Aug
15
2023
How To Calculate Marginal Propensity to Save

Guide to Marginal Propensity to Save (MPS)

By | Budgeting & Goals, Financial Independence, money | Comments Off on Guide to Marginal Propensity to Save (MPS)

The marginal propensity to save (MPS) is an economic concept that says when a person’s income rises, the MPS will determine the amount of money that is saved vs. spent on goods and services. This is an element in Keynesian Economic Theory, and it can have an important impact. The MPS can enable economists to figure out how to spend either government dollars or private funding.

But does MPS impact the average individual’s savings account? It can be a useful notion, and in this article you will learn:

•   What is marginal propensity to save (MPS)?

•   Why does MPS matter?

•   What does MPS mean to the average person?

The Keynesian Economic Theory, Explained

Economist John Maynard Keynes published The General Theory of Employment, Interest, and Money, or simply as The General Theory, in 1936. This text changed economic thought from that point on and is known as one of the classic economic publications. In the book, Keynes tried to explain economic fluctuations, especially the ones seen in the Great Depression of the 1930s.

Essentially, The General Theory was built on the idea that as a result of inadequate demand for goods and services, recessions and depressions could occur. Keynes’ theory was not just for economists—it was intended for policymakers worldwide. Keynes advocated for an increase in government spending, which would boost the production of goods and services to minimize unemployment rates and enhance economic activity. In general, this theory went against the traditional economic policy of laissez-faire, which requires minimal government involvement.

There are three main elements of this theory. These elements include:

• Aggregate demand: This is the demand influenced by the public and private sectors. The level of demand in the private sector may impact macroeconomic conditions. For instance, a lull in spending may bring an economy into a recession. At this point, the government can intervene with monetary stimulus.

• Prices: Wages, for example, are often slow to respond to supply and demand changes. This may result in an excess or shortage of labor supply.

• Changes in demand: Any change in aggregate demand results in the most considerable impact on economic production and employment. The theory states that consumer and government spending, investments, and exports increase output. Therefore, even a change to one of these factors and the output will change.

The Keynesian Multiplier was created as a result of the change in aggregate demand. The Keynesian Multiplier states, “The economy’s output is a multiple of the increase or decrease in spending. If the fiscal multiplier is greater than 1, then a $1 increase in spending will increase the total output by a value greater than $1.”

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Calculating Marginal Propensity to Save

The Keynesian Multiplier value relies on the marginal propensity to save (MPS) and the marginal propensity to consume (MPC). Here’s how you can calculate the marginal propensity to save.

Marginal Propensity to Save Formula

When people receive additional income, the MPS is the change in the savings amount. If their income increases, the MPS measures the amount of income they choose to save instead of spending it on goods and services.

That said, this is how to calculate MPS: MPS = change in savings / change in income.

For example, let’s say someone received a $1,000 raise. Of that $1000 increase in income, they decide to spend $300 on new clothes, $200 on a fancy dinner out, and save the remaining $500, so the MPS is 0.5.

(1000 – 300 – 200) / 500 = 0.5

Marginal Propensity to Consume

Conversely, the MPC is the change in the spending, or consuming, amount. If someone’s income increases, the MPC measures the amount of income they choose to spend on goods and services instead of savings.

With this in mind, MPC is calculated as MPC = change in consumption / change in income.

By using the example above, the MPC would be 500 / 1000 = 0.5.

According to Keynesian economic theory, when production increases, the level of income rises too, triggering an increase in spending.

Marginal Propensity to Save Example

As mentioned above, the marginal propensity to save can be illustrated by someone getting a raise. If you receive a $5,000 raise and decide to spend $2,500 on a vacation and save the other half.

The MPS would be change in savings / change in income, or $2,500 / $5,000, or 0.5.

Top 3 Factors That Influence Saving

Knowing how to find MPS and MPC may seem pretty straightforward. However, both calculations only account for the excess of disposable income; the calculations don’t account for other factors that may influence a consumer’s consumption functions. If one of these non-income factors shifts, the entire consumption function may shift.

Here are some of the non-income factors that may influence a consumer’s consumption function.

1. Wealth

Wealth and income are two different variables in economics. For example, suppose Javier has a job earning $60,000 per year. If his aunt Ines passes away and leaves him $200,000 as an inheritance, his income is still $60,000 per year, but his wealth has increased.

Similarly, if Javier owns a piece of art that increases in value or his investment portfolio grows, his wealth has also gone up. Just because his wealth increases doesn’t mean his income does as well.

Therefore, an increase in wealth may increase consumption despite income levels staying the same. However, both the consumption and savings function may shift upwards as well because of the newfound wealth. The same is true in the opposite situation. If wealth decreases, the consumption and savings functions may decrease as well.

2. Expectations

In some cases, consumers may adjust their spending habits based on the expectation of future income coming their way. Expectations change the shift in consumption and savings functions because there is no change in actual income, just how it’s being spent.

For example, suppose Naomi assumes her income is going to increase soon. She may consume more now because of her expectation that her income is about to grow. This may highlight an upward shift in the consumption function without an increase in income.

On the other hand, if Naomi were pessimistic about her future income, such as the fear of losing her job, she may decrease her consumption without dropping her income. This scenario may also shift the consumption factor.

