Sep
06
2024
How Does Non-Farm Payroll (NFP) Affect the Markets?

Nonfarm Payroll: What It Is and Its Effect On the Markets

By | Financial Independence, invest, Terminology | Comments Off on Nonfarm Payroll: What It Is and Its Effect On the Markets

The nonfarm payroll report measures the number of jobs added or lost in the United States. The report is released by the Bureau of Labor Statistics (BLS), usually on the first Friday of every month, and is closely watched by economists, market analysts, and traders. The nonfarm payroll report can have a significant impact on financial markets. A strong or weak jobs report may lead to stock market volatility, as investors feel confident or pessimistic about the direction of the economy.

The nonfarm payroll report is just one of many economic indicators that investors can use to gauge the economy’s strength. However, market participants often pay attention because it provides a monthly snapshot of the U.S. economy’s health.

What Are Nonfarm Payrolls?

Nonfarm payrolls are a key economic indicator that measures the number of Americans employed in the United States, excluding farm workers and some other U.S. workers, including certain government employees, private household employees, and non-profit organization workers.

Also known as simply “the jobs report,” the nonfarm payrolls report looks at the jobs gained and lost during the previous month. This monthly data release provides investors with a snapshot of the health of the labor market, and the economy as a whole.

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The U.S. Nonfarm Payroll Report, Explained

The nonfarm payroll report is one of two surveys conducted by the BLS that tracks U.S. employment in a data release known as the Employment Situation report. These two surveys are:

•   The Establishment Survey. This survey provides details on nonfarm payroll employment, tracking the number of job additions by industry, the average number of hours worked, and average hourly earnings. This survey is the basis for the reported total nonfarm payrolls added each month.

•   The Household Survey. This survey breaks down the employment numbers on a demographic basis, studying the jobs rate by race, gender, education, and age. This survey is the basis for the monthly unemployment rate reported each month.

When Is the NFP Released?

The Bureau of Labor Statistics usually releases the nonfarm payrolls report on the first Friday of every month at 8:30 am ET. The BLS releases the Establishment Survey and Household Survey together as the Employment Situation report, which covers the labor market of the previous month.

4 Figures From the NFP Report to Pay Attention To

Investors may look at several specific figures within the jobs report to help inform their investment decisions:

1. The Unemployment Rate

The unemployment rate is critical in assessing the economic health of the U.S., and it’s a factor in the Federal Reserve’s assessment of the nation’s labor market and the potential for a future recession. A rising unemployment rate could result in economic policy adjustments – like changes in interest rates that impact stocks, both domestically and globally.

Higher-than-expected unemployment could push investors away from stocks and toward assets that they consider more safe, such as Treasuries, potentially triggering a decline in the stock market.

2. Employment Sector Activity

The nonfarm payroll report also examines employment activity in specific business sectors like construction, manufacturing, or healthcare. Any significant rise or fall in sector employment can impact financial market investment decisions on a sector-by-sector basis.

3. Average Hourly Wages

Investors may consider average hourly pay a barometer of overall U.S. economic health. Rising wages may indicate stronger consumer confidence and a more robust economy. That scenario could lead to a rising stock market. However, increased average hourly wages may also signify future inflation, which could cause investors to sell stocks as they anticipate interest rate hikes by the Federal Reserve.

4. Revisions in the Nonfarm Payroll Report

Nonfarm payroll figures, like most economic data, are dynamic in nature and change all the time. Thus, investors watch any revisions to previous nonfarm payroll reports to reevaluate their own portfolios based on changing employment numbers.

How Does NFP Affect the Markets?

Nonfarm payrolls can affect the markets in a few ways, depending on the state of the economy and financial markets.

NFP and Stock Prices

If nonfarm payrolls are unexpectedly high or low, it can give insight into the economy’s future direction. A strong jobs report may signal that the economy is improving and that companies will have increased profits, leading to higher stock prices. Conversely, a weak jobs report may signal that the economy is slowing down and that company profits may decline, resulting in lower stock prices as investors sell their positions.

NFP and Interest Rates

Moreover, nonfarm payrolls can also affect stock prices by influencing the interest rate environment. A strong jobs report may lead the Federal Reserve to raise interest rates to prevent an overheated labor market or curb inflation, leading to a decline in stock prices. Conversely, a weak jobs report may lead the Federal Reserve to keep interest rates unchanged or even lower them, creating a loose monetary policy environment that can boost stock prices.

Investors create a strategy based on how they think markets will behave in the future, so they attempt to factor their projections for jobs report numbers into the price of different types of investments. An unexpected jobs report, however, could prompt them to change their strategy. Surprise numbers can create potentially significant market movements in critical sectors like stocks, bonds, gold, and the U.S. dollar, depending on the monthly release numbers.

How to Trade the Nonfarm Payroll Report

While long-term investors typically do not need to pay attention to any single jobs report, those who take a more active investing approach may want to adjust their strategy based on new data about the economy. If you fall into the latter camp, you’ll typically want to make sure that the report is a factor you consider, though not the only factor.

You might want to look at other economic statistics and the technical and fundamental profiles of individual securities you’re planning to buy or sell. Then, you’ll want to devise a strategy that you’ll execute based on your research, your expectations about the jobs report, and whether you believe it indicates a bull or a bear market ahead.

