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Sure, a budget is an important tool to help you balance your income and your spending, keep your savings on track, and help you avoid debt. But, like many good things, it sometimes goes off the rails. A person might start a budget with the best of intentions but then find it hard to stick to it. Or they might encounter an emergency expense and have a hard time getting back in the groove.

Here, you’ll learn what the common pitfalls are and how to avoid these most common budgeting mistakes so your financial life can thrive.

10 Budgeting Mistakes to Avoid

Here are 10 of the most common budget mistakes people make. Get familiar with them and try not to fall into their traps.

1. Not Having a Budget

Some people make the budget error of…not having a budget at all. Maybe it seems too hard, too time-consuming, or too boring; you’d rather be watching a hot new streaming series or playing with your dog.

Nevertheless, if you don’t create and follow a budget, you’re missing out on major benefits:

•   You may not save enough for your future

•   You may feel stressed about reaching your long-term goals

•   You might spend beyond your means, which could land you in debt and strain on your financial resources.

Recommended: Common Financial Mistakes First-Time Parents Make

2. Not Tracking Spending

Tracking your spending can be one of the more tedious tasks required for budgeting, but it’s also an incredible, truth-revealing tool. How else would you know when you are above or below your limits? You risk blowing past your limit by overspending in some categories, meaning you’ll have less (or none) for other categories. For example, overspend on eating out, and you might have less to put toward your retirement savings. Fortunately, there are an array of expense-tracking apps (many are free) that can help simplify this process.

3. Not Having Emergency Savings

Experts recommend that you save three to six months’ worth of expenses in a dedicated emergency fund. This is money you can draw on in case of emergency medical expenses and car repairs, for instance. It also provides a cash cushion should you lose your job, giving you time to get back on your feet without going into debt.

Not having an emergency fund can torpedo your budget, requiring you to draw money from other categories to cover unexpected expenses, or requiring you to take on debt.

If you don’t have a rainy day fund yet, it may be wise to set up automatic deductions monthly. Even as little as $25 can begin building a buffer. Keep your emergency cash in a separate savings account so you aren’t tempted to touch it. And if you need to dip into the account, be sure to budget additional savings until you are able to replenish it.

4. Not Considering Cheaper Alternatives

Budgeting doesn’t necessarily mean giving things up. Sometimes it can mean looking for cheaper alternatives. For example, you could swap out a pricey gym membership for one at a more budget-friendly alternative. Instead of renewing the same car insurance you’ve always had, you could shop around online for a better deal. You might even call your credit card issuer to request a lower interest rate or try to negotiate a medical bill. All of these options can free up cash in your budget that can go toward meeting other goals.

5. Thinking That You Cannot Have Fun While on a Budget

One of the reasons people don’t budget is it can feel like a real slog and a buzzkill. They assume that in order to budget successfully, they have to give up doing things they like. However, that’s not necessarily true. While a budget ensures that your necessary expenses are taken care of first, it can also provide discretionary funds that can be used however you want, from going to see a movie to booking a weekend getaway.

You may also consider making budgeting more fun by rewarding yourself when you meet certain goals. For example, you may want to treat yourself when you pay off a credit card. Just be sure you’ve already earmarked funds to pay for your reward.

6. Saving for Too Many Things Simultaneously

Another budgeting mistake involves trying to save for too many things at once. In this situation, it’s easy to stretch yourself thin. You might start to feel like you’re spinning your wheels and are unable to follow your budget.

A solution can be to narrow your focus. To prioritize your savings, first consider wants versus needs. For example, you may want to drill down on a single need, like creating an important emergency savings fund, rather than upgrading your mobile phone (which is a want, after all). Once your need is taken care of, then you can consider allocating funds for a want. Delaying gratification a bit can be a valuable tool when successfully managing your money.

7. Not Adjusting Varying Expenses Every Month

Some expenses, like rent and utility bills, are relatively fixed. Others, like how much you spend on groceries can vary from month to month. If you don’t compensate for that fluctuation, you may be making a budget mistake.

