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A personal loan can be a helpful financial tool when someone needs to borrow money to pay for things like home repairs, a wedding, or medical expenses, for example. The principal amount of a loan refers to how much money is borrowed and has to be paid back, aside from interest.

Keep reading for more insight into how a personal loan works, what the principal of a loan is, and how it affects repayment.

What Is Loan Principal?

Loan principal meaning is fairly simple: When someone takes out a loan, they are borrowing an amount of money, which is called the “principal.” Principal comes from the Latin word principalis, which means “first” or “original.” The principal is what the borrower agrees to pay back. The interest on the loan is what they’ll pay in exchange for borrowing that money.

All loans, including personal loans, come with a principal amount. Whenever a borrower makes a personal loan payment, the loan’s principal decreases incrementally until it is fully paid off.

Recommended: Guide to Personal Loans for Beginners

Loan Principal vs Interest

The loan principal is different from its interest. As noted above, the principal is the amount of money that was borrowed and must be paid back. The lender will charge interest in exchange for lending the borrower money. Interest is charged as a percentage charged based on the principal. Payments made by the borrower are applied to both the principal and interest.

As the borrower sends more payments and makes progress paying off their loan principal amount, less of their payments will go toward interest and more will apply to the principal balance. This process is known as amortization.

How Loan Amortization Works

Many forms of loans are amortized, including personal loans and mortgage loans. In the beginning of a loan’s term, you owe the most interest because your principal is at its highest. As you make your payments, the principal amount will be reduced so that, by the end of the payment term, most of your payments will be going to pay off the principal.

What Is an Amortization Schedule?

A fixed-rate loan will come with an amortization schedule, a chart showing each scheduled payment on your loan, what your principal balance is before and after the payment, and how much of the payment goes to the loan principal vs. interest. (Variable-rate loans can be amortized, too, but as the interest rate changes over time, the payment amount will change as well.)

Why Early Payments Go Toward Interest

If you look closely at the amortization schedule for a fixed-rate loan, such as a personal loan, you can see the portion of your loan payment that goes toward interest shrinking over the months and years that you pay off the loan. As we’ve seen, this is because interest is calculated based on the principal balance, and that balance is at its highest in the first years of a loan. This front-loading of interest benefits lenders by helping to ensure that they are paid the interest you owe even if, midway through the term, you decide to pay off the loan in full.

How Can You Pay Down the Loan Principal Faster?

It’s understandable that some borrowers may want to pay down their loan principal faster than originally planned as it can save them money on interest and lighten their monthly budget. Here are a few ways borrowers can pay down their loan principal faster.

Make Extra Principal Payments

When a borrower pays down the principal on a loan, they reduce how much interest they need to pay. Personal loan lenders often allow borrowers to make extra payments or to make a larger monthly payment than planned. When doing this, it’s important that borrowers confirm that their extra payments are going toward the principal balance and not the interest. That way, their extra payments work towards paying down the principal and lowering the amount of interest they owe.

Shorten the Loan Term

Refinancing a loan and choosing a shorter loan term can also make it easier to pay down a personal loan faster. Not to mention, if the borrower has a better credit score than when they applied for the original personal loan, they may be able to qualify for a lower interest rate, which can make it easier to pay down their debt faster. Having a shorter loan term typically increases the monthly payment amount but can result in paying less interest over the life of the loan and paying off the debt faster.

Refinance

Refinancing to a new loan with a lower interest rate may reduce monthly loan payments, depending on the term of the new loan. With lower monthly scheduled payments, borrowers may opt to pay extra toward the principal and possibly pay the loan in full before the end of its term.

Loan Principal Repayment Penalties

As tempting as it can be to pay off a loan as quickly as possible to save money on interest payments, it’s important to understand whether or not this will result in a prepayment penalty before paying off a loan early. Prepayment penalties aren’t used by all lenders, however. When shopping for a personal loan, for example, it’s important to inquire about extra fees like this to have a true idea of what borrowing money may cost.

A borrower’s personal loan agreement will state if they will need to pay a prepayment penalty when paying off their loan early. If a borrower finds that they are subject to a prepayment penalty, it can help to calculate which will cost less: paying the prepayment fee or continuing to pay interest for the loan’s originally planned term.

Loan Principal and Taxes

Personal loans aren’t usually considered to be a form of taxable income so the amount borrowed is not subject to taxes like investment earnings or wages are. Generally, borrowers aren’t required to report a personal loan on their income tax return, no matter who lent the money to them (bank, credit card, peer-to-peer lender, etc.). The exception? If some or all of a loan balance is forgiven, this may have tax repercussions.