For example, suppose you expect the nonfarm payroll report to be positive, with robust job growth. In that case, you might consider adding stocks to your portfolio, as share prices tend to rise more than other investment classes after good economic news. If you believe the nonfarm payroll report will be negative, you may consider more conservative investments like bonds or bond funds, which tend to perform better when the economy slows down.

Or, you might take a more long-term approach, taking the opportunity to buy stocks at a discount and invest while the market is down.

The Takeaway

The jobs report can be used as one of many economic indicators that investors take into account when weighing their next investment moves. The report offers a snapshot of the health of the labor market, and the economy at large. But it’s important to keep in mind that it’s only one indicator.

Markets move after nonfarm payroll reports, but long-term investors don’t have to change their portfolio after every new government data release. That said, active investors may use the jobs report as one factor in creating their investment strategy.

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Sep
05
2024

11 Tips to Prevent Shopping out of Boredom

By | Budgeting & Goals, Family Finances, money | Comments Off on 11 Tips to Prevent Shopping out of Boredom

If you’ve ever spent a lazy Sunday wandering through the mall, not in need of anything in particular, only to emerge with a couple of bags of purchases, you are not alone. Many of us shop as entertainment and wind up having less cash or more credit card debt as a result.

Shopping in-person can be a fun distraction thanks to the music pumping and the eye-catching displays. It’s easy to be transported and suddenly feel that you need that new jacket, cell phone, or even sofa. And today, shopping online or on your phone can be equally appealing, as a parade of products and coupons pass before your eyes.

But overspending isn’t good for anyone’s budget or debt ratio. Here, you’ll learn 11 tips to stop shopping out of boredom and protect your hard-earned cash.

What Is Boredom Spending?

Boredom spending, or shopping to fill free time, happens for many reasons. It often occurs when you’re feeling unstimulated or there’s a lack of anything demanding your attention. You might find you’re prone to boredom shopping when you’re procrastinating about work. Going out and buying something can make you feel as if you’ve accomplished something with your time. Or perhaps you do it when you want to escape certain negative emotions such as anxiety, depression, or loneliness.

Some people turn to boredom shopping because it’s easy to do. Technology has allowed us to mindlessly scroll social media, install apps, and instantly link to retailer websites without having to leave the couch. And if you’ve already stored your payment information online, it’s even more convenient to buy on a whim.

Shopping while bored can be harmless if it’s small-scale and infrequent. But if it’s a habit or your go-to activity the minute you’re freed up, shelling out money on unnecessary purchases can bring on extra debt and bust your budget.

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Examples of Boredom Spending

The habit of buying when you’re bored can happen anywhere and anytime. For instance, it can occur when you need to kill time before an appointment and wander into a store to browse and then you wind up purchasing a couple of things because a “buy one, get one” sale was advertised. Or you might suddenly have a free afternoon because a friend canceled plans, so you check Instagram where you see engaging ads for exercise equipment you never knew you needed.

Life offers up many opportunities for boredom shopping. As long as you find yourself with gaps in your schedule, there’s time to potentially give in to impulse buys. And this impulsive buying can lead to overspending and more credit card debt which, thanks to its high interest rates, can be a challenge to pay off.

11 Tips to Avoid Boredom Spending

If you need some strategies on how to quit spending money when bored, here are tactics to try. They take a variety of angles to keep you from overspending during your downtime.

1. Reducing Time Spent on Social Media

Changing your spending habits to combat boredom buying likely requires stepping away from your laptop, tablet, or smartphone. Social media can contribute to “fear of missing out” (or FOMO) spending. Trying to keep up with others’ buying habits so you’re not left out can affect mental health, causing stress, unhappiness, and feelings of low self-esteem. People dealing with FOMO may go into debt because of overspending.

To resist temptation and cut down on social media use, consider deleting specific apps or turning off the app’s notifications. There are also apps designed to increase focus and productivity that might be helpful. Freedom and StayFree are two examples; they can block social media and other websites for specific periods of time.

2. Starting a Side Hustle or a Second Job

There are several benefits of having a side hustle, freelance gig, or part-time job. For one, it can fill any additional time you might have for boredom spending. Actively pursuing another stream of income can also ignite a passion for something new, increase your professional skills and introduce you to new people.

In addition, having a side gig provides more money to put towards paying bills, decreasing debt, and increasing your savings account.

3. Allowing Splurges in Your Monthly Budget

Expecting yourself to never make boredom purchases may be unrealistic for many people. In that case, you might come up with a specific dollar amount to automatically slot into your weekly or monthly budget rather than quit cold turkey. Making an allowance for this type of shopping spree can help keep you from going completely overboard and having to skimp elsewhere.

Recommended: Developing Good Financial Habits

4. Taking a Break

Unpacking what’s going on when you are feeling as if life is tedious can help stop shopping when bored.

Feeling bored may signal it’s time to relax, switch gears, or engage in some physical activity. That “high” you tend to feel after buying something? You can thank the release of dopamine, a feel-good brain chemical that is part of the brain’s reward system. Dopamine is also released when you’re exercising or doing something you enjoy.

You can experience a dopamine rush by partaking in non-shopping activities, such as going for a hike or brisk walk, gardening, listening to music, and meditating. Relaxing with a book, tackling a jigsaw puzzle, cleaning, or baking your favorite sweet are also ways to reap similar emotional rewards while breaking monotony.

