Jun
18
2024
Guide to Outstanding Checks

Guide to Outstanding Checks

By | Budgeting & Goals, Financial Independence | Comments Off on Guide to Outstanding Checks

Outstanding checks are common for business owners and individuals. They are simply checks that have not yet been cashed or deposited at a financial institution. Since they are still outstanding, the payor (the entity that issued the check) should keep enough cash in their account so they can pay all outstanding checks. The payee, or recipient, should take steps to deposit outstanding checks as quickly as possible to avoid the risk of their becoming void.

Understanding what outstanding checks are can help you better manage your financial life and be a savvier consumer. Read on to find out:

•   How outstanding checks work

•   What to do with old checks

•   What risks are associated with outstanding checks

What Is an Outstanding Check?

Typically, a payor writes a check to a payee and the payee deposits the check. Funds are transferred into the payee’s account this way. Whether you have a traditional or an online bank account, you can typically make a mobile check deposit with just a few clicks on your phone.

But with outstanding checks, things don’t follow this flow. An outstanding check is a check that has been issued but not cashed or deposited. It is considered a liability for the issuer until it is redeemed. If outstanding checks aren’t redeemed, they can become void after a certain timeframe, often six months.

An outstanding check can also mean that a check was deposited at a bank but is still going through the process of clearing. This means it is en route to becoming available funds in the payee’s bank account, but it’s just not quite there yet.

Until it has been deposited and cleared, outstanding checks are liabilities on the payor’s balance sheet. This can be a challenge for both consumers and small business owners, because enough cash must be kept in the account drawn upon to cover outstanding checks until they are cashed. Outstanding checks can complicate accounting because the assumption is that a check gets issued, deposited, and paid. But if it hasn’t been cashed yet, it can throw off bookkeeping.

How Do Outstanding Checks Work?

Once you write a check or sign a check over to someone, the onus is on them to deposit the check. But sometimes, people don’t make a beeline for the bank or use their banking app right away. How often have you received a check, set it aside on your desk, then nearly forgotten about it? It’s not just you.

Business owners know that outstanding checks might take weeks or months to get cashed. Sometimes, checks wind up hanging around uncashed for a while. Or they even get lost.

Typically, though, check cashing is pretty straightforward. A check is simply a document that authorizes a transfer of money from a payor’s account to a payee’s account. When the payee deposits an outstanding check at a bank, a request to move money is initiated. Funds then move between the two accounts. A bank deposits the cash into the recipient’s account once the bank receives the money from the payor’s account. (Cashing a check without a bank account is more challenging, but you still have options to accomplish this.)

An outstanding check is when the payee neglects to cash or deposit a check (or the check gets lost). This means the check does not clear and does not show on a month-end bank statement. Outstanding checks are a liability for the payee, but once deposited, they are reconciled against the recipient’s account.

A Check I Wrote to Someone Is Outstanding: Now What?

If you wrote a check that is outstanding for more than a few weeks, there are steps you can take to resolve the situation. First, know that outstanding checks expire, often after six months, but sometimes as quickly as 30 or 60 days. Knowing how to stop payment on a check is useful as well if you wish to void an outstanding check (more on this below).

Here are more details on managing outstanding checks.

If the Check Is Less Than Six Months Old

•   Track the value of outstanding checks in your account register.

•   Reach out to the payee and ask what happened to the outstanding check.

If the Check Is Older Than Six Months

•   Reach out to the bank to confirm its policy on old or expired checks.

•   Issue a stop payment on the outstanding check.

◦   You might have to visit a branch location to make the request, and there could be a fee involved.

◦   Working with the bank to ensure a stale check gets deposited might require time and effort.

◦   Once voided, be sure to mark the old check as voided in your checkbook. Checkbooks can be useful when tracking old checks.

•   Contact the payee about the situation.

◦   Be sure to tell them that you issued a stop payment on the original check.

◦   Work with them to determine another way to be paid.

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Do I Need to Write a New Check?

When dealing with outstanding checks, you may wonder if there’s a limit on how long someone has to cash a check. There often is. Knowing when a check expires is an initial step before deciding whether to write a new check. If a check is outstanding for less than six months, you generally don’t want to write a new one. Instead, contact the payee to find out more about the situation. That also serves as a friendly reminder to have them deposit it. If more than six months have passed, that check may well be expired and considered void. A new check would have to be written or another method of payment could be used.

If you do write a new check, it may be safest to request that the old one be returned or ask for proof that it’s been voided. Otherwise, in rare cases, you might wind up with both the old (outstanding) and the new check being cashed, which would leave you with a financial loss.

A Check Issued to Me Is Outstanding: Now What?

You’ll want to take all reasonable steps to cash or deposit outstanding checks. If you wait too long, the check can go stale, and no longer be considered valid. If it has been more than six months, contact the issuer to resolve the matter. If the sticking point is that you don’t have an account into which you can deposit the check, you can easily open a checking account. It can take just minutes to do so online.

