May
29
2024

How Much Money Should I Spend on Rent?

By | Budgeting & Goals, money | No Comments

The rule of thumb has been that your rent should account for no more than 30% of your gross income, but that percentage isn’t right for everyone. Figuring out your “magic number” can require a little thought.

Individual circumstances matter: Maybe you have a heavy monthly student loan payment while your best friend has none. That means they can likely afford a higher rent than you can at the moment. Also, economic and social forces are shaping how big a bite rent takes out of a paycheck. According to the most recent U.S. Census Bureau data, almost one-third of Americans are spending more than 30% of their income on housing costs, an increase of almost 5 million households vs. three years earlier. That 30% just may not be realistic anymore.

Keep reading for detailed information on how much to spend on rent and how to budget for it.

How Much You Should Spend Depends on Your Situation

Whether you rent or own, housing is typically the largest expense the average U.S. consumer must pay for every month.

Determining how much you can afford is really a matter of monthly budgeting and striking a balance. You can look at your take-home pay and then consider how much you are spending on all of your monthly expenses.

You’ll want to account for the necessities, like housing, utilities, health care, debt payments, food, and clothing, as well as some discretionary expenses, such as entertainment and travel. Ideally, you will also be saving and have some wiggle room when paying your bills to cover unexpected expenses that can crop up.

As noted above, each person’s situation will be unique. One person might have a high salary but steep debt payments (student and car loans and a credit card balance to contend with). Another might earn less but be debt-free and therefore able to allocate more toward rent.

Where and how you live also makes a difference. In America’s biggest cities, it’s common for renters to pay a larger share of their income for housing. For example, one recent Moody’s Analytics report found that 57% of those in the New York metro area pay more than 30% of their income toward rent and 36.6% of those in Miami are in the same (very pricey) boat. When compared to the person who lives in, say, a small city in the Midwest or South, there’s likely a major price gap.

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Figuring Out How Much You Should Spend on Rent

There are several ways to come up with solid guidelines for how much to pay in rent based on your particular situation.

Use a Budgeting Rule

You’ve already learned about the rule of thumb — one that’s been around for decades — which puts the ideal housing costs at 30% of your after-tax income, no matter how much you earn.

That rather broad guideline dates back to the Brooke Amendment, which capped public housing rents at 25% of an individual’s income in 1969. Congress raised the cap to 30% in 1981, and eventually it became the go-to guide for determining “cost burden” — the amount of income a family could spend and still have enough left for other expenses — even those who aren’t in low-income households.

Another perhaps more useful approach is the 50/30/20 budget method, which was made popular by Sen. Elizabeth Warren’s book All Your Worth: The Ultimate Lifetime Money Plan.

The 50/30/20 budgeting method suggests dividing your after-tax income into three main categories, putting 50% toward needs (essential costs like housing, transportation, groceries, utilities, etc.), 30% toward wants, and 20% toward savings.

Following those guidelines, your rent would qualify as a need. But it remains up to you to decide how much of that 50% you want to — or feel you have to — spend on housing. If you live in a major city or tech hub, your rent may be high enough that you have to make adjustments to other essentials in your budget and/or borrow from other categories (say, cutting back on those wants, such as dinners out).

Factor in Costs

Another way to look at your rent budget is to remember that your housing costs are more than just your monthly payment to the landlord. If you only do your financial projections using that single expense, you could wind up with a too tight budget.

It can be valuable to consider all the facets of your rent: There may be a security deposit, moving costs if you are heading to a new place, utilities like electricity and wifi, as well as the cost of furniture if you are a first-time renter. Remember to add in any parking costs related to a rental, as well as renter’s insurance.

Develop a budget that acknowledges these expenses. Will you have to dip into savings for that security deposit? Will some expenses have to go on your credit card? Making these calculations can give you a better bead on your housing costs and may lead you to a new and improved budget.

Look at Other Ways to Save

There are other moves you can make to free up funds for rent if your monthly costs are running high. A few ideas:

•   Consider getting a roommate. That can cut your housing costs dramatically and can be a good option if you feel you are living paycheck to paycheck.

•   Look for less expensive locations. These may just be a few blocks or a zip code away from your ideal area, but they can make a major difference in your cost of living. For instance, if you can live 20 minutes further away from your workplace, you might reap significant savings on your rent.

