Family Finances Archives | Page 80 of 95

Aug

2022

Creating an Investment Plan for Your Child

By AJ Smith | Family Finances, invest, Investing | No Comments

As a parent, it can be hard to think beyond the day-to-day issues of raising kids, and make time to focus on a financial plan for your children. Fortunately, there are many resources these days to help parents lay the foundation for a solid investment plan for their kids.

From saving for college to — believe it or not — getting a leg up on retirement, there are simple steps parents can take to set their youngster on the path to financial security. And it’s not a cliché to say there’s no time like the present. Why? Because when your kids are young time is on your side, and theirs, in a really big way.

Why Invest for Your Child?

Why create an investment plan for kids? In a word: Time. The power of time combined with money helps to create the kind of financial growth that many adults can only dream of. And as the parent of a young child, or even a teenager, you can harness the power of time to help their money grow.

The technical name for the unbeatable combination of time + money is known as compound interest. That’s a fancy way of saying that when money earns interest, over time that money plus interest earns more interest.

A simple example: If you deposit $1,000, and it earns 5% per year, that’s $50 ($1,000 x 0.05 = $50). So at the end of one year you’d have $1,050.

And that amount also earns 5%, which means the following year you’d have $1,152.50 ($1,050 x 0.05 = $52.50 + $1,050). Then that amount would earn 5% the following year… and so on. You get the idea. It’s money earning more money.

Benefits of Investing for Your Child Early On

There are other benefits to investing for your kids when they’re young. In addition to the snowball effect of compound interest, you have the ability to set up two or three different investment plans for your child to capture that potential long-term growth.

You can have a college savings plan. You can open an IRA for your child (individual retirement account). And you can set up savings accounts as well.

Even small deposits in these accounts can benefit from the impact of compound interest over time, helping to secure your child’s financial future in more than one area. And what parent doesn’t want that?

Are There Investment Plans for Children?

Yes, there are a number of investment plans for kids these days. Depending on your child’s age, you may want to open different accounts at different times.

Investing for Younger Kids

One way to seed your child’s investing plan is by opening a custodial brokerage account, established through the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA). Many traditional brokerages offer low- or no-fee custodial accounts, including Ally Bank, Charles Schwab, Merrill Edge, TD Ameritrade, and Vanguard.

While the assets belong to the minor child until they come of age (18 to 21, depending on the state), they’re managed by a custodian, often the parent. But opening and funding a custodial account can be a way to teach your child the basics of investing and money management.

There are no limits on how much money you place in a custodial account, though parents may still want to keep the $16,000 gift tax exclusion in mind when making contributions each year.

Investing for Teens

Some brokerages also offer accounts for minor teens, under age 18. The teenager can trade and make investment decisions and the parent can monitor the account.

If your teenager has earned income, from babysitting or lawn mowing, you can also set up a custodial Roth IRA for your child. More on retirement options below.

Starting a 529 Savings Plans

Saving for a child’s college education is often top of mind when parents think about planning for their kids’ futures.

A 529 plan is a tax-advantaged savings plan that encourages saving for education costs by offering a few key benefits. While contributions to some plans are made with after-tax dollars, the money invested inside the plan can grow and compound tax-free. In some states, you can deduct your 529 contributions.

Withdrawals from the account to cover qualified educational expenses — including tuition, room and board, lab fees, and textbooks — can be made without incurring any tax.

All 50 states, as well as state agencies and educational institutions sponsor 529 plans. You do not have to choose the plan that is offered in your home state — you can shop around to find the plan that’s the best fit for you. Your child will be able to use the funds to pay for college in whichever state they choose.

💡 Need more convincing? Here are the benefits of a 529 College Savings Plan

How to Fund a 529 Plan

First let’s consider the two types of 529 plans. Contributions to either type of 529 plan are considered gifts, so deposits up to $16,000 per person are covered by the annual gift-tax exclusion.

Prepaid Tuition Plans

A prepaid tuition plan allows you to prepay tuition and fees at certain colleges and universities at today’s prices. Such plans are usually available only at public schools and for in-state students. Only a few are accepting new applicants.

The main benefit of this plan is that you could save big on the price of college by prepaying before prices go up. The risk is that your child may not attend a participating college or university, so the prepaid tuition plan may pay less than if the beneficiary attended a participating school. Some plans, like the Florida Prepaid Tuition plan, can be used to cover qualified education expenses in or out of state.

Education Savings Plans

The second type of 529 plan is the more common one. It’s an education savings plan, where the money saved grows tax free and can be withdrawn tax free to pay for qualified educational expenses, as noted above.

