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Q: How does the Federal Reserve obtain money?

If you’re wondering where does the Federal Reserve’s money come from, the answer isn’t from Congress, as many people might expect. Rather, the Fed makes money mainly through interest on government securities — such as U.S. Treasury securities, mortgage-backed securities, and government-sponsored enterprise (GSE) securities — that it bought on the open market.

Jul

2024

How Do Federal Reserve Banks Get Funded?

By Janet Siroto | money, Terminology | No Comments

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

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

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

Who Owns the Federal Reserve Bank?

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

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

How Does the Federal Reserve Make Money?

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

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

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

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

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

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

Fractional Reserve Banking and the Money Multiplier

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

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

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

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

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

The Credit Market Funnel

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

Determining the Money Supply

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

Money Creation Mechanism

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

How Is the Federal Reserve Funded?

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

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

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

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

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

How the Fed Affects Interest Rates

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

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

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

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

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

The Takeaway

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

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

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with 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.

FAQ

How does the Federal Reserve obtain money?

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

Who gives money to the Federal Reserve?

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

Is the Federal Reserve self-funded?

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

Does the Federal Reserve print money out of thin air?

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

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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.

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Jul

2024

Budgeting for a Quinceañera

By Jacqueline DeMarco | Budgeting & Goals, Family Finances, money | Comments Off

A quinceañera, the celebration of a girl’s 15th birthday, is a rite of passage that many young women and their families look forward to for years. These parties can be lavish and, therefore, expensive to host, so understandably many parents tend to budget for them far in advance.

If you’re planning one, whether it’s coming right up or years away, it’s typical to wonder: How much does a quinceañera cost? How can I make it affordable? How do I budget for a quinceañera? Read on for answers.

What Is a Quinceañera?

A quinceañera is a unique type of party that celebrates a girl’s 15th birthday in certain Latin American cultures. The term “quinceañera” translates to “the girl who is 15,” but it represents something much larger than that. A quinceañera signifies when a young girl becomes a woman who is mature, capable, and independent. This event also serves as a symbolic gesture that reaffirms her religious beliefs and commitment to the church.

Usually, a quinceañera involves hosting a religious ceremony and then following that ceremony with a party. When it comes to planning a quinceañera, many people take it as seriously as a wedding, and the expense can be similar to how much a wedding costs.

Average Cost of a Quinceañera

The cost of a quinceañera can vary greatly depending on where the party takes place, how many people are invited, and what kind of event is hosted.

In terms of ballpark figures, how much a quinceañera costs usually ranges from $5,000 to $20,000. To sock away that much cash, it’s a good idea to start putting aside some money every month in a high-yield savings account, starting well ahead of the event.

Common Expenses for a Quinceañera

To set and stick to a budget, it can be wise to look at the different components of a quinceañera. How much this party costs will depend on what is spent on things like food, decorations, and clothing. When creating a budget for a quinceañera, it can be helpful to plan for the usual expenses and to determine where it’s a good idea to splurge and where to save.

What follows is a quinceañera budget list with some of the key expenses to keep in mind.

Recommended: How Much Money Should I Save A Month?

Venue

Similar to hosting a wedding, the venue can be one of the more expensive aspects of throwing a quinceañera. It typically accounts for at least 10% of one’s budget but can go much higher. The more people invited, the larger the event space will need to be, and the more this cost can rise. Also consider whether the location you are interested in comes with tables and chairs or whether you will also need to rent those, adding to the price tag.

Recommended: Affordable Wedding Venue Ideas

Food

How much food is required and the type of food and service style can affect the cost of food for a quinceañera. Whatever the case, this is typically among the big-ticket items in a budget, often accounting for 35% of the total expense.

Having a buffet where guests serve themselves tends to cost less than hiring servers to bring the food to each individual table. Choosing to serve late-night snacks and to have an open bar for the adults can also affect the price of food.

Recommended: How to Set and Reach Savings Goals

Attire

The birthday girl normally wears a dress similar to a wedding dress, which can be costly, and close family members may also require formalwear for the event. This typically is a celebration that involves some serious wardrobe shopping that can easily cost around 10% of the total budget.

