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Liquid assets are any assets that can be easily and quickly converted into cash. In fact, people often refer to liquid assets as cash or cash equivalents, because they know that the asset can be exchanged for actual cash without losing value.

Here’s a closer look at the topic and how liquid assets can contribute to your financial well-being.

What Makes an Asset Liquid?

Liquidity means that you can readily access an asset as cash. While you might own any number of valuable assets (e.g., your home, retirement accounts, collectibles) and these can be considered part of your overall net worth, only liquid assets can generate cash quickly, when circumstances demand it. If you needed cash quickly, you likely would not be able to sell your home overnight to get money.

For an asset to be considered liquid, it must be traded on a well-established market with a large number of buyers and sellers. It also must be relatively easy to transfer ownership. Think stocks, bonds, mutual funds, and other marketable securities.

Generally, you can sell stocks and obtain cash readily. By contrast, you probably couldn’t sell your vintage watch collection that fast, and even if you could, there are a number of factors that might influence how much cash value you might obtain from the sale.

Worth noting: Although liquid assets (aka cash and cash equivalents) pose very little risk of loss, they also have little or no capacity for growth.

What Investments Are Considered Liquid Assets?

As you can see, the primary advantage of liquid assets is that they can be converted to cash in a short period of time. For example, stock trades must be settled within two days, according to Securities and Exchange Commission rules. Here, you’ll learn more about what are considered liquid assets.

Examples of Liquid Assets

Here are some specifics about what a liquid asset is:

•   Money in the bank: Cash in a checking and savings account is a liquid asset.

•   Stocks: Stocks are often considered liquid assets because they can be converted into cash when you sell them. Keep in mind, though, that the most liquid stocks might be the ones that many people want to buy and sell. You may have a more difficult time liquidating stocks with lower demand.

•   U.S. Treasurys and bonds: These instruments are relatively easy to buy and sell, and these processes are usually done in high volume. They have a wide range of maturity dates, which helps you figure out when you want to liquidate them. Because U.S. Treasurys are often considered relatively safe and dependable, the interest rates are somewhat lower and could be a good fit for investors who are looking to mitigate risk.

•   Mutual funds: Mutual funds are pooled investment vehicles that hold a diversified basket of stocks, bonds, or other investments.

◦   Open-end mutual funds are considered more liquid than closed-end funds because they have no limit on the number of shares they can generate. Also, investors can sell their shares back to the fund at any time.

◦   Closed-end mutual funds, on the other hand, are less common. These funds raise capital from investors via an IPO. After that, the number of shares are fixed, and no new shares are created. Instead, closed-end funds shares can only be bought and sold on an exchange, and thus are considered less liquid than open-end fund shares because they’re more subject to market demand.

•   Exchange-traded funds and index funds: Like mutual funds, exchange-traded funds (ETFs) and index funds allow individuals to invest in a diversified basket of investments. ETFs are traded like stocks, throughout the day on the open market, which makes them somewhat more liquid than index funds, which only trade at the end of the day.

•   Money market assets: There are two main types of money market assets:

◦   A money market fund is a type of mutual fund that invests in high-quality short-term debt, cash, and cash equivalents. It’s considered low-risk and offers low yields. It is therefore thought of as a relatively safe vs. risky investment. You can cash in your chips at any time, making money-market funds a liquid investment.

◦   Money market funds are different from money market accounts, which are a type of savings account that’s insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor, per account ownership category, per insured bank.

•   Certificates of deposit: If you have money in a certificate of deposit, or CD, this might be considered semi-liquid because your money isn’t available until the official withdrawal date. You can withdraw money if you need it, but if you’re doing so before the maturity date, you’ll likely pay a penalty.

What Assets Are Considered NonLiquid?

There are, of course, many assets that are not easy to liquidate quickly. These assets typically take a relatively long time to sell or for the deal to close. You’ll get your money but most likely not right away, and there may be time or costs associated with the conversion to cash that could impact the final amount. That’s why assets like these are considered illiquid or nonliquid assets.

Examples of NonLiquid Assets

•   Collectibles: Items such as jewelry and artwork, as well as hobby collections such as stamps and baseball cards, may be hard to value and difficult to sell.

•   Employee stock options: While employee stock options can be a valuable form of compensation, they may also be highly non-liquid. That’s because employees must typically remain with a company for years before their options vest, they exercise them, and they finally own the stock.

•   Land and real estate: These investments often require negotiation and contracts that can tie up real estate transactions for weeks, if not months.

•   Private equity: There are often strict restrictions about when you can sell shares if you’ve invested in private equity assets such as venture capital funds.

Liquid Assets in Business

If you’re running a business, accounts receivable (the money you’re owed from clients) are often considered to be a liquid asset, because you can typically expect to be paid within one or two months of billing.

Any inventory you have on hand, such as office furniture or a product you’re selling, can also be considered liquid, because you could sell it for cash if need be. The liquid assets on your company balance sheet usually list cash first, followed by other assets that are considered liquid, in order of liquidity.

Having more liquid assets is desirable because it indicates that a company can pay off debt more easily. When businesses need to determine how cash liquid they are, they often look at the amount of their net liquid assets. When all current debts and liabilities are paid off, whatever remains is considered their liquid assets.

