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Deciding between an online and a traditional bank? First, let it be known that no two people’s banking styles are exactly the same. For every person who loves popping into their local branch and chatting with their favorite teller, there’s someone else who avoids bank branches at all costs, preferring to seamlessly swipe their way through financial transactions on their mobile phone.

Traditional vs. online banks also have other important distinctions, including the dollars-and-cents bottom line. Their typical fees charged and interest rates paid differ as well.

So how can you decide which kind of financial institution best suits your needs? Read on to get the intel you need, including:

•   The differences between traditional and online banking

•   How online banking vs. traditional banking works

•   The advantages of online banking

•   How to open an online bank account

Differences Between Online and Traditional Banking

Online and traditional banking both typically offer reliable ways to manage your money, but they do differ considerably in several ways. First, a little lesson in what they are:

•   Traditional banks are ones that have branches you can visit, have ATMs, and often have a website and app for conducting some business digitally. They tend to charge account fees and offer interest rates that may be lower than online banks.

•   Online banks offer many (most, even) of the same services as traditional banks, but they don’t have a footprint in the physical world. You won’t be able to visit a branch or use their branded ATMs (though they may partner with an ATM network or refund your fees). The lack of branches usually allows them to charge lower or no fees and pay depositors a higher interest rate.

Now, here’s a closer look at some key points of differentiation:

Security

If you keep your money at a traditional bank and visit a branch, you likely feel reassured by the presence of security guards and perhaps a glimpse of a massive vault inside. You might wonder if online banking is as secure as a bricks-and-mortar bank. If you use a strong password and avoid conducting online banking with a public WiFi connection or on a public computer, you are following good advice for keeping your account safe. While there are no 100% guarantees, your money should be well protected.

What’s more, both online and traditional banks abide by the same federal regulations. This means that if your financial institution is insured by the Federal Deposit Insurance Corporation, you are covered in the event of a bank failure up to $250,000 per depositor, per account type. Want to be sure of that safety net? You can use the FDIC BankFind to make sure your online bank is FDIC-insured.

Bank Fees and Interest Rates

As briefly noted above, online banks typically save big on real estate and staffing costs and pass that along to their customers. Many charge no or low fees. Which may be a very big deal: According to the Consumer Financial Protection Bureau, Americans pay more than $15 billion a year on bank overdraft fees, which are usually $30 to $35 a pop.

Online banks also likely offer higher interest rates on saving accounts and may offer interest on checking, too. For instance, at press time, SoFi was offering 1.80% APY on savings, while Chase offered 0.01%. That’s quite a noticeable gap. So if you don’t use traditional banking services, you can probably save money and earn more interest with online banking.

24/7 Banking

A few years ago, online banks tended to have the advantage here, providing services around the clock. Traditional banks, which may only be open from 9 a.m. to 5 p.m. Monday through Friday, have been working hard to close the gap and offer services (from check deposits to money transfers) via their website or app at all hours.

Still, online banks may have the edge in terms of 24/7 support, since they have offered this kind of service from the get-go. Making mobile deposits or switching up your password at 2 a.m. is no problem for them, and if you hit a speed-bump, you can likely chat or phone your way to help.

ATMs

If you’re an account holder at a large traditional bank, you’ll probably have a good number of conveniently located ATMs that you can access without a fee. However, those who bank at a smaller, local or regional institution may have fewer options. They may have to make a special trip to get to their bank’s ATM or otherwise pay an out-of-network fee.

How about online banking and ATMs? Digital banks don’t have branches, so how can they have cash machines, you might wonder. The answer is: They don’t. Instead, they usually have work-arounds in this situation. Most online banks partner with a large cash-machine network that you can use for free for withdrawals or for depositing cash at an ATM. Or they may have an arrangement that refunds you for any bank fees you incur using an ATM. Online banks tend to work hard to level the playing field on this front.

How Online Banking Works

If you’ve been used to traditional banking, online banking may seem like a brave new world, and a somewhat intimidating one at that. In truth, however, online banking closely mirrors what happens at a bricks-and-mortar bank, minus the bricks-and-mortar and those free lollipops.