Debt

Consumers may also adjust their consumption and savings if they’re in debt. It’s observed that in economies where consumer debt rises, savings go up while consumption goes down. There is a level of debt when consumers typically feel uncomfortable spending more. Even if their income remains the same, if too much debt plagues their pocketbooks, they will start to save more and spend less so they can pay off their debt.

Conversely, if there are low levels of debt, consumers tend to spend more and save less.

Recommended: What is the Average Savings by Age?

Why Marginal Propensity to Save Matters

Using the data from MPS and MPC helps businesses, governments, and foreign policymakers determine how funds are allocated. For example, economists can assess this data to determine increases in government spending or investment spending, influencing savings numbers.

As for consumers, using the marginal propensity to save formula can help them make adjustments to their own spending habits. If their MPC is higher than their MPS, adjustments to consumption may need to be made.

How to Start Saving Money

While the way consumers spend helps the government and economists determine the best way to increase government spending, the way you choose to spend your money can help you set up a solid financial future. Carefully considering all of your spending options may get you on a path toward financial security. Being motivated to save money can have long-term benefits.

So if a windfall comes your way, you may want to consider carefully choosing how to spend those funds. While it’s tempting to use the money on a shopping spree, putting it in some type of savings account may be a better financial decision. After all, saving your extra disposable income can help build an emergency fund, avoid taking on debt, and accumulate a nest egg for your retirement.

Here are a few steps for getting started, even when it feels hard to save money:

Identifying Your Savings Goals

Do you have short-term goals like accumulating an emergency fund to pay for unexpected expenses? Or perhaps you want to save for a family vacation? Maybe you have a medium-term goal, such as paying for a wedding reception or a new kitchen renovation. Or would you like to save for retirement as a long-term goal? No matter your goals, you’ll want to have a clear idea of how much cash you need and by when.

First, decide on a goal date — when you want to have the money saved by. Then, divide the goal amount by the time frame, in months, to determine how much cash you need to stash away each month. Finally, decide where to keep the funds.

•   If your goal is short-term, you may want to consider putting your cash in a high-interest savings account or money market account. Either type of account is relatively low risk and is likely to be FDIC or NCUA insured, depending on the financial institution.

•   If the goals are more long-term, retirement accounts or brokerage accounts are worth considering since they may help your money grow.

Recommended: Take the guesswork out of saving for emergencies with our user-friendly emergency fund calculator.

Creating a Budget

It’s hard to track your money if you don’t know where it’s going. Creating and sticking to a budget is a great way to monitor your spending habits so you can stay on track.

•   To start, take note of your income and expenses for a month or two.

•   Next, create a monthly budget that reflects the average spending amounts for fixed expenses such as your mortgage and variable expenses such as eating out or clothes shopping. Also note money that goes towards savings.

•   If you determine you’re spending more than you earn, you may want to look for ways to cut back on your expenses, such as canceling subscriptions you don’t use. Or you could bring in more earnings by starting a side hustle or selling items that are still useful but that you don’t need.

Using a tool like SoFi or another digital tool makes it easy to track and categorize your expenses. It also helps you find ways to save and lets you monitor your progress toward your goals.

Recommended: Struggling to create a balanced budget? Try our 50/30/20 budget calculator for a simple solution.

Opening a Savings Account

When you receive an increase in your income, setting up automatic contributions to your savings or retirement accounts allows you to set aside extra money by automating your savings instead of having to manually transfer money each month. Look for an account with higher than average interest rate, typically found at online vs. traditional banks.

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

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.00% APY on SoFi Checking and Savings.

FAQ

Can MPS be greater than 1?

The marginal propensity to save (MPS) cannot be greater than one since it is a change in savings, and that difference cannot be greater than one, nor less than zero.

How do you calculate the marginal propensity to save?

To calculate the MPS, or the marginal propensity to save, use the formula of change in savings divided by change in income.

What is the difference between average and marginal propensity to save?

The average propensity to save is defined as the ratio of total savings to total income. However, when talking about the marginal propensity to save, or the MPS, that is the ratio of change in savings to a change in income. The latter reflects a shift.

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The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

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

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

Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

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Aug
12
2023
ACH vs. EFT: What Is the Difference?

ACH vs EFT: What Is the Difference?

By | Budgeting & Goals, Credit, Financial Independence, money | Comments Off on ACH vs EFT: What Is the Difference?

Banking today has a lot of one-click convenience, and you may hear the terms EFT and ACH used interchangeably. There is, however, a key difference between these two acronyms: ACH is one kind of EFT.

To understand this better, first know your definitions. Automated Clearing House (ACH) is a national network linking U.S. financial institutions. This electronic system allows them to debit money from one account and then credit it to another. ACH payments are one variety of EFT, or electronic funds transfer. The term EFT includes additional methods of moving money electronically, such as wire transfers.

So all ACH transactions are considered EFT, but not all EFTs are ACH.

Keep reading to learn more including:

•   Which payments are considered ACH?

•   What are some other EFT payment methods?

•   How do EFT vs. ACH vs. wire transfers compare?

ACH Transfers

ACH stands for Automated Clearing House, a network governed by Nacha (National Automated Clearing House Association). The first ACH association appeared in 1972 in California; by 1974, multiple regional networks joined together to form Nacha, which has since overseen the ACH network nationally.

But what is ACH? Put simply, ACH is a type of electronic fund transfer (EFT) that allows individuals, corporations, and even the government to electronically move money from one bank account to another. It can be thought of as a hub that keeps funds flowing.