Are Retirement Accounts Like IRAs and 401(k)s Liquid Assets?

Retirement accounts, such as individual retirement accounts (IRAs) and 401(k)s, are not really liquid until you’ve reached age 59½. Withdraw funds from your account before then, and you may face taxes and a 10% early withdrawal penalty.

What’s more, you can hold a variety of assets inside retirement accounts. For example, if you hold a money market fund inside your IRA, that is a liquid asset. But you could also hold real estate, which very much isn’t.

Reasons Why Liquid Assets Matter

Other than the most obvious reason, which is that cash gives you a great deal of flexibility and can be essential in a crisis, liquid assets serve a number of purposes.

•   Calculating net worth: To calculate your net worth, subtract your liabilities (your debt) from your assets (what you own, which can include your liquid assets).

•   Applying for loans: Lenders might look at your liquid assets when you apply for a mortgage, car loan, or home equity loan. If your liquid assets are high, you may get better terms or lower interest rates on your loans. Lenders want to know that if you were to lose your job and/or your income, you would be able to continue to pay back the loan using your liquid assets.

•   Business interests: Having liquid assets on your balance sheet is a signal that your business is prepared for an emergency or a market shift that could require a cash infusion.

Are All Liquid Assets Taxable?

While income is money you earn or receive, an asset is something of value you possess that can be converted to cash at some point in the future. While owning an asset doesn’t make it taxable, converting it to actual cash would, in most cases.

The IRS, or Internal Revenue Service, has many rules around how the proceeds from the sale of assets can be taxed.

The IRS considers taxable income to include gains from stocks, interest from bonds, dividends, alimony, and more. Gains on the sale of a home might be taxed, depending on the amount of the gain and marital status. If you aren’t sure whether income from the sale of an asset is taxable, it might be wise to consult a tax professional.

Is It Smart to Keep Cashing in Liquid Assets?

The point of maintaining a portion of your assets in liquid investments is partly for flexibility and also for diversification. The more access to cash you have, the more prepared you are to navigate a sudden change in circumstances, whether an emergency expense or an investment opportunity.

Having a portion of your portfolio in cash or cash equivalents can also be a hedge against volatility.

Thus, it may be worth keeping a mix of both liquid and non-liquid assets to help you reach your short-term financial goals as well as longer-term ones. And while cashing in liquid assets might be necessary, it’s also prudent to keep some cash on hand in case you need it. You may want to focus on gathering at least three to six months’ worth of expenses in the form of liquid assets as an emergency fund.

How Liquid Are You?

To figure out how liquid you are, make a list of all your monthly expenses, from rent/mortgage on down, including even your streaming service subscriptions. Then, make a list of all your liquid assets and investments (being careful to pay attention to the definition of liquid assets vs. illiquid assets, as it can be confusing).

Then, total all your monthly expenses, and compare that sum to the liquid assets in your possession.

Does your total savings cover six months’ worth of monthly expenses? If so, congrats! If not, you’re not very liquid. Don’t despair, though. There are ways to build up more liquidity by growing your emergency fund.

Where to Start Building Liquid Assets

As you start to build your liquid assets, first consider saving a cash cushion in the form of an emergency fund, which should be enough to cover any unexpected expenses that might come along.

Envision what you might need in the event of a crisis (e.g., a job loss, divorce, health event, and so on). In terms of how much to save in an emergency fund, aim to accumulate three to six months’ worth of expenses to cover basic bills, repairs, insurance premiums and copays, as well as any other personal or medical expenses.

One good way to build liquidity is to set money aside every week or month. Or you might have a set savings amount auto-deducted from each paycheck. You could keep the funds in a high-yield savings account to help them grow.

From there, you may consider opening a retirement account or a taxable brokerage account where you can invest in potentially more lucrative (but risky) liquid investments, such as stocks, bonds, mutual funds, and ETFs.

The Takeaway

Liquid assets are assets that can be converted into cash relatively easily, typically with little or no loss in value. Liquid assets can include cash in a checking or savings account, money market accounts, or marketable securities such as stocks, bonds, mutual funds, and ETFs.

Liquid investments can play a surprisingly important role in your financial well-being. Having ready access to cash can help you pay off debt, cover a crisis, or be able to invest in new opportunities.

Having the right banking partner can help you keep your cash secure while earning interest.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

What’s the definition of a liquid asset?

A liquid asset is an asset that is readily converted into cash. This may include money in the bank, stocks, or a certificate of deposit (although you might owe a penalty when you liquidate it).

What does nonliquid asset mean?

Nonliquid assets are resources that can’t be quickly converted to cash, such as real estate, employee stock options, or collectibles (such as artwork or jewelry) that would have to be sold, which can take time and the price may fluctuate.

Is a 401(k) considered a liquid asset?

Retirement accounts, such as a 401(k), are not really considered liquid until you are over the age of 59½. Before that age, you would face a 10% early withdrawal penalty, as well as taxes, meaning you would take a loss on the value.

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There are, unfortunately, many things in life that can rock a person’s financial stability, ranging from divorce to a devastating flood. Situational poverty is a type of poverty that occurs due to a sudden change in circumstances, such as a major life event or natural disaster.

