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A bank guarantee is a promise by a financial institution that it will assume liability for a contract if one external party fails to uphold its obligation to another. In this way, the bank acts like a cosigner for a buyer or borrower on a business agreement, reducing the risk for the seller or lender.

For a small fee, bank guarantees often enable small businesses to enter into contracts with larger companies with which they otherwise would not be able to do business. In this article, we’ll explore:

•   How bank guarantees work

•   The different types of bank guarantees

•   The benefits and downsides of bank guarantees

•   How they differ from letters of credit.

What Is a Bank Guarantee?

Here’s what a bank guarantee is: It’s a financial instrument that adds confidence to riskier business deals. If, after doing its due diligence, a bank feels confident that an applicant (the debtor) will be able to uphold their contractual obligations, the bank will offer the guarantee to the other party (the beneficiary).

And if the applicant fails to fulfill that obligation to the beneficiary? The bank will cover the loss.

Bank guarantees are usually a part of more complex financial transactions between businesses. The average borrower won’t need to worry about bank guarantees for auto loans, mortgages, or personal loans.

Instead, companies utilize bank guarantees for much more complicated contracts around the provision of goods and services. If a vendor fails to provide goods or services that have already been paid for, a bank guarantee ensures reimbursement for the business using that vendor. Conversely, if a buyer fails to pay for goods or services that have already been delivered or rendered, the bank guarantee covers the unpaid balance for the seller.

Because a bank guarantee might protect a buyer or a seller, it’s easier to think of them in terms of the beneficiary (the company that requires a bank guarantee to move forward with a contract) and an applicant (the company that must apply for the bank guarantee to close the deal).

How Do Bank Guarantees Work?

If a contract includes a bank guarantee, that guarantee will specify an amount to be repaid (or goods or services to be delivered) and a set timeframe for that to happen. In addition, the contract will articulate the bank’s responsibility should the applicant fail to meet their contractual obligations.

To assume this risk, banks charge applicants a fee for the guarantee, expressed as a percentage of the cost or value of the transaction. While the fee will vary (perhaps from 0.5% to 2.5%), it is typically around 1%.

If the bank deems a contract particularly risky, it might require the applicant to offer collateral. Unlike with secured personal loans, where a house or car might serve as collateral, bank guarantee collateral is typically liquid assets, like stocks or bonds.

Types of Bank Guarantees

There are two main types of bank guarantees: financial bank guarantees and performance guarantees.

What Is a Financial Bank Guarantee?

With a financial bank guarantee, a bank has promised to repay a debt if the borrower (or buyer) defaults on the loan, meaning the payment. For example, an applicant may purchase goods and services from a large company, receive said goods and services, and never pay the bill. In this instance, the bank would settle the debt with the large company since it can’t come out of the borrower’s bank account.

What Is a Performance Guarantee?

A performance guarantee is just the opposite: If an applicant fails to perform the obligations laid out in contract (e.g., supplying parts to a company), the beneficiary can make a claim with the bank for the losses incurred from the non-performance of contractual obligations. Performance failure might also mean that, though the goods or services were delivered, they did not meet quality standards specified in the contract. In these situations, the bank would step in to offset those losses.

Examples of Bank Guarantees

Bank guarantees can serve many purposes, usually between two businesses. Here are a few kinds of guarantees that banks often issue:

Rental Guarantee

A rental guarantee protects a landlord when entering into a contract with a company (like a restaurant or retailer) that wants to lease a space. This guarantee serves as collateral for a rental lease.

Advanced Payment Guarantee

An advanced guarantee protects a company that has paid in advance for goods or services that weren’t delivered. You may also hear this referred to as a cash guarantee. If the deal isn’t satisfied, the company that has paid will be refunded.

Shipping Guarantee

A shipping guarantee protects a carrier when a shipment (i.e., import) arrives before required documentation. It is designed to smooth this kind of transaction when the documents have not yet become available.

Pros of a Bank Guarantee

When considering bank guarantees, you’ll see the term “beneficiary.” Don’t jump to conclusions about which party that might be. Bank guarantees can provide benefits for both the beneficiary and the applicant.

Benefits for the Beneficiary

First, let’s consider how a bank guarantee can help the beneficiary.

•   Reduced costs: A large, international company might save money in a specific region or country by doing business with a local vendor who does not have an international presence. By requiring that vendor to acquire a bank guarantee, the large company can feel confident about the decision while reducing costs.

