woman calculator budgeting finances mobile

Guide To Budgeting Living Expenses

You’re undoubtedly used to those bills coming in every month, such as your housing costs, food, and car insurance, but you may sometimes wonder if there’s a way to better manage them. Budgeting for your recurring living expenses can help you take control of your cash and spend and save smarter.

While there are various techniques you could use, a good starting point can be to first get a handle on your needs vs. wants and next determine which budget technique will work best for you.

Here, you’ll learn important steps in this process such as:

•  What are living expenses?

•  What are needs vs. wants?

•  How can you budget for living expenses?

•  What are good budgeting methods?

What Are Living Expenses?

Basic living expenses, as the name implies, are ones necessary for daily living, with main categories including housing, food, clothing, transportation, healthcare, and relevant miscellaneous costs.

Although not everyone would define basic living expenses in the exact same way, here is a breakdown of expenses to consider.

Housing

For homeowners, this can include their mortgage payment, property tax, and insurance payments, along with monthly utilities and basic maintenance costs.

If living in a condo, this includes condominium fees. For renters, it can include the monthly rent payment, utilities, renters insurance, and any other housing-related costs they’re responsible for paying.

Food and Beverage

Basic expenses would include buying groceries for the family, but not restaurant food or other optional food or drink expenses. So while, yes, dinner at a sushi restaurant is technically food, dining out doesn’t count as a basic living expense. You could do without it.

Recommended: Ways to Save Money on Food

Clothing

This includes clothes for work and school for the family, plus footwear, underwear, outerwear, casual clothing, pajamas, and so forth. Designer clothing and other pricier items are typically not categorized in basic living expenses. The same holds true for buying a cool sweater that’s on sale but you don’t truly need it.

Healthcare

Expenses in this category can range from monthly payments for healthcare insurance, to co-pays and additional bills from doctors, dentists, specialists, and so forth. It also includes co-pays for prescription medications and over-the-counter meds.

Transportation

Transportation expenses can include car payments and insurance, gas, and maintenance. It can also include Uber and taxi expenses, public transportation tickets, parking fees, and so forth.

Other Expenses

Cleaning supplies for the home or apartment, personal care items, cell phone and internet bills, and similar items can also be included in a list of basic living expenses.

Minimum Debt Payments

Not to be overlooked are making sure you stay current on such things as student, car, and personal loan payments, as well as at least the minimum due on credit cards.

💡 Quick Tip: Typically, checking accounts don’t earn interest. However, some accounts do, and online banks are more likely than brick-and-mortar banks to offer you the best rates.

Average Living Expenses in the USA

The average living expenses can vary greatly depending on where you live and your household size. Here is a snapshot of a few locations across the country and how much monthly living expenses are, using data from the Economic Policy Institute.

Location

Household size

Housing

Food

Transportation

Healthcare

Rapid City, SD1$577$278$803$662
Rapid City, SD2 (couple)$664$510$980$1,324
Rapid City, SD4 (2 parents, 2 children)$875$805$1,152$2,014
Seattle, WA1$1,523$326$854$344
Seattle, WA2 (couple)$1,599$597$1,057$688
Seattle, WA4 (2 parents, 2 children)$1,906$941$1,274$1.032
Tallahassee, FL1$778$294$816$439
Tallahassee, FL2 (couple)$843$539$1,042$879
Tallahassee, FL4 (2 parents, 2 children)$1,024$850$1,170$1,327
Washington, DC1$1,387$374$472$411
Washington, DC2 (couple)$1,419$686$601$822
Washington, DC4 (2 parents, 2 children)$1,618$1,082$747$1,378

Wants Versus Needs

The challenge, in many of these categories, can be to successfully determine which of these expenses are truly needed and which are extras that would be more appropriately categorized as “wants.” In and of itself, there’s nothing wrong with paying for “wants” that fit within the budget but, for the purposes of making a basic living expense budget, it’s important to tease them apart.

Paying a cell phone bill, for example, could be considered important for safety and to facilitate communicating with work and family. Getting the latest and greatest cell phone for its bells and whistles, meanwhile, is crossing over into a want, not a need.

In the 1970s, something called the Growth-Share Matrix was developed, and it may help people who are wondering how to categorize living expenses and then prioritize them. The process includes listing all expenses, and then putting wants in one column and needs in another. Each column can then be divided into high or low priority. So, when budgeting living expenses, there would be four categories:

•   High-priority needs

•   High-priority wants

•   Low-priority needs

•   Low-priority wants

Another way to name these categories is:

•   Must have

•   Should have

•   Could have

•   Won’t have

This makes it easier to see what must be paid and what is optional. When budgeting, it can make it easier to choose where to put any discretionary funds. In other words, these methods may be able to help people answer these questions: “What are living expenses that must be paid? Which ones are more optional?”

When making a budget, it’s important to also account for any credit card payments, personal loan payments, student loan payments, and other debts that must be paid. After documenting all these expenses, figuring out how to calculate living expenses is as easy as some quick math. Figuring out how to budget for these expenses is the next item on the agenda.

💡 Quick Tip: Bank fees eat away at your hard-earned money. To protect your cash, open a checking account with no account fees online — and earn up to 0.50% APY, too.

Allocating Your Income

Although no two financial situations or budgets are exactly the same, there’s been a long-standing rule of thumb when making a budget that says people shouldn’t spend more than 30% of their after-tax income on housing.

According to the U.S. Bureau of Labor Statistics’ most recent analysis of how people spend their income, the percentages stack up as follows:

•   Housing: 33.8%

•   Transportation: 16.4%

•   Food: 12.4%

•   Personal insurance/pensions: 11.8%

•   Healthcare: 8.1%

•   Apparel and services: 2.6%

This accounts for nearly 85% of what people, on average, have been spending. It shows that, on average, people are slightly above the recommended percentage for housing expenses.

Ready for a Better Banking Experience?

Open a SoFi Checking and Savings Account and start earning up to 4.50% APY on your cash!


3 Types of Living Expense Budgeting Methods

There are numerous ways to craft a budget; in fact, we’ve created a guide to cover the different types of budgeting methods. One of the keys to effective budgeting is picking a strategy that allows for consistency. The following methods can help an individual create a budget.