If you’re in the grip of a situation like this, it can feel impossible to get back on your feet. But it’s indeed possible to overcome situational poverty. Using a variety of techniques, it’s often possible for people to pull themselves out of a difficult and painful moment. Here’s a closer look at what causes situational poverty and how to break out of a poverty cycle once it starts.

What Is Situational Poverty?

Situational poverty is a type of poverty that is the result of a sudden or severe crisis. It usually has a specific cause or triggering event, and the financial difficulties may be only temporary. Those in situational poverty may have ways to steadily improve their finances.

This is in contrast to generational poverty, where at least two generations of a family are born into poverty. In this case, poverty is largely the result of circumstance. People don’t have the knowledge or skills to escape poverty, so, often, their finances don’t improve.

Reasons for Situational Poverty

Situational poverty is often the result of a sudden or severe crisis in a person’s life. While there are many events that may lead to situational poverty, they’re often temporary. Here’s a look at some of the triggers that can cause this sort of disadvantaged scenario.

Being Born Into a Disadvantaged Background

Being born into a disadvantaged background can contribute to situational poverty. It can also be a factor in generational poverty, which requires at least two generations to be born into poverty.

In terms of situational poverty, if you were born into poor circumstances, even if your parents had been wealthier earlier in their lives, it may still be difficult for you to get ahead financially. You might face issues such as a lack of access to medical care and educational resources. You don’t get that boost into financially stable adulthood that some people do.

Making Bad Financial Decisions

When you’re grappling with poverty, you may wonder, “Why am I so bad with money?” But it’s not uncommon for people to make a series of unwise money moves and wind up in poverty as a result. Perhaps you made a bad investment or took on a large debt (say, a mortgage) that you couldn’t keep up with. Or maybe you poured all your savings into a business idea that didn’t succeed. Sadly, these things happen often. In some cases, the consequences of these sorts of decisions can trigger situational poverty.

Experiencing a Tragedy

It’s painful to think about it, but there are many types of tragedies that can send a person’s finances into a downward spiral. For instance, you might lose your house in a hurricane, or your spouse (with whom you share your finances) might die unexpectedly. These events can leave a person without the means to live above the poverty line.

Lack of Good Education

Education is a path out of poverty, and sadly, the inverse is also true: Not getting a solid education can lead to a person not succeeding financially. They may lack the skills to earn higher wages.

Not having the proper financial education, such as knowing the importance of an emergency fund and how to manage your finances, can also result in or contribute to situational poverty. Unfortunately, many U.S. high schools don’t require personal finance education as a graduation requirement. As a result, many people enter adulthood without basic financial skills like knowing how to open a new bank account, set up a basic budget, and avoid bad debts.

Tips for Breaking the Vicious Cycle of Poverty

The scenarios above reveal some of the ways that a person can slip into poverty. Once you’re in that situation and possibly struggling to pay bills, however, it can feel impossible to climb your way out. Fortunately, there are several paths that may help you rise up and get on a better financial footing. Here are some ideas for how to get out of situational poverty.

1. Getting a Sound Education

A good education, specifically a good financial education, is one of the first steps toward getting out of poverty. While financial education classes in school are ideal, you can still learn the basics on your own, even as an adult. For example, the FDIC’s How Money Smart Are You? suite of games can help you learn the basics. Many universities and organizations have personal finance courses for adults. You can also find free educational materials online that can help boost your financial IQ and guide you toward making money-smart choices.

2. Having a Close Mentor

Having a great mentor is one of the best ways to get a leg up in life, and the same applies to escaping situational poverty. A career mentor can help you gain the skills and experience you need to find (or find a better) job, while a financial mentor can help you learn how to budget, save, and ultimately break the cycle of poverty.

It can take some searching, but you may be able to find a mentor where you work or by networking with friends, family members, and neighbors. People who have achieved success and escaped poverty themselves are often happy to give back by helping others in the community.

3. Working With Well-Informed Organizations

Another way to improve your financial literacy and learn how to overcome situational poverty is to work with trusted organizations. There are a number of nonprofit groups that specialize in different aspects of personal finance that could be holding you back. For example, the National Foundation for Credit Counseling (NFCC) helps people who are saddled with large amounts of debt. Operation Hope provides financial education to underserved communities, while Accion is a nonprofit that is focused on bringing financial technology and tools to underserved communities.

4. Utilizing Community and Government Resources

There’s no shortage of community and government resources that can help if you’re experiencing situational poverty. Churches, schools, community centers, and public libraries can offer support within your community.

Beyond your community, there are extensive government resources that can also help. For example, you might qualify for benefits such as the Supplemental Nutrition Assistance Program (SNAP) or the child tax credit. There are dozens of government programs that use income or poverty level as a qualifying criterion. The U.S. Department of Health & Human Services (HHS) has a list of programs on its website.

5. Changing Your Money Mindset

Your mindset can hold you back just as much as it can empower you. It’s worthwhile to try to improve your money mindset. Something that’s important to remember is that situational poverty is often temporary.

This is especially true if a bad financial decision or a natural disaster was a major contributor to your lack of funds. These are passing, albeit difficult, moments. By leveraging some of the resources mentioned in this article and practicing financial self-care, you can make progress.

