Where do you want your money and your assets to go when you die? It’s an important question to think about.
A trust might help ensure that the person or people you want to benefit from your assets will be honored. Using a trust can often provide tax benefits as well as the ability for assets to change hands outside of probate. This can all be done with the help of a trustee, a person given control of a trust so that they can legally administer it according to specific wishes.
Here’s how a trust works, the different types of trusts, and how to decide if a trust is right for you.
What Is a Trust?
The IRS defines a trust as “a legal arrangement which can help you to control your assets and possessions. Often, trusts can help to reduce taxes on your estate and speed up the process of allowing beneficiaries access to those assets.”
A trust can hold cash, stock, real estate, and any other assets. You might meet with an attorney who specializes in trusts to officially name your beneficiaries and dictate how you want the trust to be handled.
You could also apply special rules to your trust, like how often the beneficiary can receive a payment from it, or how the money can be used (say, for education expenses or to buy a home).
The beauty of a trust is that you get to decide and control how you want your assets to be used.
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The Difference Between a Trust and a Will
After someone dies, the legal process to settle an estate and distribute assets, also known as probate, begins. The probate process goes through a court of law and a judge will validate any existing will for the distribution of assets.
If you have a trust, the probate process could be skipped, which might save time and ensure assets go to the chosen beneficiaries. (It’s important to note that if you die and don’t have a will or a trust, assets are distributed according to state law.)
Other major differences between a will and a trust include these factors:
• A will goes into effect only after you die. It’s also called a “last will and testament.”
• A trust can go into effect while you are still alive.
The Difference Between a Trustee and a Beneficiary
A trustee holds legal title to the property or assets of another person, the beneficiary. A trustee is responsible for administering the trust on behalf of those beneficiaries.
There are at least two two types of beneficiaries:
• One who receives income from the trust during their lives
• One who receives the remainder of the estate after the first set of beneficiaries dies
Choosing the Right Type
A Living Trust
A living trust is similar to a will, but not exactly the same. A living trust is a legal arrangement that you (the grantor) create during your lifetime (like a will), but instead you specify exactly the way you want your estate handled while you are still alive. A living trust might be used for people who have complex financial situations and more than one beneficiary.
When you die, the trustee you appoint carries out your instructions without having to go through the legal process of probate. A living trust might be more effective than a will in carrying out the transfer of assets according to your wishes. Types of living trusts include:
• A revocable trust. This gives you continued control and access to the assets in the trust as well as the option to make changes to beneficiaries or even revoke the trust whenever you want. A revocable trust keeps your decision-making flexible and fluid. Once you die, the revocable trust becomes irrevocable, and whatever wishes you’ve listed become final.
• An irrevocable trust. This cannot be changed, modified, or adjusted without the permission of the beneficiaries. That means that any assets transferred into an irrevocable trust cannot be taken back. Irrevocable trusts might be appropriate for those who want to permanently remove assets from their estate.
The IRS lists assets that are often included in an irrevocable trust as insurance policies, cash, and business investments. Once the ownership passes to the beneficiaries, the assets listed in the trust are no longer taxable as part of the individual’s estate.
Testamentary Trust
Then there is a trust that is not considered a living trust:
A testamentary trust is created by the person who writes a will, called a “testator.” These are not to be confused with living trusts. This type of trust would not go into effect until the death of the testator.
A Few Things to Consider
You may have to consider attorney fees if you set up a trust with the help of a lawyer — there are also options to set up the trust on your own online. A good trust attorney should know the best ways to make your trust as airtight and efficient as possible. You may want to keep in mind the potential ongoing costs of maintaining a trust as well.
For instance, depending on the type of trust established, the trust may become its own tax entity, and you might need to be prepared to pay an accountant to file a trust tax return each year. Should you elect to have a corporate trustee, where someone from a bank or trust company acts as trustee for the trust, there are typically ongoing fees associated with that service as well.
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How to Choose a Beneficiary for Your Trust
Your beneficiaries will likely be members of your family. But a beneficiary of a trust can also be a group or an institution (like a nonprofit organization or a charity). Ultimately, your beneficiary is anyone or any group that receives beneficial enjoyment from your assets, like income, the ability to use property, or ultimate ownership, per your wishes.
Where to Hold a Trust
Setting up a trust could ensure that your beneficiaries get what you intended them to have before and after you die. The IRS recommends opening a bank account for a trust, which would require the following:
• Legal documents and identification that proves you are the legal trustee
• A Trust Tax ID number
When opening a trust bank account after the grantor has passed away, you typically need a new Trust Tax ID number to replace the Social Security number of the deceased grantor. This number will be used on every trust-related document going forward.