Contributions are flexible, meaning you can save monthly, quarterly, annually, or deposit a lump sum. Beyond parents making regular payments, 529 plans can be a great way for the extended family to give a meaningful gift on birthdays or holidays.

Contributions are not deductible on the federal level, but many states provide tax benefits for saving in a 529 plan, such as deducting contributions from state income taxes or giving matching grants. Check your local tax laws to see if you qualify.

Investing Your 529 Funds

Once you make contributions, you can invest your funds. You will likely have a range of investment options to choose from, including mutual funds and exchange-traded funds (ETFs), which vary from state to state.

Many 529 plans also offer the equivalent of age-based target-date funds, which start out with a more aggressive allocation (e.g. more in stocks), and gradually dial back to become more conservative as college approaches.

How to Spend 529 Funds

You might want to plan to save only the amount you’ll need to cover education costs. Money in the plan can only be used for qualified educational expenses, so you don’t want to overfund the plan and end up having extra money and nothing to spend it on.

If necessary, you could always transfer the account to a second child who can use the money. You could even use it yourself. But non-qualified withdrawals from 529 plans are subject to income tax and a 10% penalty on the earnings portion of the withdrawal.

Thinking Ahead to Retirement Accounts

You can’t have an online retirement account until you have earned income, and your child likely won’t start working until he or she is a teenager at the earliest. However, it’s never too early to start planning for retirement.

It’s worth being aware that as soon as your child is working, you are able to open a custodial IRA, as discussed above. The assets inside the IRA belong to your child, but you have control over investing them until they become an adult.

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When to Choose a Savings Account for Your Child

Investing is a long-term proposition. Investing for long periods allows you to take advantage of compound interest, and helps you ride out whatever short-term volatility may occur in the stock market. But sometimes you want a safer place to keep some cash for your child — and that’s when opening a savings account is appropriate.

If you think you’ll need the money you’re saving for your baby or child in the next three to five years, consider putting it in a high-yield savings, which offers higher interest rates than traditional savings accounts. Or an online bank account like SoFi Checking and Savings that earns 4.60% APY.

You might also want to consider a certificate of deposit (CD), which also offers higher interest rates than traditional saving vehicles.

The only catch with CDs is that in exchange for this higher interest rate, you essentially agree to keep your money in the CD for a set amount of time, from a few months to a few years.

While these savings vehicles don’t offer the same high rates of return you might find in the market, they are a less risky option and offer a steady rate of return.

Working With SoFi Invest

When saving for long-term goals for your child, having an investing plan might make sense. Whether you want to save for college, get ahead on retirement, or just set up a savings account for your kids, now is the time to start. In fact, the sooner the better, as time can help money grow (just as it helps children grow!).

Being a busy parent means you want an easy, secure, and reliable place to start — and SoFi checks all those boxes. When you open a brokerage account it allows you to take a hands-on approach to investing. If your child is old enough to use a mobile device or laptop, they can follow along as you make different choices, whether that’s trading stocks, opening an IRA, or exploring exchange-traded funds (ETFs).

Even better, SoFi members have access to complimentary financial advice from professionals. Set up your child’s financial future today!

Learn more about how to invest your money and put it to work with SoFi Invest.

FAQ

Can a child have an investment account?

A parent or other adult can open a custodial brokerage account for a minor child. While the custodian manages the account, the funds belong to the child. Some brokerages offer youth accounts for teens.

What is the best way to invest money for a child?

The best way is to get started sooner rather than later. Perhaps start with one goal — i.e. saving for college — and open a 529 plan. Or, if your child has earned income from a side job, you can open a custodial Roth IRA for them.

What is a good age to start investing as a kid?

When your child shows an interest in investing, or when they have a specific goal, whether that’s at age 7 or 17, that’s when you’ll have a willing participant. Ideally you want to invest when they’re younger, so time can work in your favor.

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Aug

2022

How Long Do Late Payments Stay On a Credit Report?

By Dan Miller | Credit, Family Finances, money | Comments Off

One of the most important factors in your credit score is your payment history. New lenders want to make sure that you’ll pay them back on time, and your past payment history is an indicator that many lenders look at. Because of this, in most cases, credit bureaus will keep any late payments on your credit report for seven years.

Late payments only make it onto your credit report if they’re late for more than 30 days. Once a payment is late for 30 days, the creditor will likely report it to the credit bureau, where it will stay for seven years from the date of the first delinquent payment. Because late payments can have a negative impact on your credit score, it’s best to avoid them when possible.

What Is Considered a Late Payment?