•   Check with providers about monthly charges and interest rates. Sometimes, you may get lucky and find that your wireless provider can lower your bill or your credit card can take your annual percentage rate, or APR, down a notch.

•   Look for other ways to economize on non-rent expenses. Join a warehouse club and split the bounty with a friend or two to save on food costs. Minimize the number of streaming services you have. Cut back on rideshares and take public transportation; check out free music and other cultural offerings in your town.


💡 Quick Tip: When you feel the urge to buy something that isn’t in your budget, try the 30-day rule. Make a note of the item in your calendar for 30 days into the future. When the date rolls around, there’s a good chance the “gotta have it” feeling will have subsided.

The Takeaway

One common guideline says that 30% of your income (before taxes) can be allotted to rent. But everyone’s financial situation is different. Some people live in cities that are pricey; other people have student and car loans that must be paid. By using budget guidelines, you can determine the right figure for your circumstances.

Having the right banking partner may also help you budget better.

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FAQ

Is 30% on rent unrealistic? Is it too much?

Spending 30% of your gross income is a popular guideline, but only you can determine if it works for you. For some people, 30% will be too much, given their other expenses. For others, such as those in major cities, 30% may be a desirably low number.

How much of my salary should I spend on rent?

The usual guideline is to spend no more than 30% of your pretax salary on rent, but some people may find that they must spend more than that. Currently, about one third of all renters spend more than that figure.

Am I overspending on rent?

Some ways to tell that you are overspending on rent would be if you are living paycheck to paycheck, if you are not able to pay down your debts, and if you are not able to save money. If you are in this situation, it can be wise to take a holistic look at your budget, including rent, and see where you can find a better balance, which might include lowering your rent.

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May
23
2024
What Is Market Overhang?

What Is Market Overhang?

By | Growing Wealth, invest, Investing, Terminology | Comments Off on What Is Market Overhang?

Market overhang is a market phenomenon whereby investors hold off trading a stock that’s seen a drop in price, because the expectation is the price will drop even further. A market or stock overhang can be precipitated by the awareness that a large block of shares — say, from an institutional investor — is about to hit the market, potentially driving a stock’s price down.

But it can result from other factors as well. Although the event has not happened, investors may hesitate to sell or buy shares in anticipation of price drop — and this can further depress the stock price. While there is also a business use of the term “overhang,” for investors, it may be useful to focus on how market overhang works in finance, specifically.

Market Overhang Definition

In its broadest use, an overhang describes a somewhat artificial market condition brought on by an anticipated shift in supply and demand (aka the price of a stock). Market overhang has a couple of uses in the business and finance worlds, and in an IPO market as well.

What Is an Overhang in Business?

An overhang in a business context can refer to the practice whereby a company, typically an industry leader, delays the release of a new product in order to stoke greater consumer demand for that product.

A familiar example might be the release of a new technology product or video game. The anticipation of the new release may cause consumers to avoid buying other products as they wait for the arrival of the new one. The overhang may result in lower purchases for existing products — and higher purchases of the newly released product. While this practice can be considered manipulative, it’s not uncommon.

What Is an Overhang in Finance?

More commonly: An overhang in finance is used to describe a dynamic that’s specific to how investors’ expectation about supply and demand can impact a company’s share price.
A market overhang is when a stock’s price declines because investors expect a further price drop on the horizon. Thus, some shareholders may hesitate to sell their shares, because that could further drive down the share price. Other investors may also hesitate to buy shares because of the anticipated price drop.

The business use of the term and the finance use describe different situations, but the common element is how investors’ anticipation of a future event can impact a company’s revenues or share price.

Needless to say, a market overhang can cast a shadow over a company’s performance, influencing share price, liquidity, and more, especially if the situation is prolonged. In many cases, though, market overhang is relatively short-lived and temporary. The difficulty for investors is knowing when the overhang, like bad weather, is finally going to pass. To that end, it helps to know some conditions that can cause a market overhang.

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How Market Overhang Is Created

There are a few conditions that can lead to a market overhang. Often these conditions can overlap.