Photo and Video

Many families choose to hire a professional photographer, videographer, or both to capture special moments from the event. If you are among their ranks, then you need to include that expense in your party planning and plan how you want to stick to that budget. This can take about 12% of your total funds for the celebration.

Entertainment

Some parents will want to hire a DJ, live band, or other form of entertainment for the quinceañera. Mariachi bands and photo booths are other popular features of these celebrations.

Decorations

Decorations are a good example of a quinceañera expense that can vary greatly depending on how much someone wants to spend on flowers, linens, flatware, and other decorations.

Party Planner

Because planning a quinceañera can be a lot of work, some families may choose to hire a party planner to help them out. This person will typically have an extensive network of resources and can take the time and stress of planning off the hands of the parents.

Tips for Budgeting for a Quinceañera

After crunching the numbers on the expenses mentioned above, some families may find they need to scale back on their plans. Saving money is important, and no one should be saddled with major debt for a celebration. Let’s look at a few ways to make planning a quinceañera on a budget easier.

Planning the Date in Advance

The closer it gets to the event date, the more venues and other vendors are likely to charge. Planning the event far in advance can make it easier to select less expensive dates for the party and to have a top pick of vendors. The less expensive vendors may book up faster than the pricier ones.

Renting Attire

The clothes for this big celebration are likely to be worn only once. Why pay a steep price and then have them gathering dust? Renting formal dresses, shoes, tuxedos, or suits instead of buying them can help lower the cost of clothing for the event.

Finding a Reasonable Venue

Another reason it helps to plan the event far in advance is because it gives parents and their daughter time to look for different venus. Community centers, churches, or a family home may all present affordable options for a quinceañera.

DIY Decorations

It’s time to get crafty. Instead of buying expensive decorations, have some fun by planning some DIY projects and save some cash at the same time. Arranging your own store-bought flowers, for instance, can save a bundle.

Recommended: 9 Cheap Birthday Party Ideas

Limiting the Number of Guests

As tempting as it can be to invite tons of family and friends to such an important event, the more people invited to a quinceañera, the more the party will cost. Limiting the guest list to just nearest and dearest friends and family can make it easier to find a smaller and more affordable venue. It can also mean that you will spend less on food, drinks, and decor.

Sending E-invites

Paper invites and stamps add up surprisingly fast, especially when you have a long guest list. Consider keeping things low-cost and environmentally friendly by sending out e-invites instead. This is a quick way to cut a major cost from a quinceañera budget.

Tapping a Talented Friend for Videos and Photos

As noted briefly earlier, hiring a professional photographer or videographer can be expensive. Asking a friend or family member who enjoys photography or videography to capture the event can help cut down on this expense or even make it free.

Recommended: 15 Creative Ways to Save Money

Banking With SoFi

Working towards a big financial goal like hosting a quinceañera? SoFi can help. 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. 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.

FAQ

How much does a typical quinceañera dress cost?

While quinceañera dresses tend to cost around $200 to $300, they can be much more expensive. Renting a dress or buying a used one can help save money here. Don’t forget to budget for alterations and accessories like shoes and jewelry.

Who traditionally pays for a quinceañera?

The parents of the birthday girl are the ones who usually pay for a quinceañera. That’s why it’s important they have a quinceañera budget so they can save accordingly.

How long should you plan for a quinceañera in advance?

It can be helpful to plan for a quinceañera at least a year in advance, especially if the parents hosting the event need to save money for it. Depending on the scale of the event, parents may want to start saving even sooner. Parents can create a quinceañera cost breakdown so they know what to save for and where to cut back.

Photo credit: iStock/alvarez
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.

*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.

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.

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Jul

2024

Guide to Using a Personal Cash Flow Statement

By Kayla McCormack | Budgeting & Goals, money | Comments Off

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

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

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

What Is a Personal Cash Flow Statement?

