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4 Tips for Repaying Federal Student Loans

Editor's Note: Since the writing of this article, the federal student loan payment pause has been extended into 2023 as the Supreme Court decides whether the Biden-Harris Administration’s Student Debt Relief Program can proceed. The U.S. Department of Education announced loan repayments may resume as late as 60 days after June 30, 2023.

Even though common sense might suggest that repaying any loan should be straightforward—that all you have to do is send money until you don’t owe any more—there is actually a fair amount of strategy involved. When it comes to repaying federal student loans, there are many ways to think about taking them on.

Having a game plan for eradicating student loan debt is a good idea: In the United States alone, 45 million borrowers hold more than $1.6 trillion in student loan debt, and payments to tackle that mountain of debt have been slowing, on the whole. Those numbers and that trend underline the necessity that a borrower knows how to shoulder debt while reducing it.

So here’s a guide that offers tips for repaying federal student loans. Are you the calculating sort? Our student loan payoff calculator is a good tool for getting an idea of your loan payoff date. (The Education Department also has a calculator if you want to play around with your numbers.)

As outlined in the CARES Act, and extended by executive order, both the suspension of loan payments and the 0% interest rate on loans held by the Department of Education are set to expire after Aug. 31, 2022.

Repaying Federal Student Loans

1. Taking Advantage of the Grace Period

An important factor to determine your strategy to pay off a federal student loan is when you are expected to make your first loan payment. This deadline can dictate the rest of your actions. According to the Federal Student Aid office , for most student loans, there is a set period of time after a student graduates, leaves school, or drops below half-time enrollment before payments begin.

This grace period could be six to nine months, depending on the program a student received a loan through. As the date of the first payment draws closer, the loan servicer should let the borrower know when the first payment will be due—but it helps to think of how to take advantage of the grace period in advance.

While it might be tempting to view the grace period as a time when you can sink your extra money into other things you want or need, it’s probably smarter to save up for when those payments will start coming due.

If you have a subsidized federal student loan, your loan will not accrue interest while you’re in school or during the grace period, so it helps make paying it off in the longer run less burdensome.

If you have an unsubsidized federal student loan, interest has been accruing since the loan was disbursed, so you could consider taking the time when you do not have to make principal payments to pay down some of the interest that accrued.

For more information on ways to pay off student loans, this link includes tips for budgeting during a grace period and others you can mull over in that time. Interest has a way of sneaking up on borrowers because they might have in mind only the principal amount when thinking about monthly payments.

Also be aware that some federal student loan programs can have an up-front interest rate reduction, which requires making a number of monthly payments on time to prevent the rate from increasing.

So, just as studying is important to one’s academic life, studying up on student debt strategies is important to your overall life.

Borrowers can also learn to harness momentum to pay off student loans faster.

2. Selecting the Right Repayment Plan

Federal student loans come with many options for repayment. The options that might be open to you will depend on the type of loan you took out.

This Federal Student Aid office brochure drills down on the most common plans and loans they apply to, and offers bullet points of comparison.

It also links to information on consolidating federal student loans. Refinancing loans is something else to consider.

Generally speaking, the most popular repayment plan for federal student loans is the Standard Repayment Plan. Part of the reason it’s the most popular is—wait for it—is that it’s the default plan borrowers will be designated for unless they request otherwise.

The Standard Repayment Plan affords borrowers up to 10 years to repay, with an expectation of fixed monthly payments of at least $50 during that time.

There’s also the Graduated Repayment Plan, which starts with lower payments that increase every two years. Under the plan, a borrower makes payments for up to 10 years.

With the Extended Repayment Plan, a borrower can take up to 25 years to pay the loan. There are specific eligibility requirements. The plan requires lower monthly payments than the 10-year Standard plan, though you will wind up paying more in interest for your loan than you would have over 10 years.

Then there are income-driven repayment plans, which are geared toward monthly payments that are intended to be affordable based on discretionary income and family size. These are meant to further lighten the financial burden for individuals who have additional ongoing expenses or obstacles.

As such, they offer a greater degree of flexibility on their terms—like the Income-Contingent Repayment Plan. With that plan, any outstanding balance will be forgiven if the borrower hasn’t repaid the loan in full after 25 years. (Income tax may still be owed on the amount that was forgiven.) Again, more details on each of these payment plans—and others—can be found in this Federal Student Aid office publication .

Some of these plans are good options if you are seeking Public Service Loan Forgiveness—circumstances that apply if you are employed by a U.S. federal, state, local, or tribal government or nonprofit organization.

Many of the income-driven repayment plans may be good options if Public Service Loan Forgiveness is a light at the end of your federal student loan debt tunnel.