Most accounts have a grace period after the due date where the lender will accept payment without any penalty. The exact length of a grace period will depend on the terms of your credit card or other account, but 15 days is common.

After the grace period, your lender may charge a late fee or make other changes to your account. Once your account is 30 days or more past due, your lender will typically report it to the major credit bureaus.

Recommended: What is a Charge Card

When Do Late Payments Fall Off a Credit Report?

In most cases, it will take seven years for a late payment to fall off a credit report. Even if you bring your account current after the late payment has already been reported to the credit bureaus, it will still show up on your credit report for seven years after the first late payment. This is why one of the top credit card rules is to make payments on-time whenever possible.

Recommended: When Are Credit Card Payments Due

How Late Payments Affect Your Credit Score

One of the consequences of a credit card late payment is that it will have a negative impact on your credit score.

Your past payment history is one of the biggest factors in what affects your credit score. As such, if you have a significant amount of late payments on your credit report, it will be tough to have an outstanding credit score.

How to Remove Late Payments From a Credit Report

It’s difficult if not impossible to remove a late payment from your credit report — unless it was reported in error.

However, the only way to find out if a late payment is reported in error is if you regularly review your credit report. If you have documentation that shows that you made the payment on time, you can contact the credit bureau and ask them to update your credit score and credit report.

What Can You Do to Minimize the Impact of a Late Payment?

If you’re willing to do the legwork, there are a couple steps you can take that could potentially minimize the impacts of a late payment.

Negotiate

One option you have for minimizing the impact of a late payment is to negotiate with your credit card issuer. This will generally be more effective if it’s only been a short time since your payment was due or if you have not had late payments previously. For example, your lender may be willing to waive any late fees or penalty interest if you enroll in autopay and/or pay any past-due balance.

Recommended: How to Avoid Interest On a Credit Card

Dispute Errors on Your Credit Reports

If it’s been more than 30 days and your lender has already reported the late fee to the credit bureaus, it can be difficult to remove it from your credit report. However, if you have documentation that you made the payment on time, you can contact the credit bureaus to have them update and correct your credit report.

This is why it is important to understand how checking your credit score affects your rating — generally when you are reviewing your own credit report, it does not impact your credit score. Regularly reviewing your credit report for errors and discrepancies is a great financial habit to have.

Guide to Avoiding Late Payments

Since it is difficult if not impossible to remove late payments from your credit report once they’re there, the best course of action is to avoid late payments in the first place. Here are a few tips on some of the best ways to avoid late payments.

Set Up Autopay

One great way to avoid late payments is to set up autopay from a checking or savings account. That way, you know that your payments will be made each and every month.

You can customize your autopay payments to cover the minimum amount, the full statement balance, or anywhere in between. You’ll just want to make sure you have enough funds in the attached account to cover the balance.

Set Payment Reminders

If you can’t or don’t want to set up autopay on your accounts, another option is to set up payment reminders. That way, you can get an email or text message a few days before your payment is due. Getting a reminder can help you remember to make the payment on or before its due date.

Change Your Payment Due Date

Sometimes the due date for a particular loan or credit card doesn’t line up conveniently with when you have the money to pay it. You might find that your due date always seems to come a day or two before payday. If that’s the case, many lenders allow you to change your payment due date to one that’s more convenient for you.

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The Takeaway

Paying your credit card and other debts on time is one of the best ways to ensure that your credit score stays strong. Late payments can be reported to the credit bureaus as soon as 30 days after the due date. Once they’re on your credit report, they will stay there for seven years from the date of the first late payment.

If you’re looking for a credit card with great cash back rewards and other features, consider applying for the SoFi Credit Card.

The SoFi Credit Card offers unlimited 2% cash back on all eligible purchases. There are no spending categories or reward caps to worry about.¹

Take advantage of this offer by applying for a SoFi credit card today.

FAQ

Can I get late payments removed from my credit report?

Typically, once they’ve been reported to the credit bureaus, you can only get late payments removed if you didn’t actually pay late. If you have documentation that shows that you made the payment on time, you can submit that to each credit bureau and ask that they update your credit score.

Is it true that after 7 years your credit is clear?

Late payments and some other negative factors do remain on your credit report for seven years. That means that if you have not had any negative marks or late payments for seven years, you’ll be starting with a fresh slate.

Is payment history a big factor in your credit score?

Yes, payment history is a big factor in how your credit score is determined. While each credit bureau calculates your credit score differently, payment history is typically listed as one of the biggest factors in what affects your credit score.