1. Proportional Budget

For people who have divided up their expenses into needs and wants, proportional budgets may make sense. This is a budgetary strategy where monthly income is divided into three categories:

•   Needs

•   Wants

•   Savings

In one type of proportional budget — the 50/30/20 rule featured in the book “All Your Worth” by Senator Elizabeth Warren and Amelia Warren Tyagi — 50% of income would go towards needs; 30% towards wants; and 20% towards savings. It typically makes sense to do this calculation with after-tax income, which is take-home pay.

Advantages of a proportional budget include that it’s a simple formula, which may make it easier to stick to. Plus, it keeps a focus on the big picture, clearly distinguishing between needs and wants. It can also be a useful method for people who want to save money in a straightforward way.

This budget method may not work well for people who are still working on separating needs from wants. And, if a person’s needs currently take up more than 50% of income earned, then the 50/30/20 percentage breakdown may work as a goal vs. something that can be fully implemented right away.

2. Line-Item Budget

A line-item budget is a granular method where you track expenditures, line by line, in relevant categories. This can be helpful for people who want to keep their focus on spending money on basic living expenses because they can easily see how much of their money is going into what category.

This is also an easy method to create and use. However, it doesn’t necessarily have a focus on savings, and it is more time intensive to manage.

3. Envelope Budget

The envelope system is another way to create a household budget, and it may be the most hands-on way to manage money. People using this method withdraw enough money from the bank each month to cover each budget category. Then, they put the appropriate amount for each category in a separate envelope: housing expenses in one, grocery expenses in another, and so on.

Once a particular envelope is empty, then no more money can be spent in that category for that month, unless cash is taken from another envelope, which reduces the amount that can be spent on that envelope’s category. This method can work well for people who appreciate a tactile way of handling money. The need to get cash from the bank each month does add a step to the process and, like the line-item method, it doesn’t address savings.

This method can be adapted for those who don’t use cash. Instead, you can use your debit card and keep track (by hand or via an app) on how your category spending is going.

Recommended: Tips for Aggressively Saving Money

Budgeting Tips

Here’s some advice as you create and live on a budget:

•   When creating a budget, look for expenses that can be eliminated or at least reduced. For example, you might cut a streaming service or two or drop all that you subscribe to and find free entertainment through your public library’s resources.

•   It also generally makes sense to incorporate savings into a budget. First build an emergency savings account and then save for other personal goals, including for retirement.

Although the proportional budget described above has savings as an integral part, the line-item budget and envelope budget don’t. But, a line can be added for savings towards retirement or other goals — and an envelope can be added to the monthly pile.

•   Consistency also counts, big time. When budgeting is a part of daily life, it can make it much easier to reach financial goals than when it’s a sporadic activity. If budgeting fades from focus for a month, don’t quit. Get right back on track.

•   Finally, when help is needed, ask for it, whether from trusted friends and/or relatives or a qualified financial advisor.

What If Your Income Doesn’t Cover Your Living Costs?

If your income doesn’t cover your living expenses, you have two options (or you could do a combination of both):

•   Reduce your expenses. You might take a roommate, move in with a family member for a while, start shopping at warehouse clubs, or decide not to eat out much less.

•   Increase your income. This might mean looking for a new job, training up for a different career, or starting a side hustle.

These methods can help you cover your living costs. Worth noting: If part of the issue is considerable debt that is negatively impacting your spending power, you might meet with a non-profit credit counselor for advice on eliminating that drain on your funds.

Budgeting and Saving With SoFi

Budgeting for daily living expenses can help you better understand your financial situation and then meet your money goals. Your financial institution may offer tools to help you track your money and budget successfully too.

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 up to 4.50% APY on SoFi Checking and Savings.

FAQ

What are considered living expenses?

Living expenses are the minimum expenditures needed to survive, so typically they include housing and utilities, food, clothing, healthcare, insurance, and minimum debt payments.

What is the average living cost in the U.S.A.?

The current average cost of living in the United States is $61,334. That’s how much the average household spends on expenses, with almost 35% going to housing and housing-related costs.

What salary is needed to live comfortably in the U.S.A.?

The salary needed to live comfortably in the U.S. will depend on many factors, such as cost of living, location, and household size and configuration. One recent study found that, when looking at America’s 25 most expensive cities, a salary of at least $68,499 would be required for an individual to live comfortably. For larger households, the number will rise.


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


SoFi members with direct deposit activity can earn 4.50% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government 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, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

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

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

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

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

Interest rates are variable and subject to change at any time. These rates are current as of 8/9/2023. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet.
.

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

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

SOBK0723026

Read more
How to Have a Baby Shower on a Budget

How to Have a Baby Shower on a Budget

Congratulations! Someone close to you is going to be a parent, and you have the honor of throwing the baby shower. You are probably excited to come up with some great ideas for the food, the decor, the party favors, and more, and need to sort out the guest list. But along with these organizing responsibilities can come a steep price tag.

The truth is, though, with a bit of planning and creativity, you can host a very fun, very memorable party for the parents-to-be, their friends, and their family without breaking the bank. You might be able to find a venue that’s totally free, create the centerpieces yourself, and otherwise keep costs under control and on budget.

Read on for some inspiration.

Tips for Throwing a Great Baby Shower on a Budget

These inexpensive baby shower ideas can help you throw a memorable celebration for a mom-to-be and help her become better financially prepared for a baby.

Coming up with a Baby Shower Budget

Before you begin the planning process, it can help to determine the total you can spend on the event and then create a budget. You may also want to find out if family members from either side are willing to chip in financially or by offering to help make something for the party. When setting up your baby shower budget, you’ll likely want to include: the venue, invitations, decorations, food and drinks, entertainment and/or games, prizes and party favors.

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

Finding a Free (or Low-Cost) Venue

A baby shower doesn’t have to be at a fancy restaurant, hotel, or banquet hall to be festive. It could take place at your, or someone else’s, home. If you’re hosting a baby shower in warm weather. You might consider having it outdoors, such as in your backyard. You could even host a more casual shower with an outdoor barbeque or even a poolside party.

Other low-cost locales options include: a nearby park, the clubhouse of your (or someone else’s) apartment complex, or the meeting room at someone’s place of business.

