Jul
02
2024
7 Ways to Tackle Financial Stress

7 Ways of Dealing With Financial Anxiety

By | Budgeting & Goals, Financial Independence, student_loan | No Comments

If you’ve found yourself worrying about money lately, you’re not the only one. Nearly half of Americans say 2024 has been the most stressful year of their lives financially, often citing high costs for essential goods like food, according to a May 2024 poll of 2,000 adults by MarketWatch Guides . Nearly nine in 10 respondents (88%) reported feeling financial stress, with 65% saying their finances are the most stressful aspect of their life.

Many of today’s financial stressors are out of our control — like inflation and high mortgage rates. Even so, there are actions you can take to manage money-related anxiety. Here, you’ll learn steps you can take to tackle financial goals despite challenging times.

What Is Financial Anxiety?

It’s normal to worry about money from time to time, but if you are continually worrying about bills, your money worries keep you up at night, and/or you find it difficult to face your financial situation head on and come up with solutions, you may be dealing with financial anxiety.

Financial anxiety is defined as an intense fear or discomfort caused by things related to money, such as debts, expenses, investments, income, savings, or adverse economic situations. This type of anxiety can affect anyone, regardless of their income or financial status, and it can often be debilitating.

Like other forms of anxiety, financial anxiety can interfere with everyday life and affect your mental and physical well-being, leading to depression, loss of appetite, insomnia, an inability to focus, and even cardiovascular and other medical problems.

Can You Overcome Financial Anxiety?

Yes, it’s possible to overcome financial anxiety with the right strategies and mindset. Overcoming this issue involves understanding the root causes of your anxiety, developing a proactive approach to managing your finances, and seeking support when needed. While financial anxiety may not disappear entirely, you can learn to manage it effectively and reduce its impact on your life.

7 Ways to Deal With Financial Anxiety

While there’s no one-size-fits-all solution to money stress, there are strategies that can help you feel more in control of your finances. Consider trying one or more of these tips, and see what works best for you.

1. Tackle One Decision (or Problem) at a Time

Financial anxiety can be paralyzing when you try to address all your financial concerns at once. A good first step to reducing financial stress is to figure out what’s making you feel most anxious. Is it your spending, your student loans, your mortgage, or saving for the future? Then focus on tackling one decision or problem at a time.

It can also be helpful to break down larger financial goals into smaller, manageable tasks. For instance, if you’re worried about debt, start by creating a plan to pay off the smallest debt or the highest-interest loan first. Gradually addressing each issue can help you feel more on top of your money and reduce overall stress.

2. Create a Budget

A major facet of money stress can involve feeling out of control in terms of your finances. There’s a simple solution to that: making and sticking to a budget. A budget allows you to see exactly where your money is going and helps you make informed decisions about your spending.

While budgeting may sound like an overwhelming process, it simply involves looking at your income and spending over the last several months, categorizing your spending, and (if necessary) identifying areas where you can cut back. There are all different ways to allocate your money, but one simple framework is the 50/30/20 budget. It recommends putting 50% of your after-tax income toward needs, 30% toward wants, and 20% toward savings and debt repayments beyond the minimum.

Having a clear financial plan can provide a sense of control and reduce uncertainty about your financial future.

3. Prepare for the Unexpected With an Emergency Fund

One great way to allay financial stress is to know that you have some back-up funds when or if you need them. Should life throw you a financial curveball (like a major car repair, unexpected medical bill, or loss of income), having a solid emergency fund you can tap means you won’t have to run up expensive debt to cope.

A general rule of thumb is to keep at least three to six months’ worth of living expenses stored in a separate savings account (ideally a high-yield savings account). And since you already created a budget, you know how much, on average, your necessities cost each month.

Keep in mind that you don’t have to build your emergency fund overnight. It’s okay to start small; even setting aside $50 to $100 a month can add up over time. Consider setting up an automatic transfer on payday from checking to a linked savings account so you aren’t tempted to spend that amount.

Recommended: How to Build an Emergency Fund in Six Steps

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4. Deal With Debt

Even in the best of times, debt can cause worry and stress. It may feel like a weight that is always hanging over you. And inflation and high interest rates (ouch) can make the anxiety more intense.

If you have debt that is causing you stress, it’s a good idea to take steps to reduce it — think of it as a form of financial self-care. Start by listing all your debts, including the interest rates and minimum payments. Then consider using strategies like the debt snowball method (paying off the smallest debt first) or the debt avalanche method (paying off the highest interest debt first). You may also want to explore options for consolidating or refinancing your debt to reduce interest rates and monthly payments.

5. Just Say No to Splurging

When we’re stressed, there are a lot of ways to relax or blow off steam — and many of them cost money. Retail therapy, a big night out, a weekend getaway: Sure, they are all wonderful, but if you are dealing with financial stress, they may not be good options. They can add to any debt you are carrying, give you less cash for daily life, and lead to more financial stress.

Here are some tips that can help you develop better spending habits:

•   Don’t window-shop or pit-stop at your favorite stores. That’s just putting temptation in your path.

•   If you see something you feel you must have, even though it’s not a true need, wait for a while (anywhere from 24 hours to 30 days) before buying it. You may find that the urge cools.

•   Set aside some “fun money” in your budget for low-cost treats. Some ideas: getting a fancy coffee on Friday morning to reward yourself for a week of hard work; taking yourself to the beach one afternoon; climbing a mountain and savoring the view; getting a 10-minute massage at a nearby spa.

6. Add a Second Income Stream

Sometimes it’s not about subtracting spending from your daily life, but rather, about adding more cash to your pocket. There are many benefits to a side hustle: Picking one that fits into your current lifestyle without taking up too much of your free time can really add value to your wallet and your life.