For example, you can open checking and savings accounts, get a debit card, sign up for automatic bill pay, transfer funds, and more. The one challenge can be withdrawing or depositing cash; there’s no teller service, but you may be able to manage cash at a linked ATM (as mentioned above). You may find that the pros of mobile banking and online transactions make up for this inconvenience.

If you typically go into a branch for certain services, such as wire transfers, you’ll likely find you can do them online with a digital bank. And the fact that you can do them on a website or app means the bank isn’t paying the overhead of having a bricks-and-mortar location. So you are probably earning more interest and avoid account management fees than if you kept your money at a traditional bank.

Recommended: How Many Bank Accounts Should I Have?

Advantages of Online Banking Over Traditional Banking

Here’s a side-by-side comparison of how online vs. traditional banking compares.

Feature	Online Banking	Traditional Banking
Interest rates	Typically have considerably higher interest rates since they can pass along their savings on overhead to the customer	Tend to have lower APYs (annual percentage yields) as they need to cover the costs of their branches and staffing
Bank fees	Usually offer no fees or lower fees than traditional banks	Often assess monthly account fees, minimum balance fees, overdraft charges, and more
ATMs	Probably lack branded ATMs but likely partner with a network for fee-free transactions	Typically have a network of their own ATMs, which may or may not be conveniently located
Customer Service	Usually offered 24/7 via chat or phone	Usually offered in person during business hours and by chat or phone 24/7
Security	High-level online security and fraud protection	High-level online security and fraud protection at large chains

How to Know if Online Banking Is Right for You

Whether you choose to bank online or with a traditional financial institution is a very personal decision. Here are a few of the most important signs that online banks will be a good fit:

•   You prioritize high interest rates and low fees to help your money grow faster.

•   You are comfortable accessing a partner network of ATMs vs. a bank’s own branded machines.

•   You are satisfied with seeking customer service via chat or phone.

•   You are confident managing your money without having a personal banker at your local branch.

•   You are digitally savvy enough to conduct transactions online; you also know not to use public WiFi or computers for banking business or else you’ll risk bank account fraud.

Opening an Online Bank Account

With online banking, you don’t have to wait until Monday morning to open a new account. You can just log on from your couch on a Sunday afternoon to start a new account and otherwise manage your money.

Technology is allowing financial companies to change the entire banking experience and improve it for customers. One of these new ways is by opening an online bank account with SoFi. With our Checking and Savings, you’ll earn an amazing APY and pay no account fees.

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

FAQ

How does online banking work?

Online banking allows you to manage your money without going into a bricks-and-mortar branch. Using the bank’s website and/or app, you can spend, save, transfer funds, and conduct other business.

What are the advantages of online banking over traditional banking?

Online banking can offer several advantages: Some people prefer using a website or app vs. going into a bank branch as often happens with traditional banking. What’s more, online banking usually offers lower fees (or none whatsoever) and higher interest rates than bricks-and-mortar banks.

What is a disadvantage of online banking?

Online banking doesn’t offer the opportunity to build a personal relationship with your banking team. Also, depositing cash can be a challenge.

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

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

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

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

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

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

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

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

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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If you’ve been looking for a rental of any kind, you know how tough the hunt can be. Dozens of applicants for each vacancy, stricter credit, income, and referral requirements from landlords, bidding wars. These are, unfortunately, all part of navigating today’s tough rental market.

The culprit is a national housing shortage that has been brewing for more than a decade. Ever since the housing crash of 2008, new construction of homes and rental units has slowed dramatically. Any recent building uptick has been offset by supply chain and other pandemic-related delays. Meanwhile, rising mortgage rates make owning a home less affordable, prompting lots of would-be buyers to stay put in the rental market.

The result? There are many more people who want to rent than the number of rental units out there. That rental market squeeze means higher prices, forcing most people to spend more on rent than the recommended 30% of income.

