Budgeting & Goals Archives | Page 21 of 185

Jan

2024

7 Tips for Managing a Checking Account

By Sarah Li Cain | Budgeting & Goals, Financial Independence, money | Comments Off

Managing a checking account can be a simple process, thanks to all the tools at your disposal today. You can set alerts to let you know if your balance is dipping too low and use your financial institution’s app to see where your funds are flowing, among other conveniences. Doing so can set you up to avoid fees and charges while maximizing rewards and interest you may earn.

Here, you’ll learn seven simple steps to help you manage your checking account with ease.

Why Is It Important to Manage Your Checking Account?

Knowing how to manage a checking account effectively will help you with many aspects of your financial life such as meeting your savings goals and protecting your money. If you don’t know where your money goes, how effective will you be when it comes to creating a budget or assessing whether you can take that last-minute weekend getaway with a friend?

Plus, having good account-management skills will protect you against fraud. For instance, let’s say someone stole your debit card and used it to make purchases. You’d want to detect that ASAP before a bad situation got any worse. If you report any losses within two business days, you’re only on the hook for a maximum of $50 according to Federal laws.

Otherwise, you could lose up to $500 if you report it after two business days but within 60. If you don’t notice the fraudulent charges until after the 60 business-day limit, you’re on the hook for all fraudulent transactions unfortunately.

To recap, good checking account management will help you:

• Keep tabs on your bank account balance and activity

• Allow you to better fund savings goals

• Avoid fraudulent activity and potential money loss.

Now, here are the seven steps that answer the question, “How do you manage a checking account?”

💡 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.

1. Know Your Account Balance

Keeping track of your account balance gives you a clearer picture of where you stand financially. Doing so can help you with tasks such as planning for occasional and unexpected expenses, paying off your student loans on time, as well as simply sticking to your budget.

Plus, monitoring your account can help you avoid overdraft fees by preventing your balance from dipping into negative territory. It’s easy to make an online payment or swipe that debit card and forget about it, so figuring out how often to check your balance is a wise idea. (A couple times a week works well for many people.)

You can log into your account online or through the bank’s mobile app, but other ways to check your balance include:

• Receiving automated text alerts

• Speaking to a teller at a branch

• Calling your bank’s customer service hotline

• Requesting your checking account balance at an ATM.

2. Download Your Bank’s Mobile Banking App

Here’s another idea for how to manage your checking account: If your bank offers a mobile app, it can be a smart idea to download it. Yes, mobile banking is very secure most of the time. By adopting mobile banking, you can easily keep an eye on your checking account. What’s more, you can conduct an array of transactions with just a few clicks, such as paying bills, depositing checks, setting up automated alerts, and transferring money between accounts.

Depending on the mobile app’s features, you may be able to link your debit and credit cards to your account, which makes it easier to purchase and pay for things. There may be other features such as a budgeting section, money management tools, insights into your credit score, and even access to discounts at your favorite retailer.

3. Avoid Paying Extra Fees

Many checking accounts charge monthly maintenance fees, but you may be able to have them waived if you can meet certain requirements. Most commonly, you can skip the monthly fees if you set up direct deposits or maintain a certain account balance.

Perhaps you want to drill down on one kind of fee in particular: those overdraft fees. Those charges can really add up, and if they are left unpaid, they can harm your credit score. Take a bit of time to understand how your bank handles overdraft fees — will it waive it if your account is in good standing, will it charge you a fee and process the payment, or will it reject the transaction totally and assess you a fee?

Plenty of banks also offer options such as overdraft protection. Typically, this means if you’re at risk of having a negative bank balance, they will transfer the overdrawn amount from a linked savings account to your checking account automatically, without any charges. Still, you’ll probably want to set an alert so you’re notified when your checking account reaches a certain balance or hits zero. That way, you can quickly remedy the situation.

💡 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.

4. Automate Deposits and Payments

Automation can make your life so much easier. Letting technology assist you with your banking can help you keep on top of tasks such as depositing your paycheck, paying bills, or meeting savings goals.

• In terms of how to manage a bank account, direct deposit is a great way for your employer to deposit paychecks automatically. In some cases, banks will even give you early paycheck access.

• Your bank may have automatic bill payment or transfer tools as well. Consider using these for recurring payments to be made automatically, such as ones for subscription services, auto loans, or your mortgage payments. Doing so can prevent missed payments and may be able to help build your credit score.

• Also, automatically transferring a certain amount each month into a separate account can help you reach your short- and long-term savings goals.

5. Embrace Potential Earnings

Sure, having a nice big cushion of cash in your checking account can make you feel flush. However, keeping excess cash in your checking account could mean you’re losing out on the opportunity to get more out of your funds. Specifically, that money could be earning you more money. As you balance your bank account, you may find there are better ways to make your money work for you.

For instance, there are plenty of ways to earn interest even if you want your cash to remain more liquid. For instance, high-yield savings accounts linked to your checking account can earn you a bit of extra cash while still being very accessible.

6. Take Advantage of Checking Account Perks

To remain competitive, many banks are starting to offer additional perks with their checking account such as:

• Identity theft protection and assistance

• Discounts at shopping and dining retailers

• Extended warranties on purchases

• Buyer’s protection

• Health savings cards

• Cash back on qualifying debit card purchases.

When shopping around for a checking account, consider your financial habits. If you shop frequently at certain retailers, it may be worth taking advantage of an account that offers discounts. Or if you use the ATM frequently, looking for a checking account that reimburses you for third-party ATM fees may be a smart choice.

7. Consider Consolidating

Do you have multiple checking accounts? It’s not uncommon for people to have, say, their main checking account, one that they opened to get some reward or perk, and the one that their parents opened with them in high school. If you can relate, you might benefit from simplifying your finances and consolidating all of them into one main checking account.

That way, all you have to do is log into a single checking account and monitor your finances. Why overwhelm yourself with many accounts to check on and keep track of?

The Takeaway

Managing your checking account is an important path to staying on top of your finances. It will help you keep on your budget, avoid unnecessary fees, and reach your financial goals. Plus, with all the tech tools and alerts available today and the rewards being offered, it can be faster and more profitable than ever.

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

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall. Enjoy up to 4.60% APY on SoFi Checking and Savings.

FAQ

Why is it important to manage your checking account?

It’s important to manage your checking account so that you can see where your money is coming from and going to. It can help you understand how you can budget better, reach your savings goals, and even detect fraud.

How often should you manage your checking account?

For many people, checking their bank account once or twice a week works well. You can also take actions like establishing alerts when your account balance falls below a certain threshold or setting up automatic transfers for recurring payments to help save you time.

How should you keep track of what’s in your checking account?

The usual ways to keep track of what’s in your checking account are to use your bank’s app, check your balance online, call customer service, or use an ATM to see how your money is tracking.

