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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.

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.

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:

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 eligible 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.

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. Member FDIC. 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.

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 12/23/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details 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 Bank 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.

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If someone has a lot of money, you might say they’re rich or even wealthy. But there’s actually a difference between wealthy and rich, both in terms of how much money you’re talking about and how someone uses their financial resources.

A rich person can have a lot of money or earn a high income, but their money may only go so far if their lifestyle is extravagant or they take on significant debt. They may live in the moment or spend freely. A wealthy person, by contrast, is generally more focused on securing their long-term financial picture.

Is it better to be rich vs. wealthy? Here’s a closer look. Understanding the difference between them can help you to shape your personal financial plan.

What Does “Rich” Mean?

If you ask friends, family members, or coworkers whether they’d like to be rich, quite a few of them might say yes. After all, if everyone was satisfied with their financial situation, then get-rich-quick schemes wouldn’t exist. But what is the difference between rich and wealthy, and does it matter?

If you look up “rich” in a dictionary, the most common definition centers on what a person has. Someone who’s rich has a lot of possessions and material wealth. So a rich celebrity or social media influencer, for example, might own multiple homes, cars, or jewelry that’s worth millions. They may spend their time jet-setting around the world or partying with other rich people.

That’s what it means to be rich in a financial sense, but someone could also be rich in other ways. For example, someone who has an extensive personal network may be said to be rich in friends. And someone who’s well-educated or well-traveled may be described as being rich in knowledge or experience.

Recommended: What Is the Average Pay in the United States Per Year? 

What Does “Wealthy” Mean?

When discussing what it means to be wealthy vs. rich, it’s easy to assume they’re similar. Both rich people and wealthy people may maintain a lifestyle that’s posh and out of reach for the average person. The distinction between wealthy and rich, however, is that wealth is more sustainable and lasting than simple riches.

There are different ways to measure wealth. The Census Bureau, for instance, uses net worth to estimate the wealth of American households. Net worth is the difference between your assets (what you own) and your liabilities (what you owe). Someone who is wealthy may prioritize accumulating assets that produce income or appreciate in value over time, while limiting their exposure to debt.

Wealthy people may enjoy much higher incomes than everyday people, and, importantly, they may spend less than they earn. Some wealthy people are born into money; others build their fortunes through a combination of career, entrepreneurship, and careful investment.

When talking about wealth, some make the distinction between new money vs. old money. New money is earned while old money is passed down from generation to generation. In the U.S., many of the wealthiest individuals are well-known business owners or investors, like Jeff Bezos, Bill Gates, and Mark Zuckerberg to name a few. Some of these billionaires were born into wealthy families while others were not.

Recommended: Is $160,000 a Good Salary for a Single Person in 2024? 

Key Differences Between Rich and Wealthy

When comparing rich vs. wealthy people, the way they approach money matters. Rich people may see money as a means to buy things and maintain a certain lifestyle. Wealthy people, on the other hand, may view money as a means of creating more money, either through investments or business ventures.

Here’s a closer look at the difference between wealthy and rich.

Amount of Money

There’s no set dollar amount at which someone goes from being rich to wealthy. Instead, it’s largely about perception. For example, you might feel rich if you normally keep $500 in your bank account and you decide to use a tax refund to bump that up to $5,000. Meanwhile, someone who wins $100 million in the lottery after working a minimum-wage job for years might think of themselves as rich rather than wealthy.

Generally, the higher your net worth, the closer you get to the wealthy vs. rich divide. Someone who has $10 million in assets and no debt, for example, may be in a better position to invest and fund philanthropic efforts than someone who’s making $200,000 a year but has a negative net worth because of debt. The person with the $10 million in assets is wealthy, while the other person’s earning power could put them in the “rich” bucket, though their debt actually erases that upon a closer look.

Investments

People who are rich may put spending and funding their lifestyle ahead of investing. So even though they might pull in a six- or even seven-figure income each year, a lot of that money goes right back out of their bank accounts. They might have some retirement savings if they’re participating in, say, their 401(k) at work, but investing may get pushed to the back burner.

Wealth investing can look very different. Wealthy people tend to invest their money so they can grow it and turn it into more money. They may have money in real estate, the stock market, and other investments that provide them with passive income or aids in building additional wealth for themselves and future generations.

How They Live Their Lives

Money can be a tool for improving your quality of life, but what that life looks like can be very different if you’re rich vs. wealthy. A rich person might think nothing of dropping $10,000 on a shopping trip or last-minute travel. They tend to live in the moment and may not consider how spending that money today might affect them tomorrow.

A wealthy person may still enjoy the finer things, but their approach might be more balanced. For example, billionaire Warren Buffett is one of the wealthiest people in the U.S., but he notably lived in a relatively modest home that he purchased in 1958 for over seven decades. Other wealthy millionaires and billionaires may similarly adopt a frugal mindset or focus on giving away large amounts of their wealth to good causes.

Hobbies

Certain hobbies and pastimes are the domain of the rich or wealthy, simply because of how much they cost. Yachting, big game hunting, and polo are just a few examples of activities that are associated with wealthier people who can afford the associated costs.

