Nov
21
2023
index card money sign

Financial Index Card: All You Need for Your Money Management

By | Budgeting & Goals, Financial Independence, Terminology | No Comments
    Money management can be complex, but what if the best, smartest advice could fit on one little index card? That’s the idea behind the financial index card. It’s a concept that the researcher who popularized the idea that the most effective strategies could be summarized on a small piece of paper, whether you pin that to your fridge, carry it in your pocket, or keep it next to your laptop.

    Here, you’ll learn the story of that financial index card and what exactly is written on it. The advice written on it could help build your money smarts and build your wealth.

    The Story Behind the Financial Index Card

    The financial index card got its start In 2013, when Harold Pollack, PhD, a social scientist at the University of Chicago, posted a photo of an index card online. On the card, he said, was the only financial advice anyone ever needed to know.

    He created the card after interviewing personal finance writer Helaine Olen. During their talk, Pollack jokingly claimed that all the necessary info about good money management could fit on an index card.

    Pollack’s off-the-cuff comment — at the time he hadn’t actually produced this index card — generated a lot of audience commentary with investors wondering what his advice would be. Pollack grabbed an index card, wrote down nine tips, snapped a photo, and posted it online.

    The nine simple tips on the card resonated with the public and the photo went viral. In fact, the concept was so popular that Pollack teamed up with Olen to write a book, The Index Card: Why Personal Advice Doesn’t Have to Be Complicated.

    The Financial Index Card’s Advice

    Here is a rundown of the nine tips Pollack offered on the original card and an explanation of what each one means to help you better understand the value of the financial index card.

    1. Max Out Your 401(k) or Other Employee Contribution

    A traditional 401(k) is a retirement plan that offers various investment options and is often offered via your employer – but note that not all employers offer 401(k)s as a benefit. Sometimes your employer will make matching contributions to your 401(k) as well.

    What makes 401(k)s particularly useful are the tax advantages that they offer. You can fund 401(k)s with pretax money.

    Contributions can be taken straight from your paycheck before you pay any income tax, which in turn lowers your taxable income and potentially your tax bill that year. Keep in mind that when you later make withdrawals from your 401(k), you will owe income tax.

    But once in the 401(k), your money grows tax-deferred. Your employer will likely offer a number of investment options for you to choose from, such as mutual funds or target-date funds.

    The more money you can put into your 401(k), the more money you have at work for you. If your employer offers matching funds, aim to at least save the minimum amount to max out the match if you can.

    Saving for your future merits a spot on the financial index card because it’s such a vital part of planning ahead, achieving your money goals, and building your net worth. What’s more, stashing away cash for tomorrow can also help reduce money stress.

    2. Buy Inexpensive, Well-Diversified Mutual Funds

    Here’s the next bit of advice from the financial index card: It’s about buying mutual funds. A mutual fund takes a pool of money from investors and buys a basket of securities such as stocks or bonds. They are an important tool investors can use to diversify their portfolios.

    Diversification is a way to help reduce risk in your portfolio. Imagine that you had a portfolio that was only invested in one stock. If that company does poorly, your entire portfolio may suffer. Now imagine that you invested in 100 stocks. If one of the stocks does poorly, its effect on the portfolio as a whole will likely be much smaller.

    Investors may choose to invest in a target date fund, which holds a diverse selection of stocks and bonds. Investors may use these funds to work toward a goal a number of years down the line.

    Say you will retire in 2050, you may choose a target date fund with a provider called the 2050 Fund. As the target date approaches — aka the date at which you’ll likely need your money — the asset allocation inside the fund will typically shift to become more conservative.

    Mutual funds typically charge fees to pay for management costs. The fees may take a bite out of your eventual return. Consider looking for target funds that charge lower fees to minimize the amount that you’ll end up paying.

    This investing advice can help you grow your wealth and meet your long-term financial goals.

    3. Don’t Buy or Sell an Individual Security

    Buying and selling individual stocks can be tricky. It’s difficult to know how an individual stock will behave, and choosing stocks can take a lot of time and research. It may be easier for investors to use mutual funds, exchange-traded funds (ETFs), or index funds to gain exposure to many different stocks.

    Investors who are interested in adding individual stocks when managing their portfolio may want to consider their overall asset allocation and diversification strategy to be sure that the stock is the right fit.

    4. Save 20% of Your Money

    Here’s the next bit of advice on the financial index card: Save 20% of your earnings. This saving tip from Pollack dovetails nicely with the popular 50/30/20 budget rule. This rule states:

    •  50% of your income should be used to cover your needs, such as car payments, groceries, housing, and utilities.

    •  30% of your spending should be used to cover your wants, such as eating out, vacations, or hobbies.

    •  20% is the money you save, which can go toward paying down debts, building an emergency fund, or stashing cash for retirement.

    Another formula for saving that some experts recommend:

    •  Put 12% to 15% toward retirement

    •  The remaining 5% to 8% goes toward paying off debt and building an emergency fund.

    You can keep track of your savings with various mobile and online savings and budgeting tools. (Check with your bank; they may offer some.)

    If it’s not possible for you to save 20% of your income (perhaps you live in a place with a very high cost of living), then save as much as you are able.


    💡 Quick Tip: Did you know that opening a brokerage account typically doesn’t come with any setup costs? Often, the only requirement to open a brokerage account — aside from providing personal details — is making an initial deposit.

    5. Pay Your Credit Card Balance in Full Every Month

    Credit cards can be extremely convenient, whether you’re renting a car or buying a new refrigerator with all the bells and whistles which you couldn’t otherwise afford.

    However, if you start to carry a credit card balance from month to month, your credit card debt may quickly spiral out of control. The average annual percentage rate, or APR, for credit cards currently tops 20%. This rate represents that amount of interest that you’ll pay on the balance of your credit card.