Risks of Outstanding Checks

There are many risks to outstanding checks.

•   One of the major ones is that it bounces by the time an attempt is made to deposit it. This is one of the reasons why knowing what to do if a check bounces is important.

•   You may wind up being charged overdraft fees and non-sufficient funds (NSF) fees if the outstanding check is deposited and then bounces.

•   Outstanding checks also become stale and worthless after a certain period.

•   In business bank accounts, outstanding checks can cause hiccups in accounting if not tracked well.

Reasons Why Checks Aren’t Cashed

There are a number of reasons why checks don’t get cashed and wind up being outstanding:

•   Lack of urgency. A person just doesn’t get around to depositing it.

•   Simply forgetting about them or not keeping tabs on them properly.

•   Loss. Checks can be misplaced or even thrown away.

•   Mail and delivery problems that interfere with the check getting to its recipient (this can involve having an old address on file).

Avoiding Outstanding Checks

While there are many risks with outstanding checks, there are simple steps you can take to avoid them.

•   Keeping a balanced checkbook goes a long way toward preventing a check from being forgotten.

•   Maintaining a tidy desk and filing cabinet for important documents like checks can help you deposit funds promptly.

•   If you wrote the check, calling a payee to remind them that a check is outstanding is a wise tactic.

•   Using online bill pay services can help you dodge the headaches that can come with paper checks.

Banking With SoFi

It’s important to know what an outstanding check is and the potential risks that go along with them. Many checks remain outstanding which can cause risks to both the person holding a check and the entity that issued it. Fortunately, with today’s technology and mobile banking capabilities, it’s easier and faster than ever to deposit checks.

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


Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.50% APY on SoFi Checking and Savings.

FAQ

Is an outstanding check bad?

Outstanding checks are not bad per se, but it’s generally wise to promptly deposit or cash checks so that they do not expire. Checks that remain outstanding beyond a certain time frame could become void, so if you hold such a check, you might be out of luck if you then wish to deposit it. Also, outstanding checks can make it hard to determine an account’s available balance, which can lead to bounced checks and overdraft charges.

How do you handle an outstanding check?

If you wrote a check and it is still outstanding, you should consider contacting the recipient to confirm they received it. That might give the payee a nudge that they should deposit it. If you possess an outstanding check, it’s good to deposit it as soon as possible to avoid having it go stale.

Is an outstanding check a debit or credit?

An outstanding check represents a payment that has been written but not yet cleared by the bank. In a double-entry accounting system, an outstanding check is considered a credit for the check writer, since credits record outgoing money. The funds have been earmarked to be deducted from their bank account, even though the actual cash hasn’t been withdrawn yet. For the recipient, the outstanding check is considered a debit, since debits record incoming money. The recipient is awaiting the receipt of funds that have been promised through the check.

Photo credit: iStock/Tassii

SoFi members with direct deposit activity can earn 4.50% 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 4.50% 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 4.50% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 8/27/2024. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2023 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

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

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

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Jun
18
2024
Guide to Duplicate Checks

Guide to Duplicate Checks

By | Financial Independence, Life & Career, money | Comments Off on Guide to Duplicate Checks

Because check writing is a less popular form of payment these days, it’s easy to get confused about how the whole process works. When someone writes a paper check, there may be a carbon copy attached to the back of each check. These are known as duplicate checks.

But what exactly are duplicate checks? How do you use them? And when do you need them? Keep reading for more insight.

Key Points

•   Duplicate checks are carbon copies attached to the back of paper checks, serving as a record of the payment made.

•   Duplicate checks contain the same information as the original check, except the signature, and can be used for quick reference.

•   Banks and some online check printers provide duplicate checks.

•   Advantages of duplicate checks include being safer than carrying cash, ease of use, convenience, and the ability to cancel if stolen.

•   Alternatives to duplicate checks include online bank accounts, digital copies, and check registers for record-keeping.

What Are Duplicate Checks?

Duplicate checks are a type of checkbook you can get from your bank that makes it easier to keep track of the checks you write. Behind each check is a thin sheet of paper that records what you write. This check is known as a carbon copy or “duplicate”.

When you write on a check to fill it out, your writing transfers over to the duplicate check. In this way, the duplicate that is created can act as a record of the payment made, including the check number, how much was spent, the day the check was written, and to whom the check was given.

The same information found on the duplicate check can also be found by logging into your account online, but it can be helpful to have duplicate checks on hand for quick reference.

How Do Duplicate Checks Work?

A duplicate check is attached to the back of a normal check in the form of a thin piece of paper. This acts as a carbon copy of the original check. All duplicate checks have the same check number printed on them as the original. The pressure from the check writer’s pen transfers what is written on the original check to the duplicate check.

