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Values-based budgeting involves managing your money mindfully and allocating it toward the things that matter most to you. For some people, that might mean keeping sustainability in mind when designing their budget. For another, it might translate into earning and spending with the goal of securing their loved ones’ future.

Values-based budgeting can have you thinking at a deeper level than just what you need or want in the moment. It can help you manage your money effectively while reflecting your core beliefs and higher-order goals. Here’s a closer look at how this practice can bring balance and deeper meaning to your money management.

Understanding Values-Based Budgeting

While there are many budgeting methods out there, they are all similar in the fact that they help you manage your income and expenses and reach your goals. Living within your means (or living within your budget) is one of the most important things you can do to help improve your financial future. With values-based budgeting, however, you are typically taking additional steps to align your money with your core beliefs.

Definition and Core Concepts

A values-based budget is one where your budget categories tie back to your core values. To create a values-based budget, you must first determine your core values — the things that are most important to you. For some, that might mean charitable giving plays a key role in their money management, or for another, it might involve prioritizing family “together time” across the generations.

Only then do you set up your budget categories and determine how much to spend where and how much of your paycheck to save.

Comparison to Traditional Budgeting Methods

There are many strategies for saving money, and values-based budgeting shares a lot of similarities with other traditional budgeting methods. The big difference is determining your unique and individual core values before starting the budgeting process. This can help guide your budgeting decisions and inform how much money you spend in various areas.

Recommended: High-Yield Savings Account Calculator

Benefits of Values-Based Budgeting

Here are a few of the top benefits of values-based budgeting:

•  Increased satisfaction — When your budget is tied to your core values, it can often lead to increased personal satisfaction.

•  Better long-term planning — Values-based budgeting ties into the things that are most important to you. That helps make it not only a weekly or monthly thing, but something that ties into your long-term planning.

•  Reduced impulse spending — You may be less likely to, say, go on a holiday spending spree and break your budget when you know that the categories tie back to the things that are most important to you.

Identifying Your Personal Values

The first step in values-based financial planning is identifying your personal values. While this process is likely to be different for everyone, here are a few questions that might help you clarify your personal values:

•  What is your perfect life?

•  Finish the sentence — “More than anything, before I die, I want to ___ ”

•  If you could spend today doing whatever you desire, what would it be?

•  What causes are important to you?

•  If you could be paid in something other than money, what would it be?

•  What are the things in your life that you would like to get rid of?

Try to not just answer these questions superficially — instead, try to drill down to find the “whys” behind each question. For instance, if the way you would like to spend every day revolves around hanging with your high-school BFFs, you might learn that spending time with old friends is a core value. If the way you’d like to be paid involves college tuition credits for your kids, that could reveal that higher education is a priority for your family.

This process can put you on the path to finding your personal values and goals.

Steps to Implement Values-Based Budgeting

When you’ve identified your core values, you can then move ahead and start practicing money management in a way that embraces those beliefs.

Assessing Current Spending Patterns

The first step to implementing values-based budgeting is to figure out what your current spending patterns are. One way to do this is to look through your checking account and credit card statements.

It’s important to understand where you are spending money before starting a new budget. You might find a few simple ways to save money, while other money-saving strategies may require deeper cuts and more dedication.

Aligning Expenses With Values

Once you’ve identified your current spending habits, you can start aligning your expenses with the values you identified previously. For each spending category, ask yourself whether spending in this category is consistent with your values.

For instance, if you’re budgeting for a kitchen remodel and sustainability is a core goal of yours, you might begin to see how you can uphold your values and save money by seeing what’s available on Facebook Marketplace or from a freecycle site.

Creating Your Values-Based Budget

As you make your budget and go through each of your spending categories, it’s now time to adjust your spending based on your values.

•  In some cases, you might find that you are spending a high amount of money for something that is not that important to you. Perhaps it’s a case of FOMO (fear of missing out) spending, which amounts to “keeping up with the Joneses.” In those cases, you might reduce or eliminate spending in that category.

•  You might also find that you have things that are very important to you where you aren’t spending much (or any) money. If that’s the case, you should increase your spending in that category to align with your long-term goals and values.

Challenges and Solutions

Here are a few of the common obstacles in values-based budgeting plus ideas for resolving them:

•  Running out of money: If you have too many spending categories that align with your core values, you may run out of money. One of the risks of not saving money is that you may not have enough money in retirement to fulfill all your aspirations.

•  Conflicting values: If you are budgeting with a spouse or partner, you may not always agree on values. In that case, you’ll need to compromise and work together to form a shared budget.

•  Staying motivated: Finally, staying motivated to stick to your values-based budget may be just as hard as with traditional budgeting. Budgeting well does involve paying attention to how your income and expenses are tracking, which requires a time investment. However, you may find it easier to engage with this process if your budget is tied to your long-term goals.

Tools and Resources for Values-Based Budgeting

The tools for values-based budgeting are similar to those used for traditional budgeting. The exact tools that you use will depend on your own style and personality, and there is no one “right” tool that is best for everyone.

•  You might start by seeing what tools your financial institution offers with your accounts, whether that’s a traditional or online bank. They often have a variety of helpful trackers and alerts available.

•  You might use a budgeting and spending app, an online spreadsheet, or simple pencil and paper spreadsheet method to follow your income and expenditures.

•  You may want to open savings accounts that allow you to save money toward different meaningful goals, whether that’s a new electric car or an intergenerational vacation.

Again, there isn’t a set tool that is best for everyone — instead, experiment with different tools to find one that you feel comfortable with.

Recommended: How to Write a Check

The Takeaway

Making and sticking to a budget is one of the most important things that you can do to improve your financial outlook. Values-based budgeting takes traditional budgeting to the next level by making sure that your budgeting decisions tie into your long-term goals and values. This can help you stick to your budget since you know that it’s leading you on a path that aligns with your beliefs.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible 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 3.30% APY on SoFi Checking and Savings with eligible direct deposit.

FAQ

How does values-based budgeting differ from traditional budgeting?