Photo credit: iStock/jroballo

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 4.60% 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 4.60% 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 4.60% 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 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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

SOBK0124027

Jan

2024

401(a) vs 401(k) Compared

By MP Dunleavey | Budgeting & Goals, Growing Wealth, invest, Preparing for Retirement, Terminology | No Comments

Table of Contents

What Is a 401(a) Plan?
What is a 401(k) Plan?
401(a) vs. 401(k) Contribution Limits
401(a) vs. 401(k) Investment Options
401(a) vs. 401(k) Tax Rules
401(a) vs. 401(k) Rollover Rules
What is a 401(a) Profit Sharing Plan?
Summarizing the Differences Between 401(k) and 401(a) Plans
Summarizing the Similarities Between 401(a) vs 401(k) Plans
Pros and Cons of 401(k) vs 401(a) Plans

A 401(k) plan and a 401(a) plan may sound confusingly similar, but there are some differences between the two retirement accounts.

The biggest differences between 401(k) vs 401(a) plans are in the types of companies that offer them and their contribution requirements. While most private sector companies are eligible to offer 401(k) plans, only certain government and public organizations can offer their employees a 401(a) plan. Employers must contribute to 401(a) plans and can make it mandatory for employees to contribute a pre-set amount as well. By contrast, employers do not have to contribute to 401(k) plans and employees are free to choose whether they want to contribute.

Key Points

• A 401(a) plan is an employer-sponsored retirement account typically available to government workers and employees at educational institutions and nonprofits. Employer contributions are mandatory, while employee contributions may be voluntary.

• A 401(k) plan is offered by for-profit employers as part of the employee’s compensation package. Employers are permitted but not required to contribute to a 401(k) plan.

• For 2023, the total contribution limit — from both employer and employee — is $66,000 for 401(a) and 401(k) plans, with an additional $7,500 catchup contribution allowed for employees age 50 or older.

• Employee contributions to 401(a) or 401(k) plans in 2023 can amount to $22,500, or for people 50 or older the cap is $30,000. However, employee contributions cannot exceed their salary.

• You can borrow from either a 401(a) or a 401(k) plan with restrictions. Withdrawals before age 59 1⁄2 may incur penalties. Employees can begin to withdraw money without penalty when they turn 59 1⁄2.

What Is a 401(a) Plan?

A 401(a) plan is an employer-sponsored type of retirement account that typically covers government workers and employees from specific education institutions and nonprofits. It is different from an IRA in that the employer sponsors the plan, determines the investment options that the employees can choose from, and sets the vesting schedule (the amount of time an employee will have had to have worked with the organization before all employer contributions become fully theirs, even if they leave the company).

With IRAs, the individual investor decides how much to contribute and if/when they want to make withdrawals from the account. With a 401(a) plan, employer contributions are mandatory; employee contributions are not. All contributions made to the plan accrue on a tax-deferred basis.

Recommended: IRAs vs 401(k) plans

However, withdrawing from either type of plan may incur penalties for withdrawing money before age 59 ½.

What Is a 401(k) Plan?

A 401(k) plan is a benefit offered by for-profit employers as part of the employee’s compensation package. The employer establishes the plan, along with the investment options the employee can choose from and the vesting schedule. As with 401(a) plans, funds contributed are tax-deferred and help employees save for retirement.

Some employers choose to offer a match program in which the company matches employee contributions up to a specific limit.

401(k) plans are also accessible to entrepreneurs and self-employed business owners.

Who Contributes to Each Plan?

Under a 401(a) plan, employer contributions are mandatory, though the employer can decide whether they’ll contribute a percentage of the employees’ income or a specific dollar amount. Employers can establish multiple 401(a) accounts for their employees with different eligibility requirements, vesting schedules, and contribution amounts.

Employee participation is voluntary, with contributions capped at 25% of their pre-tax income.

Under a 401(k) plan, employees can voluntarily choose to contribute a percentage of their pre-tax salary. Employees are not required to participate in a 401(k) plan.

Employers are permitted but not required to contribute to a 401(k) plan, and many will match up to a certain amount — say, 3% — of employees’s salaries.

401(a) vs 401(k) Contribution Limits

For 2023, the total 401(a) contribution limit — from both employer and employee — is $66,000. However, employees with 401(a) plans can also contribute to a 403(b) plan and a 457 plan simultaneously (more on those plans in the 401(a) vs Other Retirement Plan Options section).

Employee contributions for 401(k) plans have a $23,000 limit in 2024 and a $22,500 limit in 2023. Employees who are 50 or older may contribute up to an additional $7,500 for a total of $30,500 in 2024 and a total of $30,000 in 2023. An employee with a 401(k) plan can also have a Roth or traditional IRA. However, there are limits on how much they can contribute to an IRA account — $7,000 for a traditional IRA for 2024 and $6,500 for a traditional IRA for 2023, with an extra $1,000 for people over age 50.

401(a) vs 401(k) Investment Options

401(a) vs 401(k) plans often offer various investment options, which may include more conservative investments such as stable value funds to more aggressive investments such as stock funds. Some 401(a) plans may allow employees to simplify diversified portfolios or seek investment advice through the plan’s advisor.

Most 401(k) plans also offer various investment choices ranging from low-risk investments like annuities and municipal bonds to equity funds that invest in stocks and reap higher returns.

💡 Quick Tip: All investments come with some degree of risk — and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.

401(a) vs 401(k) Tax Rules

The tax rules in a 401(a) plan may be one difference between a 401(k) and 401(a).

With a 401(a), employees make pre-tax or after-tax contributions, depending on how their employer decides to structure the plan. Pre-tax means contributions are not taxed at the time of investment, but later upon withdrawal. After-tax means contributions are taxed before being deposited into the account

A 401(k), on the other hand, is a tax-deferred retirement plan, meaning all contributions are pre-tax. The wages employees choose to contribute to their plan are untaxed upon initial investment. Income taxes only kick in when the employee decides to withdraw funds from their account.

Can You Borrow from Each Plan?

You can borrow from either a 401(a) or a 401(k) plan if you have an immediate financial need, but there are some restrictions and it is possible to incur early withdrawal penalties.

An employer can limit the amount borrowed from a 401(a) plan — and may choose not to allow employees to borrow funds. If the employer does allow loans, the maximum amount an employee can borrow is the lesser of:

• $10,000 or half of the vested account balance, whichever is greater OR

• $50,000

Because the employee is borrowing money from their account, when the employee pays back the loan’s interest, they are paying it to themselves. However, the IRS requires employees to pay back the entire loan within five years . If they don’t pay the loan back, the IRS will consider the loan balance to be a withdrawal and will require taxation on the remaining loan amount as well as a 10% penalty if the employee is under age 59 ½.

Borrowing from a 401(k) plan is similar. Employees are limited to borrowing $50,000 or half of the vested balance — whichever is less. One big difference between borrowing from a 401(a) vs. a 401(k) plan is employees lose out on a tax break if they borrow from their 401(k) because they are repaying it with after-tax dollars. Because the money is taxed again when withdrawn during retirement, an investor is essentially being taxed twice on that money.