The Income-Based Repayment Plan is worth a mention, as monthly payments would be 10% to 15% of discretionary income, and payments are recalculated each year to factor in family size and discretionary income.

It’s normal to feel a little confused with so many numbers being thrown around. Our guide on fast ways to pay off debt makes a good addition to everything discussed so far.

3. Student Loan Consolidation

A Direct Consolidation Loan allows a borrower to consolidate multiple federal education loans into one loan at no cost. It’s just a way to minimize the headaches—and ulcers—that can stem from the obligation to make monthly payments on different loans.

It’s not usually a way to save money, as the new interest rate you get with a Direct Consolidation Loan is a weighted average of all your loans’ interest rates rounded up to the nearest eighth of a percentage point.

There is another asterisk in considering this option: Private student loans cannot be consolidated with federal student loans into a Direct Consolidation Loan. You can, however, pursue refinancing both types of loans with a private lender.

If you have solid credit and a stable income, among other personal financial attributes, it’s possible to qualify for a new loan at a lower interest rate.

But there’s an asterisk to this asterisk, which is that refinancing with a private lender can make you ineligible for the federal benefits and protections offered to qualified federal student loan borrowers, like Public Service Loan Forgiveness, income-driven repayment, deferment and forbearance.

4. Paying More Than the Minimum

A strategizer knows that there’s more to it than paying the lowest amount required every month on student loans.

A big reason to pay more than the monthly minimum is that student loan repayment is structured around amortization—a word you heard if you took an accounting or economics class that basically means a portion of fixed monthly payments goes to the costs associated with interest (what the lender gets paid for the loan) and reducing your loan balance (paying off the total amount owed).

Paying more than the minimum means you can accelerate reduction of the amount you owe rather than covering the interest—which is effectively the lender charging you for the privilege of having the loan in the first place.

That privilege isn’t exactly bragworthy, so it’s smart to make more than the minimum payment—however little more it might be.

One plan of attack for borrowers to consider is signing up for automatic payments through their federal loan servicer so the payments are taken directly from their bank account as they’re due.

The payment amount to be withdrawn can be customized, and there’s a discount for doing so: Those who have a Direct Loan will get an interest-rate reduction while participating in automatic debit.

Getting Student Loans Under Control

Nobody really enjoys thinking about student loans, but the upshot of that is the pain points associated with them are well known—and there are proven strategies to ease the pain and manage the process of repaying government student loans, whether going for a special payment program, consolidating, or refinancing.

All it takes is a little planning and a willingness to adapt those plans to the ways your life unfolds after you have that degree.

SoFi student loan refinancing offers flexible terms and low fixed or variable rates. There are no application or origination fees. And getting prequalified online is easy.

Check your rate today.

SoFi Student Loan Refinance
If you are looking to refinance federal student loans, please be aware that the White House has announced up to $20,000 of student loan forgiveness for Pell Grant recipients and $10,000 for qualifying borrowers whose student loans are federally held. Additionally, the federal student loan payment pause and interest holiday has been extended beyond December 31, 2022. Please carefully consider these changes before refinancing federally held loans with SoFi, since the amount or portion of your federal student debt that you refinance will no longer qualify for the federal loan payment suspension, interest waiver, or any other current or future benefits applicable to federal loans. If you qualify for federal student loan forgiveness and still wish to refinance, leave unrefinanced the amount you expect to be forgiven to receive your federal benefit.

CLICK HERE for more information.

Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
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Should I Have an Emergency Fund?

A hospital bill in the thousands. A vet invoice for hundreds. A car repair for more than you make in a month. When faced with an emergency, it can compound the problem to try to figure out how to pay for the unexpected expenses, on top of an already stressful situation.

If you find yourself questioning, “Should I have an emergency fund?” the answer should be a resounding yes, absolutely! But where to begin? Forty percent of Americans say they are unable to afford even a $400 emergency expense.

Conventional wisdom claims you should have enough money saved in an emergency fund to cover at least three to six months of expenses, depending on your personal financial situation.

But with looming student debt, credit card payments, or other big financial burdens, it can be hard to imagine saving while keeping up with all of your bills and expenses. Emergency funds are great for major unexpected expenses, but preparing for the unexpected still takes time and planning.

Beefing up Your Budget

One of the first ways you can start saving up for an emergency fund is to evaluate your current spending habits and create a budget, if you don’t already have one. Take a look at where there is fat to trim, meaning extra expenses you can minimize or eliminate.

Start with a simple spreadsheet, which should help you break down your spending to see your total income, plus what you spend on necessities like rent, loan payments and groceries, discretionary spending like shopping or entertainment, and long-term goals, including emergency fund savings or retirement.