ACH payments work domestically; that is, among banks and credit unions within the United States. You may be able to send money via international ACH transfers, but other countries will have their own networks and governing bodies. Some countries do not have an equivalent network at all.

Funds first go to the Automated Clearing House, which then reviews the payments and releases them in batches throughout the day. For this reason, ACH transfers are not immediate. How long ACH transfers take can vary: Traditional ACH transfers can take one to two business days, but in recent years, Nacha has enabled same-day transfers for eligible transactions.

How Do ACH Transfers Work?

ACH transfers work thanks to a data file that includes information about a prospective payment. The file goes to the payor’s bank to the clearing house and then on to the payee’s bank, with details on the transaction. The funds get moved into the intended location, and the process is completed, transferring money from one account to another.

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How Is ACH Used?

Consumers and businesses can use ACH for a variety of purposes. For example, employers often use the ACH network for direct deposit. This enables them to deposit paychecks directly into employees’ bank accounts. When an entity, like an employer or the government, initiates the ACH process to send funds, this is classified as an ACH credit.

Individuals can provide bank account information to businesses, such as mortgage lenders and utility companies, to enable ACH debit transactions as part of their electronic banking. This means those companies are able to directly debit funds from the individual account using ACH as a form of electronic bill payment. Businesses and individuals may utilize ACH debit for autopay (recurring payments) or for one-time payments.

Even peer-to-peer (P2P) payment methods like PayPal and Venmo can utilize the Automated Clearing House network for electronic transfers. (When such services offer instant payments, they may charge a fee and use your credit card instead, so proceed carefully in these situations.)

Typically, the employer or merchant enabling ACH payments is the one to pay ACH fees.

Recommended: ACH Payments vs. a Check

What Is EFT?

Electronic fund transfers (EFTs) refer to a much broader range of electronic payments. ACH is a type of EFT, but EFT can also include payments like wire transfers, debit card payments, credit card payments, local bank transfers, instant P2P payments, and even ATM transfers. Electronic fund transfers can be domestic or international in scope.

The Consumer Finance Protection Bureau refers to electronic fund transfers as “any transfer of funds that is initiated through an electronic terminal, telephone, computer, or magnetic tape.”

Note: Another common term in finance is ETF (exchange-traded fund). The acronyms are similar, so it’s important to recognize that an ETF is an investment security, not a payment method.

How Do EFT Payments Work?

EFT payments may use the ACH network, or they may not. An example of a transaction that doesn’t use ACH is tapping or swiping your debit card to make a payment. It’s an instantaneous transfer of funds, without banking information being exchanged. The money is moved from your account to the store’s without any verification other than your PIN.

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Types of EFT Payments

EFT payment is a broad category, including common transfers like ACH and wire transfers. Here is just a short list of payment methods that can be classified as EFT:

•   ACH transfers

•   Wire transfers

•   Peer-to-peer payments (often done through ACH)

•   Debit card transactions (in person or online)

•   Credit card transactions (in person or online)

•   ATM transfers

•   E-checks

•   Telephone orders

Do EFT Payments Have Fees?

Typically, a merchant will pay a small percentage of a transaction’s amount for the privilege of using an EFT method. In some situations, you, the consumer, may be assessed a fee for using these methods. For instance, some merchants may add a surcharge for credit card vs. cash or debit card payments. Or if you pay by phone, there may be a surcharge. You should be alerted to these add-on costs, however, in advance, so you can decide if you want to proceed or not.

What Is the Difference Between ACH and EFT?

We’ve established that the key difference between ACH and EFT is that an ACH is a type of EFT. This table further breaks down the distinction:

ACH

EFT

AvailabilityTraditional ACH is available domestically (in the U.S.).Various types of EFTs can be used internationally.
SecurityTransfers pass through the ACH, which provides an added level of security over paper checks and debit card transactions.While ACH and wire transfers are less prone to fraud, other forms of EFTs (like debit and credit cards) can be susceptible.
SpeedCan be same-day but never instant; may take multiple days.Can be instant.

ACH vs EFT vs Wire Transfers

When banking, you’re likely to hear about different ways to move money, including ACH, EFT, and wire transfers. Here’s a closer look: ACH is a type of EFT, but another common type of EFT is a wire transfer, which can be used to send money to someone’s bank account.

Wires can be both domestic and international and often have a fee for both the sender and the receiver, depending on the banks or transfer service agencies (like Western Union) involved. Wire transfers allow you to make an electronic payment “by wire,” such as through SWIFT, the Clearing House Interbank Payments System, or the Federal Reserve Wire Network. Wire transfers can take up to two days to fully process; international ones might take longer.

Should You Use Electronic Transfers?

Electronic transfers are common in modern banking. It is likely that you already utilize some form of electronic transfer, whether you receive a direct deposit from your employer like 96% of American workers, have your utility bills on autopay, pay for groceries with a debit card, or use peer-to-peer transfer apps to split the dinner bill or pay a friend for concert tickets. When you buy a house, the mortgage company may even ask you to wire funds in time for the closing.

The Takeaway

Automated clearing house (ACH) transfers are a type of electronic funds transfer (EFT), which allows for the direct debiting and crediting of funds from one bank account to another. Common examples of ACH include direct deposit from an employer into your bank account or an automatic bill payment debited from your account.

ACH is only one type of EFT, however; other types include wire transfers and debit and credit card payments, among others. These kinds of payments are commonly used today to keep funds flowing quickly and securely and play an important role in your banking life.