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Aug

2022

9 Ways to Keep Inflation From Ruining Your Kitchen Reno Budget

By Tricia Romano | Family Finances, Home Ownership, personal_loan | Comments Off

Maybe you’ve just bought a house, or maybe you’ve had your house for decades and love everything about it — except for the extremely outdated kitchen, built before the days of marble top counters, stainless steel appliances, and kitchen islands. Renovating your kitchen can get expensive fast, but with inflation, materials cost even more than usual, so it can be tougher to control expenses. Luckily, there are a few strategies you can use to get the updates you crave, without emptying your pockets.

How to Keep Inflation From Ruining Your Kitchen Renovation

1. Setting A Budget

Like most people, you probably already have a budget in mind. That’s a good start, but even with a spending limit in place, it’s smart to use a tool like this home renovation cost calculator to get an estimate of what your kitchen reno will ultimately cost, and make sure your budget will truly cover it. These calculators allow you to choose from basic to extremely bespoke changes, and they consider the cost of labor and raw material, generally with a 20% margin for the contractors. (And contractors can cost much more than you may expect!)

2. Being Flexible

Be flexible about your upgrades. It’s not uncommon to have to cut back on some of your plans due to price hikes, sold out materials or surprise developments during construction. Expect to make compromises. If your dream project begins to get pricey, consider focusing on just one or two aspects of your reno that are most important to you, and saving other changes for another time.

3. Getting Creative

To keep your costs down, try thinking outside the box. Say the countertop you really want is way out of your budget. Perhaps your contractor may know where to find salvaged materials at a deep discount. Or the cabinets you had your eye on have jumped in price. Opting to reface instead of replace your existing cabinetry could be a reasonable, cost-effective approach. Being open to these kinds of options can really help keep your spending in check.

4. Doing It Yourself

DIY can be a great way to keep inflation from ruining your kitchen budget … if you know what you’re doing. There are millions of how-to videos online with detailed instructions on everything from putting in new flooring to installing sinks. One of the largest costs of any renovation is labor, and you can reap some significant savings by doing some of the things yourself, and saving the really hard stuff for a contractor. Keep in mind, though, that taking on tasks outside of your abilities could end up costing you in the end, so be realistic about what projects you can handle and which are better left to the professionals.

💡 Recommended: How Much Does it Cost to Remodel a House?

5. Considering Temporary Fixes

Can you update your cabinets and countertops with removable materials? Or perhaps a new coat of paint and some new pulls? Peel and stick wallpaper has become particularly popular due to its variety and flexibility. It comes in countless prints from wood grain to marble, and can be used as a backsplash, on countertops, kitchen cabinets, and yes, walls. Incorporating one of these simple changes can give your kitchen a fast and financially friendly refresh.

6. Renovating vs Remodeling

Yes, there’s a difference, and the distinction is important. If you are remodeling, you are changing the physical space, breaking down walls, removing cabinetry, etc. Remodels are almost always more labor intensive, require more materials, possibly permits, and definitely more of your contractor’s time, so they are almost always more expensive, even without inflation. Renovating, however, means you are updating what already exists. In this scenario, it’s often easier to pick your battles — keep the cabinets but change the countertop, for instance. So, if you really want to keep costs down, you may want to consider renovating cosmetic features instead of remodeling.

7. Consider a Loan

If you can’t wait to renovate but don’t have all the cash you need, you could consider getting a personal loan to cover the costs. If you’ve made enough mortgage payments, tapping into your home equity could be another option for funding your project. There are both benefits and drawbacks to borrowing so be sure to read the fine print, keep a close eye on interest rates and do your best to keep your project on track and under budget.

8. Increase Your ROI

Tapping into a mortgage refi or getting a personal loan might seem risky, but it can make sense if you’ve considered how much your home improvement may boost the value of your home when it comes time to sell it. Using a home improvement ROI calculator can help you estimate how much value you can add to your home after a renovation or remodel.

Another metric you may want to consider is the return on investment, for a particular project. Boosting your curb appeal — that is, the exterior of the house — can give you the most bang for your buck. So can things like replacing a garage door, sprucing up the yard and landscaping, and even painting the exterior of the house. And even a minor kitchen renovation can boost your home’s value, potentially offsetting any inflation costs you may incur.

9. Choosing The Right Contractor

Once you’ve decided what you want to do and what you can afford, it’s time to find a good contractor to execute your vision. This one decision can make or break the entire project, so it’s wise to ask for personal referrals. If that’s not an option, you can always search the top-reviewed contractors in your area. And just like comparing prices at the grocery store, getting estimates from at least three contractors can help you save.

The Takeaway

Inflation might be sky high right now, but it doesn’t have to stop you from having the kitchen of your dreams. Whether you are going for a full remodel or a few cosmetic changes, there are ways to update the look of your kitchen without breaking the bank.