Once you are done writing a check, you only pull the original check out of your checkbook and leave the duplicate check in the checkbook so you can reference it when and if you need to. (The original check goes to the person or business you are paying). All of the information included in the payee, amount, date, and memo sections transfers over. The one area of the original check that doesn’t copy over is the signature. This is to protect you, the account holder, from identity theft in the event someone steals your checkbook. Basically, a duplicate check mirrors the information and can help you verify the check you just wrote. You can see all the details right there, on the carbon copy.

Are Duplicate Checks Legal?

Yes, duplicate checks are legal and simply serve as a record of a check that the account holder already wrote. Where legal issues arise is if someone were to steal a checkbook and try to cash it or use the information on the check to commit bank fraud.

Where Can I Get Duplicate Checks?

If you have a checkbook, you may already have duplicate checks on hand. If not, you can order this style of checkbook from the bank or credit union where you have a checking account. It can also be possible to order duplicate checks from select reputable online check printers who may charge less than a bank does for checks.

Get up to $300 when you bank with SoFi.

Open a SoFi Checking and Savings Account with direct deposit and get up to a $300 cash bonus. Plus, get up to 4.50% APY on your cash!

Single vs Duplicate Checks: What’s the Difference?

Single checks are the type of check you typically receive in a standard checkbook. The checkbook contains a series of individual checks that are ready to be written out and used for payment. Duplicate checks come in a special checkbook that is pre-assembled with carbon paper and two copies of every check.

Pros of Duplicate Checks

Once you understand the principle of a duplicate check, you may wonder if these are right for you. Here are a few advantages of using duplicate checks.

Safer than Carrying Cash

While someone can easily steal cash out of a wallet, checks are not as simple to steal. This is especially true if you take steps to manage your checkbook well and keep it in a secure place.

Ease of Use

You don’t have to do anything to create the duplicate check thanks to the carbon copy function. No writing the check number, date, payee, and amount in your check register (unless, of course, you want to do so).

Convenience

The whole point of a duplicate check is to make staying organized and tracking former check payments easier. While most check information is available through online bank accounts, having a paper copy can act as a helpful backup.

Checks Can Be Canceled If Stolen

If you have reason to suspect a check was stolen, you can stop payment on the check before it is cashed. Again, that’s a big advantage over cash; once bills are stolen, they are gone.

Cons of Duplicate Checks

Of course, there are also some disadvantages associated with duplicate checks worth keeping in mind.

Security and Privacy Risk

Because duplicate checks have important information on them about your bank and your spending habits, it’s important not to lose a check and minimize the possibility of your checkbook getting stolen.

Cost More Than Regular Checks

Some banks or check providers charge more for duplicate checks than they do for single checks.

Not all Check Printers Provide Them

Not all check vendors can create duplicate checks, so they may not be available from the company where you normally order checks.

Checks Usage Is on the Decline

Checks (including travelers checks) are becoming a less popular form of payment as people shift to online payments, electronic checks, and other options. In many cases, it may not be worth the fuss of ordering and managing a checkbook for the occasional payment.

Alternatives to Duplicate Checks

If you want to keep good records of checks you have written but don’t want to hold onto duplicate checks, you have a few options.

•   Log into your account online. Most banks and credit unions give customers an online bank account where you can access information about your transaction history, including the information one would find on a duplicate check. A warning: This is not a reliable way to keep track of every check ever written as banks eventually stop sharing old transactions. But it is possible to download these statements and save them electronically.

•   Make a digital copy. You can take a picture of or scan each check you write and store them digitally.

•   Use a check register. To keep all information about written checks in one place, it’s possible to use a check register. These registers can be on paper or can be digital; they capture the check number, payee, when a check was written and for how much. This process can make it easy to balance, say, your high-yield checking account by copying down check-payment information and subtracting the amounts from your balance.

The Takeaway

What is a duplicate check? In short, a duplicate check is a carbon copy of a regular check. Though it can’t be used to make a payment, a duplicate check makes record-keeping easier. When you write a check, the attached duplicate check creates an automatic copy of the check that you can easily reference. While checks aren’t as widely used as they once were, a duplicate check system can be a bonus for those who like writing checks, as it can make it easier to keep tabs on your checking account.

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

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.50% APY on SoFi Checking and Savings.

FAQ

What is a single check?

A single check is the type of check you get in a standard checkbook. The book contains a series of numbered individual checks that you can write out and use a payment.

What is the difference between a single and duplicate check?

Single checks are the kind of check you receive in a standard checkbook. Duplicate checks come in a special checkbook that is pre-assembled with carbon paper and two copies of every check. This makes it easier to keep track of all the checks you’ve written.

Can you cash a duplicate check?

