Paying Tax on Personal Loans

There are plenty of reasons to take out a personal loan—many of which are totally financially savvy. For instance, you might be thinking about consolidating high interest debts like credit card balances.

Or you might plan to borrow in order to repair the roof or remodel the kitchen to help increase your home value.

Maybe you’re considering taking out an unsecured personal loan to pay for an unexpected medical bill.

Whatever the case, personal loans can be a useful tool to help you cover expenses and stabilize your finances. Plus, they may be easier to qualify for than other types of loans—and come with less red tape.

But as in all things finance, Uncle Sam wants his cut, too. So as you consider your borrowing options, you might wonder about how taxes work on unsecured personal loans.

For instance, you may question if a personal loan can be taxed as income and whether you can get a personal loan interest tax deduction.

If you are trying to decide between several types of financing, reviewing the potential tax implications of each borrowing option can help you figure out a financing strategy that fits your situation.

In this article, we’ll cover things you’ll likely want to know about when it comes to tax on personal loans, including whether personal loans qualify as income, and whether the interest on them is tax deductible.

Plus, we’ll cover some scenarios that can come with tax benefits that might apply to you and your loan. This way you’ll be armed with helpful knowledge useful when making the right borrowing decisions for you.

(It is, however, important to note that we’re not tax experts. For any tax-related questions or advice, you’ll want to consult a tax accountant—and not a blog post like this one.)

Are Personal Loans Considered Taxable Income?

When you take out a personal loan, your lender agrees to loan you a particular amount, and you agree to pay that loan back over a set period of time with interest.

Which is actually good news on the tax front: Even though it seems like a windfall that you could be taxed on, it isn’t. Since you are agreeing to pay that money back, it does not qualify as income the way wages from a job would.

The only instance when money from a personal loan can be taxed as income is if your lender agrees to forgive the loan. Loan forgiveness can be a rare occurrence and typically occurs under the following circumstances:

•   You are renegotiating the terms of a loan you are struggling to repay.
•   You’re declaring bankruptcy.
•   Your lender decides to stop collecting on the loan.

This is called a cancellation of debt, and it can carry tax liabilities since you’re receiving the remainder of the loan without the caveat that you’ll be paying it back.

For instance, let’s say you’ve taken out a $10,000 personal loan and have paid back $8,500 of it when the debt is forgiven or cancelled. The remaining $1,500 that you’d no longer have to pay back can be taxed as income during the year it is cancelled.

Typically, your lender will send you a tax form (a 1099-C) stating the amount cancelled, which you must subsequently report to the IRS on your tax return. Again, this is a very, very rare circumstance, so it’s nothing to count on.

Bottom line: In most situations, personal loans are not taxable as income—but if your loan is cancelled or forgiven, the remainder of the loan amount that you’ve yet to repay can be taxed the same way regular income is.

Is Personal Loan Interest Tax Deductible?

The IRS regulates which types of loans come with tax deductions. While there are some types of loans that have tax-deductible interest, unfortunately, personal loans don’t fit into that category.

The interest you pay on personal loans is not tax deductible. So if you take out a loan and pay a few hundred dollars in interest over the course of your repayment, that’s not a cost that will reduce what you owe in taxes come April.

Types of Loans with Tax Deductible Interest

Although personal loan interest isn’t tax deductible, there are many other types of loans that do carry special tax benefits and interest deductions. For instance, student loan interest and mortgage and property loan interest can be deductible up to certain amounts, although there are some restrictions.

Student Loan Interest

You may deduct up to $2,500 of interest on qualified student loans or the full amount you paid during the tax year—whichever is the lesser.

However, this deduction is gradually phased out as your income increases, and is not available if you or your spouse can be claimed as a dependent on someone else’s tax return.

Property Loan Interest

In the majority of cases, you can deduct every cent of interest you pay on your home mortgage. The loan must be secured (that is, your home must be offered as collateral on the loan; this deduction will not work if you use an unsecured personal loan to cover some or all of the cost of your housing).

As of 2018, you can deduct the interest on up to $750,000 of a qualified home loan if married and filing jointly, or up to $375,000 of qualified debt for single filers. (These limits were lowered from $1 million under the Tax Cuts and Jobs Act of 2017, but if you signed your mortgage before December 16, 2017, you’re grandfathered into the previous limit.)

Business Loan Interest

Some business expenses are tax deductible, and that includes the interest you pay on loans taken out for business-related purposes. However, you can also deduct business expenses you pay for using an unsecured personal loan, which we’ll dive into a little bit more deeply in the next section.

How Can Personal Loans Help You Get Your Money Right?

Although staying debt-free is standard financial advice, sometimes taking out a personal loan can be a smart money move—especially if you’re already dealing with high-interest forms of debt such as consumer credit cards.

Debt consolidation, a financial tactic which involves taking out one large loan to cover multiple smaller debts, may reduce your credit utilization ratio and potentially help you save money on interest, not to mention make your bill-paying schedule a whole lot simpler.