Rich people may also indulge in those kinds of pastimes but on a smaller scale than those who are wealthy. Instead of buying their own private yacht or plane, for example, they might lease one when they want to plan a getaway. Or instead of going to their private island for the summer, they may splurge on a couple of weeks’ vacation in Bora Bora or St. Kitts.

Expenses

Rich and wealthy people can have very different expenses, depending on their lifestyle. A rich person may have a mortgage payment, car payments, private school tuition payments for their kids, and all the regular day-to-day living expenses like utilities and food. They may also have credit card bills or student loans to pay each month.

Wealthy people may not have debt-related expenses, such as a mortgage or car payment, since they might own those assets outright. If they use credit cards, those bills might get paid in full each month rather than accruing interest.

Ultra wealthy people may have unique expenses that the rich don’t, such as maintenance for one or more vacation homes, insurance for a private jet or yacht, and staff payroll if they employ housekeepers, landscapers, and other individuals to work in their home. They may also pay out expenses to financial advisors or investment advisors for wealth management services.

Streams of Income

A rich person may rely on their paychecks from working a regular job as their main source of income. They might also earn money from side hustles or businesses they own, but generally, they’re working for a living in some way. If they don’t keep up their pace at work, they could lose that status of being rich.

An oft-cited IRS study suggests that the average millionaire has seven different streams. They may have a job, but a large part of their income may come from different types of investments or business ventures. Wealthy people can also generate income from pensions or annuities. It this way, they are less beholden to what you might call the daily grind.

Recommended: Aiming to Become a Millionaire? These Steps Could Help 

Budgeting and Financial Planning

Rich people might make a six-figure or even seven-figure income or more, but they may not save or invest much of that income. (Think about those actors and singers you may have read about who have frittered away their fortunes on luxury real estate, travel, fashion, food, and wine.) They might have a budget, but not always stick to it. Perhaps they’re spending more than they make as they attempt to cover their lifestyle. Some rich people may not be very forward-thinking in terms of planning for retirement or other long-term goals.

Wealthy people may not have to live by a strict budget either if their assets substantially outpace their spending. But they may take financial planning more seriously and be proactive about things like investing and retirement planning. They may also focus on estate planning and the best ways to pass on as much of their wealth as possible while minimizing taxes for their heirs.

Is It Plausible to Become Wealthy?

Can a regular person become wealthy? The answer is that it depends on where you’re starting, where you want to go, and your strategy for getting there. Building wealth in your 30s, for example, could be easier if you have a solid income, no debt, and you’re committed to living well below your means. The odds of starting a billion-dollar company and becoming wealthy overnight are, on the other hand, much slimmer.

Having a clear plan and getting an early start are two of the keys to building wealth. The longer you have to save and invest money, the more room that money has to grow through the power of compounding interest. It’s also important to choose investments wisely to maximize their growth potential. Understanding your individual time horizon for investing and your risk tolerance can help you to decide which investment types to include in your portfolio.

Talking to a financial advisor can help you get some clarity on what you might need to do to begin building sustainable wealth. An advisor can review your situation, offer advice, or suggest tactics for creating a realistic budget, paying down debt, saving, and investing for the long-term.

Banking With SoFi

Whether you consider yourself rich, wealthy, or neither of the above, where you keep your money matters. Finding a bank that offers you a competitive rate on your savings and charges few, or no fees can help you make the most of the money you have.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible 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.

FAQ

Is a millionaire wealthy?

Whether a millionaire is wealthy or not depends on their financial situation and lifestyle. Being a millionaire means having assets worth at least one million dollars, but true wealth involves more than just a high net worth. It also includes financial stability, freedom from debt, and the ability to sustain one’s lifestyle without relying heavily on active income. A millionaire can be wealthy if their assets provide long-term financial security and passive income.

Is six-figures rich?

Someone with a six-figure income might consider themselves to be rich if they’re able to enjoy an upgraded lifestyle. For example, traveling frequently or buying luxury items are often associated with people who are rich. However, if that person lives in an expensive city and is supporting a family, they might not feel rich at all, despite their income. In other words, it depends on personal circumstances.

Is it better to be rich or wealthy?

Being rich vs. wealthy isn’t necessarily a matter of one being better than another. It all comes down to what you do with your money. If you think of yourself as rich, can live the lifestyle you want, and are avoiding debt while investing wisely, then you may be both rich and wealthy. And remember that being wealthier might ensure that you’re financially secure, but it doesn’t guarantee greater happiness.

About the author

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.

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Discretionary income is defined as the cash you have available to spend after your necessary payments are covered. Those necessities are typically made up of basic living expenses, such as housing, utilities, food, healthcare, insurance costs, as well as minimum payments on debt.

So what does discretionary income equal in daily life? It’s the post-tax money you can put toward things like eating out, entertainment, travel, clothing, electronics, and gym memberships. You might think of discretionary income as paying for the wants in life vs. the needs.