•   Reduced risk: As mentioned above, the bank guarantee reduces the risk for the beneficiary. If the applicant fails to pay or to provide services or goods as outlined in the contract, the beneficiary can expect reimbursement from the bank.

Benefits for the Applicant

Now, here’s how a bank guarantee can benefit the applicant.

•   Increased opportunity: Bank guarantees let smaller companies and startups earn business they might not otherwise. Their newness in an industry might otherwise elicit hesitation from potential customers; a bank guarantee is often the boost needed to get business deals rolling.

•   Low cost option: All things considered, typical bank guarantee fees are low, especially when small business owners are used to dealing with higher interest rates (5.5% to 11.25%) on their small business loans, according to Experian, one of the major credit reporting agencies.

•   Credibility: Before offering a guarantee, a bank does a comprehensive, accurate assessment of an applicant’s financial standing. Earning a bank’s backing through a guarantee demonstrates that the bank finds the applicant company to be credible.

Cons of a Bank Guarantee

Both beneficiaries and applicants may encounter drawbacks to bank guarantees when initiating a contract.

Added complexity

First and foremost, a bank guarantee adds a layer of complexity to deal-making and may slow down business decisions. Companies operating in fast-paced markets may not be able to afford the delay.

Collateral requirement

If a venture seems particularly risky, banks may require collateral from applicants; this can be risky for startups with limited funding.

Lack of guarantee

Ultimately, a bank may not offer a guarantee, which means the beneficiary needs to be ready to continue its search for a new company to partner with.

Bank Guarantees vs Letters of Credit

Bank guarantees, as we’ve mentioned above, are typically used by companies bidding on large projects. The bank guarantee can underscore the business’ financial credibility. It provides assurance that a company has the financial means to complete the project in question.

Though they share some similarities with bank guarantees, letters of credit are more common in international trade. With a letter of credit, the bank is involved to a greater extent. Essentially, the bank releases the funds that the buyer owes the seller only when the seller has completed its contractual obligation (i.e., shipment has been received.)

Letters of credit instill confidence in sellers (exporters) that they will receive payment once they have shipped their goods. Likewise, importers only have to make payments (to their bank) after they have received the goods, so their funds aren’t tied up with no goods to show for it.

The Takeaway

A bank guarantee is a useful financial instrument that instills confidence between two external parties entering into a contract together. Such bank guarantees promise that the financial institution will cover any debts to one party if the other party does not meet its obligations. Larger companies often require small businesses and startups to obtain a bank guarantee before doing business with them. These guarantees can help a small or new business secure large deals since the bank has shown confidence in them.

If you want confidence in your bank for your personal accounts, consider SoFi. We help you bank smarter by offering you higher interest and no fees when you open our online bank account with direct deposit. You’ll earn a competitive APY while paying no monthly, minimum-balance, or overdraft charges.

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

FAQ

What is the purpose of a bank guarantee?

The purpose of a bank guarantee is to add confidence to a contract between two parties; if one party fails to uphold its contractual obligations or defaults on a loan, the bank promises to step in and uphold the contract.

How can I get a bank guarantee?

If a business is requiring a bank guarantee to enter into a contract, contact your bank (or your business’ bank) and request an application. The bank will then review the application to determine your creditworthiness.

What are the types of bank guarantee?

There are two main types of bank guarantees: financial bank guarantees and performance guarantees. In a financial bank guarantee, the bank assures that a buyer will repay any debts owed to a seller. If the buyer does not, the bank will take on the debt. In a performance guarantee, the bank assures that the applicant will fulfill the tasks laid out in a contract. If the applicant does not, the bank will compensate the beneficiary to cover losses from the lack of contractual fulfillment.

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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® 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.

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If you’re wondering if it’s okay to use checks with an old address, the answer is yes…most of the time.

Encountering a checkbook with your old address isn’t so unusual these days. Checks can come in handy from time to time, but many of us don’t need to use them all too often in this era of online electronic payments. Because of this, it’s easy to see how a checkbook might collect dust and the address on the checks might become outdated.

Read on to learn when it’s possible to use checks with an old address. You’ll find out:

•   Can you use a personal check with an old address?

•   Can you use a personal check with a wrong address?

•   What about business checks with an old or wrong address; are they okay to use?

•   Do checks expire?

•   How can you update checks when you move?

•   What are alternatives to using personal checks?

Can You Use a Personal Check With an Old Address?