For example, maybe you owe $8,000 on one personal credit card and $4,500 on another credit card, both with high (and different) interest rates. With multiple bills coming due at different times of the month, chances are you’re only paying the minimum required amount on each of them, which means you’re paying them off slowly and paying a lot of interest.

However, if you were able to qualify for and take out a $12,500 personal loan at lower interest rate, you’d only have to worry about one payment date, and you might even save money on the sky-high credit card interest rates, which could simplify both your life and your finances.

Personal loans (home improvement loans) can also help you get started on major home renovations, which may increase the value of your house and help you earn back your investment in the form of equity.

No matter what money moves you’re planning for your personal loan, SoFi couples competitive rates with stellar customer service and community benefits that may help set you up for a bright financial future.

Ready to apply for a personal loan for your next big project? Get a rate quote in just minutes.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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 Lending Corp (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see


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Investing During a Recession

Investing can be daunting even during the best of times—but when a recession hits, it can be that much more confusing.

As stocks plummet in response to a global crisis, investors may be concerned about their existing holdings, and those considering investing for the first time may be scared off of the idea entirely.

But while a bear market can be intimidating, it doesn’t mean the best investment strategy is to shut down entirely. In fact, volatility may offer investors the opportunity to buy low and make appreciable gains as the market corrects itself.

Observing certain best investment practices during a recession might help keep a portfolio as balanced as possible during turbulent times—and create a strong foundation to help savers ride through to the other side successfully.

Here’s what investors need to know about keeping afloat when the going gets rough.

Investing in a Normal Market Economy

Before diving into the nitty gritty on investing during a recession specifically, it might be helpful to take a step back and review how investing works in ordinary time.

Understanding stocks, and understanding the stock market itself, takes time and research. It’s not intuitive to most new investors.

The most fundamental rules are simple—and are often learned in grade school.

The stock market is an exchange on which investors buy and sell assets, such as stocks, bonds, and cash equivalents.

Common Investment Assets in the Market

Stocks are perhaps the best-known class of assets, and thus what the market is named for. They’re also known as shares and are fractions of a publicly traded company.

Trading stocks can help investors earn money in two main ways. The first is the ability of such stocks to increase in value as the companies that issue them grow and perform. When investors buy stocks at a lower price and sell them at a higher price later, they get to keep the difference as profit.

Some stocks also offer their holders the ability to earn dividend income, which are portions of profit paid directly to shareholders on a regular basis.

Investors can also earn money by purchasing bonds, which are essentially loans taken out by a government or corporation with given terms for the lifespan and interest rate of the agreement.

Other investment options include cash equivalents (like money market accounts), commodities (raw materials like grain, beef, or metal), and alternative investments (like real estate or fine art).

Gauging your Investment Risk

That said, it’s important to understand that all investments carry risk, and there’s always the potential to lose everything in a serious market downturn. However, those who play the long game tend to win out over time.

Over the course of time between 1957 to 2018, the S&P 500—an index tracking 500 of the largest companies publicly traded on American markets—saw an average annual return of 8%. Including data back to 1926, that figure rose to 10% to 11%, which includes the Great Depression.

But market volatility is a reality, and the fact remains that investing during a downturn can be downright scary. It makes sense, then, that many investors seek out advice on the best ways to maintain their portfolios during turbulent times.

And while this article is not attempting to offer specific investment advice, there are some general tips to help mitigate the fear and pressure.

Options For Investing During a Recession

There are some differences in the ways investors approach their portfolios depending on whether it’s a bear or bull market.

But in the face of market freefall, there are some potential options.

SoFi has built a Recession Help Center
that provides resources to help guide you
through this uncertain time.

Pulling Everything Out

A falling market line means many existing investments are decreasing in value—which may cause some investors to panic and sell everything they’ve got. (That’s part of what perpetuates the downturn in the first place.)

But a massive sell-off may be exactly the wrong move when prices are dropping. Keeping assets in place is more likely to offer recuperation in the long run, especially since bear markets are almost always followed by even more extreme bull trends.

While selling assets during a downturn may feel safer to some investors, it might make it much harder to regain the profit that’s been lost.

Such an investor would lose money on the sale of their assets thanks to the low recession prices, and then pay a higher price to repurchase when the prices go back up.

Investing More While the Market Is Down

Although buying more during a downturn might sound like exactly the wrong move, history reveals that it can be a worthy strategy—for the exact same reason selling everything is likely the wrong move.

During a bear market, prices are low, which means there may be more room for profits once performance returns.

Some research suggests the average gain of a bull market tops 120%, while the average bear market falls just under 30%, which means the earning potential is far greater than the loss risk.

Considering Talking to a Financial Advisor

While nobody can predict the market with certainty, qualified financial advisors make their living by helping their clients figure out how best to allocate their wealth—and keep as much of it as possible.

The advice of such an specialist can be a great way to maintain a calm, collected approach and get some confidence in an otherwise stressful time.