In the first three months of 2022, apartment occupancy hit an all-time high of 97.6%. During the same time period, asking rents jumped an average of 15.2% throughout the country.

These four steps can help you anticipate what landlords are looking for and help you present yourself as the ideal tenant.

Tips to Get Approved for a Lease

Step 1: Know Your Number

Determine just how much you can afford for housing costs.

The advertised or asking rent is just the beginning. You’ll also need to take any fees, utilities, maintenance, parking, and renters insurance into account. With inflation hitting a 40-year high, you may need to adjust your estimates for these costs upward.

Take into account the bidding war environment. In the heat of the moment, you may outbid the others but also end up with an apartment you can’t comfortably afford. To avoid this scenario, determine your ideal monthly payment and stick to that number, no matter how tired you are of the apartment hunt.

💡 Need help figuring out housing costs? Check out our cost of living by state breakdown.

Step 2: Prepare Your Rental Resume

Apply for a rental the same way you approach applying for a job. You want to make sure you fulfill all of the requirements, and then some.

The first step to getting approved for an apartment is usually filling out an application online. Be sure to do so accurately and thoroughly. When the time comes to see the place, you’ll help make your case if you bring the following:

Copies of Your Credit Reports

Landlords routinely do background and credit checks on applicants they are considering. Offering a copy of a credit report gives them on-the-spot information. If something on your report is confusing, you can attach your own letter of explanation.

Most landlords will look for a good FICO® score (670 to 739) or higher. Find your credit score on a loan or credit card statement or through an online credit score checker. Or get it for free from Experian.

Proof of Employment and Income

Landlords want to know that you can comfortably afford the rent. To prove you can, you could bring copies of your past three to six months of pay stubs, a copy of your most recent tax return, and contact information for your current employer. (This may be more than the landlord is asking for, but it helps build your case.)

Some, but not all, landlords also require employment history information. Having a list of former employers and their contact information on hand can help speed up this process. Even if it’s not required, the list helps paint a more complete picture of why you’re a trustworthy candidate.

References

Be ready to present credit references, which may include character references and asset documentation. Personal references from your boss, a co-worker, or another nonfamily adult who can vouch for you are a good idea. The landlord or agent may not call these people, but having them on your list is a sign of your professionalism and trustworthiness.

Landlords probably also will want the names, locations, and contact information of any previous landlords. A stellar rental history can help put you ahead of the crowd, so you want to make it easy for the agent or landlord to check on you.

If you’ve had trouble making rental payments, it’s best to be honest and offer an explanation.

Documentation for Service or Assistance Animals

According to the Fair Housing Act, a person with a disability may seek a “reasonable accommodation” from a housing provider so that they may have an equal opportunity as a nondisabled person to use a dwelling, even one that otherwise does not allow animals. The disability can be physical or mental.

Service animals, defined as dogs, are not considered pets, and housing providers cannot charge fees or deposits for them.

So-called emotional support animals have ruffled feathers throughout the country. First, applicants with assistance animals must make a request for reasonable accommodation, and not necessarily in writing. If the disability is not observable, they must provide reliable information — typically a letter from a medical provider or therapist — to the housing provider showing that the animal provides assistance.

Beyond that, the U.S. Department of Housing and Urban Development (HUD) does not allow housing providers to seek personal details of a person’s medical history. Importantly, HUD says that online certificates alone are not sufficient to reliably establish that a person has a nonobservable disability or disability-related need for an assistance animal.

So if you have assistance animals, it’s a good idea to bone up on the laws, which can be complicated, and have professional documentation.

Step 3: Show an Interest

It may sound trite, but landlords and rental agents are reassured when they know that someone really wants to live in the property. At a time when demand is high, this can be even more important as landlords become inundated with calls or online requests.

If you’ve visited the property before, have a friend in the same complex or nearby, love the neighborhood, or even appreciate the architecture or amenities, be sure to say so. Landlords want to know you’ll enjoy living there and, in turn, take good care of your new home.

Step 4: Prepare to Pay

Many leases have been lost when an early and promising applicant is ready to rent but doesn’t have the funds available.