And should you decide to pick up a personal loan to cover those costs, be sure to budget a little extra for the “just-in-case.” SoFi’s home improvement loans range from $5K to $100K and can cover just about any kitchen project. Plus, with no collateral and same day funding, you can kick off your project sooner and can find yourself cooking in your new kitchen in no time.

Learn how a SoFi home improvement loan may help you fund your remodel in no time.

Photo credit: iStock/sturti

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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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.

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Aug

2022

HSA vs FSA: The Similarities and Differences

By Emily Greenhill Pierce | Family Finances, Insurance, money | Comments Off

A health savings account (HSA) and a flexible savings account (FSA) both serve to set aside funds for qualified medical expenses and help you save money on taxes.

The main difference between an HSA vs FSA? Anyone can have an HSA as long as they are enrolled in a high-deductible health plan (HDHP). An FSA can only be offered by an employer to employees.

There are additional benefits and limitations to consider when comparing an FSA vs. HSA. Here, you’ll learn:

• What is a health savings account (HSA)?

• What are the pros and cons of an HSA?

• What is a flexible spending account (FSA)?

• What are the pros and cons of an FSA?

• What are the differences between an HSA vs. an FSA?

• How to choose between an HSA and an FSA?

What Is a Health Savings Account (HSA)?

There are several types of savings accounts designed to help people put away pre-tax dollars for medical expenses. But they all sound so similar, including:

• HSAs, or health savings accounts

• FSAs, or flexible savings accounts

• HRAs, or health reimbursement arrangements

• MSAs, or medical savings accounts

It’s easy to get confused.

An HSA (health savings account) enables employees and freelancers to accumulate tax-free funds to be used for current and future medical purposes, including copays, glasses, teeth cleanings, and more.

To qualify for an HSA, you must be enrolled in a high-deductible health plan (HDHP). While an HDHP often has the benefit of lower monthly premiums, you could end up paying a lot of dough out-of-pocket before meeting its high deductible. An HSA can help bridge the gap between your high deductible and out-of-pocket medical expenses.

What’s more, the funds in an HSA belong to you, travel with you when you change jobs, and can roll over year after year. They are not “use it or lose it” accounts. They may also earn interest or other earnings, which are not considered taxable interest. Another point to note: After age 65, you may use the funds for non-medical expenses, though the money withdrawn will be taxable in that situation.

2022 HSA Contribution Limits

As of 2022, the maximum contribution limits for a health savings plan (HSA) is $3,650 for individuals and $7,300 for families with high-deductible health plans.

Advantages of an HSA

HSAs definitely have their upside. Saving tax-free dollars for unexpected medical costs can provide peace of mind. But there are many other benefits of using an HSA, including:

• Covering out-of-pocket medical expenses. You can use your HSA funds for a myriad of healthcare costs, as long as they are qualified expenses approved by the IRS.

• Family healthcare expenses. Your HSA cash can be spent on any family member’s medical cost as long as they’re on your HDHP.

• Rollover contributions. Unused contributions don’t disappear at the end of the year. They stay in your HSA, growing and accumulating tax-free interest.

• It’s portable. You can change jobs or careers and keep your HSA. The funds stay with you, not your employer.

• Investments. You can choose to have your HSA money invested in specific mutual funds once you reach a minimum requirement balance.

• Retirement funds. After the age of 65, you can use HSA funds for retirement without penalty as you please—be that medical expenses or a trip to Tahiti.
Lower your taxable income. Since HSA contributions go into your account pre-taxes, you could end up owing less to Uncle Sam.

Disadvantages of an HSA

Fair is fair: Now you should know the potential downsides of having an HSA. The cons include:

• Penalties for non-qualified expenses. Before the age of 65, any money spent on unapproved purchases will be viewed as taxable income. The IRS can impose a hefty 20% penalty on any unqualified expenditures.

• Account fees. HSAs may charge a low monthly service fee, typically no more than $5 per month. If your HSA participates in mutual fund investments, there may be an annual management fee.

• Monetary fluctuations. If you choose to invest your HSA money in mutual funds, your balance can rise and fall with the market.

• Record-keeping for your taxes. HSA contributions and expenses must be reported to the IRS. Keeping tabs on those transactions can be a pain.

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What Is a Flexible Savings Account (FSA)?

A flexible savings account, or FSA, is a tax-free account used to help cover out-of-pocket medical expenses. There are two big differences between a flexible spending account vs. a health savings account:

• An FSA is available to all, not only those enrolled in an HDHP

• FSAs are only offered through an employer’s benefit package.