No. A duplicate check is simply a copy of a check you’ve written that stays in your checkbook and cannot be cashed. Only the original check can be cashed.

Photo credit: iStock/FG Trade

SoFi members with direct deposit activity can earn 4.50% 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 4.50% 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 4.50% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 8/27/2024. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2023 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

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

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

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Jun
18
2024
How to Invest in Carbon Credits

How to Invest in Carbon Credits

By | Growing Wealth, invest, Investing | Comments Off on How to Invest in Carbon Credits

When a company reduces its greenhouse gas emissions, it can earn carbon credits which may then be traded to other companies which need to offset their own emissions. Individuals can invest in the carbon credit market in a few different ways, including direct investment in low-carbon companies, or via exchange-traded funds (ETFs).

The global carbon market has expanded fairly fast in recent years, and the market is only expected to continue to grow in the years ahead. That means there should be plenty of opportunities for interested investors, assuming they know what they’re getting into.

What Are Carbon Credits?

Carbon credits are a way of valuing or pricing how much a company is reducing its greenhouse gas emissions. Companies that directly reduce their own greenhouse gas emissions, including carbon (CO2) can earn credits for doing so.

These carbon credits can be valuable to other companies that aren’t able to meet greenhouse gas reduction targets. So, they buy carbon credits from the companies that have them. Typically, companies that are in a position to sell carbon credits can make a profit. Each carbon credit represents one metric ton of carbon dioxide emissions. They are traded as transferable certificates or permits until they are actually used by a company and effectively retired.

For investors who are interested in ESG-centered strategies (i.e. companies that follow proactive environmental, social, governance policies) learning how to invest in carbon credits may be compelling.

What Is Cap and Trade?

An important dynamic to understand when deciding how to invest in carbon credits is the worldwide cap-and-trade market. Certain governments have put programs in place that place a limit or cap on the amount of greenhouse gasses that companies can emit each year. Caps vary according to industry and company size.

Over time, the cap can be reduced to force companies to invest in green technologies and reduce their emissions. Any emissions above the cap must be covered with the purchase of carbon credits (hence the term “cap and trade”), otherwise the company must pay a fine.

If a company is able to reduce their emissions, they can then sell those carbon credits to other companies, and make a profit on them. If they need to emit more than the cap, they buy additional carbon credits. As governments lower emissions caps, demand increases for carbon credits, and their price goes up.

Not every country has a cap-and-trade policy, but they have gained traction in the European Union, certain states in the U.S., the U.K., China, and New Zealand.

💡 Quick Tip: Are self-directed brokerage accounts cost efficient? They can be, because they offer the convenience of being able to buy stocks online without using a traditional full-service broker (and the typical broker fees).

How Have Carbon Credits Become a Big Market?

For those interested in investing in carbon credits, consider this: A significant (and growing) portion of global greenhouse gas emissions are now covered by carbon pricing initiatives, and even more are covered by voluntary carbon market purchases. This article focuses on the compliance carbon credit market created by governments, but it’s important to know the distinction between that and the voluntary carbon market.

In the voluntary market, companies choose to purchase carbon offsets as a way to cancel out their emissions. Carbon offset projects include emissions-reduction and removal initiatives such as tree planting and producing renewable energy.

In theory, this system allows certain companies to participate in the global system of reducing harmful emissions like carbon, even if those companies are still striving to attain low-emission goals in their own production or distribution systems. For example, some industries, such as cement and steel manufacturing, are unable to reach net zero emissions, so they can purchase carbon credits to help offset the emissions from their manufacturers.

3 Ways to Start Investing in Carbon Credits

Carbon markets are not as robust in the U.S. as they are in other countries, but this will likely change in the future. For now, there are a few ways investors can get started investing in carbon credits. This could be considered a form of impact investing.

1. Carbon Credit ETFs

An exchange-traded fund (ETF) is a pooled investment fund that tracks the performance of a certain group of underlying assets. There are carbon credit ETFs that track the performance of carbon markets. Some ETFs track a certain group of companies, while others track indices, futures contracts, or other asset groups.

2. Carbon Credit Futures

Another way to consider investing in carbon credits is through carbon credit futures contracts. Futures contracts are derivatives linked to underlying assets. A buyer and seller enter into an agreement to trade a particular asset for a certain price on a certain future date. With carbon credit futures, the underlying asset is the carbon credit certificate.

Carbon credits, such as the European Union Allowances and the California Carbon Allowances, have futures available on exchanges. However, carbon credit futures are complicated investments so they are only recommended for more experienced investors.

💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.

3. Individual Companies

A third way that investors can get involved in carbon markets is by investing in stocks of individual companies that generate or actively trade carbon credits. By investing in those companies investors can indirectly invest in carbon credits.

Other companies are investing significantly in decarbonization and decreasing their own carbon footprint. These are sometimes referred to as green stocks.

