Pros and Cons of Automatic Bill Payment

It can be easy to forget important things: What time is that meeting? Where’s my phone? Did I pay my credit card bill yet?

While all of those examples are significant, forgetting to pay your bills can be the one with considerable financial ramifications.

According to a recent Census Bureau Household Pulse survey, 36% Americans say they have trouble paying all of their bills on time. Granted, some of that may be due to living paycheck to paycheck, but organization is likely also part of the problem.

Signing up for automatic bill payment can be one path to getting bills paid by the due date, avoiding late fees, and protecting your credit. Here, you’ll learn what automatic bill payment is, how it works, how to set it up, plus the pros and cons of this option.

Key Points

•   Automatic bill payment offers convenience by automatically deducting funds from your account to pay bills on time, reducing the risk of late fees or missed payments.

•   It helps simplify your financial life by eliminating the need to manually track and pay multiple bills each month.

•   Automatic bill payment can improve your credit score by ensuring timely payments, which is a key factor in determining your creditworthiness.

•   It provides peace of mind by reducing the chances of forgetting to pay bills and avoiding potential disruptions in services like utilities or internet.

•   Setting up automatic bill payment can save you time and effort, allowing you to focus on other important aspects of your life.

What Is Automatic Bill Payment?

So exactly what is automatic bill payment exactly? Autopaying a bill transfers money to the person you owe on the due date from a connected bank account — as long as there is enough money available to cover the bill, of course. This can usually be facilitated by the company you have an account with or by your bank.

After the initial set up, automatic bill payment can help pay recurring bills with minimum effort. Simply put, automatic bill payments, once they are in place, allow someone to transfer money from their own account to a creditor, like for a credit card company or service provider, like for a utility bill, without needing to actually initiate a payment every time. In other words, payments can happen automatically, without any effort on your part, such as writing and mailing a check.

💡 Quick Tip: Make money easy. Enjoy the convenience of managing bills, deposits, and transfers from one bank account with SoFi.

Advantages of Automatic Bill Payment

Automatic bill payment has a number of benefits to consider.

It’s Convenient

Automatic bill payment is an easy way to cross off one more “to do” from the list. First, it’s simply more convenient for a lot of people. Instead of remembering specific bill due dates and having to log in to different websites or sending paper checks through the mail, automating personal finances simplifies the experience.

Once payments are set up, some people can adopt a “set it and forget it” mentality, meaning they don’t have to worry about due dates. While it’s still important to be aware of when money will be leaving the bank, sometimes the reduced stress of not worrying about due dates every month is worth it.

Recommended: When All Your Money Goes to Bills

Automatic Bill Pay Is Secure

Automatic bill payment is also secure. According to Experian, online payments can be safer than traditional paper checks and statements because they are digitized and encrypted. Avoiding those physical bills and mailing in checks can help reduce exposure to fraud.

Plus, a digital transaction can be much easier to track in real-time and make sure the correct amount for each bill went to the right place, rather than waiting weeks to see if the company cashes a check.

Putting bills on autopay can help avoid the worry about whether a bill got paid, of course, but it could even give finances an eco-friendly boost and reduce the number of paper bills mailed out.

Impacting Your Credit Score

Here’s another benefit of automatic bill payment: Not only can it help you avoid late fees in the short term, it could also help protect your credit score. In fact, payment history affects 35% of someone’s FICO® credit score. (FICO reports that negative marks on credit history can fade over time with consistent on-time payments.) Autopay can help you avoid those late payments.

Saving Money with Automatic Bill Pay

One big advantage of automatic bill payments: Doing so can help you avoid late fees that could be incurred by failing to pay on time or missing a payment. Those fees can add up quickly.

Plus, some creditors, such as federal student loan servicers, offer a discount for setting up automatic payments. In some cases, this is an interest rate reduction, which could help reduce the total amount of debt paid overtime.

Get up to $300 when you bank with SoFi.

Open a SoFi Checking and Savings Account with direct deposit and get up to a $300 cash bonus. Plus, get up to 4.60% APY on your cash!


Disadvantages of Automatic Bill Payment

Now that you know the benefits of automatic bill payments, consider the potential downsides.

Overdraft Fees

One major downside to putting bills on autopay is the fact that, well, the payments will be automatic. If there is not enough money in the connected bank account to cover the cost of the bill, there is a risk of overdraft and NSF fees from your financial institution.

If there is not enough money to cover the bill, there is a risk of overdraft fees.

Some payment amounts change month to month, such as utility bills. Without checking ahead of time how much the bill will be, it’s possible for the utility company to simply withdraw what is owed, causing the account to be overdrawn. Overdraft fees depend on the bank, but the average is around $35, according to the Federal Deposit Insurance Corporation (FDIC).

Forgetting about automatic withdrawals from financial accounts could lead to overspending, pushing account balances lower than the amount needed to cover those pre-set bill payments.

One possible solution to such cash flow issues: Spread out bill payment dates throughout the month, rather than having them all grouped together. Bills might be scheduled for the beginning or the end of the month, but it’s simple to change the date of automatic payments, with enough notice. You can contact the payee about moving a bill due date and then double-check when the change will go into effect to avoid any late payments.

The Consumer Financial Protection Bureau offers a helpful worksheet to help visualize which weeks every month are the most hard-hit.

💡 Quick Tip: Fees can be a real drag when you’re trying to save money. SoFi’s online checking account has no account fees, including overdraft coverage up to $50.

Potential Late Fees

In addition to your financial institution charging you for an overdraft, if an automatic payment doesn’t go through, the payee (the company you were trying to send funds to) may also assess a late fee.

When these fees add up, especially on an interest-charging account, you can wind up having your debt increase.

Forgotten Subscriptions Can Be Costly

Another disadvantage of automatic bill pay is that it reduces your control over what money is going out at certain times. You might wind up with more money flowing out of your account than you realize.