5. Setting Financial Goals

Dig into how boredom buying is impacting your financial health. When you see how it’s making it hard to achieve your aspirations, you’ll have added incentive to stop this behavior.

Creating money goals for yourself is an important step towards gaining control over your finances. It’s also an ideal way to start developing good financial habits. Start by writing down your short-term and long-term goals which could include tracking weekly spending, starting an emergency fund, or saving up for a down payment on a house. Once you’ve got it down on paper or in a spreadsheet, prioritize your objectives, give yourself a reasonable time span to meet those goals, and make a commitment to stick to them. Take note of how unplanned splurges will interfere with your budget.

6. Rewarding Yourself When You Achieve Your Financial Goals

If you’ve avoided boredom shopping for a couple of months, paid off a credit card bill, or managed to stow money in your savings account, it’s okay to treat yourself to a low-cost item such as a favorite meal or a movie. These little rewards can keep you from feeling deprived and inspire you to stay on course.

There are lots of rewards that don’t cost anything, such as a nature walk or a hot bath. But if you do want to spend, be sure to set a price limit based on what you can actually afford. The goal here is to reward good behavior and encourage you to stay on target and not let boredom purchases rock the boat.

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7. Utilizing the 30-Day Spending Rule

The 30-day spending rule is a strategy to help reign in impulsive spending. Basically, the rule is simple — if you see a nonessential item either online or in a store, do not buy it. Instead, make a note in your calendar for 30 days later with details about where you saw the item and its price. When you reach that date, if you still want to purchase the item, and can afford it, you can do so, knowing it’s no longer an impulse buy. Instead, the purchase constitutes a well-considered financial choice.

There’s a good chance, however, the urge to make that purchase will have faded and you simply move on.

8. Unsubscribing from Email Lists

Retailer emails or newsletters touting sales, discounts, and deals can clutter your inbox and awaken the boredom spending monster. You can remove these temptations by unsubscribing from the company mailing lists.

Usually when you open their email, there’s an “unsubscribe” button at the bottom of the correspondence. It may be in small print but if you click or tap it, you should be able to opt out of emails. Take note it will probably take a few weeks for communications to stop.

You can also opt out of text messages that broadcast sales and special deals to your mobile phone. This can help minimize the temptation to shop when bored.

9. Learning New Skills That Interest You

What sparks your interest? Maybe you want to learn web design, become a real estate professional, or hone your cooking skills. Expanding your abilities in an area of interest can keep boredom at bay, whether you choose to study in person or online. Acquiring new skills could also make you more marketable and increase your income.

But even if learning something new doesn’t impact your earning power, it can still enrich your life. Getting involved in anything that stimulates your brain — whether it’s learning a new language, taking up knitting, or signing up for that novel writing class — can help you feel more fulfilled and increase your self-esteem.

10. Making Shopping Harder

As mentioned above, shopping can be super easy, increasing the odds that you might do some boredom buying. Why not fight back with tricks and tools that help you cut back on spending? The first thing you can do to reduce online and in-app shopping is delete your credit card or payment information from your favorite sites and your phone. This will add a few steps to the checkout process which may reduce the likelihood of spontaneous buying. It will give you time to be mindful about your spending and reconsider.

If you’re out and about, try leaving your credit cards at home to avoid boredom-driven buying.

11. Connecting With Others

Shopping can be a way of coping with being alone, and studies have shown loneliness leads to higher levels of boredom. Interacting with other people is key to cutting down on social isolation. Make plans to see friends and loved ones you enjoy. Volunteering for a local organization, political campaign, or charity is another great way to network. You’ll meet like-minded people and hopefully stay away from stores.

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FAQ

How do I train myself to stop spending money?

The first thing you’ll want to do is stop and ask, “Do I need this or just want it?” If the answer is want, try waiting 30 days and then deciding whether to make the purchase. Also helpful: Find other, non-shopping ways to use those times you feel bored, such as meeting friends, starting a side hustle, or pursuing a hobby. Put the money you save towards a goal like paying down credit card debt, and congratulate yourself for your hard work.

What can I do instead of spending money?

Life presents many other options and healthier ways you can deal with ennui besides spending money. When you’re bored, engaging in another activity such as reading, cleaning, or decluttering can take your attention away, allowing you to feel productive and have a sense of purpose. Spending time with loved ones is another good use of time. Most likely, when you become engrossed in something else besides shopping, the impulse to buy will subside.

What are some spending triggers?

Shopping can stem from both psychological reasons and outside factors. Some people may be triggered to shop because of fear of missing out on what others have; others may need a mood lift when feeling sad, anxious, or lonely. Retailers are also known to use specific sensory stimuli both online and in stores to inspire spending.

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As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.50% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.50% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

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

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

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

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

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Sep
05
2024
How to Open Your First IRA

How to Open an IRA: Beginners Guide

By | Budgeting & Goals, Building Your Career, Growing Wealth, invest, Investing | No Comments

Saving for retirement may be the biggest financial goal many of us will ever set. So it makes sense to explore all retirement savings options, including an IRA, or individual retirement account. The sooner you open your first IRA, the more opportunity your savings have to grow over time, potentially leading to a nice nest egg upon retirement.

There are other benefits to opening an IRA. For one, it can deliver attractive tax perks — either up front or in retirement — and it can be especially attractive to individuals who don’t have an employer-sponsored 401(k) plan, or have maxed it out already.