    What’s more, many credit cards only require that you make a minimum payment each month — less than the balance you’re carrying. But think twice before making these minimal payments. You can continue to accrue interest, and the time required to pay off the entire amount of debt can be lengthy.

    To avoid being sucked into this spiral of revolving credit, follow the financial index card’s advice. You might consider trying to spend only what you can truly afford each month on your credit card and paying off your balance in full, if possible.

    6. Maximize Tax-Advantaged Savings Vehicles like Roth, SEP, and 529 Accounts

    A 401(k) is not your only option for tax-advantaged accounts. If you’ve earned income — and even if you already have a 401(k) — you can take advantage of setting up an IRA account. Here are some details:

    •  Contributions to traditional IRAs are made pretax and then grow tax-deferred. Contributions to Roth IRAs are made after-tax and grow without being taxed.

    •  Withdrawals from Roth accounts, when meeting specific criteria, are not subject to income tax.

    •  Small business or self-employed workers can take advantage of SEP IRAs, which allow employers to make contributions in an employee’s name.

    •  A 529 plan is a tax-advantaged account that helps people save to cover qualified education expenses, such as college tuition. These plans are sponsored by states, state agencies, and educational institutions. Contributions to 529 plans are made with after-tax money.

    However, savings inside the account grow without being taxed and qualified withdrawals are not subject to tax. Contributions are not federally deductible, but some states allow deductions on state income tax.

    Like 401(k)s, these tax-advantaged accounts allow you to supercharge your savings and can make your money work harder for you.

    7. Pay Attention to Fees and Avoid Actively Managed Funds

    The next point on the financial index card focuses on investing decisions. Actively-managed funds are run by portfolio managers who are trying to find ways to beat market returns. This requires time and manpower, both of which can be expensive.

    Actively-managed funds pass this expense on to investors in the form of fees. Investors do have an alternative in index funds, which try to match the returns of an index, such as the S&P 500. They do so by buying all or nearly all of the securities included in the index.

    Managing this type of fund takes less time and effort and is therefore typically cheaper than active management. As a result, index funds often have lower fees than actively-managed funds.

    The potential to outperform the market may make actively managed funds sound pretty tempting. With an index fund you’re likely not going to do better than the market; the funds are actually aiming to mirror the market.

    Understanding this difference can help you assess whether paying fees to go after better-than-the-market results is worthwhile for your financial management.

    8. Make Financial Advisors Commit to the Fiduciary Standard

    To understand this strategy on the financial index card, it’s helpful to first understand your terms. A fiduciary standard refers to the duty of financial advisors to always work in their customers’ best interests. That may seem like a no-brainer. Wouldn’t all financial advisors do that? Yet, there are myriad opportunities for conflicts of interest to arise in relationships between financial advisors and investors.

    For example, advisors may be paid a commission when their clients invest in certain funds. If advisors don’t disclose that information, clients can’t be sure the advisor is suggesting investments because they’re the right fit for their portfolio or because the advisor is paid to use them. Advisors adhering to a fiduciary standard disclose conflicts of interest or avoid them altogether.

    Since Pollack’s index card made waves in 2013, the U.S. Department of Labor has tried to issue regulations that all financial advisors maintain a fiduciary standard when overseeing retirement accounts.

    The Fifth Circuit Court decided that this ruling was an overreach and shot it down in 2018. In 2023, the DOL put forth a proposal to revive the rule, but as of writing, no changes have been implemented. However, until it is (if ever), investors can ask their advisors whether they adhere to a fiduciary standard, and if they don’t, ask them to commit to doing so.

    Another option: Investors may turn to fee-only vs. fee-based advisors, who accept fees from their clients as their only form of compensation. Fee-only advisors by definition operate under a fiduciary standard.

    9. Promote Social Insurance Programs to Help People When Things Go Wrong

    A rising tide lifts all ships. This final tip on the financial index card is about supporting social programs like Social Security, Medicare, and the Supplemental Nutrition Assistance Program, which help keep the population healthy as a whole — financially and literally.

    You likely already pay into programs like these through Social Security and Medicare taxes. These are taken straight out of your paycheck if you’re employed, or if you’re self-employed, you pay them yourself. (And even the savviest of investors may need to fall back on government support.)

    The Next Financial Index Card

    In 2017, Pollack acknowledged his financial tips were directed toward people of at least middle class means, so he came up with a second index card. This time, he focused more on the needs of those who had a lower income or more financial obligations.

    The second financial index card included these points:

    •  Set and pursue financial goals that excite you.

    •  Follow a budget and track your spending.

    •  Pay cash or by check rather than by credit card or payment plan whenever possible.

    •  Save consistently, and build a financial reserve.

    •  Make sure you are receiving all pertinent public benefits.

    •  Make good use of your tax refund and/or your EITC.

    •  Don’t buy any financial service/product endorsed by any celebrity.

    •  By cheap index funds rather than individual stocks.

    •  Invest in your 401(k) if you have access to one.

    •  Work with a financial coach.

    •  Protect yourself from fraud and abuse.

    •  Look into a credit union, even if you have been unbanked.

    Start Investing With SoFi

    The financial index card is a simple concept, but it can be helpful to many people. Although Pollack’s advice covers a lot, there’s only so much you can fit on an index card. Tips like setting specific financial goals, simplifying your finances, keeping track of your spending (not just your savings), and setting a realistic budget, are also helpful in establishing and maintaining financial wellness.

    As always, if you’re struggling to manage your finances, it may be a good idea to speak with a financial professional. A financial index card can help, but marshaling additional resources may not be a bad idea.

    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.


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    1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
    2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
    For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
    Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

    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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Nov
21
2023

Guide to Liquid Net Worth

By | Budgeting & Goals, Financial Independence, Growing Wealth, money, Terminology | Comments Off on Guide to Liquid Net Worth

If you’re wondering how your financial health is tracking, you may want to figure out your net worth and your liquid net worth. These two numbers reflect what your assets (what you have) vs. what you owe, helping you see how your personal wealth is evolving.