For instance, you might sign up for a one-week free trial of a streaming service with every intention of canceling it after you binge-watch a series. But then you forget and autopay kicks in, which could lead to overdrafting your account over time.

Another scenario: You might move from one home to another and be so busy that you forget to cancel an automatic payment related to your former home or neighborhood. Perhaps you had signed up for one of those “all you can drink” monthly coffee deals at a cafe around the corner from your old place. Review your monthly statements to be sure you catch unwanted charges.

Vendors May Overcharge or Make Mistakes

Another downside of automatic bill payments is that a payee could overcharge you or charge you twice, and you might not be aware of the problem until you review your account or overdraft it. For this reason, it’s wise to check your bank account regularly and scan automatic bill payment transactions to be sure everything looks in good shape.

Whatever the case, whether paying bills manually or using automatic withdrawals, it’s important to still be intentional about making and keeping a budget.

How to Set Up Automatic Bill Payment

Here are the step-by-steps to setting up automatic bill payment for, say, a credit card by selecting the service offered by your card provider.

1.   Log into your credit card account online or in the app.

2.   Select the “recurring payment” or “autopay” option.

3.   Choose how much you want to pay. You may be given such options as minimum payment, a specific amount that you designate, or the total amount of your bill.

4.   You’ll then connect your credit card account to your bank account for payment.

5.   This typically involves adding your account number and routing number.
You will need to approve the autopay set-up, often by agreeing to terms and conditions.

Another option is to set up automatic bill pay directly with a financial institution. One advantage of this is that you don’t need to share your account information with the payee, which can make some people feel more secure about their financial accounts.

1.   Log into your bank account online or in its app.

2.   Find the link for automatic recurring payments; it is often labeled “Bill pay,” “Pay bills,” or something similar.

3.   Then add a payee and follow the prompts to set up a recurring or future payment. Have a recent bill on hand, since the bank will need information like the payee’s bank account numbers, addresses, due dates, and other important information.

Example of Automatic Bill Payment

Here’s an example of how automatic bill payment might work. Say you sign up for a gym membership on a monthly basis at $65 per month. However, the gym will lower that to $60 a month if you sign up for autopay on their site and save them the trouble of billing you.

If you take advantage of this offer, you would likely go to their website or app, log in, and head to your account details, and find the payment or billing section. There, you would opt into autopay and share your banking details or your credit card details (paying by debit card usually isn’t recommended; you have less protection if there’s a problem). You may be informed of what date funds will be deducted or you might be able to select a date.

You should be all set to have your gym membership payments automatically paid every month. It’s a good idea to verify this when you check your bank account. And, of course, if you decide to end your membership, be sure to cancel the automatic payment.

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

The Takeaway

Automatic bill payments can be a major convenience as you manage your personal finances. However, like most things in life, there are pros and cons. You can gain convenience and the ability to avoid late charges, but you also have less control over your money. By educating yourself about how this process works, you can decide whether it’s right for you, and, if so, for which payments.

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

Do automatic payments hurt your credit?

Automatic payments, like manual payments, could hurt your credit if you pay your bills late or experience insufficient funds.

What is the difference between bill pay and ACH?

Bill pay usually refers to sending funds electronically. One common way that funds may be transferred (but not the only way) is via the Automated Clearing House network, which is known as ACH.

What is the safest way to set up automatic payments?

The safest way to set up automatic payments is to do so through your bank or credit card; it’s not recommended that you use your debit card as you’ll have less protection if there’s a problem. Also, check your balance and statements carefully to make sure you have enough money in the bank to cover your autopayments and also scan for any incorrect or fraudulent transactions.

Should I use autopay for utilities?

Whether you should use autopay for utilities depends on your situation and financial habits. If you know you’ll be able to cover the amount every month, it could be a real convenience. However, utility costs can sometimes fluctuate greatly, like the cost of heating a home in winter, which might cause pricing spikes and lead to your overdrafting. You want to be sure you can always afford to cover bills that are on automatic bill payment.



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

As an alternative to direct deposit, 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.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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

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 .

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Tips to Track a Money Order

Tips for Tracking a Money Order

A money order can be a safe and reliable way to send money, but what happens when the recipient doesn’t receive or cash it? It’s possible to track a money order to make sure it is delivered to the intended person, but doing so may come at a cost. While the process for tracking varies by issuer, it’s usually helpful to have the receipt and money order details before filing a request.

If you are handling money orders and want to verify that they arrive at their destination and are cashed, read on.

Key Points

•   Money orders can be tracked using the receipt and details provided at the time of purchase.

•   Tracking methods vary by issuer, but typically involve using a tracking or serial number.

•   If the receipt is lost, a request can be filed with the money order issuer, but fees may apply.

•   Contacting the recipient directly can sometimes save time and cost in tracking a money order.

•   Money order tracking can help recover lost payments and protect against fraud, but it may take time and incur fees.

What Is Money Order Tracking?

Money orders are a way of transferring money. They are prepaid with cash or a debit card.

They differ from personal checks and cashier’s checks in one important way: There is no sign in your bank transaction history if and when the money order has cleared. This can raise the question “How do I track a money order?”

Figuring out how to trace a money order is fairly straightforward if you’ve kept your receipt. When you purchase a money order, the issuer should provide a receipt with a tracking or serial number that can verify if it has been cashed or deposited. Senders can submit details from the receipt through the issuer’s website or automated phone line to track the money order.

Without a receipt, however, money order tracking becomes more difficult. You’ll likely need to file a request with the money order issuer. Doing so will probably incur fees and may take several weeks to complete but can hopefully help reduce your financial stress.

Quick Money Tip: If you’re saving for a short-term goal — whether it’s a vacation, a wedding, or the down payment on a house — consider opening a high-yield savings account. The higher APY that you’ll earn will help your money grow faster, but the funds stay liquid, so they are easy to access when you reach your goal.

