Life Stages Archives | Page 211 of 570

Aug

2023

10 Signs You’re Living Beyond Your Means

By Diana Kelly Levey | Budgeting & Goals, Financial Independence, money | Comments Off

Living beyond your means can easily happen. Typically, it’s a case of your spending outstripping your earnings. This in turn means it’s hard to pay off debt and save for your financial goals.

Sound familiar? If you find yourself running out of money before the next payday, you could be leaving above your means.

Here, learn more about this issue and the warning signs. Then you can begin to ake action and take control of your money.

What Does “Living Beyond Your Means” Mean?

Simply put, ”living above your means” means that you are spending more money than you are earning. People are able to do this by relying on credit cards, loans, and pior savings to cover their expenses. However, the process is not sustainable, and eventually overspending is likely to catch up to you.

Living beyond your means can also mean that you’re spending everything you bring in, and, as a result, don’t have anything left over for saving or investing, such as building an emergency fund, saving for a short-term goal like buying a car or a home, or putting money away for retirement.

Here are ten red flags that you’re living a lifestyle you simply can’t afford — and tips for how to get back on track.

1. You Live Paycheck to Paycheck

If most or all of your paycheck is spent immediately on bills, and you don’t have anything left over at the end of the month to put into savings, you are likely living over your means and may need to make some adjustments.

If your current lifestyle has become a habit, you may feel there is no place to cut back. However, if you get out your monthly statements for the past three months and take a close look at where all your money is going each month, you will likely find places where you can cut back on spending. This might be ditching cable, cooking (instead of ordering take-out) a few more times per week, or quitting the gym and working out at home.

💡 Quick Tip: Did you know online banking can help you get paid sooner? Feel the magic of payday up to two days earlier when you set up direct deposit with SoFi.

2. Your Credit Score Has Dropped

If you’ve been putting a lot of your expenses on your credit card and/or don’t always pay your bills on time, you may see your credit score take a hit.

This number is important because it can be accessed by anyone considering giving you new credit and may be used to determine the interest rate you’ll pay on a home or car loan, and also new credit cards.

If you aren’t sure what your credit score is, you can get a free copy of your reports from all three credit bureaus at www.annualcreditreport.com .

Looking it over can help you understand why your credit score has dropped, and help you take the necessary steps to repair it.

For example, you might set up automatic payments for the minimum amount due on credit card bills and loans, so you never miss a payment.

You may also want to pay down your balances on your credit cards and lines of credit. This can lower your “credit utilization rate” (how much of your credit limit you are using), which is factored into your score.

Recommended: What Is Considered a Bad Credit Score?

3. You’ve Stopped Your Retirement Contributions

If money is feeling a little tight, you may feel that now is not the time to worry about retirement. But you likely won’t be able to work forever, so it can be wise to make saving for retirement a priority and to get started early.

Thanks to compounding interest (which is when the interest you earn also starts earning interest), the earlier you start investing in a retirement fund, the easier it will be to save enough money to retire well.

You don’t have to contribute a lot. Even just putting aside a small amount of each paycheck into a 401(k) or IRA each month can help you build wealth over time. This move can get you on track to meet your financial goals.

Get up to $300 when you bank with SoFi.

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

4. A Big Portion of Your Income Goes to Housing

Keeping your rent or mortgage below 30% of your monthly pre-tax income is sometimes recommended because it can leave you with enough income left over to save, invest, and build wealth in general.

Staying below 30 percent can be difficult, however, if you live in a region of the country where the cost of housing is high.

Nevertheless, spending a lot more than a third of your income on housing can leave you “house poor,” and put your other financial obligations at risk.

If you find that your housing costs are taking too large a chunk of your monthly paycheck, you might consider downsizing, taking on a roommate, or finding a way to increase your income with a side hustle.

5. Your Savings Account Isn’t Growing

Another sign you may be living beyond your means is that your savings have stagnated.

Making regular deposits into your savings account–in addition to your 401(k) or IRA–allows you to work towards your short- and medium-term financial goals, such as putting a downpayment on a home or a car or going on vacation.

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

6. You’ve Been Charged an Overdraft Fee More than Once This Year

An overdraft fee — or “non-sufficient funds fee” — is charged when there’s not enough money in your account to cover a check or debit card payment.

Mistakes happen, and a one-off overdraft isn’t necessarily an indicator of overspending. But repeat offenses can be a sign that you are living too close to the edge and don’t have a clear picture of how much money is going into your account and how much is going out.

You may want to start tracking your spending and keeping a closer eye on your spending account to make sure you always have enough to cover your electronic payments.

Recommended: Using a Personal Cash Flow Statement

7. You’ve Never Set a Budget

Many people think making and following a budget will be too complicated. But having a budget can actually simplify your spending decisions by letting you know exactly what you can and can’t afford.

Having a budget also helps to ensure you have enough money to cover essentials, fun, and also sock some away in savings.

If you’ve never set financial parameters for yourself, you may want to consider taking an honest inventory of how much you are bringing in each month and how much is going out each month.

Once you get a sense of your own patterns and habits, you can work toward building a realistic budget that allows you to spend and save more wisely.

8. You’re Leasing a Car You Can’t Afford to Buy

Leasing a vehicle you would not be able to purchase outright or finance can be a major financial red flag. Leasing lets you rent a high-end lifestyle, but many people end up with leases they really can’t afford.

You might be covering your monthly payments, but if you can’t do that while meeting your other expenses and also putting money into savings, then your car is likely too expensive.

You may want to consider downgrading your vehicle or saving up enough money to buy a car — either outright or by making a solid downpayment so your monthly payments are low.

9. You’re Only Making Minimum Payments on Credit Cards

It’s fine to use your credit card to pay for everyday expenses and the occasional big purchase. But if you can’t pay off most of the balance each month, you’re likely living beyond your means.