Can you use a check with an old address? It is possible to use a check with an old address on it as long as it still has the correct routing and account numbers on it. If those numbers properly identify which bank and account the money should come from in order to pay a check, you’re good to go. That being said, it’s a good idea to let the bank know about a change of address to ensure they send statements and other important info about the account to the correct location.

If someone were to use a check with an old address on it, it can be helpful to let the recipient know about the address being wrong just in case they need to send a receipt or create any other correspondence regarding the payment via mail.

But what if the check writer got a new bank account number or the bank changed routing numbers (this can happen, for instance, when one bank merges with another)? In this situation, it is necessary to order new checks with the correct information on them. This is a great time to update the address on the check, too. Making sure a check’s routing numbers and account number are accurate is something to take seriously. If someone knowingly writes a check for an account that has already been closed, this is considered a form of fraud known as writing a bad check. Because of this, it’s a good idea to confirm check details are current and accurate whenever you move or switch banks to, say, open a new checking account.

Can You Use a Business Check With an Old Address?

It is possible to use a business check vs. a personal check that has an old address on it as long as the account number and routing number are accurate. The main difference between business checks and personal checks is that business checks can be a bit harder to deposit in a personal checking account. This however doesn’t really affect the person writing the check.

Can You Use a Personal Check With a Wrong Address?

It’s fair to wonder, is it okay if my checks have the wrong address? Whether it’s a typo or you moved, this situation definitely happens.

While writing a personal check with the wrong address on it isn’t ideal, it is possible to use one. As mentioned earlier, as long as the routing number and account number for your checking account are accurate, the check can be cashed properly. All of that being said, the check writer may want to inform the check recipient of their current correct address in case they need to mail them a receipt or any other type of communication.

Can You Use a Business Check With a Wrong Address?

As explained earlier, it is possible to write a business check with the wrong address on it as long as the routing number and account number listed on the check remain accurate. Most businesses will want to order new checks with the correct address on them to avoid confusion surrounding where their business is located and where correspondence should be directed. But they don’t need to worry if they have old checks left to use up. They should still be fine to issue.

Do Unwritten Checks Expire?

How long will a check be good for? As long as someone keeps their account open and the correct account number and routing number remain on a check, they won’t expire. However, there is still a situation to consider. If someone closes a bank account, this means the checks associated with the account become unusable. Another situation to be aware of is that bank routing numbers can change, especially when banks merge. So it’s always worth confirming if a check’s information is up to date.

When Are Checks With an Old Address Unusable?

As we mentioned, checks with an old address on them only become unusable if the routing number or account number listed on the check are inaccurate. This causes problems because these numbers are used to verify that the check is good and identify the account the money needs to be withdrawn from in order to process the check.

Ordering New and Correct Checks

If someone needs new checks for any reason — such as a desire to update their address — these are the steps they’ll generally take to order new ones.

•   Log on to their online bank account. It’s usually possible to order checks online or via a mobile account dashboard.

•   Request a counter check. If someone is really in a rush and can’t wait for new checks to come in the mail, they can go to a local bank branch and purchase counter checks. These will have your account information on them, and they typically cost $1 or $2 per check.

•   Review terms and fees. All banks charge different fees to buy checks or a checkbook, so double check how much doing so will cost.

Changing Your Address on Checks

Can you use checks with your old address? You can.

•   If you need to change the address listed on the checks in your personal checkbook, order more checks via one of the methods previously mentioned. This can be done online or in-person at the bank.

•   An alternative would be to use stick-on address labels to cover and replace the old address that appears on your checks.

Do You Need to Write Your Address on a Check?

Checks typically have an address already printed on them. Therefore it is not necessary for the check writer to write it on the check themselves. However, some people may prefer that only their name appears on their checks. Maybe they know they’ll be moving soon, or perhaps they simply prefer this for privacy and security reasons. If you do need to write your address on a check that doesn’t have your address:

•   Use blue or black pen

•   Print your new address under your name at the upper lefthand corner of the check

•   See if the business or merchant wants your phone number as well; this is a fairly common request so they can reach you if necessary. An altered check may not inspire complete confidence.

Do Checks Need an Address?

Checks do not need to have an address printed on them. However, if you choose to omit an address (say, because you know you’ll likely be moving soon), some businesses may hesitate to accept the check. They might ask for a form of ID or a phone number in case they need to contact you.