Also some companies have a business model focused on investing in carbon projects, so investing in those provides a targeted exposure to carbon credits.

Other Ways to Invest in Carbon Credits

There are also some newer private companies in the carbon credit space to keep an eye on. Although there isn’t a way for a retail investor to invest in private companies, it might be worth tracking these companies as they may go public in the future.

Additionally, some new exchanges have started offering retail investors exposure to portfolios of curated carbon credits. These credits may be grouped by region or by type, such as forestry or renewable energy projects.

Pros and Cons of Investing in Carbon Credits

While there are several benefits to investing in carbon credits, there are some risks and downsides as well.

Pros

•   Profitability: Investing in carbon credits may be very profitable, and it’s possible that the market could grow in the years ahead.

•   Environmental and social benefits: Carbon pricing incentivizes companies to reduce their emissions, and as emissions caps tighten, and the price of carbon credits goes up, it gets more expensive for companies to pollute. By investing in carbon credits, investors can contribute to an emissions-reduction strategy that benefits both people and the environment.

•   Accessibility: Investing in a carbon credit ETF is more or less the same process as investing in any other ETF. Investors can gain exposure to carbon markets without directly trading futures or researching individual companies.

•   Low supply and increasing demand: Currently there is a limited supply of carbon credits, and corporate demand for them is increasing. Companies are pre-purchasing them to cover emissions many years out, so their value is increasing.

•   Diversification: Carbon credits may be a way to diversify a portfolio outside of standard stocks and bonds.

Cons

•   Potential risks: Certain carbon credit ETFs track carbon credit futures, which can be volatile and risky assets. Also, the carbon credit market is relatively new, so there is a limited amount of past performance data to refer to.

•   Narrow exposure: Carbon markets are limited to certain regions and are still a relatively small market, so investing in them doesn’t provide a lot of portfolio diversification.

•   Limited environmental impact: Cap-and-trade policies are designed to limit corporate emissions and reduce them over time, but they are also essentially permits to pollute. Rather than reducing emissions, companies can simply purchase more carbon credits. Therefore, the actual environmental benefit of investing in carbon credits is limited.

•   Not all carbon credits are the same: Some carbon credits are higher quality than others, and various factors go into determining their true value. It’s important to purchase through reputable ETFs or brokers to ensure the credits are legitimate and have value.

Risks, and What to Watch For When Trading Carbon Credits

Investing in carbon credits may potentially be profitable, but all commodities markets, including carbon markets, come with some risks investors should be aware of.

Carbon credit futures are speculative and can be very volatile, so ETFs that track them come with associated risks. Additionally, carbon credit ETFs only provide exposure to markets that have cap-and-trade programs, such as Europe and California. Therefore, they don’t provide investors with a broad exposure to carbon markets.

Also, carbon credit schemes are created by governments, and there is a risk at any time that a government could intervene and change the program or reduce the price by increasing the cap.

For this reason, carbon credit ETFs can be a good way to diversify one’s portfolio, but aren’t necessarily a place where investors should allocate a large portion of their money.

Steps to Start Investing in Carbon Credits

As an individual investor the way to invest in carbon credits is through ETFs and other pools. There are a few simple steps to start investing in carbon credits.

Step 1: Open a Trading Account

The first step is to open a brokerage account that offers ETFs. There are easy to use online trading platforms, such as SoFi Invest, where investors can buy ETFs, stocks, and other assets.

Step 2: Research and Decide on a Carbon Credit ETF

There are several different carbon credit ETFs to choose from. The next step is to research and choose one or more ETFs to invest in.

Step 3: Invest

The final step is to invest in the chosen carbon credit ETF using the trading account. Once the purchase has been made, the investor can track the ETF in the same way they would track any other stock or asset in their portfolio. Historically, carbon markets have shown volatility in the short term, but have increased over the long term, so investors should keep that in mind when deciding how long to hold onto their investment.

Is Carbon Credit Investing Right for You?

Investing in carbon credits may be a way to get involved in a growing market and support the transition to a low-carbon global economy. However, they do come with risks, and past performance is not a predictor of future performance.

If an investor is looking to diversify their portfolio, allocating a small amount to carbon credit ETFs may be one good option.

The Takeaway

Carbon markets are a large industry, and there are several ways for retail investors to get involved by investing in carbon credits. Carbon credits are generated by companies that are able to reduce their own greenhouse gas emissions over and above what the company itself may need.

This puts the carbon-credit-generating company in a position to sell their carbon credits for a profit, to the companies that need to offset their own emissions. This system has some pros and cons from an environmental perspective, as well as from an investing perspective.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

FAQ

How do you make money with carbon credits?

Carbon credits increase in value when demand for them increases and supply decreases. As regulated emissions caps decrease, demand increases, as does price. Investors can make money with carbon credits by purchasing carbon credits and selling them when their market value increases.