Rather than give over part of your paycheck just to interest each month, you may want to cut back on nonessential spending and divert that money towards paying off your balances.

10. You Don’t Have an Emergency Fund

Not having a stash of cash you can turn to in a pinch can be a sign that you’re overspending. You may be gambling on the fact that nothing will go wrong. But life is unpredictable, and getting hit with an unexpected expense you can’t pay for can lead to a financial crisis.

Instead, you may want to build an emergency fund that can cover three to six months worth of living expenses. That way, you’ll be covered should something happen, such as an illness or injury, job loss, housing issue, or any other expensive personal matter should come up.

The Takeaway

Unfortunately, living beyond your means is all too easy to do. And while a few weeks or months of spending more than you earn may not be a major problem, overspending on a regular basis will likely catch up to you in the form of high debt and neglected savings.

Creating (and sticking to) a spending budget can help ensure that you can afford your bills and basic expenses, and still have money left over to save for the things you want in the future.

Ready to get better control of your spending? The right bank can help.

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

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

Photo credit: iStock/urbazon

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2023 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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

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 .

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.

SOBK0823004

Aug

2023

How to Become a Digital Nomad: 25 Things to Consider

By Stacey Leasca | Budgeting & Goals, Financial Independence, money | Comments Off

These past few years have proved that plenty of people can work from anywhere, which has further fueled the digital nomad movement.

Digital nomadism is a “have laptop, will travel” lifestyle for both freelancers and those who work full-time but can do so remotely. It means you can travel and do your job from wherever, enjoying new experiences and scenery as you globetrot.

But before you decide that travel plus remote work is the right situation for you, read the following 25 considerations.

They’ll help you understand if this is the right fit for you and how you’ll need to prepare before you start packing your bags.

What Is A Digital Nomad?

Digital nomads are professionals who work fully remote jobs and move locations frequently. They are able to do this either because they are self-employed, or because their company allows for a more transient lifestyle.

The number of people who are digital nomads is estimated to be more than 20 million in America and 35 million all around the world.

💡 Quick Tip: An online bank account with SoFi can help your money earn more — up to 4.60% APY, with no minimum balance required.

How Much Do Digital Nomads Make?

It seems that many digital nomads make high salaries; perhaps this earning power allows them to call the shots and travel when and where they see fit.

One 2023 study found that 36% of digital nomads around the world earned between a $100,000 salary and $250,000 per year. Only 6% of those surveyed reported earning less than $25,000 per year.

Common Jobs for Digital Nomads

Among the most popular fields for digital nomads include:

• Writing

• Education & Training

• Administrative

• Customer Service

• Art & Creative

• Computer & IT

• Consulting

• Data Entry

• Marketing

• Project Management

25 Things to Know Before Becoming a Digital Nomad

If you’re trying to decide if the digital nomad life is right for you, here are a number of things you may want to consider.

1. You’ll Be Able to Learn About Different Cultures

As a digital nomad, you get to choose where you spend your time. Maybe you’ve always wanted to know what it’s like to live on the Greek island or in the Peruvian Andes. Or, maybe you want to learn more about your ancestors. You can do that as a digital nomad. Making a list of the things you really want to see, do, and learn in your lifetime can help you start formulating a plan.

2. You Could Learn a New Language Along the Way

Beyond meeting new people, you can also choose to learn new things as a digital nomad. Living and working in a place can significantly improve your language skills. So if you want to learn Spanish, you may want to plan on living in Spain for a few months.

3. You Can Enjoy Winter or Summer All Year Long

Hate winters? They can be a thing of the past. As a digital nomad, you get to choose where you live and work, so if you want to summer in the states, then summer again in Australia or South America, or anywhere else where the temperatures are right for you, you can do it.

4. Having a Plan B, and Maybe Even C, Is Prudent

As a digital nomad, you will likely be moving around a lot, which means you may hit more snags than if you were staying in one place. Because of this, it is a good idea to always have a backup plan, like a second accommodation option in case your first one doesn’t fit the bill, multiple options for reaching Wi-Fi, as well as a starting an emergency fund.

5. Making Close Friendships Can Be a Challenge

If you’re not staying in one place for very long, it can be difficult to create deep connections with people you meet. However, if you’re willing to put time and effort into making and keeping new friends, these relationships can last for as long as you want.

6. There’s a Massive Global Network Waiting to Welcome You

Fortunately, if you decide to dip your toe in the digital nomad waters, you will not be alone. There are millions of others around the globe who are currently living the digital nomad life, and plenty of Facebook, Instagram, and chat groups to help you connect with them.

Get up to $300 when you bank with SoFi.

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

7. You May be Able to Set Your Own Hours

Because you are no longer working in an office, it may be possible to create your own working hours. This can be a major perk for many who do not like to adhere to the nine-to-five lifestyle. For example, you could choose to work early in the morning and take the afternoons off or vice versa. If your working situation allows this, it’s totally up to you.

8. Your Entire Day Will Likely Depend on WiFi Availability

If connecting to the internet to conduct work and communicate with clients or employers is important for your job on a regular basis, it can be a good idea to choose destinations with reliable WiFi. You can also take advantage of websites, such as WiFi Map, that help you track down free WiFi wherever you are in the world.

9. Investing in a VPN Could Be Smart

Depending on where you decide to travel, internet access could become an issue. That’s because the internet is censored in certain destinations. To help you access the websites you want or need for work, you may want to download a VPN (virtual private network) prior to departure. This can help you get around any censorship issues and help protect your privacy online. The cost of a good VPN service is around $10 per month.

10. You’ll Likely Become a Coffee Shop Connoisseur

Cafe life can be clutch for digital nomads. Not only are coffee shops typically welcoming to those who need to use WiFi, but they can also be excellent places to chat with locals, make new friends, or simply soak up the local culture.