This article will walk you through the steps of opening an IRA — whether a traditional, Roth, or SEP IRA.

How to Open an IRA in 5 Steps

1. Choose What Type of IRA Is Best for You

Of the several types of IRAs that exist, traditional and Roth IRAs are the most common. Both allow you to put a certain amount toward retirement each year and invest in an array of assets.

When it comes to choosing between a traditional and a Roth IRA, it helps to know their key differences.

Traditional IRAs

If you earn a taxable income, you can open a traditional IRA regardless of how much you make per year. An IRA can be a good next step if you’ve maxed out your 401(k), for instance.

One notable difference between traditional and Roth IRA accounts is that traditional IRAs allow you to deduct your contributions on your tax returns now, meaning you pay taxes on distributions when you retire. You’ll pay a 10% penalty tax (in addition to regular income tax) on any money you withdraw from a traditional IRA before age 59 ½, with a few exceptions.

It may be better to go with a traditional IRA if you think you’ll be in a lower tax bracket after retirement. This is because you’ll be saving on a higher tax rate now (vs. the lower rate you’d be paying later, since you’d be in a lower tax bracket in retirement).

Recommended: 2024 Traditional IRA Contribution and Income Limits

Roth IRAs

Unlike traditional IRAs, there are income limits on who can open a Roth IRA. For 2024, individuals can only contribute the full amount — $7,000, with an additional $1,000 for people age 50 or over — to a Roth IRA if their income is below $146,000 for single filers. Those earning more than $146,000 but less than $161,000 can contribute a reduced amount. For married people who file taxes jointly, the limit is $230,000; those who earn up to $240,000 can contribute a reduced amount.

Roth IRA contributions are made with after-tax income. While that doesn’t offer any tax advantages now, it does mean that when you withdraw money upon retirement, you won’t have to pay taxes on it. As such, a Roth IRA may make sense for eligible individuals who typically get a tax refund and expect to be in a similar or higher tax bracket when they retire (for example, if they plan to have substantial income from a business, investments, or work).

Recommended: 2024 Roth IRA Contribution and Income Limits

SEP IRAs

With the number of self-employed workers on the rise, it’s worth mentioning that there’s a third type of IRA that may be worth considering: a SEP IRA. A SEP IRA, or simplified employee pension, can be set up by either an employer at a small business or by someone who is self-employed.

Employers get a tax deduction when they contribute to their employees’ IRAs, and they’re also allowed to contribute on a “discretionary basis” (meaning the employer doesn’t have to contribute in years where it’s not as financially feasible for the company.)

For employees, this option may allow you to contribute a greater amount than other IRAs, depending on your income.

2. Choose Where to Open Your IRA

You can open an IRA at a bank, a brokerage, mutual fund company, or other financial services provider. Typically, the more personal care and advice you get, the higher the fees will be. A robo-advisor, for instance, might charge lower fees than a brokerage.

Boost your retirement contributions with a 1% match.

SoFi IRAs now get a 1% match on every dollar you deposit, up to the annual contribution limits. Open an account today and get started.

Only offers made via ACH are eligible for the match. ACATs, wires, and rollovers are not included.

3. Open Your Individual Retirement Account

Once you decide where to open an IRA, you’ll need to follow through with doing so. The process for how to open an IRA can vary a bit from provider to provider, but it’s generally pretty straightforward. You’ll typically need to provide information such as:

•   A copy of your government-issued ID

•   Personal information, including contact information and Social Security number

•   Details on intended beneficiaries

Once your account is opened, you’ll receive guidance on funding an IRA. If you want to fund your account through an electronic transfer, you’ll be asked to provide banking information. It’s also possible to roll over existing retirement accounts — and yes, it is possible to open an IRA if you have a 401(k) already.

Rolling Over a 401(k) into an IRA

If you’re leaving a job with an employee-sponsored retirement plan, you can roll over your 401(k) into a traditional IRA. Doing so can potentially allow you to access better investment options and lower fees.

When you roll money over from a 401(k), there’s no limit to how much you can add to an IRA at that time. Going forward, additional contributions will be capped at the typical IRA contribution limit.

💡 Recommended: IRA vs. 401(k)

4. Choose a Contribution Amount

As of 2024, you can contribute up to $7,000 a year to a traditional or Roth IRA, or up to $8,000 if you’re 50 or older. If you take home more than the maximum earnings allowed for a Roth IRA but still prefer a Roth IRA over a traditional account, you might be able to contribute a reduced amount of Roth IRA contribution limits.

In many cases, it’s a good idea to invest as much as you can up to that amount each year to take full advantage of the power of compound growth.

A retirement calculator can help you figure out whether you’re on track for retirement. A quick rule of thumb: By the time you’re 30, it’s typically good to have the equivalent of one year’s salary saved.

5. Decide Where To Invest Your Funds

Investors can choose to invest in stocks, bonds, mutual funds, low-cost index funds, or exchange-traded funds (ETFs) — or a combination thereof.

One popular type of investment fund geared toward retirement savings is a “target date fund.” A target date fund is calibrated to the year you plan to retire, and it’s meant to automatically update your mix of assets, like stocks and bonds, so they’re more aggressive earlier in life and more conservative as you approach retirement.