Make sure you bring your checkbook or an electronic payment option so you can pay your security deposit, first month’s rent, and whatever else is required immediately. And, of course, make sure you have the funds available, even if your budget is having to also cover moving expenses.

Move-in money can obviously be a challenge to come up with. If it’s several thousand dollars, a personal loan could help.

Did you snag the apartment or house? Once you move in and exhale, renter-friendly updates can help you make the space your own.

The Takeaway

It’s a challenging time to look for a rental. But preparing thoroughly before you start your hunt and taking steps to show landlords your qualifications and genuine interest can help you stand out in the crowd.

In this rental squeeze, however, some house hunters may find that it makes more sense to build equity in their own home, and generational wealth, than pay rent.

If so, SoFi is here to help.

Consider that SoFi home mortgage loans come with competitive fixed rates and can call for as little as 3% down for qualifying first-time homebuyers.

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Photo credit: iStock/cnythzl

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

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

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

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

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Recession warnings are everywhere. With interest rates rising, inflation hitting the highest levels in 40 years, and stocks plunging into bear market territory, most people are more than a little worried. Let’s face it, many of us are feeling the pain of the current economy every time we fill the tank, stock the fridge, or check our 401(k) balance.

But the reality is that, whether or not they fit the technical definition of a recession, these types of downturns are a normal (albeit painful) reality of economic cycles. When they happen, one of the most productive responses is to turn worry into action. Building a fortress around your finances can protect against tough times and put you in a better position when the economy bounces back.

So exactly what to do in a recession? These five steps can help you prepare for any type of economic slowdown, now and in the future.

💡 Recommended: What is a Recession and Why Do They Happen?

How to Prepare Yourself For a Recession

Step 1: Cut Expenses

Dramatic price increases across the board have already forced many consumers to cut back on their budget for basic living expenses such as groceries and travel. Now is also a good time to review bank and credit card statements to find other cost-cutting opportunities.

Maybe those streaming services that were a lifeline during COVID aren’t necessary any more. Or, it might make sense to put off some of those home improvements you were considering, keeping the equity in your home intact should you need it during the slowdown.

Revamping your budget can help you handle today’s higher prices and also help free up a few dollars for steps 2 and 3 below.

Step 2: Boost Emergency Savings

Hard as it may be to find extra cash right now, it’s important to make sure you are putting something aside for unexpected expenses. Don’t feel overwhelmed by the advice saying you should aim for three to six months’ worth of living expenses. Saving that much right now may sound more discouraging than helpful, especially for people who saw their emergency funds dwindle during the pandemic. Keep in mind, anything you can save (even $25 a month) is good, and even small weekly deposits add up over time. Whatever you can afford, know that it’s worthwhile to prioritize emergency funds.

With emergency savings, you may get to take advantage of one of the few benefits of rising interest rates. Savings accounts may begin to pay more interest soon. What kind of savings account should you get? You might look for high-interest accounts offered by online banks as they often pay more than bricks-and-mortar financial institutions. Your goal, of course, is to get the best rate. If you are employed full time, check with your benefits department to see if any emergency savings programs are available through your work. Having some cash in the bank can be a key step when you are wondering how to handle a recession. It can be a hugely helpful safety net.

💡 Recommended: Different Types of Savings Accounts

Step 3: Pay Down Debt

Here’s the bad news about higher interest rates. The national average credit card rate rose above 17% for the first time in more than two years, according to a recent weekly rate report . The jump happened after the Federal Reserve increased interest rates. More rate hikes are expected throughout the year.

Check rates on all of your credit cards and other debts. Any variable rates may have already gone up. Next step? Pay as much as you can on your highest interest rate balances first to whittle down that debt; it’s the kind that can unfortunately snowball during tough economic times.

You might also look into balance transfer credit card offers. They can offer a period of no or low interest, during which you can pay down that debt. Another option is finding out how debt consolidation programs work.

