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Contrary to logic, a person’s starting credit score doesn’t begin at zero. In fact, no one’s credit score is zero. The lowest credit score is 300, but that doesn’t necessarily mean that’s a person’s starting score. If a person is just starting and has no credit history, they’re more likely to have no score.

So, for a person just beginning their credit journey, what is the starting credit score? Read on to learn the factors that impact this score from the beginning, and the habits to establish to ensure a better credit score.

How Your Credit Score Is Calculated

There’s no standardized starting credit score. That may be partly due to the factors that influence how a score is calculated. What a person’s done in their young credit history will impact their starting score.

The FICO® Score is widely used in the U.S. to help determine a person’s credit score. This FICO company uses the following to calculate its score:

Payment history

Payment history is the most important factor for any credit score, including a starting credit score. Paying on time and avoiding missed payments account for 35% of a person’s credit score. That’s why it’s important to pay everything from credit card bills to rent on time: Even a single late payment can harm a starting credit score.

Credit utilization

The second most important factor in a credit score is credit utilization, which makes up 30% of a person’s score. Credit utilization is the percentage of their available credit a person actually uses. The ideal credit utilization ratio is 30% or under.

Length of credit history

How long someone’s accounts have been open makes up 15% of their credit score. The longer an account has been open, the higher the credit score.

While it’s out of their hands, consumers who are just beginning to establish credit will likely be negatively impacted by this factor, lowering their starting credit score.

Recommended: How to Get a Personal Loan With No Credit History

Credit mix

Making up 10% of a person’s credit score, credit mix refers to the different types of credit a person has. Generally, the two types of credit are:

•   Installment loans. Think car loans, student loans, and mortgages.

•   Revolving credit. Including credit cards and home equity lines of credit (HELOCS).

If an individual can manage different types of credit without late or missed payments, it reflects well on their score.

Recommended: Does Net Worth Include Home Equity

New credit

Opening multiple new accounts at a time? This factor accounts for 10% of a credit score. New credit includes “hard inquiries” as well as opening new accounts.

For a person with a starting credit score, they may have all, none, or some of these factors on their credit history. The mix varies from person to person, making it hard to predict one starting credit score for everyone.

Recommended: Should I Sell My House Now or Wait

What Is a Good First Credit Score?

Unfortunately, a starting credit score won’t be the perfect 850. More likely it’s in the Good (670-739) or Fair credit score (580-669) range.

That’s mostly because of their limited payment history. If a person just opened a credit card or started paying back student loans, the credit bureaus don’t see an established history of timely repayment. Even if the consumer has never missed a payment, payment history is limited.

Similarly, the length of credit history is short, perhaps only a few months, which doesn’t give lenders enough data to judge a consumer as low- or high-risk.

Recommended: What Credit Score is Needed to Buy a Car

Ways to Establish Good Credit

While it can be discouraging that a starting credit score is penalized just for being new, it doesn’t take long to build credit with a few simple habits:

•   Paying bills on time will continue to be important, as payment history is a major factor in a credit score.

•   Keeping accounts open and in good standing, even if they’re no longer used, can help lengthen a person’s history.

•   Adding to the credit mix with a personal loan, credit-builder loan, or other types of credit can boost the credit mix.

•   Paying bills in full can help keep the credit utilization ratio balanced at 30% or below.

•   Not applying for too much at once will avoid the pitfall of too many hard inquiries and new accounts, which can have a negative impact.

While an individual can proactively try to improve their score, a good portion of a credit score comes from paying bills consistently over time.

Establishing good habits, and continuing them, will likely lead to a higher credit score.

Recommended: When Do Credit Card Companies Report to Credit Bureaus?

Why Your Credit Score Is Important

It may be just a three-digit number, but a good credit score is a gateway to better financial opportunities. With a Very Good (740-799) or Exceptional (800-850) credit score, borrowers have better odds of being approved for loans and may even have better repayment terms or more favorable interest rates.

Businesses and lenders may pull your credit history to confirm your qualifications for any of the following:

•   Credit cards

•   Mortgages

•   Rental apartments

•   Job applications

•   Car loans

•   Personal loans

•   Student loans

With a low credit score, or no credit score, getting favorable terms or qualifying for anything above could be challenging.

How to Check Your Credit Score

Checking a credit score isn’t just a good way to track progress. It can also highlight any incorrect or fraudulent activity tied to a person’s name.

Monitoring a credit score is free and easy. Anyone can get their free FICO Score annually from Experian using AnnualCreditReport.com. The site allows visitors three free reports annually, one from each credit bureau.