For a two-income household, you could aim to have three months of expenses in your basic emergency fund, with six months for a one-income household.

In a recent survey, 67% of millennials report having a savings goal and sticking with it every month, or most months. Your overall savings goal might actually include more than just saving for an emergency fund.

One common tactic for an easy budget to stick to is to put 20% of your take-home income toward financial goals, such as savings, and then make part of that just for your emergency fund.

You might want to look at your current bills and deadlines and see what you can adjust to make the most sense with your paydays. If you get paid every two weeks, but all of your bills are due at the end of the month, maybe you find you are dipping into those savings to pay everything on time.

You could try spreading out your bills throughout the month or grouped closer to your paychecks, so you can better budget your money throughout the year. Everybody’s financial situation is different, so figure out what works for you—and stick with it.

Having an emergency fund means you’ll be better prepared to cover any urgent, unplanned financial crises, like a high medical bill or costly car repair, without ruining your normal budgeted living expenses. With money set aside, you’ll be able to stress less and avoid more costly solutions like credit cards or personal loans to fund any emergencies.

However, one possible disadvantage to trying to build up your emergency fund is that you might feel like that money should be going toward paying off debt, like student loans or credit cards, before storing away funds in savings. But it’s important to know good debt from bad in this case.

A mortgage or student loan is generally considered good debt, while a high-interest credit card can be worse for your overall credit score and financial health. If you are weighing paying off debt versus building up your emergency fund, you might consider this order to figure out your top priorities:

•   Make sure you have enough money in the bank to pay any recurring bills.
•   Build a safety net equal to one month of your basic expenses
•   Match any contributions your employer makes for retirement contributions.
•   Pay off bad debt, like high-interest credit cards.
•   Build up your emergency fund.

Once you have three to six months’ worth of expenses saved up for your emergency fund, you can refocus your budget on other long-term goals.

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Putting Savings on Auto Drive

If you already use direct deposit, you’ve already got a possible solution to help you fund an emergency reserve. You can set up a recurring transfer with your bank, or split your direct deposit into a checking and a savings account, in order to make savings automatic.

If you don’t notice the money sitting in your account in the first place, it might be less tempting to spend it or move it back out of savings.

So how much can you afford to automatically transfer? The Consumer Federation of America says that an emergency savings fund should consist of at least $500 . They recommend using a savings account that you do not have easy access to, perhaps at a different bank than your current home bank.

You can kick-start your emergency fund by using a cash windfall like a tax refund, work bonus, or birthday check.

You could aim first to get to $500, then $1,000, then one month of essential living expenses, and work your way up from there.

You probably aren’t going to generate three or six months worth of extra money all at once.

Automating your savings might help, whether you choose to have a certain amount from your paycheck transferred into a separate savings account, or set up recurring transfers from checking to savings with your bank.

Then, when you do reach a comfortable number in your emergency fund, you can redirect those automated savings toward other financial goals like paying off debt or funding retirement.

Saving Smarter, Not Harder

So, if you’re determined to start saving more for an emergency fund, you might want to explore exactly what kind of savings account you want to keep your money in.

Certain accounts can earn you significantly more money based on the amount of interest. This could help your emergency fund grow even faster while rewarding you for saving money rather than spending it.

In fact, a SoFi Checking and Savings® account has no account fees. Plus, as a SoFi member, you’ll also receive other benefits to help you figure out your finances, like career coaching, mobile transfers, financial advisors, and community events.

We work hard to charge zero account fees. With that in mind, our fee structure is subject to change at any time.

Before you start saving up for an emergency fund, consider what kind of account you want to keep that money in. It can be helpful to have easy access to cash, in case you are ever faced with a financial emergency.

Get started building your emergency fund with a SoFi Checking and Savings account today.

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Medical Debt Relief Options

It may come as no surprise that Americans are stressed about medical debt and the rise of healthcare costs. With the average family insurance premium growing 54% in the past ten years, one-third of Americans are concerned about paying their medical bills. Unfortunately, close to one-third of workers already carry some form of medical debt.

Luckily, there are some options for the millions of Americans struggling with medical debt, as well as some solutions to help avoid future medical debt.

How Much Do Americans Spend on Healthcare Each Year?

US healthcare spending increased 4.6% to reach $3.6 trillion, or $11,172 per person in 2018, according to Centers for Medicare & Medicaid Services . While this data only highlights the national expenditures for health care, it only takes into account those who are covered by some type of insurance.

According to recent data from the Kaiser Family Foundation (KFF) , about 158 million Americans, or around 49% of the country’s total population, have employer-sponsored health insurance (also called group health insurance).