Maximum contribution limits to a flexible savings account for 2022 are $2,850 per individual.

Advantages of an FSA

Like an HSA, having a flexible savings account or FSA offers many advantages, including:

• Covering medical expenses. You can use your pre-tax funds on copays, prescriptions, over-the-counter meds, essential dental care, contact lenses, and more.

• Contributions can come right from your paycheck. You can choose to have pre-tax contributions taken out of your earnings and deposited into your FSA account.

• Funds are available immediately. If you enroll in an FSA on January 1st, and pledge to contribute $2,400 over the year, paying $200 a month, the $2,400 becomes available for you to use right away.

Disadvantages of an FSA

There are some cons of having an FSA vs. HSA. Ironically, a flexible spending account can be rather inflexible when it comes to certain situations.

The drawbacks of a flexible spending account can include:

• Use it or lose it. In many cases, if you don’t use your FSA funds by the end of the year, you will forfeit the remaining balance. Some employers may allow certain amounts to be rolled over or a grace period to spend the money.

• You leave, it stays. Typically, if you quit or change jobs, the money in your FSA stays with your employer.

Key Differences Between HSAs and FSAs

While both HSAs and FSAs offer tax-advantaged ways to pay for medical expenses, they do vary considerably. Here’s a breakdown of the primary differences in an HSA vs. FSA:

Health Savings Account (HSA)	Flexible Spending Account (FSA)
HSAs are created and controlled by the employee or self-employed worker.	FSAs can only be obtained through an employer’s benefits package.
Contributions go where you go, travel with you from job to job or even during times of unemployment.	Contributions can only be used while a person is employed at a company.
To qualify for an HSA, you must be enrolled in a HDHP.	To qualify for an FSA, the health plan provided by the employer does not have to be an HDHP.
Contribution limits are higher for an individual and family. Employers can also contribute.	Lower contribution limits, but a spouse can also contribute to their own FSA if their employer offers one.
Contributions rollover over year-to-year.	Some employers may allow a rollover of some unused funds, but most expire at the end of the year.
HSA funds can be used, tax-free, on qualified expenses after the age of 65. They can be used on non-qualified expenses but are then subject to income tax.	FSA is a salaried benefit. After you retire, you are likely to forfeit any unused account funds.
HSA contributions can be invested into mutual funds.	Money in an FSA cannot be put toward an employee’s personal investments.

How to Choose Between an FSA and HSA

The choice between an FSA and HSA may not be up to you. Many employers offer only one or the other. If you’re a freelance gig worker or make money from home and have a high-deductible health plan, you can qualify for an HSA, but not a flexible spending account.

If you were to find yourself in a position to debate an FSA vs. HSA (say, you were deciding whether to stay self-employed with an HSA or take a full-time job which offered an FSA), ask yourself:

• Do I want an account that stays with me as I change jobs and into retirement?

• Is enrolling in a high-deductible health plan worth it in order to have an HSA?

• Do I want my contributions to be invested?

• How much do I estimate spending on out-of-pocket medical expenses for myself or my family?

Recommended: Beginner’s Guide to Health Insurance

Can You Have Both an HSA and an FSA?

It is unlikely that you can contribute to both an HSA and an FSA at the same time, unless you have an HSA that is traveling with you from a past job, or your employer offers a limited-purpose FSA to cover specific costs for vision and dental. You can ask your HR representative if such an option exists.

Using HSA and FSA Funds

Typically, setting up an HSA is simple, as is activating and using an FSA. The accounts can come with a debit card and online features, so you can spend money on qualified purchases, check your balance, and contribute and transfer funds just like you’d do with a traditional checking account.

The Takeaway

FSAs and HSAs are very different vehicles, though both of them can help you use pre-tax earnings on out-of-pocket medical costs. Health savings accounts, or HSAs, are only available to those enrolled in high deductible health plans, while FSAs are only possible if your employer offers them. Whichever plan you might be eligible for, it can be wise to look into these accounts since they do offer avenues to make one’s healthcare costs more affordable and optimize your budget.

Another way to enhance your money is with smarter banking. SoFi can help with that. Open a bank account with direct deposit, and you’ll earn a competitive APY, and pay no account fees, so your money can grow faster.

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.

FAQs

Is HSA or FSA better?

An FSA and HSA both offer ways to set aside tax-free funds to use on qualified medical expenses. However, you usually don’t have the choice of picking one: Only people enrolled in a high-deductible health plan can open an HSA, and only people whose employers offer an FSA can start one.

Can I have both an FSA and HSA?