Can You Borrow Money from a 401(a) or 401(k) to Buy a Home?

You may be able to use the funds from a 401(a) or 401(k) account to purchase a home. Remember, with 401(a) plans, the employer ultimately decides if loans are permitted from the 401(k).

If you borrow money from your 401(a) or 401(k) to fund the purchase of a home, you have at least five years to repay what you’ve taken out.

The maximum amount you’re allowed to borrow follows the rules stated above:

• $50,000 OR

• The greater between $10,000 or half of what’s vested in your account,

Whichever is less.

When Can You Withdraw From Your Retirement Plan?

Employees can begin to withdraw money from their 401(a) plan without penalty when they turn 59 ½. If they make any withdrawals before 59 ½, they will need to pay a 10% early withdrawal penalty. Once they reach 70 ½, they’re required to make withdrawals if they haven’t already started to.

With a 401(k) plan, if an employee retires at age 55, they can start withdrawing money without penalty. However, to take advantage of this early-access provision, they need to have kept the money in the 401(k) plan and not have rolled it into a Roth IRA.

Employees also need to have ended their employment no earlier than the year in which they turn 55.

Otherwise, the restrictions are the same as with a 401(a) plan, and they can begin to withdraw money penalty-free once they turn 59 ½.

401(a) vs 401(k) Rollover Rules

Generally, 401(a) and 401(k) accounts have similar rollover rules. When an employee chooses to leave their job, they have the option to roll over funds. The employee can choose to roll the account into another retirement plan or take a lump-sum distribution. Generally, if the employee decides to roll over their plan to another plan, they have to do so within 60 days of moving the funds.

The rules for a 401(a) rollover dictate that funds can be transferred to another qualified plan like a 401(k) or an individual retirement account (IRA). The rules for 401(k)s are the same.

If the employee decides to take a lump-sum distribution from the account, they will have to pay income taxes on the full amount. If they are under 59 ½, they will also have to pay the 10% penalty.

Recommended: How To Roll Over a 401(k)

What Happens to Your 401(a) or 401(k) If You Quit Your Job?

If you quit your job, you can leave the money in your former employer’s plan, roll it into the plan of your new employer, transfer it to a Rollover IRA, or cash it out. If you are under age 59 ½ and cash out the plan, you will likely need to pay taxes and a 10% penalty.

However, if you quit your job before you are fully invested in the plan, you will not get your employer’s contributions. You will only get what you contributed to the plan.

A 401(a) profit sharing plan is a tax-advantaged account used to save for retirement. Employees and employers contribute to the account based on a set formula determined by the employer. Unlike 401(a) plans, the employer’s contributions are discretionary, and they may not contribute to the plan every year.

All contributions from employees are fully vested. The ownership of the employer contributions may vary depending on the vesting schedule they create.

Like 401(a) plans, 401(a) profit sharing plans allow employees to select their investments and roll over the account to a new plan if the employee leaves the company. If an employee wants to take a distribution before reaching age 59 ½, they are subject to income taxation and a 10% penalty.

Summarizing the Differences Between 401(k) and 401(a) Plans

The main differences between a 401(k) and 401(a) are:

• 401(a) plans are typically offered by the government and nonprofit organizations, while 401(k) plans are offered by private employers.

• Employees don’t have to participate in a 401(K), but they often must participate in a 401(a).

• An employer decides how much employees contribute to a 401(a), while 401(k) participants can contribute what they like.

• With a 401(a), employees make pre-tax or after-tax contributions, depending on how their employer decides to structure the plan. With a 401(k), all contributions are pre-tax.

Summarizing the Similarities Between 401(a) vs 401(k) Plans

A 401(k) vs. a 401(a) has similarities as well. These include:

• Both types of plans are employer-sponsored retirement accounts.

• Employees can borrow money from each plan, though certain restrictions apply.

• There may be a 10% penalty for withdrawing funds before age 59 ½ for both plans.

401(a) vs Other Retirement Plan Options

401(a) vs 403b

A 403b is a tax-advantaged retirement plan offered by specific schools and nonprofits. Like 401(a) and 401(k) plans, employees can contribute with pre-tax dollars. Employers can choose to match contributions up to a certain amount. Unlike the 401(a) plan, employers don’t have mandatory contributions.

For 2024, the employee contributions limit is $23,000. For 2023, the employee contributions limit is $22,500. If the plan allows, 50 or older employees may contribute a catch-up amount of $6,500.

Generally, 403b plans are either invested in annuities through an insurance company, a custodian account invested in mutual funds, or a retirement income account for church employees.

Additionally, 403b plans allow for rollovers and distributions without a 10% penalty after age 59 ½. Like similar plans, employees may have to pay a 10% penalty if they take a distribution before reaching age 59 ½ unless the distribution meets other qualifying criteria.

401(a) vs 457

457 plans are retirement plans offered by certain employers such as public education institutions, colleges, universities, and some nonprofit organizations. 457 plans share similar features with 401(a) plans, including pre-tax contributions, tax-deferred investment growth, and a choice of investments that employees can select.

Employees can also roll over funds to a new plan or take a lump-sum distribution if they leave their job. However, unlike a 401(a) or 401(k) plan, the withdrawal is not subject to a 10% IRS penalty.

Another option offered through 457 plans is for employees to contribute to their account on either a pre-tax or post-tax basis.

401(a) vs Pension

A 401(a) is a defined contribution plan, where a pension is a defined benefit plan. With a pension, employees receive the benefit of a fixed monthly income in retirement; their employer pays them a fixed amount each month for the rest of their life. The monthly payment can be based on factors like salary and years of employment.

With a 401(a), employees have access to what they and their employer contributed to their 401(a) account. In contrast to a pension plan, retirees aren’t guaranteed a fixed amount and their contributions may not last through the end of their life.

Pros and Cons of 401(k) vs 401(a) Plans

Both 401(k) and 401(a) plans have pros and cons.

Pros of a 401(k):

• Employers may match a portion of the employee’s contributions.

• The plan is fairly easy to set up.

• Employees generally have a wide range of investment options.

Pros of a 401(a):

• Lower fees

• Contributions are tax-deferred.

• Both the employer and employee make monthly contributions.

Cons of a 401(k):

• Fees may be high.

• Need to wait until fully vested to keep employer matching contributions.

• Penalty for withdrawing funds early.

Cons of a 401(a):

• Investment choices may be limited.

• Participation may be mandatory.

• Penalty for withdrawing funds early.

💡 Quick Tip: How much does it cost to set up an IRA? Often there are no fees to open an IRA, but you typically pay investment costs for the securities in your portfolio.

Other Retirement Account Options

Roth IRAs

Roth IRAs are funded with after-tax contributions, which means they aren’t tax deductible. However, the withdrawals you take in retirement are tax-free.

You can withdraw the amount you contributed to an IRA at any time, without penalty.