Recommended: How to Save Money Daily

Limiting the Baby Shower Guest List

Generally, the more people you invite to the shower, the more money you will spend. To keep costs in check, you may want to consider limiting the invite list to the parent-to-be’s closest family and friends.

A smaller group not only cuts down on costs, but can also help to create a more intimate gathering that allows the guest of honor to spend time with each guest. It can be a good idea, however, to run the invite list by the expectant mom to be sure that you don’t exclude any important people.

Going Digital With Invitations

You can save money on baby shower invitations by using a digital service, such as Evite, Punchbowl, or Paperless Post. These sites and apps typically allow you to choose from a range of free baby shower invitation templates or, for a small fee, upgrade to a more elaborate design.

These sites also make it easy to keep track of responses. And, guests will likely appreciate the ability to RSVP with the click of a button. You may, however, want to send paper invites to older guests, particularly if they don’t use an email address often.

💡 Quick Tip: Want a new checking account that offers more access to your money? With 55,000+ ATMs in the Allpoint network, you can get cash when and where you choose.

Ditching the Caterer

Feeding guests typically takes up the biggest portion of a baby shower budget. One way to help keep the cost of food down is to forgo the caterer and head to your local warehouse club (like Costco or Sam’s Club). You’ll likely be able to create a delicious spread of appetizers, finger foods, and desserts for a lot less than ordering trays from a catering company or restaurant.

Timing It Right

You can also cut down on food costs by not holding the shower right at lunch or dinner time. That way, guests won’t arrive expecting a full meal, and you’ll be able to serve a lighter menu that includes simple appetizers and snacks. A late-morning party can be particularly wallet-friendly. You might simply offer coffee, juice, fruit, and pastries. Or, you might opt for an afternoon tea and serve sweets and finger sandwiches.

Keeping the Cake Simple

Here’s another way to save money on food: A gourmet bakery cake can look beautiful, but it could easily bust your budget. To cut costs without sacrificing on taste, you might consider ordering a cake at your local grocery store’s bakery or the bakery at a wholesale club, then having it personalized (which the store will often do free of charge).

DIYing Centerpieces

It’s a basic rule of personal finance that you’ll pay more when you farm tasks out versus doing them yourself, whether that means doing car maintenance or decorating for a party.

Fresh flowers look lovely, but they can get expensive if you order arrangements from a professional florist. Instead, you may want to head to your local farmers market, grocery store, or warehouse club to find flowers at reasonable prices that fit your color scheme, then make your own centerpieces.

A simple way to get great results is to use flowers in the same color family (like shades of pink or all white). You can pick up vases at the dollar store, or go with Mason jars, which look trendy and can be used for other purposes after the shower is over.

Printing Decor and Games for Free

Instead of racking up a big bill at the party store, you may want to comb the web for free baby shower printables. You can likely find food signs, games (like baby shower bingo), decorations, and favor tags that you can simply print right from your computer.

Making Edible Favors

Another baby shower budgeting tip for beginners: Sweets can make great favors, and you can easily bake them yourself without spending a lot. You may also find that there is a family member who would be delighted to take on this task. Edible favors can be as simple as iced sugar cookies (in your color scheme) or as elaborate as cake pops that look like baby rattles.

Recommended: Passive Income Ideas

Considering a Virtual Baby Shower

If the guest of honor’s family and friends are spread out all over the country, having a virtual baby shower is one way to include everyone that’s important, and also keep costs down. You can set a celebratory mood by choosing a Zoom background that fits the theme of your shower, and also include a link so guests can download the background as well.

Friends and family can watch the mom-to-be open gifts that were sent to her ahead of time. (In fact, you might save so much by doing a virtual shower that you can be more lavish with gifts. That might help your guests of honor save for the new baby.)

You can also organize games throughout the virtual baby shower and create a digital guest book that attendees can sign and share their words of wisdom for the expecting parents.

The Takeaway

You can plan a memorable baby shower even on a limited budget. And, spending less doesn’t mean the event will be any less special.

Some easy ways to trim the cost of having a baby shower include: hosting the shower in your home or backyard, heading to your local warehouse club (for food, flowers, and even the cake), using free printables for decor and games, and giving homemade sweets as favors.

You can also make a baby shower more affordable by setting a budget and saving up enough money to cover it in advance (so you don’t end up relying on credit cards). Looking for a good place to build your party fund? Look for a bank account with low or no fees and a high interest rate.

Better banking is here with up to 4.50% APY on SoFi Checking and Savings.

Photo credit: iStock/vejaa


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


SoFi members with direct deposit activity can earn 4.50% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government 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, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

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

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

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

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

Interest rates are variable and subject to change at any time. These rates are current as of 8/9/2023. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet.
.

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

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

SOBK0923004

Read more
Is a Rewards Checking Account Right for Me?

Is a Rewards Checking Account Right for Me?

Checking accounts provide a useful foundation for many people’s daily financial lives, and some offer additional perks beyond the basics. Called rewards checking accounts, these financial vehicles can benefit customers in a variety of ways. Your money might earn interest, cashback, points, airline miles, or other bonuses (or even a combination of these).

For some, this kind of incentive is a good reason to stash their money at a particular financial institution versus another. However, some rewards checking accounts can involve fees and/or minimum balance requirements which may make them less enticing.

To help decide if a rewards checking account is right for you, read on for such information as:

•   What are rewards checking accounts?

•   How does a rewards checking account work?

•   How do you qualify for a rewards checking account?

•   What are reward checking accounts’ pros and cons?

What Is a Rewards Checking Account?

Simply put, a rewards checking account is one that rewards a person for opening and using the account. Those bonuses can take a variety of forms. Consider this:

•   A standard, no-frills checking account may have no monthly fees, minimum balance requirements, or minimum opening deposits. However, the perks are generally equally basic: a nonexistent or nominal annual percentage yield (APY), if any no ATM surcharge reimbursements, and often no signup bonus.

•   This kind of standard checking account can be attractive for some, but those seeking to earn money for their banking loyalty might prefer a rewards checking account instead.

•   Though the specific perks vary by account, you can typically find a checking rewards account that offers a higher interest rate or cash back. You might also be offered airline miles, a signup bonus, free identity theft protection, cell phone insurance, and reimbursement for ATM fees.

💡 Quick Tip: An online bank account with SoFi can help your money earn more — up to 4.50% APY, with no minimum balance required.