Before choosing a gig, think about what you’d like to do. You might be able to freelance as a writer or social media consultant. Or perhaps you can sell your suitable-for-framing travel photos online. If you enjoy driving around on weekends, you might sign up with a ride-sharing app. Love animals? Consider starting a dog-walking service.

If you don’t have time to take on additional work, you might sell items you own that are in good condition but you no longer need. There are dozens of places to sell your stuff: For clothes, try a local second-hand store near you, such as Crossroads or Buffalo Exchange. For furniture and other goods, try listing on eBay, Etsy (yes, it’s for more than crafts), Facebook Marketplace, or Nextdoor.

7. Reframe Your Financial Stress

Changing the way you think about financial stress can help manage anxiety. Instead of viewing financial challenges as insurmountable obstacles, try to see them as opportunities for growth and learning. Focus on the progress you’ve made rather than the setbacks. Practicing gratitude for what you have and acknowledging your efforts can shift your mindset and reduce anxiety.

It can also be helpful to talk to those close to you. Let them know you are dealing with financial stress, and ask how they manage theirs. Talking about your worries can help put them into perspective. And in addition to getting reassurance and comfort, you may learn some new strategies.

Getting Help for Your Financial Anxiety

If you’re having trouble sorting out your finances and managing your anxiety on your own, it can be worthwhile to seek outside help.

For practical solutions to money issues, you might seek out a financial advisor. These professionals can offer advice on savings, investments, and retirement planning tailored to your financial situation, helping you develop a strategy to achieve your financial goals.

If your money anxiety is more deeply rooted or affecting your mental or physical health, you might want to consult a mental health professional, such as a psychologist, social worker, or financial therapist. These professionals can help you understand and work through the emotional aspects of your money worries and provide you with coping mechanisms to manage stress.

The Takeaway

Money worries can get the best of us, especially in challenging times, such as when inflation and interest rates are high and there’s talk of a potential downturn in the economy.

To manage financial stress, it’s wise to take steps to improve your cash situation — say, by budgeting, building up an emergency fund, and lowering high-interest debt. It’s also a good idea to work on your emotional wellness by tackling one problem at a time, avoiding temptation and the subsequent guilt, seeking support from those close to you and, if necessary, enlisting the help of a financial or mental health professional.

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 3.80% APY on SoFi Checking and Savings.

FAQ

How do you stop being financially anxious?

There are a number of steps you can take to reduce financial anxiety. If you’re worried about debt or lack of savings, for example, you might want to assess and categorize your spending over the last several months, then look for places to cut back. Any money you free up can be redirected toward paying more than the minimum on your debts and/or building your savings.

Other ways to stop feeling financially anxious include: building an emergency fund (this provides a safety net for unexpected expenses); seeking advice from a financial advisor to develop a long-term plan; and practicing stress-reduction techniques, such as mindfulness, exercise, and adequate sleep.

Why do you get anxious about money?

Financial anxiety can stem from a number of factors, including:

•   A lack of control or understanding of your financial situation

•   Job insecurity

•   Inflation

•   Unexpected expenses

•   Insufficient savings

•   Cultural and societal pressures (i.e., the expectation to maintain a certain lifestyle)

•   Past financial mistakes or trauma

How do you stop obsessing about money?

You might start by setting some clear financial goals, and then creating a realistic monthly budget that can help you achieve those goals. This can reduce financial worries — and help you stop obsessing about money — by giving you a greater sense of direction and control.

Other ways spend less time thinking about money include:

•   Automating savings and bill payments.

•   Limiting the amount of time you spend reviewing your accounts to once or twice a month.

•   Engaging in hobbies and activities that bring you joy and distract you from financial worries or temptations to spend money.

•   Seeking support from friends, family, or a therapist if money worries persist.

•   Educating yourself about personal finance to build confidence and reduce fear stemming from the unknown.

SoFi members with Eligible Direct Deposit activity can earn 3.80% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Eligible 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 (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below).

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning 3.80% APY, we encourage you to check your APY Details page the day after your Eligible Direct Deposit arrives. If your APY is not showing as 3.80%, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning 3.80% APY from the date you contact SoFi for the rest of the current 30-day Evaluation Period. You will also be eligible for 3.80% APY on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider 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 Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi members with Eligible Direct Deposit are eligible for other SoFi Plus benefits.

As an alternative to Direct Deposit, SoFi members with Qualifying Deposits can earn 3.80% 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 Eligible 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 an Eligible Direct Deposit or receipt of $5,000 in Qualifying Deposits to your account, you will begin earning 3.80% 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 Eligible 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 Eligible 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 Eligible 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 Eligible Direct Deposit or Qualifying Deposits until SoFi Bank recognizes Eligible Direct Deposit activity or receives $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Eligible Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Eligible Direct Deposit.

Separately, SoFi members who enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days can also earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. For additional details, see the SoFi Plus Terms and Conditions at https://www.sofi.com/terms-of-use/#plus.

Members without either Eligible Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, or who do not enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days, will earn 1.00% 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 1/24/25. There is no minimum balance requirement. Additional information can be found at http://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.

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


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Jul
02
2024
student at college graduation

What Percentage of Parents Pay for College?

By | Family Finances, Student Loans, student_loan | No Comments

If you’re a parent, you’ve likely already begun to worry about how you’re going to pay for your kid’s college tuition. But what percentage of parents pay for college? It may be less than you expect. Learn more, and tips for helping to afford college.

Key Points

•   Around half of families have a plan to pay for college, with many relying on a mix of savings, income, and borrowing.

•   Parent PLUS Loans and private parent loans are common borrowing options, with differing interest rates, fees, and eligibility requirements.

•   Refinancing student loans can free up money for college savings but may eliminate federal benefits and protections.

•   Saving strategies include high-yield savings accounts, 529 college savings plans, and Coverdell Education Savings Accounts for tax advantages and investment growth.

•   Starting early with even small contributions allows funds to grow over time and reduces the reliance on student loans for future education costs.

