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A salary of $160,000 is excellent for a single young professional, considering that it’s well over the national average of $63,795. However, the cost of living varies significantly among states, so where you decide to live will determine your quality of life and how much you can afford in terms of housing and lifestyle.

Here’s a comparison of the cost of living among states and how far a salary of $160,000 might go in meeting housing and daily expenses.

Is $160,000 a Good Salary?

A six-figure salary of $160,000 is certainly impressive for a single person in 2024 or anyone early in their professional career. It is well over double the national average wage of $63,795, reported by the Social Security Administration.

However, the cost of living across the country varies greatly, so a salary of $160,000 will buy you a lot more in Tennessee and Wyoming than it will in, say, Massachusetts or D.C. Regardless of where you decide to live, tools like a money tracker can help you manage your finances and monitor your credit score.

Recommended: What Is a Good Entry-Level Salary?

Average Median Income in the US by State in 2024

Salaries for any occupation vary by state. This is largely a reflection of how expensive it is to live in a certain area. If housing prices or property taxes are high in an area, companies will often pay higher salaries to attract employees in that state.

The table below shows the annual median income by state as of May 2023. Data are from the U.S. Census Bureau. The highest median incomes are found in Maryland, New Jersey, and Massachusetts. The lowest median incomes are found in Mississippi, West Virginia, and Arkansas.

Average Cost of Living in the US by State in 2024

The cost of living in your geographic area has a direct effect on your quality of life. The cost-of-living index is one measure of the cost of basic expenses and everyday necessities, such as food, housing, health care, and education. As a result, the cost of living index can be used as an indicator of how far your salary will go.

According to the most recent Consumer Expenditure Survey from the U.S. Bureau of Labor Statistics (BLS), American households’ average monthly expenses total $6,081. Broken down by percentage, approximately 33% of income is spent on housing, 17% on transportation, 8% on health care, and 13% on food and groceries. The remainder is spent on miscellaneous items.

The table below shows how much a typical resident in each state spends on basic necessities. Data are from the U.S. Bureau of Economic Analysis. As you can see, Massachusetts and New Hampshire have the highest cost of living, while Nebraska and Mississippi have the lowest cost of living.

How to Live on $160,000 a Year

As stated before, $160,000 is an excellent salary if you are single, regardless of what your local cost of living is. On the other hand, it might not be so great if you have a family to support and live in, say, New York or California.

Learning how to live on $160,000 a year will require budgeting. Budgeting requires allocating a portion of your income to necessary expenses like housing costs, utilities, transportation, and groceries. After that, can estimate how much discretionary income you have left over for expenses like entertainment.

Once you have a relatively accurate estimate of your expenses, you can plug them into a spreadsheet or a budget planner app and create your budget.

Recommended: Average Income by Age

How to Budget for a $160K Salary

Let’s look at an example budget for a salary of $160,000. Our fictional single professional has no kids and lives in Colorado.

We deducted $958 per paycheck for 401(k) contributions, which is the maximum the IRS allows for 2024 at $23,000 per year. Their take-home pay is $3,352 per paycheck, or $6,704 monthly.

Here is an example of how they might budget their monthly income:

Maximizing a $160K Salary

A budget will help you to determine how far a salary of $160,000 will go, but it will also help you to use your money effectively. You can either save more or spend more on what you want.

Spending more on things like entertainment or food won’t maximize your salary, but investing wisely can. By saving and investing, you can allow what income you have left over after paying necessary expenses to potentially grow.

First, however, pay off your debts and save for an emergency fund. If you have high interest debt, you will be paying more in interest than you can earn in a savings account. A personal loan can help you consolidate credit card debt and lower the interest you pay as you pay down your debt.

An emergency fund is necessary in case you have unexpected expenses. If you have six months of expenses saved, that will spare you from having to take out a loan to pay for them.

Not all debt is bad, so it’s fine to use a credit card as long as you make regular payments and pay off the balance each month. That way, you can build a good credit score so that you will qualify for better loan terms when you need to borrow money in the future.

Quality of Life with a $160,000 Salary

Quality of life is a personal thing. Some people would consider living in a smaller property or apartment in a city within walking distance to eateries and shops a good quality of life. However, another person might consider living in a bigger house in a quiet neighborhood a better quality of life.

Consider what type of lifestyle makes you happy and then plan a budget that can make that a reality. You will likely have to make compromises — for example, living in a smaller house if you want to live in or around a large city or spending more on transportation if you want to live in a larger house farther from the city.

Is $160,000 a Year Considered Middle Class?

Middle class is defined as households with a salary that’s two-thirds to twice the national median income. By that definition, middle class is income that’s between $47,189 and $141,568. So a salary of $160,000 would be considered upper class. That said, it depends on where you live, whether you have dependents, and how much debt you have.

Is $160,000 a Year Considered Rich?