What Do You Need in Order to Track a Money Order?

Depending on the issuer you used, extra information could be needed beyond the tracking or serial number on the receipt. Additional information will probably be necessary if you’ve misplaced the receipt. Here are more specifics:

•   Tracing a postal money order can be done online or by phone The following details, which are listed on the USPS money order receipt, are required.

◦   The dollar amount

◦   The post office number

◦   The money order’s serial number, which is typically a 10 or 11-digit code.

However, if you don’t have a copy of the receipt, you’ll have to fill out and submit PS Form 6401 to initiate a money order inquiry.

•   Tracking money orders from other issuers, such as MoneyGram and Western Union, can usually be done online or by automated call center. This is provided that you have the serial number and exact payment total.

   If you’ve lost the receipt, you’ll need to supply more details about you and the recipient, such as:

•   Your name, phone number, and address

•   The exact money order amount

•   The purchase location address

•   The date and time of purchase

•   The payee’s (or recipient’s) name, if included on the money order.

Recommended: How to Cash a Postal Money Order

Get up to $300 when you bank with SoFi.

Open a SoFi Checking and Savings Account with direct deposit and get up to a $300 cash bonus. Plus, get up to 4.60% APY on your cash!


Tips to Track a Money Order

Before picking up the phone or filling out any paperwork, consider these tips for tracking money orders.

Contact the Recipient

Before you get to work tracking a money order, consider that you might be able to save time and potential cost by reaching out to the intended recipient. This individual or business is referred to as the payee on the money order.

You can ask if the money order was received. It’s possible that the money order arrived and has yet to be cashed or deposited. Contacting the recipient directly could be simpler than submitting a request with the money order issuer.

Make Sure You Keep the Issuer Receipt

Another route involves using the details from the receipt. Money orders can be purchased at banks, post offices, check-cashing businesses, and retail stores like supermarkets and pharmacies. When you buy a money order, you may receive receipts from both the issuer and location you purchased it. For example, a money order bought at a pharmacy could be issued by MoneyGram or Western Union. Note that the issuer receipt is the one with the information (i.e., serial number and dollar amount) you’ll need to track your money order.

You might have to pay an extra fee and complete additional forms to track a money order without a receipt and the serial or tracking number.

Check the Status Before Submitting a Request

There are multiple ways to check the status of a money order. If you have your serial or tracking number and the money order amount, you should be able to verify online or by automated phone line whether it has been cashed or deposited. This could be free, or there may be fees (up to $15 or more), depending on the vendor.

There are also likely fees and significant waiting times when submitting a request for a copy of the paid money order. The situation is similar if you choose to investigate a money order you believe to be missing or stolen. Checking the money order status beforehand can quickly determine if it’s been cashed and guide your next steps.

Reasons Why Someone Tracks a Money Order

Money orders are considered a safe form of payment, but there are reasons why you might want to track one. Accounting for your money, after all, can be an important aspect of managing your money.

Recover Lost Payment

A lost money order can be a major inconvenience, especially if you were waiting for the funds to make timely payments. Tracking the money order can help determine if it’s gone missing and recover funds more quickly.

If you are expecting a money order that doesn’t arrive, it’s wise to contact the issuer and complete any required documents quickly.

Protect Against Fraud

Tracking a money order can help protect senders in cases of theft or fraud. In such an event, requesting a photocopy of a cashed money order can support a fraud claim and potentially get your money back. The photocopy will indicate who endorsed the money order. If the signer does not match the payee, you could get a refund since their identity wasn’t properly verified.

How Long Does It Take for a Money Order to Send?

A money order can be purchased and prepared quickly — simply add the recipient’s information, put your address, fill out the memo (if desired), and sign. From there, how long it takes to send depends on the delivery method. If handing it over in person isn’t feasible, sending it via USPS First-Class Mail can deliver the money order in one to five business days.

Once received, a money order can show as available almost immediately, but in terms of how long it takes to clear fully, that might be from a couple days to up to a couple of weeks.

Tips for Protecting Yourself When Tracking a Money Order

Although money orders are generally a secure form of payment, they can potentially be used for money scams and fraud. Consider using these tips to protect yourself.

Fill out the Recipient Information Immediately

As soon as you purchase the money order, enter the recipient name in the payee field to help safeguard yourself from fraud.

Save the Receipt

After filling out the money order, be sure to detach the money order stub and any receipt. Storing the receipt in a safe and accessible place will make it easy to track the money order in real time. It also provides the necessary information to file a request for cancellation and alert law enforcement in case the money order is damaged, lost, or stolen. It’s recommended to hold onto the receipt until the money order has been cashed.

Wait Before Spending Any Funds

If you receive payment by money order, it’s advised to hold off on using any funds until they’ve been verified by the issuer or cleared by your bank. In the event a money order is fraudulent, you could be liable for any amount spent.

Recommended: The Best Options for Sending and Receiving Money From Someone Without a Bank Account

The Takeaway

A money order is usually a secure way to transfer funds to a payee instead of using cash or a check. It can be tracked to ensure that it has been received and cashed by the designated payee. Keeping the receipt and other details will streamline the tracking process if you do need to verify the money order’s status. It can take a bit of time and money to trace a money order if it goes missing.

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

Does it cost money to track a money order?

Some issuers let you use the serial or tracking number to track the money order for free online. Otherwise, you may have to pay a small fee. Investigating a lost or stolen money order typically carries fees, often around $15.

Where can I track a money order?

You can track a money order online, by phone, or going to the issuer in person.

How do you cash a money order?

You may be able to cash a money order at a bank or retailer that issues money orders. In addition, retailers where you have cashed checks in the past (such as your local supermarket) may cash money orders. Cashing it typically requires signing the order, verifying your identity, and paying a service fee to receive the funds.


Photo credit: iStock/Prostock-Studio

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

As an alternative to direct deposit, 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.


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.