What Percent of Parents Pay for Their Children’s College Education?

About half of families (53%) have a plan to pay for college, and of those, 61% say borrowing will likely be part of how they help their child afford higher education, according to Sallie Mae’s How America Pays for College 2023.

But the reality is, even a percentage of the total college bill can be tough for most families to pay. How much exactly should parents be saving? Average yearly tuition, fees, and living expenses per student, per year, currently rings in at $38,270, according to the Education Data Initiative. (As you might guess, private colleges can be significantly more expensive than in-state public universities.)

To put it another way, the typical family plans to contribute to the total college cost of almost $160,000 for four years, meaning they could aim to save tens of thousands of dollars to help their kiddos with college.


💡 Quick Tip: Ready to refinance your student loan? With SoFi’s no-fee loans, you could save thousands.

What Student Loans Are Available to Parents?

Parents considering borrowing a student loan to pay for their child’s education can choose between a federal Parent PLUS Loan, or explore options available at private lenders.

According to the same Sallie Mae survey, parents’ income and savings account for nearly 50% of college costs. Other sources of funding include scholarships, grants, or student loans borrowed by the student. Parents can also borrow a loan to help their students pay for college. Approximately 41% of families report borrowing to help fund their child’s education.

Recommended: The Differences Between Grants, Scholarships, and Loans

Parent PLUS Loans

Parent PLUS Loans, as mentioned, are a type of federal student loan available for parents of dependent undergraduate students.

To apply, parents or their students must first fill out the Free Application for Federal Student Aid (FAFSA®). Then, the parent can apply for the PLUS Loan directly on the federal aid website. There will be a credit check to review any adverse credit history, but approval typically won’t be dependent on factors like the applicant’s credit score or debt-to-income ratio.

Parent PLUS Loans have a fixed interest rate that is set annually by Congress. For loans disbursed between July 1, 2024 and July 1, 2025, the rate is 9.08%.

Direct PLUS Loans carry an origination fee. For the 2024-25 school year, the origination fee is 4.228%.

Private Parent Loans

Private loans for parents are available from private financial institutions including banks and credit unions. These lenders generally review factors like the applicant’s credit score, income, and those for any cosigner. Private lenders determine their own interest rates, terms, and repayment plans.

Compare annual percentage rates among lenders to help you decide whether a fixed or variable interest rate would be best for your financial situation. Some private lenders charge an origination fee, while others do not.

Saving for Future College Costs

It can seem insurmountable to even think about saving in the range of $40,000 for each year for college costs on top of all your other financial responsibilities. One recommendation is to pay off your own student loans before putting significant amounts of money into college savings. Some parents find that refinancing their own student loans if they haven’t yet paid them off may allow them to save money — giving them more financial wiggle room to start saving up for future educational expenses.

How can refinancing help you save on your student loans so you can start saving for your kids’ education? Student loan refinancing allows you to trade in all your student loans for one new loan with a potentially lower interest rate and more favorable repayment terms.

But refinancing your student loans has, like many things in life, both pros and cons. Consider if the benefits outweigh any potential negatives. For example, you may be able to secure a more competitive interest rate and lower your monthly costs. However, refinancing federal loans will eliminate access to borrower protections or benefits. So, if you are using one of these benefits — such as pursuing Public Service Loan Forgiveness — refinancing may not make sense.

In addition, if you refinance for a longer term, you may well pay more interest over the life of the loan, which is why you should read up on the topic with student loan refinancing guides and other resources.

When you refinance your student loans, the lender looks at your current financial situation, including your credit score, income, and future earning potential (among other factors) to calculate an interest rate that could potentially be lower than what you might be paying to the federal government or a private student loan lender.

Refinancing Options

If you are interested in refinancing student loans with bad credit, know that it may be more challenging to secure a competitive interest rate. It’s possible to find a lender and refinanced loans that meet your needs, but you may need to shop around. Be patient as you go through the process.

You might also consider adding a cosigner to your application. A student loan cosigner is someone who agrees to take on responsibility for the loan if you, the primary borrower, is unable to make payments in the future.

If you’re unable to add a cosigner or just want to focus on refinancing without a cosigner, you might want to take some time to focus on building your credit. A few tips on building credit include making monthly payments on-time, keeping your debt-to-income ratio low, and checking your credit report regularly to remove any errors.

On top of potentially saving on interest rates, refinancing your student loans can consolidate multiple student loan payments into one monthly payment. This can simplify your money management and bill paying.

Furthermore, if you’re able to shorten your loan term through student loan refinancing, you could pay off your student loans even faster, further reducing the amount of interest you’d pay over the course of your loan. Those savings can be converted into savings for your child’s future education — hopefully saving them from having to take out too many student loans themselves.

Recommended: Student Loan Refinancing Calculator

Tips for Saving for College

There are a few options to help parents maximize their savings. In fact, one of the main benefits of saving up for college while your child is still fairly little is that you have time on your side.

•   If you can sock away even small amounts of money over time, depending on where you put it, you give that money a chance to earn interest or dividends over time — and potentially increase the amount you’ll have to put toward your child’s tuition payments.

•   Once you’ve decided to start saving up a college fund, you’ll have to choose where exactly you want to save that money. While some parents choose to set aside cash in a regular savings account, the relatively low interest rates on most standard savings accounts mean that your money may not grow as much as you’d like over time. A high-yield savings account with compound interest can help your funds grow.

•   Many parents consider a government-sponsored savings program in order to net some serious tax benefits, or even to start investing in order to grow money over time.

•   When it comes to government savings plans, you can choose from a 529 college savings plan, which offers generous tax benefits, or a Coverdell Education Savings Account, which allows you to invest in stocks and bonds to cover educational expenses.

The Takeaway

Most parents plan to contribute to their child’s college costs. Starting to save today can help you save as much as possible for future educational expenses. If you have your own student loans from your college days, one option to create some wiggle room in your budget is to refinance those loans to a lower interest rate.