Ultimately, the mix of investments in your IRA should depend on your personal risk tolerance, lifestyle, and retirement goals.

Pros and Cons of IRAs

If you’re contemplating whether to open an IRA, it’s important to understand the pros and cons of this category of retirement account. Here’s a look at the pros and cons of traditional and Roth IRAs, two of the most common types of IRAs:

Pros

 Cons
Tax-advantaged saving Lower contributions limits than other types of retirement accounts
Anyone can open one Income limits on contributions/ deductions
Wider array of investment options No employer matching contributions
Easy to set up Have to set it up yourself

Investing in Your Retirement

Once you’re familiar with how to open an IRA account, the process itself is pretty straightforward — possibly the biggest lift involved is deciding which IRA suits your personal situation and retirement goals best: a traditional, Roth, or SEP IRA. From there, you’ll need to decide where to start a Roth IRA or other type or IRA, then go through the formal process of starting an IRA, which includes providing certain information, funding the account, selecting a contribution amount, and deciding where to invest your funds.

That can all sound like a lot, but getting started on saving for your retirement doesn’t have to be difficult. SoFi Invest makes opening an IRA simple — it’s possible to sign up in less than five minutes. You can be as involved in the investment process as you want to be — either with hands-on investing or our automated investing technology, in which our algorithm will recommend an appropriate mix of investments based on your age and retirement goals.

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

FAQ

How much money is required to open an IRA?

There’s no universal minimum amount required to open an IRA. That being said, some providers will have minimum requirements.

Can you open an IRA all on your own?

Yes, it’s definitely possible to open an IRA on your own. The process is simple, similar to opening a bank account, and you can do so at most banks, brokerages, or other financial institutions. Often, it’s possible to start an IRA online.

Can you open an IRA at a bank?

Yes, many banks offer IRAs. You can also open an IRA at credit unions, brokerages, and investment companies.

Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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Aug
27
2024

Guide to Achieving Financial Minimalism: 12 Ways

By | Debt Payoff, Financial Independence, money | Comments Off on Guide to Achieving Financial Minimalism: 12 Ways

Minimalism is a lifestyle choice that centers on embracing simplicity and eliminating physical, mental, or emotional clutter. Financial minimalism is an extension of that idea. It advocates for spending less on material items and investing your time, money, and energy into experiences that enrich your life in some way.

Becoming a financial minimalist can help you to improve your money situation if you’re able to pay down debt, grow savings, and invest to build wealth while still enjoying life. Adopting a minimalist finance approach can take some getting used to, but can have a significant payoff, including less financial stress.

Read on to learn:

•   What financial minimalism means.

•   What the benefits of financial minimalism are.

•   How to practice financial minimalism.

What Is Financial Minimalism?

There’s no set definition of financial minimalism or what it means to be a financial minimalist. Broadly speaking, financial minimalism is about taking a “less is more” point of view when it comes to spending on unnecessary things and focusing more of your attention, money, and energy on experiences and purchases that add value to your life.

Minimalist finance emphasizes being intentional about how you use your money. Rather than spending money impulsively or mindlessly, you’re considerate of whether a particular purchase might offer any lasting benefit. Instead of clearing out the junk in your home, you’re clearing out the clutter in your financial life.

In this way, becoming a financial minimalist can alleviate some money stress. You have guardrails in place for spending, you likely make fewer purchases, and you hopefully have less debt to worry about as well.

💡 Quick Tip: Most savings accounts only earn a fraction of a percentage in interest. Not at SoFi. Our high-yield savings account can help you make meaningful progress towards your financial goals.

How Does Financial Minimalism Work?

Financial minimalism works by requiring you to be conscious of how you spend money. Becoming a minimalist with money doesn’t mean you live a deprived lifestyle. Instead, you choose to include only those things in your life that are meaningful to you and align with your values and minimalist belief.

Here’s what financial minimalists don’t do:

•   Spend money aimlessly, without thought to what they’re spending it on

•   Rack up high-interest credit card debt for unnecessary purchases

•   Live above their means and spend more than they earn

•   Forget about planning for the future and their long-term goals

•   Neglect saving and investing.

Because financial minimalists don’t do these things, they also don’t worry as much about money, as mentioned above.

A full 88% of adults feel some level of financial stress, and 65% say finances are their biggest source of stress, according to an April 2024 survey by MarketWatch Guides. Adhering to a minimalist finance strategy could help you to overcome the money stress in your life.

Benefits of Financial Minimalism

The exact benefits financial minimalism can deliver will depend on how you apply it. But generally, financial minimalism can benefit you in the following ways:

•   Minimalist finance can help you reduce or eliminate unnecessary spending from your budget.

•   Spending less allows you to save more or use extra money in your budget to pay off debt more quickly.

•   You may be less likely to run up new debts if you’re living within or below your means.

•   Minimalism can help you clarify and prioritize needs vs. wants in your budget.

•   Being intentional with spending can help you to plan out your financial goals and direct money toward the things that matter most to you.

•   Your home is likely to be less cluttered with “stuff,” since you’re cutting back on unnecessary spending.

•   Your mind may feel less cluttered as well if you’re not constantly worrying about how much debt you have or how to stretch your budget and bank account until your next payday.

Those are all good reasons to consider minimalism. It can be an especially wise path if you’re interested in how to gain financial freedom for yourself and your family.