The Roth IRA contribution limit for 2024 is $7,000 ($8,000 if you’re 50 or older) and for 2023 is $6,500 ($7,500 if you’re 50 or older).

Traditional IRAs

A traditional IRA is similar to a 401(k): both plans offer tax-deferred contributions that may lower your taxable income. However, in retirement, you will owe taxes on the money you withdraw from both accounts.

Unlike a 401(k), a traditional IRA is not an employer-sponsored plan. Anyone can set up an IRA to save money for retirement. And if you have a 401 k), you can also have a traditional IRA.

The IRA contribution limit for 2024 is $7,000 ($8,000 if you’re 50 or older) and for 2023 is $6,500 ($7,500 if you’re 50 or older).

HSAs

An HSA, or Health Savings Account, allows you to cover healthcare costs using pre-tax dollars. But you can also use an HSA as a retirement account. At age 65, you can withdraw the money in your HSA and use it for any purpose. However, you will pay taxes on anything you withdraw that’s not used for medical expenses.

In 2024, you can contribute up to $4,150 in an HSA as an individual, or $8,300 for a family. In 2023, you can contribute up to $3,850 in an HSA as an individual, or $7,750 for a family.

Investing In Your Retirement

The largest difference between 401(a) and 401(k) plans is the type of employers offering the plans. Whereas 401(a) plans typically cover government workers and employees from specific education institutions and nonprofits, 401(k) plans are offered by for-profit organizations. Thus, a typical employee won’t get to choose which plan to invest in — the decision will be made based on what organization they work for.

Both 401(a) plans and 401(k) plans do have restrictions that might bother some investors. For example, an employee will be at the mercy of their employer’s choice when it comes to investing options.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Easily manage your retirement savings with a SoFi IRA.

FAQ

Is a 401(a) better than a 401(k)?

It’s not necessarily a matter of which plan is “better.” 401(k) plans are offered by private employers, while the government and nonprofits offer 401(a) plans. Both plans allow you to save for retirement in a tax-deferred way.

How are 401(a)s different from 401(k)s?

There are some differences between 401(k) and 401(a) plans. For instance, 401(a) plans are typically offered by the government and nonprofit organizations, while 401(k) plans are offered by private employers. In addition, employees don’t have to participate in a 401(k), but they often must participate in a 401(a). An employer decides how much employees contribute to a 401(a), while 401(k) participants can contribute what they like. And finally, those who have a 401(k) may have more investment options than those who have a 401(a).

Can you roll a 401(a) into a 401(k)?

Yes, you can roll a 401(a) into a 401(k) if you leave your job and then get a new job with a private company that offers a 401(k). You can also roll over a 401(a) into a traditional IRA.

Photo credit: iStock/solidcolours

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.

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.

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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Jan

2024

Comparing Personal Loans vs Business Loans

By Kim Franke-Folstad | Budgeting & Goals, Financial Independence, Life & Career, personal_loan, SMB | Comments Off

If you’re looking to start or grow a side hustle or small business, you might think a business loan is the right next step. A personal loan, however, is another popular financial product that you also might be able to use. Or it could free up some cash by covering expenses elsewhere in your budget, so you can put more of your income toward funding your business.

Because there are potential benefits and disadvantages to both types of financing, it’s important to understand the differences. You’ll find that information here and be better equipped to decide whether a business loan vs. personal loan might work best for you.

What Is a Personal Loan?

A personal loan is a source of financing that a borrower typically can use for just about anything. (That said, you may need to get approval from your lender if you plan to use the money directly for your business. This is not always possible.)

Typically, you’ll find unsecured personal loans, with the borrower agreeing to pay back the full amount, plus interest, in fixed monthly payments within a predetermined time frame.

Some lenders also offer secured personal loans, however,which means some form of collateral is involved. Also, some offer personal loans with variable interest rates.

How Personal Loans Work

When you apply for a personal loan, you can expect the lender to review your personal financial information — including your credit score, credit reports, and income — to determine your eligibility. In general, the better your credit, the better your chances of receiving a lower interest rate.

Personal loan amounts vary, but some lenders offer personal loans for as much as $100,000.

Although most personal loans have shorter repayment terms, the length of a loan can vary from a few months to several years. Typically, they last from 12 to 84 months.

💡 Quick Tip: Some personal loan lenders can release your funds as quickly as the same day your loan is approved.

What is a Business Loan?

A business loan is a type of financing used specifically to pay for business expenses. It could be used to purchase equipment or inventory, for example, or to fund a new project.

There are many kinds of small business loans available — with different rates and repayment terms — including Small Business Administration (SBA) loans, equipment loans, micro loans, and more. Rates, terms, and loan requirements also can vary significantly depending on the lender.

How Business Loans Work

Applying for a business loan tends to be more complicated than getting a personal loan. For one thing, you’ll likely have to submit more paperwork to back up your application, including your business’s financial statements and an up-to-date business plan. The lender also usually will want to review your personal and business credit scores. And you may have to be more specific about what the loan will be used for than you would with a personal loan.

If your business is brand new, lenders may be reluctant to give you a business loan. Some lenders might ask you to put up some type of collateral to qualify.

Differences Between Business and Personal Loans

There are several factors you may want to evaluate if you’re trying to decide between a personal loan vs. a business loan, including the loan costs, how you plan to use the money, and how much you hope to borrow. Here’s a look at a few basic differences.

Cost Differences Between Business and Personal Loans

Whether you’re considering applying for a business loan or a personal loan to use for your business, it’s important to be clear about how much it could cost you upfront and over the life of the loan.

Interest Rates

Interest rates for business loans can be lower than for the interest rates for personal loans, but the rates for both can vary depending on the type of loan, the lender you choose, and your qualifications as a borrower.

Fees

Fees also can affect the upfront and overall cost of both personal and business loans, so it’s a good idea to be clear on what you’re paying. Some of the more common fees for business loans and personal loans that you might see include origination, application, packaging, and underwriting fees, and late payment and prepayment penalties.

Some fees may be subtracted from the loan amount before the borrower receives the money. But fees also may be folded into a loan’s annual percentage rate (APR) instead, which can increase the monthly payment.

Down Payment

Business loans may be available for larger amounts than a personal loan. For a larger business loan — a substantial SBA loan or commercial real estate loan, for example — you could be required to come up with a down payment. This amount can add to your upfront cost. However, just as with a mortgage or car loan, a larger down payment can help you save money over the long term, because you’ll pay less in interest.

Whether you’ll need a down payment, and the amount required, may depend on your individual and business creditworthiness.

Different Uses for Business and Personal Loans

One of the biggest differences between business vs. personal loans is the way borrowers can use them.

• A business loan can be used to finance direct business costs, such as paying for supplies, marketing, a new piece of equipment, business debt consolidation, or a business property. But it typically can’t be used for indirect business costs, which means a borrower can’t pay off personal debts with the money or buy personal property with it.