Recommended: What Are the Common Uses for Personal Loans?

Other Important Information on the Personal Loan Agreement

A personal loan agreement includes a lot of helpful information about the loan, such as the principal amount and how long the borrower has to pay their debt. The more information the borrower has about the loan, the more strategically they can plan to pay it off. Here’s a closer look at the information typically included in a personal loan agreement.

Loan Amount

An important thing to note on a personal loan agreement is the total amount the borrower is responsible for repaying.

Loan Maturity Date

A personal loan’s maturity date is the day the final loan payment is due.

Loan Interest Rates

The loan’s interest rate and APR (annual percentage rate) should be listed on the personal loan agreement.

Monthly Loan Payments

The monthly loan payment amount will be listed on the personal loan agreement. Knowing how much they need to pay each month can make it easier for the borrower to budget accordingly.

APR vs. Interest Rate

Along with the interest rate, a lender may also disclose the APR charged on the loan, which includes any fees the lender might charge, such as an origination fee, and the interest.

The Takeaway

What is the principal amount of a loan? The principal on a loan is the amount the consumer borrowed and needs to pay back. The interest owed on a loan is computed based on the principal. Understanding how a personal loan works can make it easier to pay one off.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

SoFi’s Personal Loan was named a NerdWallet 2026 winner for Best Personal Loan for Large Loan Amounts.

FAQ

What is the principal balance of a loan?

The principal of a loan is the amount originally borrowed that the borrower must repay. Loan principal meaning can be a bit confusing, as the term “principal balance” is often used to refer to what remains of the original loan amount after payments have been made.

Does the principal of the loan change?

The original loan principal does not change. The amount of the principal included in each monthly payment will change as the amortization period progresses. On an amortized loan, less principal than interest is paid in each monthly payment at the outset of the loan. The proportion incrementally shifts over the life of the loan until at the end of the term, the borrower is mostly repaying the principal.

How does loan principal work?

The loan principal represents the amount borrowed. Usually, you will repay the principal in monthly payments until it is fully repaid, with interest.

What happens to the principal if you make extra payments?

If you make extra payments on a loan and direct your lender to apply these payments to the principal, the principal will be reduced.

Is loan principal the same as loan balance?

The terms loan principal and loan balance are often used interchangeably to mean the amount you borrowed from a lender. But the “principal” is the amount you initially borrowed, while the “balance” is what you still owe. You might see these terms qualified further. For example, “original principal” can refer to the amount you initially borrowed, while “outstanding principal” (or “principal balance”) is what remains of the amount you borrowed after you have made some loan payments.

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After you purchase a new home, there are many things to budget for, including moving costs, new furniture, and ongoing expenses, such as your mortgage. Although it may seem like many of the significant expenditures are out of the way once you close on a property, there are additional costs that can add up.

To avoid financial surprises, it’s wise to jot down and budget for all of the extra expenses you will encounter when you move into your new place. To help you organize your finances, here are the things to budget for after buying a house.

Moving-Out Expenses to Budget For

Before you take up residence in your new home, you must move all of your things. Even if you pack and move all your belongings yourself, you’ll still have to spend on items such as boxes, packing materials, and a truck. And if you use movers, it will cost you even more.

Recommended: The Ultimate Moving Checklist

Moving Your Belongings

There are three main options for moving your belongings:

•   Renting a truck and doing it yourself: It’s more cost-efficient than using professional movers, but DIY moving still adds up. You’ll have to pay for the truck rental fee, gas, and damage protection. If you’re moving across the country, you may also have to factor in the costs of shipping some of your items. Even though you can enlist your friends and family to help you do the heavy lifting, the cost of moving yourself can still be significant, and it’s a lot of work.

•   Hiring movers: If you decide to use professional movers, it’s wise to shop around to find the best price. Here’s why: For moves under 100 miles away, the national average cost of moving is $1,714, and it ranges from $880 to $2,570. If you’re moving long-distance, costs can range from $2,417 to $6,863. To cut costs, you can do your own packing.

•   Moving your things in a storage container: Another option is to use a hauling container. You load your things in it, and the container company moves it to your new location. This usually costs several thousand dollars, averaging $3,100 for local container moves and $4,460 for long-distance ones.

Moving Supplies

If you decide to go the DIY moving route, you will need to buy boxes, bubble wrap, labels, and tape. And you likely have more items to wrap and box up than you think, which requires even more supplies.

Cleaning Supplies

You’ll probably want to clean your current property before you move out, and you’ll definitely want to clean the new place when you move in. That means buying mops, sponges, cleaning solutions, and paper towels. You may also want to get the carpets cleaned or hire a professional house cleaner if the place needs a deep cleaning.