Values-based budgeting shares a lot of similarities with traditional budgeting. Where it differs is in determining how to allocate your money across various spending categories. In values-based budgeting, you try to make sure that your spending categories are in line with your core personal and financial values. It asks you to see your financial management through the lens of whether or not you are supporting your big-picture beliefs.

Can values-based budgeting help in achieving long-term financial goals?

Yes, values-based budgeting can help you to achieve your long-term financial goals. In fact, you might argue that it is a superior way to achieve your long-term goals. Making sure that your everyday spending is in line with your core values is the definition of values-based budgeting.

How do you identify your core values for this budgeting method?

Identifying your core values is one of the most important parts of values-based budgeting. After all, if you aren’t crystal clear on the things that are most important to you, you won’t be able to make sure that your spending lines up with those values. While the process will vary depending on each individual, you’ll want to ask yourself long-term questions like where you see yourself in 30 years or what things are most important to you. Try to not only answer these questions superficially and drill down to get the answers behind the answers.

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Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

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When it comes to managing your finances, hiring a financial advisor can be a wise decision. But with all the different types of financial pros out there, how do you find one that will work for your specific needs?

Asking questions is a good way to learn more about what an advisor does, understand their approach, and determine if they are the best fit for your situation and goals. In fact, it’s a good idea to interview at least two or three different advisors before choosing one you want to work with. These essential questions to ask an advisor can help you find the right fit.

Qualifications and Experience

If you plan to trust your finances to an advisor, selecting someone with the right qualifications and relevant experience is important. Here’s what to ask a financial advisor about their professional background.

What Certifications Do You Hold?

Two meaningful credentials are Certified Financial Planner (CFP®) and chartered financial consultant (ChFC). To earn either designation, an advisor must pass a certification exam, complete coursework, and have a certain level of experience in the field. They must also submit to a background check and adhere to a set of ethical standards. An advisor with tax expertise will typically be a certified public accountant (CPA) or personal financial specialists (PFS), which are CPAs who also offer more comprehensive planning.

Do You Have Any Disclosures on Your Record?

It’s important to know if an advisor has faced any regulatory, criminal, or disciplinary actions in the past. You can also verify this information by typing the advisor’s or firm’s name into the Securities and Exchange Commission’s (SEC’s) Investment Adviser Public Disclosure search tool. There, you can find out about the professional’s licenses and any disciplinary history they may have.

Services and Approach

Financial advisors vary in terms of the services they offer, the type of clients they work with, and their approach to financial planning. These questions can help you choose a financial advisor who will be a good match for your needs.

What Are Your Areas of Expertise?

Some advisors specialize in retirement planning, tax strategies, or estate planning. Others will help you create a comprehensive financial plan that could cover general money management, the types of accounts you need, the kinds of insurance you should have, and estate and tax planning. You’ll want to make sure that their expertise aligns with your needs and goals.

What Types of Clients Do You Typically Serve?

Certain financial advisors work exclusively with high-net-worth individuals, while others focus on small business owners, pre-retirees, or people in certain professions like physicians or artists. Choosing someone who has experience serving clients similar to you can help ensure they’ll be able to offer the guidance and financial advice you need.

What Is Your Investment Philosophy?

You’ll want to make sure how your money is invested aligns with your preferences, risk tolerance, needs, and financial goals. So when speaking with a potential advisor, you’ll want to get a sense of how they typically balance risk and return, if they concentrate on specific industries or types of investments, whether they prefer active or passive investment strategies, and how they tailor portfolios to client goals.

Fees and Compensation Structure

Financial advisors are compensated in different ways, and it’s important to understand their fee structure to avoid surprises.

How Do You Make Money?

Fee-only advisors charge a flat rate, hourly rate, and/or a percentage of assets managed for their services. Fee-based advisors, on the other hand, charge fees to clients directly for financial planning or portfolio management, while also earning commissions by selling financial products. Commission-based advisors primarily earn income by selling financial products. Fee-only advisors tend to have fewer conflicts of interest (more on that below). Ensure you understand how you will be charged.

Are There Any Extra Costs I Should Be Aware of?

A financial advisor’s fees may not cover all of your expenses. They might, for example, charge one fee for creating a financial plan, but charge more for putting that plan into action. Once your financial plan is in place, you may also have to pay trading, fund, and brokerage fees. Make sure you understand what your all-in costs are going to look like.

Do You Have a Minimum Account Size?

Some advisors work only with clients who have a certain level of assets. This might be a relatively low threshold, like $25,000, but it could be significantly more, such as $500,000 or $1 million, and possibly more. You’ll want to confirm whether this aligns with your financial situation.

Recommended: Who Are Wealth Management Advisors?

Potential Conflicts of Interest

Conflicts of interest can be problematic as it can cloud the advice you receive. These questions for financial advisors can help you suss out whether their goals could potentially clash with your goals.

Do You Receive Any Compensation From Third Parties?

As mentioned above, fee-based and commission-based advisors receive payments from sales of specific investment and financial products, such as mutual funds or insurance policies, which could potentially cause a conflict of interest. It’s important to know if their recommendations could potentially be influenced by outside compensation.

Are You a Fiduciary?

Certain professional designations, such as a CFP®, are legally held to the fiduciary standard. As a fiduciary, an advisor is legally and ethically bound to put their clients’ interests ahead of their own (or their firm’s) interests and have a duty to preserve good faith and trust. If an advisor is not a fiduciary, ask how they address potential conflicts.

faith and trust. If an advisor is not a fiduciary, ask how they address potential conflicts.

Performance and Benchmarks

If you’re working with an advisor to grow wealth, you’ll want to have some way to measure your progress. Consider asking these questions about performance tracking and benchmarking.

What Investment Benchmarks Do You Use?

A financial advisor should be able to speak to the benchmarks that they will be reporting to you, as well as how they will measure your progress and determine whether adjustments need to be made in your portfolio. It’s also a good idea to find out if you will be able to track your portfolio’s performance and view financial reports online. Tools like client portals and mobile apps can improve your experience and provide transparency.