There’s no single definition for what constitutes “rich.” However, you may be considered wealthy if you are in the top 1% of income for your age. For example, a 25-year-old earning $160,000 is in a much better economic position than a 45-year-old.

Some people consider their net worth to be a better indicator of their class than salary. If you’re interested in calculating your net worth, use a net worth calculator.

Example Jobs that Make About $160,000 a Year

While they may not be the highest-paying jobs in your state, the following roles pay around $160,000 per year, according to the BLS:

•   Computer and Information Research Scientist: $157,160

•   Physicist: $158,270

•   Public Relations Manager: $159,420

•   Marketing Manager: $161,040

•   Podiatrist: $162,520

The Takeaway

While $160,000 is well above the national average and may seem like a high salary, it might not seem so generous if you live in a state like Massachusetts, where the cost of living is high. Salaries tend to reflect the cost of living in an area. They tend to be lower in states where the cost of living is lower, like Mississippi and Nebraska.

To accurately assess what quality of life you will have with your salary wherever you live, research the cost of housing, food, and transportation in your area. You can make the most of your salary, whether it be $160,000 or less, by paying down your debt and setting a budget.

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

FAQ

Can I live comfortably making $160,000 a year?

There is no doubt that if you are single, you can live comfortably on $160,000 a year. How comfortable you will be, however, depends on where you choose to live and how much debt you have. Living in an area with a lower cost of living will mean you have more cash to spend on luxury items. Also, if you live in an area with a low cost of living, you will use less of your income on expenses like housing, utilities, and food, and will have more money to spend on entertainment or investing.

What can I afford with a $160,000 salary?

Hypothetically speaking, with a salary of $160,000, you could purchase a home for around $600,000 if you don’t have too much debt. That would leave you enough money to pay for both necessary and discretionary expenses.

How much is $160,000 a year hourly?

According to Zippia.com, a salary of $160,000 is $80 an hour. This assumes that the person works 2,000 hours in a year for an average of 40 hours per week, with two weeks of vacation.

How much is $160,000 a year monthly?

A salary of $160,000 is $13,333.33 a month. Note that if you are paid biweekly, some months will include two paychecks while other months will include three paychecks, so your total monthly pay will vary throughout the year.

How much is $160,000 a year daily?

A salary of $160,000 works out to $615.38 per day, assuming an eight-hour day.

Photo credit: iStock/Lyndon Stratford

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

*Terms and conditions apply. This offer is only available to new SoFi users without existing SoFi accounts. It is non-transferable. One offer per person. To receive the rewards points offer, you must successfully complete setting up Credit Score Monitoring. Rewards points may only be redeemed towards active SoFi accounts, such as your SoFi Checking or Savings account, subject to program terms that may be found here: SoFi Member Rewards Terms and Conditions. SoFi reserves the right to modify or discontinue this offer at any time without notice.

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

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.

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.

SORL-Q224-1906629-V1

Rising prices and inflation are driving worries that money doesn’t go as far as it used to. But rest assured that $120,000 is considered a good salary, especially if you’re single and have no dependents. And by developing sound money habits now, you can help make the most of your income, no matter what it is.

Here’s a closer look at an annual salary of $120,000.

Is $120K a Good Salary?

A salary of $120,000 is nearly double the national average salary in the U.S. of $63,795, per the latest data available from the Social Security Administration. But how comfortably you’re able to live on that money depends on a number of factors, including how much debt you have, your family size, and how much your lifestyle costs in the area where you live.

A money tracker can help you with budgeting, monitoring spending, and keeping tabs of your credit score.

Average Median Income in the US by State in 2024

The average pay for a worker in the U.S. varies by state, though no state comes close to $120,000. For reference, here’s a chart of the median household income in each state, according to the U.S. Census Bureau.

Related: Highest Paying Jobs by State

Average Cost of Living in the US by State in 2024

The average cost of living in the U.S. will affect how you feel about your $120,000 salary. And, like salary, it varies by state. Here’s a look at what a typical resident in each state spends on basic necessities, such as housing, food, and transportation.

How to Live on a $120K Salary

Chances are, $120,000 can easily cover an individual’s basic expenses with some money left over for entertainment and saving. But if you live in a pricey area or are trying to pay down debt, you may need to be more mindful about how you’re managing your money. The following tips can help.

Live below your means

You‘ve heard it before, but the most important part of living well at your salary is to make sure your expenses are less than your salary. Try to find housing and transportation that fits within your budget, use a budget to plan for expenses, and manage lifestyle creep as much as you can.

Have a contingency fund

Be sure you’re planning for the unexpected. Building an emergency fund can go a long way toward preserving your finances when tough times come.

Make a plan for your money

Making a budget — yes, even on a $120,000 annual salary — can help you use your money more effectively and make progress toward financial goals.

How to Budget for a $120K Salary

There are a number of budgeting methods you may want to try.

