Internal Revenue Service (IRS) rules require companies with 401(k) retirement plans to identify highly compensated employees (HCEs). An HCE, according to the IRS, passes either an ownership test or a compensation test. Someone owning more than 5% of the company would qualify as an HCE, as would someone who was compensated more than $135,000 for the 2022 tax year.
The IRS uses this information to help all employees receive fair treatment when participating in their 401(k). As a result, your HCE status can affect the amount you can contribute to your 401(k).
What Does It Mean to Be an HCE?
A highly compensated employee’s 401(k) contributions will be subject to additional scrutiny by the IRS. Again, you’re identified as an HCE if you either:
• Owned more than 5% of the business this year or last year, regardless of how much compensation you earned or received, or
• Received at least $135,000 in compensation for the 2022 tax year ($150,000 for 2023) and, if your employer so chooses, you were in the top 20% of employees ranked by compensation.
If you meet either of these criteria, you’re considered an HCE, though that doesn’t necessarily mean that you earn a higher salary.
For example, someone could own 6% of a business while also drawing a salary of less than $100,000 a year. Because they meet the ownership test, they would still be classified as an HCE.
It’s also possible for you to be on the higher end of your company’s salary range and yet not qualify as an HCE. This can happen if your company chooses to rank employees by pay. If your income is above the IRS’s HCE threshold but you still earn less than the highest-paid 20% of employees (while not owning 5% of the company), you don’t meet the definition of an HCE.
Highly Compensated Employee vs Key Employee
Highly compensated employees may or may not also be key employees. Under IRS rules, a key employee meets one of the following criteria:
• An officer making over $200,000 for 2022 ($215,000 for 2023)
• Someone who owns more than 5% of the business
• A person who owns more than 1% of the business and also makes more than $150,000 a year
• Someone who meets none of these conditions is a non-key employee.
In order for a highly compensated employee to be a key employee, they must pass the ownership or officer tests. For IRS purposes, ownership is determined on an aggregate basis. For example, if you and your spouse work for the same company and each own a 2.51% share, then you’d collectively pass the ownership test.
Benefits of Being a Highly Compensated Employee
Being a highly compensated employee can offer certain advantages. Here are some of the chief benefits of being an HCE:
• Having an ownership stake in the company you work for may entail additional employee benefits or privileges, such as bonuses or the potential to purchase company stock at a discount.
• Even with a high salary, you can still contribute to your 401(k) retirement plan, possibly with matching contributions from your employer.
• You may be able to supplement 401(k) contributions with contributions to an individual retirement account (IRA) or health savings account (HSA).
There are, however, some downsides to consider if you’re under the HCE umbrella.
Disadvantages of Being a Highly Compensated Employee
Highly compensated employees are subject to additional oversight when making 401(k) contributions. If you’re an HCE, here are a few disadvantages to be aware of:
The IRS requires employers to conduct 401(k) plan nondiscrimination compliance testing each year. The purpose of this testing is to ensure that highly compensated employees and non-highly compensated employees have a more level playing field when it comes to 401(k) contributions.
Employers calculate the average contributions of non-highly compensated employees when testing for nondiscrimination. Depending on the findings, highly compensated employees may have their contributions restricted in certain ways. If you aren’t sure, it’s best to ask someone in your HR department, or the plan sponsor.
If an employer reviews the plan and finds that it’s overweighted in favor of HCEs, the employer must take steps to correct the error. The IRS allows companies to do that by either making additional contributions to the plans of non-HCEs or refunding excess contributions back to HCEs.
401(k) Contribution Limits for HCEs
In theory, highly compensated employees’ 401(k) limits are the same as retirement contribution limits for other employees. For 2022, the limit is $20,500; it’s $22,500 for 2023. Employees age 50 and older can make an additional $6,500 in catch-up contributions for 2022, and $7,500 for 2023.
But, as noted above, these plans may be restricted for HCEs, so it’s wise to know the terms before you begin contributing.
Other Retirement Plan Considerations
For example, one thing to watch out for if you’re a highly compensated employee is the possibility of overfunding your 401(k). If your employer determines that you, as an HCE, have contributed more than the rules allow, the employer may need to refund some of that money back to you.
As mentioned earlier, refunded money would be treated as taxable income. Depending on the refunded amount, you could find yourself in a higher tax bracket and facing a larger tax bill. So it’s important to keep track of your contributions throughout the year so the money doesn’t have to be refunded to you.