Alternatives to Personal Checks

If someone doesn’t want to write a check for whatever reason, these are some of their alternative payment options.

Money Orders

It’s possible to buy a money order from the post office and other select locations. Money orders are a very quick form of payment, and can cost less than $2 in fees.

Cashier’s Checks

A cashier’s check, which usually costs a small fee, can be bought at the bank and is a check that is guaranteed by the bank. It will usually require a visit to the bank to get one, though.

P2P Money Transfer Apps

Here’s a very convenient payment option: P2P money transfer apps — like Venmo — that allow users to instantly transfer cash electronically to an individual as long as they have enough money in their bank account. These may be free to use or can involve a small fee (a percentage of the transaction) depending on a few variables. (Sometimes e-checks, or electronic checks, are a payment option for utilities and other accounts. While not a P2P app, they do allow for a seamless transfer of funds.)

The Takeaway

As long as the routing and account numbers on the check are accurate, it’s possible to use a check with an old, incorrect address on it. That said, it’s a good idea to order new checks with the correct address on them to help lessen any confusion the wrong address might cause with check recipients. Having all your details correct can help make banking as simple as possible.

Here’s another way to simplify your financial life: Manage your money with SoFi. It’s a better way to bank. Sign up for online banking with direct deposit, and you’ll earn a competitive APY. What’s more, we don’t charge you any of the usual fees, like monthly, minimum-balance, or overdraft charges.

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

FAQ

Does it matter if the address on my check is wrong?

If you’re wondering, “Can I use old address checks?” here’s the answer: It is possible to use a check with a wrong address on it. The key is to make sure the routing number and account number is still accurate on the check before using it.

Can you cash a check with an incorrect address?

Cashing a check without the correct address on it is possible. Just make sure the recipient knows the writer’s current address in case they need to contact them.

Do checks need an address?

Checks commonly have an address on them, but it’s not a requirement. If you are using a check without an address, the business or service you are playing may require some additional ID or info.

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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.

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

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

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

Photo credit: iStock/MicroStockHub
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We live in a fast-paced world and are accustomed to immediate gratification. Just as we can get groceries delivered in minutes and order a new movie online with a few clicks, so too do we often expect our bank deposits to be available immediately.

But it doesn’t always work that way when it comes to finances. Some things do require a wait, even though it may seem like they should happen instantaneously. When money is put into a bank account, it can take a while for the deposited funds to appear and become available. When that does happen, they are considered cleared funds.

Wondering how this timing works? Keep reading to find out. You’ll learn:

•   What are cleared funds and how do they work?

•   How long does it take for funds to clear?

•   When can you withdraw cleared funds?

•   How do cleared funds and available funds differ?

•   Why are deposits sometimes delayed?

What Are Cleared Funds?

Depositing money into a bank account doesn’t always make those funds appear immediately. It can take time for cleared funds (aka the funds the account holder can access and use) to appear in an account. This is because banks and credit unions place temporary holds on the deposit. When this happens, the account holder can see their “total balance” on their account and their “available balance.” The latter is the amount of the total balance minus any pending deposits. The available balance is, as the name indicates, what is available for use.

Why Banks Put a Hold on Deposits

Here’s why banks don’t immediately declare deposits to be cleared funds: The waiting period can help avoid issues that can arise when a deposit bounces. This process helps protect customers from fraud and from paying unnecessary fees. If a bank were to allow a customer to spend funds from a check that ends up bouncing, the customer would then need to repay the bank the amount they deposited and probably pay an overdraft fee (even if the customer wasn’t at fault).

Some holds take longer than others. Keep in mind that all banks and credit unions have their own policies regarding how long it will take for funds to become available after a deposit. Another factor in terms of funds clearing is that the federal government regulates how long banking institutions can hold onto the funds before they make them available to the account holder.

It can be helpful to review a bank’s policies for holding deposits so you can get a better idea of when cleared funds will become available. That way, you won’t accidentally overdraw your account.

How Do Cleared Funds Work?

Cleared funds appear in a bank account (typically a checking account) after the holding period ends. Usually, this holding period lasts until the next business day, but it can take longer. Weekends and holidays can slow this process down. The type of deposit made can also affect the timeline.

Here’s a specific example: If you deposit a paycheck via an ATM that is not part of your bank’s network, you will probably have to wait a while to access the money. It may take up to five days before that check becomes available cash in your account.