If you are considering refinancing as one strategy to help you save more for your child’s college fund, take a look at what SoFi offers.

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.

FAQ

How many families fill out the FAFSA?

In the most recent year studied, about 70% of families reported completing the FAFSA.

What percent of parents borrow money to help pay for college?

According to the most recent Sallie Mae data, 61% of families say they will borrow to help pay for a child’s college expenses.

What are the pros and cons of refinancing student loans?

On the plus side, refinancing student loans could yield a more competitive rate and lower monthly payments. That could potentially lower your costs. However, when you refinance federal student loans, you lose federal protections, such as forbearance, and, if you refinance for a longer term, you could wind up paying more interest over the life of the loan.


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Terms and conditions apply. SoFi Refinance Student Loans are private loans. When you refinance federal loans with a SoFi loan, YOU FOREFEIT YOUR EILIGIBILITY FOR ALL FEDERAL LOAN BENEFITS, including all flexible federal repayment and forgiveness options that are or may become available to federal student loan borrowers including, but not limited to: Public Service Loan Forgiveness (PSLF), Income-Based Repayment, Income-Contingent Repayment, extended repayment plans, PAYE or SAVE. Lowest rates reserved for the most creditworthy borrowers. Learn more at SoFi.com/eligibility. SoFi Refinance Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).

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SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.


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


Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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

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Jul
01
2024
10 Tips for Spending Your Money Wise

10 Tips for Spending Your Money Wisely

By | Budgeting & Goals, Financial Independence, money | Comments Off on 10 Tips for Spending Your Money Wisely

If you feel like your money vanishes almost as soon as you get paid, you’re not the only one. Fortunately, there’s a way to remedy the problem — by learning to spend your money wisely.

Being wise with your money means being thoughtful and accountable and helping it go further to get what you want. It’s about having a plan so you can spend as well as save money for a vacation, an emergency fund, or even start that business you’ve been dreaming about.

Being wise with money is not about how much you make. It’s how you spend it and manage it so you can optimize your quality of life.

Why Spending Wisely Is Important

How to spend money wisely is not a skill taught in school, and many families don’t feel comfortable discussing money openly. Which means many of us are in the dark when it comes to putting money in a savings account and understanding how to budget and not overspend.

Plus, the world is full of enticing new things to buy, and our phones, computers and TVs are full of images of people dining out, shopping, and traveling. The idea of spending limits is often absent.

But if you’re serious about learning about how to reach your financial goals and not having too much debt, you can adopt habits that will help. It’s not about living a life of deprivation at all. But spending money a little differently is likely to be on the agenda.

When you start learning how to spend money correctly, you can get on top of your budget and your financial life. That’s a great feeling of accomplishment and independence. Plus, it sets you up for good money habits for years to come.

Here are 10 ideas for how to spend your money wisely.

10 Tips for Wise Spending

1. Not Trying to Impress Others

When you buy something, check in with yourself and make sure it’s something that is truly for you and not something you’re buying because you feel you’re “supposed to,” or “everyone else is getting one.” These purchases can wind up being very expensive and even disappointing.

Cars are a great example. There are many vehicles that may be adequate for your needs, but you might end up buying an expensive car that looks impressive and wind up living above your means. Being stuck with an unmanageable monthly payment is uncomfortable and adds a level of stress to your daily life. What’s more, if you default, it could hurt your credit score. So work towards buying just what you need, not status items.

2. Not Eating Out or Splurging Every Day

Small splurges every once in a while aren’t going to kill your budget, but a regular habit of them can put a dent in your financial fitness. Everyday spending habits can make or break your budget. Perhaps it’s not eating out that is costing you; maybe it’s ordering things online or picking up the tab too often when you and your best work buddy have a quick drink. All the small purchases you make add up over time and wind up undermining your plans to improve financial health.

To make sure you’re spending wisely, be sure to have a budget for your splurges. It’ll feel good knowing you have a plan to spend on fun things while also putting money away in your bank account. For instance, if you’ve been getting a pricey takeout coffee most mornings as a treat en route to a busy workday, try dialing it back to a Monday and Friday splurge. Eventually, you may decide to skip it completely and drink your java before you leave home.

Recommended: 6 Tips for Making a Financial Plan

3. Setting Reminders for Bills to Avoid Late Fees

One thing you don’t want to do is spend money on late fees, interest, and other costs.To make sure your bills are getting paid on time, automate your payments as much as possible and set reminders so you’re never late.

4. Using a Journal of Transactions to Avoid Frivolous Spending

A journal of transactions can help keep you accountable to yourself about where your money goes. Truly, there’s nothing more eye-opening than seeing how much you’re really spending in a month. Reviewing your transactions can help you learn how to spend wisely.

For example, you might not realize how often you use ride-share services. You may think you only call an Uber “in emergencies” but then realize those emergencies are happening a couple of times a week. A journal can help you truly get a grip on overspending and dial it down.

Get up to $300 with eligible direct deposit when you bank with SoFi.

No account or overdraft fees. No minimum balance.

Up to 3.80% APY on savings balances.

Up to 2-day-early paycheck.

Up to $3M of additional
FDIC insurance.


5. Having a Monthly Budget

A monthly budget is nothing more than a plan for how you want to spend your money for the month. When you have a plan and a goal, you can train your brain to forgo things that are not important and save for things that really matter to you.

Which kind of monthly budget to set up depends on your personal preferences and needs. Some people love apps which automate the process and can show you how your money and spending break down. Others prefer using a spreadsheet or journal. Some find systems like the envelope method or 50/30/20 rule helpful. Do a bit of online research; you may spend more wisely once you find a system that suits you.