11. Maintaining a Routine Can Be a Challenge

If you’re traveling on your own, and have the freedom to set your own work hours, your routine will be entirely up to you. For some people, this can become a challenge because they have little structure to their day. As a digital nomad, it can be a good idea to come up with your own daily schedule, such as walking in the morning, working in the afternoon, and taking an exercise class at night, no matter where you are.

12. It May Be Hard to Maintain Connections With Old Friends

Just as your life is moving on in a new direction, so are the lives of those you left behind. If you want to stay connected, you are likely going to have to make an effort. You may want to set reminders for yourself to send text messages, make phone calls, or go the old-fashioned way and write letters to those you hold nearest and dearest.

13. You’ll May Need to Learn Global Visa Rules

If you want to become an international digital nomad, you will likely have to learn a lot of the rules of entry into different countries and make sure you have all the necessary documents in advance. For example, some countries require all travelers to have visas, while others only require them for stays longer than 90 days.

14. You’ll Need to Take Stock of Your Finances

The good news: Being a digital nomad doesn’t have to be expensive. You can save money by spending time in a nation where goods cost less, or you might forgo a car and take public transit, or even couch surf when you can. No matter how you choose to travel and live, it’s a good idea to figure out a budget beforehand, and keep track of your spending as you go so you don’t run out of funds while you’re still a long way from home.

15. You’ll Want to Have Easy Access to Your Money

Traveling the globe, you will want to make sure you can access your money wherever and whenever you need it. And while you can do that with many U.S. banks, many will charge you foreign transaction fees, as well as ATM fees, which could make it expensive to access your own cash. It’s a good idea to read the fine print before you set out and, if necessary, choose a different financial institution and change banks.

💡 Quick Tip: Want a new checking account that offers more access to your money? With 55,000+ ATMs in the Allpoint network, you can get cash when and where you choose.

16. You’ll Want to Check Your Phone and Insurance Plans

It’s a good idea to check your cell phone contract to find out what the coverage is while traveling. Ideally, you want a phone plan that allows for unlimited data while traveling internationally. It’s also a good idea to find out what your cell phone protection plan will cover if you need care in another part of the country, or in a different country.

17. Hiring a Tax Professional Can Be a Smart investment

Depending on your employment situation, you may need to pay quarterly income taxes. You may also need to pay taxes on income earned while living abroad. Since this can get complicated, it may be worthwhile to hire a tax professional who can help you navigate the ins and outs of tax law and even complete your tax return for you, giving you one less thing to worry about on the road.

18. The Right Housing Can Be Hard to Find

As a digital nomad, you may not have the luxury of getting to see a property before renting it. That means you may get there and realize you made a mistake. If possible, you may want to avoid committing to (and paying upfront) a long-term stay before you see the place. It can also be a good idea to have a backup accommodation plan in case things don’t look quite as good as they did online.

19. Storage May Become an Issue

Depending on how long you plan to travel around the globe, you may need to store your items along the way. When doing so, it can be a good idea to store items in facilities or places that a friend or family member is able to access. That way, if you need something important while you’re on the other side of the world, they can get it and send it to you.

20. You May Want to Start Journaling

As a digital nomad, you will likely be making incredible memories. Even if you’ve never kept a journal, you may want to start keeping a notebook where you jot down a few lines at the end of each day or week, and document things you saw or experienced or simply what you’re feeling. You’ll likely enjoy looking back on this later. And, knowing what worked and didn’t work can also help you plan your next adventure as a nomad.

21. “Vacation” May Take on New Meaning

Because you can live and work from anywhere in the world, “vacation” may no longer mean the same thing as it used to. It can be important as a digital nomad to still ensure you are taking time off to rest and relax and recharge from your work routine. What’s great is that you can now take a vacation without having to hop on a plane to get away from it all because you’re already there.

22. Longer-Term Stays Tend to Work Best

When transitioning to a digital nomad lifestyle, it can be tempting to hop around from one place to the next in quick succession. However, this can wreak havoc on your routine and become exhausting. It also makes it hard to get to know a place or make new friends. Instead, you may want to plan for longer stints of time, such as several months, in each destination.

23. Being Alone Can Be Challenging

If you are taking up the digital nomad lifestyle on your own, you will likely be spending more time than ever before solo. And, you’ll no longer have co-workers to chat with during the day. While this can be a welcome relief for many, others may struggle with loneliness. To help combat feelings of social isolation, it can help to join meetup groups, head to events solo where you can meet new people, or join a co-working space.

24. You May Get Homesick

Yes, getting to explore the world and go wherever you wish as a digital nomad is a gift. But, the reality is that, at one point or another, you will likely miss home. It may be that you are missing family, friends, or that bit of normalcy you once had. It can help to know that this is normal and expected, and you may even want to give in to it by calling home and letting it out.

25. You May Find Out It’s Not the Right Life for You

The digital nomad lifestyle can sound wildly appealing. After all, we often see people living their best nomad life on social media. However, there are difficulties and challenges that come with the nomad lifestyle. You may try it and decide it’s not the right choice for you, which is perfectly fine. Sometimes you don’t know what you’ll like until you try it.

Pros and Cons of Being a Digital Nomad

First, consider the pluses:

• Being a digital nomad can bring personal and professional freedom. You’ll no longer have to deal with everyday office politics or have to go to the same place every weekday.

• Instead of only having a couple of weeks to travel each year, you can see and experience new places all year long.

In terms of negatives, prepare for the following:

• Being a digital nomad can also be a lot of work. If you’re going freelance or starting your own business, it can take a lot of time, effort, and hustle to start making real money.

• Depending on your budget, you may also have to put up with less than glamorous accommodations.

• For some, the nomad life can get lonely.

The Takeaway

The digital nomad lifestyle can be an exciting way to travel and live in new places while working, rather than being limited to a brief week or so away.

The nomad life can take more work than some are willing to put in, including finding new routines, more personal accountability, and dealing with details like getting visas and finding the best cell phone and health insurance plans.