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

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.00% APY on SoFi Checking and Savings.

FAQ

Is EFT the same as direct deposit?

EFT stands for electronic funds transfer. Direct deposit is one example of EFT.

Is ACH a wire transfer?

While ACH and wire transfers are similar transactions, they operate on different timelines and according to different rules. Wire transfers (especially domestic ones) can occur almost immediately, while ACH transactions can take a couple or a few business days.

What is the difference between ACH and autopay?

ACH is a method for electronically transferring funds between accounts. Autopay involves your setting up recurring payments of bills with a vendor. It typically uses the ACH network to complete those transactions.

Is ACH the same as direct deposit?

Direct deposit is one kind of ACH payment, but other kinds of ACH transactions are possible as well.

What is the best EFT payment method?

The best EFT method will depend upon various factors, such as timing and the technology you can most easily access or are most comfortable using.

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SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

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

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

Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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

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.

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Aug
10
2023
A photo of a woman relaxing mobile

Tips for Becoming Financially Independent

By | Financial Independence, money | No Comments

It’s a common dream to become financially independent. Though the words “financial independence” can mean different things depending on a person’s situation and outlook, it usually refers to living comfortably off one’s savings and investments. That often means you have no or low debt.

In some scenarios, the definition of financially independent may also mean you have the ability to retire early, though not necessarily leaving a career you love. It’s more about working because you want to, not because you have to do so to pay bills.

If this sounds appealing, you’ll probably be happy to know that achieving financial freedom could be easier than you think. The process often boils down to a relatively simple concept: Spending less and saving more.

Below, you’ll learn more about what it means to become financially independent and explore some smart strategies for achieving it

What Does It Mean to Be Financially Independent?

While there is no set definition for financial independence, the term often means getting to a point where you don’t have to work to pay your living expenses. Usually, financial independence is achieved by relying on savings, investments, and other forms of passive income to pay the bills.

Though financial independence doesn’t have to mean leaving behind a job or career path, it can. In fact, for many people, knowing the answer to “When can I retire?” helps them judge whether they are on track to financial independence or not. The term “financial independence” is often used as a synonym for early retirement. What’s more, the two phrases are commonly strung together in the popular acronym FIRE, which stands for “financially independent, retire early.”

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Benefits of Financial Independence

There are myriad benefits to becoming financially independent.

•   One of the biggest perks is the ability to have choices. You can choose to keep working if you enjoy it, or you can kick back and relax. You can save money to pass on to future generations, or you can splurge on a trip around the world.

•   Achieving financial freedom can also enable you to enjoy work more. If you’re no longer doing it for the money, you can structure your job responsibilities so you’re only doing the things you want to do.

•   Financial independence can also benefit your physical health. Having the ability to work less allows you to exercise more and get more sleep. You may have more time and energy to eat better too.

•   Financial independence may also have emotional benefits. It can allow you to spend more time with a partner, kids, family, and friends. Having stronger relationships can lead to increased happiness in life.

How to Become Financially Independent in 6 Steps

Becoming financially independent typically requires having a clear plan in place and being willing to roll up your sleeves and get to work. Here are some key steps that can help you get there.

How to Become Financially Independent

1. Setting Realistic Goals

Being financially independent can look different for everyone, so a good place to start can be to define what being financially independent means to you. What do you visualize? Maybe you want to be debt-free by 40, or you’d like to retire at 50. Or perhaps you’d love to relocate to some place warm and sunny in 10 years.

As you develop your goals, you may want to give them a reality test by consulting with a financial advisor or chatting with a trusted financial mentor. You may find that you need to retool your vision based on your financial situation and how much time you have to achieve your dream.

Once you’ve honed in on some specific, achievable long-term goals, you can begin to figure out what you’ll need to do to make them a reality — whether that’s cutting your spending, boosting your income, and/or saving and investing more than you currently are each month. Even if you are just starting out or not earning that much, it can be wise to forge ahead. There are even ways to save on a low income.

2. Understanding That Income Isn’t Everything

Another step in how to be independent financially: Learning that your salary may not be the only thing that matters. Many people have a tendency to fixate on how much money they are making. And while income is an important part of your financial big picture, other factors also count. Yes, it’s easier to amass assets if you have more monthly income, but one key to increasing your net worth is to spend less than you make.

For example, if you are making a comfortable salary but haven’t gotten into the habit of saving and investing, then you may not be leveraging your income to its full potential. Becoming financially independent often requires an understanding that the amount of money you make is just one piece of the puzzle.

The path to financial independence may become a little less daunting once you realize that a high income alone is not necessarily going to lead to sustainable wealth. There are several other factors that play a role in how much you are able to grow your finances, such as how much interest your investments are making and the rate at which you are able to save.

More than a high salary, financial independence typically requires foresight, long-term thinking, and a holistic understanding of how your income overlaps with your expenses, lifestyle, and future goals.

3. Building a Budget

No matter what your income level, one of the keys to becoming financially free is to spend less — and potentially a lot less — than you are earning. Doing that typically involves finding a budget method that works for you.

Budgeting is the process of measuring income, subtracting expenses, and deciding how to divert the difference toward reaching your goals. It’s often considered the essential first task in achieving financial independence.

You can set up a monthly budget by first assessing what you are currently earning (after taxes) each month. Next, you can tally up your actual spending by looking at the last three to 12 months of bank and credit card statements and recording your expenses on a spreadsheet.