While totaling up your net worth offers a more big-picture view of your total assets with your total liabilities subtracted, liquid net worth is a slice of that. It focuses on solely the amount you own in liquid assets minus your total liabilities.

This reflects how much cash you truly have access to or could quickly raise if for some reason you needed to.

Here’s a guide to determining your liquid net worth and ways to improve it.

Key Points

•   Net worth is the value of your assets minus your liabilities, while liquid net worth focuses on easily accessible assets.

•   Liquid net worth includes cash, checking and savings accounts, stocks, bonds, and other assets that can be quickly converted to cash.

•   Non-liquid assets like real estate and retirement accounts are not included in liquid net worth calculations.

•   Liquid net worth is important for financial stability and emergency preparedness.

•   Strategies for improving liquid net worth include building an emergency fund, reducing expenses, paying off high-interest debt, and increasing investments.

What Is Liquid Net Worth?

First, know that net worth is the amount of assets you have minus your liabilities, or what you owe. When it comes to income vs. net worth, you see that your worth is more than just what you earn; it’s also what you keep and how you invest and grow your money.

For instance, if you have a high income but spend it all because your cost of living is very high, your net worth could be very low despite your healthy salary.

Now, what is liquid net worth’s meaning? That’s the same calculation as net worth, but only looking at assets that could easily be tapped. So, you would exclude the value of, say, the home you are living in or your retirement accounts which you can’t touch until decades from now.

Liquid net worth reflects assets you could draw upon right now if you had to, without putting your home on the market or pulling money out of an IRA. Net worth vs. liquid net worth, on the other hand, represents all your assets, whether easily tapped or not.

What Counts for Liquid Net Worth Calculations?

Here are some assets that can count when calculating liquid net worth:

•   Cash

•   Money in a checking account

•   Money in a savings, CD, or money market account

•   Mutual funds, stocks, and bonds

•   Possibly jewelry and watches that could be quickly sold, if need be.

Typically, you do not include real estate or retirement savings when calculating liquid net worth as these can’t be cashed in on the spot if that was your goal.

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Net Worth vs Liquid Net Worth

As briefly mentioned above, your total net worth includes all of your assets (what you own) and liabilities (what you owe). When you determine your net worth, you add up all your assets, including non-liquid assets, such as your house, car, and retirement accounts, and then subtract all of your liabilities. The resulting number is your total net worth.

•   Your liquid net worth is the amount of money you have in cash or cash equivalents (assets that can be easily converted into cash) after you’ve deducted all of your liabilities.

It’s very similar to net worth, except that it doesn’t account for non-liquid assets such as real estate or retirement accounts.

•   Your total net worth gives you a picture of your overall financial strength and balance sheet, while liquid net worth shows how much money you have available that is quickly accessible in case of emergency or other financial hardship.

•   Both measures of net worth can give you a useful snapshot of your financial wellness, since they consider both assets and debts. Looking at your assets without considering your debts can give you a false picture of your financial situation.

•   Knowing and tracking these numbers can also tell you if you are moving in the right or wrong financial direction. If your net worth or liquid net worth is in negative territory or the numbers are declining over time, it can be a sign you need to make some changes and/or may want to put off making a major purchase such as a home or a car.

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Why Liquid Net Worth Matters

Your liquid net worth is a measure of your ability to weather a financial storm. Imagine you need money for something important — a major home or car repair, a trip to the ER, or getting laid off and deciding to start a new business.

You need it now… or, at least, within the next few weeks or months. Where are you going to get the money?

You might not want to look at cashing in things like your home, your car, your retirement savings, your baseball card collection, or Grandma’s wedding ring unless it’s absolutely necessary.

Those kinds of assets can be difficult to convert to cash in a hurry — and there could be consequences if you did decide to go that route.

Instead, it may be easier to tap your more liquid assets, such as cash from a checking, savings, or money market account, or cash equivalents, like stocks and bonds, mutual funds, or money market funds.

Liquid net worth is often considered a true measure of how financially stable you are because it tells you what you can rely on to cover expenses. In addition, your liquid net worth acts as an overall emergency fund.

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Calculating Your Liquid Net Worth

The difference in calculating net worth and liquid net worth is understanding which of your financial assets are liquid assets.

Liquid assets are cash and assets that could be converted to cash quickly. The following are considered liquid assets.

•   Cash: This includes the money that is in your wallet, as well as the cash you have in any savings, checking, and money market accounts.

•   Stocks: Any equity in a brokerage account, such as stocks, index funds, mutual funds, and ETFs, is considered a liquid asset. While you might have to pay taxes and other fees if you sell equities to convert to cash, you could liquidate these assets fairly quickly.

•   Bonds: Like equities, any bonds or bond funds are also liquid assets. Again, you may have to pay taxes on your profits when you sell, but the translation is relatively quick.

Non-liquid assets include anything that cannot be converted to cash quickly or for their full value, such as:

•   Retirement accounts, such as 401(k)s and IRAs.

•   A house or other real estate holding (which could take a while to sell and the actual sales price is not known).

•   Cars (while you may be able to liquidate a car relatively quickly, cars generally don’t hold their original value; they depreciate).

Liquid Net Worth Formula

For a liquid net worth calculation, here are the steps to follow:

•   List all of your liquid assets: The cash and cash equivalents you could easily and quickly get your hands on if you need money.

•   Next, list your current liabilities, including credit card debt, student loan balance, unsecured loans, medical debt, a car loan, and any other debt.

•   Subtract your liabilities from your liquid assets. The result is your liquid net worth.

4 Tips for Improving Liquid Net Worth

If your liquid net worth is too low to cover at least three to six months’ worth of living expenses or is in negative territory, you may want to take some steps to bolster this number. Here are some strategies that can help boost liquid net worth.