However, this life-work choice can pay off, both in terms of seeing the world and earning money. Ready to hop on a plane and become a digital nomad? Make sure you have your banking squared away first.

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

Check out all the benefits of SoFi Checking and Savings today.

Photo credit: iStock/Vasil Dimitrov

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2023 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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

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

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

SOBK0823006

Aug

2023

How to Calculate Your Savings Rate

By Kim Franke-Folstad | Budgeting & Goals, Financial Independence, money | Comments Off

You have probably heard (multiple times) that saving money for your future is important, but do you know how much you are actually socking away? There’s a formula to calculate your own specific personal savings rate (aka the percentage of your after-tax dollars that you’re putting away).

It’s not too complex and can be a helpful tool to see how your money management is tracking. Find out how to calculate your savings rate here.

What Information is Included in the Savings Rate Formula?

The basic formula to calculate savings rate is:

Your savings / your after-tax income = your savings rate

Once you’ve calculated your savings rate, you can use it to:

• Review how you’re doing from month to month or year to year.

• See how your current spending habits are affecting your future goals and financial independence.

• Motivate yourself to do better with your savings.

• Compare your efforts to others.

You can gather up the numbers you need to determine your savings rate (which is sometimes referred to as a savings ratio) in just a few steps:

Step 1: Add Up Your Income for the Month

Your income streams might include, after taxes: your monthly salary, the money you earned from any side gigs or from selling homemade items online, or rental income if you’re renting out a room of your home to get extra funds. Don’t forget to include money you earned that’s automatically deducted from your pay and added to a retirement account, such as a 401(k) or a traditional or Roth IRA. And add in your employer’s matching retirement plan contributions, as well.

Recommended: 39 Ways to Earn Passive Income Streams

Step 2: Add Up the Money You Put into Savings Each Month

This is about what you’re saving for the long-term, not next week. So it would include the money that’s automatically coming out of your check for retirement savings, plus your employer’s matching contributions, along with any funds you’re putting into separate savings or brokerage accounts.

💡 Quick Tip: Want to save more, spend smarter? Let your bank manage the basics. It’s surprisingly easy, and secure, when you open an online bank account.

Step 3: Do the Math

Divide the total amount of your long-term savings (Step 2) by the total amount of your after-tax income (Step 1). Turn the number you get into a percentage (.10 is 10%, for example), and that’s your savings rate.

You may hear or see a few variations on what’s included in the calculation. Some people don’t include their employer’s 401(k) contributions in their calculations, for instance, and some might add in extra payments they’re putting toward the principal on a student loan or other debt. The point is to be consistent with what you do or don’t include from month to month.

Get up to $300 when you bank with SoFi.

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

How About an Example?

Let’s use Jane, whose hypothetical after-tax Income every month is $4,500. She brings in another $500, after taxes, by renting the extra bedroom in her apartment to her cousin, for a total of $5,000 a month.

Jane’s employer doesn’t offer a 401(k) plan, but on her own, Jane puts $500 a month into a Roth IRA. And she always puts another $100 a month in an online savings account she has earmarked for long-term goals. Jane’s savings amount totals $600 a month.

Using the savings rate formula, that’s $600 / $5,000 = .12, which makes Jane’s personal monthly savings rate 12%.

Of course, everyone’s numbers may not be quite so straightforward. Couples, for instance, may have to consider two or more paychecks and, possibly, two or more retirement accounts. Some individuals work more than one job or earn income from multiple sources. Some might count their emergency fund as savings, and others don’t. But the idea is the same: An individual’s or a household’s savings rate measures how much disposable income (defined by the U.S. Bureau of Economic Analysis (BEA) as after-tax income) is being set aside for long-term savings and retirement.

Why Is Knowing Your Personal Savings Rate Important?

The BEA tracks the nation’s personal savings rate from month to month to monitor Americans’ financial health and better predict consumer behavior. And you can do much the same thing with your own savings rate.

By tracking your rate on a regular basis, you can assess how you’re doing in real-time. If you’re consistently falling short of the savings goals you’ve set for yourself, you can look at what behaviors might need changing or if you need to rework your budget. You also can use the information as an incentive to do better. And you might even find it’s a fun way to compete with others close to you, with the nation’s average personal savings rate, or just against yourself.

If you saved 8% in 2023, for example, could you bump that amount to 9% or 10% in 2024? What if you got an unexpected raise or bonus: Would you have the discipline to put that amount into your savings to keep your rate the same or improve it?

Knowing your savings rate can help you make those kinds of financial decisions.

💡 Quick Tip: Most savings accounts only earn a fraction of a percentage in interest. Not at SoFi. Our high-yield savings account can help you make meaningful progress towards your financial goals.

What’s a Good Savings Rate?

The average personal savings rate in the U.S. was about 4.03% in mid 2023, according to the Fed. But financial experts generally advise savers to stash away at least 10% of their income every month ($500 of a $5,000 monthly salary, for example). The popular 50/30/20 budget rule created by Sen. Elizabeth Warren suggests saving 20% of after-tax income.

If that seems extreme, it’s probably more useful to simply target a number you’re sure you can stick to monthly or annually. Just having a positive savings rate — anything above zero — can be a good starting point for building good fiscal habits and a nest egg. You can always make adjustments as you accomplish other financial goals, such as paying off student loans or credit card debt.

Isn’t Having a Good Budget Enough?

A personal budget can be a useful guide when it comes to reaching financial goals. And tracking your spending with a spreadsheet or an app can help you see where your dollars (and dimes) are actually going, as opposed to where you think they’re going—those two places might be very different.

Many people who make a budget include the amount they plan to put toward savings in their budget as a monthly expense. But that’s different from knowing your savings rate.

A savings rate provides a separate, wide-angle view of how much of what you make is going into savings. And that can help you further evaluate how you’re doing.