Seeing it all laid out in black and white can help you identify unnecessary expenses you might be able to cut out. You can then put the difference toward your long-term goals instead. One rule of thumb is to try to put 20 percent of your monthly take-home income into savings or investments. Working couples might try to bank a substantial part of one salary if possible.

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4. Establishing A Safety Net

Achieving financial independence also means thinking about financial security. Having a dedicated emergency fund that can help you weather a health emergency or another large, unforeseen expense means. Having money set aside can mean you may not have to run up credit card debt or dip into your investment or other savings account in order to cover these costs.

If you haven’t already started an emergency savings account, consider whether or not you would be able to afford a sudden car repair or if you could handle paying out of pocket for an unexpected dental procedure.

Experts often recommend having at least three to six months’ worth of living expenses set aside in an account. Ideally, that account earns interest but can be easily and quickly accessed when you need it.

The more effective you are at dealing with financial emergencies, generally the faster your savings and investments can grow.

5. Putting a Debt Pay-Off Plan Into Action

Taking care of your debt is another important step to achieving financial independence. Today, debt can take many forms — whether it’s student loan debt, a home mortgage, a car loan, or credit card debt.

If you currently have debt, consider incorporating a debt reduction plan into the budget you create and calculate how you would need to tweak your current spending habits in order to prioritize becoming debt-free.

It can be wise to start with the debt that has the highest interest first, since borrowing from those creditors is costing you the most money.

If you have multiple credit card balances, you may want to target them one at a time. You can do this by paying more than the minimum each month on one balance (paying just the minimum on the others) until that balance is wiped out, then move on to the next.

6. Being a Smart And Savvy Investor

Becoming a smart investor is another key step you can take on your journey to financial independence. The world of investment can be confusing and carries risk, but it also has the potential to be lucrative.

You may want to first focus on tax-advantaged accounts. If you have an employer-sponsored option, such as a 401(k) plan, it can be a good idea to contribute some of each paycheck, especially if your employer offers to match your contributions. Depending on your situation, you may be able to open a traditional IRA, Roth IRA, or SEP IRA as well. (There may be contribution limits to adhere to, however.)

If you have children, you may also want to consider the benefits of a 529 plan to help you invest for their college educations.

If you’re able to invest additional funds, you can choose a financial firm you want to work with and then open a standard brokerage account. From there, you can put your money in a mutual fund or an exchange-traded fund (ETF) (which bundle different types of investments together). Another option: If you’re prepared to do a fair amount of research, pick and choose your own stocks and bonds.

If you’re new to investing, you may want to consider opening an investment account through a robo-advisor, an investment management service that uses computer algorithms to build and look after your investment portfolio and typically charges relatively low fees.

Recommended: When All Your Money Goes to Bills

How Much Money Do You Need to Become Financially Independent?

How much you need to become financially independent will depend on a variety of variables, such as the cost of living you expect to have and the amount you plan to spend (will you be a no-car household? Two cars perhaps? How often would you like to travel?).

One way to look at this is to consider a formula used for retirement, which says you want to have 25 times the amount you plan to spend in a year, and that money needs to be invested in a 60/40 stocks and bonds portfolio to generate income.

Then, you would apply the 4% rule, which means that you would safely take 4% of your investments out each year (adjusting for inflation) in order to have those funds without outliving your money. Now, if you are a significantly younger person than the usual retirement age, you would have to adjust the numbers to cover more years.

Here, a couple of examples:

•   Let’s say you plan to spend $50,000 a year on your living expenses. If you multiply that by 25, you get $1.25 million. That would need to be the amount of your available assets to be financially independent.

•   Now, let’s say you plan to spend $125,000 a year on your living expenses. In this example, when you multiply $125K by 25, you would need $3,125,000 to be financially independent.

When looking at these numbers, don’t forget to consider other forms of income you might have coming in. Perhaps you earn passive income in some way or will eventually start to receive a pension. Maybe you will have money coming in from a side hustle you love or from Social Security. Consider all ways money could flow in your direction to understand your path to financial independence.

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Habits That Can Get in the Way of Financial Freedom

As you pursue becoming financially independent, there can be habits than can hold you back. Here, a few to be aware of:

•   Lack of planning: If you don’t take the time to dig into your finances and find a budget that works, you aren’t in control of your money or your goals. Thinking you can wing it typically doesn’t help you hit your marks or become financial freedom. Living with high-interest debt rather than figuring out how to pay it off is another example of how lack of planning can hinder you.

•   Lack of financial literacy: This is another aspect of “winging it”: not educating yourself about how finances, net worth, and other facets of money management work can hinder you from reaching financial freedom. Seeing what resources your bank offers, listening to well-regarded podcasts, or reading well-researched books or websites can get you on the right track.

•   Procrastination: Not getting started can hold you back financially. The sooner you begin saving, the closer you get to financial independence.

•   Lifestyle creep and/or FOMO: If, as you earn more money, you spend more money, that’s lifestyle creep), and it can inhibit your ability to save. And iif you spend lavishly to keep up with friends, that’s FOMO, and it can prevent you from achieving financial independence.

If you avoid these habits and manage your money well and save steadily, you can be on the path to financial freedom.

Starting a Savings Account Today

One path to financial independence is to save regularly. Opening a savings account with a healthy return can be one step toward doing that.

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

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FAQ

How do I start to become financially independent?