Review Any Student Debt

The current economic turmoil hits just as federal student loan repayments are set to begin again in September, after a more than two-year reprieve during the COVID-19 pandemic. Another extension is expected (and hoped for by many) but has not been announced. Nonetheless, payments are likely to start again sometime.

If you’ve taken advantage of the pause, this is the time to get ready for repayment, whenever it comes. Contact the servicers of your federal student loans to make sure you know the monthly payment due date and other details that you may have forgotten or that may have changed during the pause.

If you’re worried about affording repayments, look into alternatives. Forbearance, for example, allows a qualified borrower to suspend federal student debt payments for a period of time, although interest continues to accrue. Government-sponsored income-driven repayment programs are another option. They cap monthly loan payments at a percentage of what is defined as discretionary income. Still other borrowers may find refinancing student loans through a private lender can be an affordable option. It can be worthwhile to do the research to find out what exactly your options are to stay current on your loans.

Step 4: Stay on Your Investment Course

When it comes to your long-term investments such as 401(k)s and other retirement accounts, the key to surviving a down market is simple: Hold tight. Nothing good is likely to happen when you sell in a panic. Not only do you risk selling at a loss, but you’ll miss out when the market rebounds, as it inevitably does.

Take a look at the most recent downturn. The Standard & Poor’s stock market index plunged almost 31% in March 2020 when Covid first hit. Then the index almost doubled just a year later. Investors who sold in a panic didn’t see any of those record-breaking returns.

If rising expenses are making it impossible for you to keep up with 401(k) contributions, you may want to try to deposit the minimum necessary to get any matching funds your employer offers. That’s free money, and you don’t want to miss out.

Also try to avoid making any withdrawals from your retirement accounts. In most cases, if you’re younger than 59 ½, you’ll pay a 10% penalty plus taxes. Even more important, a chunk of your money won’t be there to see the growth in your long-term savings account when the market rebounds.

Step 5: Recession-proof Your Career

Most recessions include high unemployment and mass layoffs. This slowdown is a little different. So far, the unusually strong labor market has protected the U.S. from rising unemployment, contributing to the one bright spot in the U.S. economy. Wages have also increased, but generally not enough to offset the current record inflation.

Economists warn the strong employment market may not last. That’s something to be ready for, especially if you work in an industry that typically suffers downturns in a recession. And employees who may be counting on finding a higher-paying position in this strong job market may find their window for doing so is closing. What’s more, in a worst case scenario, some people could find themselves figuring out how to apply for unemployment.

Reducing debt and building emergency savings, as mentioned above, are two important steps you can take to prepare for the financial shock of a layoff. In addition, this is a good time to work to recession-proof your career: Update your resume, boost your network, and get the extra education, skills or training you may need to protect your livelihood.

💡 Check out our Recession Survival Guide to learn more about living through a recession.

The Takeaway

Economic downturns are never pleasant and often painful. But with some thoughtful planning and the steps outlined above, you can protect your finances and better position yourself when the economy bounces back.

Better banking at SoFi can help. When you open an online bank account with direct deposit, your money can grow faster thanks to competitive rates and no account fees.

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

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Photo credit: iStock/tolgart

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.

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Index investing is a passive investment strategy in which, typically, you buy and hold assets for the long term. As such, index investing has become a popular addition to retirement vehicles, like 401(k)s and 403(b)s. With index investing, instead of purchasing individual stocks, you buy an index — an exchanged traded fund (ETF), or a mutual fund that represents a particular market sector (technology, for instance) or a broad benchmark, like the S&P 500 index.

Index investing seeks to replicate the performance of the sector or benchmark it follows. Because this product is already composed of the companies or sectors whose performance it aims to mimic, once you purchase an index fund, there’s not much trading going on; it’s already set up to perform in line with its index. As such, it’s considered passive investing — a buy-and-hold play.

On the other hand, an actively managed fund is guided by a professional portfolio manager (PM), who makes decisions based on their experience and knowledge. Rather than wishing to generate returns in line with a sector or benchmark, actively managed funds seek to beat the market. They appeal to those who want to make a profit in the near term by outperforming the market. In an effort to do so, PMs watch their funds’ underlying assets carefully and may adjust their holdings aggressively, or as needed to beat the market.