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.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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19 Budgeting Categories For Your Budget

Building a budget can pay off quite literally: It provides guidelines for your money and helps you wrangle your spending and saving to achieve financial health. With smart planning, you can make your cash work harder for you and grow.

Many people think that a budget is all about deprivation, but it’s really about organization. A key step in developing a good budget is knowing how to categorize both your spending and saving. That can help you get a handle on where your money is going and how to make the most of it.

In this guide, you’ll learn how to divide your expenses into three main categories (namely, needs, wants, and savings), and then further separate things into smaller groups. This can help you truly understand your spending habits and optimize your finances.

Whether you’re just starting out on your independent financial life or if you’re looking to tweak your existing budget, this advice can help you better manage your budget categories and direct your spending goals.

Key Points

•   Personal budget categories help organize and track expenses for better financial management.

•   Common budget categories include housing, transportation, food, utilities, healthcare, debt payments, savings, entertainment, and personal care.

•   It’s important to customize budget categories based on individual needs and priorities.

•   Tracking expenses within each category helps identify areas for potential savings and adjustments.

•   Regularly reviewing and adjusting budget categories can help maintain financial balance and achieve financial goals.

9 Budget Categories for Needs

Of course, you probably are wondering what actually constitutes budgeting categories. First, focus on the needs of life.

This category, which represents the largest chunk, includes expenses that you must pay in order to live and work. You might think of these as things you actually need to survive — they’re sort of like the air, water, and food of your budget.

So, for instance, a fancy dinner out or a caramel latte are definitely food, but they wouldn’t necessarily go in this category. Groceries would though.

A good rule of thumb is to have this category take up about 50% of your after tax income. Housing and utilities are likely to take up the biggest chunk, but ideally no more than 30% of income.

The percentages, however, are just guidelines. Because the cost of living in different states varies across the country, you may need to adjust your budget according to where you live.

Recommended: How to Make a Budget in 5 Steps

1. Housing

Whether you pay rent or have a home mortgage, paying to keep a roof over your head is definitely a need. In addition, you may have property taxes to pay if you are a homeowner, and home maintenance costs can be part of this category for renters and owners alike.

2. Utilities

Depending on your living situation, you might pay for electricity, WiFi, heating fuel, telephone service, water, sanitation services, and other necessities.

3. Insurance

Having car, health, life, homeowners or renters insurance and possibly pet insurance can be important. You don’t want to wing it with this kind of protection (and auto insurance is required).

4. Groceries and Personal Care Items

Of course, you need food and toiletries as part of daily living. So the food you purchase to make meals and items like toothpaste go into your budget as “needs.” However, buying that $7 pack of cookies or $40 hair conditioner? Those might be better deemed “wants.”

5. Transportation

Car ownership expenses, public transportation, and the occasional Uber to get to urgent care can all be considered necessities.

6. Clothing

Yes, you need a warm winter coat if you live in the climates that get chilly, plus boots. And you need basic garments to wear to work and on your off-hours. However, if you buy a cool jacket because you love it or yet another pair of cute shoes since they are on sale, those are not vital to your survival and should go in the “wants” category.

7. Debt

Minimum payments on outstanding debts like credit cards, student loans, auto loans, or personal loans would also go into the 50% needs portion.

8. Parenting Expenses

Child care, as well as child support or alimony payments, go into the “must” bucket of your budget. Those are not discretionary expenses.

9. Healthcare

Depending on your insurance coverage, you may have expenses related to staying well, such as copays, prescription costs, and the like. Treating yourself to a massage that isn’t medically required? That’s not a “need” but a “want.”

Recommended: Use the 50/30/20 budget calculator below to see how much of your income is allocated to needs, wants, and savings.


6 Spending Categories for Wants

These are expenses that don’t qualify as needs and don’t include your savings and payments towards debt. Though it can sometimes be tricky to separate needs from wants, if you can live and earn your income without it, then it’s probably a want.

If you can live and earn your income without it, then it’s probably a want.

This is where you could put spending on clothing outside of what you need on a day-to-day basis, dinner and drinks out with friends, going to the movies, gym memberships, personal care, and miscellaneous spending.

As a general guideline, this category shouldn’t take up more than 30% of your spending. While you may need to give and take depending on your situation, seeing how much you are spending on wants in black and white may cause you to start thinking more carefully about these expenditures.

1. Clothing and Personal Care

Treated yourself to a new but unnecessary shirt as part of a little retail therapy? Took yourself to the spa for a day? Or bought yourself a fancy watch since you got a promotion? Those are all wants. They aren’t necessarily bad things, but be clear that they are not vital to your survival.

2. Dining Out and Drinking

It’s part of life to meet friends and loved ones for happy hour or a nice meal, or to get a bubble tea while running errands on the weekend. Or maybe you don’t feel inspired to cook so you order some Pad Thai for pickup or delivery. These are all discretionary food expenses vs. those that are vital to your survival.

3. Entertainment

While entertainment can definitely enrich your life, it goes into the “wants” category. This includes things like concert, play, and movie tickets; books and magazines; cable and streaming services; downloading music; and attending festivals and fairs.

4. Gym Memberships, Self-care, and Grooming

You could just workout for free at home while watching a Youtube video, so health club memberships, yoga or Pilates classes are “wants.” Same goes with self-care and grooming: Facials, manicures, and the like are considered discretionary. That $50 hair conditioner you can’t live without? That isn’t a “need” either.

5. Travel Expenses

If you are traveling for business purposes to pitch a new account, that’s more of a “need,” but otherwise, a getaway is a “want.” So tally up any airfare, rental car costs, hotel or Airbnb, food, and tour/attraction tickets, and consider them “wants.”

6. Home Decor

If your mattress bites the dust and you replace it, that is a “need,” but deciding to buy a new couch because your home could use a spruce-up is a “want.”