Becoming financially independent can involve budgeting well and avoiding overspending. It also typically involves managing your money to save steadily and invest your cash so it works for you.

How much money do you need to be financially independent?

One rule of thumb is to have 25 times the amount you plan to spend in a year in the bank in order to be financially independent. So if you plan on spending, say, $100K a year, you would need assets of $2.5 million.

How can I get financially free with no money?

With no money, it will be hard to be financially free unless you live off the grid. For most people, even those with low income, financial freedom is a matter of spending less than your make, paying off debt, saving aggressively, and investing.

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SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

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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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Taxable vs Non-Taxable Income

Taxable vs. Non-Taxable Income: What’s the Difference?

By | Family Finances, Life & Career, money | Comments Off on Taxable vs. Non-Taxable Income: What’s the Difference?

Nothing is as certain as tax season. Like it or not, it comes every year, and taxpayers need to report and pay their dues on all taxable income. But did you know that some income is non-taxable?

That’s right: In some rare cases, Uncle Sam won’t be asking for his fair share. But you may wonder how to know the difference and how you can correctly file your taxes. This guide can help you understand this important distinction.

Read on to learn:

•   What is taxable income vs. non-taxable income?

•   What are some examples of taxable income?

•   What are some examples of non-taxable income?

Taxable and Non-Taxable Income Explained

The difference between taxable and non-taxable income is pretty straightforward:

•   Taxable income is subject to taxes. That means you must report it to the IRS on your tax return and pay taxes on it based on your filing status and tax bracket. And remember: Income isn’t just money that you earn. Income can come in the form of money, property, or services rendered.

•   Non-taxable income is not subject to taxes. Though you may have pocketed money throughout the year (perhaps child support), you do not need to pay taxes on it. However, you may still need to report it on your tax return.

Understanding the differences between these two terms is easy. It’s understanding just what is considered taxable income vs. non-taxable income that can be more challenging without the help of an accountant.

Understanding your taxes is an important aspect of managing your finances. Incorrectly accounting for income could leave you owing the government money plus penalties, so read on to learn more.

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What Is Taxable Income?

Taxable income is money, property, or services that you received that the IRS requires you to pay taxes on. Common types of taxable income include wages, self-employment earnings, and stock dividends.

Examples of Taxable Income

Wages are an easy example of taxable income, but the list of what kind of earnings are taxed is much more extensive. Below are some examples of taxable income to keep in mind when filing, but note that this list is not exhaustive, meaning you should research each type of income you earned throughout the year to determine if you owe taxes.

•   Salary, wages, tips, bonuses, and self-employment income: First and foremost, the income you make for doing your job counts as taxable income. That includes both salaried and hourly workers who receive a W-2. If you earn tips — even cash tips — you’ve got to report those, too. Bonuses are also taxable, as is any income you make as a self-employed individual.

Self-employed taxpayers who receive 1099 forms have to pay more in taxes than salaried employees. That’s because they also owe self-employment taxes to cover items like Social Security and Medicare contributions.

•   Investment income: If you rent out property (like a house or a vehicle), you must report that income to the IRS and pay taxes on it. If you have investments that pay interest and unqualified dividends, those are taxable as well.

•   Fringe benefits: The IRS is careful to spell out that income isn’t just money you earn. For example, if your employer pays for an off-site gym membership or sends you a Christmas gift every year, these are considered fringe benefits — and you’ve got to report and pay taxes on the monetary value of those benefits. Not all fringe benefits are taxable; if you’re unsure whether you need to pay taxes on something, you can check out the IRS’s resource on fringe benefits or work with an accountant.

•   Some retirement income: If you contributed to a traditional IRA or traditional 401(k) plan, those contributions were pre-tax. When you start withdrawing those funds, you unfortunately have to pay taxes on that money.

•   Income from the sale of assets: When you sell something — whether it’s your car, a stock, or even an old couch — you generally have to report the capital gain from that sale. There are exceptions, including the big tax break you may receive when you sell your house (more on that below).

•   Royalties: If you earn royalties from copyrights, patents, or oil, gas, and mineral properties, you’ll have to pay taxes on those royalties.

•   Alimony, sometimes: Tax law on alimony payments has changed. If you got a divorce before 2019 and have not altered the agreement to expressly state that alimony isn’t considered income, then you’ll pay taxes on it.

•   Unemployment compensation: Yes, even if you’re out of work and receiving unemployment benefits, you’ve got to pay taxes.

Remember, this list is not all-encompassing. The IRS has guidance on everything from cash for babysitting to bartering to lottery winnings. If you’re unsure what income to report, you may benefit from working with an accountant. As you prepare for tax season, these professionals can help you sort out what is taxable vs. non-taxable income so you can file correctly.

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What Is Non-Taxable Income?

Non-taxable income is money, property, or services that you received that the IRS does not require you to pay taxes on, though you may still need to report it on your tax return. Common types of non-taxable income include child support payments, cash rebates, and welfare payments.

Recommended: What Is Unearned Income?

Examples of Non-Taxable Income

As with taxable income, the list of non-taxable income is extensive (and has a lot of fine print). We’ve compiled some examples of non-taxable income below, but it’s a good idea to work with an accountant if you’re unsure how to report your income on your tax return. Again, this is not a complete list.

•   Child support payments: Child support payments are not taxable income — and there’s no fine print to worry about with this money, either.