A Stock Decline

The first is where a stock is already declining, perhaps owing to a change in key economic indicators or market conditions, and there is a buildup of selling pressure as investors hesitate to let go of their shares in a down market. This type of market overhang may be resolved once there are signs of price stability (even if it’s at a lower level).

The Role of Institutional Investors

Another type of stock overhang can be created by institutional investors — or companies that manage investments on behalf of clients or members of a firm. Institutional investors tend to have a larger stake in a particular stock compared with individual investors. This means that when the institutional investor plans to sell a large portion of their shares, a market overhang could kick in when investors become aware of this possible sale.

The anticipation of a large block of shares entering the market could drive prices down, and thus investors might hold off trading this particular stock — affecting its price, even before the institutional investor has made a move.

The stock overhang might be worse if it occurs during a price decline. In that case, investors may see the decline in share price, become aware that a large investor may sell a block of shares (which could further depress the price), become even more wary of buying or selling the company’s shares.

IPOs and Market Overhang

A third way that market overhang may occur is after an initial public offering (IPO). An IPO market can be a hot market, after all, and a company may get significant press coverage as its IPO approaches, which can drive up the stock price.

But if the IPO isn’t a big hit, and the share price isn’t what investors hoped (in IPO terms), there might be a bit of an overhang as investors wait for the lock-up period to end. The lock-up period is when company insiders can sell their shares, potentially flooding the market and further lowering the price.

Understanding the Effects of Market Overhang

Market overhang can last for a few weeks or even months — sometimes longer. The chief impact of a market overhang is that it can artificially depress the price of a stock, and if the market overhang is prolonged, that can have a negative impact on company performance.

As noted above, a market overhang typically ends when a stock price stabilizes. Unfortunately that often occurs at a lower price point than before the shares began to decline.

Example of Market Overhang

While some consider the market overhang phenomenon more anecdotal than technical, it’s something to watch out for. It could present an opportunity. And it doesn’t require a complicated, technical stock analysis to understand.

For example, let’s say a large tech company is trading at $300 a share. But there are reports that the company has been facing some headwinds, and it may undergo a rebranding and repositioning. In the face of this change and uncertainty, it’s natural that it might impact company performance and the share price might wobble a bit. But then, if enough investors are concerned about the company’s “new direction,” there could be a bigger shift in trading behavior that might further depress the share price in advance of the company pivot — creating an overhang.

While this isn’t ideal for current shareholders, a market overhang like this could be a “buy” opportunity for other investors. It depends on a number of factors, and it’s always important to understand market trends as well as company fundamentals. But it’s possible that some investors may view the company as a good prospect, despite a currently undervalued share price, and buy shares with the hope they might rise to their previous levels.

Why Market Overhang Matters

Market overhang is a valuable phenomenon for investors to be aware of, largely because it reflects many of the basic tenets of behavioral finance, which is the study of how emotions can impact financial choices. A market overhang could be viewed as the result of loss aversion and herd mentality — two well-documented behavioral patterns among investors.

Loss aversion is, as it sounds, the wish to avoid incurring losses. Herd mentality is, not surprisingly, the tendency for investors to behave as a group: buying or selling in waves. You can see how these two very human impulses — to protect oneself from losses, and to follow the herd — might create a market overhang.

The good news, though, is that investors are capricious and markets can be volatile, which means the market overhang will usually pass, and the stock will regain its normal momentum, whatever that may be. As an investor watching the market change, it’s up to you whether a stock overhang might present a buy opportunity or a sell opportunity — if you need to harvest some losses, for tax purposes.

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What Market Overhang Means for Shareholders

Market overhang affects different shareholders differently. Since institutional investors tend to be the ones who create market overhang, they also tend to have the upper hand on what it means for their investments.

Regular investors might worry that some of their shares are losing value. But with the ebbs and flows of the stock market, a price can rise and fall at various times throughout the year — even throughout a given day. Fluctuation is normal and this is part of the risk in investing in the stock market. Consider waiting out the storm to make an informed decision. There’s a chance the stock could rise to new highs and your investment will be worth even more.

The Takeaway

A market overhang is a type of trend that is considered more behavioral in nature, but it can be worthwhile for investors to keep it in mind when a stock isn’t performing as expected. In some cases, when investors anticipate an event that could drive down a stock’s price, they may hold off on trading that stock, further depressing the price and creating a market overhang. In that sense, a market overhang can become a self-fulfilling prophecy.