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

Categorizing Your Savings

Under the 50/20/30 rule, it’s suggested that savings take up 20% of your post-tax income. This is the money you’re putting toward your retirement, emergency fund, and other savings. You can also put payments against debt above minimums here since this can ultimately save money on interest, it’s considered savings.

Here are specifics.

1. Emergency Fund

Financial experts recommend having three to six months’ worth of basic living expenses socked away in case of emergency. This could mean job loss or receiving an unexpected and major medical or car repair bill. You don’t want to have to resort to using your credit card for such things.

Recommended: Use our emergency fund calculator to determine how much you should be savings for an emergency fund.

2. Retirement Savings

If you aren’t offered a 401(k) or something similar at work, you can still contribute to retirement savings account like an IRA. You might be able to find a low-fee, or no-fee, individual retirement account (IRA).

3. Other Short- and Long-Term Savings

You’ll also probably want to fund non-retirement savings goals, such as saving for a summer vacation or the down payment on a house. It can be a good idea to open a separate savings account, ideally where you can earn higher interest than a standard savings account, such as a money market fund, online savings account, or a checking and savings account.

To make sure saving happens each month, you may also want to set up an automatic transfer from your checking account into this account on the same day every month, perhaps after your paycheck gets deposited.

4. Additional Debt Payments

If you can pay more than the minimum on your credit card bill or make extra payments on your loans, that can decrease what you are spending on interest. That in turn can help increase your overall financial health and wealth.

Get up to $300 when you bank with SoFi.

Open a SoFi Checking and Savings Account with direct deposit and get up to a $300 cash bonus. Plus, get up to 4.60% APY on your cash!


Why Categorizing Your Budget Is Important

Categorizing your budget is important because it can give you a much better sense of where your money goes versus just paying whatever bills turn up.

•   When you see how much cash goes towards the different kinds of “needs,” “wants,” and savings, you can better manage your cash. Tracking your spending can bring greater financial insight.

•   Also, as you categorize and tally your spending, you may see that much more than 30% of your take-home pay is going to ”wants.” That could convince you to recalibrate and cut back.

•   Or you might notice that you are spending way more than 50% on “needs.” This can happen when you are just starting out in your career or if you live somewhere with a high cost of living. Again, you might look to lower costs.

Finalizing Your Budget Categories and Getting Started

Now that you have an idea of how to allocate your income based on standard budgeting categories, you may want to start building out your budgeting plan.

If you find that your monthly expenses (including savings) are higher than your monthly take-home income, you’ll likely want to make some adjustments. One of the easiest places to do this is within the “wants” bucket.

Here, you can scout for unnecessary expenses you may be able to do without. For instance, maybe you would be fine saving on streaming services by dropping one or two platforms, cooking at home a few more times per week, or cutting back on clothing purchases.

If your “musts” are eating up more than 50%, perhaps you want to consider moving to a less expensive home or taking in a roommate. Another option could be to start a side hustle to bring in more income or train up for a higher-paying line of work.

It can help to keep in mind that the 50/30/20 guideline is just that, a guideline. Everyone’s situation is different and your numbers may vary depending on many different factors, including where you live, your income, how much debt you have, and your savings and investment goals. (There are also other budgeting methods to try, if you like.)

The Takeaway

Putting expenses into categories and coming up with a spending plan can bring significant benefits. These include being able to pay off debt, saving up for short-term goals (such as an emergency fund, a vacation, or a down payment on a home), and funding your retirement.

The 50/20/30 rule can give you an general idea of how to allocate your income based on standard budgeting categories and help you start building out your budgeting plan.

Need some help keeping track of spending? Many financial institutions offer tools that can help you see where your money is going and make the most of your savings.

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

What are the 4 main categories in a budget?

There are different ways to categorize a budget, but commonly, people focus on their take-home pay, their spending on their “wants,” their “needs,” and how much they save.

What categories should you have in a budget?

When building a budget, it’s important to know how much income you have after taxes, what are the expenses that are necessary for your survival, what is your usual discretionary spending (which some people call the “fun stuff” in life), and how much are you saving. Within the last three buckets, you can subdivide into more specific categories.

How do you organize a budget?

One good budgeting technique is the 50/30/20 budget rule. This principle says that 50% of your take-home pay should go towards necessities, 30% to discretionary spending, and the remaining 20% should be saved.


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

As an alternative to direct deposit, 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.

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

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What Are the Average Monthly Expenses for One Person?

It’s human nature to wonder how you compare to everyone else. And that goes for money too. For instance, are you spending more or less on housing? Food? Transportation?

The average single person spends about $3,405 per month, according to recent data. But that will vary with where and how you live. Still, knowing where you stand can help you budget better and see how your spending stacks up against other people’s outflow of cash.

Here, you’ll get a sense of how much an average person might spend per month so you can consider how your own budget looks.

Key Points

•   The average monthly expenses for one person can vary, but the average single person spends about $3,405 per month.

•   Housing tends to consume the highest portion of monthly income, with the average annual spending on housing at $1,885 per month per person.

•   Transportation costs can vary, but the average household spends around $913 per month on transportation.

•   Health care expenses can vary, with a single adult in New York City paying about $575 to $776 per month for health insurance.

•   Food expenses can range from $300 to $540 per month, depending on factors like age, income, and location.

Average Monthly Expenses in 2023

Housing

Housing tends to consume the highest portion of monthly income. Using U.S Department of Labor statistics, the average annual spending on housing was $1,885 per month per person. Typically, single people living alone (or with others but paying their own) may devote more of their monthly income to housing than those living as a family.

Costs can also vary significantly depending on the cost of living in your area. That’s important to consider when considering costs and making a monthly budget.

A single person living in a studio in New York City, for example, can expect to spend significantly more than someone living in a rural or suburban community. According to RentHop, the average price for a studio (one-room) rental in New York City was $3,450 in spring of 2023.