Tips for Achieving Financial Minimalism

Ready to give financial minimalism a try? These tips can help you create a personal financial plan for embracing a minimalist lifestyle.

1. Removing Monthly Subscriptions

Streaming and subscription services can seem like a money-saver if it allows you to cut the cable cord. The problem is these monthly fees can add up, and many people end up paying for subscriptions they don’t use. That can include not only streaming services bit also gym memberships, subscriptions for apps or financial products like credit reporting, magazine subscriptions, and other recurring memberships.

Auditing your subscription services can help you find ones that you aren’t using and can afford to cut out. Even eliminating $25 or $50 a month in unnecessary subscriptions can free up money that you can use for something else.

💡 Quick Tip: Tired of paying pointless bank fees? When you open a bank account online you often avoid excess charges.

2. Budgeting

A budget can be essential for managing your money and pursuing a minimalist lifestyle. When you have a budget, you have a plan for how you’ll spend each month. If you don’t have a budget, it’s a good idea to make one (even a basic line-item budget) before tackling anything else on this list.

Here’s how you make a budget:

•   Add up your monthly after-tax income.

•   Make a list of basic living expenses (your needs, including debt payments).

•   Make a second list of everything else you spend money on (your wants).

•   Subtract expenses from income.

Ideally, you have money left over after doing the math. Those funds might go towards savings goals. If you don’t, you’ll need to go back to your expenses to see what you can reduce or eliminate in order to bring your budget in line.

3. Being Mindful of All Your Purchases

Financial minimalism is all about not spending money on things you don’t need. If you struggle with impulse spending, you might try imposing a 48-hour waiting period on purchases that you didn’t plan for in your budget. That cooling off period can give you time to decide if it’s something you really need.

You could also try a no-spend challenge where, for a certain period of time, you challenge yourself not to spend money on anything that isn’t necessary. No coffee to-go, movies on-demand, and so on. Some people pull this off as a 30-day no-spend challenge.

4. Cutting Eating Out and Focusing on Eating at Home

Eating out can kill your budget and sabotage your financial minimalist efforts. Planning meals at home and grocery shopping only for the items on your list can be an easy way to get food spending under control.

If you’d still like to eat out occasionally, you can set up what’s known as a sinking fund just for dining out and add a little money to it every payday. For example, you could save $20 per month in the fund, then once you hit $100 you could treat yourself to a meal out. That way, you still get a reward while being disciplined about saving and planned spending.

5. Not Showing Off for Social Media

FOMO or fear of missing out can lead you to make poor financial decisions in order to keep up with what everyone on Instagram is doing. If you’re tempted to show off on social media and purchase things to do so, consider a social media fast. Taking a break from your social accounts can be a good way to put what matters to you into perspective. You may well feel less pressured — and less tempted — to spend money on things that don’t align with your financial goals.

6. Reducing Debt If Possible

Getting rid of debt can allow you to reduce your monthly expenses and stretch your money further. If you have credit card debt, student loans, and/or other debts, consider which ones you’d like to pay off first. Then formulate a plan for paying down the balances. There are ways to pay off debt without using savings.

If you’re struggling with debt and can’t see a light at the end of the tunnel, you might also seek guidance from a nonprofit like the National Foundation for Credit Counseling, or NFCC.

7. Cutting Out Unnecessary Expenses

Anything you don’t need to live is technically an unnecessary expense. You might try minimizing purchases in certain categories that aren’t vital. Depending on what your budget looks like, that might include new clothes, electronics, online shopping, or anything else that doesn’t add positive value to your life in some way. The more unnecessary expenses you can cut out, generally the better when aiming for financial minimalism.

8. Living Below Your Means

If you’re looking for ways to improve your financial health, take note of this idea. Living below your means simply means that you don’t spend more than you earn. If you’ve done your budget and your expenses are higher than your income, you’ll either need to find ways to cut spending down or earn more money. The wider the gap between what you spend and what you earn, the more money you’ll have to fund the financial goals that are important to you.

Recommended: Guide to Financially Downsizing Your Life and Saving Money

9. Getting Rid of Items You No Longer Need

Extra stuff can make your home feel cluttered and disorganized. Ditching things you no longer need or use can make it easier to breathe and reinforce your commitment to living simply. As you sort through your things, consider what you can donate or give away, what should be trashed, what can be recycled, and what you might be able to sell for a little extra cash. Whether you try a Freecycle site, post things on eBay, or give your excess stuff to a local charity, your loss can be someone else’s gain.

10. Investing If Possible

Saving money is important, but investing it can be the best way to build wealth. If you’ve pared down your budget and have money to save and invest, consider putting some of it into the market for long-term goals. While there is risk involved, historically you can reap the best rewards this way. Following advice about investing for beginners can help you get started.

11. Embracing Free Time

When financial minimalism is the goal, you sometimes have to be creative about how you spend your time. Rather than going out for a pricey dinner with friends, for example, you may be spending more time at home instead. Hosting a potluck or taking a walk with a friend can be an inexpensive way to socialize.

Finding ways to embrace your free time can be a good reminder of why you’ve chosen to pursue minimalism. Some of the ways you can do that include exploring free (or low-cost) hobbies, getting into an exercise or meditation routine, or contemplating your financial goals and your next steps along the minimalist path.