A highly compensated employee might consider opening an IRA account, traditional or Roth IRA, to supplement their 401(k) savings. Either kind of IRA lets you contribute money up to the annual limit and make qualified withdrawals after age 59 ½ without penalty.
However, income-related rules could constrain highly compensated employees in terms of funding both a 401(k) and a traditional or Roth IRA.
• An HCE’s contributions to a traditional IRA may not be fully tax-deductible if they or their spouse are covered by a workplace retirement plan. Phaseouts depend on income and filing status.
• Highly compensated employees may be barred from contributing to a Roth IRA. Eligibility phases out as income rises. For the 2023 tax year, people become ineligible when their MAGI exceeds $153,000 (if single) or $228,000 (if married, filing jointly).
The Takeaway
A highly compensated employee is generally someone who owns more than 5% of the company that employs them, or who received compensation of more than $135,000 in 2022 ($150,000 in 2023).
Being an HCE can restrict how much you’re able to save in your company’s 401(k); under certain circumstances the IRS may require the employer to refund some of your contributions, with potential tax consequences for you. Even so, HCEs may still be able to save and invest through other retirement accounts.
SoFi offers traditional and Roth IRAs to help you grow your retirement savings. You can open an account online in minutes and build a diversified portfolio that suits your goals. It’s a hassle-free way to work toward a secure financial future.
Help grow your nest egg with a SoFi IRA.
FAQ
Does HCE income include bonuses?
The IRS treats bonuses as compensation for determining which employees are highly compensated. Overtime, commissions, and salary deferrals to a 401(k) account are also counted as compensation.
What is the difference between a key employee and a highly compensated employee?
A highly compensated employee is someone who passes the IRS’s ownership test or compensation test. A key employee is someone who is an officer or meets ownership criteria. Highly compensated employees can also be key employees.
Can you be a key employee and not an HCE?
It is possible to be a key employee and not a highly compensated employee in certain situations. For example, you might own 1.5% of the business and make between $150,000 and $200,000 per year, while not ranking in the top 20% of employees by compensation.
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SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below:
Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
If you change jobs and leave a balance of $5,000 or less in your old 401(k), IRS regulations permit your former employer to distribute all of those funds to you in what’s known as a 401(k) force-out.
This move could potentially lower your former employer’s plan costs and lessen their administrative duties — but it also can affect your retirement planning. Here’s what you should know about the 401(k) force-out process.
What Is a 401(k) Force-out?
As noted above, a 401(k) plan is a type of qualified retirement plan offered by employers to help employees save money and build wealth. Once an employee moves to a new job, their former employer can impose a 401(k) force-out — a distribution from the retirement plan that the IRS allows when an ex-employee’s plan balance is $5,000 or less.
The distribution does not require the ex-employee’s consent.
That doesn’t mean your former employer can do whatever they like with your 401(k) money. The IRS requires employers to observe certain 401(k) force-out rules. The rules specify:
• When an employer must notify you about your 401(k) forced distribution
• What happens to the money in your account if you’re forced out
Not every former employee is subject to a 401(k) force-out. If your 401(k) balance is greater than $5,000, your former employer can’t force you out unless you give consent. Your spouse may also need to consent.
The 401(k) Force-out Process
How 401(k) force-outs are handled can depend on the employer and the terms of your plan. It’s important to note that your plan documents must include a provision for force-outs; your former employer can’t just impose the policy on a whim.
When force-outs take place, they generally begin with an employer’s review of their 401(k) retirement plan’s account balances, including those of ex-employees. Again, if you are an ex-employee with a balance over $5,000, the IRS requires your consent before your ex-employer can do anything with the money in your account.
If the vested balance is between $1,000 and $5,000, the former employer can:
• Cut you a check for the amount
• Give you the option to roll the money over to an eligible retirement plan
• Transfer the money to an individual retirement account (IRA) on your behalf
When the balance is below $1,000 the employer can send you a check or transfer the money to an IRA.
Before the employer can do any of those things, however, they’re required to give you at least 30 days’ notice so you can decide for yourself what happens to the money. Whatever resolution you choose, you’ll no longer be investing in the 401(k) at your old employer.
Why do employers force 401(k) distributions on former employees? Cost is one reason. A plan with fewer enrolled employees can be less expensive to administer. Removing inactive participants can also streamline recordkeeping and potentially reduce the plan’s regulatory compliance obligations.