•   50/30/20 method: With a 50/30/20 budget, 50% of your money should go toward needs (housing, transportation, food, etc.); 30% to wants (spending money, self-care, eating out, and vacations); and 20% to savings and debt payments.

•   Zero-based budgeting: In this type of budgeting, you give a job to every dollar you earn so that your income minus your expenses ends at zero.

•   Envelope method: You specify how much money is allotted to a specific category; say, $300 for gas for the month. You can spend the designated funds until they’re gone. If you’re really disciplined, you won’t spend in that category again until the next month, when the money in the envelope is refreshed.

Of course, the best budget is the one you will follow. A budget planner app can help you stay on track and reach your goals.

Maximizing a $120K Salary

Making the most of a $120,000 salary depends on what your financial goals are and your stage of life. Do you want to:

•   Save more money?

•   Grow your net worth?

•   Provide for a family?

•   Enjoy eating out and/or nightlife?

•   Afford a nice car and house?

To maximize a $120,000 salary, invest in the areas of your life that are important to you. Make a plan to spend money according to your values and be more frugal in the areas that are not as important to you.

Quality of Life with a $120K Salary

According to the World Health Organization, quality of life is about a person’s perception of their culture and value systems in relation to their goals, concerns, expectations, or standards. Translation: Your quality of life on a $120,000 salary may depend, in large part, on your perception of how good it is. If you’re able to feel optimistic with the amount of money you have, you’ll likely have a good quality of life.

Is $120,000 a Year Considered Rich?

Yes, $120,000 is a six-figure salary — and a good one for a single person — but is it enough to qualify you as “rich”? The truth is, rich is a relative term. Living well depends on how satisfied you are with your lifestyle and how much you’re able to save for a future self.

Recommended: How to Calculate Your Net Worth and Wealth

Is $120K a Year Considered Middle Class?

Middle class is determined by incomes that range from two-thirds to double the median income. It is also adjusted for family size. In the U.S., the median income is $74,580, which puts the range for the middle class between $49,745 and $149,160.

However, when adjusting for family size, a $120,000 salary for a single person puts you squarely in the upper class in every metro area in the United States.

Example Jobs that Make About $120,000 a Year Salary

According to data from the U.S. Bureau of Labor Statistics (BLS), there are a number of occupations whose salaries sit at or above $120,000 — some which could be a good fit for introverts.

Some examples include:

•   Software Developer: $132,270

•   Physician Assistant: $130,020

•   Nurse Practitioner: $126,260

•   Information Security Analyst: $120,360

•   Actuary: $120,000

Recommended: What Is a Good Entry-Level Salary?

The Takeaway

Is $120,000 a good salary for a single person? Generally speaking, yes. It’s more than what a typical American worker earns and, depending on where you live, can provide you with a comfortable life. But even with a six-figure salary, you may want to consider ways to maximize your money. Sound financial habits like building up an emergency fund, saving for short- and long-term goals, and creating a budget are all good places to start.

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

FAQ

Can I live comfortably making 120k a year?

Living comfortably on $120K a year depends on various factors, such as where you live, how much debt you have, your family size, and how you live. Many singles will find $120K enough to live on in many areas of the country, but may need to be more mindful about their spending if they live in pricier areas like Los Angeles or New York City.

What can I afford with a $120K salary?

If you’re looking to buy a home with a $120K salary, your best bet is to talk to a lender and run some numbers. In addition to your income, your level of debt, down payment amount, loan type, and interest rate can all impact how much house you can afford. For a rough estimate, a 120K salary would give you $10,000 of gross income each month, which would mean you’re looking at a mortgage payment between $2,500 and $3,600 if you have no other debt. With interest rates at 7.00%, that translates to a mortgage of around $415,000.

How much is $120K a year hourly?

A $120K salary comes out to approximately $57.69 per hour.

How much is 120K a year monthly?

A salary of $120,000 per year works out to roughly $7,706 per month, after federal income taxes are taken out.

How much is $120K a year daily?

If you earn $120,000 per year, you would be paid around $462 per day.

Photo credit: iStock/Delmaine Donson

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

*Terms and conditions apply. This offer is only available to new SoFi users without existing SoFi accounts. It is non-transferable. One offer per person. To receive the rewards points offer, you must successfully complete setting up Credit Score Monitoring. Rewards points may only be redeemed towards active SoFi accounts, such as your SoFi Checking or Savings account, subject to program terms that may be found here: SoFi Member Rewards Terms and Conditions. SoFi reserves the right to modify or discontinue this offer at any time without notice.

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.

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.

SORL-Q224-1838737-V1

The Federal Reserve, the country’s central bank, is self-funded: It mostly gets its operations covered via interest from securities that it owns as part of the Fed’s open market operations (OMO).

That said, the funding goes towards making sure these banks do their important work. This includes making sure the U.S. economy runs smoothly and serves the public interest. The Fed also manages short-term interest rates, which in turn affects the availability of credit and eventually things like consumer spending, investment, employment, and inflation.