1. Building an Emergency Fund

If you don’t already have a solid contingency fund set aside in a liquid account, you may want to start building one. Having enough cash on hand to cover three to six months’ worth of expenses can be a great place to start building your liquid net worth.

An emergency fund can help keep you from getting behind on your bills and running up high interest credit card debt in the event of an unexpected expense, job loss, or reduction in work hours.

It’s fine to build towards this slowly. Automating your savings to deposit, say, $25 per paycheck into an emergency fund can be a good starting point if money is tight.

2. Reducing Expenses

For every dollar you save each month, you are potentially increasing your liquid net worth by that amount. One way to cut spending is to take a close look at your monthly expenses and to then try to find places where you may be able to cut back, such as saving on streaming services, lowering your food bills, or shopping around for a better deal on home and car insurance.

3. Lowering High-Interest Debt

Debts add to your liabilities and therefore lower your liquid net worth. Expensive debt also increases your monthly expenses in the form of interest. This gives you less money to put in the bank each month, making it harder to build your liquid net worth.

If you’re carrying credit card debt, you may want to start a debt reduction plan (such as the “debt snowball” or “debt avalanche” method) to get it paid down faster.

4. Increasing Investments

Investing money in the market for long-term savings goals, such as a child’s education, can increase your liquid net worth. While there is risk involved, you’ll have more time to ride out the ups and downs of the securities markets when saving for the longer term.

Recommended: Average Net Worth by Age

The Takeaway

Liquid net worth is the amount of money you have in cash or cash equivalents after you’ve deducted your liabilities from your liquid assets. It doesn’t account for non-liquid assets, such as real estate or retirement accounts.

Your liquid net worth can be a valuable measure of your financial health and stability because it shows how prepared you are to handle a change in plans, an unexpected expense, or a true emergency.

One easy way to boost your liquid net worth is to start building an emergency fund. If you’re looking for a good place to start saving, you may want to consider opening a high-interest bank 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.


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FAQ

Does a 401(k) count as liquid net worth?

When calculating liquid net worth, you typically do not include retirement accounts nor real estate. Liquid net worth’s meaning involves assets you can quickly tap without paying a large penalty.

How do you calculate liquid net worth?

To calculate your liquid net worth, add up your liquid assets (cash, money in the bank, stocks, bonds, and the like) and subtract your liabilities (credit card debt, student loans, car loan, etc.). When adding up your assets, do not include real estate or retirement accounts.

What is the average liquid net worth by age?

Figures for average liquid net worth are hard to come by. Rather, total net worth is what is typically tracked, which was recently found to be approximately $76,300 for those under age 35, $436,200 for those 35 to 44; $833,200 for those 45 to 54, and $1,175,900 for those 55 yo 64. It may be helpful to also consider the media values for these age brackets, which are significantly lower than the average.

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As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% 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.

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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 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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

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21
2023
Current Balance vs Available Balance: Key Differences

The Difference Between Current Balance and Available Balance

By | Financial Independence, money, Terminology | Comments Off on The Difference Between Current Balance and Available Balance

If you’ve ever wondered about the difference between what shows up on your bank account as an available balance vs. current balance, you are not alone. It can be perplexing to sometimes see two different figures for the amount of cash sitting in your account.

The truth is, both are correct. A current balance reflects the amount of money in a checking or savings account at any given moment. The available balance, on the other hand, shows you the current balance, plus or minus any transactions that are pending but have not yet been processed fully.

Financial institutions share these two balances with their customers to give as detailed a picture of funds on deposit as possible. While it may be confusing at first glance, once you understand the difference, it can actually help you stay in better control of your cash.

Read on to learn more about current vs. available balances on your bank accounts.

Key Points

•   Current balance reflects the amount of money in an account at any given moment.

•   Available balance shows the current balance minus any pending transactions that have not been fully processed.

•   Current balance includes both credits and debits, while available balance represents the amount available for spending.

•   The time it takes for a current balance to become an available balance depends on the processing time of pending transactions.

What is Current Balance?

The current balance of an account is a reflection of the amount of funds that are moving throughout a checking account or savings account at any given time.

This is a compilation of both credits and debits — incoming and outgoing funds — within an account. It includes transactions that have been completely processed on both ends and posted to an account.

Pending transfers or payments that have been authorized but have not been fully processed yet may be listed in your transaction history but are not included in the tally. So any debit card payments, mobile deposits, or automatic bill payments that haven’t been fully processed will not be calculated into the current balance.

For example, let’s say Brian’s checking account balance is $200.

•   On Monday, his employer deposits an $800 payment into his account that clears and posts on the same day, raising Brian’s current balance to $1,000.

•   On Wednesday, Brian uses his debit card to pay $100 for dinner, and the restaurant places a hold on his account for the amount. Because the payment is pending and awaiting processing, Brian’s current balance is still $1,000.

•   However, if on Friday the restaurant charge is fully processed and posted onto his account, his current balance would drop to $900.

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What is Available Balance?

An available balance is the current balance of a checking account or whatever type of savings account you may have, minus any pending payments and deposits. In essence, it takes the total amount of all fully processed and posted credits and debits, and subtracts the total amount of any pending payments that have yet to be fully processed, providing a more accurate reflection of the money in your account that remains available to be spent.

For example, Danielle’s checking account balance is $500. She uses her debit card to pay a $100 internet bill, and her landlord cashes her $300 check for her rent — both payments appear on her account as pending.

Despite her current balance being $500, her available balance is only $100 due to the pending payments. If she were to make other payments totaling more than $100, she will risk an overdraft fee and having a negative bank balance.

Recommended: Different Types of Savings Accounts You Can Have

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No account or overdraft fees. No minimum balance.

Up to 4.00% APY on savings balances.

Up to 2-day-early paycheck.

Up to $2M of additional
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What is the Difference Between Current Balance and Available Balance?