You can have an FSA and HSA, but you typically can’t contribute to both at the same time unless you have a limited-purpose FSA that covers specific vision and dental costs.

Can you use an HSA for dental?

You can use HSA funds for qualified dental and orthodontic expenses, including cleanings, sealants, and braces.

What can you spend FSA money on?

Qualifying FSA expenses typically include copays, deductibles, prescriptions, over-the-counter drugs, acne treatments, eye and vision care, alternative medicines, and more.

Photo credit: iStock/zimmytws

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.

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.

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.

SOBK0222010

Aug

2022

Credit Card Promotional Interest Rates: Understanding Special Offers on Credit Cards

By Dan Miller | Credit, Family Finances, money | Comments Off

Some credit cards offer a promotional interest rate, as low as 0% APR, for purchases and/or balance transfers. Often, these promotional interest rates are offered for a limited period of time when you apply for a new card, though some issuers offer promotional rates for existing cardholders as well.

If you have a large purchase coming up, or an existing credit card balance that you want to transfer over, these cards can save you a significant amount of interest. You’ll just want to make sure to pay off the full balance by the end of the promotional period, as your interest rate will likely jump significantly when your promotional APR expires.

What Are Credit Card Promotional Interest Rates?

A credit card promotional interest rate is an interest rate that is offered for a limited amount of time, as a promotion. During the promotional period, you’ll be charged a lower interest rate than your typical interest rate.

It’s common for credit cards to offer these introductory promotional interest rates for new members when you open a credit card account. However, it’s also possible for issuers to offer promotional interest rates to existing cardholders.

Recommended: How to Avoid Interest On a Credit Card

How Credit Card Promotional Interest Rates Work

One common scenario for how credit card promotional interest rates work is that an issuer might offer a 0% promotional interest rate on purchases and/or balance transfers for a certain period of time. When you’re using a credit card during the promotional interest period, you won’t pay any interest.

It’s important to note that there are two major types of promotional interest rates, and they vary slightly. With a 0% interest promotion, you won’t pay any interest during the promotional period. If there’s any balance remaining at the end of the promotional period, you’ll begin paying interest at that time. With a deferred interest promotional rate, on the other hand, you’ll pay interest on any outstanding balance back to the date of the initial purchase.

Benefits of Credit Card Promotional Rates

As you may have guessed, there are certainly upsides to taking advantage of credit card promotional interest rates. Here’s a look at the major benefits.

Low Interest Rate During the Promotional Period

One benefit of credit card promotional interest rates is the ability to take advantage of a low or even 0% interest rate during the promotional period. Having access to these promotional rates can give you added flexibility as you plan your financial future.

Ability to Make Balance Transfers

One possibility to maximize a credit card promotional rate is if you have existing consumer debt like a credit card balance. By using a balance transfer promotional interest rate, you can transfer your existing balance and save on interest. This can help lower the amount of time it takes to pay off your debt.

Can Pay For a Large Purchase Over Time

If your credit card has a 0% promotional interest rate on purchases, you can take advantage of that to pay for a large purchase over time. That way, you can spread out the cost of a large purchase over several months rather than needing to pay it off within one billing period.

Just make sure to pay your purchase off completely before the end of the promotional period to avoid paying any interest.

Drawbacks of Credit Card Promotional Rates

There are downsides to these offers to consider as well. Specifically, here are the drawbacks of credit card promotional interest rates.

Deferred Interest

You need to be careful if your credit card promotional rate is a deferred interest rate, rather than a 0% interest rate. Because of how credit cards work with a deferred interest rate promotion, you’ll pay interest on any outstanding balance at the end of the promotional period — back to the date of the initial purchase. This amount will get added to your existing balance, driving it higher.

Penalty Interest Rates

You still have to make the minimum monthly payment on your credit card during the promotional period. If you don’t make your regularly scheduled payment, the issuer may cancel your promotional interest rate. They may even impose an additional credit card penalty interest rate that’s higher than the standard interest rate on your card.

Recommended: When Are Credit Card Payments Due

May Encourage Poor Spending Habits

Establishing good saving habits and living within your means is an important financial concept to live by. While it may not always be possible, it’s generally considered a good idea to save up your money before making a purchase. While a 0% interest promotional rate means you won’t pay any interest, it can contribute to a mindset of buying things you don’t truly need.

How Long Do Credit Card Promotional Interest Rates Last?

By law, credit card promotional interest rates must last at least six months, but it is common for them to last longer. You may see introductory interest rates lasting 12 to 18 months, or even longer.

Regardless of how long your promotional period lasts, make sure you have a plan to pay your balance off in full by the end of it. Credit card purchase interest charges will kick in once your promotional period is over.