Trusts and Taxes
Establishing and funding trusts could help you remove assets from your estate and reassign ownership to others. This might help reduce income taxes on the assets if transferred to a beneficiary in a lower tax bracket, or help you reduce or avoid estate and gift taxes.
Are Trusts Only for “Trust Fund Babies”?
No, trusts are not only for trust fund babies. Although the common perception might be that trust funds are only for children of the super wealthy, that is not the case. A trust fund is meant to help you make sure your money goes to whom you want it to, and that it’s put to use the way you wish. If you have children or grandchildren, and you want your money to be used in a certain way by them, a trust might help you do that.
Financial Planning for the Future
When it comes to trusts, laws can change and they can also differ from state to state. You might want to consider consulting an attorney who specializes in trusts for the most updated direction and advice.
If you’re working on financial planning based on your specific financial goals and life situation and thinking about ways to save and invest for the future, you may want to consider setting up an investment account. You could also consider talking with a SoFi Financial Planner about such topics as budgeting and saving.
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From snagging that first real job to starting a family (congrats all around), life is full of important rites of passage. These events are meaningful, for sure, and they can also impact the path of your personal finances.
As you take control of your money, it can be wise to think about and plan for these key transitions. That way, you can be better prepared for how they may alter your financial health.
In this guide, you’ll learn about seven major milestones plus advice on navigating these life events successfully so you can build wealth today and tomorrow.
1. Your First Job
You’ve finished your education (for now, at least) and are starting your first job. This is where your financial journey really begins. And, since you are likely earning more money than you ever have, it’s important to have a plan for how you will use that money wisely.
If your employer offers a 401(k) for retirement, you may want to consider having at least some money taken out of each paycheck each cycle and put into this fund.
Once you get your first paycheck, you can see exactly how much money you are taking home (after all deductions, including retirement, and taxes are taken out). This can be a perfect moment to make a simple budget. This will help you get the most out of your salary and build some financial stability.
• This involves listing all of your essential monthly expenses. You can think of these as the “needs” in life, such as housing, food, and minimum payments on debts or loans.
• Then subtract them from your monthly take-home pay to see how much you have left over to play with (the “wants” in life) and, of course, to save.
• Saving can be crucial, so it’s wise to determine an amount you can set aside each month into a separate savings account. It’s perfectly fine to start small. Even putting a little bit of money aside each month will start to add up over time.
• This savings account can help you build an emergency fund (generally three to six months’ worth of living expenses). Having financial back-up can help to ensure that if you should have a large, unexpected expense, you could cover it without having to rely on high interest credit cards.
• Once you have a comfortable emergency fund, you may then want to start working on other savings for other goals, such as buying a car or other major item you are hoping to buy in the next few months or years.
If you are looking for guidance on how to establish a budget that works for you, consider the 50/30/20 budget rule. This guideline says that, of your take-home pay, you should allocate 50% towards “needs,” 30% towards “wants,” and 20% to savings.
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2. Paying Off Student Loans
Student loan payments can be a drag on your monthly budget, especially if you are trying to save toward other financial goals, like buying a home or paying for your kids’ college education.
One of the best ways to pay off student loans is to pay more than the minimum each month. The more you pay toward your loans, the less interest you’ll owe — and the quicker the balance will disappear.
There’s typically no penalty for paying student loans early or paying more than the minimum. However, there is a caveat with prepayment: Student loan servicers, which collect your bill, may apply the extra amount to the next month’s payment.
The problem with that is that it advances your due date, but it won’t help you pay off student loans faster. That’s why it can be a good idea to tell your servicer (whether online, by phone or by mail) to apply overpayments to your current balance, and to keep next month’s due date as planned.
Another option you may want to look into refinancing your student loans. This could help you pay off student loans sooner without making extra payments.
Refinancing replaces multiple student loans with a single private loan, ideally at a lower interest rate. To speed up repayment, it can be a good idea to choose a new loan term that’s less than what’s left on your current loans.
Keep in mind, however, when you refinance a federal student loan into a private loan, however, you may lose the benefits and protections that come with a federal loan, like deferment and public service-based loan forgiveness.
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3. Buying a Car
Buying your first car can be an exciting experience. And, you might want to rush to the nearest dealer and purchase a shiny, new model right away.
However, saving up for a vehicle before you buy minimizes the amount you have to borrow to buy a car and can save you a substantial amount in interest.
To get a sense of how much you need to save for a down payment, you can research some car makes and models that might suit you and get a sense of prices for both new and used cars.
You can then zero in on a price range you can afford and calculate the down payment. Deciding between a new vs. used car? A good rule of thumb is to put 20% down on a new vehicle and 10% down on a used one.