In addition, credit card companies and lenders often offer free credit score reporting on their portals.

Recommended: What is The Difference Between Transunion and Equifax

The Takeaway

Having a starting credit score doesn’t mean starting from zero – or with a perfect 850. Consumers may start at a Fair to Good level. Working to establish healthy credit habits, such as paying bills on time and in full, will raise their credit score. That’s important because the higher your credit score, the more financial opportunities you will have.

SoFi’s money tracker app helps those starting on their credit journey. With free credit monitoring tools, users can track their credit score in real time, with customized insights to help improve their credit.

Getting your financial goals on track starts with your credit score.

FAQ

What are the FICO credit score ranges?

FICO® credit scores range from 300 to 850.

Can you have a credit score without a credit card?

Yes. Credit scores aren’t based solely on credit cards. The score takes into account student loans, rent, and utility payments.

What are the differences between FICO, Experian, and Equifax?

Experian and Equifax are credit bureaus that create credit scores and compile credit histories. FICO® creates its own credit score. All three companies provide slightly different credit scoring models.

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SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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Sinking funds are tools that people or businesses can use to set aside money for a planned expense. For instance, you may know that you want to take a vacation next year, so you may start putting cash in an envelope in order to save up for that vacation — that, in effect, is a sinking fund. Sinking fund categories, as such, depend on the expenses relevant to each individual. They can include auto repairs, health care costs, gifts, insurance payments, vacation funds, and more.

You can think of sinking funds as a way of “sinking” your money into an account for later use. It’s basically a savings strategy. We’ll get into it more below.

General Definition of Sinking Funds

The term “sinking fund” has its roots in the world of corporate finance, but mostly refers to the way that an individual would utilize them — for setting aside money or income for a future expense.

Sinking funds are smaller offshoots of an overall budget. Putting together a sinking fund entails stashing money in reserve for the future, knowing what that money will eventually be spent on.

For instance, some people like to pay their car insurance in six-month installments. They may sock money away each month in anticipation of the next six-month installment payment, so that they’re not hit with a big expense all at once.

Their car insurance sinking fund contains the money they need, so they don’t have to scramble to cover the cost every six months.

Examples of Sinking Funds Categories

When it comes to sinking funds categories, there are no hard and fast rules. Different individuals have different financial needs and planned expenditures. As such, their sinking funds categories are going to vary. That said, some common sinking fund categories are applicable to most individuals. Here are some examples:

•   Vacations

•   Gifts and holiday-related expenses

•   A new vehicle, or regular maintenance and insurance costs

•   A home purchase, or home maintenance expense

•   Medical and dental costs

•   Childcare costs

•   Tuition expenses

•   Pet expenses, such as veterinarian visits

A sinking fund can be helpful in saving for just about anything.

Recommended: How to Set Your Financial Goals

Sinking Fund Category Calculations

Setting up a sinking fund is easy enough: You can stuff cash under your mattress or use a brokerage account as a savings vehicle. The difficulty for most of us comes in regularly contributing to it. But the trickiest part may be figuring out how much you should be contributing.

A budget planner app can come in handy, as you’ll be able to see how much money you have to dole out to your sinking fund categories after your monthly expenses have been taken care of. Similarly, if you stick to a certain budget type — such as the 50-30-20 rule — that may help determine what you can contribute.

To calculate how much you can contribute to a sinking fund, first you’ll need to decide which sinking funds are the most important. Another consideration is which fund will need to be utilized first – perhaps you have an auto insurance payment coming up before a vacation. Priorities and timing both affect your sinking fund calculations.

In corporate finance, there is an actual sinking fund formula that helps a company figure out how much it needs to put away to pay off a long-term debt in a lump-sum, while paying minimum amounts in the meantime. This can apply to individuals, too.

The formula looks at the amount of money already accumulated, multiplies it by any applicable interest, then divides it by the time period remaining on the loan. Using this calculation can tell you the monthly amount needed to be contributed to a sinking fund to reach a debt-payoff goal.

For individuals, however, it can be as simple as looking at your monthly income and dividing extra cash accordingly into your sinking fund categories.

Types of Sinking Funds

How do you save up a sinking fund? There are a few savings vehicles you can utilize.

The most obvious, and probably the simplest, is to keep the sinking fund in cash, and store it somewhere safe. Of course, that money won’t be earning any interest, and will likely lose value on an annual basis due to inflation, but it’s one way to do it.

Perhaps the best and safest option is to open up individual savings accounts at your financial institution for each of your sinking fund categories. This beats cash because your sinking fund is protected (and insured up to $250,000 by the FDIC), and you will earn a little interest on it, too.