If an account goes a week or two without any activity, its available balance and current balance will likely be in sync. However, once purchases and payments are made with a debit card, that is when the available balance is likely to fluctuate.

The key difference between a current balance and an available balance is “promised payments.” A current balance is the total amount of money in an account including money that has been promised to other people or businesses. An available balance, on the other hand, is the specific amount of money available that has not been promised to any person or business. While spending the full amount of a current balance with pending payments could result in overdraft or NSF fees, spending the full amount of an available balance should not.

Generally, when a current balance and available balance differ, here’s the likely situation:

•   The available balance is the lower of the two, and it’s nearly always due to a pending payment.

•   In some less common cases, an available balance may appear larger than the current balance. This could be due to receiving a refund from a purchase or the reflection of a bank overdraft protection buffer on an account. Either way, in this case, it would be wise to contact your bank for a better understanding of your current account standing.

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How Long Does It Take for a Current Balance to Become an Available Balance?

The amount of time it takes for an available balance to sync back up with a current balance depends on the specific amount of processing time needed to complete each pending transaction.

Those times can vary depending on the type of transaction and how quickly the establishment processes it. The account holder’s ability to refrain from spending with their debit card and adding more pending payments to the account is also a major factor.

As a general rule of thumb, individual pending payments can take as little as 24 hours or as long as 3 days to be completely processed and posted to an account. The process requires communication and confirmation between the banks of the account owner and the establishment they purchased from.

If a transaction remains pending for up to a week, it would be wise to contact the merchant or your bank for clarity.

Which Balance Should I Rely On?

The current balance and available balance each serve their own purpose and both can be relied upon as an accurate representation of a checking or saving account. However, there are specific instances when it would be better to reference one over the other.

•   If you’re planning on making a purchase or withdrawal, that is an instance where it would be more beneficial to reference the available balance on your account. It’s the best way to know exactly how much money is available to be spent without disrupting any other pending payments.

Checking the available balance will give the most exact account of what is freely available to be spent and will also help you avoid incurring any overdraft fees.

•   If you’re more interested in your account balance as a whole and how much money you have flowing through your account at any given time, that is when you’ll want to reference your current balance. It accounts for every dollar entering and exiting your account at the very moment you check it.

Do keep in mind, however, that the available balance total may change quickly due to any sudden pending transactions, therefore it would be wise to check it daily for the most up-to-date tally.

Recommended: How Often Should You Monitor Your Checking Account?

The Takeaway

Knowing what your account balances mean and how to interpret them is a basic financial skill that can literally save you money. Even the slightest misinterpretation of the two could result in costly overdraft fees and disrupt your financial goals.

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 4.00% APY on SoFi Checking and Savings.

Check out SoFi Checking and Savings.

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SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 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.

SoFi members with direct deposit activity can earn 4.00% 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 4.00% 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 4.00% 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 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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

SOBK0823018

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Nov
21
2023
What Are the Differences Between FDIC and NCUA Insurance?

What Are the Differences Between FDIC and NCUA Insurance?

By | Financial Independence, money, Terminology | Comments Off on What Are the Differences Between FDIC and NCUA Insurance?

The Federal Deposit Insurance Corporation (FDIC) and National Credit Union Administration (NCUA) are independent federal agencies that insure their customers’ deposits. The FDIC insures deposits at banks typically up to $250,000 (though there are exceptions1); the NCUA offers the same insurance and consumer protection but at credit unions.

Account holders don’t have to apply or qualify for this coverage; it comes with different deposit accounts, assuming the institution is a FDIC or NCUA member. The coverage is meant to cover deposits if the institution were to fail; it doesn’t cover investment products or losses.

While these two entities serve similar purposes for consumers, they operate a little differently, with slightly different benefits for account holders. Before setting up a bank or credit union account, it may help to know how they each operate, and how to maximize your coverage.

Key Points

•   The FDIC and NCUA are government agencies that insure deposits at banks and credit unions, respectively.

•   FDIC stands for the Federal Deposit Insurance Corporation, and NCUA stands for National Credit Union Administration.

•   Both agencies provide insurance coverage of up to $250,000 per insured bank, per depositor or share owner, per account ownership category.

•   FDIC and NCUA insurance covers various types of accounts, such as checking, savings, money market, and certificates of deposit. Insurance coverage does not extend to investment products, stocks, bonds, mutual funds, annuities, life insurance policies, or safe deposit boxes.

•   It is important to verify if a financial institution is insured by the FDIC or NCUA before opening an account to ensure deposit protection.

What Is the FDIC?

FDIC stands for Federal Deposit Insurance Corporation. President Franklin D. Roosevelt established the Federal Deposit Insurance Corporation when he signed the Banking Act of 1933 amid the Great Depression.

The main purpose of the FDIC is to “maintain stability and public confidence in the nation’s financial system.” As part of that remit, the FDIC insures consumer deposits and is “backed by the full faith and credit of the United States government.”

The FDIC insures $250,000 per depositor, per insured bank, for every account ownership category. “Account ownership category” refers to single account holders, joint accounts, and other accounts like revocable and irrevocable trusts. (See table below.)

If you are a person who keeps a considerable amount of money in a bank, you’ll likely want to know that some banks participate in programs that extend the FDIC insurance to cover millions.

According to the FDIC, a depositor has not lost a single penny of FDIC-insured deposits because of a bank failure.

What Is the NCUA?

NCUA stands for National Credit Union Administration. Though the first credit union opened in the United States in 1909, and there were nearly 10,000 credit unions in the U.S. by 1960, Congress did not create the National Credit Union Administration until 1970.

Like the FDIC, the purpose of the NCUA is to insure deposits made by credit union members and protect those members who own credit unions. (Credit unions are not-for-profit and are owned by the members.)