Making a higher down payment helps you qualify for a loan, and it can earn you a lower interest rate and result in more affordable monthly payments.
Once you know how much to save, the next step is to find a good place to start saving. Good options include: a money market account, online savings account, or checking and savings account.
These accounts can enable you to earn more interest than a standard checking account but allow you to access the money when you are ready to buy that car.
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4. Buying a Home
For many people, buying a home is the biggest purchase they will ever make. So, it’s important to prepare for it.
A great first step is to figure out how much house you can afford to buy. You can come up with a target price range based on the area you want to live in, details about the type of home you want, and how much you’re comfortable spending on a monthly mortgage payment.
This exercise will help you understand how much you need to save and roughly how long it will take you to save enough.
Mortgage lenders and online mortgage calculators can also help you decide the absolute maximum you can afford to spend on your house.
One common rule of thumb is that your home payment (including loan payment, property taxes and homeowners insurance) should take up no more than a third of gross pay (your monthly paycheck amount before taxes and deductions are taken out). However, this can vary depending on the cost of housing in your area.
Once you have a target home price, you can start saving for a down payment. Many mortgage lenders prefer you to make an upfront deposit of up to 20% of your home’s cost. However, there are mortgages available for those who put down significantly less (even zero).
If you are saving for a down payment, you can think about when you want to buy a home and then work backwards to determine how much you need to save each month to reach this goal.
As with car savings, a good place to save for a home is a high-interest savings account, such as a money market account, online savings account, or checking and savings account.
5. Changing Jobs
At some point during your career, you may change jobs. Generally, this can be a smart financial and professional move, but changing jobs is still something you’ll want to plan for financially. Some tips to help your money work harder for you:
• You’ll likely be eligible for a new set of employee benefits, including health insurance. However, it will probably be up to you to ensure that you have health coverage during the transition. To avoid any gaps, it’s a good idea to ask your new employer how soon you will be able to qualify for healthcare.
• You may also want to create a plan for transferring your 401(k) and health savings account (HSA) to your new accounts. Rolling them over is generally a simple process, but you may want to contact your previous employer for guidance.
• An FSA vs. an HSA can require a different approach. If you have a flexible spending account (FSA), you may need to submit all eligible expenses for reimbursement under your old program before you leave your current job. It can be a good idea to check with your company’s HR department to find out whether or not you have a grace period for submission.
Since you may be earning a higher salary, you may also want to re-examine your budget, and perhaps do some tweaking, such as funneling a bit more money into your retirement fund and/or savings account each month.
6. Saving For Your Kids’ College
Next to buying a home, child education expenses are among the biggest you may have in your lifetime. Just like retirement: it’s never too early to start saving for college. But even if you put it off, you can still help cover most or all of those college costs with wise saving and investing.
While predicting how much college will be for a kindergartener may be difficult, it gets a little easier the older your kids get. However, you can find current college costs and predictors for future college tuition costs online and use that as a benchmark for your savings.
One great place to start building education savings is in a 529 college savings plan. These are savings plans, usually sponsored by state governments, that encourage saving for future education costs.
They are often tax-friendly, in that many states will let you deduct your contribution from your state income tax. Even better, when you withdraw the money for college, the money will not be federally taxed.
That means, any growth (or money in the account that you didn’t put in) is not taxed, which can be a significant advantage over traditional investment accounts.
You can put money into your own state’s 529, or any other state’s plan. Whatever you choose, consider making monthly contributions automatic, so that your bank transfers the money right into the 529 on the same day each month.
One way to ease saving for college is to use smaller life transitions to help fund your education savings plan. When your child no longer needs daycare or preschool, for example, you could funnel what you were paying for that into your account.
7. Retirement
Retirement may seem far away, but it can come up faster than you expect and, if you’re unprepared, you may struggle financially. Saving for retirement early can provide peace of mind later.
And, the earlier you start saving for retirement, the less you’ll actually have to put away, thanks to the magic compounding interest (which means the interest you earn on your investments also earns interest).
While it can seem impossible to predict how much money you’ll need once you retire, some financial experts recommend this rule of thumb: Aim to save at least 15% of your pretax income each year from age 25 onward. If you start later, you would want to up those percentages.
Fortunately you can get Uncle Sam to help. By contributing to tax-advantaged savings accounts like traditional 401(k)s and individual retirement accounts (IRAs), your contributions are made before tax, reducing your current taxable income.
That means you get a tax break the year you contribute. Plus, that money can grow tax-free until you withdraw it in retirement, when it will be taxed as ordinary income (and at retirement time, you may be in a lower tax bracket).