Compare that to the case of electronic deposits made via an ACH. The cleared funds can actually be available as soon as the same day. Having a paycheck deposited via direct deposit or funds put into a flexible spending account that way can help you access your money a lot faster than if you deposited a check at an ATM.

Recommended: How to Set Up Direct Deposit

Breakdown of Times of Cleared Funds

All banks and credit unions have their own timeline they follow surrounding cleared funds. In addition, the federal government sets a maximum limit for how long they can make consumers wait to access their deposit.

Here’s a quick breakdown of the federally allowed wait times for different types of transactions, from wiring money to check deposits.

Type of Deposit	Timeline
Direct Deposit	Day of Deposit
Wire Transfer	Next Business Day
First $200 of Any Non-”Next-Day” Check Deposited	Next Business Day
Cash*	Next Business Day
U.S. Treasury Check	Next Business Day
U.S. Postal Service Money Order*	Next Business Day
State or Local Government Check*	Next Business Day
Casher’s, Certified, or Teller’s Check*	Next Business Day
Checks and Money Orders Drawn on Another Account at the Same Financial Institution	Next Business Day
Federal Reserve Bank and Federal Home Loan Bank Checks*	Next Business Day
Any Other Checks or Non-U.S. Postal Service Money Orders	Second Business Day After the Day of Deposit
Deposits of Items Noted by “*” at an ATM Owned by the Customer’s Financial Institutions	Second Business Day After the Day of Deposit
Deposits Made at an ATM Not Owned by the Customer’s Financial Institution	Fifth Business Day After the Day of Deposit

*Deposited in person.

It’s worth noting that these are the maximum hold times allowed; in many cases these deposits happen much quicker. Again, it’s worth reviewing the bank’s funds availability policy. This will be listed in the account agreement given to you, the account holder, when you opened an account. You can also ask the bank for a copy of their holding policies or look online for it.

When Can You Withdrawal Cleared Funds?

Deposits often clear in segments. That is, a portion of the funds will become available in your checking account before the whole amount deposited is ready for use. In most cases, the bank has to allow the customer to access $225 from the deposit at the start of the next business day. You could either withdraw cash or write a check. Usually the rest of the deposit is available on the second business day, unless something occurs to trigger a delay.

Cleared Funds vs Available Funds

It’s worthwhile to highlight the difference between cleared and available funds. Knowing the distinction between the two can help you avoid overdrawing your account or bouncing checks. Simply depositing a check doesn’t mean you can use the money right away.

•   Regarding a deposit, the $225 that must be made available by the next business day is known as your available funds. So on the next day, you can go ahead and use that amount.

•   However, the rest of your deposit is not yet available. If you try to draw against it, you are risking overdraft and charges. The full amount of the deposit may take up to a few more days to become ready for use. When this happens, it is known as cleared funds.

Reasons Why Deposits May Be Delayed Until They Become Cleared Funds

There are a few different reasons why deposits can be delayed on their path to becoming cleared funds. Let’s examine some of these.

Deposits Over $5,000

When it comes to deposits over $5,000, the bank is usually required to make the first $5,000 of the deposit available within one business day. (Some banks, however, say they can take up to four days to clear the amount.) And as for the rest of a deposit that’s over $5,000? A financial institution can put a longer hold on the remaining amount since it’s such a large amount, and you may find this scenario holds true if you try to use other check-cashing options.

Brand New Customer Accounts

Newer customer accounts (less than 30 days old) can experience deposit delays up to nine days. Although with official checks and electronic payments, partial funds can be available the next day. (If you are in this situation and in a rush to make a payment, you can look into other ways to send money to another’s bank account, such as P2P apps. These can draw upon other available funds.)

Post-Dated or Fraudulent Checks

If a bank has reason to suspect a deposit is suspicious (such as if a check appears to be fraudulent), then it may hold the funds for longer than normal. A couple of examples of what might cause this kind of hold:

•   A check is post-dated, meaning it’s been filled out to show a date that is in the future.

•   A check is more than 60 days old.

The Takeaway

Cleared funds are the funds that become available once a deposit to a bank account clears. That means the money is ready for use. The timeline for funds clearing depends on several factors, such as where, when, and how the deposit was made and how large the amount is. Some funds may clear right away, while others can take a few days. However, federal laws are in place regarding how long a bank can wait to clear funds. By understanding this process, you can likely manage your financial life a little better and avoid situations that involve overdrafts or bounced checks.