The bank’s goals with these actions is to promote maximum employment, keep prices stable, and keep long-term interest rates moderate.

Who Owns the Federal Reserve Bank?

Even though parts of the Federal Reserve are structured like a private bank, the Fed is not owned by anyone. Congress created the Federal Reserve in 1913, and it remains an independent government agency. However, the board that oversees it — which is appointed by the president and confirmed by the Senate — still reports to Congress today.

Its leaders are required to testify in Congress and submit a lengthy report on its plans twice a year. The Federal Reserve actually consists of 12 Reserve Banks spread across different regions of the U.S. Although each one has a board of directors and is incorporated, it’s not actually a private entity and the banks aren’t in business to make a profit.

Recommended: Checking vs Savings Accounts: All About the Differences

How Does the Federal Reserve Make Money?

The Federal Reserve does not “make” money exactly, in that it doesn’t print money — that’s the Treasury Department’s job. But it does serve as a bank for other banks and government agencies, allowing them to open accounts to hold their reserves, take out loans, issue government securities, and take other actions.

When it comes to other banks, the Fed is there to lend to them in case they have problems getting funding, either because of unexpected fluctuations in their loans and deposits or due to extreme events, such as the COVID-19 crisis.

The Fed lends at a higher rate than the market in order to ensure that it’s used as a last resort. The Federal Reserve does not lend money or provide bank accounts for individuals, as retail banks do.

In other words, your checking and savings accounts won’t be held at a Federal Reserve Bank.

While the Federal Reserve does not actually print money, it does put in orders with the U.S. Treasury for “Federal Reserve notes” based on the demand it expects both domestically and internationally.

Here’s more detail on how the Fed works and keeps our economy humming along.

Fractional Reserve Banking and the Money Multiplier

Fractional reserve banking describes the system in which only a fraction of the money on deposit is actually held as cash and available for withdrawals by customers. Here are a few aspects of this system to note:

•   The Federal Reserve wants to ensure that banks keep enough money on hand so that when customers come in seeking cash, they aren’t turned away. To accomplish this, the Fed sets a reserve requirement (often 10% of all deposits) that banks must keep available. In response to the COVID-19 pandemic, this was lowered to 0% in an effort to stimulate the economy.

•   The Fed buys treasuries to help create monetary reserves. It sends the funds to banks so they can make loans with it, up to that reserve requirement limit mentioned above.

•   Another aspect of fractional reserve banking is what is known as the money multiplier. Financial analysts use a money multiplier equation to calculate the impact of the funds kept on reserve on the economy in general. It estimates how much money is created in the economy by the reserve system.

Here’s how the calculation looks: The amount on deposit is multiplied by one divided by the reserve requirement. So if a bank had $100 million on deposit, you would multiply that by one divided by 10% to get $1 billion. That $1 billion represents money potentially created by lending out the 90% not kept on reserve at the bank.

Recommended: Different Types of Bank Accounts and How They Work

The Credit Market Funnel

Another way of looking at the Federal Reserve’s role in our nation’s economy is the credit market funnel, meaning that the Fed funnels funds to businesses to grow the economy. Say the U.S. Treasury printed $20 billion in new bills, and the Fed credited $80 billion in liquid accounts. You might think the American economy got an infusion of $100 billion. But it’s actually much more than that. Credit markets act as a funnel in terms of distributing funds. As new loans are issued, more money is created. That $100 billion could trigger a tenfold monetary increase to $1 trillion.

Determining the Money Supply

Here’s another facet of what the Federal Reserve does: It considers whether our country’s money supply should be boosted. This can impact the state of the American economy. A larger money supply can lower interest rates and get more cash to consumers, which typically stimulates spending. If the Fed does feel that the money supply needs to be increased, it will typically augment bank reserves. It might purchase Treasury bonds and distribute those to banks’ reserve funds. The banks can then use some of those funds for loans and other activities.

Money Creation Mechanism

As you’ve learned, the Federal Reserve plays a vital role in determining how and when to influence the money supply in the U.S. economy. It often boils down to the Fed buying securities and putting them in the reserves of commercial banks. Those banks can then augment the amount of money in circulation by lending funds to both businesses and consumers.

Recommended: How to Set Financial Goals and Set Yourself Up for Success

How Is the Federal Reserve Funded?

So where does the Fed get its money? Unlike other government agencies, the Federal Reserve doesn’t get its money from Congress as part of the usual budget process.

Instead, Federal Reserve funding comes mainly through interest on government securities that it bought on the open market.

These primarily include U.S. Treasury securities, mortgage-backed securities, and government-sponsored enterprise (GSE) securities.

How much money does the Federal Reserve have? As of May 2024, the Fed had nearly $7.4 trillion in assets on its balance sheet. Those have grown significantly compared to 2007 (before the financial crisis hit), when the Fed had just around $870 billion in assets.