How Will You Consider Assets You Aren’t Directly Managing?

Your net worth may include assets that are not managed by a particular finance firm or advisor, such as an employee-sponsored 401(k) or any rental properties you may own. It’s important that a financial advisor look at your full financial picture when advising you on how to diversify, manage risk, and reach your goals.

💡 Quick Tip: If you’re saving for a short-term goal — whether it’s a vacation, a wedding, or the down payment on a house — consider opening a high-yield savings account. The higher APY that you’ll earn will help your money grow faster, but the funds stay liquid, so they are easy to access when you reach your goal.

Communication and Availability

Advisors can approach communication differently and it helps to have realistic expectations going in. Poor communication or misaligned expectations can put a damper on your experience in working with an advisor.

How Often Will We Meet or Communicate?

At the minimum, you’ll want to speak with your financial advisor once a year to review your financial strategies as your life and circumstances change. Some advisors offer quarterly or semiannual meetings, however, which you might prefer. Find out how often you’ll meet, whether it will be virtually or in-person, and if the advisor will be available for phone calls or emails outside of scheduled appointments. Consider if their communication frequency and style meets your expectations.

Will I Work Directly With You or Someone on Your Team?

Some firms assign a primary advisor, while others use a team-based approach. When deciding which financial advisor you want to work with, you’ll want to clarify who your main point of contact will be.

The Takeaway

Choosing a financial advisor is a significant decision that can impact your financial future. By asking the right questions, you can get a good sense of their qualifications, approach, and ability to meet your needs.

Don’t hesitate to interview multiple advisors and compare their answers to ensure you find the best match for your financial goals. A well-chosen advisor can provide valuable guidance, helping you navigate the complexities of financial planning and achieve long-term success.

One smart money move you can take right away (and on your own) is to make sure your bank account offers minimal or no account fees and a competitive interest rate.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible 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 3.30% APY on SoFi Checking and Savings with eligible direct deposit.

FAQ

What should I look for in a financial advisor’s credentials and experience?

When choosing a financial advisor, you might look for credentials such as Certified Financial Planner (CFP®) or chartered financial consultant (ChFC). These designations mean that the advisor has passed a certification exam, has a certain level of experience in the field, and is legally required to adhere to a set of ethical standards. If you’re looking for an advisor with tax expertise, consider a certified public accountant (CPA) or personal financial specialists (PFS), which are CPAs who also offer more comprehensive planning.

What are the different types of financial advisors?

The term “financial advisor” is broad and can refer to any professional who offers financial advice. Common certifications include Certified Financial Planner (CFP®), chartered financial consultant (ChFC), certified public accountant (CPA), and personal financial specialist (PFSs). There are also specialized advisors, such as investment advisors (who focus on portfolio management), retirement planners (who help with retirement strategies), and wealth management advisors (who offer comprehensive services for high-net-worth clients). Robo-advisors provide automated investment solutions at a lower cost.

How can I evaluate the fees and services provided by a financial advisor?

Start by understanding the advisor’s fee structure — whether it’s fee-only, fee-based, or commission-based. Fee-only advisors charge flat fees or percentages and don’t earn commissions. Fee-based advisors charge fees but may also earn commissions on products they recommend. Commission-based advisors primarily earn income by selling financial products. Also ask about the scope of services they provide, such as retirement planning, tax strategies, or investment management, to ensure they align with your needs.

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SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC. 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.

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 12/23/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

Eligible 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 (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, 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 Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details 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.

We do not charge any account, service or maintenance fees for SoFi Checking and Savings. We do charge a transaction fee to process each outgoing wire transfer. SoFi does not charge a fee for incoming wire transfers, however the sending bank may charge a fee. Our fee policy is subject to change at any time. See the SoFi Bank Fee Sheet for details at sofi.com/legal/banking-fees/.
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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While enjoying more protections in recent years, LGBTQ+ couples may face unique legal situations and other scenarios that can leave them financially vulnerable. Taking a proactive approach can help ensure that you and your partner are prepared for the future.

Here are essential financial tips to help LGBTQ+ couples make informed decisions and develop a plan that supports their personal and financial goals.

Unique Financial Challenges

Due to discrimination, legal limitations, and varying access to financial benefits, LGBTQ+ couples (which encompasses those who are lesbian, gay, bisexual, transgender, and queer or questioning) can encounter a number of financial hurdles. These issues may impact savings, career advancement, and even financial security, making proactive financial planning particularly crucial.

Legal Considerations

Legally speaking, LGBTQ+ couples have reasons to celebrate as well as causes for concern. Amid the legal landscape for LGBTQ+ rights, the Supreme Court’s legalization of same-sex marriage in 2015 is often noted as a highlight. This ruling gave LGBTQ+ couples access to legal protections and financial benefits that are only available for legally married couples.

Other key milestones include:

•   In 2020, the high court barred discrimination in employment decisions in relation to a person’s sexual orientation or gender identity. A 2021 executive order from President Biden further expanded these protections.

•   In 2021, the Consumer Financial Protection Bureau (CFPB) clarified that the Equal Credit Opportunity Act (ECOA) includes protections for LGBTQ+ people, making it illegal for lenders to discriminate on the basis of gender identity or sexual orientation.

Despite progress, there is still a lot of work to be done to safeguard LGBTQ+ couples’ economic security. Many states have not put antidiscrimination laws in place that affect health care, housing, and access to credit, according to the Movement Advance Project (MAP), an independent, nonprofit think tank. And some fear that existing protections might be rolled back in the future.

Discrimination and Financial Impact

Because certain LGBTQ+ rights, like marriage and workplace protections, have only been granted in recent years, many members of the community have likely been disadvantaged from decades of living without them. LGBTQ+ individuals may also face barriers to career advancement, which can limit their earning potential.