SoFi for instance offers complimentary financial planning to help clarify financial picture and prepare you for the future.

Investments Historically Considered Risky vs. Safe

There are historical trends about which types of investments seem to perform well during a recession and which may be better left for an upward trend line.

Investments Typically Considered Risky During a Recession

While no investment is risk-free, some investments are considered to be riskier than others—and a recession is probably not the right time to try out cyclical or speculative companies or those that are in a high amount of debt.

In short, if a company’s ability to perform is already in doubt, a serious economic downturn is unlikely to make things better.

However, as mentioned above, it could also be a risky move to sell off any existing investments as a response to market panic.

Many people advise against rebalancing a portfolio during a downturn, as it can be difficult to accurately predict each asset’s performance.

Keep in mind, too, that some companies may take steps to mitigate market losses, such as initiating stock buybacks or temporarily cutting back on dividend payments.

Investments that Typically Perform Well in Recessions

If an investor is considering making new investments during a recession, they may want to consider strong companies that exhibit good management, reliable cash flow, and low debt.

This is one situation in which evaluating stocks thoroughly before making an investment decision is critical.

It’s also the case that certain industries have proven to resist the influence of recessions more so than others, including:

•   Utilities like energy and water.
•   Consumer staples like food and household goods.
•   Certain retailers, particularly in the discount market, like large, nationwide franchise stores.

Certain alternative assets, like commodities, tend to work in opposition to the market.

A qualified financial planner can also help discern how and where to invest during a recession, perhaps even pointing out specific stocks and other types of assets. A financial professional can also help investors maintain the emotional consistency necessary to weather market swings without making rash decisions.

Preparing For a Recession

One tactic for maintaining a balanced portfolio (and just maybe a lower stress level) during a recession is to consider preparing for the eventuality of such a downturn ahead of time.

One of the simplest ways to prepare for a recession is to take the time to understand what they are and how they work.

Recessions can be caused by a variety of factors, from a drop in consumer confidence thanks to major crises like global pandemics (sound familiar?) to increased inflation or rising national interest rates as set by the Federal Reserve.

It might also be helpful to understand the consequences and effects of economic downturns ahead of time, so they might not feel so overwhelming and frightening once they occur.

At the basic level, understanding that asset values do fluctuate and sometimes fall—even during normal market performance—can keep such an event from seeming like a catastrophe.

Recessions may cause job loss, stress, and other negative effects, but they do tend to have some positive effects, too.

For instance, a recession can lead to lower real estate prices and loan rates, which may make it easier to buy property. And companies in the retail or service industries, attempting to avoid total failure, may ramp up their customer service practices.

One important financial move that consumers are advised to do, not only in the case of a recession but also as a regular practice, is to create an emergency fund.

Falling trend lines might feel a lot less scary if there is enough ready cash to get through the turbulence.

Most professionals recommend an emergency fund of at least three to six months’ worth of expenses, though some people may choose to accumulate more if possible.

Perhaps the most important way to prepare ahead of time for a recession is to ensure investment portfolios are well diversified.

One easy way to buy into a wide range of assets with one swift move is to invest in ETFs (exchange-traded funds) or mutual funds, which are pre-curated baskets of assets across a range of classes and companies.

These types of assets allow investors to purchase a small piece of different stocks, bonds, and other assets without having to do all the footwork—or pay all the trade fees—of researching and purchasing those assets separately themselves.

Looking to the Future with SoFi

In times of distress, having a solid plan in place goes a long way toward making the world feel less chaotic.

Knowing exactly where your money is typically means the ability to make better decisions about how to allocate it, whether that’s personal spending or maintaining—or making new—investments.

The SoFi app helps members get a bird’s eye view of their finances, all from the comfort and convenience of their smartphones.

Day-to-day cash can be managed with a SoFi Money® cash management account, as well as keeping an eye out on a debt repayment timeline for any SoFi student, personal, or home loan.

The SoFi app also allows members to see their investments and keep up-to-date with market trends that are updated on a regular basis—and a well-informed investor is a better investor, even in the shakiest of times.

Whether learning the ropes hands-on with our active investment platform, or taking a more laid-back approach by using automated investing, SoFi Invest® can help investors become more informed and successful without facing high trading fees or frustrating account minimums.

SoFi members also have access to exclusive events and educational resources, as well as the opportunity to work with a SoFi financial advisor, who can bring a clear professional opinion to a confusing financial landscape.

Even during an economic downturn, SoFi can help you get your money right. Stay up to date on the market by downloading the SoFi app.

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.

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Neither SoFi nor its affiliates is a bank.
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.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
Third Party Trademarks: Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.


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Financial Index Card: All You Need for Your Money Management

In 2013, Harold Pollack, PhD, a social scientist at the University of Chicago, posted a photo of an index card online. On the card? The only financial advice he said anyone ever needed to know.

The nine simple tips on the card resonated with the public and the photo went viral. Here’s a closer look at Pollack’s story and the advice he had to offer.