How much does it cost to buy a carbon credit?

By investing in carbon credit ETFs, investors can gain exposure to carbon markets with a small amount of capital. The value of an individual credit fluctuates based on various market factors.

How much is an acre of carbon credits worth?

The market price for carbon credits ranges from under $1 to over $150. The per-acre rate that suppliers make depends on the type of land and project as well as the current carbon credit market rate.

Photo credit: iStock/Eva-Katalin

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Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
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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Guide to Opening a Certificate of Deposit (CD) Account for Your Child

Guide to Opening a Certificate of Deposit (CD) Account for Your Child

By | Budgeting & Goals, Family Finances, Investing, money | Comments Off on Guide to Opening a Certificate of Deposit (CD) Account for Your Child

A certificate of deposit (CD) can be a good option to consider as a savings vehicle for a child. With a CD, you can deposit money for a specific term, such as a few months to a few years, and earn a fixed rate of interest.

CDs are relatively safe investments; they are federally insured for up to $250,000, and can offer minimal but steady growth for a period of years.

An adult can open a custodial account for a child who will assume management of the CD account when they reach adulthood. However, there are some pros and cons you should know before opening a CD, including how CDs compare to other investment vehicles for your child.

Understanding Certificate of Deposits

A certificate of deposit is considered a type of savings account. The account holder deposits the funds and agrees not to withdraw the money for a specific period of time, in effect, loaning the money to the bank. The bank pays the CD holder interest based on the total amount deposited and the maturity date of the CD (the term).

You can open a CD at a bank or a credit union; this can be done in person or online. Most CDs are federally insured up to $250,000.

If the account holder decides to withdraw the funds before the end of the term, they are typically charged an early withdrawal penalty, often forfeiting a portion of the interest. For example, if you deposit $1,000 in a two-year CD, and you want to withdraw the funds after one year, you would only be entitled to the amount of interest earned up until that point, minus any fees or penalties.

CDs are generally considered a conservative investment, but the interest earned on a CD tends to be less than some other investments because CDs are lower-risk investments. When opening a CD account for a child, it’s important to consider whether the peace of mind and a lower return is what you’re after, or whether you’d like an investment that potentially offers more growth, but also possibly more risk.

Can a Child Have a Certificate of Deposit?

A CD for kids can be a solid start to an investment plan for your child. It’s also a way to help explain the dynamics of saving to them and what it means to earn interest on a principal deposit.

That said, minors cannot legally open CDs. An adult must acquire a CD for the child and then transfer it to them when the child reaches adulthood.

One thing to keep in mind about a CD for kids is that funds held in CDs and other savings accounts can affect a child’s eligibility for future financial aid. This is an important consideration, which could affect how much a family might pay for college tuition.

Who Would Own the CD?

A minor cannot apply for a CD, but they do own it. That means that the account cannot be given to anyone else.

An adult, usually a parent or legal guardian, can open a custodial account for a minor under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act, which is an extension of the UGMA. A custodial account allows one person to deposit funds into an account for another. The account can be transferred to the child once they reach adulthood. The age of adulthood is not federally mandated. However, in most states, it is age 18.

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How to Give a Certificate of Deposit to a Minor

Here’s how to set up a CD for a minor child, and transfer the account to them when they reach adulthood.

Select the Bank Where You Want to Purchase the CD

Explore bank account options and decide which bank or credit union you want to hold the CD for your minor child. Compare interest rates based on the amount you intend to deposit and the term for the CD. Also, look at any penalties and fees the bank might charge.

List Yourself as the Custodian and the Child as the Owner

Fill out the form online or in person stating that you will be the custodian and the minor will be the owner of the CD. You will be asked to provide identifying information such as your Social Security number and the child’s Social Security number.

Deposit the Money in the CD

Deposit the desired amount into the CD account, taking into consideration how different amounts and terms might affect the interest rate paid.

Discuss What to Do With the Funds

Opening a CD account for a child presents a “teachable moment,” in that the minor child, who is the owner of the CD, needs to think through what the money can be used for once the CD reaches maturity. When the CD matures, you can cash it out, or renew the CD. If the child is of legal age at that point, the account is transferred to the child. You may have to contact the bank to remove your name from the account.

Recommended: What Are No Penalty CDs?

Are CDs a Good Choice to Help My Child Save?

CDs are among the lower-risk investment options, and a good way to help a child save.

That said, CDs are also low-yield investments. If you are saving for your child’s education, funding a 529 college savings plan might offer more growth potential over time, if that’s your goal.

For longer-term savings, opening a Roth IRA may also be a good choice for parents hoping to provide financial security for their child.

Tax Implications of CDs for Kids

There are tax considerations to opening a CD for kids. Taxes are typically due on earnings when the CD matures, but a child will likely be in a lower tax bracket than an adult, so at least some of the earnings could be taxed at a lower rate.