Indeed, LGBTQ+ workers earn, on average, 90 cents for every dollar a non-queer worker earns, according to a recent analysis by the Human Rights Campaign. The gap widens further for LGBTQ+ people of color, transgender women and men, and non-binary individuals, who earn even less when compared to the typical worker.

Data also indicates that LGBTQ+ people generally carry more student loan debt and have saved less for retirement compared to their cisgender/heterosexual peers.

At the same time, LGBTQ+ couples often face higher living expenses, due to a desire to live in welcoming communities (often cities with a high cost of living). They also tend to face higher health care costs, particularly if they or someone in their family seeks gender-affirming medical care.

Creating a Solid Financial Foundation

Establishing a strong, shared financial base can be the first step toward long-term security. This process involves open communication, assessing your bank accounts, setting goals, and establishing a budget that can help you achieve your shared objectives.

Setting Joint Financial Goals

As with any partnership, it’s important to sit down as a couple and consider goals that reflect your values and aspirations. These could include saving for a home, planning for retirement, starting a family (and a college fund), or preparing for potential health care costs.

Once you have a list of goals, you’ll want to discuss how much money you will need, a timeline, and steps you’ll take to achieve your goals. Strategies might include cutting back on nonessential expenses and/or transferring a set amount into a joint savings account each month.

Since your goals, as well as your income and expenses, will likely change over time, it’s a smart move to have regular check-ins. This allows you to assess your savings, budget, and cash flow and make any necessary adjustments in how you manage your money to help stay on track. Find a cadence that suits you: Monthly or quarterly might work well, but no less than annually. It’s a good idea to reassess your situation when there are any big life changes, such as a new job, a new baby, or buying a home, as all of these can impact your budgeting.

Legal Protections and Documentation

Securing proper legal protections and documentation can be essential for LGBTQ+ couples, as laws around partnership rights can vary. The documents listed below can protect both partners.

•   Wills: A will ensures that your assets are distributed according to your wishes. If you die without one, your assets will likely be distributed according to the state’s default plan, which usually directs the assets to a legal spouse or, if none exists, to your blood heirs.

•   Financial power of attorney: This document enables your partner to make financial decisions on your behalf if you’re incapacitated. Without it, they would need to obtain a court order in order to take over your financial accounts in an emergency. This is the case even if you are married — without a power of attorney, spouses can only control joint bank accounts and joint brokerage accounts.

•   Health care directives: A health care directive (also known as a medical power of attorney) specifies your wishes regarding medical treatment if you cannot communicate them. It ensures your partner can make decisions aligned with your preferences. This document is particularly important for unmarried LGBTQ+ couples. Should one of you experience a medical emergency, your partner could be bypassed at the hospital and a relative would be contacted instead about what could potentially be life-or-death decisions.

Marriage and Domestic Partnership Considerations

While LGBTQ+ couples are now legally able to get married, some may choose not to. This is a personal decision that also has implications on financial planning. Here’s a look at how marriage vs. domestic partnership impact your finances.

Marriage: Getting married can provide access to numerous financial, tax, and legal benefits, including spousal benefits through Social Security, pensions, and work. Marriage also allows partners to pass money and assets back and forth without worrying about gifting limits, and it gives each partner inheritance rights. One downside, however, is the so-called “marriage penalty.” This is the tax increase that many couples face once they combine their incomes and file as married filing jointly. (However, as noted above, there are tax benefits to marriage, such as additional deductions, which may offset this.)

Domestic partnership: A domestic partnership is an alternative to marriage and may provide you with some of the benefits that married couples receive. For example, your employer may allow your partner to receive benefits like health insurance. However, domestic partners are not considered “family” by law and are not recognized by most states. Also, while married couples automatically inherit each other’s assets upon death (and without incurring taxes), this is not the case for domestic partners. You can inherit your partner’s assets through a will, but you’ll be subject to taxes.

Retirement Planning for LGBTQ+ Couples

Members of LGBTQ+ community often have unique needs in retirement. Many look to retire in more accepting parts of the country, which tend to be cities with high housing and other costs, making retirement generally more expensive. Here are some factors to keep in mind as you plan for retirement.

•   Social Security benefits: Married couples in which one spouse earned significantly more than the other may be able to use spousal benefits to maximize their combined Social Security income. Married or not, it’s important for LGBTQ+ couples to understand how Social Security benefits work and consider the timing of their claims. You can get an estimate of your monthly payout and how it’s impacted by the age you start to claim your benefits at SSA.gov.

•   Pension plans: A pension plan is a retirement account provided by an employer that pays out a fixed amount of money to the employee after they retire, providing a steady stream of passive income for life. Certain pensions provide spousal benefits upon death, but these may only be accessible to married couples. Check with your employer to understand the details and consider how this might impact your retirement savings strategy.

•   IRAs and 401(k)s: Individual retirement accounts and employer-sponsored retirement plans are critical components of retirement planning. Both partners will want to contribute as much as possible to their retirement accounts, and at least enough to get the full employer match (if offered). Once you’ve maxed out your 401(k), you might each consider contributing to a Roth IRA, if you’re eligible.

Recommended: Savings Goal Calculator

Family Planning and Financial Preparation

For LGBTQ+ couples, family planning may involve additional costs, especially if it includes adoption, surrogacy, or fertility treatments. For example, adoption can run anywhere from $20,000 to $70,000, depending on whether it’s done domestically or internationally. IVF can cost $13,500 to $21,000 or more, while surrogacy can range between $60,000 to $250,000-plus.

Since insurance often does not cover most of these costs, creating a financial plan that accounts for these expenses can be crucial. This plan should include saving for baby costs, as well as the ongoing expenses related to raising children.

Insurance Needs for LGBTQ+ Couples

Insurance provides an essential financial safety net for couples. Below are three kinds of insurance that can help protect your family.

•   Health insurance: Health insurance is vital for all couples, so you’ll want to make sure you are both covered either through employer plans, the Affordable Care Act marketplace, Medicare, Medicaid, or private options. When choosing a health care plan, carefully review coverage details, including any potential limits for LGBTQ+-specific health care needs. Though most health insurers cover medically necessary gender-affirming care, some states allow private health plans to deny coverage to transgender people for certain health care services.