10 Common Expenses After Buying a Home

Once the move is done, there are other expenses you’ll need to account for as you settle into your new abode. Here are a few things to budget for after buying a home.

Furniture and Appliances

You’ll likely bring some furniture and decor from your old place, but you’ll probably want to purchase some new things as well. For example, if the appliances are outdated, you may want to upgrade to new ones. And you may have more rooms to furnish, which requires additional furniture.

Consider opening a savings account for the new items you want to purchase. It can also help pay for any unexpected costs, such as having to replace a broken hot water heater.

Mortgage Payments

As a homeowner, every month you will likely be making a mortgage payment that typically includes:

•   The principal portion of the payment. This is the percentage of your mortgage that reduces your payment over the life of the loan. The more you pay toward the principal, the less you will have to pay in interest.

•   The interest. This is the amount you pay to borrow funds from the bank or lender to purchase your home.

If you are using an escrow account to pay your mortgage, other things may be included in your payment, such as your property taxes, insurance, and PMI. This guide to reading your mortgage statement can help you understand all the costs involved in your mortgage payment.

Property Taxes

Property taxes are the taxes you pay on your home. In many cases, these taxes are the second most significant expense after your mortgage. Property taxes are based on the value of your home, which is typically governed by your state. The county or municipality you live in calculates and collects the sum due. Usually, property tax calculations are done every year, so the amount you owe may fluctuate annually.

Homeowners Insurance

Homeowners insurance helps protect your home from damage or destruction caused by events such as fire, wind, storms, or vandalism. It can also protect you from lawsuits or property damages you are liable for. If someone slips and falls on your sidewalk, for instance, homeowners insurance will pay for the injured person’s medical bills and the legal costs if they decide to sue you.

The cost you pay for this coverage will vary by the type and amount of coverage you select.

Private Mortgage Insurance (PMI)

For borrowers who can’t afford a down payment that’s 20% of the mortgage value, lenders usually require PMI. This type of insurance coverage is designed to protect the lender if you default on your mortgage payments.

PMI can cost as much as a few hundred dollars per month, depending on the amount you borrow.

HOA Dues

HOA fees go toward the upkeep of property in a planned community, co-op, or condo. The amount can range from a couple of hundred dollars a year to more than $1,000, depending on the amenities you’re paying for (such as a pool and landscaping). You typically pay HOA fees monthly or annually.

Utilities

Your utility payments include water, gas, electric, trash, and sewer fees. Some bills, such as water and electricity, are based on the amount you use every month, so monitoring your electric and water usage, including taking short showers and turning lights off, can help lower your cost. Other payments, such as your trash or recycling, might be a fixed amount.

Lawn Care

Maintaining the curb appeal of your home requires landscape services and lawn care. If you choose to mow your own lawn, you may need to factor in the purchase of a mower, which can cost about $1,640 on average. If you hire a lawn service to cut your grass, you may pay $30 to $85 a week.

Pest Control

Pests, such as ants, ticks, rodents, or mice, can wreak havoc on your home and your family’s health. For these reasons, many homeowners hire a pest control company to prevent the infestations of pests around their homes. The company’s initial visit may cost between $150 to $300 and then $40 to $70 for every follow-up.

Home Improvement Costs

As a homeowner, there are likely things you want to change about your house. From painting the walls to a complete kitchen renovation, transforming your property can add to the cost of owning a home. According to the Angi 2025 State of Home Spending Report, homeowners spent an average of $9,288 on home improvement that year.

Additionally, as the features of your home age, you will need to replace and repair them accordingly.

Common Mistakes After Buying a Home

One of the most common mistakes people make when buying a home is spending more than they can afford. For instance, you may forget to factor in utilities, lawn care, HOA fees, costs of upkeep, and other hidden expenses that come with owning a home. It’s crucial to do your research to determine extra costs and add them up before you move forward with purchasing a property.

Another mistake new homeowners make is taking on too many DIY projects. TV shows can make home renovations look easy. However, many of these projects require professionals who know what they are doing. Attempting a home improvement project could cost you more to fix than hiring a pro in the first place. In fact, about 80% of homeowners who attempt their own renovation projects make mistakes — some of them serious.

Unless you can afford an expert, you may want to rethink purchasing a home that requires a lot of renovation.

The 50/30/20 Rule

For help planning your budget as a homeowner, you can use the 50/30/20 rule, which breaks your budget into three categories:

•   50% goes to needs

•   30% goes to wants

•   20% goes to savings

That means you’ll be budgeting 50% of your income to go toward necessities such as housing costs, grocery bills, and car payments. Then 30% will go toward things you want, such as entertainment (movies, concerts), vacations, new clothes, and dining out. The remaining 20% goes toward saving for the future or financial goals such as home improvement projects.