Also like the FDIC, the NCUA is “backed by the full faith and credit of the United States government,” and insures deposits up to $250,000 per share owner, per insured credit union, for each account ownership category, share accounts, and some IRAs and trusts.

Rivaling the FDIC’s track record, the NCUA states that no member has ever lost a cent from accounts insured through the NCUA.

All federally chartered credit unions are a part of the NCUA while state-chartered credit unions adhere to state-specific regulations. That said, many state-chartered credit unions are also insured by the NCUA.

Recommended: Understanding the Marginal Propensity to Save Theory

FDIC vs NCUA Insurance: Similarities and Differences

So what’s the difference between the FDIC and NCUA? The biggest difference regarding FDIC vs. NCUA is the customers they protect. The FDIC insures deposits for bank customers while the NCUA insures deposits for credit union members. As a customer of a financial institution, you will not likely notice a difference in your day-to-day banking.

In fact, it’s easier to talk about all the ways the FDIC and NCUA are similar. The table below explores these similarities (and minor differences).

FDICNCUA
Year Created19331970
Applicable Financial InstitutionBanksCredit Unions
Insurance Amount$250,000 per depositor, per insured bank, for each account ownership category$250,000 per share member, per insured credit union, for each account ownership category
What Is InsuredChecking accounts
Savings accounts
Money market accounts
Time deposits (like CDs)
Other deposit accounts		Share draft (checking) accounts
Share savings accounts
Money market accounts
Certificate accounts (like CDs)
Other deposit accounts
What Is Not InsuredStocks
Bonds
Mutual funds
Annuities
Treasury securities
Life insurance policies
Safe deposit boxes (or contents)		Stocks
Bonds
Mutual funds
Annuities
Life insurance policies
Safe deposit boxes (or contents)
Ownership TypesSingle ownership
Joint ownership
Revocable trust account
Irrevocable trust account
Certain retirement accounts (like IRAs)
Employee benefit plan accounts
Corporation/Partnership/Unincorporated Association Accounts
Government Accounts		Single ownership
Joint ownership
Revocable trust account
Irrevocable trust account
Certain retirement accounts (like IRAs, KEOGHs)
Employee benefit plan accounts

What Does NCUA Coverage Protect?

NCUA coverage comes from the National Credit Union Share Insurance Fund (NCUSIF). The following account types are insured via the NCUSIF:

•   Share draft accounts (checking accounts)

•   Share savings accounts

•   Money market deposit accounts

•   Share certificates (like certificates of deposit)

Recommended: The Benefits of a High-Interest Savings Account

What Isn’t Covered by NCUA?

If your credit union carries insurance through the NCUA, you can depend on coverage up to $250,000 for common accounts like a checking or savings account. However, NCUA insurance does not cover:

•   Stocks

•   Bonds

•   Mutual funds

•   Annuities

•   Life insurance

•   Safe deposit boxes (or their contents)

What Does FDIC Coverage Protect?

Insurance through the FDIC covers account types that are comparable to those covered by the NCUA:

•   Checking accounts

•   Savings accounts

•   Money market deposit accounts

•   Time deposits (like certificates of deposit)

The FDIC also notes that its insurance covers Negotiable Order of Withdrawal (NOW) accounts, cashier’s checks, money orders, and other local items issued by a bank.

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No account or overdraft fees. No minimum balance.

Up to 4.00% APY on savings balances.

Up to 2-day-early paycheck.

Up to $2M of additional
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What Isn’t Covered by FDIC?

The FDIC has coverage exclusions similar to those of the NCUA. Insurance through the FDIC does not extend to:

•   Stocks

•   Bonds

•   Mutual funds

•   Annuities

•   Treasury securities

•   Life insurance

•   Safe deposit boxes (or their contents)

Treasury securities like bills, bonds, and notes are, however, “backed by the full faith and credit of the U.S. government.”

How to Know if Your Institution Is Insured by the FDIC or NCUA

Because the FDIC and NCUA insure deposits up to $250,000 for checking and savings accounts (some external programs allow for higher insurance limits with the FDIC), it’s important to know when selecting a new financial institution that it is insured by one of the two organizations.

So how do you know if a bank is insured by the FDIC? The FDIC provides a few easy options:

•   Call and ask. Calling the FDIC is toll-free. You can reach them at 1-877-275-3342.

•   Search online. The FDIC has a database called “Bank Find” that allows you to search for insured banks.

•   Look for the sign. When you enter a brick-and-mortar (aka physical) bank location, look for official FDIC signage.

•   Search the bank’s website. If you fall on the digital side of the traditional vs. online banking debate, you can scour a bank’s website instead. Usually you can find language like “Member FDIC” in the footer if the bank is insured. In fact, you can try it on this page; you’ll see that SoFi’s Checking and Savings account is FDIC-insured.

Determining whether a credit union is insured by the NCUA is just as easy:

•   Check online. Visit the NCUA’s agency website to search a complete directory of federally insured credit unions.

•   Look for the sign. Similar to the FDIC, the NCUA requires federally insured credit unions to place NCUSIF signage in their advertisements, offices, and branches to indicate insurance coverage.

•   Search the credit union’s website. Credit unions that are federally insured will include NCUA verbiage in the footer of their websites, just like banks do for the FDIC.

Remember, some state credit unions may not be federally insured. A credit union that includes “federal” in its name should automatically be insured by the NCUA. If you aren’t sure about a state credit union’s insurance, you can ask a credit union representative on site or over the phone for more information.

Recommended: Where to Store Short-Term Savings

Are All Banks FDIC Insured?

Nearly all banks are FDIC insured — but not all of them. Any bank that is not insured federally through the FDIC likely carries insurance through its state, so your deposits are typically still safe. However, it is a good idea to thoroughly research a bank and its insurance policies before storing any money in an account at the institution.

Are All Credit Unions NCUA Insured?