For 2019, the average annual dollar amounts covered workers contributed were $1,242 for single coverage and $6,015 for family coverage, according to the 2019 Employer Health Benefits Survey . Typically, employers pay a portion of health insurance costs, so employees don’t pay the full cost of their health care.

How Many Americans Struggle With Medical Debt?

Despite employer-sponsored health plans covering some of the costs, some Americans struggle to pay their medical bills.

In fact, approximately 137.1 million adults reported medical financial hardship in the past year according to the Prevalence and Correlates of Medical Financial Hardship in the USA study . This is especially true for adults ages 18 to 64 years old and for those not covered by health insurance.

Although the number of families having problems paying medical bills in the past 12 months decreased from 19.7% in 2011 to 14.2% in 2018 , medical debt continues to be a problem for many Americans.

What Happens If Medical Debt Is Not Paid?

Even with an overwhelming amount of medical debt, the worst thing to do is ignore it. Depending on the state, a medical provider might charge a late fee for bills not paid on time. Also, the provider may even charge interest on those bills if payments aren’t made at all.

If medical bills go unpaid, after a few months the provider might pass the debt over to a debt collection agency.

If the medical provider does decide to give the debt to a debt collection agency, the debt might immediately appear on the debtor’s credit report and affect their credit score.

The debt collector will take steps to collect the bill. If the debt is not collected, the provider may take it even further and take legal action.

While US laws don’t allow debtors to be imprisoned for unpaid debts, they could face another consequence, such as wage garnishment. If the case goes to court and a judge rules in favor of the medical service provider, there’s a chance the debtor’s wages could be garnished.

In simple terms, this means that payment will be taken out of their paycheck and sent to the provider.

4 Medical Debt Relief Options

Fortunately, even if medical debt is plaguing a person’s finances, there are solutions to help them either ease the financial burden of the debt or get rid of it for good. But medical debt is often a very sensitive topic and the suggested solutions may not be a good fit for everyone’s circumstances.

Since everyone has a unique financial situation, it’s wise to contact a professional before taking action. With this in mind, here are a few suggestions to help get a handle on medical debt.

1. Medical Debt Payment Plans

Because healthcare services are often costly, contacting medical providers to ask if they offer payment plans might be one plan of action to consider.

Some medical providers may offer payment plans to pay off debt in installments instead of paying it off all at once, which might make the debt more manageable.

Reaching out to the hospital or medical office can help determine if there are payment plans available. However, not all medical providers may offer this solution. Some providers may even require full payment at the time of service.
Others may request a payment plan be set up before a service, and if this option isn’t considered in advance, the offer might not be available later.

Also, the medical provider may set up a payment plan that’s too expensive for a person’s monthly budget. If this is the case, a payment plan may not help with their current medical debt situation.

2. Negotiating Medical Debt

It may feel counterintuitive or inappropriate to negotiate medical bills, but some providers actually expect it. While it may seem awkward at first, negotiating medical bills can help make them more manageable. Additionally, negotiating may even help avoid a credit score ding, or worse, getting sued.

For starters, reaching out to the provider’s billing department directly to see if negotiation is possible might be an option to start with. Many providers have financial departments that can determine if patients qualify for discounts or reductions.

Remember, when negotiating, try to be as polite as possible. But it can be helpful to be persistent, too. Being rude to the provider probably won’t work very well. Taking the high road can help make the negotiating process a lot more manageable.

Another point to remember is that providers may favor cash. So those who can afford to make a lump sum payment might consider asking if the provider offers a discount for a cash payment.

3. Working With a Nonprofit Advocate

If the medical bills keep piling up, it may be worthwhile to consider finding a nonprofit advocate or reputable credit counseling organization that offers assistance with managing money and debts, creating a budget, and providing resources to help consumers pay off the debt that’s dogging them.

Certified counselors that have been trained to help individuals create a plan to solve financial concerns can be found through the US Department of Justice . These organizations offer counseling and debt management plans and services.

One solution credit counselors may suggest is a debt management plan. These plans may help the borrowers get their debt under control.

With one type of debt management plan, the borrower makes a lump sum payment to the credit organization, and then the organization pays the creditor in installment payments.

If deciding to go this route, make sure not to confuse a credit counseling nonprofit organization with a debt settlement company. In contrast to credit counseling nonprofits, debt settlement companies are profit-driven.

A debt settlement company negotiates with creditors to reduce the debt owed and accept a settlement—a lump sum—that’s less than the original debt. However, these companies can charge a 15% to 25% fee on top of the debt settled. While some of these companies are legitimate, consumers are cautioned to be wary of scams related to debt settlement.

Some deceptive practices include guarantees that all of a person’s debts will be settled for a small amount of money, that debtors should stop paying their debts without explaining the consequences of such actions, or collection of fees for services before reviewing a person’s financial situation. Researching a company’s reputation can be done through the state attorney general’s office or the state consumer protection agency .