Read on for a closer look at the meaning of discretionary income, including examples, how to calculate discretionary income, plus tips on how to make the most of your discretionary income.

What Is Discretionary Income?

Discretionary income is defined as the amount of post-tax income that is left over after you have paid for all your essential expenses. Essential expenses include your mortgage or rent, utilities, car payments, as well as food, healthcare, and occasionally clothing (if it is needed, not just wanted). To phrase it another way, no, a Netflix subscription or your AM latte isn’t a “necessity.”

Also worth noting (warning, buzzkill ahead): Discretionary income isn’t just to be spent on cool stuff and fun experiences. It’s also important to put at least some of this money towards savings and making extra payments on any debt. This can help you build wealth and financial security over time.

7 Examples of Discretionary Income and Expenses

Discretionary expenses are the things people buy with their discretionary income. Here are some examples:

Entertainment and Eating Out

This category includes such expenses as dining out, getting drinks, splurge-y takeout food (pizza delivery, we’re looking at you!), and fancy coffees. In terms of entertainment, the following is typically considered discretionary: Concert, play, and movie tickets, as well as museum admission, books, magazines, streaming services, and similar costs.

Recommended: How to Save on Streaming Services

Vacations and Travel

Taking a vacation, whether you go to the other side of the planet or an hour’s drive away, is not a necessity, despite how you may feel about it.

Luxury Items

These expenses could be anything from a pricey sports car to designer clothes to jewelry to wine. While clothing and a car may be necessities in life, when you pay extra for top-notch prestige brands, you enter the realm of discretionary expenses.

Memberships and Hobbies

Yes, joining a gym or taking up a musical instrument are admirable pursuits. But they are not essential. For this reason, things like yoga or Pilates classes, crafting supplies, and similar expenses are considered discretionary.

Personal Care

A basic haircut or bottle of shampoo may not be discretionary, but pricey blowouts, manicures, massages, skincare items, and the like are.

Upgrading Items

If your current phone is functional but you still decide to buy the latest one, that’s a discretionary expense. The same holds true for being bored with your couch and getting a new one or remodeling your bathroom just because.

Gifts

Of course you want to show you care for your loved ones. But buying presents for others isn’t something you absolutely have to do, so this should be earmarked as a discretionary expense.

How Is Discretionary Income Used?

In addition to making the types of purchases listed above, discretionary income can also be used to save for future purchases and getting ahead on long-term financial goals.

Common Uses of Discretionary Income

Here’s a more detailed look at some of the different ways you can use discretionary income:

•   “Fun” spending: Many people use discretionary income to purchase goods or experiences that they can enjoy right away.

•   Saving for short-term goals: Another common use of discretionary income is to put it in a high-yield savings account earmarked for goals like taking a vacation or making a down payment on your dream house.

•   Paying down debt: While minimum payments on debts are generally considered necessary expenses, making extra payments is a common — and potentially smart — way to use discretionary funds.

•   Investing: Another way many people use discretionary income is to invest it in the market for long-term goals like retirement or a child’s future college education.

•   Charitable donations: Doing good with your discretionary dollars is another common and positive way to spend discretionary income.

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

How to Calculate Discretionary Income

The formula for calculating discretionary income is:

Discretionary Income = Gross Income − Taxes − Essential Expenses

Start by assessing your average monthly take-home income (gross income − taxes). You can do this by scanning the last several months of financial statements. Or if your only source of income is your paycheck, you can simply look at your paystubs.

Next, you’ll need to tally up your essential expenses. These may include:

•   Rent/mortgage payment

•   Utilities

•   Internet/phone bills

•   Groceries

•   Minimum debt payments (credit cards, student loans or car loans)

•   Insurance premiums

•   Medical expenses

•   Transportation costs

Once you know how much you’re spending on essentials, you can subtract that number from your monthly take-home income. The result is your monthly discretionary income.

Factors That Affect Discretionary Income Calculation

A number of things can influence the amount of discretionary income you have to spend, such as:

•   Income level: Higher earnings generally increase discretionary income, provided you don’t increase your living expenses as your income goes up.

•   Living costs: Living in an area with a high cost of living raises essential costs and, in turn, lowers discretionary income.

•   Debt level: Needing to make monthly payments on loans, credit cards, and other financial obligations reduces funds available for discretionary spending.

•   Tax rates: Higher income and/or property taxes lowers your take-home pay, resulting in less discretionary income.

•   Inflation: Rising prices for goods and services increases essential expenses, which shrinks discretionary income.

What Is a Good Amount of Discretionary Income?

Generally, a good amount of discretionary income means you have enough funds after covering your essential expenses to be able to save, invest, and still enjoy the pleasures of life. The 50/30/20 budgeting formula offers one way to allocate your income. It suggests using 50% of your take-home pay on needs, 30% on wants (discretionary purchases), and 20% on goals (saving and paying more than the minimum on debts).

For example, if your monthly take-home income is $5,000, $2,500 would be siphoned off for necessities, $1,500 would be allotted for wants, and $1,000 would go toward goals like saving and investing.