• Some business loans have a very specific purpose, and the borrowed money must be used for that purpose. For example, if you get an equipment loan, you must buy equipment with it. Or, if you get a business car loan, you must buy a business car with the money.

• Because you may be able to use the influx of cash for both business and personal expenses, the uses of a personal loan can be very flexible. But personal loans are typically smaller than business loans, and they generally come with a shorter repayment term. It can be helpful to have a clear intent for how the money will be spent and to keep separate records for business and personal expenses.

• It’s also important to note that some lenders put restrictions on how personal loans can be used, so you should read the fine print before applying and share your plans with the lender if asked.

Differences When Applying for Business and Personal Loans

The criteria lenders look at can be very different when approving a small business loan vs. a personal loan. Here’s what you can expect during the application process.

Applying for a Personal Loan

When you apply for a personal loan, your personal creditworthiness usually plays a large role in the application and approval process.

• Lenders typically will review a borrower’s credit scores, credit reports, and income when determining the interest rate, loan amount, and repayment term of a personal loan.

• Generally, you can expect to be asked for a government-issued photo ID, your Social Security number, and/or some other proof of identity.

• You also may be asked for proof of your current address. And the lender will want to verify your income.

Applying for a Business Loan

When you apply for a business loan, your personal finances still will be a factor, though other aspects of your application will be reviewed carefully.

• The loan underwriters also will evaluate your business’s cash flow, how long you’ve been in business, your profitability, the exact purpose of the loan, trends in your industry, your business credit score, and more.

• The lender may ask for a current profit-and-loss statement, a cash-flow statement, recent bank statements and tax returns for the business, your business license and a business plan, and any other current loan documents or lease agreements you might have.

• You also will have to provide information about your collateral if you are applying for a secured loan.

Recommended: Understanding Credit Score Ranges

Structural Differences in Business and Personal Loans

Knowing the differences in how personal loans vs. business loans are structured could help you decide which is right for you and your business. A few factors that might affect your choice include:

Loan Amount

A business loan may be more difficult to apply for and get than a personal loan, especially if your business is a startup or only a few years old. But if you can qualify, you may be able to borrow more money with a business loan. While personal loan amounts typically top out at $50,000 to $100,000, some SBA loans can go as high as $5.5 million.

Loan Length

You’ll likely find personal and business loans with both short and long repayment terms. But generally, personal loans have shorter terms (typically one to seven years), while some business loan repayment periods can be up to 25 years.

Tax Advantages

If you have a business loan, deducting the interest you pay on the loan may be possible when filing income taxes if you meet specific criteria.

With a personal loan, it might get a little more complicated. If you use the borrowed money only for business costs, you may be able to deduct the interest you paid. But if you use the loan for both business and personal expenses, you would only be able to deduct the percentage of the interest that was used for qualifying business costs.

And you should be prepared to itemize deductions, documenting exactly how you spent the money. Your financial advisor or tax preparer can help you determine what’s appropriate.

Support

Along with the traditional banking services you might expect to get with any type of loan, a business loan also may come with operational support and online tools that can be useful for owners and entrepreneurs.

Risk

When you’re deciding between a personal vs. business loan, it’s also a good idea to think about what could happen if, at some point, the loan can’t be repaid.

• If your business has financial problems and you have a personal loan, you (and your cosigner, if you have one) could be held responsible for the debt. You could lose your collateral (if it’s a secured loan) or damage your personal credit.

• If your business defaults and it’s a business loan, the impact to your personal credit would depend on how the loan is set up.

◦ If you’re listed as a sole proprietor or signed a personal guarantee, it’s possible you could be sued, your personal and/or business credit scores could take a hit, and your personal and business assets could be at risk.

◦ If your business is set up as a distinct legal entity, on the other hand, your personal credit score might not be affected — but your business credit score could suffer. And it could be more difficult for you to take out a business loan in the future.

Structural Differences in Business and Personal Loans
	Business Loans	Personal Loans
Loan Amount	Typically come in larger amounts (up to $5 million)	Generally are limited to smaller amounts (up to $100,000)
Loan Length	Usually have longer repayment periods (up to 25 years)	Generally have shorter terms (a few months to a few years)
Tax Advantages	Interest paid on a business loan is often tax-deductible	Interest paid on a personal loan used for business expenses may be tax-deductible
Support	Lenders may offer operational support and online business tools to borrowers with business loans	Lenders may offer more personal types of support to borrowers with personal loans
Risk	Defaulting on a business loan could affect the borrower’s business credit score or business and personal credit scores (based on how the loan is structured)	Defaulting on a personal loan could affect the borrower’s personal credit score

Pros and Cons of Business Loans

There are advantages and disadvantages to keep in mind when deciding whether to apply for a business loan vs. personal loan.

• A business loan can be more difficult to get than a personal loan, especially if the business is new or still struggling to become profitable.

• If you qualify for a business loan, you may be able to borrow a larger amount of money and get a longer repayment term.

• A business loan also could make it easier to separate your business and personal finances.

• There could be fewer personal consequences if the business defaults on the loan.

Pros of Business Loans	Cons of Business Loans
Borrowers may qualify for larger amounts than personal loans offer	Applying can require more time and effort
Longer loan terms available	Qualifying can be difficult
Interest rates may be lower	Collateral and/or a down payment may be required
Interest is usually tax deductible	Loan must be used for business purposes only
Lenders may offer more business-oriented support	New businesses may pay higher interest rates
Debt may be the responsibility of the business, not the individual (depending on loan structure)	Responsibility for the debt could still land on individual borrowers

Recommended: Can You Refinance a Personal Loan?

Pros and Cons of Personal Loans

A personal loan vs. business loan can have advantages and disadvantages to consider if you are wondering if you can use one to fund a business.

• Personal loans can offer borrowers more flexibility than business loans in terms of usage.

• They’re generally easier to qualify for and may have lower interest rates.

• One major hurdle may be tracking whether the funds were used for business or personal expenses, which can be crucial, especially for income taxes.

Pros of Personal Loans	Cons of Personal Loans
Application process is usually quick and easy	Lending limits may be lower than business loans
Qualifying can be less challenging than with a business loan because it’s based on personal creditworthiness	Borrower doesn’t build business credit with on-time payments
Can use funds for both personal and business expenses (unless there are lender restrictions)	Defaulting can affect personal credit score/finances
Most personal loans are unsecured	Interest rates are generally higher than for a business loan
Interest may be tax deductible (when funds are used for business)	Shorter loan terms than business loans typically offer

💡 Quick Tip: Swap high-interest debt for a lower-interest loan, and save money on your monthly payments. Find out why SoFi credit card consolidation loans are so popular.

Is a Business or Personal Loan Right for You?

Considering the differences between a personal loan and a business loan can help you decide which is right for your needs. You may want to do some online research, compare rates and terms, and/or ask a financial professional or business mentor for advice before moving forward with this important decision. Here are some things to think about as you look for a loan that’s a good fit for your personal and professional goals.