You can also invest your sinking fund. Just know that there are risks involved with that. Your investments could lose value, for one, and your savings could end up being worth less than when you initially invested them. There is likely to be fees involved too. Consider speaking to a financial professional before investing money you will need for a planned expense.

Recommended: Money Market Account vs Savings Account

Best Time to Take Advantage of Sinking Funds Categories

Sinking funds are all about using time to your advantage, by saving up for a planned or known expense well ahead of time. As such, the best time to take advantage of them is when that expense finally does arrive, be it a pricey vacation, a new car, or sending a child to college.

There may be times or periods during the year when it’s more advantageous to save than others. For instance, most people experience a financial crunch during the holiday season — there are gifts to buy, parties to attend, and other demands on your income. So that may not be the best time to “sink” money into a fund.

Instead, think about when you may have some extra money: When you get a tax refund, or receive a cash gift for your birthday. Those are the times when you may want to add something to your sinking funds.

The Takeaway

Sinking funds are designated cash reserves for future expenses. Using a sinking fund means that you’re stashing money away for an upcoming, known expense, and relieving some of the financial pressure of that expense ahead of time. Sinking fund categories can vary, depending on your individual situation. Corporations and businesses also use sinking funds.

Sinking funds are a way to get ahead of your planned expenses, and give yourself some financial wiggle room. A money tracker app can do the same, like the one included in SoFi.

SoFi tracks all of your money, all in one place.

Check out SoFi today!

FAQ

What to put in sinking funds?

You’ll put cash in a sinking fund — cash to use on an upcoming expense at a later time. What that expense is (i.e., a sinking fund’s category) will vary depending on your specific financial needs.

What is a sinking fund leasehold?

A sinking fund leasehold contains funds for repairs or renovations to a rental property. The leaseholder or landlord sets aside a small percentage of the rental money collected every month to build up the fund.

What is the difference between a reserve fund and a sinking fund?

The two are more or less the same. The big difference is that a sinking fund’s contents are designated for a specific purpose or expense, whereas a reserve fund contains funds used for general future expenses.

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Photo credit: iStock/Delmaine Donson

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

*Terms and conditions apply. This offer is only available to new SoFi users without existing SoFi accounts. It is non-transferable. One offer per person. To receive the rewards points offer, you must successfully complete setting up Credit Score Monitoring. Rewards points may only be redeemed towards active SoFi accounts, such as your SoFi Checking or Savings account, subject to program terms that may be found here: SoFi Member Rewards Terms and Conditions. SoFi reserves the right to modify or discontinue this offer at any time without notice.

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

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Gross income is the amount of money earned before any payroll deductions for taxes, insurance, retirement contributions, and such. To calculate gross monthly income from a biweekly paycheck, find the gross amount listed on the pay stub (usually the starting number). Multiply that figure by 26 (the number of paychecks received in a year), then divide by 12 (months in a year).

The calculation for gross monthly income can differ depending on paycheck frequency. Below we’ll show you how to calculate your gross pay for different payroll schedules.

How to Calculate Monthly Pay From Biweekly Pay

There are two different monthly pay figures to understand, gross and net. Each is useful in different situations. When you’re applying for a loan, most lenders use gross monthly income to determine your debt-to-income ratio (DTI). However, many people find it easier to budget based on net or take-home pay. A budget planner app can help you decide the best approach for your situation.

As we spelled out above, if you’re paid biweekly (every two weeks), the formula for gross monthly income is:

(Gross pay amount × 26) ÷ 12

Hourly workers can also use this next formula, if they work a consistent number of hours per week:

(Hourly salary × weekly hours worked × 52) ÷ 12

To find net monthly pay, substitute the actual amount of your paycheck for the gross amount in the first formula.

Recommended: Does Net Worth Include Home Equity

How Many Bi-Weeks in a Year

There are 26 biweekly pay periods in a year. Employees who get paid biweekly will receive 26 paychecks from January to December.

It’s important to note that receiving pay biweekly differs from receiving pay twice a month on the same dates. Workers who receive biweekly checks can’t just multiply one paycheck by two to find their monthly salary.

Employees who get paid twice a month — for instance, on the 15th and 30th — can find their monthly gross income simply by adding together the gross figures on their two monthly paychecks.

Recommended: What Is the Biweekly Money-saving Challenge?

The Different Types of Payment Periods

The most common pay periods for employees are:

•   Biweekly: Paid every other week, or 26 paychecks per year.

•   Semimonthly: Paid twice a month on the same dates, or 24 checks per year.