With Roth 401(k)s and IRAs, your contributions are after tax, but you can withdraw the money tax-free in retirement (assuming certain conditions are met).
If you are contributing to 401(k) at work and your employer offers matching funds, you may want to increase your automatic contributions at least to that level. This is effectively “free” money.
The Takeaway
Throughout your life you will likely experience some significant events and milestones that can have a major impact on your financial well-being.
The better prepared you are for these transitions, the less stressful and more enjoyable they can be.
If you’re looking for a simple way to start saving for your financial goals, like buying a car or a home, you may want to consider opening an account that charges low or no fees and pays higher than average interest.
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
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If you’re thinking of buying a car, you are probably wondering how to budget for it. Figuring out how much to spend can be a challenge: Do you go for a cheaper used car or splash out on a fully loaded new vehicle? And how do you balance a car loan with other debt you may have?
Read on for guidelines to determine a car-buying budget so you can make the best decision for your needs. You’ll learn valuable options as well as helpful tips for when you are ready to start shopping.
Determining How Much to Spend on a Car
There are a few guidelines to consider when you’re trying to figure out how much money you should spend on a car. Before you dig into the details, perhaps start by taking a minute to balance your budget so you have an accurate idea of how much money you’re able to spend on a car.
Tally up your monthly income and all of your monthly expenses so you have a keen understanding of where you are spending your money. Once you have a solid grasp on your monthly expenses, you may be better able to determine how much to spend on a car.
Here are some common recommendations for determining how much to spend on a car. Think of these more as guidelines than hard and fast rules. They may give you an idea of how much you should spend on a car, but of course it all depends on your specific circumstances.
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The 10% Rule
The 10% rule is pretty straightforward. The general idea is to not spend more than 10% of your gross annual income on a car. But the low limit can make it difficult to stick to this rule. If you just need a car that will get you from point A to point B, you may be able to find a vehicle that will fall under 10% of your income. But if you need a car with more features or more space, you may want to consider one of the following rules.
The 36% Rule
This rule takes into consideration your total debt-to-income ratio. This guideline suggests you keep all of your debt, including your car payments, to less than 36% of your income. If you, like many Americans, have debt from credit cards, student loans, or a mortgage, you may want to calculate how a car payment would factor in.
• Another related guideline is the 15% rule, which can be useful if the only debt you have is a mortgage. If that’s the case, the guideline suggests that you don’t spend more than 15% of your net monthly take-home pay on car expenses.
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The 20/4/10 Rule
This is a multi-part rule.
• First, it suggests that when you buy a car, you make a down payment of 20%.
• Secondly, it recommends that when you take out a loan to finance the car, you plan to pay it off in no more than four years.
• Finally, the total monthly vehicle expenses shouldn’t be more than 10% of your monthly income. Having your dream car is great, but it may not be worth it if you can’t afford to save for retirement or focus on other goals because your disposable income is primarily going toward your car payments.
The 50/30/20 Rule
If you find the above rules unrealistic, you could also consider using the general 50/30/20 budget rule. This rule says that you should spend 50% of your income on needs, 30% of your income on wants, and 20% of your income should go toward saving.
Your auto loan would fall into the needs category, but if you opt for a more expensive vehicle, you could consider a portion of the payment as part of your wants. This way, you can get the car you need with the features you want, while still keeping your budget balanced by allocating some of your discretionary spending money to your car payment.
Recommended: Check out the 50/30/20 calculator to see the breakdown of your money.
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Finding a Car You Can Afford
Buying a car can be an intimidating process. Thankfully, there are plenty of options, so you can find a car that works for your lifestyle and budget. Here are some things to consider as you embark on your search for a car that fits into your budget technique.
What Are You Going to Use the Car for?
Will you use the car mostly for quick trips to and from work? Do you have a large family that you’ll be driving to and from baseball games, soccer practices, and play dates? How you plan to use the car may influence the type of car you choose to get.
It’s also worth considering the weather. Do you live in an area with harsh winters where a larger vehicle with all-wheel drive may be helpful? There are a wide variety of vehicles on the market that fill different needs so take the time to determine which features are most important to you.
Doing Your Research
Once you decide on the type of car you want to buy, you’ll want to dig into the research phase of the process, so you are familiar with the models available, the features, and their average price.
When you’ve decided on a few models, there are a variety of resources that can help you track down details on each car. Sites like Edmunds, Kelley Blue Book, and Consumer Reports have reliable information to help consumers. And hopefully being an informed shopper will take some of the intimidation out of buying a car.
Will You Buy Used or New?