If you notice you are suddenly spending more each month in a certain category, be sure to adjust your budget accordingly, or look for ways to cut back on spending in that category. To protect yourself in times of high inflation, it can be especially important to monitor this. Your food, gas, and heating expenses may well run high for a while.

8. Not Taking Into Account One-Time Expenses

One-time expenses can be real budget busters if you don’t plan for them ahead of time. Estimate the cost of the expense, and spread out your savings over a couple of months.

For example, if you plan to attend a wedding that will cost $800, you could start saving $200 a month four months in advance so you don’t end up footing the bill all at once. Or let’s say you know you’ll be needing a set of new tires soon (currently averaging about $764 installed); start stashing away cash in advance so you don’t get hit with a major bill that sends your budget spiraling. Another category many budgeters overlook is gifts; birthday and holiday presents aren’t free, so remember to set aside funds to afford them without a hiccup.

9. Having an Unrealistic Budget

It’s easy to be optimistic and have the best intentions when you create your budget, but make sure it’s something you can realistically stick to. Otherwise, you may have a budget mistake on your hands.

You may be overly optimistic, for instance, if you allocate 20% of your take-home pay towards retirement savings. If you oversave in one area, like retirement savings, it can mean that you’ll incur credit card debt that’s hard to pay off to buy groceries. Be honest with yourself about how much you spend and how much you can save.

10. Having the Wrong Budget Method for You

There is no one-size-fits all budgeting strategy. As we mentioned above, there are a number of strategies you can use to help you build and stick to your budget. The best one is the one that works for you. Just because a budget strategy sounds good when you first learn about it or your best friend swears by it doesn’t mean it will work for you. It’s a budgeting error to cling to a system that isn’t working. If the technique you are using isn’t working, acknowledge that, and try something else.

The Takeaway

Now you know what is a common mistake made in budgeting; ten of them, in fact. By avoiding these pitfalls, you give yourself a better chance of sticking to your budget and meeting your financial goals. What’s more, you’re far less likely to be derailed by debt, whose interest payments can eat into your ability to save and manage your money.

Setting up the right bank accounts can also benefit your budget. Open a bank account online with SoFi and set up direct deposit, and you’ll be rewarded twice. Your money will earn a competitive APY, and you won’t pay any account fees. That’s a win-win that could help your money grow faster.

FAQ

What are some pitfalls of budgeting?

Budgeting pitfalls that can derail your financial goals include failing to have a budget, not tracking your expenses, forgetting to account for varying monthly expenses, and not building up an emergency fund.

What is improper budgeting?

Improper budgeting can occur if your budget is incomplete, if it’s overly ambitious (not recognizing how much you actually spend), or if you don’t update it with new sources of income or expenses.

Why do people fail in budgeting?

Your budget may fail for a variety of reasons, such as trying to achieve too ambitious or too many goals at once; not tracking your expenses; and sticking with a budgeting strategy that doesn’t fit your needs. If the latter is the case, try multiple strategies to find the one that suits you best.

Photo credit: iStock/Prostock-Studio

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.

SOBK0622043

Your 40s are a pivotal point in your life. You may have a house, a family, aging parents, and a busy job by this time. College expenses for kids may be looming, as well as retirement a little farther off. Maybe you’re hatching a plan to start your own business soon or buy a beach house that’ll be your empty-nester home.

Each person will have unique financial goals in their 40s, which will depend on many factors, like lifestyle, salary, and acquired assets. Now is the perfect time to crystallize those dreams and get your money in top shape. You’re old enough to know what you want, and chances are, you have many peak earning years ahead.

Read on for financial planning tips for your 40s, including:

•   Why it’s not too late to start budgeting and saving in your 40s

•   What are the right financial goals for 40-year-olds

•   Ways to save for children’s college expenses

•   How to save for retirement

•   What financial goals you should meet in your 40s.

Why Turning 40 Is a Big Deal

Where personal finances are concerned, your 40s are a big deal. You’re most likely approaching the height of your career and earning potential. Research from the Bureau of Labor Statistics says that primetime for earnings usually hits between age 35 and 54.