What Happens to a 401(k) After You Leave Your Job?
Keep in mind that a 401(k) cash distribution is subject to ordinary income tax — including in the case of a force-out, where it’s required by your ex-employer. You may also face a 10% early withdrawal penalty if you’re younger than age 59 ½.
Ways to Cope With a 401(k) Force-Out
What can you do to prevent the additional tax and potential penalty? Rolling over a 401(k) to your new employer’s retirement plan or to an IRA within 60 days can prevent you from owing taxes on the amount (or the 10% penalty).
A rollover may also allow you to preserve some tax benefits. For example, if you’re rolling money from one 401(k) to another or to a traditional IRA, it can continue to grow on a tax-deferred basis until you’re ready to retire. And you can keep saving for retirement in your new employer’s plan if one is offered.
Leaving the money in your former employer’s plan could make sense if you’re comfortable with the investment options offered and the fees you’re paying. Of course, that may not be possible if that employer has 401(k) force-out rules that require you to either cash out or move the money elsewhere.
Withdrawing money from a 401(k) when you leave a job is usually the least preferable option for people below the age of 59 ½. Barring exceptions, any 401(k) cash distribution before you reach that age is treated as taxable income. The IRS can also assess an early withdrawal penalty.
Keep in mind that if you’ve taken out a loan against that 401(k) account, you’ll need to pay the loan’s full outstanding balance at the time of separation. Otherwise, the IRS views the entire loan as a taxable distribution.
Can a Company Refuse to Give You Your 401(k) Money?
A company can’t refuse to give you your 401(k) funds, but there may be restrictions on when you can access those funds. If you’ve borrowed from your 401(k), for instance, an employer may require you to repay the rest of the loan before permitting you to roll over or withdraw your balance.
Starting a New 401(k)
Having left an old employer behind, you may find that starting a new 401(k) account can be as simple as opting into automatic enrollment in your new company’s plan. You may need to work a certain number of months before you’re eligible for automatic enrollment; that will depend on the plan rules.
Regardless, contributing to a 401(k) is one way to ensure that you’re on track for retirement.
For the new 401(k) plan, it’s important to consider the amount you’re deferring into the account and the fees you’ll be paying. It’s a good idea to at least contribute enough to get the full employer match (if one is offered).
You can also ask your plan administrator about scheduling annual contribution increases to coincide with yearly raises you might receive (some companies offer this as an automatic feature). Making regular adjustments to contributions and asset allocation can help you make the most of every dollar when saving for retirement.
The Takeaway
If you participated in the 401(k) plan at a past job and left less than $5,000 in the account, your former employer has the option of cashing you out of their plan. The account balance determines whether they can do this by distributing the money as cash or rolling it over into a retirement account.
In any event, you will be notified at least 30 days in advance of the company’s action. You can generally inform them of your preference at that time.
With the funds from that old account, you could open a traditional or Roth IRA to add to your savings. Or do a direct 401(k) rollover. SoFi makes the direct rollover process streamlined and simple.
Help grow your nest egg with a SoFi IRA.
FAQ
Can your employer force you to cash out your 401(k)?
Yes. If you leave your job and your 401(k) balance is less than $1,000, your ex-employer can cut you a check for that amount. Keep in mind that a 401(k) cash distribution is subject to ordinary income tax; you may also pay a 10% early withdrawal penalty if you’re younger than age 59 ½. For larger balances, you’ll likely have a rollover option, even if your consent isn’t required. If your balance is more than $5,000, the IRS requires your ex-employer to get your consent before doing anything with the funds in your account.
What happens when your company no longer offers a 401(k)?
When an employer opts to terminate a 401(k) plan, they’re required to make sure employees are able to access the full amount of their 401(k) savings. Assets are usually distributed within a year or so. You may be given the option to withdraw the balance in cash or put it into a rollover IRA in order to avoid negative tax consequences.
Can your company kick you out of the 401(k) plan?
A company can cull its 401(k) plan enrollment by forcing out ex-employees who are no longer active plan participants. If you’re forced out of a former employer’s 401(k), you may opt to receive a cash distribution, or you may wish to roll the money over to your current employer’s retirement plan. Your former employer may also have the ability to transfer your 401(k) funds to an IRA for you.
Photo credit: iStock/AJ_Watt
SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below:
Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. 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.