•   Weekly: Paid once a week, or 52 checks per year.

•   Monthly: Paid once a month, or 12 checks per year.

Employees who receive biweekly pay get two checks or direct deposits each month, except for two months of the year when they receive three paychecks. Employees who are paid biweekly might get a paycheck every other Wednesday or Friday, or whatever day their employer chooses.

With semimonthly pay, an employee might get paid on the 15th and 30th of every month. So there are always two paydays, for a total of 24 per year instead of 26.

An employee who gets paid twice a week is on a semiweekly schedule. This would entail eight paychecks each month.

Pros and Cons of Biweekly vs Semimonthly Pay

For employees, there are pros and cons to biweekly pay. Depending on their expenses and savings strategy, someone might prefer a biweekly or semimonthly schedule.

For most workers, the main pro to biweekly pay is the third “bonus” check they receive two months out of the year. By budgeting for two paychecks every month, workers can designate the occasional third check for special line items like vacations, holiday gifts, paying off debt, or boosting savings.

For others, biweekly checks just make budgeting and managing expenses more challenging. Semimonthly pay is preferable because it offers an accurate reflection of real monthly income.

Also, each semimonthly check can be dedicated to particular expenses. For example, the second check of the month can go to rent, utilities, and other housing costs, which are often due the first of the month.

Compared to weekly paychecks, both biweekly and semiweekly checks require better cash management on a weekly basis. For someone who lives paycheck to paycheck, biweekly pay periods might mean they run out of money before the next check arrives.

The Takeaway

To calculate gross monthly income from a biweekly paycheck, find the gross amount listed on the pay stub, multiply by 26, then divide by 12. (Do not use this formula if you’re paid twice a month on the same dates, rather than the same days of the week.) For your monthly net pay, substitute your net or take-home pay for the gross amount in the same calculation.

Understanding your monthly income is key to budgeting and saving. If you’re looking for help keeping track of your income and expenses, one great money tracker tool is SoFi.

See all your financial information in one simple dashboard with SoFi.

FAQ

How do you convert biweekly pay to monthly income?

To calculate gross monthly income from a biweekly paycheck, find the gross amount listed on the pay stub (usually the starting number). Multiply that figure by 26 (the number of paychecks received in a year), then divide by 12 (months in a year).

How do I calculate my gross monthly income?

Gross monthly income is the total of all paychecks and income received in a month, including any side hustles, rental income, etc., but before taxes and other deductions.

How do you calculate gross income from a W-2 form?

Gross wages cannot always be found on a W-2 form, due to various pre-tax deductions. Instead, look at the gross amount listed on the employee’s final paycheck for the year.

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Photo credit: iStock/Eva-Katalin

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

*Terms and conditions apply. This offer is only available to new SoFi users without existing SoFi accounts. It is non-transferable. One offer per person. To receive the rewards points offer, you must successfully complete setting up Credit Score Monitoring. Rewards points may only be redeemed towards active SoFi accounts, such as your SoFi Checking or Savings account, subject to program terms that may be found here: SoFi Member Rewards Terms and Conditions. SoFi reserves the right to modify or discontinue this offer at any time without notice.

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

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Should I save or pay off debt? It’s a tough financial choice. Prioritizing debt repayment can help you pay off what you owe faster, eventually freeing up more money that you can save. It could also cut down on what you pay in interest charges. On the other hand, delaying savings could mean missing out on the power of compounding interest.

Whether it makes sense to pay off debt or save depends largely on the specifics of your financial situation, your needs, and your goals. The right decision might actually be to try to do both.

Here, you’ll learn how to make the smart decision, including:

•   The pros of paying down debt first

•   How to start paying down debt

•   The advantages of saving money

•   How to start saving money

•   How to pay down debt and save money at the same time

What Are the Benefits of Paying Down My Debt?

Debt can wear you down mentally, emotionally, and financially. Collectively, Americans owed $15.84 trillion in household debt as of the first quarter of 2022, according to the Federal Reserve Bank of New York’s Center for Microeconomic Data. Whether you owe a credit card balance, student loans, personal loans, or a mortgage, here are some of the main advantages of choosing to pay off debt first:

•   Paying off debt could save you money on interest charges, finance charges, and fees.

•   As you reduce your credit utilization ratio (how much of your total credit limit you are tapping into), your credit scores might improve.

•   Reducing debt can also reduce your mental or emotional burden if your financial obligations are a source of stress.

•   Once your debt is gone, you can redirect those funds in your budget to saving or other financial goals.