The Story Behind the Card

The story of the index card began when Pollack was interviewing personal finance writer Helaine Olen. While speaking with Olen, Pollack offered his own two cents on the personal financial industry. Pollack made a joking claim that all need-to-know financial information could fit on an index card, and better, that it was available free from the library.

Pollack’s off-the-cuff comment—at the time he hadn’t actually produced this index card—generated a lot of audience commentary with investors wondering what his advice would be. Pollack grabbed a 4-by-6 card, wrote down nine tips, snapped a photo, and posted it online.

The concept was so popular that Pollack teamed up with Olen to write a book, The Index Card: Why Personal Advice Doesn’t Have to Be Complicated.

Here are the nine tips Pollack offered on the original card and an explanation of what each one means:

1. Maxing your 401(k) or equivalent employee contribution

A traditional 401(k) is a retirement plan that offers various investment options and is often offered via your employer. (Not all employers offer 401(k)s as a benefit.) Sometimes your employer will make matching contributions to your 401(k) as well.

What makes 401(k)s particularly useful are the tax advantages that they offer. You can fund 401(k)s with pre-tax money.

Contributions can be taken straight from your paycheck before you pay any income tax, which in turn lowers your taxable income and potentially your tax bill that year.

Once inside the 401(k), your money grows tax-deferred. Your employer will likely offer a number of investment options for you to choose from such as mutual funds or target-date funds.

Because you aren’t paying taxes yet, you’re able to take extra advantage of compounding interest—the interest you earn on your returns—because the money you would otherwise be spending on taxes is left in your account.

When you make withdrawals from your 401(k), you owe income tax.

The more money you can put into your 401(k), the more money you have at work for you. If your employer offers matching funds, aim to at least save the minimum amount to max out the match if you can.

After age 50, you can start to make catch-up contributions, which increases the amount you’re able to save.

2. Buying Inexpensive, Well-Diversified Mutual Funds

A mutual fund takes a pool of money from investors and buys a basket of securities such as stocks or bonds. They are an important tool investors can use to diversify their portfolios.

Diversification is a way to help reduce risk in your portfolio. Imagine that you had a portfolio that was only invested in one stock. If that company does poorly, your entire portfolio may suffer. Now imagine that you invested in 100 stocks. If one of the stocks does poorly, its effect on the portfolio as a whole will likely be much smaller.

Investors may choose to invest in a target date fund, which holds a diverse selection of stocks and bonds. Investors may use these funds to work toward a goal a number of years down the line.

Say you will retire in 2050, you may choose a target date fund with a provider called the 2050 Fund.

As the target date approaches—aka the date at which you’ll likely need your money—the asset allocation inside the fund will typically shift to become more conservative. For example, the fund might shift from stocks to a heavier allocation in bonds.

Mutual funds typically charge fees to pay for management costs. The fees may take a bite out of your eventual return. Consider looking for target funds that charge lower fees to minimize the amount that you’ll end up paying.

3. Not buying or selling an individual security

Buying and selling individual stocks can be tricky. It’s difficult to know how an individual stock will behave, and choosing stocks can take a lot of time and research. It may be easier for investors to use mutual funds, exchange-traded funds, or index funds to gain exposure to many different stocks.

Investors who are interested in adding individual stocks to their portfolio may want to consider their overall asset allocation and diversification strategy to be sure that the stock is the right fit.

4. Saving 20% of your money

Pollack’s savings tip dovetails nicely with a common rule of thumb known as the 50/30/20 rule. This rule states that 50 percent of your income should be used to cover your needs, such as car payments, groceries, housing, and utilities. Next, 30 percent of your spending should be used to cover your wants, such as eating out, vacations, or hobbies.

The final 20 percent is the money you save, which can be broken down into three categories. It can be the money used for paying down debts, the money you use to build an emergency fund, or the money you use to save for retirement.

Some recommend saving 12 to 15 percent for retirement and put the remaining five to eight percent towards paying off debt and building an emergency fund. You can keep track of your savings with various mobile and online savings and budgeting tools.

If it’s not possible for you to save 20 percent of your income—21% of Americans can’t save more than 15% , much less 20—the bottom-line is to save as much as you are able.

5. Paying your credit card balance in full every month

Credit cards can be extremely useful tools. They make reserving things like booking a hotel or renting a car easier, and they can help us pay for things that we may otherwise be unable to afford immediately.

That said, if you start to carry a credit card balance from month to month, your credit card debt may quickly spiral out of control. The average annual percentage rate, or APR, for credit card in 2019 hovers above 17 percent. This rate represents that amount of interest that you’ll pay on the balance of your credit card.

What’s more, many credit cards only require that you make a minimum payment each month—often less than the balance you’re carrying. And if you only make minimum payments, your balance will continue to grow and you’ll owe ever-increasing amounts of money and make ever-increasing interest payments.