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

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

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

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

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

How to Build a Personal Cash Flow Statement

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

Listing All Your Sources of Income

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

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

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

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

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

Listing All of Your Expenses

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

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

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

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

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

Determining Your Net Cash Flow

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

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

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

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

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

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

The Difference Between a Personal Cash Flow Statement and a Budget

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

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

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

For example:

• Are you on track for saving for retirement?

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

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

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

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

Recommended: 4 Smart Ways to Pay Off Student Loans

Using Your Personal Financial Statement to Create a Simple Budget

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

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

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

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

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

• Try out spreadsheet templates and printable worksheets.

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

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

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

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

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

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

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

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

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

Improving Your Net Cash Flow

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

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

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

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

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

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

• One option could be asking for a raise.

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

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

The Takeaway

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

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

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

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.

FAQ

How do you create a personal cash flow statement?

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

What is the importance of a personal cash flow statement?

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

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

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

SOBNK-Q324-025

Jul

2024

How To Fix a Declined Debit Card When You Have Money

By Dan Miller | Credit, Financial Independence, money | Comments Off

Debit cards make it easy to complete purchases without using cash, writing checks, or charging to credit. Just tap or insert your card, enter your PIN, and the funds will immediately get debited from your checking account. You then grab your goods and go. Simple, no?

Not always. Every once in a while, a debit transaction gets declined. This can be incredibly frustrating (and embarrassing), especially when you know there is money in the account. On a positive note, the issue is often easy to resolve. Here are some simple steps to take when a debit transaction doesn’t go through.

Make Sure Your Card Is Good

Every debit card has an expiration date. Once the date passes, the card gets blocked automatically and becomes useless to the account holder. If you’ve just started using a new debit card because your old one expired, it may not be activated yet. Until it is, you won’t be approved for any debit transactions that require a PIN.

To get your card working again, you may need to get it replaced or, if it’s new, activate the card either online or by phone. When you start using a new card, you’ll want to be sure to update any online payment information. This ensures uninterrupted services for recurring payments you have set up through your card, such as online payments for your cell phone, car loan, streaming and subscription services, and utilities.

Check Your Account Balance

While you may believe you have enough money to cover a purchase, unexpected debits, merchant holds, and pending deposits might have reduced your available balance. That’s why it’s critical to check the balance of your checking account.

You can do this by logging into your account using your banking app or computer, then looking at both your “current balance” and “available balance.” What’s the difference? Pending transactions (which have not yet posted to your account) are included in your “current balance” but not in your “available balance.” It may look like you have enough funds to cover a purchase, but if the money isn’t part of your available balance, you can’t spend it.

If your available balance is lower than you thought, scan your recent transactions and look for:

• Pending deposits: You may have deposited a check or have a direct deposit that has not fully cleared yet. This means the bank is still verifying that the incoming deposit is valid.

• Merchant holds: A hold is a way for merchants to reserve a certain amount of funds in a customer’s account to ensure a future transaction can be processed successfully. This can happen for transactions where you won’t know the final amount of the charge until later, such as hotel reservations or a car rental, and can temporarily lower your available balance.

• Recent withdrawals: Look for any recent withdrawals or debits that you might have forgotten.

• Errors or fraudulent activity: Check for any errors or unauthorized transactions that could have depleted your funds. If you notice any, reach out to your bank right away.

Know Your Debit Card’s Purchase Limit

If you’ve made some particularly large purchases in the last 24 hours, your debit card might be denied because you’ve reached your daily purchase limit. Banks set daily purchase limits on debit cards to minimize risk if the card is lost or stolen.

The daily purchase limit for a debit card can range anywhere from $300 to $50,000 per day, depending on the financial institution. You may be able to request a temporary limit increase on your debit card to complete your purchase by calling your bank. For security purposes, the representative will ask you to verify your identity.

Check for Holds or Blocks on Your Card

Banks and merchants will sometimes place temporary holds or blocks on someone’s bank account for various reasons. These can temporarily restrict access to your funds, even if you have a sufficient balance.

Here are some reasons why your bank may have put a hold on your debit card or decline a particular transaction.