6. Setting Financial Goals

Setting financial goals is important whether you’re experiencing poverty or not. But it’s even more important when you’re hoping to build up your financial resources. Money goals can help you work toward something specific. Consider taking some time to map out what steps you want to take to move through your situational poverty. Some common goals are developing a budget with positive cash flow and paying down high-interest credit card debt.

7. Cutting Expenses and Spending Wisely

One aspect of budgeting that can help you pull yourself out of a tough financial spot is cutting any nonessential expenses and then funneling that money toward your goals, such as paying down debt (more on that below) or taking a class to learn a skill that can help you get a promotion or a higher-paying job.

To “find” money, it can help to look at your current expenses and see where you may be able to trim back. For example, if you have any streaming services, you might pause them until you have your finances in order. Or if you have a cell phone plan, you might switch to a prepaid plan so you aren’t being charged automatically and can take control of your spending. You might also negotiate lower interest rates by calling your credit card issuer. This tactic may yield rewards.

8. Paying Down Your Debt

If you have large amounts of debt, you’ll want to prioritize paying down those with the highest interest rates first. You might look into a balance transfer credit card, which may give you no or low interest for a period of time. That can help you whittle down debt, as it gives you some breathing room from a high annual percentage rate (APR). If you can qualify for a low rate on a personal loan, you may use it to consolidate your debt. Working with a nonprofit credit counseling organization is another option to help you manage this common aspect of poverty.

Recommended: What Is the Average Credit Card Interest Rate?

9. Avoiding Payday and Predatory Loans

Payday loans offer cash advances before payday to those who need cash quickly, but this money infusion can really cost you. These loans typically have extremely high interest rates. Even with state laws limiting fees to no more than $30 per $100 borrowed, you could still end up paying the equivalent of around 400% interest. And if you’re unable to pay back a payday loan, you may end up in a debt cycle that can be difficult to break out of.

10. Making Saving a Priority

Saving is generally always smart, but situational poverty can highlight its importance. When you’re financially vulnerable, any expense you aren’t expecting could really rock your situation. A big medical or car repair bill could be a huge problem.

Even if you don’t have the means to put much aside, even a small contribution to savings each month can slowly but surely add up to a solid cash cushion over time, especially if you put the funds in a savings account that pays a competitive rate, such as a high-yield savings account. This allows your money to grow just by sitting in the bank. As your finances improve, you can gradually increase how much you siphon off into savings each month.

11. Finding Out Where You Stand

Finding out where you stand can be a powerful exercise. We tend to be our own biggest critics, and that applies to finances, too. When you take a look at the numbers (go ahead and really study your income, cash outflow, assets, and debt), you might find you’re doing better than you think.

Granted, this may not be the case when you first find yourself in situational poverty. But as you start to work on things, you might find your debt declining or that your savings by age is better than you expect. That can give you the confidence boost you need to keep exercising good financial habits and continue to improve your situation.

Also, even if you’re in the midst of situational poverty and your status isn’t great, you’ll at least know exactly where you are. That benchmark will be what you build from.

The Takeaway

Situational poverty is a type of poverty typically caused by a life event, such as a divorce, severe health problems (and the resulting bills), or a natural disaster. This type of poverty is usually temporary and can often be overcome by boosting your financial education, accessing community and government resources, and prioritizing debt elimination and saving.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

How can I overcome a poverty mindset?

Changing your mindset is often a key step to getting out of poverty. Here are some ways to break out of a poverty mindset and feel more empowered:

•   Set achievable financial goals and celebrate small victories to build confidence.

•   Educate yourself on personal finance through books, courses, and mentors.

•   Surround yourself with positive influences, and avoid those who reinforce negative stereotypes.

•   Practice gratitude to appreciate what you have.

•   Cultivate a growth mindset by seeing challenges as opportunities for learning.

How do I know if I am poor or not?

The federal poverty guideline for 2026 for the lower 48 states and DC is an annual income of $15,960 or less for an individual. For a couple, poverty is defined as an annual income of $21,640 or less. For a family of four, it’s defined as an income of $33,000 or less.

How many people are in situational poverty?

It’s difficult to know exactly how many people live in situational poverty. However, a large number of people live in poverty in general. According to the latest data from the U.S. Census, the official poverty rate is 10.65% of the population, with 35.9 million people living in poverty.

Photo credit: iStock/malerapaso

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Sure, you could store all the cash you’re likely to need in the near future in a checking account and call it a day. But that would mean missing out on the many benefits of having a savings account.

While savings accounts may not offer the returns you could potentially get in the market, they pay interest (generally more than you can earn in a checking account), while keeping your money safe and accessible. This makes them ideal for storing your emergency funds and money you’re saving for shorter-term goals, such as buying a car or going on vacation.

Here’s a closer look at the perks of having a savings account and why this type of account likely deserves a place in your financial toolkit.

What Savings Accounts Are

A savings account is a type of deposit account at a bank, credit union, or other financial institution where you can safely store your money and earn interest. Savings accounts at banks insured by the Federal Deposit Insurance Corporation (FDIC) are typically covered up to $250,000 per depositor, per insured institution, per ownership category. Co-owners of joint accounts at the same bank are typically each insured up to $250,000. Credit unions offer similar insurance through the National Credit Union Administration (NCUA).

Unlike a checking account, which is set up for everyday money management, a savings account is designed to store money you don’t need right away. These accounts usually don’t come with checks and debit cards, and some banks may limit you to a certain number of withdrawals per month.