But you may also have many more expenses, such as planning for college for your children, planning for retirement, and caring for aging parents. Your 40s are a complicated decade where sound financial planning is crucial for a secure future.

Why It Is Not Too Late to Start Financial Planning in Your 40s

If there is one thing that is certain in life, it is uncertainty. Things change. Many people return to school in their 40s to boost their earning potential. Some take the plunge and dive into an entrepreneurial venture. Some leave the workforce entirely to focus on raising a family.

Whatever your life brings at this stage, you still have a couple of decades to plan for the years ahead, including your retirement, so set some goals now. It’s advisable to set long-term goals (5+ years), mid-term goals (2 to 5 years), and short-term goals (1 to 2 years). Having this staggered approach can help you balance your varied aspirations. Different timelines can demand different tactics.

Financial Planning Tips in Your 40s

So how exactly can you successfully manage your money in your 40s? Here are some tips for developing a financial strategy, saving money in your 40s, and more.

Pay Off Credit Cards and High-Interest Loans

Pay off as much high-interest debt as you can. This debt, typically the kind charged on credit cards, can be a major drain on your finances. Currently, credit card interest rates hover near 20%, which can throw a wrench in your budget if you’re carrying a balance.

You don’t need to stop using plastic completely, but you do want to whittle down what you owe. Credit cards can actually boost your credit score if you use them wisely and pay off the balance each month. If you can’t easily prioritize this debt and pay it down, options include:

•   Getting a balance transfer credit card, which will allow you to pay no or low interest for a period of time and catch up on payments

•   Taking out a debt consolidation loan at a lower rate to pay off the cards

•   Talking with a low- or no-fee credit counselor for guidance.

Invest in Physical and Mental Health

Healthcare can be one of the biggest expenses a person faces, so it pays to take care of yourself. The healthier you are, the fewer services and interventions you will likely need, and the less you will pay in deductibles each year. Most importantly, your quality of life and ability to earn will be so much greater if you are physically and mentally healthy. Take steps to assess your wellness and address any issues that are brewing. Also make sure that you choose the right health insurance plan for your specific situation.

If you have aging parents, talk to them about their health insurance plan and finances so that you understand how they are handling their wellness costs and have peace of mind.

Look More Closely at Retirement

At age 40, many people decide now is the right time to start saving for retirement. Or perhaps they already have a retirement plan or a 401(k) through their employer that they haven’t revisited recently.

Whatever your exact situation, your 40s are a good time to focus on your plan. You might think about increasing your 401(k) contributions, opening a Roth IRA, or finding a taxable investment account. Also, if you get a raise or bonus, why not put a chunk of it towards saving for your future?

You’ll likely want to consider how much of a nest egg you will need to retire and whether your current plan will get you there. If you pay for a professional financial planner, they can help you figure out how to save money in your 40s and maintain your desired standard of living into retirement.

Plan for Children’s Expenses (College, Careers)

It can be a shock when you realize that your baby is suddenly heading to college, and the cost of paying for their education may be an even greater surprise—and not necessarily a pleasant one. It can be very expensive. That’s why, when it comes to budgeting for couples or single parents, paying for higher education is often a major (and majorly challenging) goal.

There are saving plans specifically designed for college; for instance, 529 plans offer many benefits. If your children are not headed to college, other savings options like certificates of deposit (CDs) might be a better way to invest in their future. Teach your children sound financial management skills so you won’t be supporting them in their adulthood.

Some people go back to school in their 40s to help them move to the next level at work or prepare for a new career. If you are among them, create a budget that includes all your expenses and income. Project those numbers into the next few years to help you plan your life and stay on track financially.

Choose or Revisit Insurance Plans

In addition to health insurance mentioned above, your 40s can be a good time to consider disability insurance. If something happens to you and you cannot work, you could be forced to use your retirement and emergency funds sooner. Whether you choose short-term vs. long-term disability insurance, a policy can protect you by providing a safety net.

