you can keep that money in order to earn interest. When deciding where to keep idle cash, consider what kind of access you’d like to have to those funds, the interest rates you could earn, and the fees you might pay.

Here are some of the different savings accounts to have for idle funds if you’d like to grow your money.

Certificates of Deposit

A certificate of deposit account is a time deposit account. When you deposit money into a CD, you’re agreeing to leave it there for a set time period, until what is known as its maturity date. The bank pays you interest on your deposit, and, once the CD matures, you can withdraw your initial deposit and the interest earned. Or you could roll it over into a new CD.

CD accounts can be a good place to keep idle funds that you know you won’t need any time soon. Online banks can offer competitive rates on CDs with no monthly fees. Just keep in mind that you might pay an early withdrawal penalty fee if you take money from your CD account before maturity.

Brokerage Account

Brokerage accounts are designed to hold money that you invest. For example, you can open a taxable investment account or a tax-deferred individual retirement account (IRA) at a brokerage. The rate of return you earn on your money can depend on how you choose to invest it.

Some brokerages can also offer cash management accounts to hold money that you plan to invest later. These accounts can function like checking accounts, but they can also earn interest. Depositing some of your idle funds into a cash management account at your brokerage can help you earn some interest until you’re ready to invest it.

Recommended: How to Set up a Health Savings Account

High-Yield Savings Account

A high-yield savings account is a savings account that pays an above-average interest rate and annual percentage yield (APY). Traditional banks can offer high-yield savings accounts but you’re more likely to get competitive rates from an online bank. Online banks can also make high-yield accounts more attractive with low initial deposit requirements and no monthly fees.

Opening a high-yield savings account for idle funds could be a good move if you’d like to keep some of your money liquid and accessible. You can link a high-yield savings account to a checking account for easy transfers. Depending on the bank, you may also be able to get an ATM card with your savings account for added convenience.

I Bonds

An I Bond is a type of savings bond that’s issued by the U.S. Treasury. I Bonds can earn a competitive interest rate that’s based on inflation. Putting money into I Bonds could be a good use of idle cash if you’re worried about inflation eating into your spending power. Just keep in mind that I Bonds, like CDs, are designed to be longer-term investments and cashing them out early could cost you some of the interest earned.

The Takeaway

Having idle funds (money that’s just sitting and not appreciating in value) isn’t necessarily a bad thing. However, it’s important to understand what you could be missing out on if your savings or cash isn’t earning any interest. If you’re unsure what to do with idle money, some options include a high-yield savings account, a CD, or other financial products that can help you grow your wealth.

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FAQ

What is the best option for me to activate idle funds?

If you have idle funds, depositing them into a high-yield savings account can be the fastest way to put them to use. Online banks typically offer these kinds of savings accounts with competitive interest rates and no or low monthly fees. You can link your online savings account to your checking account for convenient access to your money.

Are idle funds always a bad thing?

Idle funds aren’t always a bad thing if you’re planning to invest or save them at some point in the near future. For example, you may have $1,000 sitting in a cash management account at your brokerage that you plan to invest in stocks. Since that money does have an end goal, the fact that it’s idle in the meantime isn’t so bad.

Can idle funds ever improve your money?

Having some idle funds could offer reassurance if you’d like to have a go-to stash of cash on hand for emergencies. Whether idle funds can improve your money depends on where you’re keeping them, how you plan to use them, and whether you have other funds that are actively working for you and earning interest.

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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.

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

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.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

Third Party Trademarks: Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

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.

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Dec
13
2024
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Managing Loans After Losing a Job

By | Debt Payoff, personal_loan | Comments Off on Managing Loans After Losing a Job

There’s no such thing as a good time to lose your job. Unfortunately, a layoff typically does not stop the influx of bills.

Luckily, individuals who find themselves in such a tough position have options. Before resorting to pulling out the big guns, like forbearance or other alternatives that can potentially hurt your credit, it’s worth taking a look at all of the choices on the table. That way, you’ll fully understand your options and their implications before making a move when you’ve lost your job and can’t pay your bills.

Key Points

•   Explore financial assistance options like unemployment benefits, hardship loans, and forbearance programs to manage loans after job loss.

•   Communicate with lenders to discuss potential relief measures such as reduced payments or interest rates.

•   Seek professional guidance from financial planners or credit counselors to manage finances and explore debt consolidation.

•   Assess your financial situation by creating a budget, prioritizing essential expenses, and cutting unnecessary costs.

•   Consider loan modification or refinancing to make payments more affordable without resorting to high-interest debt traps.

Assess Your Financial Situation

Whether you’ve lost your job or are in a precarious employment situation, getting your financial house in order is an important first step. Start by evaluating your current income and recurring expenses and looking for areas where you can cut back.

A good way to keep monthly spending in check is to create a budget, either on your own or with the help of a budget planner. If you’ve lost your job and your income has dropped, you’ll want to prioritize the essentials: food, utilities, housing, and transportation.