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Transportation

Transportation costs can vary depending on your mode of transport (i.e., car vs. bus vs train), as well as what region of the country you live in.

But one thing that holds true for many of us: Transportation often accounts for the second-largest budget item, after housing.

The average household shells out around $913 per month on transportation, including car or public transportation, gas, insurance and other related expenses. A single person could expect to pay half or even a quarter of that amount, depending on their particular situation, such as whether they are making car payments or using public transportation.

And, of course, you can take steps to lower those costs as needed, like learning how to save money on gas.

Health Care

Health care expenses can vary depending on each individual’s circumstances, and can also rise and fall from one month to the next.

For example, there may be some months where unexpected medical costs crop up (such as emergency care), and other months where you only need to cover insurance premiums and preventive care appointments.

Cost varies by location as well.

For instance, a single adult living in New York City can expect to pay about $575 to $776 a month for health insurance (or more).

A single adult living in Boise, Idaho, on the other hand, can anticipate shelling out roughly $274 to $422 (depending on specifics) per month for those health insurance costs.

Recommended: How to Save Money Daily

Food

Everyone’s gotta eat, and the average single person spends about $300 to $540 per month.

This figure ranges depending on your age, income, gender, eating habits, and where you live.

The wide variability in spending in this category shows that food can be an area where consumers can find savings if they need to reduce monthly spending (such as getting serious about meal planning and choosing lower cost brands at the supermarket).

💡 Quick Tip: When you overdraft your checking account, you’ll likely pay a non-sufficient fund fee of, say, $35. Look into linking a savings account to your checking account as a backup to avoid that, or shop around for a bank that doesn’t charge you for overdrafting.

Cell Phone

Average monthly wireless fees run about $166 for a plan, which might include multiple lines.

The good news? If your budget is particularly tight, you could spend as little as $10 a month for basic service with no data.

Utility Bills

After you’ve saved up and carefully budgeted to buy a home, you probably don’t want to be surprised by a higher-than-expected utility bill. The average monthly electricity bill was $121 per month recently, but that figure can of course vary.

A number of factors go into utility costs, including home size, where you set the thermostat, type of insulation you have, the climate, as well as what part of the country you live in (since rates vary across the country). For instance, those who live in Utah paid $80.87 a month while those in Hawaii shelled out $177.78 per month on average.

Clothing

The average adult spends about $146 on clothing per month. If your budget is tight, this is one category where you can often pare back spending, whether by shopping your closet, hitting the sales racks, or bringing older clothes that need repairs or fit adjustments to the tailor. A clothing swap with friends can be another option.

💡 Quick Tip: If you’re faced with debt and wondering which kind to pay off first, it can be smart to prioritize high-interest debt first. For many people, this means their credit card debt; rates have recently been climbing into the double-digit range, so try to eliminate that ASAP.

Gym Memberships

The average gym membership runs anywhere from $20 to $60 per person per month, which could be a good deal if you use it regularly.

If, however, you aren’t really using that membership or it’s too pricey for your budget, you could try going outside and hitting the pavement, joining an exercise meetup group, watching YouTube videos, and/or picking up some dumbbells and exercise bands to workout at home.

Get up to $300 when you bank with SoFi.

Open a SoFi Checking and Savings Account with direct deposit and get up to a $300 cash bonus. Plus, get up to 4.60% APY on your cash!


Getting Your Monthly Expenses in Check

Knowing the average cost of living can be helpful when you’re trying to determine how much of your budget you may need to allocate to different spending categories. (If you’re thinking, “What budget?” it’s likely a wise move to get busy creating a budget.)

Recommended: Cost of Living per State

These average monthly expenses shared above, though, are just that — averages.

To fine-tune your budget, and make sure your spending is in line with both your income and your goals, it’s a good idea to track your own spending (which means every cash/debit card/credit card payment and every bill you pay) for a month or two.

There are a few options for tracking spending. One easy method is to make all purchases for the month on one debit card or credit card, then, at the end of the month, take note of all the purchases made.

Another option is to use an app (your bank may provide a good one) that can help you log and track your spending. At the end of the month, you can then see everything you spent, as well as allocate each expense into key categories, such as housing, transportation, food, health care, etc.

You can then see how your spending compares to national averages, as well as where you might want to tweak things. For instance, if you don’t have enough at the end of the month to put any money away into your retirement fund, you might want to pare back non-essential spending (such as restaurants, clothing, gym memberships).

The same holds true if you haven’t been able to put money towards an emergency fund, which is an important safety net if you were to endure an emergency such as a job loss.

Recommended: Use our emergency fund calculator to figure out your ideal emergency fund amount.

The Takeaway

Whether you’re creating a new budget or refreshing an old one, you’ve probably noticed how important (and tricky) it is to get your monthly expenses right.

Knowing the average amount people spend to live can help you figure out how your spending stacks up and, if you’re just starting out, help to ensure you’re budgeting enough for each category.

To see how your actual spending compares to national averages, you may want to track your daily spending for a month (or more), and then set up certain spending limits to keep your purchases in line with your income, as well as your savings goals.

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.


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

As an alternative to direct deposit, 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.

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

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Understanding Discretionary Expenses

When it comes to spending money, there are the needs in life, and then there are the wants. Of course, when it comes to essentials, you need to shell out for a roof over your head, food, healthcare, WiFi, and other essentials. But those enticing wants can open up a world of fun purchases, dining out, travel, and other discretionary expenses.

What is the definition of a discretionary expense? It’s a non-essential outlay of cash. Examples are any spending that is not required or that is driven by individual preference (say, a brand new fully loaded Bronco vs. a used minivan). They’re optional things that you can choose to spend money on or not. Think of upgrading to a new phone because the camera is cooler or deciding to head to the beach for a long weekend. Those are discretionary, for sure.

Digging into the difference between discretionary and essential spending can help you understand and optimize your spending and your budgeting.