Institutional investors can create a market overhang, for example, when they contemplate selling a large portion of their holdings. This might spook other investors, who likewise decide not to trade their shares, creating a sort of temporary downward spiral in the share price. But because two common investor dynamics are at play here — the fear of losses, and the desire to comply with what other investors are doing — the emotions are usually temporary, and the market overhang passes.

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May
21
2024
ACH vs Check: What Are the Differences?

ACH vs Check: What Are the Differences?

By | Budgeting & Goals, money, Terminology | Comments Off on ACH vs Check: What Are the Differences?

While both ACH and checks have their upsides, ACH tends to be the quicker and more secure payment method. However, in your financial life, there will probably be times when one is a lot better suited to your needs than the other.

Here’s a detailed breakdown of ACH vs. check, the pros and cons of each, and how they stack up.

What Is ACH and How Does It Work?

An ACH transfer (named after the Automated Clearing House network) is an electronic banking transaction that is processed through the ACH network. The network is a major financial hub, made up of around 10,000 institutions. Through the ACH network it is possible to process the following transactions:

•   Direct debits

•   Direct deposits

•   Direct payments

•   Electronic checks (eChecks)

•   Electronic funds transfers (EFTs)

Businesses and consumers have the option of using ACH transfers to make direct payments (known as ACH debit transactions) or direct deposits (ACH credit transactions). Some financial institutions even make it possible to schedule and pay bills electronically via ACH transfers. You are probably familiar with ACH transactions when you set up autopay on an account, whether it’s a utility bill or your gym membership.

You may wonder how long ACH transfers take. Because they are electronic, ACH transfers can clear banks in a matter of a few business days as long as there are enough funds in the account. However, there are times where ACH transactions will take longer. This is especially common if a transaction is suspected to be fraud.

However, for something like a direct deposit of a paycheck, ACH can be quite quick. When the payment hits your checking account, it’s immediately available. You don’t have to run around with a paper check that needs to be deposited. That can make a big difference between getting paid by ACH vs. a check.

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Pros and Cons of ACH

Like any financial tool, ACH transfers have some advantages and disadvantages worth considering. Here’s a closer look at some important pros and cons.

Pros

 Cons

•   Free. Most, but not all, ACH transfers are free.

•   Errors can be reversed. You can sometimes request a transaction reversal for ACH transfers if an error occurs.

•   Simple and straightforward. Convenient form of payment allowing you to pay without cash.

•   Secure. The digital nature of these payments can make them less likely to have funds stolen.

•   Fees can apply. May need to pay a fee to expedite bill-pay services or to make a transfer to an outside bank.

•   Slow timeline. Can take up to three days for a transfer to go through.

•   Potential roadblocks. Daily transfer limits apply.

What Is a Check?

A check is a payment method that involves making a payment using a paper check that has the payment amount and the payee’s bank account information on it. Once someone writes a check, the recipient can cash it and receive the funds.

Pros and Cons of Using a Paper Check

While not as popular as in the past, checks are still one of the most basic and time-honored financial tools at your disposal. They allow you to move money around without paying a fee, and they are a secure way to do this. What’s more, checks create a paper trail with proof that funds have been received.

But they can wind up costing you, they can take longer than you might expect, and sadly, there are scams that prey upon those who use checks. Here are some of the pros and cons of using a check to make payments or to receive payments in chart form.

Pros

 Cons

•   No fees. Electronic payments can come with fees, but there are no fees for standard checks once you purchase them.

•   Safe way to send money. Cash can be lost or stolen. If a check is lost or stolen, the person who finds it will have a hard time cashing it thanks to handy security features.

•   Proof of payment. Checks have a paper trail confirming proof of payment.

•   Check scams exist. Check scams can be dangerous and easy to fall for.

•   Checks cost money. Typically, you don’t pay a fee when you use a check, but it costs money to buy checks, and depending on your situation, you might have to pay a fee to cash a check at some locations.

•   Processing delays occur. Paying by cash, credit, or electronic transfer can usually occur more quickly than paying by check.