How Does a Rewards Checking Account Work?

Some checking accounts with rewards have criteria for earning perks each month. For instance, a bank may require you to:

•   Use your debit card for a minimum number of transactions each month

•   Maintain an average minimum account balance

•   Receive a set number of direct deposits equal to a specified value

•   Enroll in services like e-statements or online bill pay

If the reward is a higher APY, you will likely earn that in the form of monthly interest on your bank’s payment schedule, deposited directly into the account. If the checking reward is cash back, the bank may offer multiple ways to redeem the cash within the mobile app. Similar to cashback credit cards, you can often convert points into airline miles or other perks — or just receive cash in your account.

Perks of a Rewards Checking Account

The perks of a rewards checking account will vary by bank but might include:

Cash Back

Cash back is usually expressed as a percentage of the transactions made with a debit card; this might also be structured as points or even airline miles.

Interest

A rewards account may be an interest-bearing checking account. If so, it will offer an APY that is higher than the zero or the very low rate usually offered by most checking accounts.

Signup Bonus

A rewards checking account may pay a one-time bonus for signing up for a new account and meeting specific criteria.

ATM Fee Reimbursement

A rewards account may offer refunds for expenses incurred for using out-of-network ATMs.

Other Perks

Among the other rewards you may see offered are ways to earn airline miles, shopping discounts, cell phone insurance, and identity theft protection, among other options.

Some rewards checking accounts may offer a combination of these perks.

Ready for a Better Banking Experience?

Open a SoFi Checking and Savings Account and start earning up to 4.50% APY on your cash!


Who Should Use a Rewards Checking Account?

A rewards checking account can be a good option if you regularly use your debit card for purchases and keep a substantial amount of money in your checking account. If you do not have a rewards credit card, a rewards checking account can serve as an alternative way to earn money for spending money.

As mentioned, some banks have special requirements for members to earn rewards. Read terms and conditions carefully. If you cannot meet account requirements for the reward, the account might not be right for you, especially if there are monthly maintenance fees.

💡 Quick Tip: Are you paying pointless bank fees? Open a checking account with no account fees and avoid monthly charges (and likely earn a higher rate, too).

How to Qualify for a Rewards Checking Account

Qualifying for a rewards checking account may vary depending on the bank, but, as mentioned above, there tend to be common core requirements for earning rewards, such as:

•   A minimum number of debit card transactions in a month

•   An average daily minimum account balance

•   A minimum number (or value) of monthly direct deposits

If an account comes with a signup bonus, the bank likely has a set of requirements you’ll need to meet to snag that cash. This may include enrolling in direct deposit to get you started.

When considering a rewards checking account, it’s wise to read the fine print before opening to ensure you fully understand the requirements. Opening a checking account is typically a simple process, but you do want to make sure you understand the details before you sign up.

Pros of Rewards Checking Accounts

Here are some of the benefits of a rewards checking account, though perks will vary by program:

•   Earning potential: Whether through a higher-than-average APY or through cash back on debit card purchases, the main draw of a rewards checking account is often earning money (or more money) for doing the banking you would do anyway.

•   Tax implications: In general, the Internal Revenue Service (IRS) sees cash back as a rebate for or discount on something you purchased, so you won’t have to pay taxes on that money. Not a bad deal at all! However, if the reward for the account is a high interest rate or a signup bonus, you should expect to receive an IRS Form 1099 from your bank for that income.

•   Fees: Some rewards checking accounts charge monthly fees (some of which might be waivable), but other rewards checking accounts are noteworthy for being fee-free.

Recommended: Pros and Cons of No Interest Credit Cards

Cons of Rewards Checking Accounts

Depending on the individual and their financial style and goals, there may be some downsides to a rewards checking account:

•   Limits on rewards: Some bank programs cap the rewards at a set amount each month, meaning there could be a limit to the amount of cash back you can earn.

•   Better rewards elsewhere: Rewards credit cards may offer more cash back than a rewards checking account. However, these cards often have credit score requirements that make it more difficult to qualify. You probably need a credit score in the good to excellent range, meaning 670 or above.

•   Minimum balance requirements: Some banks have minimum balance requirements to earn the reward. If you cannot meet the requirement or do not wish to keep that much money in a checking account, the account might not be the right fit.

•   Fees: While some rewards checking accounts have no fees, others do charge monthly maintenance fees that can make the rewards less attractive or possibly even negate them.

Cashback Checking Accounts vs Credit Cards

You may be wondering whether a cashback checking account or credit card is the better fit for you. See how they stack up here:

Cashback Checking Account

Cashback Credit Cards

Provides a secure hub for daily financesProvides a line of credit for purchases
May charge feesCharges interest
Earn cashback typically through debit card useEarn cashback typically through spending with credit card

Is a Rewards Checking Account Worth It?

A rewards checking account with cash back can be a good fit if the conditions to earn the perks are no problem for you.

•   You might already be in the habit of swiping your debit card for everyday purchases or this prospect doesn’t faze you. If so, then a rewards checking account with cash back might be worth it. It can be easy to manage a checking account like this and make your money work harder for you.

•   If you like to keep a large sum of funds in your checking account to cover automatic bill payments, you might enjoy the earning potential provided by a high-interest checking account even if it has a higher-than-usual balance requirement.

Is a Rewards Checking Account Right for You?

Each person has a unique financial situation and goals. Here are some considerations that may help you decide if a rewards checking account is right for you:

•   If you want to earn interest (or more interest) on cash you have sitting in your checking account, a rewards account might be a good choice for you.

•   If there are perks that you could reap for behaviors you engage in (swiping your debit card, receiving direct deposit) or don’t mind adopting, this kind of account could work well for you.

•   Not a person who has a rewards credit card? A rewards checking account could give you some of the same perks.

Opening a Checking Account With SoFi

Rewards checking accounts are checking accounts that offer special incentives to members, such as cash back on debit card purchases, high interest rates, or ATM fee reimbursements. SoFi could be the right bank for you if you’re looking for these kinds of perks.

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 up to 4.50% APY on SoFi Checking and Savings.

FAQ

What are rewards in banking?