The reason for this has to do with the Fed’s response to the Great Recession and the COVID-19 crisis, among other factors. But remember how the Federal Reserve isn’t in it for the profit? Once it pays its own overhead, the rest of its earnings go right into the country’s coffers in the U.S. Treasury.

How the Fed Affects Interest Rates

In its attempts to steer the ship of the U.S. economy on a solid course, one of the main things the Fed does is influence interest rates. The Fed can either raise or lower the federal funds rate, which is the rate at which financial institutions that hold deposits can borrow and lend funds they keep at Federal Reserve banks from each other.

The Federal Open Market Committee, which is made up of some members of the Fed’s Board of Governors and others, meets multiple times a year to determine what they want the federal fund rates to be.

These decisions then influence other longer-term interest rates, such as those on savings accounts, mortgages, and loans.

The Fed often cuts interest rates to energize the economy by making it less expensive for businesses and consumers to borrow money. It raises rates when inflation seems too high, as was the case a couple of years ago.

The rate had been cut to the 0.00% to 0.25% rate in March of 2020 due to the emergence of the COVID-19 pandemic and its expected economic impacts. However, by September of 2022, with inflation surging to 40-year highs, the rate was raised to the 3.00% to 3.25% range. As of July 2024, the Fed’s interest rate is 5.25% to 5.50%, which is far below its peak of 20% in December 1980, when the Fed was reacting to runaway inflation.

The Takeaway

Understanding the role of the Federal Reserve in our economy and how it is funded can help explain how the Fed balances our money reserves, controls inflation, and stimulates the economy’s growth. Especially in the current economic climate, knowing how the Federal Reserve works can enhance your financial literacy. This in turn can help you better manage your own money.

Another way to boost your money management skills: Bank smarter with SoFi.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

How does the Federal Reserve obtain money?

The Fed makes money mainly through interest on government securities — such as U.S. Treasury securities, mortgage-backed securities, and government-sponsored enterprise (GSE) securities — that it bought on the open market.

Who gives money to the Federal Reserve?

The Federal Reserve isn’t given money; it finances its operations via the interest made on the securities it owns.

Is the Federal Reserve self-funded?

Yes, the Federal Reserve is self-funded. It doesn’t get money via Congress but through the interest earned on the government securities that it buys.

Does the Federal Reserve print money out of thin air?

While the Federal Reserve has the power to print money, there’s a delicate balance at work. If the Fed just ordered the Treasury Department’s Bureau of Engraving and Printing to print more money without a commensurate increase in economic activity, it could trigger inflationary growth, which isn’t desirable.

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

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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If you’re often surprised (and not in a good way) when you open up your credit card and bank statements and see how much money you spent, you are not alone. In this scenario, there could be a simple solution: a personal cash flow statement.

Creating a personal cash flow statement can give you a clear picture of your monthly cash inflow (money you earn) and your monthly cash outflow (money you spend). Armed with that intel, you can determine if you have a positive or negative net cash flow.

The process is relatively simple. It involves doing some basic math calculations with a month or two worth of bank statements and bills. Once you have your personal financial statement, you’ll know where you stand and likely be better able to budget your money.

What Is a Personal Cash Flow Statement?

“Cash flow” is a term commonly used by businesses to detail the amount of money flowing in and out of a company. Companies can use cash flow statements to determine how well the business is generating income to pay its debts and operating expenses.

Just like the ones used by companies, tracking your own cash flow can provide you with a snapshot of your financial condition.

You might learn, for example, that you have less leftover at the end of each month than you thought or that you are indeed operating at a shortfall.

Once you have the numbers down in black and white, you can then make any needed changes, such as cutting your expenses to save money, increasing income, and making sure that your spending is in line with your goals.

So, how do you set up one of these cash flow statements? You may find a personal cash flow statement template or a personal cash flow statement example online, but what follows will explain how and why to create one.

How to Build a Personal Cash Flow Statement

Here are the steps to take to build a personal cash flow statement.

Listing All Your Sources of Income

A good first step when creating a personal cash flow statement is to get out all of your pay stubs, bank statements, credit card statements, and bills or review them online.

•   Next, list any and all sources of income — the inflow, such as salaries, anything you make from side hustles, interest from savings accounts, income from a rental property, dividends from investments, and capital gains from the sale of financial securities like stocks and bonds.

•   You might want to avoid listing money in accounts that aren’t available for spending. For example, you may not want to list dividends and capital gains from investment accounts if they are being automatically reinvested or those that are part of a retirement account from which you aren’t actively taking withdrawals.

•   Since income can vary from one month to the next, you might choose to tally inflow for the last three or six months in order to come up with an average.

Once you’ve collected and listed all of your income for the month, you can then calculate the total inflow.