How Can Someone Improve Their Savings Rate?

The answer is simple: Spend less and save more.

Here are some steps that could help improve an individual’s or household’s savings rate.

Opening or Contributing More to a Retirement Account

One of the easiest ways to save more money can be to open a 401(k) or IRA, or to boost the amount that’s automatically deposited to an account you already have. After all, if you never see the money, you likely won’t be as tempted to spend it. And if you’re a long way from retirement, the money you invest should have lots of time to grow with compound interest. If your employer offers a 401(k) with a matching contribution, a goal might be to save as much as possible to maximize those funds.

Recommended: How an Employer 401(k) Match Works

Opening an Online Savings Account

If you’ve been saving s-l-o-w-l-y with a traditional type of savings account, it might be time to consider other options. Many online financial institutions, for example, offer higher interest rates for deposit accounts because they have lower overhead costs than brick-and-mortar banks, and they pass those savings on to their customers. Online accounts also may offer lower fees than traditional banks—or, in some cases, no fees.

Cut Back on Discretionary Spending

The thought of squeezing out additional dollars for savings each month might be daunting if you’re already on a tight budget. But even a little spending cut can go a long way toward nudging up your savings rate.

Let’s go back to our hypothetical saver, Jane, for an example. If Jane could manage to save just $50 more every month (or about $12 a week), she could increase her savings rate by a full percentage point — from 12% to 13%. That might mean getting takeout one less time every week. Or one less night out with the girls every month. Or maybe cutting back on streaming services she seldom uses.

Lowering Fixed Expenses

Lowering the bills that have to be paid every month can increase the amount of money that’s available for savings. That could include:

• Shopping for cheaper car insurance or a less expensive cell phone carrier

• Keeping your paid-off car for an extra year or two instead of jumping right back into another auto loan

• Refinancing to a lower interest rate on a mortgage or student loans

• Cutting the cord on cable

• Doing your own landscaping.

Ditching the Credit Card Debt

Yes, credit cards are convenient, and using your cards wisely can have a positive effect on your credit score. But the interest on credit cards is typically higher than for other types of borrowing, and it compounds, which means you could be paying interest on the interest charged on previous purchases.

If you’re carrying a balance from month to month and paying interest, you’re giving money to the credit card company that could be going into your savings account. Using a debt payoff strategy or consolidating your credit card debt with a personal loan could help you dump those credit card bills and get your savings back on track.

Putting Pay Raises Toward Savings, Not Spending

No one is suggesting that you should live ultra frugally like when you were scraping by in college or starting your career, but it might not hurt to hold on to some of those money-saving habits you had then. Otherwise, if your pay goes up and your savings stay static, your savings ratio is doomed to drop.

One last example using our hypothetical friend, Jane: If Jane got a $100-a-month raise (after taxes), but she continued putting $600 a month into savings, her savings rate would fall from 12% to just below 10%.

The Takeaway

Saving money might not be considered exciting by everyone, but the thought of being financially secure is pretty appealing. Think of your savings rate as a mirror you can hold up every month to see how you’re doing.

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

Photo credit: iStock/fizkes

SOBK0823005

Aug

2023

Interest Rates: Definition, How They Work, and Different Types

By Jamie Cattanach | Debt Payoff, Financial Independence, personal_loan | Comments Off

Whether you’re borrowing money from a lender or depositing money in a savings account, interest rates will play into your financial picture. And understanding exactly how they work is crucial to making the best possible decisions for your money.

Here’s the scoop.

Interest Rate Definition

Interest rate is the cost of borrowing or the payoff of saving. Specifically, it refers to the percentage of interest a lender charges for a loan as well as the percentage of interest earned on an interest-bearing account or security.

Interest rates change frequently, but the average personal loan interest rate is dependent on several factors, including the amount borrowed, credit history, and income, among others. A borrower with an excellent credit score and a dependable income, for instance, will likely be considered low risk and may be offered a lower interest rate. On the flip side, some vehicles like payday loans are considered riskier for lenders and tend to have higher interest rates.

How Interest Rates Work

Whether you’re borrowing or saving money, the interest rate is applied to the balance during set periods of time called compounding periods.

For borrowers, this extra charge can add to outstanding debt. For savers, savings interest can be one way to earn money without much effort.

Let’s look at some specific examples.

You might take out a personal loan with an APR of 5.99%. That means you’ll pay an additional 5.99% of the loan balance each year in addition to the principal payments, which is paid to the lender for servicing the loan.

Or, if you hold a high-yield savings account that offers a 1% APY return, you can expect that account to grow by 1% of its balance each year.

Of course, the interest you might earn in a savings account is usually substantially lower than what you might earn on higher-risk investments.

And when it comes to any of the multiple uses of a personal loan, paying interest means you’re paying substantially more than you would if you were able to cover the expense out of pocket.

Fixed vs Variable Interest Rates

Lenders charge fixed or variable interest rates. What’s the difference between the two? Let’s take a look.

As the name suggests, fixed interest rates remain the same throughout a set period of time or the entire term of the loan. Fixed rates can be higher than variable rates. Borrowers who prefer more predictable payments — or are borrowing when interest rates are low — may decide to go with a fixed-rate loan.

Pros of Fixed Interest Rates	Cons of Fixed Interest Rates
Rates won’t increase	Fixed rates can be higher than variable rates
Predictable monthly payments	Borrowers would need to refinance to get a lower rate, which may involve paying more in fees
Consistent payment schedule can make budgeting easier	Borrowers won’t benefit if interest rates decrease

Variable interest rates change periodically, depending on changes in the market. This means the amount of your payments will vary. Generally speaking, variable-rate loans can be riskier for consumers, so they tend to have lower initial rates than fixed-rate loans. However, it’s important to note that when interest rates rise, so can the cost of borrowing. When borrowers decide to renegotiate from a variable-rate to a fixed-rate loan, they may face additional fees and a new loan length.