Managing Your Discretionary Income for Financial Success

Making the most of your discretionary income involves thoughtful planning and smart money management. Here are some strategies to consider:

•   Track your spending: “It’s the last thing that many people want to do on their precious weekends, but tracking spending is essential. There is real truth to the saying ‘What gets measured gets improved,’” says Brian Walsh, CFP® and Head of Advice & Planning at SoFi. You may find some easy places to cut back, freeing up more money for saving.

•   Slash necessary expenses: Consider ways you might be able to reduce the cost of essentials, such as switching to a more affordable insurance, cell phone, or internet provider; meal-planning to cut food spending; or moving to a less expensive location.

•   Set financial goals: Having specific goals — like purchasing a home, funding a child’s future education, or retiring early — can help you stay focused and use your discretionary income wisely.

•   Grow your income: To boost discretionary income, you might ask for a raise at work or look into side jobs, freelance work, or ways to earn passive income.

•   Avoid lifestyle creep: As your income rises, try to resist the temptation to increase spending. Consider funnelling the extra funds into savings or investments to build wealth and strengthen your financial future.

Discretionary vs Disposable Income

The terms “discretionary income” and “disposable income” are often used interchangeably but they are not the same thing.

Key Differences

While discretionary and disposable income both refer to income left over after certain financial obligations are met, they differ in scope.

•   Disposable income refers to the money you have left from your earnings after taxes are taken out but before any other deductions are removed. It’s the total amount you have available to spend, which is typically a much higher number than your discretionary income.

•   Discretionary income is a subset of disposable income — it’s the amount of money left after your taxes and all necessary expenses are paid. You use it for “extras” like entertainment, savings, and investments.

It’s important to note that the government and courts may have slightly different definitions of these terms. In bankruptcy cases, for example “disposable income” is the amount that remains after subtracting allowed bankruptcy expenses from your monthly gross income.

If you have student loans, the federal government uses a discretionary spending formula to set your repayment amount under income-driven repayment plans. For many plans, they define “discretionary income” as the difference between your annual income and 150% of the poverty guideline for your family size and state.

Get Ready to Bank Better with SoFi

Once you know how much discretionary income you have, it’s a good idea to set some of it aside in a savings account that pays an above-average interest rate.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible 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.

FAQ

What is the meaning of discretionary income?

Discretionary income is defined as the amount of money you have left after covering essential expenses like taxes, rent or mortgage, utilities, and groceries. It represents the portion of your income that can be used for nonessential spending, such as entertainment, dining out, and vacations.

What is an example of discretionary income?

Discretionary income is the money left after paying for essentials like rent, groceries, and utilities. So, for example, if you earn $4,000 a month after taxes, spend $2,500 on necessities, and have $1,500 left, that’s your discretionary income. You could use that $1,500 for dining out, entertainment, and/or saving for a vacation. How you spend this money reflects your financial priorities and lifestyle choices.

What is the difference between discretionary and disposable income?

Disposable income is the money left after paying taxes and is used to cover both essential and nonessential expenses. Discretionary income, on the other hand, is the portion of disposable income left after covering necessities, like housing, food, and utilities. You can use this money for entertainment, shopping, or saving.

How does discretionary income impact financial planning?

Discretionary income is the money you have left after covering all of your essential expenses. It plays a key role in financial planning because it determines how much you can save, invest, and spend on nonessentials each month. Higher discretionary income gives you more flexibility in your budget, allowing you to save for emergencies and other goals, invest for future growth, and enjoy life’s pleasures.

Can discretionary income be invested?

Yes, discretionary income can be invested to grow your wealth over time. After covering essential expenses, you can allocate discretionary income to stocks, bonds, mutual funds, or retirement accounts. Investing part of your discretionary income can help you build financial security, generate passive income, and achieve long-term goals like sending a child to college or retiring comfortably.

Photo credit: iStock/Gearstd

SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC. 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.

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 12/23/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

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

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 Bank Fee Sheet for details at sofi.com/legal/banking-fees/.
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.

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

SOBNK-Q125-081

If you’re looking to open a new checking and/or savings account, you’ll likely have loads of options and offers to consider. The question is, how do you choose the right bank?

The best bank for you will depend on a number of factors, including your needs, priorities, and personal preferences. Whether you’re more comfortable with a small local financial institution or prefer the expansive resources of a national bank, this list of key things to look for in a bank will help you make the right choice.

Importance of Finding a Good Bank

It can be valuable (literally and figuratively) to find the right banking partner for a few good reasons:

•   It provides a home base for the money you earn.

•   It can provide security, knowing that your cash is safe and you have a team of professionals to assist you with your money management.

•   It can pay you interest on your funds so your cash grows.

•   It can help you build your financial security and literacy.

•   It may be flexible enough to grow and change with you as you move through the stages and phases of your life. (If not, you can always switch as your needs evolve.)

•   It can offer you additional benefits, like a cash back debit card or a lower mortgage rate.