6. Figuring Out What Habits Eat Up Your Budget

After you’ve tracked your expenses, it might be shocking to see where your money is going. You might have a few habits, such as shopping too often or splurging on gourmet dining, that take up more of your budget than you would like. Or you might have signed up for a number of streaming services when you only really watch a couple of them.

By identifying what is burning through your money, you can then take steps to spend more wisely. Changing up a few of these habits can help you stretch your budget, save more, and spend your money wisely.

7. Putting Money on Your Credit Card When You Can Afford to Pay It Off

As of June 2024, the average credit card interest rate is more than 24%, making this one of the most expensive ways to finance a purchase. In a nutshell, you wind up paying a 24%-plus surcharge if you buy things with plastic and don’t pay it off right away.

Using a credit card wisely is key. Charge up no more than 30% of your credit limit (though less is better) to keep your credit utilization ratio low. And pay the bill off ASAP to avoid owing interest.

8. Thinking About Long-Term Effects of Purchases

The average American spends approximately $150 on impulse purchases each month, data shows. That’s $1,800 a year for unplanned purchases. If spending wisely is your goal, you should ask yourself: Wouldn’t that money be put to better use elsewhere, such as a vacation or in savings?

One way to curb impulse spending is to acknowledge the emotional component. Some of us shop when we are feeling bored, angry, or sad. Purchasing some cool new gizmo or a great jacket can be a distraction and a mood booster. One strategy to help short-circuit this emotional spending can be to imagine the item in your house and how it will look used a few years from now. If you can visualize its future (being out of style, faded, worn, or broken), you might not want to purchase it in the first place. That may help you realize that the item isn’t as vital as it feels when you are shopping.

You might also want to consider the long-term financial impact the purchase will have. If you make a lot of impulse buys, these costs can either snowball due to interest or shadow your finances for years to come.

9. Tracking Your Finances Daily

Following your money closely can help you spend wisely. Fortunately, there are easy ways you can keep track of your spending in today’s technology-rich world, including money-management apps. These can connect your bank accounts, credit cards, investment accounts, and more to give you a snapshot of your financial health.

If, say, you see that your credit card balance is climbing, you might decide to cook pasta versus ordering takeout that night. Or perhaps you notice that with a recent rent increase, you are struggling a bit to cover all your expenses. That trend might convince you to economize some of your spending or start a side hustle to bring in more cash.

10. Knowing How Much You Can Actually Spend

A key part of your budget should be knowing how much you can actually spend in a month, as well as how much you should save per month. It sounds obvious, but many people don’t do the math. Figuring out and then hitting those numbers is important when you are focusing on spending wisely.

While the average household spends more than $6,000 each month, your number will likely be different as it is unique to your circumstances. It’s wise to look at your take-home pay and see how much the “musts” (food, shelter, health expenses, and anything else needed to survive) cost every month. Next, assess what debts need to be paid. Do you have student loans you are paying off? Credit card debt you are whittling down? Subtract that from your earnings, too.

Then, you don’t want to spend every penny of what’s left. It’s important to also dedicate some funds to saving, whether that means for a down payment for a home, for retirement, or for an emergency (or for all of those). Budgeting $25, $100, or more a month to savings can help you reach your money goals. You might have that amount automatically transferred on payday from your checking account to savings accounts so you can help keep your cash safe vs. spent.

Managing Your Finances With SoFi

Spending wisely is a key step towards financial health. Often, we fall into shopping and splurging habits without realizing where our cash is going. By tracking your spending and starting some smart new habits, such as finding the right bank account and regularly making deposits into it, you can save more and rein in spending without feeling deprived.

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 3.80% APY on SoFi Checking and Savings.

FAQ

What is the smartest way to spend money?

The smartest way to spend money is to spend according to your means and your values. Figure out how much you want to save, whether for a vacation, a new car, retirement, or something else, and how much you owe for expenses, and create a budget. Then, your spending needs to fit within that budget, including planned-for splurges. Be sure to track what you spend to stay accountable.

How can I manage my money wisely?

If you’re looking to manage your money wisely, use the tools available to you. There are apps that help you track your money and budget, or you could use a journal or spreadsheets. Put some time into finding a system that suits your goals and lifestyle.

How do I start saving?

One way to start saving is to open a savings account and automate your deposits. Have a certain amount transferred regularly from checking into savings, for example.

Photo credit: iStock/millann


Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2025 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.

3.80% APY
SoFi members with Eligible Direct Deposit activity can earn 3.80% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Eligible 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 (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below).

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning 3.80% APY, we encourage you to check your APY Details page the day after your Eligible Direct Deposit arrives. If your APY is not showing as 3.80%, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning 3.80% APY from the date you contact SoFi for the rest of the current 30-day Evaluation Period. You will also be eligible for 3.80% APY on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider 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 Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi members with Eligible Direct Deposit are eligible for other SoFi Plus benefits.

As an alternative to Direct Deposit, SoFi members with Qualifying Deposits can earn 3.80% 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 Eligible 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 an Eligible Direct Deposit or receipt of $5,000 in Qualifying Deposits to your account, you will begin earning 3.80% 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 Eligible 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 Eligible 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 Eligible 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 Eligible Direct Deposit or Qualifying Deposits until SoFi Bank recognizes Eligible Direct Deposit activity or receives $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Eligible Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Eligible Direct Deposit.

Separately, SoFi members who enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days can also earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. For additional details, see the SoFi Plus Terms and Conditions at https://www.sofi.com/terms-of-use/#plus.

Members without either Eligible Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, or who do not enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days, will earn 1.00% 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 1/24/25. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet.
*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

SOBK-Q224-1939823-V1

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Jul
01
2024
Guide to a Commercial Letter of Credit

Guide to a Commercial Letter of Credit

By | Credit, Financial Independence, money | Comments Off on Guide to a Commercial Letter of Credit

If you’re doing business internationally, you may have come across a requirement for a commercial letter of credit. This financial document serves as a guarantee of payment for goods or services, thereby playing an important role in facilitating international trade and industry growth.