Using a 50/30/20 budget rule is simple and easy. It allows you to see where your money is going and helps you save.

Recommended: How to Track Home Improvement Costs

Lifestyle Trade-Offs in Order to Budget

With so many things to budget for after buying a home, you may need to cut back on spending. Start by looking at your discretionary spending and think about where you can trim back. For example, instead of eating out regularly, you can cook more meals at home. Or perhaps you can put your gym membership on hold and do at-home workouts for a while to stay in shape physically and financially.

Recommended: How to Budget in 5 Steps

The Takeaway

After you buy a house, there are many expenses you may not have accounted for, such as the cost of hiring movers, and buying furniture, as well as getting your new place painted, cleaned, and ready to move into. Making a budget is vital to keep you on track financially so you can enjoy your new home.

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

See exactly how your money comes and goes at a glance.

FAQ

How much money should you have left over after buying a house?

After buying a home, the amount you have left will vary depending on your financial situation. However, it’s a good idea to have at least three to six months of living expenses in reserve. That way, in case of an emergency, you can stay afloat financially.

Is it worth putting more than 20% down?

Putting more than 20% down on your home can help lower your monthly mortgage payment and interest because you’ll be borrowing less money. It also gives you more equity in your home from the beginning. But make sure you can afford to pay more than 20% in order not to stretch beyond your budget.

What’s the 50/30/20 budget rule?

The 50/30/20 rule means that you budget 50% of your expenses for needs (housing, groceries, loan payments), 30% for wants (entertainment, eating out, shopping), and 20% for savings goals (retirement, renovations, new furniture).

How much should you budget for home maintenance?

A common rule of thumb is to set aside about 1% to 4% of your home’s value each year for maintenance and repairs. This money can help cover routine upkeep as well as larger fixes that may come up unexpectedly, such as replacing appliances or repairing the roof.

What are some hidden costs of owning a home?

In addition to your mortgage payment, homeowners may face extra costs such as property taxes, homeowners insurance, utilities, maintenance, and repairs. Other expenses can include lawn care, pest control, homeowners association fees, and home improvements. Planning for these costs can help prevent financial surprises after you move in.

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Whether you’re mulling a job offer or thinking about a new career, you may be wondering whether $80,000 is a good salary for a single person in 2026. It certainly can be. An $80,000 salary is higher than what the typical American worker makes. According to the Social Security Administration, the average salary nationwide is $69,847.

If you have no dependents, that income is likely enough to cover your basic needs with some discretionary money left over. However, several factors, including where you live and your spending habits, can all impact how far your pay will go.

Is $80K a Good Salary?

While it’s not a six-figure salary, an annual salary of $80,000 is generally considered a respectable wage, especially for a single person. Of course, your local cost of living plays an important role in whether a salary is “good” for you or not. You might feel financially comfortable living in one area — and like you’re just getting by in another.

It can be helpful to take a look at your expenses to understand where your money is going and if your income can keep up. A money tracker provides you with a bird’s-eye view of your spending so you can see where you might need to make adjustments.

Median Household Income in the US by State

An annual salary of $80K may be higher than the average salary in the U.S., but how does it stack up next to wages in different states? Here’s a look at what a typical household in each state earns, per U.S. Census Bureau data.

State	Median Household Income
Alabama	$66,659
Alaska	$95,665
Arizona	$81,486
Arkansas	$62,106
California	$100,149
Colorado	$97,113
Connecticut	$96,049
Delaware	$87,534
Florida	$77,735
Georgia	$79,991
Hawaii	$100,745
Idaho	$81,166
Illinois	$83,211
Indiana	$71,959
Iowa	$75,501
Kansas	$75,514
Kentucky	$64,526
Louisiana	$60,986
Maine	$76,442
Maryland	$102,905
Massachusetts	$104,828
Michigan	$72,389
Minnesota	$87,117
Mississippi	$59,127
Missouri	$71,589
Montana	$75,340
Nebraska	$76,376
Nevada	$81,134
New Hampshire	$99,782
New Jersey	$104,294
New Mexico	$67,816
New York	$85,820
North Carolina	$73,958
North Dakota	$77,871
Ohio	$72,212
Oklahoma	$66,148
Oregon	$85,220
Pennsylvania	$77,545
Rhode Island	$83,504
South Carolina	$73,350
South Dakota	$76,881
Tennessee	$71,997
Texas	$79,271
Utah	$96,658
Vermont	$82,730
Virginia	$92,090
Washington	$99,389
West Virginia	$60,798
Wisconsin	$77,488
Wyoming	$75,532

Average Cost of Living in the US by State

From grocery store bills to gas prices to mortgage payments, your cost of living is tied, in part, to where you reside. As you think about whether an $80K salary is good, it can be helpful to understand where prices for necessities such as housing, food, transportation, and childcare may be higher.