The IRS taxes kids’ unearned income, such as interest, dividends, and capital gains, in tiers. In 2024, for a child with no earned income, up to $1,300 in unearned income is not taxed. The next $1,300 is taxed at the child’s tax rate. Any amount over $2,600 is taxed at the parent’s rate. So that is something to keep in mind.

The custodian of a CD should also be aware that they can give up to $18,000 in 2024 to a child without owing gift taxes.

Financial Aid Implications of CD Earnings

There are some implications of CD earnings regarding financial aid. If a child is applying to college and has savings in a UGMA, those assets will need to be disclosed on the Free Application for Federal Student Aid (FAFSA). It may be that the student will have to pay more of their college costs than if their money had been put in a 529 college savings account.

Is a CD a good investment for a child? That depends on the length of time between the opening of the CD account, and when the child reaches the age of majority. If the child is a teenager, a CD will provide a guaranteed amount of money, and there is no risk of loss if the market drops.

However, CDs don’t earn a lot of interest, and a growth-oriented investment might earn more and grow faster if the child is younger.

Finally, as noted above, if you are saving for the child’s education, you may want to explore a 529 college savings account, instead of or in addition to a CD for a child.

Where Can I Find a CD for a Child?

Most banks and credit unions offer CDs, and they allow custodians to open accounts for a child. Online banks can also be convenient. Many offer competitive interest rates and lower fees. Be sure to compare the interest rates and APY of each bank and make sure to understand the penalties that will apply if you withdraw the funds early.

The Takeaway

There are many ways to help your child save. Which one is the best depends on the ultimate use of the funds. CDs are lower-risk, they are federally insured up to $250,000, and they may offer higher interest rates than regular savings accounts. However, other options to consider are a 529 college savings account and a Roth IRA.

CDs are easy to open; most banks and credit unions offer these products. They earn interest on the amount invested as long as the funds are not withdrawn before the CD’s term. If the custodian does withdraw funds before the maturity date, the bank will charge a penalty.

Most online banks also offer CDs, and an adult can open a custodial account online for a child. The child is named as the owner of the account, and they will assume management of the account when they reach adulthood according to state laws.

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

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.50% APY on SoFi Checking and Savings.

FAQ

What is the best way to save money for a child?

The best way to save money for a child depends on your goals. Some options include a savings account or a custodial CD, a 529 college savings account, or a Roth IRA. Explore the options to determine which is best for your situation.

Can you buy a CD as a gift?

Yes. Under the Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA) an adult can gift a CD to a child.

Can I open a CD for my child?

Yes. Opening a CD account for a child is easy using a custodial account. The child will be named as the owner and you as the custodian. The owner (the child) will assume full legal ownership of the CD when they reach adulthood. The account cannot be given to anyone else but the named holder.

Photo credit: iStock/Hispanolistic

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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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4.50% APY
SoFi members with direct deposit activity can earn 4.50% 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 4.50% 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 4.50% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 8/27/2024. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet.

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.

*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.

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Money Market Account vs Money Market Fund

Money Market Account vs Money Market Fund: What’s the Difference?

By | Growing Wealth, Investing, money | Comments Off on Money Market Account vs Money Market Fund: What’s the Difference?

Money market accounts and money market funds may sound like the same thing, but the former is actually a savings account, while the latter is a kind of investment. It’s not a matter of one being better than another; they are simply different financial products, and each can play an important role in a person’s money management.

Here, learn more about the uses and benefits of each.

Key Differences Between a Money Market Account and Money Market Fund

A money market account vs. fund are the same in the following ways:

•   Both options are a great place to keep cash in the short term.

•   Both options are low-risk and offer yields that help boost your cash position.

•   These financial vehicles offer easy access to your funds.

That said, there are some important differences between a money market account and a money market fund:

•   A money market account is a savings account, while a money market fund is an investment vehicle.

•   Money market accounts are insured by the FDIC, while money market funds are not federally protected.

•   You open a money market account with a bank or credit union, but you invest in a money market fund via a brokerage firm.

•   Money market accounts may or may not charge account fees; money market funds probably carry maintenance fees.

Here are these differences in chart form:

Money Market Account

 Money Market Fund
A savings account An investment vehicle
Insured by the FDIC Not federally insured
Opened at a bank or credit union Opened with a brokerage firm
May or may not have account fees Probably have maintenance fees

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What Is a Money Market Account?

A money market account (or MMA) is a kind of savings account, which is one of the most common types of bank accounts. It allows account holders to earn a higher savings rate compared to a conventional savings account.

Thanks to its higher-than-standard annual percentage yield (APY), it can be a good option to earn interest. Simply put, your money can grow faster than it would at a lower APY account. (Interest earned will be taxable, as with other savings accounts.)