Listing All of Your Expenses

Now that you know how much money is coming in each month, you’ll want to use those same statements and bills, as well as any for debts (such as mortgage, auto loan, or student loans) to list how much was spent during the month.

•   Again, if your spending tends to fluctuate quite a bit from month to month you may want to track it for several months and come up with an average.

•   To create a complete picture of how much of your money is flowing out each month, you’ll want to include necessities like food and gas, and also discretionary expenses, such as trips to the nail salon or your monthly streaming services.

•   Remember to include infrequent expenses such as birthday gifts for loved ones, annual insurance premiums, and the like.

•   Once you’ve compiled all of your expenses, you can calculate the total and come up with your total outflow for the month.

Determining Your Net Cash Flow

To calculate your cash flow, all you need to do is subtract your monthly outflow from your monthly inflow. The result is your net cash flow.

•   A positive number means you have a surplus, while a negative means you have a deficit in your budget.

•   A positive cash flow is desirable, of course, since it can provide more flexibility. You can decide how to best use the surplus. There are a variety of options. You could choose to save for an upcoming expense, make additional contributions to your retirement fund, create or add to an emergency fund, or, if your savings are in good shape, consider splurging on something fun.

•   A negative cash flow can signal that you are living a more expensive life than your income can support. Some people refer to this as not living within your means. In the future, maintaining this habit could lead to additional debt.

•   When creating personal cash flow statements, it’s also possible to have net neutral cash flow (all money coming in and going out is fairly equal).

In this case, you may still want to jigger things around if you are not already putting the annual maximum into your retirement fund and/or you don’t have a comfortable emergency cash cushion.

The Difference Between a Personal Cash Flow Statement and a Budget

A personal cash flow statement provides a comprehensive look at what is currently coming in and going out of your bank accounts each month. You might think of a cash flow statement telling you where you are, financially speaking.

Whichever budget method you use, on the other hand, helps you to get where you want to go by giving you a spending plan that is based on your income and expenses. A budget can provide you with some general spending guidelines, such as how much you should spend on groceries, entertainment, and clothing each month so that you don’t exceed your income — and end up with a negative net flow.

Creating a budget can also be a good opportunity to check in with your financial goals.

For example:

•   Are you on track for saving for retirement?

•   Are you interested in tackling the credit card debt that has been spiraling due to high interest rates?

•   Do you want to amp up your emergency fund, separate from your usual checking and savings account?

•   How are you progressing on paying off your student loans?

Whatever your goal, a well-crafted budget could serve as a roadmap to help you get there.

Recommended: 4 Smart Ways to Pay Off Student Loans

Using Your Personal Financial Statement to Create a Simple Budget

Because a cash flow statement provides a comprehensive look at your overall spending habits, it can be a great jumping off point to set up a simple budget.

When you’re ready to create a budget, there are a variety of resources:

•   Break out a pencil and paper or buy a journal for this purpose

•   Use an app that’s part of your bank’s suite of tools

•   Download an app that isn’t connected to your financial institution but offers budgeting services

•   Try out spreadsheet templates and printable worksheets.

A good first step in creating a budget is to organize all of your monthly expenses into categories.

Spending categories typically include necessities, such as rent or mortgage, transportation (like car expenses or public transportation costs), food, cell phone, healthcare/insurance, life insurance, childcare, and any debts (credit cards/loans).

You’ll also need to list non-essential spending, such as cable travel, streaming services, concert and movie tickets, restaurants, clothing, etc.

You may also want to include monthly contributions to a retirement plan and personal savings into the expense category as well.

And, if you don’t have emergency savings in place, put that on the spending list as well, so you can start saving towards that every month. How big an emergency fund do you need? Use an emergency fund calculator, and aim to cover at least three to six months’ of living expenses.

Once you have a sense of your monthly earnings and spending, you may want to see how your numbers line up with general budgeting guidelines. Financial counselors sometimes recommend the 50/30/20 budget rule, which looks like this:

•   50% of money goes towards necessities such as a home, car, cell phone, or utility bills.

•   30% goes towards your wants, such as entertainment and dining out.

•   20% goes towards your savings goals, such as a retirement plan, a downpayment on a home, emergency fund, or investments.

Improving Your Net Cash Flow

If your net cash flow is not where you want it to be or, worse, dipping into negative territory, a budget can help bring these numbers into balance.

The key is to look closely at each one of your spending categories and see if you can find some ways to trim back.

•   One of the easiest ways to change your spending habits can be to cut some nonessential expenditures. If you’re paying for cable but mostly watch streaming services, for example, you could score some real savings by getting rid of that service and its bill.

•   Not taking as many weekend getaways and cooking more often instead of getting takeout could add up to a big difference. If you tend to be a compulsive or impulsive shopper, you might take steps to understand your triggers, change your behavior, and rein in the outflow of money.