With that in mind, here’s the average cost of living in each state, according to U.S. Bureau of Economic Analysis data.

State	Average Cost of Living
Alabama	$47,096
Alaska	$66,356
Arizona	$56,211
Arkansas	$46,259
California	$67,565
Colorado	$66,448
Connecticut	$66,645
Delaware	$60,131
Florida	$62,618
Georgia	$52,806
Hawaii	$60,711
Idaho	$48,098
Illinois	$60,612
Indiana	$51,821
Iowa	$49,473
Kansas	$51,082
Kentucky	$48,901
Louisiana	$50,454
Maine	$63,046
Maryland	$58,310
Massachusetts	$71,946
Michigan	$54,197
Minnesota	$58,433
Mississippi	$43,947
Missouri	$54,405
Montana	$58,499
Nebraska	$54,512
Nevada	$56,103
New Hampshire	$68,900
New Jersey	$65,873
New Mexico	$48,119
New York	$66,426
North Carolina	$53,334
North Dakota	$58,090
Ohio	$52,708
Oklahoma	$46,319
Oregon	$58,150
Pennsylvania	$59,260
Rhode Island	$58,041
South Carolina	$51,423
South Dakota	$54,100
Tennessee	$51,507
Texas	$54,060
Utah	$52,677
Vermont	$62,629
Virginia	$58,224
Washington	$62,837
West Virginia	$50,286
Wisconsin	$54,705
Wyoming	$55,543

How to Live on $80K a Year

Even though $80,000 is a good salary for a single person, it’s still a good idea to create a budget. There are all sorts of budgeting methods out there, and it may take some trial and error before you find the approach that works best for you. Whatever method you choose, be sure it fits your basic needs and leaves you with some funds left over to pay down debt, save, and enjoy.

Recommended: U.S. Average Income by Age

How to Budget for an $80K Salary

One popular approach to budgeting calls for organizing expenses into different categories, then designating an amount or percentage you can spend per month in each category.

An example of this is the 50/30/20 budget rule, where you reserve 50% of your salary for “needs,” 30% for “wants,” and 20% for saving.

Another, similar option is the 40-30-20-10 budget. Here, expenses are broken down as follows:

•   Housing, groceries, utilities, gas: 40%

•   Discretionary spending: 30%

•   Savings, retirement, and investments: 20%

•   Additional debt payments or savings goals: 10%

If you need help getting started with your budget, consider enlisting the help of a budget planner app.

Maximizing an $80K Salary

To make the most of your salary, try to strike a balance between working toward short- and long-term financial goals. For instance, if your employer offers a 401(k), consider signing up for it. And check your budget to see if you can contribute the maximum amount each month.

Another way to make the most of your income? Build an emergency fund. A good rule of thumb is to save enough to cover three to six months’ worth of expenses.

Quality of Life With an $80K Salary

The quality of life you can have on an $80K salary can be greatly impacted by where you live. If you’re in an area with a low cost of living, you may be able to afford a comfortable lifestyle with that level of income. But that may not necessarily be the case if you live in a pricey part of the country, such as in a major coastal city.

Is $80,000 a Year Considered Rich?

While there’s no single definition of rich, $80,000 would likely not qualify. On the other hand, it’s significantly more than what the typical U.S. worker makes and would be a very good entry-level salary for many professionals who are just starting out.

Another way to think about wealth is by looking at net worth. To calculate your net worth, simply subtract your outstanding debts from the value of your combined assets. A positive net worth is one where your assets are worth more than your liabilities. Conversely, a negative net worth is when your liabilities are more than your assets.

Recommended: Net Worth Calculator by Age

Is $80K a Year Considered Middle Class?

Short answer: Yes. Based on guidance from the Pew Research Center, a middle-class household has an income between $56,600 and $169,800. An $80,000 salary is within that range.

Example Jobs that Make About $80,000 a Year

The highest-paying jobs in your state probably pay more than $80,000 a year, but that said, there are plenty of good, stable roles out there where you can command that level of pay. Here are some to consider:

•   Agricultural engineer

•   Credit analyst

•   Fashion designer

•   Police patrol officer

•   Accountant

Of course, salary is just one consideration. You’ll also want to find a job that you’re passionate about and that fits your personality. If you’re reserved, for instance, you might think about looking for jobs for introverts.