Eliminating debt also means that you can lower your baseline cost of living. So instead of needing $5,000 a month to cover your expenses, you might be able to trim that to $4,000 instead, provided you can pay off a $1,000 monthly debt payment. Reducing monthly expenses can make it easier to get through a financial crisis or emergency should one come along.

When Might I Make Paying Down Debt a Priority?

If you’re debating whether to pay off debt or save, it’s helpful to think about your bigger financial picture and goals. For example, you might put debt repayment ahead of saving if you:

•   Have been paying debts for a while and are tired of feeling like you’re not making any progress.

•   Are able to qualify for a low APR personal loan or credit-card balance transfer that would allow you to pay off the debt faster.

•   Mainly owe unsecured “bad” debts, such as credit cards or payday loans that are costing you significant money in interest.

•   Are committed to sticking to your debt repayment strategy in order to clear your balances as quickly as possible.

That last point might be the most important. If you’re not all-in with your debt payoff plan, then you might not get much in return for your efforts.

How Can I Start Paying Down My Debt?

If you’re ready to pay down debt, the first step is knowing what you owe and to whom. You can start by making a list of your debts, including the creditor’s name, account balance, APR or interest rate, and monthly minimum payment, and how long it’s projected to take to pay down the debt.

Once you know what you owe, you can formulate a plan for paying it off. There are different strategies to become debt free that you can put to work.

Some of the most popular options include:

•   Debt snowball. The debt snowball method involves ranking debts from lowest balance to highest and paying them off in that order. You pay as much as you can toward the smallest debt, while making minimum payments to everything else. Once that debt is paid off, you roll its payment over to the next debt on the list, continuing the process until all debts are gone. Recommended: How the Debt Snowball Payoff Method Works

•   Debt avalanche. The debt avalanche (or highest interest rate) method ranks debts from highest APR to lowest. You’d then pay as much as you can toward your most expensive debt (the one with the highest interest rate), while making minimum payments to everything else. Once the first debt is paid off, you’d roll its payment over to the next debt on the list, continuing this process until all debts are gone. Recommended: How the Debt Avalanche Payoff Method Works

•   Credit card balance transfer. Transferring balances to a credit card with a low or 0% APR can help you to save money on interest charges. Typically, these offers involve a window of no- or low-interest, after which point, you pay a typical variable APR. The goal is to catch up financially during that time period, or to whittle your debt down significantly since no interest is accruing. The most important thing to keep in mind is how long you have to pay off the balance transfer at the promotional rate before the higher APR kicks in.

•   Debt consolidation. Debt consolidation means taking out a personal loan, home equity loan, or home equity line of credit (HELOC) to pay off other debts. You’d then make one payment toward the loan going forward. Whether this option saves you money can depend on the loan’s APR vs. the average APR you were paying across your other debts. If you can save a significant amount of money with a new rate versus your current rate, it may be worth the effort.

If you’re struggling to find the right debt repayment option, you might consider meeting with a nonprofit credit counselor or financial advisor. Guidance on financial planning for debt reduction can be very helpful, and organizations like the National Foundation for Credit Counseling (NFCC ) can connect you with advisors.

What Are the Benefits of Saving Money?

It pays to look at the other side of the issue when you are wondering, Is it better to save or pay off debt? Understanding the benefits of saving can help you to decide. Here are some of the main advantages of prioritizing saving:

•   The sooner you begin saving, the longer you have to grow your money through the power of compounding interest.

•   Having money in emergency savings can give you peace of mind if an unexpected expense comes along.

•   Saving and investing in a tax-advantaged retirement plan can help you to build wealth for the long-term.

•   You can save money for different goals at a pace that works for your budget.

Saving is crucial if you’d like to avoid racking up debt in an emergency. If your car breaks down or your dog needs surgery, for instance, you can use your emergency fund to pay those expenses rather than having to rely on a high-interest credit card.

When to Consider Saving Money Over Paying Down Debt

The decision to save vs. payoff debt also depends largely on your goals and what your financial situation looks like. You might prefer to save first and pay off debt second if you:

•   Mainly owe “good” debts with low interest rates and don’t feel unduly burdened by them.

•   Would like to build up an emergency fund before tackling your debt payoff plan.

•   Could earn a higher interest rate on savings compared to the rate you’re paying on your debts.

•   Are able to get “free” money by investing in an employer-sponsored retirement plan.

It’s important to note that there’s a difference between savings vs. investing. When you save money, you’re earmarking it for some future expense which might be planned (say, a down payment on a house) or unplanned (in the case of an emergency fund). You might put your money in a savings account, money market account, or certificate of deposit (CD) account where it can safely earn interest.