Because discretionary expenses are unnecessary, they can be a good place to trim one’s budget and find more funds to use elsewhere. Read on to learn more about these costs and how to manage them.

Key Points

•   Discretionary expenses are non-essential costs that can be adjusted or eliminated to free up money for savings or other financial goals.

•   Examples of discretionary expenses include dining out, entertainment, vacations, and luxury items.

•   Differentiating between discretionary and non-discretionary expenses helps prioritize spending and make informed financial decisions.

•   Tracking discretionary expenses can reveal patterns and areas where adjustments can be made to save money.

•   Balancing discretionary spending with saving and investing is key to achieving financial stability and reaching long-term goals.

What Are Discretionary Expenses?

So, how can someone identify discretionary expenses? To do so, it can be helpful to take a step back and consider what a necessary expense is.

Needs are more or less mandatory or unavoidable. For example, housing expenses, like mortgage payments or rent, are things a person can’t do without.

Most workers have to pay federal and state taxes on their work income. People with outstanding debt are generally expected to make monthly payments. And, in everyday life, food (aka groceries) and fuel (aka gas or public transit) are typically must-haves.

Some of these necessary expenses will still be variable, changing every month. For example, an electricity bill may go up and down depending on how much time is spent at home and the season of the year.

However, the wants of life (or what some people may call the fun stuff) are those expenses paid from your discretionary income. They reflect the goods and services that may not be vital for survival but that people frequently spend money on.

Types of Discretionary Expenses

What are discretionary expenses exactly? Here’s a list of some common ones to consider.

•  Eating out: Your everyday meals are a necessity, but when you grab a pricey green juice to go, take a seat at the sushi bar, or join friends for drinks on a Friday, those are discretionary expenses.

•  Grooming services: Soap and shampoo may be musts, but massages, manis, facials, and the like are luxuries. Same goes for sending your furbaby to the doggie spa.

•  Entertainment: Concerts, movies, comedy shows, and plays can be wonderful experiences. Though you may argue that Taylor Swift or Beyonce tickets are necessary for survival, these are discretionary spending in truth.

•  Media: Books, streaming platforms, magazines, and the like are also discretionary expenses.

•  Subscription boxes: Do you have wonderful things turn up on your doorstep regularly as part of a subscription? Whether makeup samples or snacks of the world, these don’t count as needs but wants.

•  Gifts: Sure, you love treating your nearest and dearest, but splashing out on gifts is optional and therefore a “want,” not a need. Same for holiday trappings, like that high-priced chocolate pecan pie from your favorite bakery.

•  Travel: While the “I need a vacation” sentiment runs strong, taking a trip is considered a discretionary expense.

•  Clothing: Some clothing (such as items you wear to work) may be rightly considered needs, but when you buy cute shoes on sale just because, well, they are so cute, that is a “want.”

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Understanding Needs vs. Wants

Are you seeing a pattern here? Any expenses beyond core costs are considered discretionary; it’s a matter of needs vs wants. Typically, discretionary costs reflect wants. They aren’t needed for a person to function in day-to-day life. Rather, they have more to do with lifestyle.

Broadly, discretionary expenses could include vacations, entertainment, luxury items, eating out in restaurants, and electronic gadgets.

Exactly what constitutes a discretionary expense isn’t always cut and dry. As with any personal choice, there’s likely a significant element of subjectivity.

•  As mentioned above, while food is generally thought of as a necessary expense, some types of eating are actually discretionary. Eating at restaurants is avoidable and often more expensive than making food at home. Buying luxury ingredients at the grocery store (ahem, imported cheeses) can be more costly than sticking to pantry staples.

•  Similarly, clothing, in many instances, is a necessary expense. If a person lives in a cold climate, owning an insulated winter coat is a legitimate need. (Without one, the person could risk their health or well-being).

Still, there’s tons of variation in the price of winter coats. Choosing to buy a utilitarian coat often costs much less than buying a designer jacket.

Even within the categories of essential expenses, individuals can exercise their discretion to save money.

💡 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.

Budgeting for Discretionary Expenses

Tracking discretionary expenses is key in case times get tough or a person wants to make a budget or tighten theirs up. When planning for future financial goals, like saving up for a mortgage down payment, finding places to pare back can add up.

Tracking discretionary expenses can help with making or paring back budgets.

One of the most important strategies for tracking discretionary spending is creating a household budget. Budgeting may help individuals to ensure there’s enough money to cover necessary expenses and bills. Once those needs are covered, it’s possible then to set the remaining money aside for discretionary spending.

Advantages of Budgeting for Expenses

Consider these reasons why budgeting for expenses can benefit you:

•  Avoid overspending: When you have a budget, you have guardrails. You know how much money you have coming in and how it’s allotted. You know that if you spend too much, you could wind up with high-interest credit card debt, which can be challenging to pay down.

•  Paying off debt: With a budget for your expenses, you can likely rein in spending and focus on putting dollars toward wiping out high-interest debt.

•  Saving for your future: If you follow a budget and don’t go overboard with discretionary spending, you can likely funnel funds toward important short- and long-term goals, such as buying a house or paying for your child’s college education.

Tallying Monthly Income and Earnings

To start building a monthly household budget, tally up total monthly income after taxes. Be sure to include all sources of income, such as:

•  Salary

•  Any money made from freelance or side gigs

•  Passive earnings, such as rental property income or dividends.

Understanding Regular Non-Discretionary Expenses

Next, a would-be budgeter might want to write down all necessary expenses and add up their associated costs. Some regular expenses could vary from month to month. So, it might be helpful to go back and look at costs incurred every month during the last year. This way, it’s easier to average the amounts that get spent on X, Y, and Z essential costs.

Whenever budgeting, it’s important to determine whether incoming money can cover both regular and surprise costs. Ideally, an individual would have enough money saved or in income to pay for all necessary expenses.