A business loan may make sense if:

• You’re seeking a lower interest rate and/or repayment term.

• You want to keep personal and business expenditures separate.

• You’ve been successfully running your business for a while.

• You need more money than you can get with a personal loan.

• You hope to build your business credit.

• You want to limit your liability.

A personal loan may make sense if:

• Your goal is to grow your startup or new business and the loan allows this usage.

• You plan to use the money for both business and personal expenses.

• You can find a personal loan with a lower interest rate than a comparable business loan, and the lender approves the loan for business expenses.

• You want to get the money as quickly as possible.

• You are seeking a shorter repayment term.

• You don’t want to secure the loan with collateral.

• You feel confident about your personal ability to repay the loan.

Recommended: Can I Pay Off a Personal Loan Early?

The Takeaway

If you’re seeking funding to start or grow your business, you may have to decide between personal and business loans. Personal loans are typically easier to apply for and offer quicker access to funds, but often at a somewhat higher interest rate and shorter term vs. business loans. Also, business loans usually offer significantly higher loan amounts and the interest can be tax-deductible. It’s worthwhile to consider the tax and credit implications of each type of loan too, among other factors.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.

FAQ

Are business loans more expensive than personal loans?

Business loans typically have lower interest rates than personal loans. Still, it’s probably worth comparing both types of loans and the rates lenders are willing to offer you and/or your business before making a final decision between the two.

Is it illegal to use personal loans for business?

Most (but not necessarily all) personal loans can be used for just about anything. Your lender may not even ask how you intend to spend the money. But it’s a good idea to check the lending agreement in case there are any restrictions. And if the lender wants to know the purpose of the loan, you should be honest about your intentions.

Are startup loans personal loans?

There are a few different options for funding a startup, including SBA loans, family loans, or crowdfunding platforms. But if you have good credit and are confident you can make the monthly payments, taking out a personal loan could be an effective strategy for funding a startup, if the loan permits that usage.

Photo credit: iStock/MicroStockHub

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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.

This article is not intended to be legal advice. Please consult an attorney for advice.

SOPL0124044

Jan

2024

$10,000 Personal Loan: Everything You Need to Know

By Jason Steele | Budgeting & Goals, Financial Independence, personal_loan | Comments Off

A personal loan can be a relatively low-interest way to access a lump sum of cash, which is usually paid back in monthly payments. This kind of unsecured installment loan can be used for a variety of purposes, from paying off high-interest credit card debt to funding a home renovation.

Here, you’ll learn the full story on one popular option, a $10,000 personal loan.

Reasons to Get a $10,000 Personal Loan

Many prospective borrowers are attracted to personal loans because of the freedom and flexibility that they offer compared to some alternatives. Reasons to get a $10,000 loan might include the following:

• To pay off an unforeseen expense, such as costly car repairs or a major medical bill. (A borrower might use a lesser sum, like a $5,000 personal loan, in some situations.)

• To consolidate other debts. For example, assume you have a $10,000 balance between two credit cards, each having an interest rate of over 20%. You might be able to secure a $10,000 personal loan with a significantly lower interest rate to pay off that debt.

• To pay for a home renovation.

• To start a side hustle.

• Any other need for a cash infusion.

💡 Quick Tip: A low-interest personal loan from SoFi can help you consolidate your debts, lower your monthly payments, and get you out of debt sooner.

$10,000 Personal Loan Terms

Depending on the lender, the repayment periods typically range from 12 months to 84 months.

You can shop around for a personal loan with terms that allow for affordable monthly payments. Keep in mind that a longer term likely means you will pay more interest over the life of the loan.

When calculating the overall costs of a personal loan, consider such factors as the principal amount borrowed, interest rate, fees, and the loan term. You might use an online personal loan calculator to help you tally up costs.

$10,000 Personal Loan Monthly Payments

Personal loans are typically repaid over a multi-year term through monthly payments. The cost of the monthly payments is influenced by the interest rate that applies to the specific loan. Interest rates are essentially the fees charged by the lender for providing the loan.

The lowest interest rates are typically offered to consumers with a good to excellent credit history and may also be influenced based on other factors including their current income. Generally speaking, lenders may increase their interest rates if they think an applicant presents higher risk for timely repayment.

The following chart shows the impact that interest rates have on the monthly payment and also how choosing a longer-term loan can increase the overall cost of the loan.

Principal	Interest Rate	Loan Term	Monthly Payment	Total Interest Paid
$ 10,000	6.0%	24 months	$ 443.21	$ 636.95
$ 10,000	10.0%	24 months	$ 461.45	$ 1,074.78
$ 10,000	6.0%	48 months	$ 234.85	$ 1,272.81
$ 10,000	10.0%	48 months	$ 253.63	$ 2,174.04

Personal loan interest rates are generally fixed, which means the monthly payment will remain the same. Variable-rate personal loans are offered by some lenders, and payments will be influenced by market conditions.

💡 Quick Tip: Just as there are no free lunches, there are no guaranteed loans. So beware lenders who advertise them. If they are legitimate, they need to know your creditworthiness before offering you a loan.

$10,000 Personal Loan Fees

In addition to interest, some lenders charge origination fees that will also increase the overall cost of the loan.
The combination of the interest rate and any applicable fees is the annual percentage rate (APR) of the loan. Calculating the APR is necessary for determining the true cost of the loan. Recent Federal Reserve data shows the average APR of a 24-month personal loan to be 12.17%.

It’s important for applicants to closely review the terms of any potential loan agreement. For example, a lender may charge a late fee when payments are not received on time, and some may have prepayment penalties that apply if a borrower pays off the loan ahead of schedule.

What Credit Score Do You Need To Get a $10,000 Personal Loan?

Your credit score is a three-digit number that a lender checks to assess your creditworthiness. The most popular credit scoring systems (like FICO® Score) usually range from 300 to 850. Your credit score is calculated largely based on your credit history because past consumer behavior tends to predict the future.

Here are the usual credit score ranges according to FICO:

• 300 to 579: Very Poor

• 580 to 669: Poor

• 670 to 739: Fair

• 740 to 799: Good

• 800 to 850: Excellent

There’s no single credit score needed for getting a personal loan. Keep in mind that $10k loan represents an average personal loan amount (the current average is $11,548). Rates may vary depending on the size of your loan.

Can You Get a $10,000 Personal Loan With Bad Credit?

In general, you need a credit score of 640 to qualify for a personal loan. If you have bad credit (say, in the lower “poor” or “very poor” range), you might still be able to secure a loan, but potentially at a higher interest rate.

How Long Does It Take to Get a $10,000 Personal Loan?

Personal loans are known for offering fast processing — or funding — times, particularly among online lenders. Many lenders today offer same-day or next-day funding of personal loans after approval. Applicants should be properly prepared with the documentation necessary to confirm their identity, address, and income, as well as current bank statements.