When you invest money, you’re putting it into the market. So you might buy stocks, mutual funds, or other investments. Investing money has the potential to deliver higher returns than saving it. But there’s a greater risk of losing money.

Potential Strategies to Start Saving Money

Making saving a regular habit can take time and effort. You may have to bypass little splurges (takeout food, for instance) as well as larger ones (joining pals on a vacation to Paris). But finding easy ways to save money can help you get into a routine of setting aside money. Here are a few ways you can do just that:

•   Schedule automatic transfers. One of the simplest ways to save money is to transfer funds from checking to savings every payday. You can pick a set dollar amount to transfer. Then when you get paid, you’ll know that money is automatically going to savings. It won’t be sitting in your checking account, tempting you to spend it.

•   Save at work. If you have a 401(k) or similar plan at work, that’s a built-in opportunity to save. You can defer part of your paychecks into the plan automatically, and your employer may chip in matching contributions, which is free money for you. If you get a raise each year, you can adjust your contribution rate by that same amount to funnel more money into retirement savings.

•   Save “found” money. Found money is money that you weren’t planning on receiving. So that can include things like tax refunds, rebates, cash gifts you receive for birthdays or holidays, and other windfalls. Found money can give your savings a boost with minimal effort. Even if you don’t set aside the whole amount you receive, do try to stash part of it in savings.

•   Use apps to save. Apps can make saving money easy. There are round-it-up apps that push purchases up to the nearest whole dollars and put the difference into savings. Or there are apps that pay you a percentage cash back on things like gas, groceries, and shopping. That’s money you can add to your savings pile.

If you’re struggling to find motivation to save money, try setting one or two small financial goals. For example, give yourself a goal of saving $1,000 to start your emergency fund in the next 60 days. Challenging yourself this way can help you get fired up about saving. If you’re able to knock out some smaller goals fairly quickly, it can get you solidly on the path to save more.

Can I Pay Down Debt and Save Money at the Same Time?

Whether you can pay down debt and save money at the same time will depend largely on your budget and how much you can dedicate to either goal. If you don’t have a firm budget in place, making one can help you see at a glance how much money you have to pay down debt or save.

So, say you make your monthly budget, and you have $1,000 left over after all your regular expenses are paid. Your current debt payments total $500 per month.

In that case, you might decide to keep paying $500 each month toward the debt and put $500 in savings. That way, you’re working toward both goals equally. If you’d like to prioritize paying off debt vs. saving, then you might pay $750 per month to debt and cut the amount you save down to $250.

Saving and paying off debt at the same time might be ideal if you can find the right balance between them. Again, it all comes down to whether paying off debt or saving takes first priority on your list of financial goals.

Does Starting an Emergency Fund Make Sense?

An emergency fund is designed to help you pay for unplanned expenses or unanticipated events. For example, getting laid off from your job could be a financial emergency if you don’t have any other income to fall back on. Other examples of financial emergencies include unexpected appliance repairs, vehicle repairs, vet bills, or medical bills.

Sixty-four percent of U.S. adults say they’d be able to handle a $400 emergency in cash, according to the Federal Reserve. But that means roughly a third of Americans would have to turn to debt to manage an unexpected expense. That’s a lot of people without a financial back-up plan. It may be wise to prepare and put some funds away in case a rainy day strikes.

Starting an emergency fund makes sense if you don’t want to be left scrambling to pay for unanticipated expenses. Even a small emergency fund of $1,000 could be enough to help you weather most minor emergencies. Once you save that amount, you could then work on building a larger emergency fund.

Of course, you may not need an emergency fund if you have substantial savings, investments, or other assets to draw on in a crisis. For most people, however, this is not the norm, so an emergency fund can still be an important part of their financial plan.

Banking With SoFi

Saving money and paying off debt can both be central to improving your financial situation. Whether you prioritize one over the other or tackle them both at the same time, it’s important to understand how saving and becoming debt-free can help you to get ahead and build wealth.

If you’re ready to start saving, then it pays to keep your money in the right place. With SoFi, you can get a Checking and Savings account in one place for added convenience. With direct deposit you’ll also earn a competitive APY, which can help you grow your money faster. Plus, you won’t pay any fees.

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

FAQ

How much money should I save before paying down debt?

At a minimum, it can be a good idea to save $500 to $1,000 before paying down debt. That amount of money may be enough to get you through any small financial emergencies that might come your way as you focus on debt repayment.

Is it better to pay down debt or save money?

It may be better to pay down debt if you’re carrying debts with high interest rates or are simply tired of not seeing your balances go down. On the other hand, it may be better to save money first if your debts have low interest rates or you don’t owe that much overall.