Death is an unavoidable life event, so review your life insurance policy (could you get a better deal elsewhere?) and be sure you have drafted a will. Parents who plan and pay for their funerals ahead of time ease the burden on dependents. The median cost of a traditional funeral is around $7,848, according to the National Funeral Directors Association. An insurance policy, a payable-on-death account, or prepaying at a funeral home can be good options to fund end-of-life expenses.

If you are shopping for life insurance, there are many online comparison tools that let you quickly see some different offers and how they stack up. It’s an easy way to start the process.

Keep Emergency Funds in Good Shape

Life is full of unexpected twists and turns. Some of them are not so fun, like having your car conk out, the roof leak, or your job suddenly come to an end. In times like those, you will need access to funds to cover your costs. That’s why having an emergency fund is important; with enough money to cover three to six months’ worth of your basic living expenses in a savings account, you’ll have peace of mind. If you don’t yet have a rainy day fund, start putting money aside each month (even just $25). Funnel any “found money” (say, a tax refund) to this savings account too.

Invest in a Diversified Portfolio

Growing your wealth often involves investing. While it does carry risk, it can yield big rewards. For instance, the annualized Standard and Poor’s (S&P) 500 return over the last 10 years was a healthy 14.7%. You might invest on your own, with a broker, or with automated financial planning. The vehicles you choose will depend on your risk tolerance. Some people invest in CDs and bonds, which are relatively low risk, while others enjoy speculating on the stock market. Manage your risk by never investing more than you can afford to lose.

Some people prefer to invest in stocks using dollar-cost averaging—investing a fixed dollar amount regularly, regardless of the share price—which can help you to build a diversified portfolio while minimizing volatility over the long term.

How Technology Can Make Managing Finances Easier

Managing finances and investments is so much easier in the digital age. Mobile banking and finance apps mean that you can manage your finances from your armchair 24/7. Online lenders offer favorable investment and savings options, and online trading platforms allow anyone to trade on the stock markets.

Where Should I Be Financially by 40?

Financial goals by age 40 vary. One rule of thumb is to save 15% of your income each year, but this figure is subjective and depends on many factors, including your existing assets.

The Takeaway

It’s never too late to take control of your finances. In your 40s, you are likely entering your prime earning years, so it’s a good moment to focus on paying down debt, preparing for the next chapter of your children’s lives, and saving and investing to get ready for retirement. With some wise money moves, you’ll be set to make the most of this decade and beyond.

One path to help pump up your cash: Choosing a bank that could help your money grow faster, like SoFi. Open an online bank account with direct deposit, and you’ll earn a competitive APY and pay zero fees. Plus, we make checking your balance and completing transfers super quick and easy.

FAQ

What financial goals should a 40-year-old have?

Ideally, a 40-year-old would be building a nest egg for retirement, paying down high-interest debt, and finding ways to sensibly pay for children’s college fees and meet other financial obligations. How much anyone needs to achieve these goals depends on many factors, such as lifestyle, income, and financial obligations.

How much should a 40-year-old have saved?

How much a 40-year-old should have saved depends on their current and future lifestyle and needs. A rule of thumb is to save 15% of your income each year towards retirement, but it will be different for everyone.

How can I build my wealth in my 40s?

You can build wealth in your 40s by paying down high-interest debt, choosing the right savings and investment vehicles, and planning for retirement.

Photo credit: iStock/shapecharge

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.

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.

SOBK0622039

What does it mean to be prequalified or preapproved for a mortgage? One lets a future homebuyer dream, and the other adds reality to the dream.

Here’s a look at how these two steps vary, how each can play a part in a home-buying strategy, and how one in particular can increase the chances of having a purchase offer accepted.

What Does Prequalified Mean?

Getting prequalified by phone or online usually takes just minutes.

You provide a few financial details to mortgage lenders. The lenders use this unverified information, usually along with a soft credit inquiry, which does not affect your credit scores, to let you know how much you may be able to borrow and at what interest rate.