To avoid being sucked into this spiral of revolving credit, consider trying to spend only what you can afford each month on your credit card and paying off your balance in full, if possible.

6. Maximizing tax-advantaged savings vehicles like Roth, SEP, and 529 accounts

A 401(k) is not your only option for tax-advantaged accounts. If you’ve earned income—and even if you already have a 401(k)—you can take advantage of traditional or Roth IRAs.

Contributions to traditional IRAs are made pre-tax and then grow tax-deferred. Contributions to Roth IRAs are made after-tax and grow without being taxed.

Withdrawals from Roth accounts, when meeting specific criteria, are not subject to income tax.

Small business or self-employed workers can take advantage of SEP IRAs, which allow employers to make contributions in an employee’s name.

A 529 plan is a tax-advantaged account that helps people save to cover qualified education expenses, such as college tuition. These plans are sponsored by states, state agencies, and educational institutions. Contributions to 529 plans are made with after-tax money.

However, savings inside the account grow without being taxed and qualified withdrawals are not subject to tax. Contributions are not federally deductible, but some states allow deductions on state income tax.

Like 401(k)s, these tax-advantaged accounts allow you to supercharge your savings and can make your money work harder for you.

7. Paying attention to fees and avoiding actively managed funds

Actively-managed funds are run by portfolio managers who are trying to find ways to beat market returns. This requires time and manpower, both of which can be expensive.

Actively-managed funds pass this expense on to investors in the form of fees. Investors do have an alternative in index funds, which try to match the returns of an index, such as the S&P 500. They do so by buying all, or nearly all of the securities included in the index.

Managing this type of fund takes less time and effort and is therefore typically cheaper than active management. As a result, index funds often have lower fees than actively-managed funds.

The potential to outperform the market may make actively managed funds sound pretty tempting. With an index fund you’re likely not going to do better than the market; the funds are actually aiming to mirror the market.

However, despite the temptation to chase big returns, there isn’t a lot of evidence that active managers really outperform that market with enough consistency to make their higher fees worth it.

8. Making financial advisors commit to the fiduciary standard

A fiduciary standard refers to the duty of financial advisors to always work in their customers’ best interests. That may seem like a no-brainer. Wouldn’t all financial advisors do that? Yet, there are myriad opportunities for conflicts of interest to arise in relationships between financial advisors and investors.

For example, advisors may be paid a commission when their clients invest in certain funds. If advisors don’t disclose that information, clients can’t be sure the advisor is suggesting investments because they’re the right fit for their portfolio or because the advisor is paid to use them. Advisors adhering to a fiduciary standard disclose conflicts of interest or avoid them altogether.

Since Pollack’s index card made waves in 2013, the U.S. Department of Labor has tried to issue regulations that all financial advisors maintain a fiduciary standard when overseeing retirement accounts.

The Fifth Circuit Court decided that this ruling was an overreach and shot it down in 2018. It appears that the DOL plans to try to revive the rule at some point. However, until they do, investors can ask their advisors whether they adhere to a fiduciary standard, and if they don’t, ask them to commit to doing so.

Another option: Investors may turn to fee-only advisors, who accept fees from their clients as their only form of compensation. Fee-only advisors by definition operate under a fiduciary standard.

9. Promoting social insurance programs to help people when things go wrong

A rising tide lifts all ships. This final tip is about supporting social programs like Social Security, Medicare, and the Supplemental Nutrition Assistance Program, which help keep the population healthy as a whole—financially and literally..

You likely already pay into programs like these through Social Security and Medicare taxes. These are taken straight out of your paycheck if you’re employed, or if you’re self-employed you pay them yourself. (And even the savviest of investors may need to fall back on government support.)

In 2017, Pollack acknowledged his financial tips were directed towards people of at least middle class means, so he came up with a second index card .

What’s Missing?

Although Pollack’s advice covers a lot, there’s only so much you can fit on an index card. Tips like setting specific financial goals, simplifying your finances, keeping track of your spending (not just your savings), and setting a realistic budget, are also helpful in establishing and maintaining financial wellness.

There are ways to tackle these tips, as well. With SoFi Money®, a cash management account, you can keep track of your spending in your dashboard within the app.

To learn more about how to keep your financial life organized and achieve your goals, download the SoFi app.

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.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
Third Party Trademarks: Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.
SoFi Money®
SoFi Money is a cash management account, which is a brokerage product, offered by SoFi Securities LLC, member FINRA / SIPC .
Neither SoFi nor its affiliates is a bank.


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Creating a Household Budget

It’s been a crazy day, and after hours of meetings (that really could have been emails), you’re finally home. Earlier in the week you had enough energy to go to the grocery store and have a slew of ingredients that are ready to become a meal.

But today, the thought of cooking just seems like one more thing on your already lengthy to-do list. So when little Johnny looks up at you with his big eyes and says “Pizza…please?” you pick up the phone and dial your local pizza joint.