Recommended: Ways to Send Money Online

ACH vs Check: The Differences

Here, a side-by-side comparison of ACH vs. checks. It’s important to note that both have their own unique set of advantages and disadvantages, but much of the choice about which to use will depend on your particular circumstances and preferences.

ACH

 Check

•   For the most part, ACH transfers are free unless a rush fee or a fee for transferring to an outside bank applies.

•   It is sometimes possible to request a transaction reversal for ACH transfers if an error occurred.

•   ACH payments are fairly simple and easy to conduct.

•   ACH transfers can take a few days to clear.

•   There are no fees associated with checks, but consumers do have to buy the checks to be able to use them.

•   Checks offer a safe way to make payments, but there can be issues with scams and stolen checks.

•   Checks provide a convenient paper trail that cash payments lack.

•   Checks can take several days to clear.

Recommended: Average Savings by Age

Which Should You Consider Using?

There’s no right or wrong answer when it comes to choosing a check over an ACH transfer. Both have unique advantages and disadvantages. Consider these scenarios:

•   Because it’s possible to set up recurring ACH transfers, that can be a much more convenient option if someone wants to schedule ongoing automated payments such as rent or bills.

•   Checks, which are very secure and convenient, may be a better fit for one-off payments such as paying the babysitter or a hairdresser.

As you see, the decision depends on what best suits your needs for a particular transaction.

The Takeaway

Both ACH transfers and checks offer benefits. They can be convenient, secure ways to transfer money, though ACH may be faster and safer. Which one is the “best” will often depend on the unique preferences of both parties involved in the transaction. You may well find yourself toggling between the two during your everyday financial life.

While you’re thinking about which kinds of payments work best for you, consider your banking options.

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FAQ

Is an ACH payment a check?

No, ACH payments are an electronic transfer processed through the Automated Clearing House network, which is a network made up of around 10,000 financial institutions. A check is a different kind of payment, using a paper document and being processed in a different way.

Is ACH better than checks?

Not necessarily. ACH can be faster, cheaper, and more secure in certain scenarios, but both can be useful ways to make payments.

Is ACH cheaper than checks?

When it comes to check vs. ACH costs, ACH payments can be cheaper than checks in some cases, but not always. ACH payments are free, whereas consumers generally need to buy checks to use for payments. However, you may run into fees when doing certain ACH payments.

Is ACH safer than a check?

Both checks and ACH transfers are very secure, but ACH payments are known to be more secure, thanks to the extra layers of protection in place due to encryption that occur during the transfer. Both checks and ACH transfers do require that the identity of the recipient be verified before the transaction can complete. Fraud and mistakes can occur for both payment types.

Photo credit: iStock/bernardbodo

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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May
20
2024
What Is a High-Yield Checking Account?

What Is a High-Yield Checking Account?

By | Budgeting & Goals, Financial Independence, money | Comments Off on What Is a High-Yield Checking Account?

A high-yield checking account is a secure place to deposit, store, and withdraw money, but with an enhanced interest rate vs. other similar accounts. Typically, money in a checking account doesn’t earn any interest — or maybe a nominal fraction of a percent.

With a high-yield checking account, there’s the potential to turn your regular deposit account into a passive income machine. While it’s unlikely to make you rich, a high-yield checking account can help pad your pockets with a few extra interest dollars, which can add up over time.

However, these accounts can come with certain conditions that may or may not make them the right choice for you. Here’s what you need to know.

Key Points

•   High-yield checking accounts offer significantly higher interest rates compared to traditional checking accounts, potentially reaching up to 5.00% APY.

•   These accounts can transform regular checking into a source of passive income, though they won’t make you rich.

•   To avoid monthly fees and earn interest, account holders may need to meet specific requirements such as maintaining a minimum balance or making a certain number of transactions.

•   Online banks frequently offer these accounts with fewer fees and conditions compared to traditional banks.

•   Despite the potential for higher returns, the interest rates on these accounts generally do not compare to those possible through investments in stocks and bonds.

How High-Yield Checking Accounts Work

High-yield checking accounts, as their name implies, are checking accounts that offer a high “yield,” or interest rate, on the balance held in the account.