• You repeatedly typed in the wrong PIN: If you enter the wrong password three times, your ATM card may get blocked. If this happens, you can generally just wait for 24 hours and your card will be unblocked automatically.

• Suspected fraud: If your bank detects any suspicious activity on your card, such as an unusually large purchase or unusual use patterns, they may automatically block your card to protect against fraud. Using your card in a new location, especially internationally, can also trigger a security block.

• Institutional security issue: If there is a security issue at the bank or credit union that holds your account, it may block your debit card to protect your money and details. In such cases, the bank will issue a new card to its customers, free of cost.

The best way to get to the bottom of a card hold or block is to speak with a customer service representative at your financial institution. In some cases, explaining that the purchase is legitimate or that you are currently traveling, and confirming your identity will immediately resolve the problem.

Informing your bank in advance about debit card usage that will be outside your regular routine can help avoid temporary holds and declines.

Recommended: Why Credit Cards Get Declined

Consider Alternate Payment Methods

If you can’t immediately resolve a declined debit card and have a crucial transaction that you don’t want to walk away from, you may need to use an alternate payment method. Here are some options to consider.

• Credit card: Even if you prefer debit over credit, having a credit card in your wallet can serve as a backup if your debit card fails.

• Cash: Though not every place of business accepts cash, it can be useful to have cash on hand to cover necessary transactions in the event your debit card fails.

• Mobile payment app: If you have a payment app on your phone that is connected to a credit card or linked directly to your bank account, you may be able to use that instead of your debit card.

• Bank transfer: For larger transactions, you may be able to make the payment by transferring money from your savings or checking account directly to the recipient.

The Takeaway

Dealing with a declined debit card can be annoying and stressful. To get to the root of the problem, you’ll want to first make sure your card is up to date and, if it is, check your account balance to confirm there are sufficient available funds to cover the purchase.

If you have enough funds, you might next call your bank to see if there’s a temporary hold on your card due to any security issues. By confirming that the transaction is legitimate and verifying your identity, they may lift the hold.

Being proactive and keeping a close eye on day-to-day activity in your checking account can minimize debit card declines and ensure smooth transactions in the future.

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.

FAQ

Why would a debit card be declined even if I have money in my account?

A debit card may be declined even if you have enough money in your account to cover the transaction due to various reasons. These include:

• Exceeding daily transaction limits

• Multiple incorrect PIN entries

• Using an expired card

• Using a new card that hasn’t yet been activated

• Suspected fraud

If your debit card gets declined despite sufficient funds, it’s a good idea to contact your bank. You may be able to quickly resolve the problem and get your card working again.

What should I do if my debit card is declined due to suspected fraud?

If your debit card is declined due to suspected fraud, you’ll want to immediately contact your bank’s customer service department. They will review recent transactions with you and, if necessary, cancel that card and issue a new one.

Once you receive the new debit card, you’ll want to change your PIN and monitor your account for any further suspicious activity. Banks often have fraud protection services to assist and safeguard your funds.

How long does it typically take to resolve a debit card decline issue?

The length of time it takes to resolve a debit card decline will depend on the cause. If the problem is insufficient funds, you may be able to quickly fix it by transferring money from another account. If the issue is suspected fraud, you may be able to clear it up right away by calling customer service, verifying your identity, and letting them know that the charge is legitimate.

Other scenarios may take longer. For example, if your debit card has been compromised or has expired, you may have to wait until you receive a new card in the mail.

Photo credit: iStock/Jacob Wackerhausen

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.

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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.

SOBK-Q224-1897023-V1

Jul

2024

Money Market vs Capital Market: What’s the Difference?

By Rebecca Lake | Growing Wealth, Investing, money | Comments Off

The money market is where short-term debt and lending takes place; the capital market is designed for long-term assets, such as stocks and bonds. The former is considered a safer place to park one’s money; the latter is seen as riskier but potentially more rewarding. While the money market and the capital market are both aspects of the larger global financial system, they serve different goals for investors.

Understanding the difference between money market and capital market matters plays a role in understanding the market as a whole. Whether you hold assets that are part of the money market vs. capital market can influence your investment outcomes and degree of risk exposure.