4. Using a Personal Loan

A personal loan might also be a solution for tackling medical debt and may offer lower interest rates and more flexibility than resorting to credit card debt.

Using an unsecured personal loan to pay off medical debt is similar to other uses for personal loans, like home improvement costs or credit card consolidation.

Similar to other financing options, lenders will review an applicant’s credit history and financial health (among other factors) when determining eligibility and the interest rate qualified for. The amount of money borrowed is paid back in installment payments over the terms agreed upon between the lender and the borrower.

Personal loans may help consolidate all of a person’s medical debt via a medical loan—which can be used to pay off multiple medical providers. At that point, the borrower would just be responsible for paying back the personal loan, which may help simplify the repayment process because there won’t be multiple bills to pay every month.

Taking the Next Steps

If an unsecured personal loan seems like a viable option for your financial situation, comparing lenders is a good first step. Some lenders may charge an origination fee, a prepayment fee, or other fees. Reviewing potential interest rates and terms to see which lender is more advantageous and makes financial sense for your situation is also important.

As stressful and overwhelming as medical bills can be to tackle, creating a repayment plan can help you get on track and make repayment more manageable. It takes just a few minutes to determine your rate at SoFi. And SoFi Personal Loans have no fees required.

Learn more about how a personal loan from SoFi can help you pay for medical costs.

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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.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.


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What is a Direct Deposit?

A direct deposit occurs when funds are electronically transferred out of one bank account and then deposited into another account.

In other words, this is one type of automated funds transfer, with direct deposits often used for payroll purposes, rather than having employees get paid via cash or through physical checks.

The concept of direct deposits can be traced back to 1968. That’s when bankers in California decided that technology might not be able to keep up with the number of paper checks being issued and cashed.

So, they created SCOPE, which is the Special Committee on Paperless Entries, to come up with a solution. The American Bankers Association sponsored a study around the same time to discover ways to improve the payment system in the United States.

In 1972, the first automated clearing house (ACH) network formed to manage electronic payments, with other networks quickly following. In 1975, the Social Security Administration (SSA) decided to test the system of direct deposit for payments they issued. Today, 99% of SSA’s payments are directly deposited.

The U.S. Air Force became the first employer to pay people through this method. And, today, nearly 93% of employed people in the United States receive their salaries or wages this way.

Automatic bank transfers are used today in ways beyond having paychecks directly deposited, including bill pay, retirement account contributions, and more.

Explaining Payroll Direct Deposits

Let’s say that someone is ready to start a new job. The human resources department explains how the company either requires direct deposit or offers the option.

If that employee signs up for direct deposit, they would need to share bank information with their new employer, including the bank’s name, the routing number that identifies the financial institution, and the employee’s bank account number.

This information would then be entered into the company’s payroll system and, whenever payroll rolls around, the company would send an electronic file to this employee’s financial institute. This file would share how much money should be transferred from the company’s (the “originator’s”) bank account to accounts for each of the employees whose direct deposit accounts are located at that particular financial institution.

If, for example, three employees of a company all share Bank A, then let’s say this bank receives an electronic transfer of $4,345. Bank A would then distribute the money appropriately into the proper bank accounts, perhaps:

•   $2,000 in Person A’s checking account and $500 into their savings account
•   $1,350 in Person B’s account
•   $445 in Person C’s checking account and $50 into their savings account

Then, if the employees (known as “receivers”) check their bank balances, they’ll see the deposits made through this direct deposit process.

As noted in this example, money may be directly deposited to a checking account or into a savings account. Or, some money can be put into a savings account with the rest in a checking account.

In September 2016, same day transfers for direct deposits debuted.

Benefits of Payroll Direct Deposits

With a direct deposit of their paycheck, employees can skip the step of physically depositing a paycheck into their accounts, which can be a timesaver.

This can be especially true if the employee telecommutes from home, is on vacation, or is otherwise out of the office when payday comes, because that employee doesn’t have to go into the office to retrieve the paper check.

With direct deposit, the money is typically in an employee’s bank account at the start of the designated payment date, which gives them access to the funds that day.

With paper checks, there’s always the possibility that they will get lost or stolen. So, payroll direct deposit can add a layer of security to the process.

Many times banks will waive fees for customers who have direct deposits set up, although there may be a minimum deposit amount required for this to happen.

Plus, some banks put a hold on paper checks until they clear the banking system. With direct deposit, account holders don’t need to deal with that delay.

Here’s another benefit. If an employee puts a percentage of each paycheck automatically into a savings account, this can get them into a regular savings habit.