12. Separating Money for Yourself First

“Pay yourself first” is an oft-repeated piece of financial advice and it simply means that before you pay any other bills or expenses, you set aside something in savings. How much you should save a month will vary person to person, and where the money goes may differ.

It could mean depositing $50 to start an emergency fund whenever you are paid or contributing 10% of your annual salary to a 401k at work. Automatic transfers on payday can help whisk the money to where you want it, rather than have it hit your checking account and tempt you to spend it.

Managing Your Finances With SoFi

If you want to spend less, save more, and lower your money stress, giving financial minimalism a try could help. Becoming a financial minimalist can help you really take control of your money and grow it.

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


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

FAQ

Can minimalism cause financial freedom?

Minimalism can help you to achieve financial freedom if you’re committed to paying down debt, cutting out unnecessary spending, saving, and investing. If you follow minimalist principles, it’s possible to live well on less, build wealth, and perhaps even retire early.

Can minimalism hurt financial freedom?

Minimalism won’t necessarily hurt financial freedom. However, it may take some getting used to in the beginning if you feel deprived because you’re spending less. Implementing one or two steps toward financial minimalism at a time can make it easier to transition to this kind of lifestyle gradually.

Is it OK if I am not a financial minimalist?

Financial minimalism may not be right for everyone and that’s perfectly acceptable. You can, however, apply some of the principles of financial minimalism to improve your money situation. For example, making a budget and dropping a subscription or two can be relatively easy ways to help rein in overspending and avoid debt.

Photo credit: iStock/mphillips007

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

*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 4.50% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.50% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.50% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

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

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

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

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.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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Aug
26
2024

Correspondent Bank: What They Are & How They Work

By | Family Finances, money, Terminology | Comments Off on Correspondent Bank: What They Are & How They Work

A correspondent bank helps to connect domestic and foreign banks that need to do business together. Correspondent banks can facilitate different types of transactions, including wire transfers, cash and treasury management, and foreign exchange settlement.

Correspondent banking plays an important part in the international financial system and the flow of cross-border payments. Correspondent banks are often a subject of scrutiny as they can also be used to perform illegal operations, such as money laundering.

What Is Correspondent Banking?

Correspondent banking is a formal system through which banks in different countries are able to provide payment services to one another. Correspondent banking makes it easier for funds to move between domestic and foreign banks, regardless of whether they have an established relationship. This plays an important role in smoothing international transactions.

Here’s the definition of a correspondent bank:

•   It’s the financial institution or bank that connects other banks within a correspondent banking system. Foreign banks may rely on correspondent banking if establishing one or more branches in another country isn’t feasible. While correspondent banking is often used to facilitate business transactions on a larger scale, individual consumers may also use correspondent banking to complete a money transfer from one bank to another.

For example, if you’re Canadian but living in the U.S. temporarily for work, you may use cross-border banking services to transfer funds between your U.S. bank accounts and your Canadian accounts. A correspondent bank would handle those transactions for you so that you never lose access to your money.

Recommended: Separate vs. Joint Bank Account in Marriage

How Correspondent Banking Works

Correspondent banking works by allowing payments to move between banks located in different countries that may not have a formal relationship with one another. In a typical correspondent arrangement, you have two respondent banks and one correspondent bank.

The correspondent bank is effectively a liaison or halfway point between the two respondent banks. The main role of the correspondent bank is to provide necessary financial services to the two respondent banks. The types of services correspondent banks can provide include:

•   Wire transfers

•   Check clearing and payment

•   Trade finance

•   Cash and treasury management

•   Securities, derivatives or foreign exchange settlement.

In exchange for these services, correspondent banks can charge respondent banks fees.

Correspondent banks operate through the Society for Worldwide Interbank Financial Telecommunication (SWIFT network). SWIFT allows for the secure transfer of financial messages to correspondent banks and other financial institutions around the world. Millions of messages move through the SWIFT network on a daily basis, transmitting financial information.

Correspondent Banking Example

Curious about how exactly correspondent banking works? Money moves from respondent bank to respondent bank in a sequential way, with the correspondent bank in the middle. Here’s an example:

•   Say you run an auto repair business, and you need to order parts from a supplier in Canada. The supplier only accepts wire transfers as payment so you go to your local bank to schedule one.

•   Since your bank and the supplier’s Canadian bank do not have an established banking relationship, there needs to be an intermediary. In order to send the wire transfer, your bank will need to connect to a correspondent bank in the SWIFT network that has a relationship with the supplier’s bank.

•   Once your bank is connected to the correspondent bank, it can facilitate the wire transfer from your account. The money will move from your account to the correspondent bank, along with an added fee.

•   The correspondent bank will then send the money along to the supplier’s bank in Canada, less the amount of the fee.

You might also use correspondent banking if you’re working in one country and want to send part of your pay to your bank account in your home country. You could send a wire transfer through the local bank you have an account with, which would forward it to the correspondent bank. The correspondent bank would then send the money to your account at your home bank.

Get up to $300 when you bank with SoFi.

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

Additional Considerations

Correspondent banks may operate largely behind the scenes for most consumers, but they play an important role in international financial transactions. Without correspondent banking, it might be much more difficult to complete international wire transfers as many banks do not have formal relationships with banks in other countries.