Requirements for a $10,000 Personal Loan

Requirements will vary across lenders. However, qualifying for a $10,000 personal loan typically requires a credit score that exceeds 640, an active checking account, and a steady, verifiable income, among other factors.

Top $10,000 Personal Loan Lenders

Lender	Minimum Credit Score	APR Range	Loan Amounts
SoFi	None	8.99% to 25.81%	$5,000 to $100,000
LightStream	660	8.49% to 25.49%	$5,000 to $100,000
Upstart	None	6.40% to 35.99%	$1,000 to $50,000
Discover	660	7.99% to 24.99%	$2,500 to $40,000
Upgrade	560	8.49% to 35.99%	$1,000 to $50,000

The Takeaway

If you’re considering a personal loan, it’s a good idea to take the time to compare the various options available and make sure you understand the terms and costs of a loan. A $10,000 personal loan is close to the average amount borrowed currently, which indicates that these loans are typically accessible. Those with less-than-perfect credit are likely to encounter significantly fewer choices and higher interest rates and fees.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.

FAQ

What is the monthly payment on a $10,000 personal loan?

The monthly payment on a $10,000 personal loan will fluctuate based on your credit score, the loan’s interest rate and fees, and the term of the loan, among other factors.

Do I need at least a 620 credit score to get a $10,000 loan?

There is no formal minimum credit score needed for getting a personal loan. Different minimums may apply across the various institutions that offer personal loans in the $10,000 range. Those with a 640 or higher credit score are likely to find a number of options for a $10,000 personal loan; those with higher scores may have more options as well as more favorable terms.

How long will it take to get a $10,000 loan?

Fast-funding options including same-day and next-day loans are common for 10,000 dollar loans. As long as you are prepared with some basic documentation that verifies your identity, address, and income, rapid approval and funding may be available.

Photo credit: iStock/Edwin Tan

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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.

SOPL0124045

Jan

2024

When Should You Start Saving for Retirement?

By Melanie Mannarino | Budgeting & Goals, Growing Wealth, invest, Preparing for Retirement | No Comments

If you ask any financial advisor when you should start saving for retirement, their answer would likely be simple: Now, or in your 20s if possible.

It’s not always easy to prioritize investing for retirement. If you’re in your 20s or 30s, you might have student loans or other goals that seem more “immediate,” such as a down payment on a house or your child’s tuition. But starting early is important because it can allow you to save much more. In fact, setting aside a little every year starting in your 20s could mean an additional hundreds of thousands of dollars of accumulated investment earnings by retirement age.

No matter what age you are, putting away money for the future is a good idea. Read on to learn more about when to start saving for retirement and how to do it.

This article is part of SoFi’s Retirement Planning Guide, our coverage of all the steps you need to create a successful retirement plan.

What is the Ideal Age to Start Saving for Retirement?

Ideally, you should start saving for retirement in your 20s, if possible. By getting started early, you could reap the benefits of compound interest. That’s when money in savings accounts earns interest, that interest is added to the principal amount in the account, and then interest is earned on the new higher amount.

Starting to save for retirement in your 20s can allow you to save much more. In fact, setting aside a little every year starting in your 20s could mean an additional hundreds of thousands of dollars of accumulated investment earnings by retirement age.

That said, if you are older than your 20s, it’s not too late to start saving for retirement. The important thing is to get started, no matter what your age.

The #1 Reason to Start Early: Compound Interest

If you start saving early, you could reap the benefits of compound interest.

CFP®, Brian Walsh says, “Time can either be your best friend or your worst enemy. If you start saving early, you make it a habit, and you start building now, time becomes your best friend because of compounded growth. If you delay—say 5, 10, 15 years to save—then time becomes your worst enemy because you don’t have enough time to make up for the money that you didn’t save.”

Here’s how compound interest works and why it can be so valuable: The money in a savings account, money market account, or CD (certificate of deposit) earns interest. That interest is added to the balance or principle in the account, and then interest is earned on the new higher amount.

Depending on the type of account you have, interest might accrue daily, weekly, monthly, quarterly, twice a year, or annually. The more frequently interest compounds on your savings, the greater the benefit for you.

And the sooner you start saving, the more time compound interest has to do its work.

💡 Quick Tip: If you’re opening a brokerage account for the first time, consider starting with an amount of money you’re prepared to lose. Investing always includes the risk of loss, and until you’ve gained some experience, it’s probably wise to start small.

Saving Early vs Saving Later

To understand the power of compound interest, consider this:

If you start investing $6,000 a year at age 25, by the time you reach age 67, you’d have a total of 1,055,703.27. However, if you waited until age 35 to start investing the same amount, and got the same annual return, you’d have $545,338.67.

Age	Annual Return	Savings
25	6%	$1,055,703.27
35	6%	$545,338.67

As you can see, starting in your 20s means you’d save almost half a million dollars more than waiting until your 30s.

Starting Retirement Savings During Different Life Stages

Retirement is often considered the single biggest expense in many peoples’ lives. Think about it: You may be living for 20 or more years with no active income.

Plus, while your parents or grandparents likely had a pension plan that kicked off right at the age of 65, that may not be the case for many workers in younger generations. Instead, the 401(k) model of retirement that’s more common these days requires employees to do their own saving.

As you get started on your savings journey, do a quick assessment of your current financial situation and goals. Be sure to factor in such considerations as:

• Age you are now

• Age you’d like to retire

• Your income

• Your expenses

• Where you’d like to live after retirement (location and type of home)

• The kind of lifestyle you envision in retirement (hobbies, travel, etc.)

To see where you’re heading with your savings you could use a retirement savings calculator. But here are more basics on how to get started on your retirement savings strategy, at any age.

Starting in Your 20s

Starting to save for retirement in your 20s is something you’ll later be thanking yourself for.

As discussed, the earlier you start investing, the better off you’re likely to be. No matter how much or little you start with, having a longer time horizon till retirement means you’ll be able to handle the typical ups and downs of the markets.

Plus, the sooner you start saving, the more time you’ll be able to benefit from compound interest, as noted.

Start by setting a goal: At what age would you like to retire? Based on current life expectancy, how many years do you expect to be retired? What do you imagine your retirement lifestyle will look like, and what might that cost?

Then, create a budget, if you haven’t already. Document your income, expenses, and debt. Once you do that, determine how much you can save for retirement, and start saving that amount right now.

💡 Learn more: Savings for Retirement in Your 20s

Starting in Your 30s

If your 20s have come and gone and you haven’t started investing in your retirement, your 30s is the next-best time to start. While there may be other expenses competing for your budget right now — saving for a house, planning for kids or their college educations — the truth remains that the sooner you start retirement savings, the more time they’ll have to grow.

If you’re employed full-time, one easy way to start is to open an employer-sponsored retirement savings plan, like a 401(k). We’ll get into details on that below, but one benefit to note is that your savings will come out of your paycheck each month before you get taxed on that money. Not only does this automate retirement savings, but it means after a while you won’t even miss that part of your paycheck that you never really “had” to begin with. (And yes, Future You will thank you.)