What bills should I pay down first?

When paying debts or other bills, it’s always important to pay any past due accounts first. Late payments can hurt your credit score, so it’s helpful to get past due accounts current. From there, you can focus on paying down the highest-interest debts first if you’d like to save money on interest charges. Or you can pay down debts from lowest balance to highest, which could help you knock out some smaller debts fairly quickly.

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Photo credit: iStock/malerapaso

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.

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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Ever have a glitch when it comes to budgeting and wind up in overdraft or close to it?

Whether it’s from an unexpected transaction, forgetting about an automated bill pay, or just overspending, there are times when checking accounts may dip dangerously low.

In these situations, a cash cushion can add a layer of protection. It’s a bit of extra money kept in your account to help protect against bounced checks and overdraft charges.

Read on to learn more about cash cushions, including:

•   What is a cash cushion and how does a cash cushion work?

•   Why are cash cushions useful?

•   How can you save up a cash cushion?

•   What are the differences between a cash cushion vs. an emergency fund?

•   What are alternatives to cash cushions and emergency funds?

What Is a Cash Cushion?

A cash cushion is extra money in a person’s checking account that serves as a buffer. It can keep them from hitting zero or overdrawing if they deviate from their budget or a minor emergency occurs.

As you may know, if you overdraw your checking account, you can owe overdraft or NSF (non-sufficient fund) fees and possibly be liable for other late charges as well. With a cash cushion in place, you may avoid the risk of overdrawing and these consequences.

How Do Cash Cushions Work?

Even if you’re the most meticulous budgeter, you can benefit from keeping a cash cushion in your checking account. Here’s how it can help: Say it’s the first of the month when rent and other bills auto-withdraw from a checking account. Maybe you made an error in your math or you swiped your debit card a few too many times, and there isn’t enough in your account to cover those bills. This would usually mean that your account would be overdrawn, leading to fees and canceled transactions.

But, if you keep a cash cushion of even a couple of hundred bucks in the checking account, it can prevent the account from becoming overdrawn. It can also take the stress off of having a perfectly balanced budget all the time. Having some extra cash sitting there, just in case, can really pay off.

Worth noting: A cash cushion is different from a slush fund, another odd financial term. What is a slush fund? It’s typically someone’s “fun money” in a budget, or cash set aside for discretionary spending.

Reasons Why a Cash Cushion Is Useful

A cash cushion is useful for several reasons:

•   It creates breathing room. Instead of keeping the exact amount of money needed monthly in a checking account, the cash cushion creates padding in the event of a budget mistake or emergency expense.

•   It benefits “hands-off budgeters.” Some account holders may set their budget at the beginning of the month and then not check in again that often. A cash cushion can provide peace of mind in this scenario.

•   It can help avoid account fees. A cash cushion helps avoid overdrawing a checking account. The average overdraft fee is $35, which can add up over time.

Tips for Saving Up a Cash Cushion

While a cash cushion can sound intimidating, it likely only amounts to a few extra hundred dollars, $1,000 at most, in a checking account. In terms of financial priorities, it’s lower on the list than necessities, or building up an emergency budget.

Here are a couple tricks for starting a cash cushion:

•   Reserve just a few dollars each paycheck until reaching the goal.

•   Set aside a windfall, like a quarterly bonus or tax refund.

•   Cut out an unnecessary expense, such as a streaming service, for a few months.

•   Reward good behavior. Pay a bill on time? Add a dollar to the cash cushion budget. Visit the gym? Add a dollar to the cushion.

•   Adopt “no spend” days and put the cash that would’ve been spent into the cushion budget.

Recommended: What Is a Sinking Fund?

Is This the Same as an Emergency Fund?

An emergency fund is used to cover large, unanticipated expenses. This could be anything from a medical emergency to living expenses in the event of losing a job. While it’s impossible to anticipate when things will go wrong, an emergency budget can help people avoid going into debt when a financial emergency happens.

Emergency budgets can be a sizable chunk of change. It’s recommended to reserve between three to six months’ worth of living expenses in a separate savings account.

How Do Emergency Funds Work?

If everything goes well, an emergency fund isn’t deployed. But, if a large, urgent bill hits, this fund can help cover the costs. Without an emergency fund, it might be challenging or impossible to pay this expense without taking on credit card debt or asking for assistance.

Emergency funds should be easy to access. While the fund probably shouldn’t sit in an everyday checking account, where it earns little or no interest, it also shouldn’t be in the market or a retirement fund, where it would be challenging to withdraw. Many choose to start an emergency fund in its own standard or high yield savings account, where it can accrue interest.