•   Welfare: Welfare benefits are not taxable. Like child support payments, guidance is very straightforward on this.

•   Alimony, sometimes: If you receive alimony for a divorce in 2019 or later, you do not pay taxes on that income. If you got a divorce before 2019 and modified the agreement after 2018, you may not have to pay taxes on alimony.

•   The sale of a house, sometimes: If you’re quickly flipping houses for a profit, those capital gains are taxable. However, the government has provided a sizable tax break for homeowners. If you sold your home and lived in it for at least two of the last five years, you don’t have to pay taxes on the first $250,000 in profit ($500,000 if married, filing jointly). There’s more fine print about this tax break, so it’s a good idea to reference IRS materials if you have large capital gains from the sale of a house.

•   Some fringe benefits: In general, fringe benefits are taxable, but the IRS does have a list of exclusions, like adoption assistance and dependent care assistance (up to certain limits). For full details, review the IRS’s detailed breakdown of fringe benefits and taxation; the link is provided above.

•   Some retirement income: While you’ll pay taxes when withdrawing from your traditional IRA and 401(k) in retirement, you won’t have to worry about taxes when drawing from a Roth IRA and Roth 401(k). Why? Contributions are post-tax, so you’ve already paid taxes on the funds.

•   Gifts and inheritances: You usually don’t have to pay taxes on (property) gifts you receive; the IRS doesn’t come for Santa’s presents!). What’s more, you likely don’t have to pay taxes on inheritances. Instead, the deceased’s estate pays taxes on the money before you receive the inheritance.

•   Life insurance payout: If you receive proceeds as the recipient of a life insurance policy when the policyholder dies, that money is not taxable. But if you cash in a life insurance policy, some or all of it is taxable.

The IRS has a more comprehensive list to review before filing.

Recommended: Different Types of Taxes

The Takeaway

It’s possible to earn both taxable and non-taxable income. While the most common source of income — your paycheck — is taxable, you might receive some income for which you pay no taxes, like child support or capital gains on the sale of your home. It’s wise to make sure you fully understand how money you receive is categorized, so that you can file your taxes correctly. This could be accomplished by working with a tax professional, using tax software, or doing your own research.

Looking for a way to make more money from your cash? Open a SoFi bank account, which boasts a competitive annual percentage yield (APY) and charges no account fees, both of which can help your savings grow. You can also spend and save in one convenient place and have savings tools like Vaults and Roundups at your fingertips.

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FAQ

What are the pros and cons of taxable income?

The largest pro of taxable income is that it inherently means you’re making money. Whether it’s from a salary or an investment, having income that’s taxable implies you are receiving the money you need to survive. And, of course, the con of taxable income is that not all of the income is yours — you’ll have to pay taxes on it, and generally, the more you earn, the more you’ll owe.

What are the pros and cons of non-taxable income?

The biggest pro of non-taxable income is that you don’t have to pay taxes on it. Every dollar you earn is yours to keep. Non-taxable income can have some cons, however, depending on the source. For example, you may receive non-taxable income as a life insurance payout or inheritance, which implies you’ve lost someone special in your life. Non-taxable income can also be more confusing to navigate on your tax return and could necessitate the help of a professional accountant.

How do you calculate taxable and non-taxable income?

The IRS has a comprehensive guide to taxable vs. non-taxable income. In assessing each source of your income, you can review IRS guidance for how to report it and whether it’s taxable or not. If you’re feeling overwhelmed, you may benefit from using tax preparation software or a professional tax preparer.

Photo credit: iStock/atakan

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 members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

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

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

Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

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.

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.

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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Aug
08
2023

Guide to Bank Deposits

By | Family Finances, Life & Career, money | Comments Off on Guide to Bank Deposits

A bank deposit is money that you give a financial institution like a bank or credit union to keep safely in an account. You can make bank deposits via cash, checks, online transfers, or direct deposit. The type of deposit you make will determine when you can withdraw funds.

You can make a deposit into a checking or savings account, among others. Some of these accounts may pay interest for the privilege of having your cash on deposit.

Understanding how bank deposits work and the pros and cons of each type of deposit can help you better manage your money. Here’s what you need to know.

What Are Bank Deposits?

The bank deposit definition is when you put money into a bank account. Your bank deposits can go into various accounts such as savings, checking, money market accounts, or certificates of deposits (CDs).

Depositing your money into a bank account can help you accomplish two things:

•   It can keep your money safe.

•   It can help your money grow.

Bank deposits are insured by the Federal Deposit Insurance Corporation (FDIC) (up to $250,000 per depositor, per ownership category, per financial institution, and in some cases even more). That means your money is a whole lot safer in a bank account than under your mattress.

The other thing you can accomplish by depositing your money is helping it grow. Because many financial institutions offer interest-bearing bank accounts, you can capitalize on compounding interest by not withdrawing funds and also consistently adding to your balance over time.

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How Do Bank Deposits Work?

The type of deposit you make dictates the process.

For example, when you deposit a check, the bank sends a digital image of the check to the payer’s financial institution. While large banks usually communicate directly to clear checks, other banks work through a clearinghouse or a third-party intermediary to verify checks. The clearinghouse organizes all the deposits coming in and out of a specific bank and ensures all deposits are put in and taken out of the correct accounts.

If the payer’s account doesn’t have enough funds to process the check, it will bounce and be returned unpaid. If you have already taken out the funds from the check, you will have to pay the total balance back, usually plus a fee.