Looking for quicker deposits? See how SoFi can help you bank smarter and faster. When you open an online bank account with direct deposit, it’s possible to get paid up to two days early! Plus you’ll earn an amazing APY which will help your money grow faster.

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

FAQ

What is the difference between a cleared balance and an available balance?

Before a deposit fully clears and turns into cleared funds, the bank may make some of the deposit available by the start of the next business day. That partial deposit is known as available funds or an available balance.

How long does it take to get money cleared?

Some deposits can happen as soon as the same day, with most happening the next business day. In some cases, though, a deposit can take as long as nine days to clear. Check with your bank to know their timelines.

Can you reverse a cleared check?

Once a check has cleared, there is little that can be done to reverse the transaction. If, however, a cleared check is to be found fraudulent, it may be possible for a bank to intervene.

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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.

Photo credit: iStock/RgStudio
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Depression is a major health issue that can impact all areas of our lives — including how we feel about and manage our money. Given that estimates of depression rates run as high as one out of three U.S. adults, this is surely an important topic to consider. If you or someone close to you is dealing with money depression or has mood issues that interfere with their financial management, you know how challenging this situation can be.

Keep reading for insight into how to manage finances when feeling depressed or stressed about money. Among the topics considered:

•   Is there a correlation between money and depression?

•   Tips for handling your finances when you are dealing with depression.

Is There a Correlation Between Money and Depression?

There’s the old saying that money can’t buy happiness, but there actually may be a correlation between having less money and experiencing depression. Depression is a mood disorder that involves constant feelings of sadness and can make a person experience a lack of interest in and enthusiasm for life.

Studies have shown that having a lower income is a risk factor for depression and that having a higher income can protect against depression. How? When someone has a higher income, they can reduce stressors. They likely don’t have to worry as much about paying bills and managing debt as those who have less money do. They also have the financial resources necessary to pay for the healthcare and treatment that can help with depression.

Tips to Manage Your Finances When Dealing With Depression

If you are experiencing depression, it may make it difficult to focus on managing your money. That symptom described as lack of interest in life may make it hard to prioritize finances or focus on wrangling them.

What’s more, financial worries might negatively impact your mental health. In these situations, you can consider taking the following steps to manage your money better when dealing with depression.

Apply a Helpful Budgeting Model

Budgeting can be a way to take more control of your finances and can help you figure out what your next steps can be to meet your financial goals. To create a budget and stay on track, you can tally up how much you typically spend in a month and subtract that number from how much you earn after taxes. You can then create a spending plan that helps you spend less than you currently do. Or you might integrate financial goals like saving for a down payment or paying down credit card debt. Having a strong budget in place can make it easier to know where you stand money-wise and keep finances organized. You’ll have a good idea of exactly where income is coming from and where spending is going.

There are different types of budgeting methods that can work well, but much depends on what will suit you personally. There are pros and cons to budgets, so if one method doesn’t work for you, don’t feel defeated. Instead, see if another budgeting method might work better. One to consider is the 50/30/20 rule.

Talk With Financial and Health Specialists

No one has to navigate depression or manage their finances alone — it’s always a good idea to ask for help if you feel you need it.

If you need help with your finances, you could work with a financial advisor to help you manage your money and make the right decisions to meet your financial goals. Delegating in this way can be helpful if you are feeling as if you don’t have the focus or expertise to do this yourself. It might be a positive move to let someone else handle these functions. A certified financial planner (CFP) is a great option as they can help you create a budget and make long-term plans for your financial life. If you are looking to invest, you can work with an investment advisor or a certified financial analyst (CFA). All of these professionals can help you learn the most important finance concepts needed to better understand how to manage money. It’s easy to feel like you are “bad” at managing money, but the truth is no one teaches us how to handle our finances. It’s not as if we’re taught any money management tips as a college student. Bringing in a trained professional can help.

Another important angle is to consider consulting your doctor or health insurance provider about mental health resources that may be available. These services may help you manage and improve your mood. There are mental health specialists who focus on helping people who are depressed about money. If this describes your situation, you might search for a therapist with those qualifications to get help with your money depression.

Another option: Contact the Substance Abuse and Mental Health Services Administration’s National Helpline which is a free, confidential treatment referral and information service that is available 24/7, 365-day-a-year.

Tackle Your Debt

It’s easy to see how having debt can bring a lot of financial stress and anxiety into your life. Not only can debt result in high interest charges, it can hurt your credit score. When creating a budget, going beyond just minimum credit card payments and making extra or higher debt payments can help pay down debt. It’s possible to work with a credit counselor to make a plan for getting out of debt. This may help alleviate depression about money to some degree.