Rewards in banking refer to incentives and perks that account holders receive. They might be a signup bonus for a new account, a higher-than-average interest rate, or checking account cash back in the form of points, miles, or actual cash that can be deposited into your account or, for a credit card, applied toward your statement.

Why do banks offer points or rewards?

Banks offer points or rewards to entice consumers to choose their accounts or cards over competitors. Once you become a member, rewards ensure you continue to engage with the bank’s product, either by depositing more funds into your account or using your debit or credit card for more daily purchases.

Are bank rewards interest?

Bank rewards can come in the form of higher interest. For example, the current national average interest rate for a checking account is 0.43%, while rewards checking accounts may offer a higher than average interest rate, often 1.00% to 3.00% or higher. The interest that you earn is taxable, while cash back typically is not (it’s considered a rebate).

Can you earn points on a checking account?

Some checking accounts do allow you to receive points as a reward. For instance, you might receive one point for every dollar or two you spend with your debit card.

Are bank rewards worth it?

Whether or not bank rewards are worth it depends on your financial situation and preferences. Do you meet the criteria for a rewards checking account (such as swiping your debit card often enough or receiving a certain dollar amount of direct deposits)? Can you handle any requirements such as monthly minimum balance or account fees, if assessed? If so, earning interest or receiving other perks could be a smart, money-wise move.


Photo credit: iStock/Feodora Chiosea

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


SoFi members with direct deposit activity can earn 4.50% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government 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, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

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

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

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

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

Interest rates are variable and subject to change at any time. These rates are current as of 8/9/2023. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet.
.

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

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.

SOBK0723047

Read more
What Is a Tax-Free Savings Account?

Guide To TFSAs

If you’re a Canadian age 18 or older, you may want to open a Tax-Free Savings Account (TFSA). Funds deposited in this kind of tax-advantaged account are not assessed any taxes on any interest earnings, capital gains, or dividends earned on contributions.

TFSAs can be opened at almost any major financial institution across Canada for those age 18 or older with a valid Social Insurance number, or SIN. They can be held in cash, mutual funds, government bonds, guaranteed investment accounts, and sometimes even publicly traded stocks.

In this guide, you’ll learn more about TFSAs, including:

•   What is a Tax-Free Savings Account?

•   How does a TFSA work?

•   How do you withdraw funds from a TFSA?

•   What are the pros and cons of TFSAs?

•   What are U.S. alternatives to TFSAs?

What Is a Tax-Free Savings Account?

TFSAs, or Tax-Free Savings Accounts, can be excellent tax-sheltered accounts that allow contributed funds to grow-tax free. That means no taxes on interest earnings, dividends, or capital gains. What’s more, funds can be withdrawn at any time without penalty for account holders. This is a key difference between TFSAs and retirement savings plans, which are designed to be held till a certain age.

If you compare a TFSA vs. RRSP (Registered Retirement Savings Plan), you’ll see that a TFSA allows you to withdraw your contributions and any subsequent earnings over time, tax-free. With an RRSP, a certain percentage of any withdrawals taken out prior to retirement may be withheld.

To look at this from a different angle, any funds contributed into a TFSA can be withdrawn on demand and are not subject to taxation or penalty, as long as all contributions remain beneath your overall TFSA contribution limit. This can make them a smart tax shelter for both short-term and long-term financing needs.

💡 Quick Tip: Banish bank fees. Open a new bank account with SoFi and you’ll pay no overdraft, minimum balance, or any monthly fees.

How Do TFSA Contributions Work?

Here’s the scoop on how TFSAs work:

•   Tax-Free Savings Accounts allow you to contribute a finite amount, set annually by the Canada Revenue Authority (CRA). As mentioned above, your funds within the TFSA can earn interest, earn dividends and even capital gains without being taxed. The 2023 contribution limit for TFSAs is $6,500. This makes them excellent financial vehicles when it comes to the important goal of saving for the future.

•   TFSA limits accumulate and carry over every year. This means that your contribution limits (commonly referred to as your “contribution room”) will stack up annually. This holds true whether or not you’ve completed a Canadian income tax return or even have an existing account at the time. In other words, if this year’s contribution limit is $6,000 and you only contribute $4,000, next year you can save an extra $2,000 over the limit to catch up. So if the limit for the following year was $6,000, your contribution room will be $8,000 (adding the $6,000 and the additional $2,000).

•   In fact, you’re allowed to make retroactive contributions for all of the cumulative annual contribution limits dating back to 2009, or when you first turned 18, whichever was more recent.

•   Make sure you keep track of your overall contributions, as accidentally overcontributing to the account can result in tax penalties. According to the CRA, overcontributions are subject to a 1% penalty tax on the overcontribution amount each month until it’s withdrawn from the account.

Contributing to a TFSA

To contribute to a TFSA, you’ll want to first figure out what your current annual contribution limit is and then calculate how much additional contribution room you have from years past where you didn’t hit the limit. By the way, there’s no earned income requirement for contributing to a TFSA.

To help you calculate your total TFSA contribution limit, check this table below that outlines all of the annual contribution limits since the program was established in 2009. You’ll also find a cumulative contribution limit to help you back-date your permitted total contribution amount.

Year

Annual Limit

Total Accumulated Limit

2009 $5,000 $5,000
2010 $5,000 $10,000
2011 $5,000 $15,000
2012 $5,000 $20,000
2013 $5,500 $25,500
2014 $5,500 $31,000
2015 $10,000 $41,000
2016 $5,500 $46,500
2017 $5,500 $52,000
2018 $5,500 $57,500
2019 $6,000 $63,500
2020 $6,000 $69,500
2021 $6,000 $75,500
2022 $6,000 $81,500
2023 $6,500 $88,000

If you turned 18 in 2009 or prior and have just begun making contributions this year, your total permitted lifetime contribution limit is $88,000. If you turned 18 after 2009, your contribution room (or limit) will be the sum of the cumulative amounts for all years starting from when you first turned 18.

💡 Quick Tip: Want a simple way to save more everyday? When you turn on Roundups, all of your debit card purchases are automatically rounded up to the next dollar and deposited into your online savings account.

How to Withdraw Money From a TFSA

When thinking about different types of savings accounts, you may wonder how a TFSA stacks up in terms of how you can withdraw funds. One important point: You can withdraw both contributions and earnings from your TFSA at any time, without fear of tax penalty.