What Is the Money Market?

The money market is where short-term financial instruments, i.e. securities with a holding period of one year or less, are traded. Examples of money market instruments include:

• Bankers acceptances. Bankers acceptances are a form of payment that’s guaranteed by the bank and is commonly used to finance international transactions involving goods and services.

• Certificates of deposit (CDs). Certificate of deposit accounts are time deposits that pay interest over a set maturity term.

• Commercial paper. Commercial paper includes short-term, unsecured promissory notes issued by financial and non-financial corporations.

• Treasury bills (T-bills). Treasury bills are a type of short-term debt that’s issued by the federal government. Investors who purchase T-bills can earn interest on their money over a set maturity term.

These types of money market instruments can be traded among banks, financial institutions, and brokers. Trades can take place over the counter, meaning the underlying securities are not listed on a trading exchange like the New York Stock Exchange (NYSE) or the Nasdaq.

You may be familiar with the term “money market” if you’ve ever had a money market account. These are separate from the larger money market that is part of the global economy. As far as how a money market account works goes, these bank accounts allow you to deposit money and earn interest. You may be able to write checks from the account or use a debit card to make purchases or withdrawals.

💡 Quick Tip: Don’t think too hard about your money. Automate your budgeting, saving, and spending with SoFi’s seamless and secure mobile banking app.

How Does the Money Market Work?

The money market effectively works as a short-term lending and borrowing system for its various participants. Those who invest in the money market benefit by either gaining access to funds or by earning interest on their investments. Treasury bills are an example of the money market at work.

When you buy a T-bill, you’re essentially agreeing to lend the federal government your money for a certain amount of time. T-bills mature in one year or less from their issue date. The government gets the use of your money for a period of time. Once the T-bill matures, you get your money back with interest.

What Is the Capital Market?

The capital market is the segment of the financial market that’s reserved for trading of long-term debt instruments. Participants in the capital market can use it to raise capital by issuing shares of stock, bonds, and other long-term securities. Those who invest in these debt instruments are also part of the capital market.

The capital market can be further segmented into the primary and secondary market. Here’s how they compare:

• Primary market. The primary market is where new issuances of stocks and bonds are first offered to investors. An initial public offering or IPO is an example of a primary market transaction.

• Secondary market. The secondary market is where securities that have already been issued are traded between investors. The entity that issued the stocks or bonds is not necessarily involved in this transaction.

As an investor, you can benefit from participating in the capital market by buying and selling stocks. If your stocks go up in value, you could sell them for a capital gain. You can also derive current income from stocks that pay out dividends.

Recommended: What Is an Emerging Market?

How Does the Capital Market Work?

The capital market works by allowing companies and other entities to raise capital. Publicly-traded stocks, bonds, and other securities are traded on stock exchanges. Generally speaking, the capital market is well-organized. Companies that issue stocks are interested in raising capital for the long-term, which can be used to fund growth and expansion projects or simply to meet operating needs.

In terms of the difference between capital and money market investments, it usually boils down to three things: liquidity, duration, and risk. While the money market is focused on the short-term, the capital market is a longer term play. Capital markets can deliver higher returns, though investors may assume greater risk.

Understanding the capital market is important because of how it correlates to economic movements as a whole. The capital market helps to create stability by allowing companies to raise capital, which can be used to fund expansion and create jobs.

Differences Between Money Markets and Capital Markets

When comparing the money market vs. capital market, there are several things that separate one from the other. Knowing what the key differences are can help to deepen your understanding of money markets and capital markets.

Purpose

Perhaps the most significant difference between the money market and capital market is what each one is designed to do. The money market is for short-term borrowing and lending. Businesses use the money market to meet their near-term credit needs. Funds are relatively safe, but typically won’t see tremendous growth.

The capital market is also designed to help businesses and companies meet credit needs. The emphasis, however, is on mid- to long-term needs instead. Capital markets are riskier, but they may earn greater returns over time than the money market.