Employ an Emergency Fund

Having an emergency fund at the ready when unexpected expenses arise can make those moments much less stressful. Medical bills, car issues, and home repairs can come out of nowhere. If possible, it’s a good idea to carve out a little extra room in a monthly budget to contribute to an emergency fund. That way, if emergency expenses do arise, turning to a credit card or loan won’t be necessary. Experts recommend that people aim to have several months’ worth of basic living expenses in an emergency fund.

Utilize a Savings Account for Future Progress

Alongside an emergency fund, it’s wise to work on building up overall savings. Making financial progress feels good; it also helps us work towards larger future goals and provides a buffer if and when a budget feels a bit tight. It’s possible to open a high-yield bank account that offers interest on savings, so your money can grow over time.

Take It One Step at a Time

Navigating managing money while struggling with depression can be challenging. In this situation, it can be helpful to be patient with yourself as you work through your mood and financial goals. Taking things one step at a time can help you make steady progress without feeling overwhelmed.

The Takeaway

Struggling with feelings of depression can be challenging, especially when you are trying to navigate money matters as well. Take small steps towards gaining financial control by creating a budget, working with financial and mental health professionals, and creating an emergency fund. These moves can help alleviate financial stress that can contribute to depression and also help you manage your money wisely.

To make managing money easier, consider banking where product features are designed to help you get the very most out of their money. That’s what we offer here at SoFi. Open our Checking and Savings with direct deposit, and you’ll enjoy access to your paycheck up to two days early, plus earn a competitive APY. Your money will make more money, and you won’t pay any account fees either.

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

FAQ

Is it normal to get depressed over money?

It can be quite normal to experience money depression because of financial issues. Studies have found that having a low income is a risk factor for depression. Having a higher income has also been found to help protect against depression by reducing stressors and providing social resources. Plus financial resources may also be used to pay for treatment for existing cases of depression.

What does financial stress look like?

Financial stress can look like other major forms of stress and can impact someone’s physical and mental health. This, in turn, can diminish their relationships and quality of life. Someone experiencing financial stress may feel ashamed, scared, or angry, and they may lash out at their loved ones. Financial stress can lead to feelings of depression as well.

What do you not say to a financially struggling person?

There are no hard and fast rules for what someone should or shouldn’t say to someone feeling depressed about money. Try to be sensitive to their situation. Don’t diminish their emotions and make it seem as if it’s simple to overcome their issues. Be compassionate, and offer support when possible.

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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.

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.

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.

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.

Photo credit: iStock/Prostock-Studio
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The answer to the question, “How much should I spend on rent?” is a highly variable one, but, as a guideline, the number is typically 30% of your income.

Figuring out your “magic number” will require a little thought…and math. Individual situations certainly differ. Maybe you have a heavy monthly student-loan payment while your best friend has none. In other words, they have more disposable income than you and could likely pay a higher rent. Or perhaps you have a trust fund which gives you a degree of financial security but your best friend doesn’t: In this case, you might be comfortable putting more towards rent than your pal.

While 30% is a guideline, most Americans are paying more than that right now. The latest figures say that the typical citizen is paying closer to 32% of their income, or about $1,792 per month. Rents have been climbing, increasing by double digits year over year, so it’s not always possible to stick below that 30% guideline.

Here, we’ll take a look at how to budget for your rent, what a reasonable rent is for your income, and how to figure out different angles on what you can afford to pay for rent.

Budgeting: What Should You Spend on Rent?

Whether you rent or own, housing is typically the largest expense the average U.S. consumer must pay for every month.

Determining how much you pay is really a matter of better monthly budgeting. The question isn’t “How much can I spend on rent?” it’s “How much should I spend on rent?” It’s best not to max out your take-home money on rent and leave some wiggle room in your budget. You can take a look at your income after taxes and other deductions are taken out. Then you might look at what you’re spending now on rent, food, entertainment, transportation, clothes, and other costs. What can you afford to pay in rent that will allow you to live comfortably, do what you like (whether that means eating out often or affording vacations), pay your bills, get rid of any debt, and save some money, too?

No matter which rent formula you choose, it all comes back to your budget.

It’s a lot to figure out (and then to stay on top of) once you set your budget and determine how much to spend on rent.