Another benefit is that money market accounts usually have some of the features of a checking account. These may include a debit card and check-writing abilities. It gives you easy access for spending money from your savings account.

This account type, however, typically involves a higher minimum balance compared to a traditional savings account. There may also be a maximum of six withdrawals per month from a money market account, whether by ATM, check, debit card, or electronic transfer.

Recommended: What Is a Good Interest Rate on Savings?

Are Money Market Accounts Safe?

If you open a money market account with a bank that is insured by the Federal Deposit Insurance Corporation (FDIC), you can consider your money to be safe. FDIC-insured banks give account holders peace of mind because even in the rare event of a bank failure, your money is insured up to $250,000 per depositor, per account ownership category, per insured bank. In other words, a money market account is a very safe deposit account.

What Is a Money Market Fund?

Money market funds are a type of mutual fund; they are sometimes referred to as money market mutual funds. Whichever term is used, these funds allow investors to purchase securities that may provide higher returns compared to interest-yielding bank accounts. There are a variety of types of money market funds, but many popular ones invest in debt securities with short-term maturities. This account is typically known as a lower-risk type of investment since it invests in high-quality, short-term debt securities.

Money market mutual funds are typically offered by brokerage firms and can be used as a savings or investing vehicle. The typical profile of a money market fund account holder is someone who wants to stow their cash away for a short period of time as an alternative to investing in the stock market. These funds tend to experience very low volatility compared to the stock market.

Depending on the specific fund, earnings may or may not be taxable.

Are Money Market Funds Safe?

Unlike a money market savings account, which is federally insured, money markets mutual funds are not FDIC-insured, though they are subject to the scrutiny of the Security and Exchange Commission. That’s because your fund could potentially lose value.

While there isn’t an FDIC safety net, money market funds likely invest in high-quality securities, so the risk of loss tends to be very low. The investments in the fund, for example, may be Treasury bills or certificates of deposit. For these reasons, money market funds have a reputation for being relatively safe investments even though you are not protected against losses.

Choosing Between a Money Market Account and Money Market Fund

Here’s important information on when a money market account is the right option and when a money market fund is the better choice. Or you might decide to have both.

When to Consider a Money Market Account

Account holders can consider a money market account if they want to improve their savings rate and get higher rates compared to traditional savings accounts. If you have an existing savings account and you want to put your extra cash to work for higher yield, a money market account could be a suitable option. It can be appropriate for short-term savings, though it may not be the best long-term savings account option.

Keep in mind that money market accounts, unlike some other common types of savings accounts, may have minimum deposit requirements. The higher the yield you’re searching for, typically, the greater the minimum deposit may be. In addition, there may be monthly fees for these accounts.

Money market accounts are also great for account holders who want the flexibility to write checks, withdraw cash, and even use a debit card for purchases. These features, which typically come with checking accounts, are some of the upsides of a money market account.

When to Consider a Money Market Fund

You may want to consider opening a money market mutual fund vs. a money market account (or any other vehicle) if you are seeking a low-risk investment with what are probably higher yields compared with savings accounts. More specifically, they may be a good option if you are, say, an investor looking to build up cash holdings through a high-quality investment vehicle that pays dividends reflecting short-term interest rates.

That said, investors must consider the fees attached to money market funds. Many investment vehicles charge a management fee or an expense ratio. This can range considerably, but the average annual rate is currently around 0.13%, so if you had $20,000 invested, you’d pay $26. This expense can eat away at your investment returns.

The Takeaway

Money market accounts and money market funds can be great tools for safely building wealth. However, they are different kinds of products: A money market account is a savings account that earns interest while providing checking-account style access (say, via a debit card). Money market funds are an investment vehicle that puts your money in historically low-risk debt securities. Depending on your money goals and style, either or both can be a positive part of your financial portfolio.

If you’re looking to grow your personal finances day to day, consider what SoFi offers.

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


Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.50% APY on SoFi Checking and Savings.

FAQ

Are money market funds safe?

While not immune to losses, money market funds are relatively safe investments since they invest in high-quality debt securities.

Can you lose money in a money market fund?

Since money market funds are an investment, they are not insured by the FDIC. There is a possibility of loss, but money market funds are known for investing in very low-risk debt securities.

What are money market funds?

Also known as money market mutual funds, money market funds are a low-risk investment account. They allow investors to purchase securities that typically provide higher returns than interest-yielding accounts.

Is a money market account considered cash in the bank, like a savings account?

Yes. A money market account is a savings account with some checking account features. Money can be withdrawn at will, but there may be a limit regarding how many of these transactions you can complete in a given month. Check with your financial institution for specific account details.


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SoFi members with direct deposit activity can earn 4.50% 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 4.50% 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 4.50% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 8/27/2024. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet.

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

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

SoFi Invest®

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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.

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