We’ll come back to active versus passive investing later.

There are many ways to approach investing. Some require a significant amount of time and involvement, while others need less effort on your part. It’s important to be aware of your objectives and tolerance for risk, so you can choose which types of investments fit with your goals and are in line with your temperament.

In this article, we discuss the nature of index investing, its potential advantages and disadvantages, and how best to use this strategy.

What Are Index Funds?

An index fund is a type of mutual fund or exchange traded fund (ETF) that tries to track the performance of a specific broad sector of the market — like technology — or a market index — like the Standard and Poor’s (S&P) 500. The idea is to try to replicate the chosen benchmark’s performance as closely as possible. Because index funds seek to replicate an index as closely as possible without trying to change it, you may hear people refer to indexing as being passive.

There are index funds for the U.S. bond market, the U.S. stock market, international markets, and others. Index investing is the process of investing in these index funds.

How Do Index Funds Work?

An index fund is a mutual fund or ETF that aims to mimic the overall performance of a particular market. The fund includes multiple stocks or bonds and is bought and sold like it’s a single investment. Index funds follow a benchmark index, such as the S&P 500 or the Nasdaq 100.

When you put money in an index fund, that cash is invested in all the companies that make up the particular index, which adds more diversity to your portfolio than if you were buying individual stocks. The S&P 500 is one of the major indexes that tracks the performance of the 500 largest companies in the U.S. Investing in an S&P 500 fund means that your investments are tied to the performance of a wide range of companies.

Because the goal of index funds is to mirror the same holdings of whatever index they track, they are naturally diversified and thus generally have a lower risk profile than do individual stocks. Market indexes tend to have a good track record, too. Though the S&P 500 certainly fluctuates, historically, it has historically generated an approximate 10.5% average annual return for investors; from its inception in 1957 through 2021. Just remember that — as with all investments — future returns are not guaranteed.

Index Investing vs Active Investing

Active investing typically involves in-depth research into each stock purchase, as well as regularly watching the market in order to time buys and sells. Passive investing strategies either aim to bring in passive income or to grow a portfolio over time without as much day-to-day involvement. Index investing is a passive strategy which looks to match the returns of the market it seeks to track.

Index investing is a form of passive investing. Index investors don’t need to actively manage the stocks and bonds investment as closely since the fund is simply copying a particular index. This is why index funds are known as passive investing — and it’s what sets them apart from mutual funds.

Mutual funds are actively managed by portfolio managers who choose your investments. The goal with mutual funds is to beat the market, while the goal with index funds is to match the market’s performance. Because index funds don’t require daily human management, they have lower management costs (called expense ratios) than mutual funds. The money saved in fees by investing in an index fund instead of a mutual fund can save you lots of money in the long term and help you to make more money.

A common strategy for many investors who have a long investment horizon is to regularly invest money into an S&P 500 index fund and watch their money grow over time.

Growth of Index Investing

Index investing started in the 1970s, when economist Paul Samuelson claimed that stockpilers should go out of business. Samuelson believed that even the best PMs could not usually outperform the market average. Instead of working with portfolio managers, Samuelson suggested that someone should create a fund that simply tracked the stocks in the S&P 500.

Two years later, struggling firm Vanguard did just that. The fund was not widely accepted, and neither was the concept of index funds. Index investing has only become widely popular in the past two decades as data continues to reaffirm its merits.

Index investing has been gaining in popularity in recent years. Since 2010, actively managed funds have dropped from comprising 75% of all mutual fund assets to just 51%, as passively managed funds have grown to 49%. It’s reached the point where some industry observers may believe that the craze for passively managed index funds could even be dampening capitalism’s greatest innovation driver: competition.