You’ll also need to decide if you plan to buy a new or used car new. If you are on a tight budget, a used car may be a more affordable option. Something to remember is that a car is a depreciating asset — it typically loses around 20% of its value within the first year.
Test Driving a Few Options
Before you consider buying, consider test driving a few options. Buying a car is a big purchase, so take your time if you’re able to. It can be worth trying the car out on a few different types of roads so you can see how it drives in different settings.
It can be easy to feel pressure to make a purchase after a test-drive, but it is a standard part of the car buying process. The salesperson will likely be interested in making the sale, but there’s no reason you need to decide on the car immediately after the test-drive. One option is to let the salesperson know at the beginning of the drive that you’re still researching options and don’t plan to buy during this visit.
Being Prepared to Walk Away
When buying a car, you may have to negotiate. Haggling can be an acquired skill, but if you’ve done the research and know exactly how much the car is worth, you can dust off your negotiating skills and try using them to work out a deal you’d be happy to accept. If negotiations aren’t going well, being prepared to walk away may help.
SoFi members with Eligible Direct Deposit activity can earn 3.80% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. 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 during a 30-day Evaluation Period (as defined below).
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 3.80% APY, we encourage you to check your APY Details page the day after your Eligible Direct Deposit arrives. If your APY is not showing as 3.80%, 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 3.80% APY from the date you contact SoFi for the rest of the current 30-day Evaluation Period. You will also be eligible for 3.80% APY 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, 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 members with Eligible Direct Deposit are eligible for other SoFi Plus benefits.
As an alternative to Direct Deposit, SoFi members with Qualifying Deposits can earn 3.80% 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 Eligible 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 an Eligible Direct Deposit or receipt of $5,000 in Qualifying Deposits to your account, you will begin earning 3.80% 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 Eligible 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 Eligible 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 Eligible 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 Eligible Direct Deposit or Qualifying Deposits until SoFi Bank recognizes Eligible Direct Deposit activity or receives $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Eligible Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Eligible Direct Deposit.
Separately, SoFi members who enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days can also earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. For additional details, see the SoFi Plus Terms and Conditions at https://www.sofi.com/terms-of-use/#plus.
Members without either Eligible Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, or who do not enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days, will earn 1.00% 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 1/24/25. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet. Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Understanding your personal finances is the first step in taking control of your money and making it work harder for you.
One valuable tool for determining your financial status involves using personal finance ratios. These are akin to formulas that show the relationship between numbers and how your cash is tracking.
For instance, you might look at how your debt is versus your income or how your budget categories are stacking against versus your take-home pay. Calculating and considering these figures can help you manage your money better as well as achieve your short- and long-term goals.
To help you put these important ratios to use, this guide shares eight formulas to help you optimize your money.
Emergency Fund Ratio
An emergency fund is the cash you keep on hand to pay for unexpected expenses, such as a job loss, a large medical bill, or a roof repair.
This fund acts as a safety net so you don’t have to go into debt or raid your long-term savings accounts to take care of the situation.
Formula: Monthly Expenses X 6 = Emergency Fund Ratio
To calculate your target emergency fund, you’ll want to add up your essential monthly expenses, or the minimum amount of money you need to live for one month. That includes your mortgage or rent, insurance, utilities, and groceries.
One common rule of thumb is to then multiply this by three months (as a bare minimum); while others may aim for six months. This gives you a good number to shoot for keeping in your emergency fund.
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Liquid Net Worth Ratio
This formula is essentially an extension of your emergency fund. If you were to need funds as a result of an unplanned event or emergency, this metric looks at how many months of expenses would be covered by your liquid assets — funds that can be easily and quickly converted into cash.
Formula: Liquid Assets/Monthly Expenses = Liquidity Ratio
Liquid assets include your checking and savings accounts, as well as cash-like equivalents. For this number, you do not want to include other assets that are not liquid, such as your home, car, or tax-advantaged retirement savings accounts.
Monthly expenses include essential expenses that you accounted for above to determine your emergency fund ratio.
A common goal: maintaining a liquidity ratio of between three and six months.
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Personal Cash Flow Ratio
Cash flow is a term often associated with companies. But this can also be a simple yet powerful personal finance ratio because it tells you how much is flowing in vs. flowing out of your accounts each month.
Knowing how much cash flow you have is useful because it tells you exactly how much money you have available to pay down debt or save or invest for your future.
Formula: Monthly (After Tax) Income – Monthly Expenses = Personal Cash Flow Ratio
To calculate this, you’ll want to add up all of your average monthly take-home income, including your paycheck, any side hustles, and income from any investments or savings accounts that are available to you for spending.