Because savings accounts offer safety, liquidity, and interest, they can be a great place for setting aside money for shorter-term goals, such as:

•   Establishing an emergency savings fund

•   Putting a down payment on a house

•   Paying for a wedding

•   Funding a vacation

•   Buying a new car

•   Renovating your home

Six Benefits of Savings Accounts

Here’s a look at some of the main advantages of a savings account.

1. You Earn Interest on Your Deposits

Savings accounts earn interest, expressed as an annual percentage yield (APY). That means you earn money just for keeping your funds in the bank, making it a low-risk way to build wealth. Not every savings account offers the same interest rate, however. While the current national average savings yield is 0.38%, top-yielding savings accounts are currently earning APYs above 3.00% percent.

To see how that translates into actual dollars, let’s say you currently have $5,000 sitting in your checking account you don’t need immediately, you could transfer those funds to a 3.50% APY high-yield savings account. Even if you don’t add any additional money to the account, your balance could increase in one year to $5,177.83 (assuming it compounds monthly), just by letting the initial deposit sit in the savings account.

2. Your Money Is Insured

Savings accounts are typically insured by the FDIC or NCUA, depending on where the account is held. That means your money is protected against major losses, as noted above, in the event that the bank or credit union goes out of business. You would either receive payment directly or, more likely, a new account may be opened for you at another bank with the same balance as before. This makes a savings account safer than keeping your money in a sock drawer or under the mattress, where it is susceptible to theft or loss.

3. It’s Low Risk

Savings accounts don’t offer high returns compared to what you could potentially make in an investment account over the long term. However, savings accounts don’t come with the same level of risk. With investments, you can potentially lose money, including your principal, over the course of days, weeks, months, and even years. The balance on a savings account, on the other hand, will typically continue to grow over time due to compound interest (unless, of course, you make a withdrawal). In addition, investments are not insured by the FDIC.

If you have money you plan to use within the next couple of years that you can’t afford to lose, a savings account may be the best place to store it.

4. It Doesn’t Require a Large Initial Deposit

Savings accounts are easy to open and typically do not require a big initial deposit, so you can start saving from the ground up. Many online-only savings accounts allow you to open an account with $0, while traditional brick-and-mortar banks may require deposits of $25 to $100 to open a new account.

Keep in mind, though, that some savings accounts do offer higher interest rates and low (or no fees) if your balance stays above a certain minimum threshold or you meet other criteria.

5. You Can Separate Money for Different Goals

If you’re saving for a particular goal, such as buying a car or putting a down payment on a home, it can be helpful to keep that money in a separate savings account. This helps to ensure that you don’t use the money on something else, like groceries or clothing.

If you have several things you’re saving for — such as an emergency fund, a new car, or a vacation — you might even want to open multiple savings accounts. Separating money can help you visualize progress toward each goal. Some savings accounts let you organize your savings into separate buckets, or “vaults,” so you can save toward multiple goals within one account.

6. Easy Access When You Need It

Savings accounts are relatively liquid, meaning you can access your money when you need it by transferring it into your checking account or withdrawing it at an ATM or through a teller at a local branch. That’s not true for many investments, which may take a few days to convert to cash. Some investment products, such as real estate properties, can potentially take months or years to sell off.

That makes a savings account an ideal spot for your emergency fund. When an unexpected expense comes up, you can access your funds immediately — and avoid running up expensive credit card debt — in order to cover it.

That said, the money is not quite as accessible as the money in a checking account. Savings accounts typically don’t come with checks and debit cards, and some banks limit the number of withdrawals you can make to six or nine per month. However, you might see these limitations as benefits, since they encourage saving rather than spending.

Recommended: Can You Write Checks From a Savings Account?

Is a Savings Account Right for You?

Savings accounts offer numerous benefits, including insurance on your deposits, higher APYs than checking accounts, and liquidity. Plus, you generally don’t need a large (or sometimes any) initial deposit to get started.

However, the interest you earn on a savings account may not always keep up with inflation, which means your balance could become less valuable over time. As a result, a savings account is generally not the best place to put money you are saving for a long-term goal, such as retirement or your child’s college education. You might potentially earn a better return over time if you instead put that money in a diversified portfolio. Investments are higher risk, however, and come with the risk of losing principal, as well.

If you’re interested in opening a savings account, it’s a good idea to research your options and compare APYs, minimum deposits, balance requirements, and any fees. If you have a savings account but aren’t satisfied with the perks, there’s likely a better fit for you that still offers the full benefits of a savings account.

Recommended: Perks of Long-Term Savings Accounts

The Takeaway

Savings accounts provide a secure, liquid, and low-risk way to build your savings through the interest earned over time. Unlike checking accounts, which are designed to make funds readily accessible on a day-to-day basis, savings accounts are ideal for storing money for goals in the not-too-distant future, such as a wedding or a down payment on a house. They also typically offer protection via FDIC or NCUA insurance. They may not offer the potential returns that other financial products may offer, but their accessibility and safety make them an important component of a financial toolkit.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

What is the benefit of a savings account?

The primary benefit of a savings account is that it allows you to build your savings over time (by earning interest), while keeping it safe and accessible. This allows you financial flexibility in case of unplanned expenses, but you can still save up for important goals in the near term.