Popular Indexes Include

•   S&P 500 Index

•   Dow Jones Industrial Average

•   Russell 2000 Index

•   Wilshire 5000 Total Market Index

•   Bloomberg Barclays Aggregate Bond Index

Popular Index Funds Include

•   Vanguard S&P 500 (VOO)

•   T. Rowe Price Equity Index 500 (PREIX)

•   Fidelity ZERO Large Cap Index Fund (FNILX)

•   Standard and Poor’s Depository Receipt (SPDR) S&P 500 ETF Trust (SPY)

•   iShares Core S&P 500 ETF (IVV)

•   Schwab S&P 500 Index Fund (SWPPX)

Potential Advantages of Index Investing

The popularity of index investing is well-founded, as it has a number of benefits.

Can Be Easier to Manage

It might seem as though active investors would have a better chance at seeing significant portfolio growth than index investors, but this isn’t necessarily the reality. Day trading and timing the market can be extremely difficult, and may result in huge losses or underperformance. Active investors might have one very successful year, but the same strategy may not work for them over time.

Some individual investors who are not professionals just don’t have the time to learn the ins and outs of financial markets, let alone stock picking. Further, taking a hands-off approach to investing could eliminate many of the biases and uncertainties that arise in a stock-picking strategy.

Empirical research consistently demonstrates that index investing tends to outperform active management over the long term. Boston financial services market research firm, Dalbar, Inc., confirms that the average investor consistently earns below-average returns. For instance, for the 12-months ended Dec. 31, 2021, the S&P 500 posted a market return of 28.71%, while the average equity fund investor returned 18.39%.

SoFi users can take advantage of index investing by setting up an automated investing strategy to rebalance and diversify portfolios.

Lower Cost of Entry for Multiple Stocks

If you only have a small amount of money to start investing, and you choose to invest in individual stocks, you may only be able to invest in a few companies. With index investing, you gain access to a wide portfolio of stocks with the same amount of money.

Also, index investing doesn’t necessarily require a wealth manager or advisor — you can do it on your own. The taxes and fees tend to be lower for index investing because you make fewer trades, but this is not always the case. Always be sure to look into additional fees and costs before you make an investment.

Portfolio Diversification

One of the key tenets of smart investing is diversifying your portfolio. This means that rather than putting all of your money into a single investment, you divide it up into different investments. By diversifying, you may lower your risk because if one of your investments loses value, you still have others. At the same time, if an investment significantly goes up in value, you still typically benefit.

Index funds give you access to numerous stocks all within a single investment. For example, one share of an index fund based on the S&P 500 can give you exposure to as many as 500 different companies for a relatively small amount of money.

Index Investing Is Fairly Passive

Once you decide which index fund you plan to invest in and how much you will invest, there isn’t much more you need to do. Most index funds are also fairly liquid, meaning you can buy and sell them relatively easily when you choose to.

Potential Disadvantages of Index Investing

Although there can be upsides to investing in index funds, there can also be downsides and risks to be aware of.

Index Funds Follow the Market

Index funds track with the market they follow, whether that’s the U.S. stock market or another market. So, if the market drops, so does the index fund that’s trying to replicate that market’s performance.

Index Funds Don’t Directly Follow Indexes

Although index funds generally follow the trends of the market they track, the way they’re structured means that they don’t always directly track with the index. Because index funds don’t always contain every company that’s in a particular index, this means that when an index goes up or down in value, the index fund doesn’t necessarily act in exactly the same way. This is why it’s important to understand how specific index funds seek to track their underlying index.

Index Investing Is Best as a Long-Term Strategy

Because index funds mostly track the market, they do tend to grow in value over time, but they are certainly not get-rich-quick schemes. Returns can be inconsistent and typically go through upward and downward cycles.

Some investors make the mistake of trying to time the market, meaning they try to buy high and sell low. Investing in index funds tends to work the best when you hold your money in the funds for a longer period of time; or if you engage in as in dollar-cost-averaging. Dollar-cost-averaging is a method of investing the same amount consistently over time to take advantage of both high and low points in market prices.