Withdrawals from a TFSA are only logged when you transfer or take savings out of your account. So if you convert your investments into cash and the money remains in your account, this won’t be counted as a withdrawal.

You can withdraw any amount up to the entire balance of your TFSA account (though obviously, you’d like to avoid overdrafting a savings account). One of the best aspects of TFSA withdrawals is that the amount of any withdrawn contributions is automatically added back to your total TFSA contribution room for the following tax year.

However, if you reach your contribution limit in a given year, you won’t be able to make any additional contributions during that year, even if you decide to withdraw funds from the account. Contribution rooms are only recalculated after the beginning of the following year.

Withdrawals can typically be done easily online; check with your account holder for details.

Pros and Cons of a TFSA

Curious about the pluses and minuses of TFSAs? You’re in the right place.

Pros of a TFSA

Here are the main advantages of a TFSA:

•   Tax-exempt interest and investment earnings: TFSAs are excellent places to park excess savings to earn a higher rate of return without having to worry about taxes on interest and capital gains. These tax advantages can be a bonus vs. how savings accounts typically work.

•   Withdrawal and use flexibility: Unlike RRSPs which may incur a penalty when withdrawn prior to retirement, TFSAs have no restriction on the use of the underlying funds.

•   Contribution limits rise annually and do not expire: This means that you won’t miss out on any opportunities to add to your TFSA, even if you don’t have any income to add to your account in the current year.

•   Wide range of permitted investments: Unlike what the name suggests, funds deposited in a TFSA can be invested in stocks, bonds, mutual funds and other investments as permitted by the issuing institution.(Remember, though, that these investments may not be insured.)

•   Some insurance coverage: Deposits held in cash or GICs are insured by CDIC (Canada Deposit Insurance Corporation) to a maximum of $100,000, which is separate from other holdings by the same customer at the same member institution.

Cons of a TFSA

Yes, there are some downsides to be aware of with TFSAs. Consider these three points:

•   Non-deductible contributions: All contributions to TFSAs are made on an after-tax basis. As a result, TFSA contributions can’t be used to reduce your taxable income.

•   Day-trading is not permitted: The CRA discourages day-trading in your TFSA account. Depending on the frequency and type of trading activities within your account, it may declare your investment returns to be taxable business income if you’ve failed to follow the rules.

•   Not bankruptcy-remote: Unlike RRSPs which are protected from creditors, TFSAs are subject to the whims of any creditors that may seek to pull your assets back in court. This means that the funds in TFSA are fair game in bankruptcies.

•   Not always insured: If your TFSA funds are held in the market, they will not be insured by CDIC.

Opening a TFSA in 5 Steps

You can open a TFSA at most major financial institutions in Canada. They’re available at banks, credit unions, and even insurance companies. Some offerings may differ slightly in terms of their permitted investments, so it pays to shop around for the one that best suits your financial goals. Here are the five typical steps to opening a TFSA:

1. Shop Around

Research a financial institution that offers TFSAs; make sure it fits your needs and investing style. The following are the types of TFSA accounts available:

a.    Deposit

b.    Annuity

c.    Trust arrangement

d.    Self-directed TFSA.

2. Apply for a TFSA

Once you’ve decided on the right TFSA, contact your chosen institution directly and apply for an account. You may choose to do this in person or online. In some cases, the choice will be yours; in others, the financial institution will dictate how to do so.

3. Gather Documentation

As part of the application process, the institution (issuer) will ask for some personal information. Make sure to have the following items available:

a.    Birthdate

b.    Social Insurance number (SIN)

c.    Government-issued ID

4. Register Your Account

After you’ve provided all the necessary documentation and are approved, your issuer will register the account as a qualifying arrangement with the CRA.

5. Move Funds Into Your Account

You can then set up funds transfers or direct deposits into your TFSA account whenever you’re ready.

Congratulations, you now have a newly formed TFSA!

Keep in mind that while there’s no restrictions on the number of Tax-Free Savings Accounts you can have, your total contribution limit will be shared across all your accounts. Additional TFSAs will not increase your total contribution room.

All contributions will be reported to the CRA by your issuing institution, so remember to keep track of your contributions to avoid running afoul of the tax rules.

Alternatives to TFSAs Available in the US

If you are a U.S. citizen and are looking for an account that is similar to a TFSA, consider these options:

Roth IRA

A Roth IRA is similar to a TFSA in that it is a vehicle designed to help you save for retirement. The contributions grow tax-free; in addition, withdrawals are not taxed. However, contributions are made with after-tax dollars.

Roth 401(k)

If you are employed full-time, your company might offer a Roth 401(k). This is a savings fund that uses after-tax dollars. When you withdraw from the account when you retire, the money is tax-free.

The Takeaway

Anyone who can afford to should consider taking advantage of a Tax-Free Savings Account. TFSAs are versatile tax-advantaged accounts that can be used for both short-term and long-term savings needs. They provide an excellent tax-shelter for your investment earnings that can accumulate over time and be applied to a variety of needs. For those looking for a great savings vehicle, this could be it.

For those in need of a great day to day banking partner in the U.S., you may want to consider your options.

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 up to 4.50% APY on SoFi Checking and Savings.

FAQ

Can you lose money in a Tax-Free Savings Account?

Yes, depending on the underlying investments, there’s a possibility that you may lose the principal on your investment. When the principal is invested in securities like stocks, bonds and mutual funds, it is not covered by the Canada Deposit Insurance Corporation (CDIC). However, any uninvested cash in your TFSA is insured for up to $100,000 under the CDIC.

How do tax-free savings work?

Interest, capital gains, and dividends earned in a Tax-Free Savings Account aren’t taxed as long as you adhere to guidelines set by the CRA. As long as you remain beneath the contribution limits and don’t run afoul of any TFSA rules, earnings from your TFSA account won’t be treated as income.

Keep in mind, some exceptions, like dividends earned from U.S.-based equities may still be considered taxable income. You’ll want to thoroughly review and understand the investment guidelines set by the CRA when planning your portfolio.

Is a Tax-Free Savings Account worth it?

Depending on your particular situation and goals, it can indeed be worth it. Your interest, dividends, and your capital gains will grow tax-exempt, and you won’t pay taxes on any withdrawals.