A variable-rate loan may be a good move for borrowers who plan to pay off the loan quickly or can take on the risk.

Pros of Variable Interest Rates	Cons of Variable Interest Rates
Monthly payments may go down when interest rates decrease	Interest rates fluctuate depending on changes in the market
Rates can be lower (at first) than fixed-rate loans	Repayment amounts can vary, which can make budgeting difficult
Borrowers may receive better introductory rates when taking out a loan	May face extra fees and extended payoff time if you renegotiate to a fixed-rate loan

Types of interest rates

Types of Interest

While all interest does one of two things — accrue as a result of saving money or in payment to the bank for a loan — it can be calculated and assessed in different ways. Here are a few common types of interest rates explained.

Simple Interest

Simple interest is interest that is calculated, simply, based on the balance of your account or loan. This is unlike compound interest, which is based on the principal balance (the original money you borrowed) as well as interest accrued over time.

Most mortgages and auto loans are calculated using simple interest. That means you won’t pay additional interest on any interest charged on the loan.

For example, let’s say a driver takes out a simple interest loan to pay for a new car. The loan amount is $31,500, and the annual interest rate on the loan is 4%. The term of the loan is five years. The driver will pay $580.12 per month. After five years, when the loan is satisfied, they will have paid a total of $34,807.23.

Compound Interest

Compound interest, on the other hand, means that interest is charged on not only the principal but also whatever interest accrues over the lifetime of that loan.

Say you take out an unsecured personal loan in the amount of $20,000 to pay for home remodeling. The loan is offered to you at an interest rate of 6.99% compounded monthly, and you must also pay an upfront fee of $500 for the loan. You’ll pay it back over the course of five years.

Over the course of those 60 payments, you’ll pay $3,755.78 in interest, not including the $500 extra you paid in fees. Each month, you’ll pay back some of the principal as well as the interest charged to you.

By the time you’re done with your home remodel, you’ll have paid $24,255.78 altogether, and that’s on a personal loan with a fairly low rate. In other words, you’ll have paid 20% more for the project than you would have if you’d funded it out of pocket.

Recommended: Simple Interest vs. Compound Interest

Amortized Interest

Amortizing loans are common in personal finance. If you have a home loan, auto loan, personal loan, or student loan, you likely have an amortizing loan.

Amortization is when a borrower makes monthly (usually equal) payments toward the loan principal and interest. Early payments largely go toward the calculated interest, while payments closer to the end of the loan term go more toward the principal.

The interest on an amortized loan is calculated based on the balance of the loan every time a payment is made. As you make more payments, the amount of interest you owe will decrease.

To see how payments are spread out over the life of the loan, borrowers can consult an amortization schedule. A mortgage calculator also shows amortization over time for a loan.

But here’s a look at a sample calculation:

Let’s say you take out a $200,000 mortgage over 10 years at a 5% fixed interest rate. Your monthly payments will be $2,121.31. Next, divide the interest rate by 12 equal monthly payments. That equals 0.4166% of interest per month. This means that in the first month of your loan, you’ll pay $833.33 toward interest and the remaining $1,287.98 toward your principal.

Now, how about the second month? To calculate what you’ll owe, deduct your monthly payment from the starting balance. (This will give you the “balance after payment” for the chart.) Be sure to add to the chart the $833.33 you paid in interest and the $1,287.98 you paid toward the principal. Repeat the calculation of monthly interest and principal breakdown for the rest of the chart, which includes 12 months of payments.

Date	Starting Balance	Interest	Principal	Balance after payment
July 2023	$200,000	$833.33	$1,287.98	$198,712.02
August 2023	$198,712.02	$827.97	$1,293.34	$197,418.68
September 2023	$197,418.68	$822.58	$1,298.73	$196,119.95
October 2023	$196,119.95	$817.17	$1,304.14	$194,815.80
November 2023	$194,815.80	$811.73	$1,309.58	$193,506.23
December 2023	$193,506.23	$806.28	$1,315.03	$192,191.19
January 2024	$192,191.19	$800.80	$1,320.51	$190,870.68
February 2024	$190,870.68	$795.29	$1,326.02	$189,544.66
March 2024	$189,544.66	$789.77	$1,331.54	$188,213.12
April 2024	$188,213.12	$784.22	$1,337.09	$186,876.03
May 2024	$186,876.03	$778.65	$1,342.66	$185,533.37
June 2024	$185,533.37	$773.06	$1,348.25	$184,185.12

Precomputed Interest

Loans that calculate interest on a pre-computed basis are less common than loans with either simple or compound interest. They’re also controversial and have been banned in some states. Precomputed interest has been banned nationally since 1992 for loans with terms longer than 61 months.

This method of computing interest is also known as the Rule of 78 and was originally based on a 12-month loan. The name is taken from adding up the numbers of the months in a year (or a 12-month loan), the sum of which is 78.

1 + 2 + 3 + 4 + 5 + 6 + 7 + 8 + 9 + 10 + 11 + 12 = 78

Interest is calculated ahead — precomputed — for each month and added to each month’s payment, giving more weight to interest in the beginning of the loan and tapering off until the end of the loan term. In the case of a 12-month loan, the first month’s interest would be 12/78 of the total interest, the second month’s interest would be 11/78 of the total interest, and so on.

Here’s an example: Let’s say a borrower takes out a personal loan with a 12-month term that will accrue $5,000 in interest charges. According to the Rule of 78, here’s what the borrower would pay in interest each month:

Month	Fraction of total interest charged	Monthly interest charge
1	12/78	$769
2	11/78	$705
3	10/78	$641
4	9/78	$577
5	8/78	$513
6	7/78	$449
7	6/78	$385
8	5/78	$321
9	4/78	$256
10	3/78	$192
11	2/78	$128
12	1/78	$64

A loan with precomputed interest has a greater effect on someone who plans to pay off their loan early than one who plans to make regular payments over the entire life of the loan.