Setting Aside Funds for Later

On top of short-term expenses, some budgeters like to allot amounts each month either to savings or to a rainy day fund (you’ll learn more about the actual amount in a minute). With some money management accounts or retirement plans, users can directly deduct funds from a paycheck on payday.

Automating savings might cut the temptation to shop, as these funds are already transferred to another vault or account (and, hence, harder to spend).

If money isn’t being auto-saved, budgets can be updated to include savings under the discretionary fund category. Over time, as savings grow, squirreled away funds could go toward pursuing long-term financial goals, such as a home down payment, starting a kid’s college fund, or investing for retirement.

Tabulating a Discretionary Expense Budget

Once essential expenses have been budgeted for, a list of discretionary spending costs can be drafted. This can cover broad categories that might include trips, entertainment, savings, or eating out.

When either income drops or the cost of a necessary expense goes up, it can be necessary to update one’s budget accordingly. Making cuts to discretionary expenses may be one place to find more cash.

Budgeters could rank, for instance, their discretionary spending according to what’s least or most important. A food lover, for instance, might want to allot more to dining out than an avid skier.

With discretionary expenses prioritized and mapped out, it can be easier to tighten a budget, identifying easier-to-cut-back-on items.

Budgeting Strategies That Include Discretionary Expenses

There are a variety of different budgeting methods. And, some are particularly suited to tracking discretionary spending. Here’s a look at common budgeting strategies:

The 50/30/20 Rule

The 50/30/20 rule was popularized by Elizabeth Warren and Amelia Warren Tyagi in their book All Your Worth. The idea behind this strategy is that monthly income is divided proportionally between three categories:

•  50% goes to essentials, or needs

•  30% goes to discretionary spending, or wants

•  20% goes to savings.

This strategy prioritizes savings, removing it from the category of discretionary spending and making sure it’s part of every month’s budget. This budgeting strategy takes a broad view and can be good for people who are easily overwhelmed by tracking details.

Use the 50/30/20 calculator below to get a quick look at how your income falls into the three categories.


Line-item Budgeting

For those who love to dive into the nitty-gritty details of spending habits, line-item budgeting might be a better fit. Line-item budgeting can involve breaking out a spreadsheet, examining expenses in fine-toothed detail.

For example, rather than simply having a broad category for all groceries, a line-item budget could break down how much gets spent on buying meat, vegetables, dairy, bread, prepared foods, and coffee. Naturally, the more details that are tracked, the more information a budgeter has on exactly where their money is going.

Line-item budgeting can show the nitty-gritty of personal spending habits.

There may even be pockets of “essential” spending — for instance, the types of groceries being bought — that could be pared back. Rather than helping a person to allocate funds, a line-item budget focuses on tracking spending.

It can also help people to compare their spending habits over extended time periods, such as a month or a year.

Making comparisons in this way can help keep spending in line with previous months. Because line-item budgeting is a spending tracking system, it doesn’t necessarily help build toward goals, like savings or retirement. It’s not designed to cut costs.

Envelope Budgeting

Envelope budgeting can be a useful way to track discretionary spending for two reasons: 1) It’s tangible, and 2) it’s strict.

When using the envelope method, a person writes down their discretionary spending categories on individual paper envelopes. Next, they decide how much they’re willing to spend in each category.

To limit the urge to spend beyond the budget, only the allotted amount is placed as cash in each envelope. Afterwards, just the cash in that envelope is used to make purchases within that category of expenses. The idea is to train oneself to avoid using debt or credit cards, which can encourage impulse spending.

And here’s the rub: Once the cash within a given envelope has run out, it’s gone. You could borrow from another envelope if that has some available cash. But most envelope budgeters strive not to spend beyond the predetermined funds.

So, if the entertainment fund has run dry, then it’s Netflix at home instead of going out to the movie theater. And, if a person blows through their eating-out budget, it could be fun to do a refrigerator sweep. Often, a tasty meal can be whipped up with groceries that have already been purchased.

Though this budgeting approach may sound harsh, it can provide stricter guardrails that help individuals to spend within their means.

For some, adopting this “tougher” approach to budgeting can help reinforce tighter spending habits.

Zero-Based Budgeting

Zero-based budgeting is another way to track spending. The idea behind this budgeting strategy is that every dollar of income has a designated role and can be assigned as an expense. In this way, one’s income minus expenses equals zero.

Zero-based budgeting can take a little bit of extra work, since individuals would need to sit down at the start of each month to assign exact dollar amounts to necessary expenses, discretionary expenses, savings, and other costs.

With zero-based budgeting, the goal is to stick within the dollar amount assigned to each expense. Budgeters seek to stop spending in each category when the allotted dollar amount gets spent.

Still, it may not always be possible to avoid running over the anticipated budget. In those cases, the amount spent in excess of the budget could be subtracted from discretionary funds in the next month. Or perhaps the budgeter may want to allocate more funds in the future for discretionary categories.

💡 Quick Tip: If you’re faced with debt and wondering which kind to pay off first, it can be smart to prioritize high-interest debt first. For many people, this means their credit card debt, so try to eliminate that ASAP.

Tracking Discretionary Spending with a Budget

One part of adopting a budget is finding a tracking system that works for the long haul. So, when figuring how to track spending, it can be helpful to go with the approach that fits individuals’ financial goals and habits.

Online budget tracking tools are one way to help make sense of spending. There are plenty on the market, and your bank may well have tools for this purpose.

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FAQ

Is clothing a discretionary expense?

Clothing can be a discretionary expense if it’s not a necessity, such as a warm winter coat or basic clothes to wear to work. When you buy something just because you like it but don’t need it, that’s a discretionary expense.

What are discretionary expense examples?

Examples of discretionary expenses include travel, entertainment, and eating out.

What are examples of non-discretionary expenses?

Non-discretionary expenses are typically the needs or musts of basic life, such as housing and utilities, food, healthcare, transportation, and minimum debt payments.



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