Downsides of Payroll Direct Deposit

When people receiving direct deposits decide to change banks, it may be a hassle. It may take workplaces a period of time to change where paychecks are sent, which means that the old account might need to be kept open longer to make sure all paychecks are received.

How long that period of time may be can vary. But, before you close your old account, ensure that all direct deposits are being put into the new account. Also make sure that all withdrawals and checks have cleared at your old bank and that any automated payments are coming out of the new bank.

Although ATMs make banking simpler for many people, they may come with fees, which can add up. (This downside would also be true if paper paychecks were manually deposited and then, later, funds were withdrawn from the ATM.)

Plus, with direct deposit, it’s important to make sure the correct deposit dates and amounts are recorded. Otherwise, account holders could write checks beyond what’s available, which could trigger non-sufficient fund fees—which, like ATM fees, can be costly, especially when they add up.

To help prevent this, see about setting up bank alerts that indicate when a transaction has been made.

Here’s one more downside. Not everybody in the United States has a bank account. If someone doesn’t but their employer requires direct deposit (more about that, next), then employees without a bank account would likely receive their paychecks through a prepaid debit card.

These can come with fees and, like paper checks, can be lost or stolen.

Employers Requiring Direct Deposit

Just as there are benefits to payroll direct deposit for employees, there are also benefits for employers—including that it’s cheaper to manage payroll payments this way, versus physical checks.

Plus, they have a record of accounts, which makes it easier for companies when they’re reviewing expenses—and they don’t have to reissue a check if an employee loses one.

And, after a person’s payroll information has been entered into the system, paying employees can be faster and easier with direct deposit.

Laws governing payroll direct deposit vary by state and, if a state has no specific laws on this subject, it defaults to federal regulations.

Federal law states that employers must give each employee using direct deposit a summary of rights and liabilities, and must get their signature on an authorization form along with relevant banking information.

Some states allow employers to actually require direct deposit for payroll, as long as the program is administered in a way that’s consistent with federal regulations. Most states, however, still give employees the choice between direct deposit and receiving a physical check.

A handful of states have laws that are unique to them, ones that don’t fit into any of the broad categories already described.

Automating Your Finances

The concept of electronic funds transfers is at the heart of payroll direct deposits, but goes beyond that. Here are additional ways to benefit from automating your money management.

Automation is a tool that can also help people to build an emergency savings account. In general, traditional wisdom says this account should contain three to six months’ worth of living expenses.

That way, if an emergency arises—whether that’s a job loss, an unanticipated repair, or unexpected medical expenses—a financial cushion exists. By setting up a regular funds transfer to a savings account, this can make it easier to build up that emergency fund.

Another strategy to consider: paying bills through autopay. In some instances, lenders may offer a discounted interest rate for borrowers who use automated payments to pay their bills.

Beside the potentially lower interest rate, autopay can help borrowers to make their payments on time, rather than forgetting them when life gets hectic. This also helps to prevent being charged a late fee if a payment is missed, keeping more money in the bank account.

And, because payment history plays a key role (35%) in a person’s FICO® Score, autopay can help to build or preserve a person’s credit score, given that enough money is in their checking or savings account when the payment is due.

Autopay helps to reduce the number of paper bills that need to be sent out—for example, monthly utility bills—and the number of paper checks that may be written to pay those bills. This means that automated funds transfers can therefore be an eco-friendly choice to make.

And, whenever funds are electronically transferred, either in or out of a bank account, a digital record is automatically created. This can be helpful when balancing accounts, creating a budget, looking for tax deductible items, searching for ways to trim discretionary spending, and more.

Autopay might also be a good strategy to use to contribute to a retirement account. Employers are sometimes willing to automatically deduct an amount from employee paychecks to transfer it into a retirement account that’s set up by the company.

Additionally, some employers match retirement account contributions, with these matches sometimes having the potential of doubling the amount of money contributed to an employee’s retirement account.

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Optimal Number of Bank Accounts

To make the necessary financial transactions, how many bank accounts are ideal?

There is no one right answer for everybody. What matters is setting up a system that works well for the person using it to manage their finances.

To help make that decision, here are benefits associated with having just one account, as well as those of having two (or more) accounts, one for bills and another for personal use and pleasure.

First, with a bank account that’s set up strictly for bills and another for personal use, people who use this method can deposit enough money to cover upcoming bills (and perhaps a little bit extra, just in case) into the bills account.

Then they may feel more confident that money left over, whether in cash or in the other bank account, can be spent on a pair of new shoes or a restaurant meal.

And, when that money is directly deposited into the bill-pay account, with bills themselves set up for automatic withdrawal, then that automates the process and saves time.