•   Living on a budget may also require looking at the bigger picture and finding places for more significant savings. For example, maybe rent eats up 50% of your income, and it’d be better to move to a less costly apartment. Or you might want to consider trading in an expensive car lease for a less pricey or pre-owned model.There may also be opportunities to lower some of your recurring expenses by finding a better deal or negotiating with your service providers.

You may also want to look into any ways you might be able to change the other side of the equation — the inflow of funds.

•   One option could be asking for a raise.

•   Another could be training for a higher-paying field.

•   Or you might find an additional income stream (making more money is a key benefit of a side hustle).

The Takeaway

One of the most important steps towards achieving financial wellness is cash flow management — i.e., making sure that your cash outflow is not exceeding your cash inflow.

Creating a simple cash flow statement can show you exactly where you and your money stand. It can also help you create a budget that can give you greater control over your finances and achieving your goals.

If you need help tracking your spending, banking with SoFi may be a good option for you.

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FAQ

How do you create a personal cash flow statement?

To create a personal cash flow statement, gather information on how much you typically take in (income) after taxes per month and how much your outflow (spending and saving) is. That captures the amount you spend on necessities, like housing and food, as well as wants and debt payments. When you subtract the outflow from the income, you’ll see where your cash flow stands.

What is the importance of a personal cash flow statement?

A personal cash flow statement is an important way to track your personal spending and see where pain points may be. It will also reveal if you are going into debt or if you have surplus funds you can put towards future goals. Also, a personal cash flow statement can be an important factor in establishing your budget.

What is the difference between a personal balance sheet and a cash flow statement?

A personal balance sheet captures your assets (money in the bank and real estate, for instance) and liabilities (your credit card balance and any loans), which allows you to determine your net worth. A cash flow statement, on the other hand, tracks your spending versus your income, to see whether you are operating with a deficit, a surplus, or if you are breaking even.

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SOBNK-Q324-025

Fibonacci retracement is a type of technical indicator that traders use to determine the support and resistance levels for a stock price.

The well-known Fibonacci sequence of numbers, where each number is the sum of the two previous numbers, is important to how this technical analysis tool works owing to the relationship between the numbers in the series.

These ratios, expressed as a percentage, capture how much a stock price has retraced with its recent movement. The most important Fibonacci retracement levels are: 23.6% 38.2%, 50%, and 61.8%, 78.6%, and they are applied as horizontal lines on a stock chart.

Traders can use these retracement levels to mark high and low points that may offer signals that a price is going to stall out or reverse.

What Are Fibonacci Retracement Levels?

Fibonacci retracement levels are based on the Fibonacci series where each number equals the sum of the two previous numbers. The most basic series is: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, etc.

The relationship between these numbers has created the retracement levels commonly used by traders: 23.6% 38.2%, 50%, and 61.8%, 78.6%.

For example, each number is approximately 1.618 times greater than the preceding one. As a result, some analysts refer to 61.8% as “the golden ratio,” because it roughly equals the division of one number in the series by the number that follows it. For example: 13/21 = 0.6190, and 21/34 = 0.6176, and 34/55 = 0.6181

In fact, there are similar relationships to be found between other numbers in the series, and these have become the ratios used by technical traders to determine retracement levels in stock prices. For example, dividing a number in the series by the number three places to its right roughly equals 23.6%.

Note that 50% is somewhat of an exception to the rule: It’s not mathematically part of the Fibonacci-derived number set, but traders have nonetheless found it useful when gauging support and resistance levels.

Who Created Fibonacci Numbers?

The Fibonacci sequence is based on the work of a 13th-century mathematician Leonardo Pisano Bigollo, nicknamed Fibonacci. While Fibonacci was not the first to identify this series, he transformed mathematics in the West thanks to his introduction of the Hindu-Arabic system of numbers, a place-value system.

The Hindu-Arabic system, which we use today, replaced Roman numerals and the complex calculations that required.

In 1202, Fibonacci published Liber Abaci (“Book of Calculations”) to introduce Hindu-Arabic numerals. The Fibonacci series was included here, but the observation of this pattern had been identified and worked with for hundreds of years before, in India. Over time, its pattern has been observed in everything from the spiral of seeds in sunflowers to spirals in the double helix of DNA.

Because the Fibonacci sequence occurs frequently in various natural and mathematical contexts, it has been adopted for a number of uses, including as a technical analysis tool for stock traders. That said, the reason for the common occurrence of these numbers in contexts or applications that are unrelated, is not well understood.

How Does Fibonacci Retracement Work

Fibonacci retracement levels are not based on an exact formula that gets applied to the stock price movements. Rather, traders identify two static price points for analysis, e.g., a high and a low, and apply the retracement levels from the Fibonacci sequence to determine support and resistance levels.

If a stock price movement retraces a prior move, ending on a point that is represented by a Fibonacci number, it could indicate that a reversal is in store.