Getting prequalified can give homebuyers a general idea of loan programs, the amount they may be eligible for, and what monthly payments might look like, the way a home affordability calculator provides an estimate based on a few factors.

You might want to get prequalified with several lenders to compare monthly payments and interest rates, which vary by mortgage term. But because the information provided has not been verified, there’s no guarantee that the mortgage or the amount will be approved.

What Does It Mean to Be Preapproved?

Everyone talks about what direction the housing market is taking, but the reality is that millions of Americans buy homes in any given year. They brush up on types of mortgage loans, and many face the probe known as mortgage preapproval.

Preapproval requires an investigation of your income sources, debts, employment history, assets, and credit history.

Verification of this information, along with a hard credit pull from all three credit bureaus, which may cause a small, temporary reduction in your credit scores, allows the lender to conditionally preapprove a mortgage before you shop for homes.

A preapproval letter from a lender stating that you qualify for a loan of a specific amount can be useful or essential in a competitive real estate market.

When sellers are getting multiple offers, some will disregard a purchase offer if it isn’t accompanied by a preapproval letter.

When seeking preapproval, besides filling out an application, you will likely be asked to submit the following to a lender for verification:

•   Social Security number and card

•   Photo ID

•   Recent pay stubs

•   Tax returns, including W-2 statements, for the past two years

•   Two to three months’ worth of documentation for checking and savings accounts

•   Recent investment account statements

•   List of fixed debts

•   Residential addresses from the past two years

•   Down payment amount and a gift letter, if applicable

The lender may require backup documentation for certain types of income. Freelancers may be asked to provide 1099 forms, a profit and loss statement, a client list, or work contracts. Rental property owners may be asked to show lease agreements.

You should be ready to explain any negative information that might show up in a credit check. To avoid surprises, you might want to order free credit reports from www.annualcreditreport.com. A credit report shows all balances, payments, and derogatory information but does not give credit scores.

Knowing your scores is also helpful. There are a few ways to check your credit scores without paying.

Those who have filed for bankruptcy may have to show documentation that it has been discharged.

Calculate Your Potential Mortgage

Use the following mortgage calculator to get an idea of what your monthly mortgage payment would look like.

Do Preapproval and Prequalification Affect Credit Scores?

Once you decide on a mortgage lender or lenders, you can begin the preapproval process.

Only preapproval requires a hard credit inquiry, but the good news for mortgage shoppers is that multiple hard pulls are typically counted as a single inquiry as long as they’re made within the same 14 to 45 days.

Newer versions of FICO® allow a 45-day window for rate shoppers to enjoy the single-inquiry advantage; older versions of FICO and VantageScore 3.0 narrow the time to 14 days.

You might want to ask each lender you apply with which credit scoring model they use.

Do I Have to Spend How Much I’m Preapproved for?

No! The preapproval amount is your maximum house-hunting budget. Staying well under that number can’t hurt and might free up money for more than mortgage payments.

Like what? Like a college fund, retirement, and vacations.

And like — groan — emergency home repairs.

Recommended: Guide to First-Time Home Buying

Are Prequalification and Preapproval the Same Thing?

By now you know that they are not one and the same. Here’s a visual on what’s needed for each:

Do I Need a Prequalification Letter to Buy a House?

No. Nor do you have to have a preapproval letter when making an offer on a house.

But getting prequalified can allow you to quickly get a ballpark figure on a mortgage amount and an interest rate you qualify for, and preapproval has at least three selling points:

1.    Preapproval lets you know the specific amount you are qualified to borrow from a particular lender.

2.    Going through preapproval before house hunting could take some stress out of the loan process by easing the mortgage underwriting step. Underwriting, the final say on mortgage approval or disapproval, comes after you’ve been preapproved, found a house you love and agreed on a price, and applied for the mortgage.

3.    Being preapproved for a loan helps to show sellers that you’re a vetted buyer.

The Takeaway

Prequalified vs. preapproved: If you’re serious about buying a house, do you know the difference? Getting prequalified and then preapproved may increase the odds that your house hunt will lead to a set of jangling keys.