The Takeaway

An annual salary of $80,000 is considered good for a single person and is higher than the average pay in the United States. But just how far that money will go for you depends on your financial obligations, where you live, and other factors. In some areas, getting by on $80K a year might be tight, while in others, you may have enough breathing room to start working on your savings goals.

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

See exactly how your money comes and goes at a glance.

FAQ

Can I live comfortably making $80K a year?

You can live comfortably on $80,000 per year. However, keep in mind that your local cost of living has a big impact on just how far your money will go.

What can I afford with an $80K salary?

With an $80,000 salary, a single person with no dependents or major financial obligations can likely afford the necessities, with money left over for entertainment and savings. Ideally, you should spend no more than a third of your income on housing (usually the biggest line item in a budget). That means if you earn $80,000 a year, you could spend roughly $26,000 per year on housing.

How much is $80K a year hourly?

An annual salary of $80,000 works out to around $38.46 per hour.

How much is $80K a year monthly?

A worker who earns $80,000 a year can expect to make $6,666 a month before taxes.

How much is $80K a year daily?

An annual salary of $80K equals approximately $307.70 a day.

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Photo credit: iStock/LumiNola

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

*Terms and conditions apply. This offer is only available to new SoFi users without existing SoFi accounts. It is non-transferable. One offer per person. To receive the rewards points offer, you must successfully complete setting up Credit Score Monitoring. Rewards points may only be redeemed towards active SoFi accounts, such as your SoFi Checking or Savings account, subject to program terms that may be found here: SoFi Member Rewards Terms and Conditions. SoFi reserves the right to modify or discontinue this offer at any time without notice.

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.

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

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

SORL-Q126-046

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Contrary to what you might think, a person’s starting credit score doesn’t begin at zero. In fact, no one’s credit score is zero. The lowest credit score is 300, but that doesn’t necessarily mean that’s a person’s starting score. If a person is just starting and doesn’t yet have any credit history, they’re more likely to have no score at all.

So, for a person just beginning their credit journey, what is the starting credit score? Read on to learn the factors that impact this from the start and the habits that can help ensure a better credit score.

How Your Credit Score Is Calculated

There’s no standardized starting credit score. That may be partly due to certain factors that influence how a score is calculated. A person’s young credit history will impact their starting FICO® score.

The FICO® Score is a numerical scoring system widely used in the U.S. to help determine a person’s creditworthiness. The FICO company calculates the score, which ranges between 300 and 850, using the following data:

Payment History

Payment history is the most important factor for any credit score, including a starting credit score. Paying on time and avoiding missed payments account for 35% of a person’s credit score. That’s why it’s important to pay everything from credit card bills to rent on time — even one single late payment can harm a starting credit score.

Credit Utilization or Amount Owed

The second most important factor, making up 30% of a credit score, is credit utilization. Credit utilization is the percentage of available credit a person actually uses, and it should ideally be kept at 30% or under, as higher credit utilization can cause your score to decrease.

Length of Credit History

How long someone’s accounts have been open makes up around 15% of their credit score. The longer an account has been open, the higher the credit score.

While it’s out of their hands, consumers who are just beginning to establish credit will likely be negatively impacted by this factor, lowering their starting credit score.

Recommended: How to Get a Personal Loan With No Credit History

Credit Mix

Making up around 10% of a person’s credit score, credit mix refers to the different types of credit a person has. Generally, the two types of credit are:

•   Installment loans: Think car loans, student loans, and mortgages.

•   Revolving credit: Includes credit cards and home equity lines of credit.

If an individual can manage different types of credit without late or missed payments, it reflects well on their score.

New Credit

Opening multiple new accounts at a time? This factor accounts for 10% of a credit score. As well as the action of opening new accounts, this includes the application of hard inquiries to your accounts.

A person with a starting credit score may have all, none, or some of these factors on their credit history. The mix varies from person to person, making it hard to predict one starting credit score for everyone.

What Is a Good First Credit Score?

Unfortunately, a starting credit score won’t be the perfect 850. More likely, it’s somewhere within the fair-credit-score range (580-669).

That’s mostly due to limited payment history. If a person just opened a credit card or started paying off their student loans, the credit bureaus can’t see an established history of timely repayment. Even if the consumer has never missed a payment, payment history is limited.

Similarly, a credit history of just a few months doesn’t give lenders enough data to judge a consumer as low- or high-risk.

Ways to Establish Good Credit

While it can be discouraging that your starting credit score is penalized just for being new, by following these tips on establishing credit, it shouldn’t take you too long to build it up:

•   Paying bills on time will continue to be important, as payment history is a major factor in your credit score.