What to Look for in a Bank

There are thousands of options in terms of banking in the United States. So how do you narrow the choices down to the one bank that’s right for you? There’s no right or wrong answer; it’s all about finding what works best for you.

Consider the following 12 factors that can help you find the right bank account for your current needs. You might create a comparison chart (Excel can be your friend here) so you can tick off the most important factors to you as you delve into this topic. Then use the process of elimination to find your perfect financial institution match.

Sure, it can be smart to take friends’ suggestions into consideration, but the final choice should be the one that is all about you and your needs… not what works for someone else or just what has a good marketing gimmick. Here are key things to consider when choosing a bank.

1. Security

Whether you choose to put your money in an online bank vs. a traditional bank vs. a credit union, it’s vital to make sure your funds are safe. Check to make sure any bank you’re considering is insured by the Federal Deposit Insurance Corporation (FDIC) or if you’re looking at a credit union, that it is insured by the National Credit Union Administration (NCUA).

In the very rare event of a bank or credit union closure, either FDIC or NCUA would be a safety net. You would be covered for up to $250,000 per depositor, per insured institution, for each account ownership category.

2. Bank Fees

This is an important factor. Fees can eat away at the money you have on deposit and the savings you are trying to build up. Some banks charge minimal or no account fees, but in other cases, you may be faced with a deluge. A few of the obvious fees are ATM charges, maintenance fees, and overdraft protection, and they can add up quickly.

What are ATM fees? They can run a few dollars per out-of-network withdrawal and sometimes even more. And how about overdraft? These often range from $30 to $35, and while they’re a good way to avoid negative balances, they can cost you hundreds of dollars if you fall behind.

Returned deposits, foreign transactions, low balances, lost cards, and sometimes even interacting with a human can also incur fees. If you want to avoid monthly maintenance fees and more, be sure to read through the terms and conditions carefully so you aren’t unpleasantly surprised. You may just want to choose an account that’s fee-free instead.

3. Interest Rates

While some banks might still offer the standard — and very low — interest rates on savings accounts, it doesn’t mean you’re stuck with that.

Especially with online-only banks, where overhead is typically much less than traditional brick-and-mortar banks, customers often benefit from annual percentage yields (APYs) that are many times the average interest rates offered by savings accounts. Some online banks even offer high-interest checking accounts.

4. Location

Consider whether you’re the kind of person who likes to visit brick-and-mortar branches often. If you do, you may want to bank with a financial institution that has physical locations close to your home, your workplace, or both.

You might also want to check out if your bank has ATMs or a partner network of no-fee machines near you and the neighborhoods where you typically spend time. This can be important for avoiding ATM fees, such as non-network fees and ATM operator fees. These can add a few or several dollars to every transaction.

5. Ease of Deposit

Along the same lines, you may want to consider how easy it is to deposit funds in a particular financial institution. Many banks offer the benefit of mobile deposit, which allows you to add a check to your account by snapping a photo with your cell phone and uploading it. Check to see what’s available.

Also, if you are looking at online banks, suss out how you might deposit cash, if that’s something you frequently do, and make sure it’s a convenient process for you.

6. Digital Banking

Building on the topic of mobile deposits, it’s likely worth your while to check out a potential bank’s app and online services. Are they easy to navigate? Do they offer the features you’re most likely to use? Comparing a couple of financial institutions’ user experiences can reveal important nuances.

See if you can download a demo or find one on YouTube. Ratings and reviews can also be a great way to find out other customers’ experiences — the good, the bad and the ugly — as opposed to trusting a commercial to be honest with you.

Linking to an outside bank account can help you lower overdraft fees.

For instance: Can you activate push alerts for low balances, or can you link your account to another financial institution? (Life hack: Linking to an outside bank account can help you lower overdraft fees — you’ll still get charged if your bank has to pull from the external account, but it’s typically less than if you didn’t have any other account to pull from at all.)

7. Minimum Requirements

Explore whether your potential bank has a minimum deposit and minimum account balance requirement. If so, that means you must initially put in a certain amount of cash to open your account or to start it and earn a certain APY. Then, with minimum balance requirements, if you dip below a given level, you’ll likely pay a monthly account charge.

With online banks, you may not have a minimum opening deposit or balance requirement; however, you may not earn the top APY unless you maintain a certain level of funds in the account, make a certain number of debit card transactions per month, or set up a direct deposit of your paycheck. Read the details when considering a bank.

8. Availability of Funds

Few people like waiting for funds to clear. When evaluating prospective financial institutions, find out how quickly funds clear. Some banks may offer early paycheck access, for instance, for qualifying accounts.

9. Customer Service

Here’s another dimension to consider when choosing a bank: What kind of customer service do they offer and when? If you are the type of person who likes to interact in-person, you may prefer a traditional bank with branches.

But even if that isn’t a big plus for you, also consider the availability of support by phone and chat during non-business hours. What if you have a pressing financial problem at 9 AM on a Sunday? Would help be there for you?