Choosing an Index to Invest in

The name of a particular index fund may catch your eye, but it’s essential to look at what’s inside an index fund before investing in it. Determine what your short- and long-term goals are and what markets you are interested in being a part of before you begin investing.

There are both traditional funds and niche funds to choose from. Traditional funds follow a larger market, such as the S&P 500 or Russell 3000. Niche markets are more focused and may contain fewer stocks.

They may focus on a particular industry. Typically, a good way to start investing in index funds is to add one or more of the traditional funds first, then add niche funds if you feel strongly about their growth potential.

Index Funds Are Weighted

Depending on which index fund you invest in, it may be weighted. For example, the S&P 500 index is weighted based on market capitalization, meaning larger companies like Amazon and Meta (formerly Facebook) hold more weight than smaller ones.

If Meta’s stock suddenly goes down, it may be enough to affect the entire index. Other indexes are price weighted, which means that companies with a higher price per share will be weighted more heavily in the index. Another form of index weighting could be equal-weight or weights determined by other factors, such as a company’s earnings growth.

Less Flexibility

If you actively invest in individual stocks, you can usually choose exactly how many shares you want to buy in each company. But when you invest in index funds, you have less flexibility. If you’re interested in investing in a particular industry, there may not be an index fund focused solely on that.

How to Get Started With Index Investing

To invest in an index, investors typically purchase exchange traded funds that seek to track an index. Some funds include all the assets in an index, while others only include certain assets.

Prior to investing in any index fund, be sure to look into the details of how the fund works. You can find information about what is contained in the fund, how it is weighted, its fees and quarterly earnings, and other details on the fund’s website. You also can get that data via a financial advisor, or from the Electronic Data Gathering, Analysis, and Retrieval system (EDGAR) , which the U.S. Securities and Exchange Commission (SEC) oversees.

Alternatives to Index Investing

Despite the fact that index investing has grown in popularity over the past two decades, some analysts are now bringing up additional downsides and alternatives that investors may want to consider.

The stock market includes companies from many industries, some of which investors are moving away from investing in. Oil and gas companies, pesticide companies, and others — which some people could consider harmful to the environment or human populations — may be included in an index fund. As the economy moves away from these industries, these types of companies may not perform as well, and as an investor you may not want to support them financially.

Some new index funds are being formed around the principles of sustainability and positive social impact. You may also be interested in impact investing and other types of ETFs and mutual funds that focus on specific industries that affect society positively.

Building Your Portfolio

Whether you’re interested in investing in index funds or in hand-selecting each stock, it’s important to keep track of your portfolio and current market trends.

Once you know what your investment goals are, the SoFi Invest online investing platform can be a great tool to build your portfolio and track your finances. And, as we discussed above, with SoFi Automated Investing, you can easily add index fund ETFs to your portfolio, all on your phone if you choose. The automated investments are pre-selected for you, so you simply need to decide which funds to invest in, and how much you want to invest. Or, if you prefer to hand-select each stock in your portfolio, you can use the SoFi Active Investing self-directed brokerage platform.

SoFi has a team of credentialed financial advisors available to answer your questions and help you reach your goals. You only need a $1 to get started.

Find out more about how you can use SoFi Invest to meet your financial goals.

FAQ

What happens when you invest in an index?

When you invest in an index, you’re investing in not one stock, but in a collection of stocks (or other asset types, like bonds). The number of assets in an index can range from the tens to the hundreds. And they usually have something in common, be it their capitalization (large or small cap); their sector (tech or healthcare), and so on.

Are indexes safe investments?

Investing in the capital markets always entails a degree of risk; there are no guarantees, and no investment is 100% safe. That said, investing in an index fund can entail less risk than owning a handful of individual company stocks because index funds are diversified. That doesn’t mean you can’t lose money, but an index generally fluctuates a lot less than an individual stock. Index funds are only as stable as their underlying index.

What does index mean in investing?

In investing, the term “index” refers to the basket of assets (stocks, bonds, etc.) that comprise an index fund.

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Photo credit: iStock/PixelsEffect

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.

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

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