•   Keeping accounts open and in good standing, even if they’re no longer used, can help lengthen a person’s history.

•   Adding to the credit mix with a personal loan, credit-builder loan, or other types of credit can help boost your credit score.

•   Paying bills in full can help keep the credit utilization ratio balanced at 30% or below.

•   Not applying for too much at once will help you avoid the pitfall of too many hard inquiries and new accounts, which can have a negative impact.

While an individual can try to build their score proactively, a substantial portion of it will come from paying bills consistently over time.

Establishing and continuing these good habits will likely lead to a higher credit score.

Why Your Credit Score Is Important

It may be just a three-digit number, but a good credit score is a gateway to better financial opportunities. With a very good (740-799) or exceptional (800-850) credit score, borrowers have better odds of being approved for loans and may even have better repayment terms or more favorable interest rates.

Businesses and lenders may pull your credit history to confirm your qualification for any of the following:

•   Credit cards

•   Mortgages

•   Rental apartments

•   Job applications

•   Car loans

•   Personal loans

•   Student loans

With a low credit score or no credit score, getting favorable terms or qualifying for any of the above could be challenging.

How to Check Your Credit Score

Checking a credit score isn’t just a good way to track progress. It can also highlight any incorrect or fraudulent activity tied to a person’s name.

You can check your credit score for free through your card issuer, your bank, or a nonprofit credit counseling agency. Also, anyone can get their free credit report, which is not the same as a credit score, from three nationwide consumer credit reporting companies using AnnualCreditReport.com. The site allows visitors three free reports annually, one from each credit bureau.

In addition, lenders often offer free credit score reporting on their portals.

Recommended: The Difference Between Transunion and Equifax

The Takeaway

Having a starting credit score doesn’t mean starting from zero or with a perfect 850. Establishing healthy credit habits, such as paying bills on time and in full, is important because it can help you build a solid credit score. The higher your credit score, the more financial opportunities you’ll have.

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

See exactly how your money comes and goes at a glance.

FAQ

What are the FICO credit score ranges?

FICO credit scores range from 300 to 850. Under 580 is considered a poor score, 580 to 669 is fair, 670 to 739 is good, 740 to 799 is very good, and 800 is considered exceptional.

Can you have a credit score without a credit card?

Yes. Credit scores aren’t based solely on credit cards. The score takes into account student loans, rent, utility payments, and more.

What are the differences between FICO, Experian, and Equifax?

Experian and Equifax are credit bureaus that collect and compile credit histories for lenders and financial institutions based on data from consumers’ borrowing habits. FICO then uses that data to create a numerical credit-scoring system that measures consumers’ creditworthiness.

Do you start with a specific credit score?

There’s no standardized starting credit score. You’ll likely start with no credit score until you have an active credit history, after which your habits will determine your credit score based on factors such as payment history, the length of that history, and how much you owe.

Do I have to pay to get my credit report?

You can get a free copy of your credit report online via the website AnnualCreditReport.com. This detail of your credit history is prepared by the three major credit bureaus — Experian, Equifax, and TransUnion — and you can request your report from one or all three of these agencies.

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Photo credit: iStock/blackCAT

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

*Terms and conditions apply. This offer is only available to new SoFi users without existing SoFi accounts. It is non-transferable. One offer per person. To receive the rewards points offer, you must successfully complete setting up Credit Score Monitoring. Rewards points may only be redeemed towards active SoFi accounts, such as your SoFi Checking or Savings account, subject to program terms that may be found here: SoFi Member Rewards Terms and Conditions. SoFi reserves the right to modify or discontinue this offer at any time without notice.

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.

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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Sinking funds are tools that people or businesses can use to set aside money for a planned expense. For example, if you want to take a vacation next year, you may start putting cash in an envelope to save up for the trip.

Sinking fund categories can vary by person, depending on their relevant expenses. They can include auto repairs, health care costs, gifts, insurance payments, vacation funds, and more.

You can think of sinking funds as a way of “sinking” your money into an account for later use. It’s basically a savings strategy. Find out more below.

General Definition of Sinking Funds

The term sinking fund has its roots in the world of corporate finance, but it mainly refers to setting aside money for a future expense.

Sinking funds are smaller offshoots of an overall budget. Putting together a sinking fund entails stashing your money away to spend it on a predefined purpose later on.

For instance, some people like to pay their car insurance in six-month installments. They may set aside money each month in anticipation of the next six-month installment payment so that they’re not hit with a big expense all at once.