While correspondent banking is used to facilitate legitimate financial transactions, it can also be a vehicle for criminal activity. Two of the biggest concerns center around the use of correspondent banks to launder money and fund terrorist organizations. In the U.S., regulatory requirements exist that aim to bar the use of correspondent banking for these types of transactions, though they’re not always foolproof.

Recommended: Why Your Bank Account Is Frozen

Vostro vs. Nostro Accounts: How Banks Settle Cross-Border Transactions

Correspondent banks handle large amounts of money every day, which can easily get confusing. They keep track of the movement of funds between respondent banks using nostro and vostro accounts. These accounts allow one bank to hold another bank’s money on deposit during the completion of international financial transactions. Here’s the difference:

•   Vostro means “yours” in Latin, while nostro means “ours.” Vostro and nostro can be used to describe the same account for recordkeeping purposes. The label that’s used describes which bank holds the funds.

•   For example, say a Canadian bank has an account with a U.S. bank and funds are held in U.S. currency. The Canadian bank would apply the nostro label to that account signifying that the money in it is “ours.”

•   Meanwhile, the U.S. bank would refer to it as a vostro account, acknowledging to the Canadian bank that the money is “yours”.

Correspondent banks use nostro and vostro accounts to settle transactions and identify accounts as money flows between them. For every vostro account, there’s a corresponding nostro account and vice versa.

Recommended: Should I Open More Than One Bank Account?

Correspondent vs. Intermediary Banking

Intermediary banking is similar to correspondent banking in that it involves the transfer of funds between banks that do not have an established relationship with one another. Similar to a correspondent bank, an intermediary bank acts as a middleman for the other banks involved in the transaction.

But consider these distinctions:

•   Intermediary banks primarily assist in completing wire transfers between different banks, either domestically or internationally. For example, the U.S. Department of the Treasury acts as an intermediary bank in wire transfers between other banks.

•   In intermediary banking, there are three parties: the sender bank, the beneficiary bank, and the intermediary bank. It’s the intermediary bank’s role to ensure that money from the sender bank gets to the beneficiary bank.

Typical Correspondent Bank Fees

As mentioned, correspondent banks can charge bank fees for the services they provide. The fees charged can depend on the bank itself and the service that’s being provided. Fees are typically charged in the currency of the payment.

A general range for wire transfer fees for this kind of transaction can be anywhere from $0 to $50, depending on the bank. The easiest way to get a sense of what you might pay for correspondent banking is to check your bank’s fee schedule for wire transfers. Banks can charge fees for:

•   Incoming domestic wire transfers

•   Outgoing domestic wire transfers

•   Incoming international wire transfers

•   Outgoing international wire transfers

International wire transfers are typically more expensive than domestic transfers. Some banks may charge no fee at all to receive incoming domestic or international wire transfers. But you may still be charged a fee by the correspondent or intermediary bank. It can be wise to investigate before you conduct the transaction so you can be prepared.

Recommended: Understanding the Different Bank Accounts and How They Work

Difference Between Correspondent and Intermediary Banks

Correspondent and intermediary banking share some similarities, but it’s important to understand what sets them apart. Here are some of the key differences between correspondent and intermediary banks:

•   Correspondent banks can handle transactions in multiple currencies.

•   Intermediary bank transactions typically involve a single currency.

•   Correspondent banks can be used to facilitate a number of different transaction types.

•   Intermediary banks are most often used in situations involving wire transfers between two unconnected banks.

•   Correspondent banks are the middle ground between two respondent banks, which may or may not be located in the same country.

•   Intermediary banks act on behalf of sender and beneficiary banks.

The Takeaway

Correspondent banks make it easier for money to move across borders and around the world. You might want to use one if you are working in one country and want to send some of your earnings to an account in another country, for example.

If you simply need to move money between banks in the same country, there are other banking features you can benefit from.

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


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

FAQ

Why is a correspondent bank needed?

Correspondent banks are necessary because they help to facilitate cross-border payments between banks that have no formal banking relationship. Without correspondent banking, it would be more difficult to complete international financial transactions.

What is the difference between correspondent bank and beneficiary bank?

A correspondent bank is a go-between for two different respondent banks in an international financial transaction. A beneficiary bank is the bank that receives money from a sender bank through a third-party intermediary bank.

What is correspondent and respondent bank?

A correspondent bank is a financial institution that helps respondent banks to complete financial transactions. A respondent bank is a bank that needs help connecting to another respondent bank through a third-party, i.e., the correspondent bank.

Photo credit: iStock/Auris

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

SoFi members with direct deposit activity can earn 4.50% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.50% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.50% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

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

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

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

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

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

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Terms and conditions apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or other eligible status, be residing in the U.S., and meet SoFi's underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates reserved for the most creditworthy borrowers. If approved, your actual rate will be within the range of rates at the time of application and will depend on a variety of factors, including term of loan, evaluation of your creditworthiness, income, and other factors. If SoFi is unable to offer you a loan but matches you for a loan with a participating bank, then your rate may be outside the range of rates listed above. Rates and Terms are subject to change at any time without notice. SoFi Personal Loans can be used for any lawful personal, family, or household purposes and may not be used for post-secondary education expenses. Minimum loan amount is $5,000. The average of SoFi Personal Loans funded in 2023 was around $33K. Information current as of 2/26/24. SoFi Personal Loans originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org). See SoFi.com/legal for state-specific license details. See SoFi.com/eligibility for details and state restrictions.

✝ To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

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