A budget can be a terrific tool to help you understand how much money you have flowing in and out every month. It provides the guidelines and guardrails you may need to avoid overspending and hit your savings goals.
No one likes to feel broke or in debt, and setting up a simple line item budget is a time-tested way to take control of your money. If you’re sick of running out of money before the end of the month or watching your credit card debt climb, this guide to line item budgeting can help.
Read on to learn:
• What is a line item budget?
• What are the pros and cons of a line item budget?
• What are examples of a line item budget?
• How do you set up a line item budget?
What Is a Line Item Budget?
Depending on where you look, you’ll find a variety of budgeting insight and advice. Some tout the benefits of the 50/30/20 rule and others swear by the envelope method. These different budgets can offer flexibility and provide a solid structure for your budget.
However, if you’re looking for specific insights, it could be worth starting with a different approach that offers more granular detail into your expenses and spending habits — a line item budget.
Essentially, line item budgets function by grouping related costs together and creating a clearly organized flow of funds. They also track both income and expenses, giving a more complete and accurate financial picture.
What Is Considered a Line Item?
A line item budget at its core is a list of expected income streams and pre-planned expenses expected over a specific period of time. A line item is simply one of the items on that list.
For example, a line item budget that calculates income from a salaried job and a rental property, plus expenses for a cell phone, car insurance, and a music subscription, would have a total of five line items. A line item budget can have as few or as many line items as needed, and they’re often categorized by type to help keep the budget organized.
It may be helpful to know a bit about how these budgets can work in business, as background for creating your own line item budget. Say a business is creating a new advertising campaign. They might consider:
• Projected expenses: How much they think the cost of creating and executing their advertising materials will cost in the future.
• Previous actual expenses: This will show how much in the past their costs actually were for such endeavors.
• Present-year expenses: This would track the actual expenses being incurred as they create their ads. This could be done week by week or month by month.
In this way, one can track expenses over time and see how spending is trending.
In personal line item budgeting, you will be able to use this technique in a similar way. In addition to focusing on day-to-day spending, saving, and keeping expenses in line, you can also use this sort of household budget to plan for the future and to save.
What Are the Advantages of Using a Line Item Budget?
If you are considering implementing a line item budget, consider these upsides.
Allocating Expenses Is Simple
One of the biggest pros of using this kind of budget is the ease with which they can be created. With just a few clicks on a spreadsheet, you can establish a basic structure and begin to fill in the data that needs to be recorded. And as priorities change, the budget can be changed just as easily to meet those new needs.
Interpreting the Budget Is Easy
Another major advantage of the line item approach: Making a budget this way isn’t only easy to do, it’s also easy to understand. Creating a basic list of categorized income and expenses doesn’t require any specialized accounting degree to decipher. With your phone’s calculator function, you’re good to go.
Planning Your Future Finances
It provides an easy to read, at-a-glance view of what to expect from your expenses in a week’s, month’s or year’s time. And specific amounts are clearly displayed on each individual line. Those looking for budgeting for beginners tips may want to consider a line item budget for these two benefits.
What Are Some Downsides to Line Item Budgets?
Next, it’s worthwhile to recognize the possible drawbacks of line item budgets.
Best for Steady Earners
Line item budgeting usually relies on fixed and steady income and expenses for accuracy. It can work well for managing predictable finances, but if a budget contains line items that fluctuate significantly, it may not balance properly. This can lead to inaccurate calculations.
For instance, a business budget with a line item for income from a candle company may be accurate if the same number of candles is sold each month. However, if the candles are sold during the holiday at a discount, the income would not match the preset number on the line budget, and the final calculations would be incorrect.
Typically Rigid
Another disadvantage of line item budgets is that they are rigid. It’s not uncommon to change spending habits throughout the year to fit changing needs, but those changes aren’t automatically reflected in a line item budget.
Spending adjustments may require extensive budget rewrites in order to accurately capture a new spending plan. With a line budget, any time financial goals change, it requires reviewing and adjusting everything line-by-line in order to stay current.
Requiring Detail
Unlike a budget such as the 50/30/20 rule, in which a person wrangles three big financial buckets (or spending categories), a line item budget does require rigorous accounting of specific expenses. This can be challenging for some people.
Now, in chart form, here are the pros and cons of line item budgets:
Pros of Line Item Budgets
Cons of Line Item Budgets
Simple to manage
Requires detailed record-keeping
Easy to create
Rigid
Good for future planning
Best for steady earners
Budgeting: Is It Worth It?