Even the best-laid plans can fall apart sometimes, and that’s never more true than when you have plans to cut down your takeout spending and cook at home for the week. The problem is, keeping your finances in order without a plan can be nearly impossible.

You wouldn’t build a house without sketching out blueprints first, right? Well, the same logic applies to getting your spending under control. The first step is to create a household budget.

While sitting down with receipts, credit card statements, and spreadsheets might not sound like your idea of a good time, it can help you figure out how much you’re spending each month.

And that, in turn, can help you create a realistic budget. Sure, you might not want to spend your
Saturday budgeting after a grueling 50-hour work week.

But instead of ruminating on the fact that spreadsheets can be a little tedious, you could try focusing on how great it would feel to have a flourishing savings account. And creating a household budget could get you one step closer to your goals. So on that note, let’s get started.

Getting Your Budget Going

One way to start budgeting is to take a good, hard look at what you spend money on. And sometimes, it isn’t easy to get real with your financial decisions.

It might not be fun to total up the amount you spend on takeout sushi every month.

Whether your spending vice is high-end beauty products or vino from the chic artisanal wine shop on your block, it might be time to confront it.

Going through one month of expenses and dividing everything into categories can help you figure out exactly where your money goes every month. After going through your expenses each month, you could divide your spending into categories like these:

•   Food
•   Entertainment
•   Education
•   Home
•   Bills & Utilities
•   Transportation
•   Shopping
•   Personal care
•   Travel

Of course, you may not have expenses that fall into all of these categories, but it could help inform your budget if you know definitively that you spend $60 a month on your electric bill, $90 on cable and internet, and $170 on household necessities like shampoo and paper towels.

Understanding Your Personal Cash Flow

Armed with information on your spending habits, now is the time to tally up how much money you have coming in every month. You could include things like your income and any earnings form side hustles, gifts, and bonuses. Ideally, you want to have more money coming in than you have going out every month.

If that’s not the case, it could be time to adjust your spending habits and create a new budget that will help you live within your means. Even if you are earning more than you’re spending, you could be interested in revamping your budget.

Cutting Back Where Necessary

Once you’ve figured out where your money is going, it’s time to consider how you actually feel about that. Hypothetically, if you’re spending $60 a month on your electric bill, do you think you could realistically cut that down?

As you’re going through this exercise, being honest with yourself is crucial. There are going to inevitably be some areas where you can’t cut back, and that’s okay. But you also might realize you’re paying too much for your phone plan or your haircuts.

For each of your spending categories, consider setting a realistic limit for yourself. And keep in mind that cutting back on some expenses might mean you have to increase your budget in other places.

For example, say you currently spend $400 on eating out every month and $400 on groceries, for a total food budget of $800. If you’d prefer to spend closer to $200 eating out each month, you may have to increase your grocery spending.

Do you think you could spend $200 on eating out and increase your grocery spending to $500? If so, your total food budget would come down to $700, saving you $100.

Differentiate Between Wants and Needs

Take the time to determine whether certain purchases are wants or needs. For example, is a class package at the boutique fitness studio a want or a need? Could you opt for a cheaper gym membership, try an at home fitness routine, or join a free running club to keep you motivated?

Determining needs and wants will be personal, but sometimes a harsh look at spending habits can be beneficial. Figuring out what is really a want can mean you’re able to cut back even further, and wants can be easier to eliminate or reduce than needs.

For example, you could switch to a less expensive cable option but may not have much wiggle room when it comes to health insurance. Creating a workable budget is all about balance—you still want to be able to live your life, so don’t feel like you need to cut out all your fun spend—just check in with your habits so you have an idea of where you can make changes and improve in the future.

If after making adjustments to your expenses you’re still looking for ways to boost your budget, you could look into increasing your income. Could you potentially ask for a raise at work? Are there any side hustle opportunities to pursue?

Factoring in Your Debt

If you have debt, unfortunately it’s an unavoidable part of your budget. Whether you’re paying down credit card debt or diligently chipping away at your student loans, it’s a part of your budget that can’t be ignored.

When you’re adding your debt payments to your budget, you may want to put the amount you actually pay each month, as opposed to your minimum required payment. This is because you might be paying more toward your debt so you can get out of debt sooner.

For example, hypothetically, if your car loan payment is $200 a month, but you typically pay $400 a month, then you may want to put $400 as the line item in your budget.

That being said, it can still be helpful to note your minimum debt payments somewhere on your budget—perhaps in a separate tab if you’re using Excel or Google spreadsheets.

If you run into an unexpected financial problem, it might help to know the minimum you’re expected to pay on your debts, so you can still plan to meet it (even if you aren’t able to exceed it).

Striving for Simplicity

Making your home budget too intricate might encourage you to start ignoring it. If it’s a chore to even take a peek at your budget, are you really going to go through the trouble of implementing it? Perhaps not.

One possible way to start a simple-yet-effective budget is to give yourself a total spending limit for the month, which is called your spending target.