APR vs APY

Whether compound or simple, interest rates are generally expressed as APR (Annual Percentage Rate) or APY (Annual Percentage Yield). These figures make it easier for borrowers to see what they can expect to pay or earn in interest over the course of an entire year of the loan or interest-bearing account’s lifetime.

However, APY takes compound interest into account, whereas usually APR does not — but on the other hand, APR takes into account various loan fees and other costs, which APY might skip.

APR (Annual Percentage Rate)	APY (Annual Percentage Yield)
Expresses what you pay when you borrow money	Expresses what you earn on an interest-bearing account
Factors in base interest rate over the course of one year	Factors in base interest rate over the course of one year
Factors in fees and other loan costs	Does not factor in fees and other loan costs
Does not factor in compounding	Factors in compounding

factors that determine interest

How Are Interest Rates Determined?

Lenders use several factors to determine the interest rate on a personal loan, including details about your financial background and about the loan itself. What kind of financial questions can you expect?

When lenders talk about a borrower’s creditworthiness, they’re usually referring to elements of your financial background. This may include:

• Your credit history

• Your income and employment

• How much debt you already have

• Whether you have a cosigner

The loan terms can also affect the rate. For example, personal loan rates can be affected by:

• The size of the loan

• The duration of the loan

Loan term is something borrowers should be thinking about as well. A longer loan term might sound appealing because it makes each monthly payment lower. But it’s important to understand that a longer-term loan may cost you significantly more over time due to interest charges.

💡 Quick Tip: In a climate where interest rates are rising, you’re likely better off with a fixed interest rate than a variable rate, even though the variable rate is initially lower. On the flip side, if rates are falling, you may be better off with a variable interest rate.

Interest Rates and Discrimination

Generally speaking, the higher your credit score and income level, the easier it is to qualify for loans with better terms and lower interest rates — which, of course, can make it more difficult for people in lower socioeconomic positions to climb their way out.

Discriminatory lending has had a long history in the U.S. Before federal laws protecting against discrimination in lending practice, lenders would regularly base credit decisions on factors such as applicant’s race, color, religion, sex, and other group identifiers rather than their creditworthiness.

The practice of “redlining” was begun in the 1930s as a way to restrict federal funding for neighborhoods deemed risky by federal mortgage lenders. It persisted for decades, and the detrimental effects can still be felt today by residents of minority neighborhoods.

Since residents of redlined neighborhoods were excluded from approval for regular mortgage loans, they were forced to look for other financing options, which were often exploitive. If they could not find any lender willing to loan to them, they continued renting, unable to gain equity in homeownership.

The Takeaway

The interest rate is the cost of borrowing money — it’s a percentage of the total amount of the loan. It can also refer to the rate at which interest is earned on money in a savings account, certificate of deposit, or certain investments. The amount of interest you’ll pay is usually expressed using percentages, which will be listed as either APR (Annual Percentage Rate) or APY (Annual Percentage Yield), depending on which kind of financial product you’re talking about.

Lenders charge fixed or variable interest rates. Fixed interest rates remain unchanged for a set period of time or for the life of the loan, and may be a smart choice for borrowers who want a predictable payment schedule or are taking out a loan when interest rates are low. Variable interest rates can change depending on the market, which means the payment amount will vary. Though potentially riskier, these loans may offer lower initial rates. However, when interest rates rise, so can the cost of borrowing.

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

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

FAQ

What is the definition of interest rate?

An interest rate is expressed as a percentage and is used to calculate how much interest you would pay on a loan in one year (APR), or how much you would earn on an interest-bearing account in one year (APY).

What is an example of an interest rate?

Simple, compound, or precomputed interest rates are types of interest rates commonly used.

What is the difference between interest and interest rate?

Interest is the money you’re charged when you take out a loan — or earn for leaving your money in a deposit account to grow. Interest rate is the percentage you’re being charged or are earning.

What happens when interest rates are high?

Interest rate increases tend to lead to higher interest rates on personal loans, mortgages, and credit cards. It can also mean costlier financing for borrowers.

Can you adjust the interest rate on a personal loan?

Possibly. One way to lower the interest rate on a personal loan is to refinance it with another lender.

Photo credit: iStock/Remitski

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

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

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.

SOPL0723005

Aug

2023

Inherited IRA: Distribution Rules for Beneficiaries

Inherited IRA Distribution Rules Explained

By Ashley Kilroy | invest, Investing, Preparing for Retirement | Comments Off

When an IRA account holder passes away, they might choose to leave their account to a loved one. But whether the recipient is surprised or knew about the inheritance ahead of time, they may have questions about what to do with this inherited IRA.

How does an inherited IRA work? The key to properly handling an inherited IRA is to understand what it means for you as a beneficiary. Your relationship with the deceased, for example, could impact the tax consequences on the inheritance. Plus there are inherited IRA distribution rules you’ll need to know.

An inherited IRA can also be a tremendous financial opportunity, as long as you understand the inheritance IRA rules. Here’s what you should know about the beneficiary IRA distribution rules.

What Is An Inherited IRA?

An inherited IRA, also called a beneficiary IRA, is a type of account you open to hold the funds passed down to you from a deceased person’s IRA. The original retirement account could have been any IRA, such as a Roth, traditional IRA, SEP IRA, or SIMPLE IRA. The deceased’s 401(k) plan can also be used to fund an inherited IRA.

Spouses won’t necessarily need to open an inherited IRA, because spouses are allowed to transfer any inherited assets directly into their own retirement accounts. However, any other beneficiary of the deceased’s account — such as someone who inherited an IRA from a parent — will need to open an inherited IRA, whether or not they already have a retirement account.