•   Life insurance: Life insurance protects your partner in case of your untimely death by replacing lost income. This can be particularly important if you have children. Life insurance offers a safety net by ensuring the loss of income doesn’t disrupt your children’s daily life, education, and future opportunities. Keep in mind that you don’t have to be married to get life insurance — you can each purchase an individual policy and name the other as the beneficiary.

•   Long-term care insurance: This type of insurance helps cover expenses for long-term care that aren’t typically covered by health insurance or Medicare. LGBTQ+ seniors may face added costs if they lack family support (as can be the case for any couple that doesn’t have children). Long-term care insurance can be a worthwhile investment in this scenario. An alternative option is to self-fund your future needs.

Estate Planning Strategies

Estate planning is essential for LGBTQ+ couples to ensure assets are transferred to the right individuals and that financial protections are in place for the surviving partner. This is particularly important if you are not married, as your assets would not likely go to your partner without a well-defined estate plan. The following protections can help.

•   Trusts: Unlike wills (which can be successfully challenged), trusts cannot be contested by others. Putting some assets into a trust can be especially helpful for LGBTQ+ couples, as it can help you to avoid potential legal disputes with non-supportive family members. Assets in a trust may also be able to pass outside of probate, which can save time, court fees, and (potentially) estate taxes.

•   Beneficiary designations: Certain assets, like savings accounts and life insurance policies, can pass to the beneficiary on file without the need for a will and without going through probate. Whoever is listed as beneficiary will get those assets regardless of what a will might state. For this reason, it’s important to regularly review and update beneficiary designations on your accounts, especially if you set these accounts up years ago.

•   Titling: Another way to protect your estate is to make sure the title to your assets, particularly property, is coordinated with your will. For example, if your shared home is titled “joint tenants with rights of survivorship,” it will pass directly to the surviving owner when an owner dies, rather than through your will. Assets titled in an individual’s name (absent a beneficiary designation) or as “tenants in common,” on the other hand, will pass according to your will. You may want to discuss asset protection options with an estate planning attorney who understands the specific needs of LGBTQ+ couples to ensure you are both protected.

Recommended: Financial Planning for Young Adults

Building a Support Network

A strong support network can be invaluable for LGBTQ+ couples navigating unique financial and personal challenges. Community support can provide resources and guidance, along with a sense of belonging.

Community Resources and Support Groups

Many LGBTQ+ organizations and support groups offer financial assistance programs, legal resources, and planning guidance. Consider seeking out organizations or LGBTQ+-friendly financial advisors who understand the needs and challenges faced by LGBTQ+ couples.

A sampling of resources you might tap:

•   The Center for LGBTQ Economic Advancement & Research provides access to financial workshops, counseling, and self-help resources targeted to LGBTQ+ individuals and couples.

•   CenterLink focuses on strengthening, supporting, and connecting LGBTQ+ community centers nationwide.

•   Rainbow Families offers education, resources, and peer support groups for LGBTQ+ parents, families, and parents-to-be.

•   SAGE offers supportive services and consumer resources to older LGBTQ+ people and their caregivers.

The Takeaway

Financial planning is essential for everyone, but LGBTQ+ couples often face unique challenges and considerations. From navigating legal protections to managing potentially higher family-planning costs, these complexities can make proactive financial planning even more critical. By delving into these issues, LGBTQ+ couples can create a plan that protects their rights, and helps them build wealth over time.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible 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 3.30% APY on SoFi Checking and Savings with eligible direct deposit.

FAQ

How does marriage equality affect financial planning for LGBTQ+ couples?

Marriage equality gives LGBTQ+ couples access to financial benefits that are limited to legally married couples, which can simplify and enhance financial planning. This access can include spousal Social Security benefits, joint tax filing, inheritance rights, and health insurance coverage through a partner’s employer. These benefits can help reduce taxes, provide more retirement benefits, and offer financial security if one partner passes away. However, marriage can also come with new tax considerations, so couples might want to consult a financial advisor to optimize financial planning.

Are there specific estate planning considerations for LGBTQ+ couples?

Yes, estate planning is particularly important for LGBTQ+ couples to ensure their wishes are honored and to avoid potential family disputes. This may involve creating or updating wills, establishing durable powers of attorney, and designating health care directives to protect each partner’s wishes. In addition, they may want to establish trusts (for added control over asset distribution and to protect their estate from taxes) and update beneficiary designations on financial accounts.

What financial resources are available specifically for LGBTQ+ individuals and couples?

LGBTQ+ individuals and couples can access a number of specialized financial resources, including LGBTQ+-friendly financial advisors, legal services, and community-based support organizations. Organizations like the Center for LGBTQ Economic Advancement & Research provide access to financial workshops, counseling, and self-help resources targeted to LGBTQ+ individuals and couples, while SAGE offers resources for LGBTQ+ seniors. There are also a number of nonprofit groups and community centers that offer financial assistance to LGBTQ+ individuals and families facing financial challenges.

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Photo credit: iStock/MStudioImages

SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC. 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.

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 12/23/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

Eligible 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 (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, 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 Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
We do not charge any account, service or maintenance fees for SoFi Checking and Savings. We do charge a transaction fee to process each outgoing wire transfer. SoFi does not charge a fee for incoming wire transfers, however the sending bank may charge a fee. Our fee policy is subject to change at any time. See the SoFi Bank Fee Sheet for details at sofi.com/legal/banking-fees/.
*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.

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.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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A deposit account is the kind of account that allows you to store money at a bank or credit union and also withdraw funds. Deposit accounts come in many forms, from checking and savings accounts to money market accounts and certificates of deposit.

Each of these deposit accounts has unique features, and together they can help achieve an array of financial goals. They are typically the hub of your everyday financial life, supporting you as you earn, spend, and save money.

Understanding Deposit Accounts

Deposit accounts are a core offering of banks. Here’s a closer look at the meaning of deposit accounts and look at how they work.