These letters can help businesses work successfully with new clients and can build trust. Learn more about how they work and their pros and cons here.

What Is a Commercial Letter of Credit?

A commercial letter of credit, also known as a documentary credit, is an aspect of business banking. It’s a document issued by a bank to guarantee payment for goods or services for a seller (also called the supplier or exporter). It is issued on behalf of the company acquiring the supplies (the importer). It ensures that suppliers are paid for the services and/or goods they provide and that buyers receive the goods or services promised. This can be an important tool when doing business internationally or working with a new supplier. Simply put, it supports the deal and inspires trust.

Most of us know that good credit is important, and with a bank’s assistance, a commercial letter of credit can vouch for a new and/or foreign business partner. Let’s say an American company has never done business with Thailand before but wants to. Or it’s found some goods it would like to buy from a company in France, but that business only started a few months ago. There can be an element of risk to this kind of deal. The commercial letter of credit can reduce that worry since a bank steps in as a third party.

Commercial letters of credit are considered to be a very secure form of payment and are able to power many international trade transactions. The parties involved typically have every reason to believe the deal is solid, thanks to the bank’s participation.

💡 Quick Tip: Help your money earn more money! Opening a bank account online often gets you higher-than-average rates.

How Does a Commercial Letter of Credit Work?

A commercial letter of credit is more than a piece of paper promising payment. It acts a bit like an escrow agent between buyer and seller.

To explain it in more detail, a business (the buyer) can obtain a commercial letter of credit by applying for one at a bank or commercial lending institution. The seller may require this when the relationship is new (or perhaps the buyer is new and their credit history is not yet solid) or when exporting to another country.

After approval, the bank issues a letter of credit for the supplier (also called the beneficiary). This letter signals to the seller that the funds are guaranteed and will be paid by the bank, making it safe for the seller to produce goods or provide services for the buyer.

Once the seller shows evidence of having provided services or shipped the goods to the buyer (such as a bill of lading), the seller can draw on the letter of credit using their own bank. After payment has been made to the seller, the buyer must reimburse the bank before receiving the documents necessary to take delivery of the goods from the supplier.

By using a bank in this way, both the buyer and seller can feel confident in the business transaction.

Recommended: Is a Bad Credit Score a Big Deal?

Protections Offered by a Commercial Letter of Credit

A commercial letter of credit offers protections for both the buyer and seller. This is one of the reasons why it’s such an important tool.

•   For the seller (or supplier), the letter guarantees payment for goods or services.

•   For the buyer, the letter requires sellers to provide these goods or services before payment is issued.

These are particularly important in international trade where market conditions vary around the world and trust comes at a premium. For instance, a location might have intense climate conditions that threaten production or perhaps there’s political instability at a given moment. With a commercial letter of credit, participants in a deal can feel more secure about the deal going smoothly and successfully.

Get up to $300 with eligible direct deposit when you bank with SoFi.

No account or overdraft fees. No minimum balance.

Up to 3.80% APY on savings balances.

Up to 2-day-early paycheck.

Up to $3M of additional
FDIC insurance.


What Parties Are Involved in a Commercial Letter of Credit?

There are always four parties involved with executing a commercial letter of credit. These are:

•   Buyer: The party who applies for a letter of credit from their bank.

•   Supplier: The seller of goods or services the buyer desires.

•   Issuing bank: The bank of the buyer who has approved a letter of credit.

•   Supplier’s bank: The financial institution from which the supplier can draw on the letter of credit. The supplier will then receive payment via the issuing bank.

Recommended: Can Personal Loans Hurt Your Credit?

Commercial Letter of Credit Process Example

Here’s an imaginary example of how a commercial letter of credit might be used during an international business deal: The Winter Company makes blankets in the U.S. and needs to order raw material from China. They want to order from a new supplier, Fine Fibers, and that new supplier wants to be sure this is a legitimate, reliable deal before beginning work. Therefore, Fine Fibers asks for a commercial letter of credit in order to start manufacturing the material for the blankets.

The Winter Company (the buyer/importer) applies for a commercial letter of credit from their bank and is approved. The letter is sent to the seller/supplier/exporter, Fine Fibers. It then begins manufacturing the material needed by the blanket-making company.

After finishing the order, Fine Fibers ships the order and provides the bank with the bill of lading. The fiber company can collect payment from the bank using their own bank.

The Winter Company, the buyer, can pay their bank back, and the bank will release information to receive the shipment. The buyer now has possession of the goods shipped. The deal is done without any hitches.

Difference Between a Commercial Letter of Credit & a Standby Letter of Credit?

There are many different types of letters of credit. One of the other commonly used letters of credit is a standby letter of credit. There are a few differences between a commercial letter of credit and a standby letter of credit, which are explored here.

Commercial Letter of Credit

 Standby Letter of Credit
Bank pays the beneficiary Bank pays the beneficiary only if the buyer cannot
Acts as payment Acts more like a default or back-up payment method
Buyer must apply and be approved for a commercial letter of credit Buyer goes through underwriting to examine their creditworthiness
Used as the primary financing instrument Used when a deal is threatening to fall through

Recommended: Are Credit Scores Supposed to Be Different?

Examples of Commercial Letters of Credit

For both domestic and international transactions, commercial letters of credit can fulfill payment according to the contract’s specifications and help identify the goods’ delivery so a final payment can be made.

For example, Wells Fargo offers these letters to business clients. The letters of credit have a renewable term and typically take two weeks to process once the Letter of Credit application has been completed. Many other banks (Citibank, for instance) also offer these letters of credit too, facilitating business deals.

Pros of a Commercial Letter of Credit

There are benefits for both the seller and the buyer for using a commercial letter of credit.