Budgeting can seem tedious. After a long day (or week) at work, the last thing you may want to do is spend time in front of a screen, plugging in data and recording how much you’ve spent.
But tracking your money can be a powerful exercise. Here are some reasons why budgeting can be worthwhile:
• Tracking your spending can give you direct visibility into your habits and when you understand where your money is going, you can feel empowered to make adjustments.
• Budgeting can be part of a good money mindset. Instead of thinking of budgeting as a series of spending restrictions, you could think of it as a tool you can use. It’s a technique that can give you the freedom to spend money on what is most important to you.
• Setting money goals can provide a structure to help you build out your budget and plan for the future. So, whether you’re saving for retirement, planning a wedding, or jetting off on a trip overseas, having and sticking to a well-crafted budget can help you get there.
• It’s also worth noting that your budget is a living document. It’s okay to make changes. As you adjust your goals or experience or experience changes in your income or lifestyle, you can (and should) make adjustments and changes to fit your new needs. Your life isn’t stagnant, and your budget shouldn’t be either.
Typically, line item budgets are used by small businesses to track their earnings and expenses and compare them from year to year. They lend well to financial analysis, allowing business owners to easily target areas of their business where they may potentially reduce costs — and where there might be room to grow the company.
While businesses typically have different needs than households, creating a line item budget can be helpful in personal finances, too.
Just as they give small businesses insight into opportunities to grow the business or reduce expenses, line item budgets can help manage your personal expenses. Outlining each source of income and expense can reveal personal spending habits and opportunities to reduce one’s cash outflow.
The specific insights you gather from a line item budget, as well as the changes you make, will ultimately depend on your personal goals and overall financial situation.
Deciding What to Include in a Line Item Budget
Deciding to create a line item budget is just the first step. Next, consider which categories are most important for you to include. A personal budget is just that — personal.
Everyone’s financial situation is different, so this list is not the end-all-be-all solution, but here are a few high-level categories you may want to consider.
Bills and Utilities
This category is fairly self explanatory — after all, everyone’s got bills to pay, right? Things worth listing in this category might include water and electricity bills; cable, internet, or phone bills; or any other monthly bill you have on your expense list.
Debt
If you have student loan payments, credit card bills, or other recurring debt payments, include them in your budget. That’s an important area to track.
Education
If you are currently attending school or have kids, you’ll likely want to consider including things like tuition and fees, the cost of books and other supplies, and any other expenses directly related to education costs.
Entertainment
This one is a little broader and can be highly customized depending on personal spending habits. Do you have subscriptions to streaming services? Do you buy lots of books?
Tickets to the movies, museums, or a concert could also be included in this category. Depending on your hobbies and interests, you may find you can expand this with additional detail.
Fees
Think of all the fees charged to your accounts. Late fee on a delayed credit card payment? ATM fees? Add ՚em here. You could add HOA fees and others to this category as well. If you pay an annual fee to your credit card issuer, that goes here as well.
Food
Depending on your eating habits, you could split this up even further in a line item budget into categories like groceries, snacks, and dining out.
Home
Think of things like your rent or mortgage as well as expenses for maintenance and upkeep of your home.
Income
You’ll probably want to include all sources of income, not just your regular 9 to 5. If you’re budgeting as a couple, you can include income for both partners.
Add income earned from having a side hustle or from passive income opportunities, too.
Investments
Add your contributions to all investment accounts including a 401(k), IRA, 529 accounts, or other brokerage accounts.
Medical
Expenses for medications, health, dental, or vision insurance, and co-pays can all be included under this category.
Personal Care
Things like toiletries, vitamins, and beauty supplies would fit into this category. Hair cuts, trips to the nail salon, and massages could be included as well. If desired, you could also include the cost of other self-care practices, like a subscription to a meditation app, gym membership, or exercise classes.
Savings
Money that you put into an emergency fund, vacation fund, or other form of savings should be accounted for in your line item budget, too.
Services
Do you pay for any regular services? You could include things like dry cleaning services, the cost of having a housekeeper, or the fee you pay your babysitter for a night out.
Shopping
Heading to the mall? Shopping expenses like clothing, toys, and even gifts for others, could be added here.
Taxes
If you’re a full-time employee, be sure to note the taxes being taken out of your paycheck. If you are a freelancer or independent contractor, note quarterly taxes in your line item budget.