Definition of a Deposit Account

A deposit account, as noted above, is a bank account where you can safely store (i.e., deposit) and withdraw your money. While there are various types of deposit accounts that specify when or how often you can make withdrawals and how much interest your money makes while deposited, they can all help you manage your spending and saving, whether it’s by allowing you everyday access to funds or by helping you save money for larger, longer-term needs.

How Deposit Accounts Work

You can open a deposit account at a bank or credit union. Depending on the financial institution and type of account, you can deposit money into the account in a variety of formats, such as in-person cash deposits, in-person or mobile check deposits, and electronic fund transfers from other sources, such as a bank-to-bank transfer.

When the money is in the account, it is typically insured (meaning you’re protected against loss; more on that below), and it may earn interest. You can likely withdraw funds using a debit or ATM card, electronic transfer, or online payment.

Types of Deposit Accounts

Banks offer four core types of deposit accounts:

•   A checking account is perhaps the most basic type of bank account. It’s a place to store money that you can easily access with a debit card or check, through peer-to-peer money transfer services, and via online payments. Think of it as an easy way to stash and spend money, and it’s safer than carrying cash. It’s also a great place to receive a direct deposit, such as a paycheck, tax refund, or government benefit. However, these accounts typically earn no or low interest.

•   A savings account is designed for money you’ll spend less frequently. Instead, you can store money in a savings account and have it earn interest. Over time, as you add more money and it continues to grow with interest, you could save enough for, say, a vacation, down payment on a house or car, or wedding. You can withdraw money as needed, though some banks may limit the number of withdrawals per statement period.

•   A money market account (MMAs) is like a savings account, though it may earn more interest and/or may have a higher minimum balance threshold. Often, MMAs offer check-writing capabilities, much like a checking account.

•   Certificates of deposit (CDs) are another deposit account geared toward saving, but you must agree to a specific number of months or years (known as the term) during which you won’t access the money. In exchange for keeping your money on deposit, you’ll earn a competitive interest rate. However, if you remove funds before the CD matures, you usually face fees and penalties that could wipe out any interest earned.

Many people have multiple bank accounts. For instance, they might have a checking and savings account, as well as some funds in a CD.

Features of Deposit Accounts

Deposit accounts usually share some of the following core features:

Interest Earnings

When you keep cash in your wallet, stow it in your sock drawer, or hide it under the mattress, it doesn’t grow. In fact, you could argue you’re losing money over time — inflation ensures your dollars won’t go as far in the future.

But when you put it in a deposit account, it often earns some kind of interest. Some checking accounts aren’t interest-bearing or may only earn a nominal interest rate, but other checking accounts, like some online bank accounts, may earn more favorable levels of interest.

But it’s savings accounts (particularly high-yield savings accounts), money market accounts, and certificates of deposit where interest rates may outpace inflation and help your money grow.

FDIC Insurance

Most banks offer $250,000 of insurance on all deposits via the Federal Deposit Insurance Corporation (FDIC). This means, even in the very rare occurrence of a bank failing, your money is protected up to $250,000 per depositor, per account ownership category, per insured institution. (Some banks may offer additional insurance above this level.)

Credit unions don’t offer FDIC insurance; instead, they typically offer similar coverage, with up to $250,000 of insurance on deposits via the National Credit Union Association (NCUA).

Access to Funds

Deposit accounts offer some level of access to your money. Checking accounts are the most liquid type of deposit account; you can withdraw money at any time and for any reason. Savings accounts may limit withdrawals and transfers each statement period, but it’s generally easy to access your money when you need it to cover an emergency or major life purchase.

Money market accounts often come with an ATM card and/or checks that allow you to access your funds. CDs have a maturity date, but you can access your money before then, though you will likely pay a penalty.

Online and Mobile Banking Capabilities

Increasingly, banks have made it easy to monitor your spending and savings online. Before opening an account, it’s a good idea to read reviews of mobile banking apps to see which banks have the best security features and easiest-to-use apps for managing your money online. Many offer features such as dashboards to track your earnings, spending, and savings, as well as other useful tools.

Recommended: Does Switching Bank Accounts Affect Your Credit Score?

Benefits of Deposit Accounts

When you open a bank account, you’ll likely find that deposit accounts offer a number of benefits, including:

Safety and Security of Funds

When you don’t store your money in a bank, you’re exposed to loss or theft. If you can’t find a $100 bill you swear was in your wallet, no one is going to reimburse you.

But if you keep your money in an insured deposit account — and most bank accounts are insured — you know your money has a safety net. Most banks insure your money with the FDIC, as noted above.

Potential for Earning Interest

Storing your cash in a bank where it earns a competitive interest rate is a great way to inflation-proof your money. Particularly look for CDs, MMAs, and/or high-yield savings accounts to maximize interest on what’s in your deposit account.

Just remember you need to keep some money in a checking account, even if it earns less interest, to cover your everyday expenses.

Convenience for Daily Transactions

Deposit accounts make managing your money easy. You can use a checking account’s debt card to make purchases at the grocery store or pay your bills, and it’s also a good spot for receiving your paycheck as a direct deposit.

Savings accounts can be a little less liquid than checking accounts, but they help you save for regular goals, like home improvements and birthday gifts. When you’re ready to spend the funds, access it at a branch or ATM, or simply transfer it over to your checking account. Many MMAs offer check-writing privileges.

CDs are less convenient for daily transactions, but you can choose from a mix of short- and long-term CDs, ranging from several months to several years, to suit your needs.

Choosing the Right Deposit Account

Ready to open a deposit account? Here are some strategies to help:

•   Assess your financial needs: Do you need to write checks and make regular cash deposits at an ATM? A checking account with a wide ATM network may be ideal. Hoping to earn a lot of interest on money you won’t touch for a few years? Consider a CD.

•   Compare account features and fees: When trying to choose which bank is right for you, it can be helpful to compare factors like annual percentage yields (APYs), mobile app reviews, monthly maintenance fees, and overdraft fees. This can guide you to the right deposit account for your needs.