💡 Learn more: Savings for Retirement in Your 30s

Starting in Your 40s

When it comes to how much you should have saved for retirement by 40, one general guideline is to have the equivalent of your two to three times your annual salary saved in retirement money.

Once you have high-interest debt (like debt from credit cards) paid off, and have a good chunk of emergency savings set aside, take a good look at your monthly budget and figure out how to reallocate some money to start building a retirement savings fund.

Not only will regular contributions get you on a good path to savings, but one-off sources of money (from a bonus, an inheritance, or the sale of a car or other big-ticket item) are another way to help catch up on retirement savings faster.

Starting in Your 50s

In your 50s, a good ballpark goal is to have six times your annual salary in your retirement savings by the end of the decade. But don’t panic if you’re not there yet — there are a few ways you can catch up.

Specifically, the government allows individuals over age 50 to make “catch-up contributions” to 401(k), traditional IRA, and Roth IRA plans. That’s an additional $7,500 in 401(k) savings, and an additional $1,000 in IRA savings for 2024 and 2023.

The opportunity is there, but only you can manage your budget to make it happen. Once you’ve earmarked regular contributions to a retirement savings account, make sure to review your asset allocation on your own or with a professional. A general rule of thumb is, the closer you get to retirement age, the larger the ratio of less risky investments (like bonds or bond funds) to more volatile ones (like stocks, mutual funds, and ETFs) you should have.

Starting in Your 60s

It’s never too late to start investing, especially if you’re still working and can contribute to an employer-sponsored retirement plan that may have matching contributions. If you’re contributing to a 401(k), or a Roth or traditional IRA, don’t forget about catch-up contributions (see the information above).

In general, when you’re this close to retirement it makes sense for your investments to be largely made up of bonds, cash, or cash equivalents. Having more fixed-income securities in your portfolio helps lower the odds of suffering losses as you get closer to your target retirement date.

💡 Learn more: Savings for Retirement in Your 60s

The Takeaway

Investing in retirement and wealth accounts is a great way to jump-start saving and investing for your golden years, whether you invest $10,000 or just $100 to get started.

The first step is to open an account or use the one that’s already open. You could also increase your contribution. If you’re opening an account, you may want to consider one without fees, to help maximize your bottom line.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Easily manage your retirement savings with a SoFi IRA.

FAQ

Is 20 years enough to save for retirement?

It’s never too late to start investing for retirement. If you’re just starting in your 40s, consider contributing to an employer-sponsored plan if you can, so that you can take advantage of any employer matching contributions. In addition to regular bi-weekly or monthly contributions, make every effort to deposit any “windfall” lump sums (like a bonus, inheritance, or proceeds from the sale of a car or house) into a retirement savings vehicle in an effort to catch up faster.

Is 25 too late to start saving for retirement?

It’s not too late to start saving for retirement at 25. Take a look at your budget and determine the max you can contribute on a regular basis — whether through an employer-sponsored plan, an IRA, or a combination of them. Then start making contributions, and consider them as non-negotiable as rent, mortgage, or a utility bill.

Is 30 too old to start investing?

No age is too old to start investing for retirement, because the best time to start is today. The sooner you start investing, the more advantage you can take of compound interest, and potentially employer matching contributions if you open an employer-sponsored retirement plan.

Should I prioritize paying off debt over saving for retirement?

Whether you should prioritize paying off debt over saving for retirement depends on your personal situation and the type of debt you have. If your debt is the high-interest kind, such as credit card debt, for instance, it could make sense to pay off that debt first because the high interest is costing you extra money. The less you owe, the more you’ll be able to put into retirement savings.

And consider this: You may be able to pay off your debt and simultaneously. For instance, if your employer offers a 401(k) with a match, enroll in the plan and contribute enough so that the employer match kicks in. Otherwise, you are essentially forfeiting free money. At the same time, put a dedicated amount each week or month to repaying your debt so that you continue to chip away at it. That way you will be reducing your debt and working toward saving for your retirement.

7 Tips for Managing a Checking Account

Why Is It Important to Manage Your Checking Account?

1. Know Your Account Balance

2. Download Your Bank’s Mobile Banking App

3. Avoid Paying Extra Fees

4. Automate Deposits and Payments

5. Embrace Potential Earnings

6. Take Advantage of Checking Account Perks

7. Consider Consolidating

The Takeaway

FAQ

Why is it important to manage your checking account?

How often should you manage your checking account?

How should you keep track of what’s in your checking account?

401(a) vs 401(k) Compared

What Is a 401(a) Plan?

What Is a 401(k) Plan?

Who Contributes to Each Plan?

401(a) vs 401(k) Contribution Limits

401(a) vs 401(k) Investment Options

401(a) vs 401(k) Tax Rules

Can You Borrow from Each Plan?

Can You Borrow Money from a 401(a) or 401(k) to Buy a Home?

When Can You Withdraw From Your Retirement Plan?

401(a) vs 401(k) Rollover Rules

What Happens to Your 401(a) or 401(k) If You Quit Your Job?

What Is a 401(a) Profit Sharing Plan?

Summarizing the Differences Between 401(k) and 401(a) Plans

Summarizing the Similarities Between 401(a) vs 401(k) Plans

401(a) vs Other Retirement Plan Options

401(a) vs 403b

401(a) vs 457

401(a) vs Pension

Pros and Cons of 401(k) vs 401(a) Plans

Other Retirement Account Options

Roth IRAs

Traditional IRAs

HSAs

Investing In Your Retirement

FAQ

Is a 401(a) better than a 401(k)?

How are 401(a)s different from 401(k)s?

Can you roll a 401(a) into a 401(k)?

Comparing Personal Loans vs Business Loans

What Is a Personal Loan?

How Personal Loans Work

What is a Business Loan?

How Business Loans Work

Differences Between Business and Personal Loans

Cost Differences Between Business and Personal Loans

Interest Rates

Fees

Down Payment

Different Uses for Business and Personal Loans

Differences When Applying for Business and Personal Loans

Applying for a Personal Loan

Applying for a Business Loan

Structural Differences in Business and Personal Loans

Loan Amount

Loan Length

Tax Advantages

Support

Risk

Pros and Cons of Business Loans

Pros and Cons of Personal Loans

Is a Business or Personal Loan Right for You?

The Takeaway

FAQ

Are business loans more expensive than personal loans?

Is it illegal to use personal loans for business?

Are startup loans personal loans?

$10,000 Personal Loan: Everything You Need to Know

Reasons to Get a $10,000 Personal Loan

$10,000 Personal Loan Terms

$10,000 Personal Loan Monthly Payments

$10,000 Personal Loan Fees

What Credit Score Do You Need To Get a $10,000 Personal Loan?

Can You Get a $10,000 Personal Loan With Bad Credit?

How Long Does It Take to Get a $10,000 Personal Loan?

Requirements for a $10,000 Personal Loan

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