Next, you can look at credit card and bank statements, as well as receipts, for the past several months to come up with the average amount you are spending each month. This includes necessities like mortgage or rent and utilities, and also discretionary spending such as eating out and entertainment.
You can then subtract your spending number from your income number and you’ll have your net cash flow. If that number isn’t where you want it to be, you can use these calculations as a starting point to make adjustments.
Generally, the higher your cash flow, the better off you are.
Housing-to-Income Ratio
This ratio is vital to helping you understand how much you can afford to spend on your home, whether you buy or rent. It is also an important metric that mortgage lenders use when they decide whether or not to approve your loan.
Formula: Monthly Housing Costs/Gross Monthly Income = Housing Ratio
It’s important to use total housing costs when you calculate this ratio. This includes: your monthly mortgage payments (or rent payments), property taxes, insurance, and utilities.
You can then compare that total cost to your gross monthly income (income before taxes are deducted). Financial experts often recommend keeping this number to 28% or less. In some high cost-of-living areas, closer to 40% can be common.
The lower this number, the more affordable your housing costs are and the more income you have for other financial goals.
Debt-to-Income Ratio
The debt-to-income ratio is often used to determine a company’s ability to pay its debts. It works for individuals as well. It tells you what percentage of your income is being used to repay debts.
Formula: Monthly Debt Payments/Monthly Gross Income = Debt-to-Income Ratio
To calculate your debt payments, you’ll want to include credit card, student loan, and other consumer debt, as well as your mortgage payments. Your gross income is how much you earn each month before any deductions or taxes are taken out.
The common wisdom is to keep your debt at or below 36% of your gross income, but the lower your debt-to-income ratio, the financially healthier you likely will be.
Many people are surprised when they calculate this number to find just how much of their income is going to repay debt, often at high interest rates. This ratio can help you rethink that situation.
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Net Worth Ratio
Personal net worth is a measurement of an individuals’ total wealth. Your net worth ratio gives a little bit broader perspective than your debt-to-income ratio because it takes your total assets into account.
It is calculated as the total value of all your assets minus the total value of all your liabilities.
Formula: Total assets – Total Liabilities = Net Worth Ratio
To find this ratio, you’ll want to add up the current market values of all of your assets including your home, stock and bond holdings, checking and savings accounts, and any other financial accounts.
Next you’ll want to calculate your total liabilities. This includes any debt such as mortgages, credit card balances, car loans, personal loans and 401(k) loans.
You can then subtract your liabilities from your assets. The resulting number is, hopefully, positive, and the higher that positive number, the better for your financial health.
This is a snapshot of your net worth at this moment. You may want to calculate this metric periodically, perhaps quarterly or annually, to track your wealth. Ideally, you should see increases over time.
Savings Ratio
Since saving for the future is such a key part of personal finances, it makes sense there would be a personal finance ratio to help you gauge how you’re doing.
Your savings rate is expressed as what percent of your gross income you are putting away for the future, including retirement and other shorter-term financial goals.
Formula: Savings/Gross Income = Savings Ratio
To calculate this, you’ll want to add up your annual savings in any retirement accounts, including employer-sponsored retirement plans such as 401(k)s, traditional and Roth IRAs and taxable accounts earmarked for retirement. Do not include your emergency fund or college savings accounts.
Compare that savings to your annual gross income (your earnings before taxes and deductions are taken out).
Generally speaking, you want to aim for a saving rate of 10% to 20%. Younger people may want to aim for a 10 percent savings ratio, and then gradually increase their savings rate as their income increases.
50/30/20 Budget Ratio
The 50/30/20 formula can help you manage your budget no matter what your income. It proves a simple guideline as to how to apportion your income so you can afford to pay your bills, have some fun, and also put money into savings.
Essential needs are the largest allocation at 50% of monthly take-home income. These are bills you must pay including mortgage or rent, utilities, health insurance, and groceries. Housing will likely take up a big chunk of this category.
With this formula, you’ll want to keep discretionary spending at no more than 30% of your monthly take-home income. These are most likely the things you do for fun, like dining out, travel, clothing beyond what you need for work, and entertainment.
Saving for future financial goals accounts for the remaining 20% of monthly take-home income. This includes retirement savings, saving for a house, tuition savings, saving to repay debt, etc.
The Takeaway
Personal finance ratios can give you a clear snapshot of your financial health in a variety of areas and help you make better decisions about money management and future planning.
Rather than making a best guess, personal financial ratios give you an edge in your analysis by using simple math. Once you’ve done some of these calculations, you may discover that you want to make some changes, such as watching your spending more closely and/or putting more money into savings each month.