What are the advantages and disadvantages of a savings account?

Advantages of savings accounts include:

•   Earning interest: Deposited funds accrue interest, helping your money grow over time.

•   Safety and security: Funds in savings accounts are typically insured by the Federal Deposit Insurance Corporation (FDIC or National Credit Union Administration (NCUA), providing protection against loss in the rare case of a bank failure.

•   Liquidity: Savings accounts funds can be accessed quickly, making them ideal for emergency savings.

Disadvantages of savings accounts include:

•   Lower interest rates: While savings accounts offer interest earnings, the interest may be lower than the potential interest or returns you might see in other financial products that might be higher risk.

•   Inflation risk: Inflation may erode the purchasing power of your savings over time, especially if the interest earned does not keep pace with inflation.

•   Fees and minimum balance requirements: Some savings accounts may have fees or minimum balance requirements, potentially reducing the overall return on your savings.

How is a savings account most useful?

Savings accounts can be most useful for storing your emergency funds and money you plan to spend in the next few months or years, since they pay interest while keeping your funds safe and accessible. However, interest on savings accounts are often lower than the returns you may potentially earn through other higher-risk financial products. That makes these accounts less useful for long-term savings goals, such as retirement or a child’s future college education.

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Congrats, new driver: Hitting the open road on your own can mean freedom and just plain fun. But remember that safety comes first — and part of driving safely is having sufficient car insurance coverage.

The world of auto insurance can be confusing, especially for new drivers, who also often face the challenge of higher insurance premiums. Still, there are ways to save money on insurance both right off the bat and as you spend more time behind the wheel.

Here’s what new drivers need to know about auto insurance.

Car Insurance: The Basics

First things first: What is auto insurance, how does it work, and why do you need it?

Car insurance pays out money for car repairs, medical bills, and other expenses in the event you get in an accident. Liability insurance, which pays out money to the other driver when you’re found at fault, is legally required in most states.

The amount of auto insurance you need depends on the law in the state where you live as well as your own risk tolerance level. But keep in mind that even minor auto accidents can be very costly, which makes auto insurance a necessity.

Unfortunately, auto insurance can be more expensive for new drivers — but again, take heart. There are still ways to ensure you get the best possible rate.

Factors That Affect Car Insurance Price

Car insurance prices are affected by far more than just a driver’s experience level, though that’s certainly an important part of the equation. Here are some other factors that insurers will take into account when drawing up your quote:

•   Driver’s age

•   Driver’s gender

•   Driver’s marital status

•   Driver’s history of accidents and damage

•   Driver’s credit score

•   Vehicle’s primary location (where it’s kept and driven)

•   Vehicle’s make, model, and age

Although there are some general rules that hold true — for instance, that people with lower credit scores or worse driving records end up with higher premiums — the way some of these factors are used is less than transparent. For example, a 2026 study by the insurance comparison site The Zebra found that in most states, men pay higher insurance costs than women.

According to the Insurance Information Institute, women tend to have fewer accidents than men and therefore often pay less for auto insurance.

While there’s no easy way to predict what your rates will look like without getting a custom quote, new drivers will likely need to prepare for higher insurance premiums. This makes sense. After all, the insurance company is trying to hedge its bets that you won’t get in an accident (and therefore need an expensive claim paid out), and they don’t have a driving record to rely on while they make their best guesses.

Recommended: Auto Insurance Terms, Explained

Who’s Considered a New Driver?

Although the classic image of a new driver might be an eager teenager with their brand-new license and the family’s hand-me-down car, there are other people who fit the description, too. Drivers considered “new” include:

•   Teenagers with new driver’s licenses

•   Adults without a driving record

•   People with a gap in their driving history or car insurance coverage

•   Immigrants to the United States whose driving records might not transfer over from their country of origin

Being a new driver doesn’t change how much insurance you’re required to purchase by state law. But as mentioned, it can affect your price. Here’s a closer look at solutions for each type of driver.

Car Insurance for Teens

Teens — or, in many cases, teens’ parents — face some of the highest insurance costs out there because often, youthful abandon and lack of experience can lead to accidents. There are some moves you can make to minimize the costs, including:

•   Staying on a parent’s policy: Staying on a parent’s policy as long as they’re living under the same roof can keep costs relatively low for teenage drivers. However, parents should still expect their policy costs to double.

•   Looking for discounts for good grades or defensive driving classes: Teens may also be able to score good student discounts by maintaining above-average grades in school, or get a discount if they attend and complete an approved defensive driving class.

•   Maintaining a good driving record: For all drivers, an accident-free driving history goes a long way toward lowering insurance costs over time. Of course, practicing care and vigilance on the road is always of paramount importance. But given how high the cost of teenagers’ insurance policies can be, there’s even more incentive.

Recommended: How Does Car Insurance Work?

Car Insurance for People Who Moved to the U.S.

Even if you have a robust driving history in your home country, if you immigrate to the United States, it’s unlikely to transfer over. This means you could face elevated insurance prices for the first few years you’re a U.S. driver.

The first step to attaining U.S. car insurance is often securing a valid driver’s license since insurers generally require or strongly prefer licensed drivers. However, many states issue driver’s licenses regardless of immigration status. Applicants may be required to provide documentation, such as a foreign passport or birth certificate, depending on the state. Some of these licenses are not valid for federal identification purposes.