Not all credit unions are NCUA insured. All federal credit unions are automatically insured by the NCUA, but state credit unions must opt into NCUA share insurance. Those that don’t are typically insured through the state. As with banks, it is a good practice to understand a credit union’s insurance status and how it can affect your money before opening any account.

How to Maximize FDIC and NCUA Insurance

Both the FDIC and NCUA are typically very clear on how much they insure — $250,000 — careful to use specific terminology like “per depositor” or “per share owner”; “per insured bank” and “per insured credit union”; and “for each account ownership category.”

Knowing that, there are a few ways you can maximize your insurance coverage:

Open an Account That Insures for More Than $250,000

As briefly noted above, some banks offer programs that allow depositors to insure their account for more than the usual $250,000 amount. Check with financial institutions to see what may be available that can extend your account insurance to cover millions.

Open Accounts at Multiple Financial Institutions

You receive $250,000 of insurance coverage at each institution with applicable accounts. That means you could open up accounts at multiple banks and credit unions, spread your wealth across those accounts, and wind up with coverage on much more than $250,000.

Use Account Ownership Categories to Your Advantage

Another way to maximize FDIC and NCUA insurance is to utilize multiple account ownership categories. For example, at one bank, you could have a single ownership certificate of deposit with $200,000 and share a joint savings account holding another $200,000 with a partner. Even though you’d be above the $250,000 threshold, these separate account ownership categories each qualify for the max insurance coverage.

Open Accounts for Various Family Members

You, your spouse, and your children could each open a single ownership savings account at the same bank and each deposit $250,000 in your own account. Because each account has a different depositor, each is protected fully for $250,000.

Consider a Revocable Trust

If you and a partner want to put money together and save it as a potential nest egg for a family member, you can create a revocable trust (a type of trust fund). Then you can name beneficiaries for that money should you and the other account owner die. For each beneficiary, the account is insured for $250,000. If you name three beneficiaries, you can deposit $750,000, and it will all be insured.

Recommended: Where to Store Your Mortgage Down Payment

The Takeaway

The FDIC (Federal Deposit Insurance Corporation) and NCUA (National Credit Union Administration) are government agencies that protect consumers’ deposits at banks and credit unions. The two agencies operate similarly and protect the same kinds of accounts, typically up to $250,000. The key difference? The FDIC only insures money at banks while the NCUA only insures credit unions.

As a customer of a financial institution, it’s important to know which, if any, of your accounts are insured. A final caveat: While it is rare, not every bank is insured by the FDIC, and not every credit union is insured by the NCUA.

Looking for a checking or savings account that is insured by the FDIC? Check out the all-in-one SoFi Checking and Savings account, where your deposits earn a very competitive rate of up to 4.00% APY with direct deposit. Plus, SoFi recently announced that deposits may be insured up to $2 million through participation in the SoFi Insured Deposit Program. Need more incentives? When you open an online bank account with SoFi, qualifying accounts can paycheck access up to two days early — all for no monthly fees.

Open an FDIC-insured bank account with SoFi today.

FAQ

What does the NCUA not cover?

The National Credit Union Share Insurance Fund, which operates under the NCUA, does not cover stocks, bonds, mutual funds, annuities, life insurance policies, or safe deposit boxes and their contents.

How are the FDIC and NCUA similar?

Both the FDIC and NCUA are government agencies created by Congress to insure consumers’ deposits, including savings accounts, checking accounts, and CDs, up to $250,000 per person, per financial institution, and for each account ownership category. The main difference between FDIC and NCUA is that the FDIC insures banks and the NCUA insures credit unions.

Why are credit unions not FDIC insured?

Credit unions are not FDIC-insured because the FDIC insures banks. Federal credit unions (and many state credit unions) are instead insured by the NCUA.

How much of your money is protected by FDIC or NCUA?

The FDIC insures $250,000 per depositor, per insured bank, for each category of ownership. In theory, you could have more than $250,000 across different account types at different banks, and it would all be insured by the FDIC.

The same is true of the NCUA. The NCUA insures $250,000 per share owner, per insured credit union, for each category of ownership.

Photo credit: iStock/Talaj

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 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.

SoFi members with direct deposit activity can earn 4.00% 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 4.00% 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 4.00% 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 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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

SOBK0423010U

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Oct
26
2023
Discretionary Income and Student Loans: Why It Matters

Discretionary Income and Student Loans: Why It Matters

By | Fresh Out of School, Student Loans, student_loan, Terminology | No Comments
Editor's Note: The SAVE Plan is still in limbo after being blocked in federal court. SAVE enrollees are in interest-free forbearance until at least April 2025. Two closed repayment plans — Income-Contingent Repayment (ICR) and PayAs You Earn (PAYE) — are reopened to those who want to leave forbearance. We will update this page as information becomes available.

Knowing what your discretionary income is (and how to calculate it) can help you make decisions about how to best repay your federal student loans. The U.S. Department of Education calculates discretionary income as your adjusted gross income in excess of a protected amount.

The “protected amount” is typically a percentage of the federal poverty guideline appropriate to your family size. The Saving on a Valuable Education (SAVE) Plan, for example, defines discretionary income as any adjusted gross income you have above 225% of the federal poverty guideline appropriate to your family size.

When it comes to individuals who are considering repaying federal student loans with the SAVE Plan or the Income-Based Repayment (IBR) Plan, discretionary income can be a major factor in how much they’ll owe each month. That’s because the federal government typically uses a borrower’s discretionary income to determine their monthly payments.

Below we’ll discuss different IDR plans and the ins and outs of discretionary income, so you can figure out a repayment strategy that works for you and your budget.

Key Points

•   Discretionary income, calculated by subtracting a protected amount from adjusted gross income, is crucial for determining monthly student loan payments under federal repayment plans.

•   The SAVE Plan defines discretionary income as income above 225% of the federal poverty guideline, potentially allowing for $0 payments for borrowers under specific income thresholds.