And if you can reduce your rent payment, you’ll likely have a bit more flexibility in choosing where to allocate your money — whether that’s spending it, paying down debt, or saving for a future goal. Along with reducing small indulgences, sticking to a reasonable rent can be an effective way to free up more cash in your budget.

That’s a tall order in today’s hot housing market, for sure. But it can make a huge difference in terms of your overall financial health and your stress level. Wondering how to make rent every month can be a real source of anxiety. It may be better to, say, ward off “lifestyle creep” and rent a home with one or two fewer perks or amenities to keep the price down.

Recommended: Smart Debt Payoff Strategies

Strategies for Figuring Out How Much to Spend

Next, let’s dig into how to figure out the amount you can spend on rent every month. We mentioned a ballpark figure, but remember: There’s no single magic formula, and everyone’s situation is different.

That said, there are several formulas out there that you can use as a guide. Here are three:

The 30% Rule

We’ve already mentioned this rule of thumb — one that’s been around for decades — which puts the ideal housing costs at 30% of your after-tax income, no matter how much you earn.

That rather broad guideline dates back to the Brooke Amendment, which capped public housing rents at 25% of an individual’s income in 1969. Congress raised the cap to 30% in 1981, and eventually it became the go-to guide for determining “cost burden” — the amount of income a family could spend and still have enough left for other expenses — even those who aren’t in low-income households.

Critics of this model advise using it as a starting point rather than a rule when determining a spending limit. Depending on how much you earn, 30% of your income could be more — or less — than you actually can afford to pay in rent.

Your location could also influence whether or not the 30% rule is realistic for you, since depending on where you live, accessibility may be a factor. Can a person who makes $40,000 even find a rental for $1,000 a month in most cities? It would likely be a challenge.

And, again, when you’re looking at renting a home, you’ll likely want to weigh what you’ll get vs. what you’ll give up. This isn’t just in money, but in time, safety, and happiness. Is the cool place downtown worth it if you can’t afford to go out and enjoy the nightlife? Is a longer commute or a roommate out of the question, or could those options open doors to your dream home?

Recommended: Price to Rent Ratio in the Top 50 Cities

The 50/30/20 Approach

If you’re a disciplined budgeter, you may already be familiar with this model, which was made popular by Sen. Elizabeth Warren’s book All Your Worth: The Ultimate Lifetime Money Plan.

The 50/30/20 budgeting method suggests dividing your after-tax income into three main categories, putting 50% toward needs (essential costs like housing, transportation, groceries, utilities, etc.), 30% toward wants, and 20% toward savings.

Following those guidelines, your rent would qualify as a need. But it remains up to you to decide how much of that 50% you want to — or feel you have to — spend on housing.

If your home is your castle, and your castle is in a major city or tech hub, it could be a lot. Which means you may have to make adjustments to other “essentials” in your budget or perhaps borrow from other categories (so …maybe fewer massages and dinners out).

The Budget Backwards Formula

Another way to budget is to look at your take-home pay and work backwards, deducting your expenses to see how much of a range you have for rent. Maybe you take home $4,000 a month. From that figure, deduct things like student loans and credit card debt you are paying down. Do you have a high-yield savings account where you are stashing some cash — say, are you putting money towards a vacation or new car fund? Subtract those too.

Then look at your typical monthlies in terms of food, utilities, transportation, gym memberships and subscription services, and the like. Take those off the remaining monthly amount and take a look at what is left. Of that sum, how much can you put towards rent, keeping aside some cash for discretionary spending? Once you know what number suits your finances, you can go hunting for a rental.

The Takeaway

Figuring out how much you can spend on rent involves some basic math. For instance, one common guideline says that 30% of your income (before taxes) can be allotted to rent. But everyone’s financial profile is different. Some people live in cities that are pricey; other people have student and car loans taking a big bite out of their money. Use the guidelines here to figure out the right number for you, and recognize where you may need to compromise. For instance, if you are paying off debts for the next couple of years, maybe it’s a good moment to consider having a roommate. There’s no one-size-fits-all answer.

Flexibility also matters when it comes to your personal banking, and SoFi understands that its clients have different needs. If you’re planning on opening a bank account online, consider our Checking and Savings. You can spend, save, and earn all in one place — complete with mobile transfers, photo check deposit, and customer service. Plus, when you sign up with direct deposit, you will earn a terrific APY and pay zero account fees.

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.

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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.

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

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

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