10. Investment Account Options

If you’re looking for more than just checking and savings, consider a bank that also has investment account options. Having everything you need within the same financial system can make deposits, withdrawals, transfers, and automatic saving a breeze.

11. Perks

Some banks may offer perks that appeal to you, so see what’s out there. For instance, some financial institutions may offer a cash bonus when you open an account; others may have cash back options that suit your spending style. Still others may offer educational events to boost financial literacy or might provide special passes that allow clients to visit local cultural institutions for free.

12. Your Banking History

One last factor to consider when choosing a bank: If you have some less-than-perfect aspects of your financial life, see if you will be penalized for that. For instance, some banks may scrutinize your banking history. If you have enough overdrafts in your history or other issues, they may not approve your account application. Or you might need to open what’s known as a second chance checking account until you prove that you’re a reliable client. It’s wise to consider this as you go bank shopping.

Banking with SoFi

If you’re in the market for a banking partner, come take a look at all that SoFi offers. We think you can bank smarter when you open an online bank account with us. Our Checking and Savings account lets you spend and save in one simple spot; you’ll earn a competitive APY, and you won’t pay any account fees. That means managing your money may be simpler and your cash can grow faster. What’s more, qualifying accounts with direct deposit may get paycheck access up to two days early.

Meet the new SoFi Plus!

Get access to higher APY, credit card cash back rewards, discounts, and more.

The Takeaway

Choosing the right bank depends on your needs and financial goals. In general, you’ll want to look for low (or no) fees, competitive interest rates, and convenient access, whether through local branches, ATMs, or online banking.

Also consider your personal banking preferences. For example, if you want to have the option of meeting with bank staff in person, you might choose a bank or credit union with nearby branches. If, on the other hand, you prioritize digital convenience and user-friendly interfaces, you might consider an online bank. Either way, be sure to compare your options, read reviews, and choose a bank that aligns with your lifestyle and financial priorities.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible 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.

FAQ

What should I do if a bank does not have what I am looking for?

If a bank doesn’t have the features you are looking for, it’s wise to shop around. There are thousands of banks and credit unions in America, and one or more are likely to suit your needs.

What are some banking red flags?

Banking red flags will vary depending on what your needs are. For instance, is that enticing annual percentage yield (APY) offered just a promotional rate that will drop considerably lower in a short period of time? Do you notice that your bank’s ATM network is getting smaller? Focus on the most important features you’re looking for and read the fine print to prevent disappointment and dissatisfaction.

What is the most important thing to look for in a bank?

Depending on your particular financial style and goals, the most important things when choosing a bank may be interest rates and fees; convenience; and additional features it may offer (such as budgeting tools, cash back, competitive mortgage rates, and the like).

SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC. 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.

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 12/23/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

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

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 Bank Fee Sheet for details at sofi.com/legal/banking-fees/.
Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

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.

SOBNK-Q125-048

Budgets come in all shapes and sizes, from the old-fashioned, “write down everything you spend” approach to using apps that automatically track and categorize your expenses. There is likely at least one method out there that can help you gain insight and manage your finances effectively. Once a budget is up and running, it can help you wrangle your spending and reach your savings goals, too.

Below, we break down seven popular budgeting strategies, including their benefits and potential drawbacks so you can choose the best fit for your needs and lifestyle.

Line-Item Budget

A line-item budget is what you may first imagine when you think of a “typical” type of budgeting. They’re commonly used by small businesses, but individuals can also benefit from keeping close tabs on cash flowing in and out of their checking accounts.

You can set up a basic line-item budget using pen and paper, or you might find it easier to use a spreadsheet on your computer. Either way, you’ll want to list income and expenses vertically in the first column, then make columns for each month of the year. It’s also a good idea to set spending targets for each category. As you log actual spending numbers into your budget, you can see how they line up to your targets.

Benefits and Drawbacks of Line-Item Budgeting

Pros:

•   For new budgeters, this method is relatively easy to create and intuitive.

•   Due to its detail, a line-time budget can be a good starting place for tracking expenses.

•   This method is well-suited for someone who needs more control over their spending.

Cons:

•   It can be time-consuming to set up and requires a high level of commitment to stick with.

•   It may feel restrictive for those who prefer more flexible spending.

•   It does not easily accommodate unexpected expenses.

Recommended: How to Make a Budget in Excel

Proportional Budgets

A proportional budget divides your after-tax income into several broad spending categories (or buckets) and allocates a set percentage for each. This budgeting strategy helps ensure you cover all of your needs, wants, and savings goals without having to account for every penny you spend.

How to Divide Your Income Proportionally

•   50/30/20 Rule (50% needs, 30% wants, 20% savings)

•   60/40 Rule (60% expenses, 40% savings/extras)

•   Custom variations based on individual priorities and financial situations

Proportional budgeting offers a structured yet flexible financial plan. You might try one method of allocating funds for a month or two, then adjust the proportions to better fit your living expenses and goals. (Read on for more details on how to set up a 50/30/20 and 60/40 proportional budget.)