Other benefits of having multiple accounts include:

•   Couples can decide to set up a joint account for bills and then also have individual accounts for independent spending.
•   This can be a way to save for a dream vacation or other key goal.
•   Freelancers can separate business expenses from personal ones.

And, for people who have their home mortgage at one bank and their car loans at another, it can sometimes make sense to have savings or checking accounts at both if there are any discounts associated with that setup.

Multiple bank accounts may not work for everyone, though. For one thing, if a bank account comes with a minimum required balance—and there are multiple bank accounts requiring one—then a person’s funds might be spread too thin.

If there’s a fee associated with going below the minimum balance with one or more of these accounts, then this strategy may be more complicated and costly than what’s optimal.

Types of Accounts for Direct Deposits

For people who decide to use forms of automated funds transfers, here are some options to consider:

•   Checking account
•   Traditional savings account
•   Interest-bearing savings account
•   Certificate of deposit (CD)
•   Money market account

Another option is SoFi Checking and Savings®.

With SoFi Checking and Savings, it’s quick and easy to open a bank account online and directly deposit to that account.

Plus, within your overall SoFi Checking and Savings account you can create different vaults for different savings goals, so you only need one account vs multiple to save for different purposes.

Try SoFi Checking and Savings today and set up your direct deposit.

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Bond ETFs Explained

Investing in individual bonds can be complicated. Bonds don’t trade in an open marketplace, they can be somewhat illiquid, and investors may need a broker—who will certainly charge for the service.

Luckily, bond exchange-traded funds provide a potential alternative for small investors everywhere.

Investors may associate ETFs with stocks, thanks to the popular ETFs that track stock indices like the S&P 500. ETFs also happen to trade on stock exchanges, like the New York Stock Exchange.

Bond ETFs work similarly. Though the ETF holds bonds and not stocks, it trades on a stock exchange. Said another way, a bond ETF is a bundle of bonds that an investor can trade like a stock.

Bond ETFs make it possible for investors to buy a diversified set of bonds, without the big bucks it would take to build a portfolio of individual bonds.

What is a bond ETF and how does a bond ETF work? Find the answers to these questions below, along with the benefits to using bond ETFs when building out a balanced portfolio.

Before getting into the specifics of bond ETFs, it will be helpful to understand ETFs and bonds separately. Let’s begin with ETFs.

ETF 101: Reviewing the Basics

A fund provides a way to pool money with other investors so that money can then be spread across many different investments (sometimes referred to as a “basket” of investments).

For most small investors, it would be too costly to individually purchase 500 individual stocks or 1,000 individual bonds. But such a thing becomes possible when doing it alongside thousands of other investors. Funds provide investors with an incredible opportunity to diversify their investments.

For retail investors, investment funds come in two major varieties: mutual funds and exchange-traded funds. Mutual funds and ETFs are constructed differently—ETFs were built to trade on an exchange, as the name implies—but both can be useful tools in gaining broad diversification.

Whether investors will choose a mutual fund or ETF will likely depend on their preference, and context. For example, someone using a workplace retirement plan may only have access to mutual funds, so that’s what they use.

Someone who is using a trading platform like SoFi Invest® may choose ETFs because it is possible to purchase them without any of the normally associated trading costs.

Whether an investor is using a mutual fund or an ETF, what’s most important is what’s held inside that fund. Think of an ETF as a basket that holds some other type of securities, like stocks or bonds.

Most ETFs will hold just one type of security—only bonds, for example. A bond ETF could be broad, or it could contain a narrower sliver of the bond market, like corporate bonds or short-term treasury bonds.

What Is a Bond?

A bond is an investment in the debt of a company, government, or other entity. Investors loan the entity their money, and then the entity pays interest on the amount of that loan.

Although an individual is not a bank, it may be helpful for investors to think of themselves as a miniature bank. Just as a bank collects interest on a mortgage loan, an investor collects interest on debt investments.

These IOUs are packaged into contracts called bonds. The terms are laid out in this contract. When investors buy a bond, they are agreeing to the rate of interest and other terms set by the bond. Because bonds pay a set rate of interest, bonds are sometimes referred to as fixed-income investments.

Bonds typically make interest payments, sometimes referred to as coupon payments, twice annually.

Let’s say an investor buys a Coca-Cola bond for $10,000 that pays a 4% rate of interest over 20 years. The bond earns $400 every year, earning the investor a total of $8,000 over the 20-year period. At the end of the period, the $10,000 “principal” investment is returned. As long as the investor holds the bond for the full 20 years, there should be no surprises.

Because bonds pay a fixed rate of return, their earnings potential is largely predictable. But there is limited upside on what can be earned on a bond. For this reason, bonds are considered to be a safer, less volatile complement to stock holdings, which have a higher potential for returns over time.