Whereas the national average for an interest-bearing checking account is about 0.07% APY (annual percentage yield) per the FDIC, a high-yield account might offer 3% to 5% APY or even higher — which still might not make you a fortune, but is a significant upgrade and on a par with some savings accounts.

High-yield checking accounts make it possible to create a passive income stream, albeit a small one, just by holding money in your checking account (which you likely already do). A high-yield checking account can augment interest earnings from other financial products you may hold, such as a high-interest savings account or investments like high-yield bonds.

However, there can be account minimums to contend with or potential fees.

Does a High-Yield Checking Account Come With Fees?

Although some high-yield checking accounts come with monthly maintenance fees that could easily eclipse whatever interest you stand to earn, these fees can commonly be waived so long as you maintain a certain minimum monthly balance or meet other requirements. These may include making a certain number of debit card transactions or receiving a certain threshold in direct-deposit income each month.

These days, there are even some free high-yield checking accounts — usually offered through online banks — but the level of interest you’ll earn may depend on your ability to meet the same kind of transaction minimums we just mentioned. (If you don’t meet the requirements, you might not earn any interest at all.)

So, in short, while you might not have to pay for your high-yield checking account, you’ll likely need to perform the basic minimum monthly transaction requirements in order to glean the full benefits of the account.

Get up to $300 when you bank with SoFi.

No account or overdraft fees. No minimum balance.

Up to 4.00% APY on savings balances.

Up to 2-day-early paycheck.

Up to $2M of additional
FDIC insurance.


Top 3 Pros of a High-Yield Checking Account

High-yield checking accounts can be very beneficial — here’s how.

1. More Earnings

These accounts offer an opportunity for interest earnings simply by holding a checking account. In some cases, the interest rate may rival that of certain kinds of savings accounts.

2. Motivation to Keep More in Your Account

These high-yield checking accounts can incentivize account holders to keep a higher minimum balance due to interest-earning requirements — which can help you generate a cash cushion.

3. Availability

These accounts are becoming increasingly available, especially thanks to the proliferation of online-only banks. You likely don’t need to invest much time and energy in research when looking for one.

Cons of a High-Yield Checking Account

On the other side of the coin (pun totally intended), high-yield checking accounts can have their drawbacks.

Transaction Requirements

These high-yield accounts may come with transaction requirements to secure interest earnings. If the account holder doesn’t meet them, little or no interest will be earned. These obligations might suit your money style, or they might prove to be a major hassle.

Modest Interest (If We’re Honest)

Many interest-bearing accounts generate just a fraction of a percentage in interest. Even the highest-yield checking accounts currently only offer about 5.00% APY. Yes, every little bit helps but this certainly isn’t enough money to retire on.

Additional Fees

In some cases, high-yield checking accounts may come with fees. Waiving them may require holding a significant minimum monthly balance — which can be challenging for individuals and families living paycheck to paycheck.

Here, you can review the pros and cons again in table format:

Pros of High-Yield Checking Accounts

 Cons of High-Yield Checking Accounts
Potential to earn interest on checking, which normally offers little or no earning potential May have many monthly transaction minimums to meet in order to qualify for interest earnings
Can incentivize account holders to keep more money in their accounts May have fees that can only be waived by maintaining a significant minimum monthly balance or meeting minimum transaction requirements
Are increasingly available — and increasingly fee-free — from online banks Even the best high-yield checking accounts typically offer far less than the average return on stocks and bonds (though when FDIC-insured, these checking accounts can be a safer investment vehicle)

Recommended: What Is a Certificate of Deposit (CD)?

Is a High-Interest Checking Account Worth It?

Whether or not a high-interest checking account is worth it will probably depend on a couple of key factors.

•   First of all, how high is the interest rate? If it’s just a fraction of a percentage above the norm, it may not be worth it. But if it’s a multiple of the standard rate, it might be a good way for your money to make money.

•   Next, what fees or minimum requirements are involved? If your money would make $10 more in interest per year in a high-yield account but you need to tie up funds that could be working harder elsewhere, then it’s probably not a money-wise move.

Factors to Look For in a High-Yield Checking Account

If you’re shopping for a high-yield checking account, consider these factors:

Interest Rate

Of course, you will likely want to shop around and see what are the highest rates available for a checking account. Currently, the highest rates are 5.00% or slightly higher.