Understanding where your money is going is important, but the end goal of a budget is to make sure you are spending less than a certain amount so you can still save for your future. That’s where the spending target approach comes into play.

Working as a Team

As you determine your household budget, don’t work in a vacuum (unless you’re a household of one). If you’re setting up a budget for your family, consult your partner.

You’d be offended if your partner created a household budget planner without consulting you, so be open and honest about why you want to adjust the family budget and work together to decide where you plan to cut your spending and what costs are most important to each of you. You may have to compromise on some things, but that’s ok.

If you have kids, this could be a teaching opportunity. Get them involved so they can start to understand the importance of financial management.

Pay attention to the way you talk about family financial issues when you’re around your kids. To get them excited about money management, perhaps you could work an allowance into your budget. Then, the kids can be involved in managing their own money too—it’s a family affair!

Help them set financial goals—maybe it’s saving for a new toy, a new gadget, or tickets to visit a theme park with their friends. Depending on your child’s age, it could also be an opportunity to have a talk about the cost of college so they can start to save for that as well.

Encourage them and help them set some guidelines but let them have some autonomy over their money too.

Establishing Financial Goals

Instead of thinking of a budget as a series of rigid spending restrictions, change your perspective. What if instead, they were flexible guidelines that were designed to help you reach your financial goals. As you review your budget, it could be a good opportunity to set some new spending and saving intentions.

Check in with your savings. Do you want to work toward setting up an emergency fund? Or are you interested in boosting your retirement savings? Do you want to create an ambitious plan to repay your debt? Saving for an European adventure?

Think in both short- and long-term goals. Visualize what you want for yourself in a year from now. Are you debt free? Establish a plan now to help you get there. Perhaps your five year goal is saving for a down payment on a house. Work toward that goal as well.

Understanding how you want to spend your discretionary income can go a long way in informing your budget. Knowing what you want to accomplish with your money can give aid in giving you direction.

Setting Some Time to Check in with Your Progress

After outlining your cash flow and setting up your spending categories, set some time to check in with your budget and track your progress. A budget is only good if it gets used—and when it comes to building a habit, consistency is key. Getting into the budgeting groove can be a challenge, but you may find it easy to keep going once you’ve set up the basic structure.

If checking in every day is too much, check in once a week instead. Have you overspent on take-out? Are bills coming due next week? Taking the time to look at your budget regularly could help keep you keep your budget and finances on track.

Feeling Empowered to Make Changes

Sometimes, life happens. Even with the best intentions, plans change. When it comes to budgeting, remember, it’s a tool there to help you.

If you fall short on your savings goal one month, don’t lose hope—readjust next month. Your BFF just got engaged and is planning a wedding in Italy? Add it as a savings goal to your budget.

At the end of the day, your budget should ideally make your money work for you, so that you can spend it on the things (and people) you love. Make changes as you see fit.

Tracking Your Finances With SoFi Money

Tracking your budget regularly could help you see measurable progress as you work toward financial goals. If you find that tracking your budget manually is monotonous, try another method that might work better for you.

Technological advances have made it easier than ever to track expenses. One innovative option is a cash management account with SoFi Money®, which allows you to track your spending and saving in real-time. And the best part? Absolutely no spreadsheet is required.

Ready to build a better budget? Download the SoFi app today to get started.

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.
SoFi Money®
SoFi Money is a cash management account, which is a brokerage product, offered by SoFi Securities LLC, member FINRA / SIPC .
Neither SoFi nor its affiliates is a bank.


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Tips for Where to Store Your Mortgage Down Payment?

“Location. Location. Location.”

Real estate agents say when you’re searching for a new home, it can be one of the keys to success.

Location also can be a crucial consideration for homebuyers who are looking for just the right place to store their money for a down payment.

Where you decide to keep the money you save for a down payment can have an important role in your ability to reach your goal amount. And that means finding an account that has the right balance of security, growth, and accessibility to fit your desired timeline.

Tips for Determining a Timeline?

It starts with having some idea of how much you’ll need for the down payment and then estimating how long it will take to save it.

You may have heard that traditionally 20% was the must-have magic number for a down payment, but that amount isn’t by any means set in stone. According to Zillow ’s 2018 Consumer Housing Trends Report, more than half of the buyers surveyed (52%) put less than 20% down.

And younger buyers put down less than older buyers: 60% of millennials put down less than 20% compared with 48% of Gen Xers, 43% of baby boomers, and 38% of silent generation buyers.

Borrowers can find a range of down payment options based on the lender or type of loan they choose, as well as other factors.

A homebuyer might be looking to save anywhere from 3% down for a conventional loan or 3.5% of their expected home price (for the down payment on an FHA loan , for example) to more than 20% for unique properties or other eligibility scenarios.

For those who anticipate buying a home priced at $300,000 (the current median price in the U.S.), that could mean coming up with $10,500 … or more than $60,000. And it could take months or possibly several years to accumulate either amount depending upon circumstances.

Does Timeline have an Effect on Savings ‘Location’?