Types of Bonds

Bonds are issued by different entities and are often categorized by the issuer. There are four categories of bonds available to investors.

Treasury bonds: Bonds issued by the U.S. government.

Municipal bonds: Bonds issued by local governments or government agencies.

Corporate bonds: Bonds issued by a public corporation.

Mortgage and asset-backed bonds: Bonds that pass through the interest paid on a bundle of debts, such as a bundle of mortgages, student loans, car loans, or other financial assets.

As one could imagine, there are many subtypes within these broad categories.

When it comes to risk, the bond market produces a wide range. Corporate, municipal, and asset-backed bonds are generally considered to be higher risk than treasury bonds.

Whereas a business or even a municipal government could potentially “default” on a loan, it is highly unlikely that the U.S. government would go bankrupt. (The U.S. government has never defaulted on a treasury bond.)

Because they are considered low risk, treasury bonds typically pay less interest than the other bond types. This is an important trade-off to understand. Higher-risk investments should pay a higher rate of interest in order to compensate the investor for taking on that additional risk.

This is why it is possible to see bonds with high rates of interest issued by unstable governments or by highly speculative companies. These are often referred to simply as high-yield bonds or junk bonds.

Bonds can also vary by their maturity dates. It is possible to purchase bonds with a wide range of timelines, ranging from the very short (a few days) to the very long (30 years). Although it depends on the current state of interest rates, long-term bonds tend to pay more than short-term bonds. This should make intuitive sense; investors want to be compensated for locking their money up for longer periods.

Benefits of Bond ETFs

Combine the two ideas, and voila: A bond ETF is born. How does a bond ETF work in practice? To understand, it is helpful to analyze the benefits of using bond ETFs.

They can be purchased in small dollar amounts.

For some bonds, the starting price is $1,000. This can be prohibitive for small investors who don’t have $1,000 to start building their bond portfolio, let alone a diversified one.

Generally, ETFs are sold by the share, and the cost of one share varies by ETF. Some trading platforms allow for the purchase of partial shares, which allows investors to get started with as little as $1.

They provide diversification.

It is possible to buy into a fund of hundreds or thousands of bonds using a bond ETF. This type of diversification would be otherwise impossible to achieve for small investors trying to build a bond portfolio on their own. ETFs make diversification a possibility, even at very small dollar amounts.

They are low cost.

ETFs, by their nature, are low cost. Because they are typically index by style, the management fee embedded within the fund—called the “expense ratio”—is typically quite low. Compare this to an actively managed mutual fund of bonds, where the expense ratios can top 1%.

There’s another fee that investors will want to be aware of, called a trading cost or transaction fee. This is the cost of buying and selling ETFs (and stocks). These fees can be quite prohibitive for smaller investors. Luckily, there are ways to buy ETFs without paying any trading or transaction fees.

They are easy to buy and sell.

Individual bonds are not always easy to buy and sell. Said another way, they are not particularly liquid. Bonds do not trade on an open exchange, like stocks and ETFs. It is likely that an investor would need to involve a professional to broker the transaction.

ETFs, on the other hand, are very easy to sell. Most banks and trading platforms allow investors to do it themselves, online. This way, an investment can be sold quickly if needed.

Downsides of Bond ETFs

Bond ETFs do have their downsides, though.

Bond ETFs reveal underlying price changes in the bonds, which some investors may find disconcerting. Because yes, it is possible for bonds, and a bond ETF, to lose value.

When holding an individual bond or a portfolio of bonds, an investor is not provided minute-by-minute updates of the market value of that investment. In this way, a bond is like a house. There is no ticker sitting above anyone’s house that tells them the value of that property at that very second.

This is not the case with a bond ETF, where price changes can be felt in near real time. It will be important that investors are prepared for this. It is generally not wise to make a decision about long-term investments based on recent price gyrations, not just with stocks but with bonds, too.

Buying Bond ETFs

The first step is to research bond ETFs, as there are many kinds. Bond ETFs can be broad and cover a wide sample of the bond market, or they can be narrower. For example, it is possible to buy a long-term treasury bond ETF or a bond ETF that only holds certain municipal bonds.

Investors may want to spend time examining their goals, and then choose the appropriate bond funds to match.

Once that decision is made, bond ETFs can be purchased at a brokerage firm of a person’s choosing. Pro tip: Search for a trading platform that doesn’t charge trading or transaction fees.

Not all investors are interested in a DIY approach and may want to open an investment account with SoFi Invest®.

For help building a low-cost, diversified ETF strategy with the support of investment professionals, check out SoFi Invest®.

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

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If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.

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Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.


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