Transportation and Auto
This is a catch-all category for things like your monthly metro pass, gas, car insurance, auto loan payment, and general maintenance of your vehicle (if you own one).
Travel
Add all costs associated with trips you take here. Things like hotels or lodging, air travel, taxis, travel insurance, and tickets and admission for excursions and seeing the sights.
If you’re road-tripping, you could include the cost of gas, tolls, and other car-related expenses for the trip here too. Also worth including is the cost of food while on the road.
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Putting Your Line-Item Budget Together
A list this long can seem overwhelming. Take it one step at a time, and, if needed, break the work up over a few days. For instance:
• On day one, gather all of the relevant documents (tax returns, paychecks, credit card statements, etc) and create the skeleton of your line item budget.
• On day two you could aim to make it through recording your income and investments, and maybe half of your expenses.
• On day three you could finish adding data and add any finishing touches or edits.
After creating this line-item budget, you should have a bird’s-eye view of your spending habits. Take a close look at the information, and decide if you are happy with what you see. Now is the time to be honest with yourself and make the changes you feel are necessary. Do you want more money to put towards savings or paying down debt? See how you might alter the numbers as they currently exist for the months ahead.
Want to make cuts to your monthly expenses? Now you know exactly how much money is being spent in each category and where you could stand to hold back. Some ideas to mull over:
• Can you negotiate a less expensive car insurance fee? Experiment with meal planning to see if you can be intentional about your food spending and potentially cut your grocery bill.
• Try adjusting the thermostat setting while you’re asleep or away from your home to cut your energy bill.
• Getting hit with fees on late payments? You might want to add an alert to your calendar or a monthly notification to your phone to remind you when payments are due. Another possible option is to enroll in autopay so you never miss a payment.
Payment history accounts for 35% of your credit score. So making payments on-time consistently could not only eliminate those pesky late fees from your budget but it could also potentially help improve your credit score in the long-term.
A line item budget example can be as simple as using an Excel or Google Sheets spreadsheet. You could even make your own basic line item budget template, if you prefer.
At the top rows, income can be added, say, for a given month. Then, moving down the page, you can list out the various expenses you have.
That will allow you to see your income and cash that is flowing out. To the right of that column of numbers, you can have last month’s expenses, if you like. Some people find it helpful to put their projected income and spending vs. actual income and spending in the other vertical columns. Then they can assess if they are in debt or have excess funds.
You can customize the organization to best suit your needs.
Alternatives to a Line Item Budget
Though simple and intuitive in nature, line item budgets aren’t a perfect fit for everyone. However, there are many different budgeting methods to choose from to fit unique lifestyle needs. A few popular methods are:
50/30/20 Budget
Also known as a proportional budget, the 50/30/20 budget rule focuses on splitting income into three buckets — “needs,” “wants,” and savings. Instead of creating lists of expenditures, you instead commit to spending 50% of your income on things you need to spend on (housing, food, debt, and similar “musts”), 30% on things you want (dining out, travel, and so forth), and the remaining 20% is set aside for savings.
Because spending isn’t tracked on a granular level, spend tracking apps and services can be used to help avoid overspending in any one category.
The envelope method focuses on using physical envelopes and labeling each with a spending category such as food, bills, or entertainment. The envelopes are then filled with the maximum amount of money desired to be spent in each category, and spending throughout the month happens directly from those envelopes.
Once an envelope is empty, no more spending can be done in that category, unless taken from another. This method can be adapted to use a debit card vs. cash.
Zero-Based Budget
Similar to the line item budget, this approach takes account of all income and expenses. The difference is that with this budget, the goal is to make sure that every incoming dollar is allocated to either a saving or a spending purpose, and to leave nothing left over. Automating finances with services like automatic bill-pay and pre-scheduled bank transfers can help with managing this style of budgeting.
The Takeaway
Creating a line item budget can be useful when determining your spending habits. It’s a fairly simple, detailed, and well-organized way to track your earnings and spending, but it’s not always flexible. Also, if you don’t have your budget spreadsheet on hand, it could be more difficult to make changes or check-in while you’re busy living.
Enter SoFi’s Checking and Savings, an account that allows you to review your weekly spending in your dashboard within the SoFi app. With it, you can save, spend, and earn all in one convenient place, which can make staying on budget easier. What’s more, this online account pays a competitive annual percentage yield (APY) while charging no account fees, which can help your money grow faster.
Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.20% APY on SoFi Checking and Savings.
FAQ
What is an example of a line item budget?
A line item budget is a simple, organized way of listing income and spending in detail so you can keep things in balance and see how you are tracking over time. It can be easily made with a basic spreadsheet template.
What is the difference between a line item budget and a program budget?
Line item budgets and program budgets are frequently used in business. Typically, a line item budget will list out individual budget expenses, item by item. In a program budget, however, the spending tends to be grouped into smaller budgets for specific activities or programs. For instance, in a program budget, all the costs related to advertising a new service could be kept together, to show the expenses required to meet that goal.
How do I create a line item budget in Excel?
One simple way to make a line item budget in Excel is to create vertical columns for each month. Starting at the top of each month, you could list various sources of income. Then below that, you could break out, line by line, all of your expenses, such as food, housing, utilities, entertainment, clothing, dining out, travel, transportation, and so on, going down the page.
This can allow you to tally your earning, spending, and saving. As time passes, each vertical column can represent a month of the year. Some people like to enter and compare projected earning, spending, and saving vs. actual; it’s up to you if that suits your needs.
SoFi members with direct deposit activity can earn 4.20% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.
As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.20% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
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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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So you want to go to medical school and become a doctor? Then you know that the MCAT, a rigorous test, is likely in your future. Since it’s an important qualifying test for medical school and can be challenging, you likely want to arm yourself with info and prepare well for it.
Here, you’ll learn some of the most important information, such as:
• What are the MCATs
• How to start studying for the MCATs
• How to pay for the MCATs and medical school.
Read on, and hey: You’ve got this!
What Are the MCATs?
MCAT stands for Medical College Admission Test® (MCAT®). The test, which the Association of American Medical Colleges (AAMC) creates and administers every year, is multiple-choice and standardized. Some important facts:
• Medical schools have been utilizing it for more than 90 years to determine which students should gain admission.
• Most medical schools in the United States and some in Canada will require that students take the MCATs. Every year, more than 85,000 prospective medical school students take it.
• There are four sections to the MCATs:
◦ Critical analysis and reasoning skills
◦ Biological and biochemical functions of living systems
◦ Chemical and physical foundations of biological systems
◦ Psychological, social, and biological foundations of behavior.
• Students will receive five scores: one for each section, and then one total score.
◦ In each section, they can get a score ranging from 118 to 132, and the total score ranges from 472 to 528.
◦ Generally, a competitive MCAT score is a total of 511 or above, which would place a student in the 81st percentile.
The average MCAT score for all medical school applicants is currently 501.3. Usually, students will receive scores 30 to 35 days after they take the exam.
Keep in mind that MCAT scores, while important, are just one part of a medical school application. Medical schools often review other factors, including things like a student’s:
• GPA
• Undergraduate coursework
• Experience related to the medical field, including research and volunteer work
• Letters of recommendation
• Extracurricular activities
• Personal statement.
Because of this array of inputs, If a student has a high GPA from a competitive undergraduate school, for instance, and they don’t score very high on the MCATs, they may still have a chance of getting into a medical school.
Getting a competitive score on the MCAT can give applicants an edge, especially when applying to ultra-competitive medical schools. One way students can help improve their chances of getting a desirable score on the MCAT is to learn how to study for the unique demands of this test.
One of the first things a student can do when determining how to prepare for the MCAT is to create a study plan. A well-crafted study plan will review what materials the student should review in order to prepare for the exam.
That said, there’s no one best way to prep for the MCAT. Consider these options; you might use one or a variety of techniques.
The AAMC Website
One great place to get started is the AAMC website, which provides an in-depth outline of the test on their website. Obviously, the same questions students will see on the actual exam won’t be listed, but sample questions that are similar to the real questions are. Students may find helpful tutorials and other content as well.
Online Resources
There are a variety of other online resources students can explore to help them review. For example, the AAMC currently recommends students take a look at Khan Academy’s MCAT Video Collection, where there are more than 1,000 videos as well as thousands of questions that students can use to review.
There are also MCAT study apps like MCAT Prep from Varsity Tutors and MCAT Prep by Magoosh that students can download and use to study.