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SoFi members with Eligible Direct Deposit activity can earn 3.80% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. 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 during a 30-day Evaluation Period (as defined below).
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 3.80% APY, we encourage you to check your APY Details page the day after your Eligible Direct Deposit arrives. If your APY is not showing as 3.80%, 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 3.80% APY from the date you contact SoFi for the rest of the current 30-day Evaluation Period. You will also be eligible for 3.80% APY 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, 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 members with Eligible Direct Deposit are eligible for other SoFi Plus benefits.
As an alternative to Direct Deposit, SoFi members with Qualifying Deposits can earn 3.80% 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 Eligible 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 an Eligible Direct Deposit or receipt of $5,000 in Qualifying Deposits to your account, you will begin earning 3.80% 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 Eligible 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 Eligible 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 Eligible 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 Eligible Direct Deposit or Qualifying Deposits until SoFi Bank recognizes Eligible Direct Deposit activity or receives $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Eligible Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Eligible Direct Deposit.
Separately, SoFi members who enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days can also earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. For additional details, see the SoFi Plus Terms and Conditions at https://www.sofi.com/terms-of-use/#plus.
Members without either Eligible Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, or who do not enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days, will earn 1.00% 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 1/24/25. There is no minimum balance requirement. Additional information can be found at http://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.
If you’re attending a public university that is not in your home state, establishing residency could significantly reduce the tuition bill. However, establishing residency for the sole purpose of qualifying for in-state tuition can be difficult. Generally, you need to be financially independent, live in the state for at least a year, and demonstrate that you intend to stay in order to be considered a resident of a new state.
Read on for a closer look at what it takes to establish residency where you go to college, whether or not it’s worth the effort, plus other ways to get a break on out-of-state tuition at a public university.
Establishing Residency
Each state has their own requirements for establishing residency. Requirements can also vary based on the university, which can add confusion to the process. Here are some of the general requirements that states and universities often require to determine residency:
• Physical Presence Most states need you to be a resident for 12 consecutive months before you qualify for in-state tuition. The time to establish residency could be more or less, depending on the state.
• Intent Students generally must prove that they are living in a state for more reasons than just attending school.
• Financial Independence Typically, students must prove they are financially independent and no longer supported by their parents.
💡 Quick Tip: You can fund your education with a low-rate, no-fee private student loan that covers all school-certified costs.
3 Tips for Establishing Residency
Establishing residency can be difficult, but with these tips and a little legwork, you may be able to become a resident of the state where you go to college and, possibly, slash your tuition bill.
1. Relocate as Soon as Possible
Since most states require you to be a resident for 12 consecutive months, it makes sense to relocate as soon as you can. If you are currently enrolled in a school, and are hoping to establish residency, this could mean spending your summers on-campus or at the very least in that state. You may also need to rent or buy property, as well as pay income taxes in your new state.
In addition, you’ll likely have to cut ties to your home state and do things like change your voter registration.
2. Boost Your Reasons for Moving
You usually need to prove the reason you moved to the state wasn’t solely for getting in-state tuition.
There are a few things you can do to help prove intent:
• Get a new driver’s license
• Register a vehicle
• Get a state hunting and/or fishing license
• Open a local bank account
• Get a local library card
Having any of these things in your old state may make it more difficult to establish residency in your new state.
3. You May Have to Distance Yourself from Your Parents
One of the common requirements for establishing residency is financial independence. This can make establishing residency extremely difficult for students between the ages of 18 and 22 who are still being supported by their parents. Becoming an independent student before the age of 24 can be challenging, both logistically and emotionally.
Establishing residency in a new state isn’t always the only option for getting in-state tuition. Some states participate in regional reciprocity agreements that let students attend colleges in bordering states at a discount.
Here are a few examples:
1. New England Regional Student Program
Run by the New England Board of Higher Education, this program allows New England residents to enroll in out-of-state New England public colleges and universities at a discount. To be eligible for the program, students must enroll in an approved major that is not offered by the public colleges and universities in their home state.
This program includes six states: Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont.
2. Midwest Student Exchange Program
Through the MSEP , public institutions agree to charge students no more than 150% of the in-state resident tuition rate for specific programs. Some private colleges and universities offer a 10% reduction on their tuition rates.
Participating states include: Illinois, Indiana, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, and Wisconsin. You can use its database to find colleges and universities participating in the program.
3. Southern Regional Education Board’s Academic Common Market
This program is similar to the New England Regional Student Program. It provides tuition-savings to students in the 16 SREB states who are interested in pursuing degrees that are not offered by their in-state institutions. Students are able to enroll in out-of-state institutions that offer their degree program, but they pay the in-state tuition rate.