SoFi offers a range of fixed rate mortgage loans with competitive rates and low down payment options.

Looking at investment properties? SoFi has loans for those, too.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility for more information.

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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.

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.

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Investing in the stock market is usually alluring for those trying to grow their money. But there are many things to consider before jumping in — chief among them stockbroker commissions. Stockbrokers often charge commissions and other fees for the use of their services, and these brokerage fees can vary widely.

Investors must pay attention to average brokerage fees when making investment decisions; finding the right broker can play a significant role in long-term financial outcomes. Before delving into how much stockbrokers typically charge for their services, it’s worth understanding their role in an individual’s investment strategy.

What Does a Stockbroker Do?

A stockbroker, or investment broker, is an individual or firm that charges a fee or commission to buy or sell stocks and other securities on behalf of their clients. Using a stockbroker is relatively common for people looking to invest in the market.

Buying stocks isn’t like making other purchases because the channels through which stocks are bought and sold are fairly controlled. While an individual buying a computer could choose to purchase directly from a manufacturer, a store, or a friend, the channels for buying stocks are much more limited. Generally, purchases of stock are required to flow through a stockbroker.

However, there are some instances when someone may buy stocks without a broker, including buying and selling through direct stock and dividend reinvestment plans.

A stockbroker has a license that allows them to trade registered securities, meaning the ability to buy and sell stocks on behalf of clients. But merely acting as an agent for buying and selling stocks doesn’t capture the full extent of what some brokers do. Many brokers offer additional services to clients, like money management and estate planning.

Because the types of services a stockbroker may offer, and the fees they levy on these services, can vary, it’s good to understand the main categories of brokers. In addition to selling shares of companies, a stockbroker may also sell other traded securities such as mutual funds and exchange-traded funds.

What Is the Average Stock Broker Commission Fee?

The amount charged by a brokerage firm for its services can vary greatly. Some firms may charge a flat fee for their services, while others may charge a percentage of the overall value of the transaction. The average fee charged by brokerage firms is typically between 1% and 2% of the total transaction value.

Full-Service vs Discount Stockbrokers

The main two categories of stockbrokers are full-service brokers and discount brokers. You want to understand the differences before opening a brokerage account.

As they sound, a full-service brokerage firm provides more hands-on service, helping clients balance their portfolios and providing other investment advice. Discount brokers allow an investor to buy and sell stock and other assets, but provide few add-ons but still. Commission rates and additional fees vary accordingly.

Because full-service stockbrokers provide an array of services over the year, they typically base their commissions on a more all-inclusive model determined by the value of the investments they manage. While there may also be additional fees, the typical commission structure for a full-service broker is known as the percentage of assets under management. The cost is charged annually and is listed within fee schedules as “x%/AUM” (assets under management).

Discount brokers, synonymous with online brokerage accounts, on the other hand, typically charge a per-transaction flat stock trade fee, regardless of the type of stock or number of shares being bought or sold.

For example, if the stock trade fee is $5 per trade, that’s what an individual would pay whether they were buying five shares of a stock valued at $50 a share ($250) or 500 shares ($25,000).

However, many discount brokers these days charge no commission for trading stocks.

Common Brokerage Fees

Various investment fees and costs are associated with the buying and selling of investments. Investors should consider these brokerage fees when choosing a broker and deciding what investments to make.

Management Fees

An investment’s management fee is the fee the investment manager charges for its services. This fee is typically a percentage of the investment’s assets under management and is deducted from the investment’s returns.

If you use a full-service brokerage that offers money management services, they will often charge a management fee. Some charge as much as 2% and others far less.

Generally speaking, the more money you have invested with a broker or money manager, the lower your management fee will be.

Commission For Trading

Many brokerage firms charge a commission for making trades on behalf of clients. Fees and commissions vary widely depending on the type of transaction and broker. Those fees can be based on a percentage of the transaction’s value — usually between 1% to 2% — or they can be a flat fee.