Depending on how long you may have to save, there are a few possible places to consider when you are ready to stash that down payment money.

Those who are looking at three years or fewer to save may want to focus on security and easy accessibility—getting the money in as conveniently as possible and, ultimately, getting the money out quickly when they need it.

Those who are looking at a longer timeline may wish to invest their money, even though it may mean immediate access can prove to be a bit more complicated.

While investing has it’s risk, those saving for a down payment over a longer time frame might find it a suitable option since there is some time to weather the fluctuation of the market. And those who find themselves somewhere in the middle may want to consider a little of both.

With those factors in mind, options for a shorter timeline may include:

Traditional Savings Account:

Storing money in a savings account at the brick-and-mortar bank where you do your checking (and, perhaps, other business) can be a convenient choice. You may have the choice to make deposits in person, online, or through automatic paycheck withdrawals.

And, because the funds are likely guaranteed by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Association (NCUA) , it’s considered a safe option. But there’s a trade-off—because these types of accounts typically pay comparatively low interest , the money may not grow much while it’s sitting there.

Money Market Account:

A money market account (MMA) is considered another safe place to put down payment savings, and these accounts can also be insured by the FDIC or NCUA. Just as with a traditional savings account, there’s the convenience of being able to open the account at your local bank branch.

Money market accounts are similar to checking accounts in some ways, and may come with a debit card and or checks, but there’s typically a limit on transactions , and if that limit is exceeded, there may be a fee. An MMA usually will offer a higher interest rate than a traditional savings account, but the bank could require a higher minimum balance.

High-Yield Cash Management Account:

High-yield deposit accounts can offer a balance between safety and growth—with a dash of convenience thrown in for good measure.

The interest rates on these types of accounts are typically higher than a traditional savings account, especially with online institutions, which have lower overhead costs than brick-and-mortar banks and can pass those savings on to customers.

The money is accessible with a debit card (and sometimes checks), and some companies (including SoFi) charge no fees and have no minimum balance requirements.

Some online accounts also come with an app that allows users to link other accounts and track their spending and saving—a benefit that can be particularly useful when you’re working to accumulate a down payment for a home.

Signing up is usually easy, and saving can be, too, thanks to automatic deposits. And though online banking lacks the facetime with your favorite teller that a branch bank offers, customer service is generally still available.

If you have a longer timeline to save for your down payment—maybe five or more years—you could also consider these options:

Market Investing:

Savers may look at investing in the market as a way to further grow their down payment money—but even with a diverse portfolio, it’s a risk. That’s because the value of investments tied to the markets—stocks, bonds, exchange-traded funds, mutual funds, etc.—can rise or fall on any given day.

If the market drops just as you’re ready to sell your holdings, you could lose money . Or you may have to push back your home purchase by months or even years until the account recovers. So market investing isn’t really built for short-term saving.

Taxes also could be an issue for those who hold investments outside of a tax-advantaged account. If your down payment savings timeline is longer, an alternative might be to open a Roth IRA specifically with home buying in mind.

Under certain special circumstances—including buying a first home—savers who have had a Roth for five years or more are allowed to withdraw up to $10,000 of their investment earnings with no tax or penalty.

But, it may be a good idea to consider other funding options before taking money from an IRA as it could set back retirement earnings, potentially by years.

It also may help to treat this down-payment-building investment account almost like a target-date fund, moving to safer investments as the time to make a home purchase draws nearer. Or you may wish to take a blended approach, investing a portion of your money in the market and putting the rest in a cash management account like SoFi Money®.

Certificate of Deposit:

From time to time, certificates of deposit are mentioned as a possible place to hold money for a home purchase—and like any other strategy, they have their pros and cons. CDs are considered “safe” investments because they’re insured by the FDIC.

They have a guaranteed interest rate, and investors won’t lose their principal unless they withdraw money from the account before the term is up.

But to get a competitive interest rate, an investor typically must sign up for a longer term. CDs offer different term lengths that can range from months to decades. And a CD owner usually can’t keep adding more money over time the way a savings account owner or market investor can.

Ready to Do Your ‘Home’ Work?

Buying a home can sometimes be a long, challenging process. It may take a sizable chunk of your income and your time. And the decisions you make at the start of the journey—even just finding the best account for mortgage savings—can possibly affect everything else down the road.

There are plenty of choices. If you’re looking for convenience and familiarity, a savings account at your local bank branch may do—but you’ll likely sacrifice growth.

If you shoot strictly for growth, you could risk losing the money you’ve worked hard to earn. With a cash management account like SoFi Money, you may be able to earn interest and grow your money without tying yourself to a long-term investment or market volatility.

Ready to start your home-buying journey? Start saving by downloading the SoFi app today.

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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.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
SoFi Money®
SoFi Money is a cash management account, which is a brokerage product, offered by SoFi Securities LLC, member FINRA / SIPC .
Neither SoFi nor its affiliates is a bank.


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