Participating states include: Alabama, Arkansas, Delaware, Florida, Georgia, Kentucky, Louisiana, Maryland, Mississippi, North Carolina, Oklahoma, South Carolina, Tennessee, Texas, Virginia, and West Virginia. You can use its database to find participating institutions.
4. Western Undergraduate Exchange
The Western Undergraduate Exchange is open to students from any of the 16 states that participate in the Western Interstate Commission for Higher Education (WICHE). The program allows students to enroll as nonresidents in more than 160 participating public colleges and universities and pay 150% (or less) of the enrolling school’s resident tuition.
Participating states and territories include: Alaska, Arizona, California, Colorado, Hawaii, Idaho, Montana, Nevada, New Mexico, North Dakota, Oregon, South Dakota, U.S. Pacific Territories and Freely Associated States, Utah, Washington, and Wyoming.
5. Exceptions for Students without Residency
Sometimes, residency rules are waived or are more lenient for students with special circumstances, including, veterans or the children of military personnel.
There is no single database of these exceptions, so if you think you may qualify for one, check with the colleges you are interested in to see whether there are any exceptions and how you can apply for them.
Types of Student Loans to Help Students Pay for College
Even if you’re able to establish residency in a new state and qualify for in-state tuition, you still may need help paying for college. Scholarships, grants, and work-study are types of financial aid that are not required to be repaid. Beyond that, student loans are also an option. There are two major categories for student loans: federal and private.
Federal Student Loans for Undergraduate Students
Federal student loans are funded by the U.S. government and are subject to a set of standard rules and regulations. The interest rate on federal loans is fixed, which means it remains the same over the life of the loan. These interest rates are set annually by Congress.
Direct Subsidized student loans are awarded based on financial need. The interest on these loans is paid for (or subsidized) by the U.S. Department of Education during the following periods:
• While the student is enrolled in school at least half-time
• During the loan’s grace period, which is usually the first six months after the borrower graduates or drops below half-time enrollment
• During qualifying periods of deferment, which is a period of time when loan payments are paused
Borrowers with unsubsidized loans are responsible for all of the interest that accrues on the loan, even while they are attending school
To apply for a federal student loan, students must fill out the Free Application for Federal Student Aid (FAFSA®). Students interested in receiving financial aid must submit the FAFSA each year.
Private Student Loans
Private student loans are borrowed directly from private lenders like banks or other financial institutions. These loans may have fixed or variable interest rates. Unlike the federal student loans available to undergraduate students, which do not require a credit check, private lenders will generally review a borrower’s credit history, among other factors, when making their lending decisions.
In general, you’ll want to consider private student loans only after you’ve tapped any federal loan options available to you. This is because private lenders do not offer the same protections — such as income-driven repayment plans — to borrowers.
💡 Quick Tip: Federal student loans carry an origination or processing fee (1.057% for Direct Subsidized and Unsubsidized loans first disbursed from Oct. 1, 2020, through Oct. 1, 2024). The fee is subtracted from your loan amount, which is why the amount disbursed is less than the amount you borrowed. That said, some private student loan lenders don’t charge an origination fee.
The Takeaway
Establishing residency can help a student qualify for in-state tuition, which could lead to a substantial savings in tuition costs. Unfortunately, establishing residency for the purpose of qualifying for in-state tuition, especially as a dependent student, can be challenging. Some states, however, have reciprocity agreements with other states, which allows you to benefit from lower tuition without establishing residency in a new state.
Whatever tuition you end up paying, there are resources that can help make the cost of going to college more manageable, including financial aid and federal and private student loans.
If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.
Cover up to 100% of school-certified costs including tuition, books, supplies, room and board, and transportation with a private student loan from SoFi.
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.
SoFi Private Student Loans Please borrow responsibly. SoFi Private Student loans are not a substitute for federal loans, grants, and work-study programs. We encourage you to evaluate all your federal student aid options before you consider any private loans, including ours. Read our FAQs.
Terms and Conditions Apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. SoFi Private Student loans are subject to program terms and restrictions, such as completion of a loan application and self-certification form, verification of application information, the student's at least half-time enrollment in a degree program at a SoFi-participating school, and, if applicable, a co-signer. In addition, borrowers must be U.S. citizens or other eligible status, be residing in the U.S., and must meet SoFi’s underwriting requirements, including verification of sufficient income to support your ability to repay. Minimum loan amount is $1,000. See SoFi.com/eligibility for more information. Lowest rates reserved for the most creditworthy borrowers. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change. This information is current as of 04/24/2024 and is subject to change. SoFi Private Student loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org).
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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