Paying Yourself First

The “pay yourself first” approach is a simple budgeting method that prioritizes savings before anything else. Rather than wait to see what’s left over after covering all of your expenses, you siphon off a predetermined amount for savings as soon as your paycheck hits your bank account. This keeps the money out of sight and (hopefully) out of mind, so you’re less likely to spend it on something else.

Prioritizing Savings With the Pay Yourself First Method

Some tips for using this method effectively:

•   Put savings on auto pilot: Consider setting up an automated transfer from checking to savings for a set amount on the same day each month, perhaps the day after you get paid.

•   Set up a split direct deposit. Another way to automate savings is to ask your employer to do a split direct deposit, where most of your paycheck goes into checking but a portion goes directly into your savings account.

•   Watch your spending. You may need to adjust nonessential (discretionary) spending to ensure you can cover all of your fixed expenses, like rent, utilities, and debt payments, once saving has been deducted.

Envelope Budget

Also known as “cash stuffing,” the envelope budgeting method involves dividing your expenses into categories (such as rent, groceries, transportation) and assigns an envelope to each one. You then decide how much you can spend on each category and stuff your envelopes with the allotted amount.

You use your envelope money to spend throughout the month. Once an envelope is empty, no more spending is allowed in that category until the next month.

To update this approach for today’s digital world, many budgeting apps allow you to create digital “envelopes” and follow the same principals as the original envelope system.

How to Effectively Use the Envelope Budgeting System

Here’a how to get started with the envelope system:

•   Consider the types of expenses you have and sort them into categories. You can be highly specific (such as “eating out”) or more broad (like “discretionary spending”).

•   Decide how much you will spend on each category, or envelope, per month and portion out the money.

•   Once an envelope is empty, you’ll want to stop spending in that category.

•   If you have remaining funds in an envelope at the end of the month, you could roll over the funds into the same envelope for the next month, move them to a different envelope, or put them in a savings account.

This budgeting method can work well for those who need a tangible way to control their spending. However, it may not be practical unless you’re using a digital tool.

Zero-Sum Budgeting

The idea here is to spend every dollar that you have. That doesn’t mean going on a shopping spree, however. Instead, you assign a specific purpose to each dollar that you earn, whether it’s expenses, savings, debt repayment, or discretionary spending.

It’s called a zero-sum budget because the goal is to have income minus expenses equal zero, meaning there is no unaccounted-for money. This budgeting strategy not only ensures all of your needs are met, but that you also have room in your budget for future needs and fun.

Balancing Income and Expenses With Zero-Sum Budgeting

To create a zero-sum budget:

1.    Go through the past three to six months of financial statements to determine your average monthly take-home income and typical expenses.

2.    Assign dollars to each of your non-negotiable bills, such as rent, insurance, student loan payments, and groceries.

3.    Assess how much money you have left for saving, paying more than minimum on debts, and discretionary spending, then assign where your remaining money is going to go.

Though this approach requires meticulous tracking, it can be ideal for those who want complete control over their finances and ensure they are using their money efficiently.

50/30/20 Budget

The 50/30/20 budget is type of proportional budget that divides your monthly income into three buckets:

•   50% for “needs:” This includes essential expenses like housing, food, transportation to work, as well as minimum payments due on debt.

•   30% for “wants:” This is anything that you buy for personal enjoyment, such as eating out, traveling, and shopping for clothes (beyond basic needs). You may also hear these called discretionary expenses.

•   20% for goals: This category includes saving for short-term goals like building an emergency fund, saving for long-term goals like retirement, as well as paying more than minimum on debts.

This budgeting method can be a great fit for someone who likes a simple framework or just beginning to budget. However, others may crave more structure, such as pre-assigned spending limits for individual categories.

60/40 Budget

Another type of proportional budget, the 60/40 budget divides your monthly income into only two buckets:

•   60% for expenses: This includes fixed costs like rent, utilities, and nonessential bills (like streaming services or a gym membership). The idea is that 60% of your budget goes to regular spending, rather than out-of-the-ordinary expenses like concert tickets or a vacation.

•   40% for everything else: This represents the rest of your income and it goes towards savings goals and spending that is outside your usual lifestyle.

Adjusting for Savings and Spending Needs

You can take the 40% bucket and allocate it however you wish. One allocation you might consider is:

•   20% for retirement/other long-term goals

•   10% for short-term savings goals, such as building an emergency fund, saving for a vacation, or making a major purchase.

•   10% for “fun” spending, like going out to dinner, seeing a show, or other occasional splurges.

The simplicity of the plan can be a positive for people who don’t like complicated, time-consuming budgets, but it may not provide enough guidance for those who really need to take control of their finances.

Sticking to a Budget

Whatever approach you pick, a budgeting method only works if you stick with it. Here’s a look at some ways to make it sustainable.

Overcoming Mental Barriers

Having financial discipline and sticking to a budget can be difficult. If you are struggling with discipline, you might try these tactics:

•   Acknowledge the issue that is holding you back. Out loud. You can only fix a problem if it’s been identified.

•   Create space for yourself to succeed. For example, you might put a 20-minute block on your calendar to look over your budget every week.