•   Consider online vs. traditional banks: Online banks typically offer higher interest rates and lower (or not) fees on deposit accounts, and their mobile app tech is generally very easy to use. But if you prefer going to a brick-and-mortar bank to cash checks, make deposits, and get help from a teller, you may want to consider a traditional bank, even if it means earning less interest.

Managing Your Deposit Account

Managing a deposit account is generally straightforward, and often, you can do so online, through a mobile app, or (with traditional banks) in person. Here are some things to consider when managing a deposit account:

•   Real-time alerts: It can be wise to set alerts to make sure no one is spending your money (perhaps via stolen debit card) without your permission. Real-time alerts can also notify you of a low balance so you don’t overdraft.

•   Automation: Some banks may offer automated savings features, such as automatically moving money from checking into savings when you get paid or pay with your debit card. Or they might have a rounding-up function for some transactions. Opting into such features can help you grow your savings faster.

•   Patience: The key to savings accounts, MMAs, and especially CDs is to practice patience vs. spending. Leaving the money untouched (or adding to it) for several months or even years ensures it grows so you can reach larger goals down the line.

Recommended: 50/30/20 Budget Calculator

Regulations Governing Deposit Accounts

Several government regulations protect banking consumers and their deposit accounts.

•   Truth in Savings Act: This landmark regulation requires banks to be transparent about fees, interest rates, and other terms impacting deposit accounts such as checking and savings accounts.

•   Electronic Fund Transfer Act: This act, from 1978, protects consumers during electronic fund transfers (ETFs). Nowadays, this offers protection for a variety of transactions, such as ATM, debit card, point of sale, direct deposit, Automated Clearing House (ACH), and other similar electronic transfers. Among consumer protections are error resolution and liability limits for unauthorized transactions.

•   Regulation CC: Reg CC, as it’s often known, implemented the Expedited Funds Availability Act of 1987, which required banks to make deposited funds available within a certain timeline. In 2003, it also allowed Congress to pass Check 21, which made it easier for consumers to mobile-deposit checks. These provisions continue to benefit consumers today.

The Takeaway

Deposit accounts are an essential part of banking and safe money management. You can use these accounts to store your money securely, spend, and help it grow over time with interest. Finding the right deposit account(s) for your needs can involve assessing your needs and comparing offerings to see which bank offers the best combination of competitive interest rates, low fees, and easy-to-use tech features.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible 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 3.30% APY on SoFi Checking and Savings with eligible direct deposit.

FAQ

What’s the difference between a checking account and savings account?

While they’re both deposit accounts, checking accounts are designed for spending and savings accounts are for keeping money in the bank and helping it grow. Checking accounts offer easy access to your money via debit cards and checks but usually earn low or no interest. Savings accounts tend to earn more interest but may have withdrawal limits.

Are there limits on withdrawals from deposit accounts?

It depends. Checking accounts typically don’t have withdrawal limits, but some may limit the number of transactions you can make per day. Previously, Regulation D limited withdrawals from savings accounts and MMAs to six per month. This regulation is no longer enforced, but some banks may still cap how many monthly withdrawals you can make. Lastly, CDs are designed so that you don’t make any withdrawals until they mature.

How does FDIC insurance work for deposit accounts?

FDIC insurance typically covers deposit accounts in the very rare event of a bank failure. It insures up to $250,000 per depositor, per account ownership category, per institution. That means account holders would have their funds reimbursed up to that amount. (Some banks may offer programs that insure more than $250,000).

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Photo credit: iStock/
SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC. 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.

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 12/23/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

Eligible 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 (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, 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 Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details 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.

*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 Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

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Investing in single-family homes is often a good way to build wealth and generate monthly cash flow.

Real estate has proven to be an economic bulwark when stocks and bonds experience downturns. Even in late 2024, with the average sales price of homes in the U.S. slightly down from its 2022 historic high, the average price is almost $100,000 above where it stood at the start of this decade, according to the Federal Reserve Bank of St. Louis, which tracks the data.

Single-family rental homes have lots of upsides for an investor, but there are also a few reasons to look before you leap.

What Is a Single-Family Home?

The popular image of a single-family home is a stand-alone, one-dwelling structure with its own utilities, entrance, exit, and access to the street. The owners own both the building and land it sits on, so condos do not count.

Some government agencies expand this definition to include properties of up to four units, such as duplexes, as well as townhouses.

Why Invest in Single-Family Homes?

Buying investment property offers two key benefits to long-term investors:

•   the potential for capital appreciation

•   immediate cash flow

Let’s walk through some of the key motivators for investing in single-family homes.

Financing

Single-family homes are typically easier to obtain financing for than multifamily homes of five or more units.

A multifamily property meeting that criterion requires a commercial loan, which usually has a higher interest rate and shorter term than a residential mortgage. (Note: SoFi does not offer commercial loans; it does provide loans for residential investment properties of four or fewer units.)

Lenders often require at least 20% down for an investment property. It could be higher, depending on the borrower’s credit score and savings. Then again, there are creative ways to buy a multifamily property with no money down.

Less Volatility

The market for single-family homes is relatively stable and tends to grow more smoothly over the long run compared with other types of homes.

Unlike commercial real estate and apartments, the demand for single-family homes tends to remain relatively strong at all stages of the economic cycle.

Steady Income

Single-family homes may be rented out for longer terms than apartments and usually sit vacant for less time thanks to the steady demand for single-family housing.

Some contend that single-family rentals feel more like proper homes for tenants and therefore are better cared for than apartments.

You’re also more likely to find more families renting single-family homes than individuals. Families may be more likely to extend the lease if they end up loving the neighborhood and schools, as in a coveted suburb.

Tangible Asset

Many people seek to diversify portfolios with different types of investments. Unlike stocks and bonds, which represent shares of ownership and rights to dividend payments from a company, real estate is a tangible asset.