Examples of Sinking Funds Categories

When it comes to sinking fund categories, there are no hard-and-fast rules. Different individuals have different financial needs and planned expenditures. Some common sinking fund categories are:

•   Vacations

•   Gifts and holiday-related expenses

•   A new car or regular maintenance and insurance costs

•   A home purchase or home maintenance expenses

•   Medical and dental costs

•   Child care costs

•   Tuition fees

•   Pet expenses, such as veterinarian visits

A sinking fund can help you save for just about anything.

Recommended: How to Set Your Financial Goals

Sinking Fund Category Calculations

Setting up a sinking fund is simple enough: You can set cash aside or choose a more formal option like a savings account. The difficulty for most people is regularly contributing to it. The trickiest part, though, may be figuring out how much to put away.

A budget planner app can come in handy, allowing you to assess how much money you have left to put toward your sinking fund categories once you’ve taken care of your monthly expenses.

Similarly, sticking to a certain budget type — such as the 50/30/20 rule — may help determine what you can contribute. You could also structure your sinking fund contributions as a biweekly savings challenge.

To calculate how much you can contribute to a sinking fund, you’ll need to decide which categories are the most important. Another consideration is which fund to use first — perhaps an auto insurance payment is due before a vacation. Your priorities will affect your sinking fund calculations.

In corporate finance, the sinking fund formula helps a company figure out how much it needs to put away to pay off a long-term debt in a lump sum. The formula takes the amount of money already accumulated, multiplies it by any applicable interest, and then divides it by the remaining number of payments.

For individuals, however, the calculation can be as simple as looking at your monthly income and putting extra cash into each of your sinking fund categories.

Types of Sinking Funds

What type of vehicle can you use to save up for a sinking fund? There are a few to choose from.

The most obvious, and probably the simplest, is to keep the sinking fund in cash and store it somewhere safe. Of course, that money won’t earn any interest and will likely lose value due to inflation.

Perhaps the ideal option is to open up individual savings accounts at your financial institution for each of your sinking fund categories. This beats cash because your sinking fund is protected (and insured up to $250,000 by the Federal Deposit Insurance Corporation or the National Credit Union Administration), and you might also earn some interest on it.

Recommended: Money Market Account vs Savings Account

Best Time to Take Advantage of Sinking Funds Categories

Sinking funds are all about taking advantage of saving up for a planned or known expense well in advance. As such, the ideal time to use your saved money is when it’s time to make the payment, be it a fancy vacation, a new car, or paying your child’s college tuition fees.

There may be times during the year when it’s more advantageous to save than others. For instance, most people experience a financial crunch during the holiday season — with gifts to buy, parties to attend, and other demands on income. That may not be the best time to sink money into a fund.

Instead, think about when you may have some extra money to put into your sinking funds, such as when you get your tax refund or receive a cash gift for your birthday.

The Takeaway

Sinking funds are designated cash reserves for future expenses. Corporations and businesses also use sinking funds. Having this type of fund means that you’re stashing money away for an upcoming, known expense and relieving some of the financial pressure ahead of time. Sinking fund categories can vary depending on your individual situation.

Sinking funds are a way to get ahead of your planned expenses and give yourself some financial wiggle room. A money tracker app can help you do the same.

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

See exactly how your money comes and goes at a glance.

FAQ

What to put in sinking funds?

You put cash into a sinking fund to use later for an upcoming expense. What that expense is (i.e., the sinking fund’s category) depends on your specific financial needs.

What is a sinking fund leasehold?

In property management, a sinking fund leasehold contains funds for repairs or renovations to a rental property. The leaseholder or landlord sets aside a small percentage of the monthly rental money to continue adding to the fund.

What is the difference between a reserve fund and a sinking fund?

The two are similar, but a sinking fund’s contents are designated for a specific purpose or expense, while a reserve fund contains funds used for general future expenses.

What is the difference between an emergency fund and a sinking fund?

An emergency fund is a general fund set aside for sudden, unexpected expenses, such as job loss and medical bills. In contrast, sinking funds are meant to finance expenses that you plan for.

What is a common sinking fund mistake?

People may sometimes split their sinking funds into too many categories and find it overwhelming to put money into each. The right number of sinking funds for you will depend on your finances and your individual needs.

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Photo credit: iStock/Delmaine Donson

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

*Terms and conditions apply. This offer is only available to new SoFi users without existing SoFi accounts. It is non-transferable. One offer per person. To receive the rewards points offer, you must successfully complete setting up Credit Score Monitoring. Rewards points may only be redeemed towards active SoFi accounts, such as your SoFi Checking or Savings account, subject to program terms that may be found here: SoFi Member Rewards Terms and Conditions. SoFi reserves the right to modify or discontinue this offer at any time without notice.

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

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

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