Minimum Balance

With this kind of checking account, you may be required to make a specific size of deposit to open the account. You may also need to keep a certain balance in order to earn the high interest rate or to avoid fees. If that’s the case, make sure you can meet that number.

Fees

In addition, when opening a checking account, be sure you understand what fees might be charged. These can include maintenance, overdraft, ATM, and foreign transaction fees, among others. You’ll probably want to avoid being charged fees so that they don’t eat away at the interest you are earning. Online banks may be more likely to waive such fees.

How to Qualify for High-Yield Checking Accounts

In order to qualify for a high-yield checking account — and actually get the benefits — you’ll need to be able to fulfill whatever that account specifies as far as transaction requirements or minimum opening deposits.

In addition, if your banking history is marked by overdrafts and other negative factors, this may be reported by ChexSystems, which is kind of like a credit score bureau but for banking. If you have many negative factors (unpaid fees, say, or many overdrafts), you may not be able to qualify for a high-yield checking account — or other types of deposit accounts, either. (If your ChexSystems report contains errors, you can always dispute false information with ChexSystems online.)

How to Open a High-Yield Checking Account

Now that you know what it is, you may wonder how to open a high-yield checking account. The process is similar to opening any other type of account. You’ll be asked to provide:

•   Basic personal information, such as your name and address

•   Proof of address (such as a utility bill)

•   Government-issued photo ID

•   Your Social Security number or other taxpayer identification number

In addition, your chosen bank may also require a certain minimum opening deposit, which you’ll need to provide to activate the account. The bank will offer specific details as far as what documentation is required and how to deliver it.

High-Yield Checking Accounts vs High-Yield Savings Accounts

If you are comparing high-interest checking and high-yield savings accounts, you will likely want to consider the following points:

•   A high-interest checking account does generate money on your deposit, but it may come with minimum transaction or balance requirements. These could be difficult for some people to meet.

•   A high-interest savings account can offer good earning power, but the number of transactions you are allowed could be limited. Although Regulation D, which limits savings accounts to six transactions a month, was largely suspended since the pandemic, some financial institutions may still apply this rule and charge fees if you conduct more transfers.

Depending on your needs, one of these may be a better option than the other. Also, it is likely to be easier to find a solid interest rate with a high-yield savings account than with the checking variety. In other words, many high-interest checking accounts don’t offer all that much earning power.

Opening a Checking and Savings Account With SoFi

A high-yield checking account is a great way to augment whatever passive income you might earn from savings accounts, investments, and other holdings. Some interest is better than none, after all — every little bit of interest earned counts.

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 a high-yield checking account worth it?

This all depends on whether or not you can meet any minimum monthly transaction requirements. If you can fairly easily do so, a high-yield checking account is an easy way to earn passive income just by keeping an active bank account. But if you can’t, you might not earn any interest at all — or even pay additional fees for the account.

What is the difference between a high-yield checking and savings account?

A high-yield checking account is designed to be the hub of your financial life and typically doesn’t have any limits on the number of transactions you may make; savings accounts may restrict this. However, this kind of checking account likely pays less interest than a high-yield savings account, which may do a better job of helping you generate passive income.

Can you withdraw money from a high-yield savings account?

Yes, you can withdraw money from a high-yield savings account. However, there may be restrictions on how many transactions you can make per month. Going over that number could result in fees or the account being converted to a checking account.

What bank has the highest checking interest rate?

Currently, some of the banks offering the highest checking interest rates are Axos Bank, Presidential Bank, Heritage Bank, and Quontic Bank.

Can you ever lose your money with a high-yield savings account?

A high-yield savings account is typically a very safe place to keep your money, especially if it’s FDIC- or NCUA-insured. The risk of losing money is extremely low.

Photo credit: iStock/MicroStockHub

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.

We do not charge any account, service or maintenance fees for SoFi Checking and Savings. We do charge a transaction fee to process each outgoing wire transfer. SoFi does not charge a fee for incoming wire transfers, however the sending bank may charge a fee. Our fee policy is subject to change at any time. See the SoFi Checking & Savings Fee Sheet for details at sofi.com/legal/banking-fees/.
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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