The tangible factor gives you something physical to hold on to that’s unlikely to disintegrate over the long term. Stocks, bonds, and other intangible investments require the underlying company to remain a going concern.

Inflation Hedge

Inflation is the creeping impact of price increases, and when there are concentrated bouts of it over a short period of time, it can rapidly erode the purchasing power of your assets.

Housing has often been touted as an inflation hedge because it has historically held its real value during inflationary markets. This could be because of the following reasons:

1.    Most homebuyers lock in their purchase price through a mortgage.

2.    Rental agreements typically last one or two years, which allows homeowners to gradually raise rents to keep pace with inflation.

3.    Home values typically appreciate over the long run thanks to the intrinsic value of the house and land.

Return on Investment

Thanks to steady demand, single-family homes can match or even exceed the return on investment (ROI) of bigger multifamily properties, with lower volatility than stocks or bonds.

Potential ROI across different real estate properties can be compared using a capitalization rate (cap rate) calculation: net operating income divided by current market value.

Net operating income is your gross annual income from the property minus operating expenses (like repair costs, groundskeeping, property taxes, insurance, utilities not paid by tenants, and any property management fees). Home mortgage loan payments are not included in the net operating income formula.

Diversification

Single-family homes could be a good addition to a portfolio of stocks and bonds, but why does portfolio diversification matter anyway? Because by diversifying assets, you may offset a certain amount of risk and improve returns. When stocks or bonds fall, real estate prices can take much longer to follow.

Things to Know Before Investing in Single-Family Rentals

Because of the high acquisition cost of single-family homes, you’ll want to conduct proper due diligence on your local housing market and target property before you buy. As with all investments, be cautious when investing a significant portion of your cash in one place.

Your Numbers

While the projected rental income on a property looks attractive at a glance, bear in mind that maintenance costs and surprises should be factored in. Vacancy rates, legal issues with tenants, and unexpected repairs can sap your returns over time.

It’s smart to factor in a cash buffer to ensure that money is available on short notice.

Your Target Rental and Housing Market

While the rental income streams of New York and California offer much higher revenue potential, keep in mind that the costs of owning real estate in those areas is enormous as well.

Income is only one side of the rate of return calculation, so make sure you have a good handle on the expenses as well. You can only do that by thoroughly investigating your target housing market and relying on the home appraisal.

The local job market, its dominant industries, and the dependability and growth of local businesses also will shed light on how stable a given market will be over time. Good schools, safe cities, and proximity to workplaces and attractions matter to many renters.

If you’re looking to use the property as a short-term rental, check out the local ordinances, which may prohibit you from doing so.

The 1% and 50% Rules

The 1% rule is a back-of-the-envelope calculation to estimate whether your rental income strategy will be profitable. If the estimated rental income on the property is at least 1% of its purchase price, you should theoretically be able to generate cash flow. If your purchase price was $300,000, for example, the monthly rent should be at least $3,000, according to the rule.

The 50% rule states that you should expect the expenses on your real estate investment to make up approximately 50% of the gross income generated. That’ll give you a quick and dirty estimate to help you start ballparking your net returns.

Obviously, the exact numbers are more complicated. When you have time, you’ll want to run a full comparison of revenues vs. potential costs of your venture.

Your Strategy

This one’s a little more nuanced, as it depends on your goal amount, the time horizon, and your risk tolerance.

Are you looking to build a rental home empire or are you just looking for a little extra income to supplement your retirement?

Do you intend to tap home equity to buy one or more investment properties? Do you plan to flip or hold the home?

How to Invest in Single-Family Homes

If you’re confident that buying a single-family home is the right choice for you, there are a few ways you can invest:

Buy It Yourself

This is the most capital intensive and least liquid route. Buying a single-family home in the neighborhood of your choice will net you reward as well as the risk that comes with any property.

If you’re handy, you can buy a fixer-upper or a HUD home (bidding opens to investors after owner-occupants are given a chance) and renovate it into turnkey condition.

The expense of any contractors or property managers will need to be factored in.

Invest Through a Crowdfunding Platform

If you don’t have copious amounts of capital, you can still fund real estate investment projects through online crowdfunding platforms like Fundrise. These allow you to diffuse risk while taking part in more aggressive investments than you might have been willing to by yourself.

Keep in mind that you’ll need to share the benefits with all investors who partake in the process. Another shortcoming is that your funds may be tied up for an extended period of time, which varies by project.

Invest in a Real Estate Investment Trust

REITs are corporate entities that specialize in purchasing and financing pools of real estate investments on behalf of their clients. They sell shares that are publicly traded and can specialize in any number of sectors or strategies.

The big benefit of REITs is that they’re one of the most liquid real estate investments out there, as you can buy or sell your shares at almost any time on the open market. However, the market value of each share will fluctuate daily.

In the realm of investment opportunities, REITs often provide better returns than fixed-income assets like bonds, but REITs carry higher risk.

There are REITs that specialize in buying and operating single-family rentals. These REITs pay out a major portion of their cash earnings to shareholders.

The Takeaway

When done right, your single-family home investment can offer growth and income and diversify your portfolio. You can start with lower levels of capital by investing in REITs or crowdfunding platforms, but any gains will be diluted. It may be easier to obtain a mortgage for a one-family home, or a property that is four units or fewer, than for a larger multiunit property.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

SoFi Mortgages: simple, smart, and so affordable.

FAQ

Is renting out a single-family home worth it?

It can be. Appreciation and rental income have made single-family homes attractive to investors. Multifamily properties provide more rental income streams but also require more property and tenant management.

How do you value a single-family home rental?

There are a few ways. One is to look at recent comparable sales. Another is to calculate the capitalization rate (net operating income divided by property price or value). A third is to use the gross rent multiplier approach (property price divided by gross rental income).

How fast does the value of single-family homes appreciate?

It depends on the market. Lately, appreciation has decelerated. But the median sales price of a house in the last quarter of 2024 was still about $100,000 more than it was five years before.

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Photo credit: iStock/Phynart Studio

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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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