Length of Securities

The money market is where you’ll find short-term securities, typically with a maturity period of one year or less, being traded. In the capital market, maturity periods are usually not fixed, meaning there’s no specified time frame. Companies can use the capital market to fund long-term goals, with or without a deadline.

Financial Instruments

As mentioned, the kind of financial instruments that are traded in the short-term money market include bankers acceptances, commercial paper, and Treasury bills. The capital market is the domain of stocks, bonds, and other long-term securities.

Nature of Market

The structure and organization of the money market is usually informal and loosely organized. Again, securities may be traded over-the-counter rather than through a stock exchange. With the capital market, trading takes place primarily through exchanges. This market is more organized and formalized overall.

Securities Risk

Risk is an important consideration when deciding on the best potential places to put your money. Since the money market tends to be shorter term in nature, the risk associated with the financial instruments traded there is usually lower. The capital market, on the other hand, may entail higher risk to investors.

Liquidity

Liquidity is a measure of how easy it is to convert an asset to cash. One notable difference between capital and money market investments is that the money market tends to offer greater liquidity. That means if you need to sell an investment quickly, you’ll have a better chance of converting it to cash in the money market.

Length of Credit Requirements

The money market is designed to meet the short-term credit requirements of businesses. A company that needs temporary funding for a project that’s expected to take less than a year to complete, for example, may turn to the money market. The capital market, on the other hand, is designed to cover a company’s long-term credit requirements with regard to capital access.

Return on Investment

Return on investment or ROI is another important consideration when deciding where to invest. When you invest in the money market, you’re getting greater liquidity with less risk but that can translate to lower returns. The capital market can entail more risk, but you may be rewarded with higher returns.

Timeframe on Redemption

Money market investments do not require you to hold onto them for years at a time. Instead, the holding period and timeframe to redemption is likely one year or less. With capital market investments, there is typically no set time frame. You can hold onto investments for as long as they continue to meet your needs.

Relevance to Economy

The money market and capital market play an important role in the larger financial market. Without them, businesses would not be able to get the short- and long-term funding they need.

Here are some of the key differences between money markets and capital markets with regard to their economic impacts:

• The money market allows companies to realize short-term goals.

• Money market investments allow investors to earn returns with lower risk.

• Capital markets help to provide economic stability and growth.

• Investors can use the capital market to build wealth.

Money Market	Capital Market
Offers companies access to short-term funding and capital, keeping money moving through the economy.	Provides stability by allowing companies access to long-term funding and capital.
Investors can try to use interest earned from money market investments to preserve wealth.	Investors can try to use returns earned from capital market investments to grow wealth.
Money market investments are typically less volatile, so they’re less likely to negatively impact the financial market or the investor.	Capital market investments tend to be more volatile, so they offer greater risk and reward potential.

Deciding Which Market to Invest In

Deciding whether to invest in the money market or capital market can depend on several things, including your:

• Investment goals and objectives

• Risk tolerance

• Preferred investment style

If you’re looking for investments that are highly liquid and offer a modest rate of return with minimal risk, then you may turn to the money market. On the other hand, if you’re comfortable with a greater degree of risk in exchange for the possibility of earning higher returns, you might lean toward the capital market instead.

You could, of course, diversify by investing in both the money market and capital market. Doing so may allow you to balance higher-risk investments with lower ones while creating a portfolio mix that will attempt to produce the kind of returns you seek.

Alternatives to Money and Capital Markets

Aside from the money and capital markets, there are other places you can keep money that you don’t necessarily plan to spend right away. They include the different types of deposit accounts you can open at banks and credit unions. Specifically, you may opt to keep some of your savings in a certificate of deposit account, high-yield checking account, or traditional savings account. Here’s a closer look:

High-Yield Checking Accounts

Checking accounts are designed to hold money that you plan to use to pay bills or make purchases. Most checking accounts don’t pay interest but there are a handful of high-yield checking accounts that do.

With these accounts, you can earn interest on your checking balance. The interest rate and APY (annual percentage yield) you earn can vary by bank. Some banks also offer rewards on purchases with high-yield checking accounts. When looking for an interest-checking account, be sure to consider any fees you might pay or minimum balance requirements you’ll need to meet.