The commissions for trading depend on whether an investor uses a full-service or discount broker. Because full-service brokers offer a wide range of advice and services, their commissions per trade may be higher than a discount or online brokerage might charge.

Discount brokers offer fewer advice and services, so they can charge a lower flat fee per trade, from less than $5 to more than $30. In recent years, the biggest online brokerage firms have offered no commission trading, partly due to competition and because they instead get paid through a practice known as payment for order flow.

Retirement Account Fees: 401(k)

If you have a 401(k) savings account through your employer, there are several fees to keep in mind when making your investments.

First, you’ll likely be charged an administration fee to maintain the plan. These fees can range from 0.5% to 2% of your 401(k) balance. The 401(k) provider charges this fee to your employer, and the cost is usually passed down to the employees.

Additionally, the actual investments in your 401(k), like mutual funds and ETFs, charge management fees that you’ll have to pay.

Mutual Fund Fees

Investors interested in buying and selling mutual funds must consider the fees associated with these investment vehicles.

Expense Ratio

The expense ratio is the yearly cost that mutual funds and ETFs charge investors to cover operating costs. The expense ratio measures the total costs as a percentage of the fund’s total assets. The fund’s costs may include management, custodial, marketing, and other expenses.

The average expense ratio for an actively managed mutual fund ranges from 0.5% to 1.0%, while passive funds have an average expense ratio of 0.2%.

The costs of operating the mutual fund are deducted from your investment, reducing your returns each year.

Sales Load

Mutual fund investors may pay sales loads — also known as sales charges — when they buy or sell shares of the fund. The sales load is how the broker or advisor gets paid for their service.

A sales load isn’t a flat transaction fee, however. Instead, it’s a percentage of the assets invested.

FINRA caps mutual fund sales loads at 8.5%, though the common range is between 3% and 6%.

Brokerage Fee Impact on Investments Long-Term

Brokerage and investment fees and commissions can eat away at long-term gains. Thus, finding the right broker and investing in low-cost funds can help you achieve your long-term financial goals.

To illustrate, if full-service brokerage charges a 1.5% annual management fee on a $50,000 portfolio, that costs $750 for the investor during a single year. While that charge doesn’t seem significant for one year, those fees will add up and eat into overall returns over time.

Brokerage Fee Pros

One of the benefits of using a brokerage is that you have access to valuable resources, research, and advice. These services may help you make better investment decisions, leading to better financial outcomes. So, you may get what you pay for, even if you think the fees may be steep.

Brokerage Fee Cons

As noted above, brokerage fees can be expensive and eat into investment returns. This is especially a problem if you don’t do your homework and pay attention to all the fees charged by brokers and the kind of investments you make.

Additionally, high brokerage fees may discourage some people from investing, leading to poor long-term financial outcomes.

Is It Worth Using a Stockbroker?

Using a stockbroker, especially a full-service brokerage, can be ideal for investors intimidated by complicated financial markets. The idea of having a licensed professional guide novice investors through every investment decision and trade might seem like a good way to get more comfortable with the principles of investing. But as the above examples illustrate, the average full-service stockbroker commission can make the full-service approach expensive.

Free Trades and Chat With a Planner

With long-term returns that have historically outpaced interest rates on savings, investing in the stock market can be a powerful strategy for financial growth. Even beginners may find investing less intimidating than they thought — and possibly see clear of high stockbroker fees.

With a SoFi Invest® online brokerage account, you can start trading stocks and ETFs with no commissions for as little as $5. If you sign up for a SoFi account, you’ll even get complimentary access to financial planners, SoFi’s non-commissioned fiduciaries who are required to keep your best interests in mind.

FAQ

How do stock brokerage fees work?

Stock brokerage fees are typically a commission that a broker charges for executing trades on behalf of their clients. These fees can vary depending on the type of trade being executed, as well as the broker’s commission structure.

Are there any alternatives to a brokerage fee?

A brokerage fee is a charge assessed by a broker for their services, which typically include advice, transaction execution, and asset management. There are a variety of alternatives to brokerage fees, including flat fees, subscription fees, and performance-based fees.

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