Explore Financial Assistance Options

Even with modified spending habits and a new budget, a loan due is a loan due — or at least a situation that won’t go away without dealing with it. Here are some options to consider.

Reaching for Lifelines

Even with modified spending habits and a new budget, a loan due is a loan due — or at least a situation that won’t go away without dealing with it. The reason you lost your job will form a fork in the road of sorts about how to proceed.

Unemployment Benefits

If you voluntarily quit without good cause, then unemployment benefits probably will not be available. But usually the first part of a survival plan for unemployment is to get into the system for unemployment, if possible. To get started, an unemployment benefits finder can help, as can exploring unemployment resources by state.

Hardship Loans

These types of personal loans are designed to help borrowers overcome a job loss or other financial difficulty. Whether they’re unsecured or secured, hardship loans for unemployed borrowers can provide much-needed funds during a difficult time. You may be approved within a couple of days and could receive the money in about a week or less.

Forbearance and Deferment Programs

Many lenders have forbearance and deferment programs in place for their customers, but it’s generally up to the customer to reach out and ask for help.

Forbearance — a pause in monthly payments toward a loan — is an option offered in many lending agreements. The terms vary, but it can open the door to a revised agreement that may allow for decreased or delayed payments for a specific period of time. Some lenders may even offer to reduce the interest rate charged on the debt.

On the surface, this sounds positive, but note that these options can significantly affect your credit scores. The impact depends on the type of loan and the lender. What’s more, interest will usually accrue and be added to your principal balance at the end of a forbearance period.

Communicate With Lenders

As we mentioned, it’s a good idea to contact your lenders as soon as possible if you’ve lost your job and are struggling to make your monthly payments. Discuss your situation with them, and explain how your job loss is impacting your ability to repay your debt.
Then explore options that may be available to you. Two strategies to consider:

•   Negotiate a reduced balance on the account. Most creditors would rather receive a partial payment than none at all. If you’re having a difficult time making ends meet, you may want to propose paying a lump sum for less than what you owe. If the lender agrees, be sure to get the arrangement in writing.

•   Ask about hardship programs. Depending on the lender, you may be offered relief measures like a lower interest rate, waived late fees and penalties, a temporary pause in payments, or lower minimum payments.

Explore Loan Modification or Refinancing

Instead of falling into potential debt traps like payday loans or credit cards with high interest rates, look for solutions that make monthly payments more affordable — without saddling you with hefty interest rates and fees. A loan modification or refinancing are two such options.

With a modification, a lender agrees to change your loan’s rate, repayment term, or both to an amount you can afford. For example, they may extend the number of years you have to pay back the loan, lower your interest rate, or reduce your principal balance. Keep in mind that lenders are under no obligation to offer loan modifications, and they’ll likely first require you to provide proof of financial hardship.

Another option is to explore refinancing opportunities. While it can be harder to qualify for refinancing when you don’t have a job, it is possible. Lenders like to see borrowers with a strong credit history and a good debt-to-income ratio. Asking a trusted friend or family member to be a cosigner may also help bolster your application.

As you weigh your choices, consider enlisting the help of a financial advisor or mortgage specialist who can help you find the solution that’s right for you.

Build an Emergency Fund

Losing a job can be stressful, but there are ways to prepare financially while you’re still employed. One effective strategy is to build an emergency fund.

There are several approaches you can use to help you establish a safety net, including:

•   Creating a budget — and sticking to it

•   Building a savings plan so you’re able to cover at least three to six months’ worth of unexpected expenses

•   Exploring high-yield savings accounts

•   Automating your savings contributions

•   Paying down debt

Seek Professional Guidance

If you’re struggling to pay off your loans after losing a job, you may think you have to figure out all the answers on your own. You don’t. Help is available.

•   Consult with a financial planner or credit counselor. These professionals can help you manage your finances after a job loss and get back on firmer financial ground once you land a new job.

•   Seek assistance from nonprofit organizations. Services vary by organization but may include resume building programs, education and training opportunities, and job placement programs.

•   Consider debt counseling or debt consolidation. With debt counseling, a professional will offer advice on your finances and debt, help you create a budget and debt management plan, and provide financial education. Debt consolidation is when you combine multiple debts into a single loan, ideally with a lower interest rate. However, it may lead to longer payment terms or involve fees.

The Takeaway

The main thing to remember for anyone who is out of work and still responsible for loans is: You are not alone. It might seem difficult, even impossible, but it is doable — and even the longest journeys begin with taking the first steps.
After you’ve started tracking your expenses, cutting back on costs, and reaching for lifelines through unemployment benefits and your lender, the next step in dealing with loan payments after a job loss is to explore your options. Rather than turning to potential debt traps like payday loans and credit cards, you might consider jobless loans.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.


SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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.

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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