Direct deposits, on the other hand, work a little differently. Since direct deposits are scheduled payments, the payer’s or employer’s bank will credit the account before sending the direct deposit. This way, the payer’s bank can ensure the account has enough money to cover the transaction.

Once the funds are deposited, you can access the sum the next business day.

How Long Do Bank Deposits Take to Process?

Process times vary by the financial institution and how the deposit is made. However, federal law limits the time it takes for a bank deposit to process.

•   For example, if you deposit checks totaling $225 or less, the bank must let you access the funds the next business day. So, if you deposited checks on a Monday, you should be able to access your money on Tuesday. However, if there’s a bank holiday, transactions may be delayed.

•   If you deposit a check(s) totaling more than $225 you will have access to the first $225 the next business day. Then, you will have access to the remaining deposit the following business day.

•   When you deposit a check from another account from that financial institution, a government check, or a certified check in person at a bank branch, you should have access to the money the next business day.

Keep in mind some banks and credit unions apply cut-off times, which dictate the end of the day. So, if you deposit after the cut-off time, you may have to wait an extra business day before accessing the deposit.

Also, other types of deposits have different processing time. For example, wire transfers, and ACH deposits may take between one and five business days to process.

Here are a few reasons why it can take longer for your deposit to process:

•   You’re depositing money into a new account

•   You made an ATM deposit to an ATM outside the financial institution’s network

•   If you have a deposited check that was returned unpaid

•   Your deposits exceed $5,525

•   You’ve overdrawn your account too many times.

Recommended: Causes of Overspending

2 Types of Bank Deposits

There are two primary types of bank deposits: demand deposits and time deposits. Here’s a breakdown of each.

Demand Deposits

Demand deposits consist of money you put into the bank that you can take out when you need cash. Demand deposit accounts usually have minimal interest rates (or no interest), but they give you more freedom to withdraw money when needed. These types of deposits can be made to three types of accounts, including:

•   Checking accounts. This type of account is meant for everyday transactions. You can deposit and withdraw money as often as you want. Usually, checking accounts have checks and debit cards linked to them so you can access your money when you’re on the go.

•   Savings accounts. This type of account is designed to help you sock your money away for short-term or long-term goals. Since the different types of savings accounts are meant for savings, some banks apply withdrawal limits, limiting the number of monthly withdrawal transactions that can occur in an account.

Savings accounts may also have interest rates higher than checking accounts. This is especially true if you deposit funds at an online vs. traditional bank.

•   Money market accounts. This type of account combines the features of a savings account with those of a checking account. Money market accounts let you earn interest like a savings account. They can also provide a debit card and checks so you can withdraw funds.

Time Deposits

A time deposit is when you put money into a deposit account with a fixed rate and term, like certificates of deposit (CDs). You can only take money out of a time deposit account once the term expires. (You may have to pay a penalty if you take money out of the account beforehand. But whether you get a penalty or not depends on the type of account and the financial institution.)

For example, let’s say you deposit $5,000 in a CD that earns 5% interest for one year. Then, after one year, you can withdraw $5,250.00, which includes your deposit and interest earned.

You can think of banks as using time deposit accounts to borrow money from depositors. In exchange for borrowing money for a certain amount of time, the bank usually gives the depositor a fixed interest rate, typically higher than traditional savings accounts. At the end of the term, the depositor can take out the money in the account or renew the time deposit for another term.

Recommended: What Is an Electronic Check (E-Check)?

What Are Mobile Deposits?

Many banks and credit unions now offer mobile banking, giving you access to banking services no matter where you are. You can make mobile check deposits from your phone as part of mobile banking. So, instead of driving to an ATM or local bank branch, you can deposit it on your mobile device.

All you have to do is:

•   Download the bank’s mobile banking app.

•   Log into your account.

•   Choose the account you want to deposit the check into.

•   Endorse the back of the check.

•   Enter the amount of the check.

•   Snap a photo of the front and back of the check.

•   Review the deposit information, and then hit deposit.

Remember, though, there can be limits on the amount and type of checks you can deposit on your mobile app. For example, some banks prohibit depositing third-party checks, money orders, traveler’s checks, and foreign checks. So, verify the rules with your bank or credit union.

Also, if you deposit a check using the mobile app, keep the paper check until the check clears. This way, you’ll have a backup if it doesn’t go through or there is an error.

Open a Bank Account Today

Are you looking for a home for your money? If so, see what SoFi has to offer. With a SoFi bank account, you will spend and save in one convenient place. Plus, you’ll earn a competitive annual percentage yield (APY) and pay no account fees, both of which can help your money grow.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.00% APY on SoFi Checking and Savings.

FAQ

What are the 2 types of bank deposits?

Demand deposits and time deposits are the two types of bank deposits. A demand deposit references deposits made into an account such as a checking or saving account where you can withdraw. A time deposit, on the other hand, refers to a deposit made to an account with a fixed interest rate and set terms, like certificates of deposits.

What happens if you deposit more than $10,000 in the bank?

When you deposit $10,000 or more into a financial institution, federal law requires them to report the deposit to the federal government. The federal government requires this alert to help prevent money laundering and fraud.

Does deposit mean payment?

Yes, deposits can mean an initial payment towards a product or service. It can also mean putting something of value away for safekeeping, like when you make a bank deposit to a bank.

Photo credit: iStock/AlexSecret
SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

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 members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

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

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

Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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