What does TFSA stand for?

The letters TFSA stand for tax-free savings account, which is used to refer to a savings vehicle available in Canada.

Are TFSAs available in the US?

TFSAs are not available in the U.S., only in Canada. However, there are other savings vehicles in the U.S. that may provide similar benefits.


Photo credit: iStock/Vladimir Sukhachev

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


SoFi members with direct deposit activity can earn 4.50% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government 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, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

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

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

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

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

Interest rates are variable and subject to change at any time. These rates are current as of 8/9/2023. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet.
.

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

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.

SOBK0723020

Read more
top view working on desk with flowers

25 Tax Deductions for Freelancers

Are you a freelancer? If so, you are in good company. Last year, almost 40% of the U.S. population did freelance work.

As the gig economy surges and more people participate, it’s important to be aware of the taxes you owe and the deductions you can take. Those deductions can help lower the amount of taxes you owe and help you keep more of your hard-earned money, so you’ll want to claim what’s due to you.

Taxes for those who are self-employed can get complex, and tax laws can change frequently. It’s therefore wise to do your research or hire a tax professional who focuses on freelance taxes.

But whether you choose to work with a tax pro, or go it on your own, it can be very helpful to know about the self-employed tax deductions that are usually allowed. To help you get up to speed, read on for 25 tax deductions that many freelancers can take.

Self-Employed Tax Deductions You Won’t Want to Miss

When considering whether an expense is deductible or not, you may want this rule of thumb in mind: The Internal Revenue Service (IRS) guideline for freelancer tax deductions is that expenses must be ordinary and necessary.

If you purchase an item or incur an expense even if you weren’t running your freelance business, it likely would not qualify for a deduction.

Below are some key deductions you may be able to qualify for. Knowing and noting them can help you with financial planning for freelancers.

1. Home Office

Are you earning money from home? If so, one of the most common deductions for freelancers is claiming a home office on your taxes. To take this deduction, the designated space must be used regularly and exclusively for business operations, and must be the principal location where business is conducted.

You can take this deduction whether your own or rent. You can use the simplified method, which has a rate of $5 per square foot for business use of the home, with a maximum deduction of $1,500 (or 300 square feet), according to the IRS .

Or, you can use the regular method, which divides expenses of operating the home (including mortgage/rent, real estate taxes, utilities, home insurance) between personal and business use.

Calculating Home Office Tax Deductions

To maximize your deduction for a home office you may want to calculate both the simplified and the regular techniques to see which is higher.

•   As mentioned above, the simplified method involves calculating your home office’s square footage (up to a cap of 300 square feet), and multiplying that by five.

•   For the regular method, you would use IRS Form 8829 to figure out the number. While this is a more involved calculation (yes, some basic math is involved), it might yield a higher number.

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

2. Office Supplies

Looking for more tax deductions for freelancers? The materials you purchase to work in your home office, such as paper, pens, pencils, pads, printer ink, staples, paper clips, etc, can typically be deducted at full cost as long as the items are used for business.

3. Hardware and Equipment

If you require specific hardware, such as a laptop, personal computer, tablet, or other types of equipment to run your business, these purchases may count as deductions.

Or maybe you earn money from a side hustle like photography or jewelry making, which requires specialized equipment.

You may want to talk to your accountant about the best way to deduct these expenses, as some bigger purchases that will be used beyond one year may need to be depreciated over a set number of years, rather than deducted in full.

4. Web Hosting and Online Tools

If you have a website and pay fees for web hosting, these expenses can likely be deducted from your taxes. If you use other online tools for your business (such as Dropbox or Zoom), fees you pay for these services can also usually be deducted.

5. Phone And Internet Service

If you use the internet, a landline phone, or a cell phone for business at least some of the time, these services may qualify for a deduction.

You may want to keep in mind, however, that you can generally only deduct a portion based on your business usage.

6. Start-Up Costs

Here’s another freelance tax deduction: You may be able to deduct up to $5,000 of initial purchases and investments made to get your business up and running in its first year. Purchases that exceed that amount can often be deducted over time.

7. Employee Salaries

The cost of paying employees to work within a business can usually be deducted. These costs generally include both wages and benefits.

8. Self-Employment Tax

Are you a 1099 worker? Self-employment taxes cover freelancer contributions toward Social Security and Medicare. You can generally deduct the employer-equivalent portion of your self-employment tax, which is half the total self-employment tax.

💡 Quick Tip: Your money deserves a higher rate. You earned it! Consider opening a high-yield checking account online and earn 0.50% APY.

9. Your Car

The entire cost of ownership and maintenance of any vehicle used strictly for business purposes can typically be deducted from business income (subject to some limits). For 2023, the standard mileage rate per the IRS for business-related driving you do is $0.655 per mile.

Cars driven for both business and personal use can also be deducted, but only for costs incurred while conducting business. It’s wise to set up a system to keep track of when you are driving for personal vs. professional purposes.

10. Unpaid Invoices

Also known as bad debt, unpaid invoices (meaning your business is owed money that it has no hope of reclaiming) may be deductible.

However, in order for the deduction to be allowed, it must be clear to both parties that the transaction was not a gift.

11. Business License

Depending on the industry, certain state and federal licenses may be required for a business to operate. However, there may be an amortization schedule to be aware of, meaning you would deduct percentages of the cost over time.

The fees paid annually to state or local governments for obtaining those licenses can generally be deducted.

It’s wise to look further into the tax code to be sure you understand how to properly take these deductions.

12. Qualified Business Income

This is a newer self-employment deduction. If you earn $182,100 or less as a single filer (or $364,200 as a joint filer) in 2023, you may qualify for a 20% deduction on your taxable business income via the QBI, or qualified business income deduction.

13. Product Supplies and Storage Units

For freelancers who sell products, the supplies purchased in order to make those products can usually be a freelance tax deduction.

The costs of keeping business supplies and assets in a storage unit can generally also be deducted, since storage is an expense factored into the overall cost of the goods sold.

Ready for a Better Banking Experience?

Open a SoFi Checking and Savings Account and start earning up to 4.50% APY on your cash!


14. Business Loan Interest

If you’ve taken out a loan to help fund your business, you may be able to deduct the interest you incur from it as a business expense.