The use of Fibonacci ratios as a technical indicator is somewhat subjective, however, since the underlying numbers are a part of a mathematical pattern. They aren’t inherently related to stock prices or market movements.

For example, if a stock price rises to $20 from $15, a trader might set the retracement levels at 23.6% and 50%. Those would be, respectively: $18.82 ($20 – ($5 x 0.236) = $18.82) and $17.50 ($20 – ($5 x 0.50) = $17.50).

If the stock price retraced from $20 down to one of those levels, it could signal a reversal. But Fibonacci retracements can also be used to gauge the strength of an uptrend, by noting the support and resistance in relation to the retracement levels.

Support and Resistance

Support is the price level that acts as a floor, preventing the price from being pushed lower, while resistance is the high level that the price reaches over time. Analysts often illustrate these as horizontal lines on a graph.

A support or resistance level can also represent a pivot point, or point from which prices have a tendency to reverse if they bounce (in the case of support) or retreat (in the case of resistance) from that level.

Learn more: Support and Resistance: What Is It? How to Use It for Trading

What Does a Fibonacci Retracement Do?

Markets don’t go straight up or down. There are pauses and corrections along the way. Traders can use these retracements to find optimal prices at which to enter a trade. For example, if a stock moves up, but then retraces to the 61.8% level before moving higher again, that might be a signal to buy.

Why? Because the price retraced to a Fibonacci level during an uptrend. A trader could also use that retracement point to set a stop-loss order at the 61.8% level (remember, that’s the boundary of the price retracement, not the price itself). If the price drops down below that level, the rally may be a bust.

In other words, the Fibonacci retracement levels, while static, help to indicate potential inflection points where a stock might see a break or a reversal.

What Is a Fibonacci Extension?

As discussed, Fibonacci retracements may help indicate a price reversal. Fibonacci extensions apply the same logic to price moves in an upward trend.

With a Fibonacci extension, the trader uses three points to assess whether the price will continue on its trend. The first two points are similar to those used for a Fibonacci retracement: the trader picks two price points, a start and an end (e.g. a high and a low). The third point is the retracement level, which sets up the potential extension (if there is one).

Some of the key ratios used to calculate Fibonacci extensions are 61.8%, 100%, 161.8%, 200%, and 261.8%.

Limitations of Fibonacci Retracement

Fibonacci retracements may indicate potential price movements, especially when employed by experienced traders who are familiar with the application of this particular indicator. But over-relying on them can be counterproductive:

•   Fibonacci retracements, like other indicators, are most informative when paired with at least one other technical analysis tool, such as moving averages.

•   The use of Fibonacci retracement levels and extensions is generally a subjective endeavor. Although the numbers themselves do occur in a range of contexts in the natural world and in mathematics, there is no objectively tested rationale for how or when to use the Fibonacci numbers with stock prices.

•   Fibonacci retracement sequences are often close to each other, therefore it may be tough to accurately predict future price movements.

Fibonacci Retracements and Trading

Traders typically use Fibonacci retracement levels to help anticipate price reversals, to set entry and exit points for trade, to create stop-loss orders, and more.

•   Trend prediction. Fibonacci retracements have been known to predict the price reversals of a stock at early stages.

•   Flexibility. Fibonacci retracement works for assets in any market and any time frame. Longer time frames could result in a more accurate signal.

•   Gauge of market psychology. Fibonacci levels are built on both a set of mathematical calculations and the psychology of the market. Combined, these may convey a fair assessment of market sentiment.

The Takeaway

The Fibonacci retracement technical indicator can help identify hidden levels of support and resistance so that analysts may be able to better time their trades. The Fibonacci retracement levels are derived from the well-known mathematical phenomenon known as the Fibonacci sequence: a series where each number is the sum of the previous two numbers.

From this sequence, mathematicians dating back centuries were able to derive ratios based on the relationship between one number and another in the series. What makes these ratios significant is that they recur in a range of contexts, from the natural world to the stock market.

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FAQ

How accurate is Fibonacci retracement?

Fibonacci retracement levels can be useful for traders, although no indicator is perfect and they are best used in combination with other technical indicators. The accuracy levels often increase with longer time frames. For example, a 50% retracement on a weekly chart is a more important technical level than a 50% retracement on a five-minute chart.

What are the advantages of using Fibonacci retracement?

Fibonacci retracement is relatively easy to apply to any price chart. It’s not a formula, but a set of measurements that may help traders assess the importance of certain price movements and trends. When an experienced trader uses the Fibonacci ratios in combination with other technical indicators, it may be possible to set entry and exit points for trades and anticipate reversals.

What are the disadvantages of using Fibonacci retracement levels?

Although it’s well established that the Fibonacci numbers occur in plants, in galaxies, and in stock market movements, it’s not well understood why that is. Therefore, the use of the Fibonacci retracement levels tends to be subjective. For that reason, it may be more effective in combination with other indicators that can help confirm price trend analysis.

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