Once you’re ready to shop for car insurance, consider obtaining several quotes to see which company can offer the basic auto insurance coverage you need for the least amount of money.

Car Insurance for Adults Without a Driving Record

Maybe it’s been a long time since you’ve driven, or you’ve never driven at all.

Without a solid, recent driving history, car insurance companies will still consider you a new driver, which can push costs up. The same goes for having a gap in car insurance coverage. (There may be exceptions to this rule if your driving gap was due to military deployment status, so be sure to check with your prospective insurer.)

Shopping around for the best quote and maintaining as clean a driving record as possible going forward will help your case considerably. If you’re confident in your driving ability and you’ve built up the savings to afford it if an accident does occur, choosing a higher deductible could also help you save money on monthly premiums.

3 Ways to Save on Car Insurance for New Drivers

Along with the tips in the sections above, there are some universal suggestions that can help most new drivers — and, in fact, most drivers, period — lower their car insurance costs.

Choose Your Car Wisely

Certain cars are more expensive to insure than others, including flashy models that are likely to get stolen (or tempt their drivers into three-digit speeds). You can find lists of the cheapest cars to insure online, but generally speaking, slightly older, more modest vehicles are the least expensive to keep insured.

Improve Your Credit History

It’s incredible how many parts of our lives credit history touches, and car insurance is no exception. While your quote is drawn up based on many factors, as mentioned above, your credit history is definitely part of it. Besides, maintaining good credit behavior is highly likely to help you elsewhere, too.

Bundle Up

Many insurance companies offer discounts to people who “bundle” coverage or purchase more than one type of insurance from the same company. So if you’re required to have renter’s insurance or have home insurance, see if buying them all from the same provider might save you some dough.

The Takeaway

The price of car insurance is impacted by several factors, including the driver’s age, gender, marital status, credit score, and history of accidents and damage. Just as important is their experience level. Newer drivers and drivers with large gaps in car insurance coverage often end up paying higher premiums — at least at first. However, there are ways to potentially lower costs, including driving a more modest vehicle, bundling coverage, and improving your credit score.

Whether you’re a first-time driver or a seasoned pro, shopping around for insurance in your area can help you figure out how much coverage you really need and what your premium might be.

When you’re ready to shop for auto insurance, SoFi can help. Our online auto insurance comparison tool lets you see quotes from a network of top insurance providers within minutes, saving you time and hassle.

FAQ

Why is car insurance important for new drivers?

Car insurance is important because it helps cover costs for car repairs, medical bills, and other expenses after an accident. It’s also legally required in most states to ensure drivers can pay for damages they may cause.

Why do new drivers often pay higher insurance premiums?

New drivers usually pay higher premiums because they have little or no driving history for insurers to assess their risk. Without a proven record, insurers assume a higher likelihood of accidents and price coverage accordingly.

How can new drivers lower their car insurance costs?

New drivers can lower costs by staying on a parent’s policy, maintaining good grades, and completing defensive driving courses. They can also reduce premiums by choosing a modest, older vehicle, bundling insurance policies, and improving their credit history.

Photo credit: iStock/SolStock

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Yes, in most cases it’s illegal to check someone else’s credit report. The Fair Credit Reporting Act (FCRA) is a federal statute that defines and limits who can receive credit-related information. The act lists legal reasons why someone’s credit can be checked, meaning it’s illegal for an individual or organization to check someone’s credit report for any other purpose.

This article will do a deep dive into when it’s okay to run a credit check on someone and what to do if you suspect someone has pulled your credit report without permission.

Can Anyone Check Your Credit?

The short answer is no. Legally speaking, a person or organization can check your credit only under certain circumstances. Someone either needs to have what’s called a “permissible purpose” or have your permission and cooperation in the process for the credit check to be considered legal.

Who Can Access Your Credit Report?

People and organizations that can legally access your credit report under certain circumstances include the following:

•   Banks and other lenders

•   Utility companies

•   Insurance companies

•   Landlords

•   Employers

Here’s more about each.

Banks and Other Lenders

A financial institution can check someone’s credit in connection with credit-related transactions, such as when they apply for a mortgage or car loan. Note that section 609(g) of the FCRA requires financial institutions that arrange mortgage loans and use credit scores in their decision-making to provide the credit score and additional information to the applicant.

Utility Companies

Although it may not be commonly thought of in this way, applying for a utility service is a form of credit. So when someone requests service from an electric company, the utility provider will likely check the person’s credit history. If the individual doesn’t have at least a fair credit score, the company can request a deposit or even deny service.

Insurance Companies

Insurance companies have permission to review an applicant’s credit information. Note that companies must also comply with state laws, as they use the credit data to underwrite policies.

Landlords

The Federal Trade Commission notes that landlords have the right to review consumer credit reports when someone applies to rent from them or renews a lease. A landlord must certify to the credit bureau (such as Equifax, Experian, or TransUnion) that they will only use this information for rental purposes.

Employers

A potential employer can check an applicant’s credit report, although the company must give the applicant notice of their intent and get written permission. State laws vary regarding an employer’s ability to use this information as part of a hiring decision.

When Is It Legal to Run a Credit Report on Someone?