Traditional Savings Accounts

A savings account can be another secure place to keep your money and earn interest as part of the bargain. The different types of savings accounts include regular savings accounts offered at banks, credit union savings accounts, and high-yield savings accounts from online banks.

Of those options, an online savings account typically has the highest interest rates and the lowest fees. The trade-off is that you won’t have branch banking access, which may or may not matter to you.

The Takeaway

There are lots of reasons why people do not invest their money. A lack of understanding about the difference between money market vs. capital market investments can be one of them. Once you understand that the money market typically involves short-term, lower-risk debt instruments, while the capital market likely revolves around longer-term ones with higher risk and reward, you will be on your way to better knowing how the global financial market works.

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.

FAQ

What are the similarities between a money market and capital market?

Both the money market and the capital market are intended to make it easier for businesses and companies to gain access to capital. The main differences between money markets and capital markets are liquidity, duration, and the types of financial instruments that are traded. Both also represent ways that consumers can potentially grow their money by investing.

How is a money market and capital market interrelated?

The capital market and the money market are both part of the larger financial market. The money market works to ensure that businesses are able to reach their near-term credit needs while the capital market helps companies raise capital over longer time frames.

Why do businesses use the money markets?

Businesses use the money market to satisfy short-term credit and capital needs. Short-term debt instruments can be traded in the money market to provide businesses with funding temporarily as well as to maintain liquid cash flow.

Photo credit: iStock/AndreyPopov

SOBK-Q224-1945699-V1

How Do Federal Reserve Banks Get Funded?

Who Owns the Federal Reserve Bank?

Get up to $300 when you bank with SoFi.

How Does the Federal Reserve Make Money?

Fractional Reserve Banking and the Money Multiplier

The Credit Market Funnel

Determining the Money Supply

Money Creation Mechanism

How Is the Federal Reserve Funded?

How the Fed Affects Interest Rates

The Takeaway

FAQ

How does the Federal Reserve obtain money?

Who gives money to the Federal Reserve?

Is the Federal Reserve self-funded?

Does the Federal Reserve print money out of thin air?

Budgeting for a Quinceañera

What Is a Quinceañera?

Average Cost of a Quinceañera

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Common Expenses for a Quinceañera

Venue

Food

Attire

Photo and Video

Entertainment

Decorations

Party Planner

Tips for Budgeting for a Quinceañera

Planning the Date in Advance

Renting Attire

Finding a Reasonable Venue

DIY Decorations

Limiting the Number of Guests

Sending E-invites

Tapping a Talented Friend for Videos and Photos

Banking With SoFi

FAQ

How much does a typical quinceañera dress cost?

Who traditionally pays for a quinceañera?

How long should you plan for a quinceañera in advance?

Guide to Using a Personal Cash Flow Statement

What Is a Personal Cash Flow Statement?

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How to Build a Personal Cash Flow Statement

Listing All Your Sources of Income

Listing All of Your Expenses

Determining Your Net Cash Flow

The Difference Between a Personal Cash Flow Statement and a Budget

Using Your Personal Financial Statement to Create a Simple Budget

Improving Your Net Cash Flow

The Takeaway

FAQ

How do you create a personal cash flow statement?

What is the importance of a personal cash flow statement?

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

How To Fix a Declined Debit Card When You Have Money

Make Sure Your Card Is Good

Check Your Account Balance

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Know Your Debit Card’s Purchase Limit

Check for Holds or Blocks on Your Card

Consider Alternate Payment Methods

The Takeaway

FAQ

Why would a debit card be declined even if I have money in my account?

What should I do if my debit card is declined due to suspected fraud?

How long does it typically take to resolve a debit card decline issue?

Money Market vs Capital Market: What’s the Difference?

What Is the Money Market?

How Does the Money Market Work?

What Is the Capital Market?

How Does the Capital Market Work?

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Differences Between Money Markets and Capital Markets

Purpose

Length of Securities

Financial Instruments

Nature of Market

Securities Risk

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