Recommended: Why Emergency Funds are so Important

Reasons Why an Emergency Fund Is Useful

When things are going well, it might be hard to imagine why an emergency fund is useful. No one ever really expects accidents to happen, for instance, but they do. So consider these benefits that underscore the importance of having an emergency fund:

•   It helps avoid debt. Without an emergency fund, the path to paying bills may involve resorting to credit card debt, unsecured loans, or pulling from retirement to pay expenses.

•   It can provide a cushion during unemployment. Unemployment benefits might not be enough to cover day-to-day living expenses in the event of job loss.

•   It could relieve stress. An emergency may happen, but money set aside could provide a sense of financial security.

Tips for Building an Emergency Fund

Accruing three to six months’ worth of living expenses may sound challenging, but the cash doesn’t have to be saved all at once. Consider these strategies when building a beginner emergency fund:

•   Automate transfers, even a few bucks a week, from checking to your emergency fund account.

•   Look for excess spending, such as a pricey gym membership or multiple streaming services. Cancel those, and put the savings towards your fund.

•   Take on a side hustle to earn extra money, at least temporarily, until reaching the goal.

•   Challenge yourself. Skip eating out for a month, and send the savings to an emergency fund.

•   Sell any gently used items you own (clothing or electronics, say), and put the proceeds towards your fund.

Cash Cushion vs Emergency Fund

At a high level, cash cushions and emergency funds seem very similar. They are both techniques that provide a financial safety net. However, an emergency fund is usually larger than a cash cushion because it’s designed to cover the possibility of a greater expense. Also, an emergency fund is typically held in a savings account, while a cash cushion stays in your checking account.

Here’s more detail on how each works and how they compare:

	Cash Cushion	Emergency Fund
Location	Checking account	A separate savings account
Amount	$300-$500, perhaps $1,000	Three to six months’ worth of living expenses
How used	A buffer to avoid overdraft or NSF fees	Cash to cover large, unexpected expenses

How Emergency Funds and Cash Cushions Can Improve Your Banking Experience

Both cash cushions and emergency funds can make banking simpler and better.

Cash cushions can help keep unwanted fees, like overdraft or NSF fees, at bay. This saves the account holder money and stress.

An emergency fund can bring in interest since it’s usually held in a savings account. In this way, it builds a bit of additional money.

Alternatives to Cash Cushions and Emergency Funds

There are a couple of alternatives to cash cushions and emergency funds.

In the case of a cash cushion, you might instead opt for overdraft coverage by linking a backup savings account to your checking account. If your checking account is about to be overdrawn, money is whisked in from your savings to cover the shortfall.

If an emergency strikes and you don’t have a fund waiting, there are a couple of other sources of cash:

•   If you have a Roth IRA (individual retirement account), you might be able to withdraw funds without penalty. However, once you’ve tapped retirement savings, it can be hard to rebuild them.

•   You might be able to use an HSA (health savings account), if you have one, to pay for unexpected health-related costs.

•   A HELOC (home equity line of credit) might be an option if you are a home-owner. This line of credit can be a source of cash, but you will need to pay it back plus interest.

•   Credit cards are an option if you are hit with unanticipated expenses, but they carry high interest rates. Most financial experts recommend using these sparingly as debt can snowball.

Banking With SoFi

A cash cushion can help account holders avoid overdrawing their checking and paying fees. This “breathing room” (usually a few hundred dollars sitting in their account) can allow them to worry less about their balance on a daily basis, knowing they have some wiggle room.

Looking to build a cash cushion? Consider opening an online bank account with SoFi. If you sign up for Checking and Savings with direct deposit, you’ll earn a competitive APY, plus you’ll pay no account fees. That means your cash cushion could grow that much faster.

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

FAQ

Is a cash cushion different from an emergency fund?

Yes. A cash cushion is padding (typically a few or several hundred dollars) that someone keeps in their checking account to fill in small gaps in overspending. An emergency fund, however, is usually a larger sum of money, held in a savings account, and reserved for unexpected expenses that come up, such as a medical emergency or paying expenses when out of work.

Should a cash cushion be the same amount as an emergency fund?

No. A cash cushion can be a couple hundred dollars, or up to $1,000, while an emergency budget should cover between three and six months’ worth of expenses.

Should I keep my emergency fund and cash cushion in separate accounts?

Yes. Emergency funds should be in their own savings account, while a cash cushion should be in a regularly used checking account.

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Photo credit: iStock/Mykola Sosiukin

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.

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