•   Income-driven repayment plans can lower monthly payments but may extend loan terms significantly, resulting in more interest paid over time compared to standard repayment options.

•   Borrowers must recertify their income and family size annually, affecting their monthly payment amounts based on changes in financial circumstances.

•   Refinancing student loans with private lenders can lower payments but forfeits access to federal benefits like income-driven repayment plans and potential loan forgiveness.

What Is Discretionary Income?

As mentioned above, the Department of Education calculates discretionary income as your adjusted gross income in excess of a protected amount defined by a federal IDR plan.

Discretionary income under the SAVE Plan, for example, is any adjusted gross income you have above 225% of the federal poverty guideline appropriate to your family size. You’ll have a $0 monthly payment under the SAVE Plan if your annual income doesn’t exceed the protected amount of $32,805 for a single borrower and $67,500 for a family of four in 2023.

If you don’t qualify for a $0 monthly payment on the SAVE Plan, your monthly payment beginning in July 2024 is set at 5% of discretionary income for undergraduate loans, 10% for graduate loans, and a weighted average if you have both.

Discretionary income as defined by the Education Department is different from disposable income, which is the amount of money you have available to spend or save after your income taxes have been deducted.

How Is Discretionary Income Calculated?

Here’s how federal student loan servicers may calculate your discretionary income:

•   Discretionary income under the SAVE Plan is generally calculated by subtracting 225% of the federal poverty guideline from your adjusted gross income (AGI).

•   Discretionary income under the Income-Based Repayment (IBR) Plan is generally calculated by subtracting 150% of the federal poverty guideline from your AGI.

If you’re filing jointly or you have dependents, that will impact your discretionary income calculations. For married couples filing together, your combined AGI is used when calculating discretionary income. Under an income-driven plan, filing with a spouse can drive up your income-driven monthly payments because of your combined AGI.

So, let’s say you’re in a one-person household and have a 2023 AGI of $40,000. If you are considering the SAVE Plan, you would subtract 225% of the 2023 poverty guideline ($32,805), to get an official discretionary income of $7,195. Monthly, that is a discretionary income of about $600, and your monthly payment beginning in July 2024 is set at 5% of discretionary income for undergraduate loans, 10% for graduate loans, and a weighted average if you have both.

Borrowers are generally expected to make required loan payments when due. The 2023 debt ceiling bill officially ended the three-year Covid-19 forbearance, requiring federal student loan interest accrual to resume on Sept. 1, 2023, and payments to resume in October 2023.


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What Income-Driven Repayment Plan are You Eligible For?

There are now two federal IDR plans that have different eligibility criteria and terms. (There are two others that are no longer accepting new enrollments.) These income-driven repayment plans can reduce monthly payments for people with incomes below a certain threshold.

It should be noted that federal IDR plans don’t apply to private student loans. They’re only an option for federal student loans.

Income-Driven Repayment Plans for Federal Student Loans

The federal Department of Education offers the following IDR options for eligible federal student loan borrowers:

•   Saving on a Valuable Education (SAVE) Plan

•   Income-Based Repayment (IBR) Plan

All IDR plans generally use discretionary income to determine monthly payments. So, if there is a change in a borrower’s income or family size, their monthly payment could increase or decrease, depending on the change. Borrowers enrolled in an income-driven repayment plan are typically required to recertify their income and family size each year.

The SAVE ICR plan is open to anyone with eligible federal loans. Under this repayment plan, the amount owed each month is always tied to a borrower’s discretionary income. This could mean that if an individual’s income increases over time, they may end up paying more each month than they would under the 10-year Standard Repayment Plan.

For the IBR plan, eligibility is determined based on income and family size. As a general rule, to qualify, borrowers must not pay more under IBR than they would under the 10-year Standard Repayment Plan. Under this plan, the amount owed each month will never exceed what a borrower would owe under the Standard Repayment Plan.

The PAYE and Income-Contingent plans stopped accepting new enrollments in July 2024.

Pros and Cons of Income-Driven Repayment Plans

IDR plans come with trade-offs. While they can lower your monthly payment and help free up your cash flow now, they may extend the life of your loan. The standard student loan payoff plan is based on a 10-year repayment timeline. An income-driven repayment plan can extend your payment timeline to up to 25 years.

This means you’ll be paying off the loan longer and possibly paying more in interest over time. If you stay on an income-driven repayment plan, the government might forgive any remaining balance after 20 or 25 years of payments — or as little as 10 years for SAVE Plan enrollees with original principal balances of less than $12,000. But the amount that is forgiven may be taxed as income.

How Does Discretionary Income Affect Student Loan Payments?

Income-driven repayment plans generally use your discretionary income to dictate the amount you’re required to repay each month. In the case of borrowers enrolled in the SAVE Plan, any required payments beginning in July 2024 are set at 5% of discretionary income for undergraduate loans, 10% for graduate loans, and a weighted average if you have both.

Recommended: How Is Income Based Repayment Calculated?

How Else Can Borrowers Lower Their Student Loan Payment?

Another potential way for borrowers to reduce their student loan payment is by refinancing student loans. When you refinance your student loans, you take out a new loan with new terms from a private lender. The new loan is used to pay off your existing student loans.

Depending on your financial profile, refinancing could result in a lower interest rate or a lower monthly payment depending on which terms you choose. You may pay more interest over the life of the loan if you refinance with an extended term.

Refinancing federal student loans with a private lender also forfeits your access to federal IDR plans, Public Service Loan Forgiveness, and Teacher Loan Forgiveness.


💡 Quick Tip: When rates are low, refinancing student loans could make a lot of sense. How much could you save? Find out using our student loan refi calculator.

The Takeaway

The government uses discretionary income to calculate your federal student loan monthly payments under a qualifying IDR plan. The SAVE Plan may not provide the lowest monthly payment for eligible borrowers with high salaries.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.


With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.

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