Some people prefer to open their inherited IRA account with the same firm that initially held the money for the deceased. It can make it simpler for the beneficiary while planning after the loved one’s passing. However, you can set up your account with almost any bank or brokerage.

💡 Quick Tip: Did you know that opening a brokerage account online typically doesn’t come with any setup costs? Often, the only requirement to open a brokerage account — aside from providing personal details — is making an initial deposit.

How Does an Inherited IRA Work?

When it comes to IRAs, there are two types of beneficiaries: designated and non-designated. Designated includes people, such as a spouse, child, or friend. Non-designated beneficiaries are entities like estates, charities, and trusts.

This article focuses on designated beneficiaries. While your relationship with the deceased may impact your options and any inherited IRA distribution rules, as can the age of the deceased at the time of death, certain inheritance IRA rules apply to everyone:

1. You cannot make additional contributions to the inherited IRA. You can only make changes to the investments or buy and sell assets held by the IRA.

2. You must withdraw from the inherited IRA. The required minimum distribution (RMD) rules depend on your age and relationship to the deceased, but according to inherited Roth IRA distribution rules, withdrawals are required even if the original IRA was a Roth IRA (which typically does not have RMD requirements).

What are The RMD Rules For Inherited IRAs?

When it comes to required minimum distributions, there are different rules for inherited IRA RMDs for spouses and non-spouses.

One recent difference between the rules for spouse and non-spouse beneficiaries is a result of the SECURE Act, established in early 2020. It states that non-spouse beneficiaries have to withdraw all the funds from their inherited IRA within a maximum of 10 years. After that time, the IRS will impose a 50% penalty tax on any funds remaining.

Spouses, on the other hand, can take yearly distributions from the account based on their own life expectancy.

RMD Rules for Spouses

Once a spouse takes ownership of the deceased’s IRA account, they can either roll over the assets into their own pre-existing IRA within 60 days, or transfer funds to their newly opened inherited IRA they can withdraw based on their age.

Note that taking a distribution from the account if you are under age 59 ½ results in a 10% early withdrawal penalty.

RMD Rules for Non-Spouses

For non-spouses (relatives, friends, and grown children who inherited an IRA from a parent), once you’ve opened an inherited IRA and transferred the inherited funds into it, RMDs generally must start before December 31st following a year from the person’s death. All assets must be withdrawn within 10 years, though there are some exceptions: if the heir is disabled, more than a decade younger than the original account owner, or a minor.

💡 Quick Tip: Did you know that a traditional Individual Retirement Account, or IRA, is a tax-deferred account? That means you don’t pay taxes on the money you put in it (up to an annual limit) or the gains you earn, until you retire and start making withdrawals.

Multiple Beneficiaries

If there is more than one beneficiary of an inherited IRA, the IRA can be split into different accounts so that there is one for each person. However, in general, you must each start taking RMDs by December 31st of the year following the year of the original account holder’s death, and all assets must be withdrawn from each account within 10 years (aside from the exceptions noted above).

Inherited IRA Situation Examples

These are some of the different instances of inherited IRAs and how they can be handled.

Spouse inherits and becomes the owner of the IRA: When the surviving spouse is the sole beneficiary of the IRA, they can opt to become the owner of it by rolling over the funds into their own IRA. The rollover must be done within 60 days.This could be a good option for someone who is younger than the original owner of the IRA because it delays the RMDs until the surviving spouse turns 73.

Non-spouse designated beneficiaries: An adult child or friend of the original IRA owner can open an inherited IRA account and transfer the inherited funds into it. They generally must start taking RMDs by December 31 of the year after the year in which the original account holder passed away. And they must withdraw all funds from the account 10 years after the original owner’s death.

Both a spouse and a non-spouse inherit the IRA: In this instance of multiple beneficiaries, the original account can be split into two new accounts. That way, each person can proceed by following the RMD rules for their specific situation.

How Do I Avoid Taxes on An Inherited IRA?

Money from IRAs is generally taxed upon withdrawals, so your ordinary tax rate would apply to any tax-deferred IRA that was inherited — traditional, SEP IRA, or SIMPLE IRA.

However, if you have inherited the deceased’s Roth IRA, which allows for tax-free distributions, you should be able to make withdrawals tax-free, as long as the original account was set up at least five years ago.

Spouses who inherit Roth accounts have an extra opportunity to mitigate the bite of taxes. Since spousal heirs have the power to take ownership of the original account, they can convert their own IRA into a Roth IRA after the funds roll over. Though the spouse would be expected to pay taxes on the amount converted, it may ultimately be financially beneficial if they expect higher taxes during their retirement.

Recommended: Is a Backdoor Roth IRA Right For You?

The Takeaway

Once you inherit an IRA, it’s up to you to familiarize yourself with the inherited IRA rules and requirements that apply to your specific situation. No matter what your circumstance, inheriting an IRA account has the potential to put you in a better financial position in your own retirement.

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

Help grow your nest egg with a SoFi IRA.

FAQ

Are RMDs required for inherited IRAs in 2023?

The IRS recently delayed the final RMD rule changes regarding inherited IRAs to calendar year 2024. That’s because rules regarding RMDs have changed in the last few years, leaving many people confused. What this means is that the IRS will, in some cases, waive penalties for missed RMDs on inherited IRAs in 2023 — but only if the original owner died after 2019 and had already started taking RMDs.

What are the disadvantages of an inherited IRA?

The disadvantages of an inherited IRA is knowing how to navigate and follow the many complex rules regarding distributions and RMDs, and understanding the tax implications for your specific situation. However, it’s important to realize that an inherited IRA is a financial opportunity and it could help provide you with money for your own retirement.

How do you calculate your required minimum distribution?

To help calculate your required minimum distribution, you can consult IRS Publication 590-B. There you can find information and tables to help you determine what your specific RMD would be.

Photo credit: iStock/shapecharge

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.

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 Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

SOIN0723178