Books, Textbooks, and Class Resources
How else to prep for the MCATs? It may also help to buy or borrow books from the library that go into detail on the MCAT. One word of advice: Students should just make sure that the books they’re reading are up to date. Information (and the MCAT) get refreshed often; you don’t want to be studying yesterday’s medical data.
It can also be helpful to review class notes and study guides from courses you’ve taken that are related to MCAT materials. Some schools have study groups and other academic support resources for students who are studying for the MCAT. If you’re currently enrolled in classes, take a look to see what might be offered at your campus. You might luck out with some great ways to learn more.
Practice Tests
AAMC offers official sample MCAT practice exams online. You can access two for free, and others for a cost of $35 each. Taking practice tests can help students familiarize themselves with the exam. Taking practice tests can also be important in helping students understand the timing of each section.
Study Groups and Tutors
Here are other ideas for how to start studying for the MCAT:
• Getting an MCAT tutor who has taken the test could also be helpful. A tutor will generally be able to provide guidance on what kind of questions a student can expect. Plus, they will likely have hands-on experience with effective methods and tips for studying.
If you decide that how to prep for the MCAT should involve a tutor, ask friends and fellow students who have taken the MCATs recently for recommendations. There are also test preparation companies that provide resources for students to find tutors online or in person. Do check reviews and references.
• Study groups can also be a tool to help students who are preparing for the MCATs. Students can find others who are on the same path and work together to build proficiency. If possible, find a group where each student has a different strength and weakness. This can maximize students learning from one another.
• It may help to use a shared calendar or another tool to make sure everyone is on the same page for dates, times, and locations for when the study group will meet.
• Want to find a study group as part of how to prepare for the MCATs? Search engines, professors’ recommendations, school bulletin boards/online groups, and fellow students are good bets.
💡 Quick Tip: Refinancing could be a great choice for working graduates who have higher-interest graduate PLUS loans, Direct Unsubsidized Loans, and/or private loans.
Important Dates to Keep in Mind
Now that you know the ins and outs of preparing for the MCAT, what about taking the test itself? Students can take the MCATs several times throughout the year, from late January through September. There are hundreds of test locations around the U.S. and Canada as well as select locations around the globe.
If a student’s preferred MCAT test date or location is not available, they can sign up for email notifications to see if it becomes available down the line.
As you explore the best way to prepare for the MCAT and plan your medical school journey, you’ll likely be keeping costs in mind. Here are details to note.
Paying for the MCATs
The registration fee for the MCAT exam is $330, and that includes distribution of scores. There may be additional fees for changes to a registration, a late registration, and for taking the test at international sites.
The AAMC does offer a Fee Assistance Program to students who are struggling to pay for the test and/or medical school applications. To be eligible for the Fee Assistance Program, students must meet the following eligibility requirements:
• Be a US Citizen or Lawful Permanent Resident of the US.
• Meet specific income guidelines for their family size.
Note that the Fee Assistance Program will review financial information of the student and the student’s parents, even if the student is considered independent.
Keep in mind that along with the MCAT fee, applying to medical school can be quite expensive. Most medical schools in the US utilize the AAMC’s American Medical College Application Service® (AMCAS®). To apply to medical schools, students will generally pay a first-time application fee of $170, as well as $40 for each additional school.
Some medical schools may require a secondary application, and those fees range depending on the school. Students may also need additional money to travel to and tour schools.
The application process is just one portion of the expense of med school. After being accepted, there’s the cost of tuition, books, and more, and these medical school costs have been rising steeply lately.
• The average cost of the first year of medical school at a public school with in-state tuition is $67,641, which includes tuition, fees, and living expenses.
• The average cost for the first-year at a private medical school is $93,186. The average debt for medical school graduates is currently $202,453. Debt after medical school can go even higher when you add in undergraduate loans.
Obviously, that’s a significant number and can make you wonder how to pay for medical school. First, do remember that medical school is a path to a rewarding and challenging career, as well as potentially a lucrative one. The average medical school graduate earns more than $150,000, with high earners enjoying salaries above the $400K mark, according to ZipRecruiter data.
Paying for School with the Help of SoFi
Paying for the MCATs and medical school can be a challenge. SoFi understands this, which is why they offer students private student loans and the opportunity to refinance their current student loans.
Keep in mind, however, that if you refinance with an extended term, you may pay more interest over the life of the loan. Also note that refinancing federal student loans means forfeiting their benefits and protections, so it may not be the right choice for everyone.
Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.
With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.
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Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.
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.