There are a handful of legal reasons to run a credit report on someone.

Permissible Purpose

This umbrella term used in the FCRA describes when a credit-reporting agency can provide a credit report.

Proxy Ordering

“Proxy” is a legal term for someone with the authority to represent someone else. The only instance that isn’t considered proxy ordering is when a consumer requests their own credit report.

To pull your report, a proxy will need to get answers to questions that only you should know — information that comes directly from your credit report. This provides an extra layer of protection to ensure that your permission is being given freely.

Deceased Spouse

An individual can send a letter to a credit agency requesting the credit report of a deceased spouse. The surviving spouse will need to provide information about both parties so that the agency can verify identities and ensure that it can proceed with providing the credit report.

During Mortgage Underwriting

The FCRA notes that a financial institution can obtain a credit report when extending, reviewing, and collecting credit. This applies to mortgage underwriting as well as other types of loans.

Screening Job Applicants

With permission, an employer can request and review a credit report for the purpose of evaluating a consumer for employment, promotion, reassignment, or retention as an employee.

During Insurance Underwriting

An insurance company can check a person’s credit report, with permission, as part of the underwriting process for a policy. The FCRA delves into specifics for different types of insurance, such as life, health, and homeowners insurance.

Recommended: Does Net Worth Include Home Equity

Evaluating Prospective Tenants

The FCRA states that a potential landlord can pull a credit report with the prospective tenant’s permission.

Court-Appointed Guardians

Court-appointed guardians can request a copy of their ward’s credit report by mail. They must provide information about themselves and their ward.

What to Do if Someone Pulls Your Credit Without Permission

Contact the organization that pulled your credit to rule out that it was done in error. Then contact the three credit bureaus and request that any hard credit inquiries be deleted from your credit report.

You can also submit a complaint to the Consumer Financial Protection Bureau (visit https://www.consumerfinance.gov/complaint/), and ask for any problems associated with the inquiry to be resolved.

Who Can Check Your Credit Without Permission?

Government agencies may check your credit report to process an application for a license, to determine if you qualify for public assistance, or to calculate what a person can pay in child support, among other reasons.

If you already receive credit from a company, it may periodically check your credit report. Language giving the company permission is likely in its terms and conditions. Debt collectors may also get access to information on credit reports.

Recommended: What Is a Tri-Merge Credit Report?

How to Know if Your Credit Was Checked

All hard inquiries will appear on your credit report for two years, so you can find the information there. Soft checks may or may not appear. Each year, you can get a free copy of your credit report — and find out your credit score for free — via AnnualCreditReport.com.

If you’re concerned about credit checks, consider signing up for a credit monitoring service.

What qualifies as credit monitoring varies from service to service. You should look for one that sends out alerts for new hard inquiries.

How a Credit Check Affects Your Credit Score

A soft inquiry will not hurt your credit score even if it appears on your report. A hard inquiry can lower the score by up to 5-10 points. Although the inquiry will remain on your credit report for two years, it will stop affecting your credit score after a few months. Applying for several credit accounts in a relatively short amount of time may pose a greater risk. (Find out more about what affects your credit score.)

Can You Stop Someone From Getting Your Credit Report?

You can freeze your credit at all three bureaus, which will prevent them from sharing information with businesses that make inquiries. However, if you want to apply for a loan or otherwise conduct a transaction that requires a credit check, you will need to unfreeze your credit.

The Takeaway

The Fair Credit Reporting Act (FCRA) provides legal guidelines on who can and can’t check consumer credit reports. Certain individuals can check your credit with your permission, including landlords and employers. Banks, insurers, lenders, and utility companies may also pull a credit report if you’ve applied for credit or service with them. In some circumstances, government agencies may request your credit report without your permission. In general, an average citizen cannot check someone else’s credit report unless they are serving as a legal proxy.

Want to keep an eye on changes in your credit report? Consider downloading a money tracker app, which can alert you to fluctuations.

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

FAQ

Can you sue for an unauthorized credit check?

Consult an attorney to discuss potential legal remedies. If you discover that your credit was run inappropriately without your permission, contact all three credit bureaus to ask them to remove the inquiry so that it doesn’t harm your credit score. You can also file a complaint with the Consumer Financial Protection Bureau at https://www.consumerfinance.gov/complaint/.

What is a violation of the Fair Credit Reporting Act?

There are multiple types of Fair Credit Reporting Act (FCRA) violations. They include instances when a credit bureau provides your information to someone who is not authorized to receive it, doesn’t demonstrate a valid need for the data, or doesn’t get your written permission in advance.

How do you find out who ran your credit?

You can get a free copy of your credit report from each of the three bureaus at AnnualCreditReport.com. Your credit report lists all hard credit inquiries from the past two years and potentially some soft inquiries.

How do you stop unauthorized access to your credit report?

You can freeze your credit at all three credit bureaus. This prevents the sharing of information, but you will need to unfreeze your credit if you want to carry out a transaction that needs a credit check.

Who can check your credit without permission?

There are several situations in which someone can check your credit without permission. For example, government agencies could check your credit for a license application or to qualify for public assistance. Debt collectors may also have access to this information, as well as companies where you are already receiving credit and need to check your report from time to time.

Photo credit: iStock/vitapix

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.

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

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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