For the seller/exporter

•   Ensures supplier is paid when requirements are met, building trust

•   Payment can be remitted to a bank of their choice

•   Can access financing in many countries by having a letter of credit

•   Helps develop new trade relationships, especially internationally

For the buyer/importer

•   Reduces the amount of money tied up in a lengthy transaction

•   Allows the buyer to stipulate terms and conditions for fulfillment of the contract before payment is made by the issuing bank

•   Ensures goods or services are provided to the buyer, building trust

•   Helps develop new trade relationships, especially internationally

Recommended: How Often Does Your Credit Score Update?

Cons of a Commercial Letter of Credit

There are a few drawbacks to consider, however, when using commercial letters of credit. These include:

For the seller/exporter

•   Payment takes longer than with an all-cash transaction.

•   Compliance with conditions of the contract may delay payment.

For the buyer/importer

•   Application process can take two weeks or longer.

•   Can be pricey. The bank fee for a letter of credit is usually taken as a percentage of the amount of goods sold.

Recommended: Differences Between a Bank Guarantee and a Letter of Credit

The Takeaway

A commercial letter of credit can help you businesses conduct transactions by guaranteeing payment from the issuing bank once requirements are met. This way, you can work with new businesses to dependably complete deals domestically and internationally. Commercial letters of credit can be a valuable asset in building trade and trust.

If you’re looking for solutions for your day-to-day personal banking needs, take a look at what SoFi has to offer.

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 3.80% APY on SoFi Checking and Savings.

FAQ

Who is the beneficiary in a commercial letter of credit?

A commercial letter of credit facilitates trade by guaranteeing funds (payment) for a supplier. The beneficiary is the receiver of the funds, whether the seller or the bank named by the recipient.

What is a letter of credit in commercial banking?

A letter of credit in commercial banking is a document from a bank guaranteeing payment to a supplier once a deal’s conditions are met. Typically, it is used in international trade and/or between companies that have not done business previously.

Why do you need a letter of credit?

You may need a commercial letter of credit if your company is working with a new supplier that doesn’t offer trade credit, your supplier is outside the country or your normal trading area, or your company doesn’t have enough credit history for a supplier to trust your ability to pay.

Photo credit: iStock/fizkes

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2025 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 Eligible Direct Deposit activity can earn 3.80% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Eligible 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 (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below).

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning 3.80% APY, we encourage you to check your APY Details page the day after your Eligible Direct Deposit arrives. If your APY is not showing as 3.80%, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning 3.80% APY from the date you contact SoFi for the rest of the current 30-day Evaluation Period. You will also be eligible for 3.80% APY on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider 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 Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi members with Eligible Direct Deposit are eligible for other SoFi Plus benefits.

As an alternative to Direct Deposit, SoFi members with Qualifying Deposits can earn 3.80% 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 Eligible 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 an Eligible Direct Deposit or receipt of $5,000 in Qualifying Deposits to your account, you will begin earning 3.80% 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 Eligible 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 Eligible 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 Eligible 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 Eligible Direct Deposit or Qualifying Deposits until SoFi Bank recognizes Eligible Direct Deposit activity or receives $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Eligible Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Eligible Direct Deposit.

Separately, SoFi members who enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days can also earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. For additional details, see the SoFi Plus Terms and Conditions at https://www.sofi.com/terms-of-use/#plus.

Members without either Eligible Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, or who do not enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days, will earn 1.00% 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 1/24/25. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet.
*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

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


Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

SOBK-Q224-1939845-V1

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Jul
01
2024
Overdraft Fees vs Non-Sufficient Funds (NSF) Fees: What’s the Difference?

Overdraft Fees vs Non-Sufficient Funds (NSF) Fees: What’s the Difference?

By | Budgeting & Goals, Financial Independence, money | Comments Off on Overdraft Fees vs Non-Sufficient Funds (NSF) Fees: What’s the Difference?

Overdraft and non-sufficient funds (NSF) fees have a lot in common. Both fees are triggered when there’s not enough money in an account to cover a transaction, except with overdrafts, the transaction usually goes through and with NSF, it’s canceled.

Both of these bank fees can be avoided with a bit of focus and practice. Read on to learn the details.

What Are Overdraft Fees?

When a bank account balance is negative (meaning transactions exceed deposits), the account holder is often charged an overdraft fee. The transaction goes through, but the account holder owes the bank the cost of the transaction to bring the account back to zero, as well as the overdraft fee set by the bank.

Typically, overdraft fees will continue with each transaction until an account’s balance is out of the red. That means if an account holder is unaware of the overdraft and goes on using the card without making a deposit, they could be hit with a fee for each charge, no matter how small.

The average overdraft fee is currently $26, but it can be as high as $39, which can add up quickly when someone isn’t paying attention to their checking account balance. It’s worth noting that the government is considering capping these fees at a lower figure, which would benefit consumers.

How Do Overdraft Fees Work?

Overdraft policies vary from bank to bank, but typically they kick in when a debit card or checking account transaction exceeds the amount held in a bank account. There is usually a limit for how much overdraft is covered, say $50.

When the transaction goes through, the bank has a few choices:

•   If the account holder has opted for a tool like overdraft protection, they may be shielded from overdraft fees up to a certain amount

•   If the account is in good standing, or if the account holder has never over drafted before, the bank may choose to waive overdraft fees in this instance (or you might be able to request this and see if you can avoid overdraft fees).

•   If the account holder has a history of over drafting, or is relatively new, the bank may choose to charge the overdraft fee.

When You Could Get Hit With an Overdraft Fee

It’s not just debit card purchases that can set off an overdraft fee. If the account holder doesn’t have enough cash in their checking account, any of the following transactions could lead to an overdraft fee:

•   ATM withdrawals

•   Checks

•   Autopay bill payments or withdrawals

•   Transfers between bank accounts

As mentioned above, once an account holder overdraws, the bank may continue to charge subsequent overdraft fees on the account until the balance is restored through a deposit.