For this to be deductible, however, a freelancer must be legally liable for that debt. In addition, both the freelancer and the lender must intend that the debt be repaid and have a true debtor-creditor relationship.

15. Meals

Sorry, buying takeout and eating it at your desk isn’t tax-deductible. But if you are traveling for business, at a conference, or dining with a client, then you can deduct 50% of the cost if you have the receipt. If you don’t have the receipt, you can take off 50% of the standard meal allowance.

16. Transaction Fees

If part of your business involves processing credit card orders, you may have an additional freelancer deduction. The processing costs a freelancer may incur by accepting credit cards payments is usually deductible as a qualified business expense.

17. Attorney & Accountant Fees

The fees charged by attorneys and accountants that are related to operating your business are typically considered tax-deductible business expenses.

That includes tax preparation fees, as well as any additional tax resolution expenses that pertain to your business.

18. Education Costs

Freelancer deductions can include the cost of education that helps you maintain or improve skills needed in your present work. This tax deduction also typically includes costs for books, supplies and even transportation.

19. Industry Events

Fees for attending conferences or conventions that are business related can typically be deducted.

Not only are the admission or registration fees often deductible, but all reasonable travel expenses accrued in order to attend the event may be deductible as well.

20. Promotional Materials

Tools used for marketing, advertising, and the general promotion of a business are considered deductible expenses. That includes advertising your product or service on social media or elsewhere.

Any expenses incurred in order to influence legislation (such as lobbying), however, are not deductible.

21. Business Membership Fees

While you generally can’t deduct dues or fees paid for memberships in clubs organized for recreational or social purposes, dues paid to join organizations that align with your specific business industry are usually considered deductible.

This includes organizations, such as boards of trade, chambers of commerce, and professional organizations (like bar associations and medical associations).

22. Business Travel Expenses

Travel costs that are associated with conducting business are considered valid income tax deductions, as long as they are ordinary and necessary and last more than one workday.

This can include flights, hotel stays, meals, getting around locally via bus/train/ride sharing services, even dry cleaning or laundry expenses while you’re away from home.

You may want to keep in mind that lavish and extravagant travel conditions generally do not qualify for deduction.

Also, day-to-day commuter expenses between home and business are not typically deductible.

23. Business Gifts

If you give a gift to a client or vendor as a thank you for conducting business with you, the cost of the gift is generally deductible up to $25 per person per year.

Extra costs such as engraving, packing, or shipping aren’t included in the $25 limit if they don’t add significant value to the gift.

24. Health Insurance

Self-employed individuals with qualifying policies are typically allowed to deduct premiums for health, dental, and long-term care for themselves and their families.

25. Retirement Plan Contributions

Just because you don’t work for a large company doesn’t mean you can’t benefit from a tax-advantaged retirement plan. Indeed, freelancers often have even more options for saving this way.

Two self-employed retirement options you may want to consider: a traditional IRA (which allows you to contribute up to $6,500 per year in pre-tax dollars if you’re under 50, and up to $7,500 if you’re older) and a SEP IRA (which allows you to contribute up to 25 percent of your income for a maximum of $66,000 per year as of 2023).

Claiming Tax Deductions

Why is it important to claim tax deductions? They will help lower how much you pay in taxes and increase how much you keep to spend and save.

If, say, you earn $120,000 in a given year and can claim $25,000 in tax deductions, then you would only be paying taxes on $95,000. That can make a big difference in your daily financial life as well as your ability to build wealth and hit your financial goals.

Tips for Freelancer Tax Deductions

If you are a freelancer, there are a couple of smart guidelines to follow as you move through the tax year.

Keeping Records of Everything

As you earn, spend, and save as a freelancer, it’s important to make a budget and track where your money is going. Keeping records of how much you are paid from different clients or customers, what you are spending on your business, and when and where those expenses are incurred (and even how they are paid) can make a big difference when tax preparation time rolls around.

Also, if you ever need that information if audited, you will be glad you have those files.

Managing Your Personal and Business Finances Separate

As you have learned, it’s important to keep your business and personal finances separate when you are self-employed. This means your workspace, your transportation and meal expenses, and the like.

This will have important implications at tax time. For instance, you may have to parse how much of your rent or mortgage and your utilities actually go towards your home-based business vs. personal use.

•   Opening a Separate Bank Account for Your Business. It can be a smart move to keep your business finances separate from your personal to clarify your professional earning and spending. Many financial institutions offer business accounts to meet these needs, or, if you are just launching a side hustle or have a small, part-time gig, you might simply open up an additional checking and savings account to start.

Working With a Tax Professional

It’s not always easy to decipher the tax code as a freelancer or know which expenses qualify and to what expense.

Sometimes, working with a qualified tax professional can help. They are trained to know the ins and outs of the law and can guide you on correct tax filing.

The IRS offers guidelines for choosing a reputable tax professional that can be worth reading.

The Takeaway

As a freelancer, you can often lower your tax liability by deducting expenses that were incurred to operate your business.

There are a wide range of deductions you may be able to take, including some or all of your expenses for a home office, supplies for that home office, business events, advertising, self-employment taxes, and more.

In addition to managing your business income, you’ll also want to consider the full breadth of financial services you need, and compare which banking partner is best for your needs, whether personal or professional.

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


Better banking is here with up to 4.50% APY on SoFi Checking and Savings.

FAQ

Do freelancers need to declare income?

Yes, if you are a freelancer, you need to declare your income and pay taxes on it. It is wise to pay quarterly estimated taxes to avoid a large tax bill and potential penalties at tax time.

How is income tax calculated for freelancers?

To calculate income tax as a self-employed individual, you would first determine your income minus deductible expenses. You would then multiply that figure by 0.9235 (aka 92.35%), and then multiply that again by the year’s FICA tax rate. The number you get is your estimated self-employment tax.

What happens if you don’t file freelance taxes?

Not filing freelance taxes doesn’t mean you don’t owe them. Not paying taxes can mean you are still liable for the amount you owe, plus interest and penalties.


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


SoFi members with direct deposit activity can earn 4.50% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government 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, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

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

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

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

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

Interest rates are variable and subject to change at any time. These rates are current as of 8/9/2023. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet.
.

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

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.

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.

SOBK0223043

Read more
TLS 1.2 Encrypted
Equal Housing Lender