Recommended: What is a Charge Card

Zero Interest vs Deferred Interest Promotions

Both 0% interest rates and deferred interest rates are different kinds of promotional rates where you don’t pay any interest during the promotional period. However, they come with some key differences:

Zero Interest	Deferred Interest
Often marketed with terms like “0% intro APR for 15 months”	Often marketed as “No interest if paid in full in 6 months”
No interest charged during the promotional period	No interest charged during the promotional period
Interest charged on any outstanding balance starting at the end of the promotional period	At the end of the promotional period, interest is charged on any outstanding balance, back-dated to the date of the initial purchase

What to Consider When Getting a Card With a Zero-Interest or Deferred Interest Promotion

One of the top credit card rules is to make sure you pay off your credit card balance in full, each and every month. But if you’re carrying a balance with a promotional credit card rate, you’ll want to make sure you understand if it’s a 0% rate or a deferred interest promotion.

With a 0% promotional rate, you’ll start paying interest on any balance at the end of the promo period. But with a deferred interest promotional rate, you’ll pay interest on any balance, back-dated to the date of the initial purchase.

In either case, the best option is to make sure that you have a plan in place to pay off the balance by the end of the promotional period.

Paying off Balances With Promotional Rates

You’ll want to have a gameplan for how to pay off your balance before the end of the promotional period. That’s because at the end of the promotional period, your credit card interest rate will increase significantly.

If you still are carrying a balance, you will have to start paying interest on the balance. And if you were under a deferred interest promotional rate, that interest will be calculated back from the initial date of purchase.

Watch Out for High Post-Promotional APRs

Using a 0% promotional interest rate can seem like an attractive option, but it can lull you into a false sense of financial security. You should always be aware that the 0% interest rate won’t last forever. Your interest rate will go up at the end of the promotional period, and if you’re still carrying a credit card balance, you’ll start paying interest on the balance.

Exploring Other Credit Card Options

There are some other credit card options besides getting a card with a promotional interest rate. For instance, you might look for a credit card that offers cash back or other credit card rewards with each purchase.

Before focusing on credit card rewards or cash back, however, you’ll want to make sure that you first focus on paying off your balance. Otherwise, the interest that you pay each month will more than offset any rewards you earn.

If you’re carrying a balance, you can also attempt to get a good credit card APR by making on-time payments and asking your issuer to lower your interest rate. By simply securing a good APR, you won’t have to worry about it expiring and then spiking like you would with a promotional APR.

Recommended: Can You Buy Crypto With a Credit Card

The Takeaway

Some credit cards offer promotional interest rates to new and/or existing cardholders. These promotional interest rates could be a 0% interest rate for a specific period of time, or a lower interest rate to encourage balance transfers.

While taking advantage of promotional interest rates can be a savvy financial move if you have existing consumer debt or need to make a large purchase, you’ll want to make sure you have a plan to pay off your balance in full before the promotional period ends. That way, you avoid having to pay any interest.

Another option can be to sign up for a cash back credit rewards card like the SoFi credit card.

The SoFi Credit Card offers unlimited 2% cash back on all eligible purchases. There are no spending categories or reward caps to worry about.¹

Take advantage of this offer by applying for a SoFi credit card today.

FAQ

Will my interest rate spike after a promotional deal ends?

Yes, generally credit card promotional interest rates last only for a specific number of months. The way credit cards work is to charge interest on balances that are not paid off. So, while your credit card may charge 0% or a lower promotional rate for a period of time, the interest rate will rise once the promotional period is over and will apply to any outstanding balance on the card.

How does promo APR work?

Promotional APR offers are generally put forward by credit card companies as a way to entice new applicants. Cards may offer a 0% introductory APR for a certain number of months on purchases and/or balance transfers. Once the promotional period is over, your interest rate will rise to its normal level.

Should you close a credit card with a high interest rate?

Having a credit card with a high interest rate will not negatively impact your credit or your finances if you’re not carrying a balance. So, simply having a high interest rate is not a reason, in and of itself, to close a credit card. But if you have a balance on a credit card with a high interest rate, you might want to consider doing a balance transfer to a card with a promotional 0% interest rate while you work to pay it off.

Is my credit card’s promotional rate too good to be true?

Promotional interest rates are a legitimate marketing strategy used by many credit card companies. While you shouldn’t treat them as a scam, you also need to make sure that you are aware of the terms of the promotional rate and how long the rate is good for. Make a plan to completely pay off your balance by the end of the promotional period before your interest rate increases.

Photo credit: iStock/Jakkapan Sookjaroen