•   Anchor the task of budgeting to another activity that you do regularly and enjoy (such as making coffee on Sunday morning). This way, you’ll start to associate the two tasks and think about them in tandem.

Setting Realistic Expectations

A common pitfall when setting a budget is to be too restrictive in your spending targets right out of the gate. While it’s great to be ambitious, it’s unlikely that you’ll make sweeping changes in your spending just because you set lofty targets. And in fact, missing big targets could be disheartening.

Instead, try to set yourself up for success by choosing realistic goals for the upcoming months. You can gradually decrease spending and increase saving as you get used to budgeting.

Considering Irregular Expenses

No matter what type of budget you choose, there will always be the issue of irregular expenses. Irregular expenses may be expected (like annual membership fees or holiday gifts) or unexpected (like car repairs). Some solutions:

•   Turn irregular expenses into monthly expenses. To account for occasional or seasonal expenses, add up the total expected cost for the year, divide that number by 12, then factor it into your monthly budget.

•   Set up an emergency fund for unexpected expenses. It’s a good idea to have three to six months’ worth of living expenses set aside in a separate savings account to cover any unexpected costs or financial bumps in the road.

Staying Out of the Weeds

To avoid getting overwhelmed by the details when budgeting, consider these tips:

•   Steer clear of strategies that feel complicated or require hours of effort. You need a budget you will stick with, and that is likely one that suits your style and feels manageable.

•   Test-drive a couple of budgets to see which works best.

•   Recognize that a budget is never going to be perfect. And that’s okay! If you forget a category or overspend here and there, it may feel like a failure when it’s not.

Tips for Maintaining Motivation

These strategies can help ensure you stick with your budget long-term:

•   Set clear, meaningful goals: Budgeting can feel easier when you have a purpose behind it. Instead of just tracking expenses, consider setting specific goals like saving for a vacation or buying a car.

•   Make it fun: If budgeting feels like a chore, you’re less likely to stick with it. You might use an app that makes tracking finances fun or gamify the experience by setting challenges, such as a no-spend challenge or the 52-week savings challenge.

•   Celebrate your successes: Even small wins, like saving an extra $50 a month, deserve recognition. Reward yourself in non-financial ways, such as a relaxing day off or a favorite activity.

Leveraging Technology

Budgeting apps and tools can simplify financial management and automate tracking, making it easier to stick with a budget.

Apps to Simplify Budgeting

Your bank may offer a free spending tracker as part of their mobile app. If not, consider downloading a separate budgeting app. Some popular options include:

•   Goodbudget: A digital version of the envelope system, this app helps you divide up your salary into spending categories, then tracks your spending and helps you stick to the plan.

•   YNAB (You Need A Budget): YNAB helps you create a budget then monitors your spending and charts your progress as you work towards your goals.

•   PocketGuard: This tool connects to all of your financial accounts and syncs transactions in real-time, helping you stick to your budget.

The Takeaway

Budgeting is a system that can help you track and manage your money better, which in turn can optimize your spending and saving. There are many different budgeting methods. Popular ones include the 50/30/20 budget rule, the zero-sum system, and the envelope technique. Take some time experimenting to find the system that works best for you. A good budget and the right banking partner can help you along the path to financial wellness.

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FAQ

What’s the best budget plan?

The best budget plan is one that works for you. To find the best fit, consider your goals and personal preferences. Some people want to control their spending and like a really detailed budget, such as a line-item budget. Other people are more focused on making sure they allocate funds towards savings, in which case a 50/30/20 rule could be a good option.

What are the simplest ways to budget?

A simple way to start budgeting is to look at the past several months of financial statements, then determine the average amount of money you have coming and going out of your bank account each month. If you see that monthly outflows are close to (or, worse, exceed) monthly inflows, you’ll want to comb through your nonessential expenses and find places to cut back. Any funds you free up can be funnelled into saving and, if you have debt, paying it down.

What is the 50/30/20 rule budget?

The 50/30/20 rule is a simple budgeting framework that recommends putting 50% of your money toward needs (like housing, food, and utilities); 30% toward wants (including entertainment and dining out); and 20% towards goals (savings, investments, and debt repayment beyond the minimum).

This budgeting method can work well for beginners and those who are looking for a simple approach to personal finance. However, you may need to adjust percentages based on your needs and goals.

What tools can help with sticking to a budget?

All you really need to start budgeting is a pen and a notebook, where you keep track of income and expenses. But tech tools can simplify and streamline the process. Spreadsheets, like Microsoft Excel or Google Sheets, are easy to update and offer built-in formulas for automatic calculations. Budgeting apps, on the other hand, can link to outside accounts, track spending in real time, and categorize expenses automatically, which can save time.

How can budgeting methods be adapted for families?

You can adapt any budgeting method for a family by coming up with your total monthly household income and expenses. Plan for essential costs like housing, food, and childcare first, then set aside savings for emergencies and future expenses. You can involve children by teaching financial literacy through allowances and savings goals.

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