💡 Quick Tip: An online bank account with SoFi can help your money earn more — up to 3.80% APY, with no minimum balance required.

What Are NSF Fees?

On the surface, it’s hard to tell the difference between overdraft and NSF fees. Both fees occur when an account doesn’t have enough cash to cover a transaction.

However, an NSF fee is charged when an account doesn’t have enough money to cover a transaction and the transaction is canceled or rejected.

The average NSF fee is currently $20, but some banks may charge considerably higher.

How Do NSF Fees Work?

An account holder might trigger an NSF fee instead of an overdraft fee if they:

•   Opt out of or never signed up for overdraft protection

•   Already exceeded the bank or credit union’s overdraft protection limit

•   Write a check that’s more than the balance of the account

When You Could Get Hit With an NSF Fee

NSF fee policies vary by banking institution, but an account holder is more likely to be charged in the following situations:

•   Check writing. When someone writes a check for more than the account’s balance, the check bounces, and the transaction won’t go through. The account holder will be charged an NSF fee by their bank, and they may be charged an additional fee by the bank or entity that tried to cash the check.

•   ACH payments. An ACH payment, or Automated Clearing House Network payment, can be an easy way to transfer money or pay someone, but if the transferring bank doesn’t cover ACH payments, the transaction could be canceled and the NSF fee charged.

Get up to $300 with eligible direct deposit when you bank with SoFi.

No account or overdraft fees. No minimum balance.

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What Are the Differences Between Overdraft and NSF Fees?

NSF and overdraft fees are commonly lumped together as general bank fees, but they are not the same. Here’s the difference between overdraft and NSF fees:

NSF Fee vs. Overdraft Fee

NSF Fee

 Overdraft Fee
Average Fee $19 $26
Transaction goes through? No Yes
Charged repeatedly until corrected? No Yes
Can it be avoided through overdraft protection? No Yes

Tips for Avoiding Overdraft and NSF Fees

Overdraft and NSF fees are frustrating for many people because they fall into the category of bank fees you should avoid — and you can easily do so with a few simple practices.

1. Setting Up Email and Text Alerts

Many banks and credit unions offer email and text bank alerts that account holders can set up to notify them of low balances. For example, an account holder could set up an alert when their checking account balance falls below a certain amount.

With enough notice, account holders have time to transfer money into the account to cover upcoming charges or auto-debits.

2. Utilizing Direct Deposit

Setting up direct deposit with an employer means paychecks go directly to a bank account on payday. It’s a nearly immediate payment, opposed to waiting for a check by mail then depositing it at the bank. This could save someone from overdraft fees, especially if paychecks and major bills occur at regular intervals.

3. Having a Savings Cushion to Prevent Overdraft

Keeping a healthy cash cushion in a checking account can prevent it from dropping dangerously low. While it’s not best practice to keep tons of extra cash in a checking account (as these accounts often have low or no interest), keeping a few hundred extra in the account could keep someone from overdrafts when they need to make a transfer or forget about a check they wrote.

4. Checking Finances Regularly

While automation can help, nothing beats a regular check-in for managing your bank account. Consider reviewing account balances at least once a week. It can help you keep those numbers in mind when a large transaction or purchase comes up.

Recommended: Is Overdraft Protection Worth It?

5. Utilizing a Budgeting App

Keeping a budget is an important part of financial wellness. Not only does it involve knowing the balance of bank accounts, but it can also prevent people from over- or unnecessary spending that sends an account into overdraft. Some budgeting apps come with alerts to notify users when account balances are low. One good resource: Your financial institution. See what it offers.

The Takeaway

Both overdraft and non-sufficient funds (NSF) fees occur when your bank balance drops below zero into negative territory. The key difference is that with overdraft fees, the transaction is typically completed, while with NSF fees, the transaction is usually rejected.

You might look for a bank which doesn’t charge overdraft fees up to a limit to minimize the impact of these charges and take steps to always keep your account with a positive balance.

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 3.80% APY on SoFi Checking and Savings.

FAQ

What is the difference between overdraft and non-sufficient funds fees?

The difference between overdraft and NSF fees is the success or failure of the transactions. Overdrafting will allow the debit to clear. With an NSF, the transaction does not go through.

Is an overdraft fee or an NSF fee more expensive?

Currently, NSF fees average around $19, while overdraft charges are about $26.

How can you avoid overdraft and NSF fees?

You can avoid overdraft and NSF fees by keeping a close eye on bank account balances and choosing a bank that offers overdraft protection or forgiveness.

Photo credit: iStock/Ivan Pantic

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SoFi members with Eligible Direct Deposit activity can earn 3.80% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Eligible 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 (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below).

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning 3.80% APY, we encourage you to check your APY Details page the day after your Eligible Direct Deposit arrives. If your APY is not showing as 3.80%, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning 3.80% APY from the date you contact SoFi for the rest of the current 30-day Evaluation Period. You will also be eligible for 3.80% APY on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider 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 Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi members with Eligible Direct Deposit are eligible for other SoFi Plus benefits.

As an alternative to Direct Deposit, SoFi members with Qualifying Deposits can earn 3.80% 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 Eligible 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 an Eligible Direct Deposit or receipt of $5,000 in Qualifying Deposits to your account, you will begin earning 3.80% 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 Eligible 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 Eligible 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 Eligible 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 Eligible Direct Deposit or Qualifying Deposits until SoFi Bank recognizes Eligible Direct Deposit activity or receives $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Eligible Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Eligible Direct Deposit.

Separately, SoFi members who enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days can also earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. For additional details, see the SoFi Plus Terms and Conditions at https://www.sofi.com/terms-of-use/#plus.

Members without either Eligible Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, or who do not enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days, will earn 1.00% 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 1/24/25. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet.
*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

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

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