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

Learn what the common pitfalls are and how to avoid common budgeting mistakes to help your financial life thrive.

10 Budgeting Mistakes to Avoid

Here are 10 of the most common budget mistakes people make. Get familiar with them as a way to steer clear of them.

1. Not Having a Budget

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

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

•   You may not save enough in your bank account for your future

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

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

Recommended: Common Financial Mistakes First-Time Parents Make

2. Not Tracking Spending

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

3. Not Having Emergency Savings

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

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

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

4. Not Considering Cheaper Alternatives

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

5. Thinking That You Can’t Have Fun While on a Budget

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

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

6. Saving for Too Many Things Simultaneously

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

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

7. Not Adjusting Varying Expenses Every Month

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

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

8. Not Taking Into Account One-Time Expenses

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

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

9. Having an Unrealistic Budget

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

You may be overly optimistic, for instance, if you allocate 20% of your take-home pay toward one goal. If you oversave in one area, like for a downpayment on a home, for example, it may mean that you could incur credit card debt in order to buy necessities like groceries. Be honest with yourself about how much you spend and how much you can save.

10. Having the Wrong Budget Method for You

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

The Takeaway

Now you know what is a common mistake made in budgeting; 10 of them, in fact. By avoiding these pitfalls, you give yourself a better chance of sticking to your budget, saving money in your bank account, and meeting your financial goals. What’s more, you’re far less likely to be derailed by debt, and interest payments that could eat into your ability to save and manage your money.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with 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 are some pitfalls of budgeting?

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

What is improper budgeting?

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

Why do people fail in budgeting?

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

Photo credit: iStock/Prostock-Studio

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.

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.

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.

4.60% APY
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 recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit 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, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

As an alternative to direct deposit, 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.

*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

SOBK-Q224-1945831-V1

A standby letter of credit (also known as an SLOC or SBLC) is a legal document, typically used in international trade, that acts as a safety net for a deal. It communicates that a bank will guarantee payment if, for example, their customer fails to send funds to a seller for goods or services provided.

Generally, SOLCs are important when the buyer and seller haven’t been acquainted and haven’t yet established a sense of trust. These documents can help a seller secure a contract with a new client. This is especially helpful when they are competing with larger, more established sellers.

What Is a Standby Letter of Credit?

An SLOC (or SBLC; the terms are used interchangeably) is an irrevocable commitment by an issuing bank that it will make payment to a designated beneficiary if the bank’s client defaults on a deal. To phrase it a bit differently, these commitments ensure the payment of a specific amount if one party does not make good on a business agreement. For example, a seller might ship goods to a buyer, but the buyer fails to pay within a specified number of days. In such cases, the bank will intervene and compensate the seller if certain conditions are met.

However, the conditions can be very specific, and failure to meet them can result in the seller not being compensated. For example, issues with shipping or with the product itself could result in denial of payment.

These letters of credit are common in international trade when buyers and sellers aren’t familiar with one another. When entities from two different countries do a deal, the laws and regulations involved may differ. This can add a layer of uncertainty to whether the deal will go through smoothly. An SLOC can help the seller feel more confident they will be paid.

An SBLC acts as a safety net or insurance policy for the seller. If all goes well with the transaction, they won’t have to make use of it. Only if there are issues with the sale will the SBLC be needed, but that bank guarantee adds a level of confidence.

💡 Quick Tip: Typically, checking accounts don’t earn interest. However, some accounts do, and online banks are more likely than brick-and-mortar banks to offer you the best rates.

How a Standby Letter of Credit Works

Now that you know the meaning of SBLC, here’s how it actually functions.

•   When a buyer and seller are entering into a large contract, an SLOC might be created, especially if the buyer and seller don’t know one another. The buyer might create one to help secure a contract or the seller might ask the buyer to obtain a letter.

•   In either case, the buyer goes to a bank and requests an SLOC.

•   The bank will then perform underwriting to verify the buyer’s creditworthiness.

•   The bank might also ask the buyer for collateral if they have bad credit (this is an example of why bad credit is a big deal). The amount of collateral will depend on a variety of factors, including the level of risk, the size of the deal, and the strength of the business.

•   Once the process is complete, the buyer receives the SLOC.

•   The bank will charge a fee, typically between 1% and 10% of value per year while the contract is in effect.

•   Once the transaction project is complete, the SBLC is no longer valid, and the bank will no longer charge a fee.

However, if the buyer defaults on the agreement for any reason, the seller must provide all documentation listed in the SBLC to the buyer’s bank, informing them that the buyer has not held up their end of the arrangement. The bank will then reimburse the seller and later collect payment from the buyer, plus interest.

A deal can fail to be completed for many reasons, such as bankruptcy, lack of cash flow, or dishonesty on the part of the buyer. If the bank determines the buyer has violated the terms of the SLOC, it will then make payment to the seller.

Recommended: Why Are My Credit Scores Different?

Types of Standby Letters of Credit

There are two types of standby letters of credit: financial SBLCs and performance SBLCs.

Financial SBLC

A financial SBLC guarantees payment for goods or services provided. The SBLC guarantees that the buyer’s bank will pay the seller if the buyer doesn’t pay within the timeframe outlined in the letter. If the bank does need to step in and make payment, it will later collect payment from the buyer, plus interest.

Performance SBLC

A performance SBLC is less common but usually guarantees the completion of a project. In this case, a person or company agrees to complete a project within a specified timeframe. Thus, a performance SBLC would reimburse the party paying for the project if it isn’t completed in time or if the client otherwise feels the project was not completed to satisfaction.

Standby Letter of Credit Example

The most common use of SBLCs is to guarantee payment when a seller ships goods, typically internationally, to a buyer.

•   For instance, a buyer might secure a contract to purchase a large shipment of corn from overseas. The seller, never having done business with the buyer before, might ask the purchaser to obtain an SBLC to ensure they are paid for the shipment. Even if the purchaser has taken steps to build credit, this is a new relationship between the two businesses, and trust hasn’t yet been established.

•   The SBLC indicates that the buyer will remit payment within 30 days of receiving the shipment. Thanks to shipment tracking, the seller can see that the buyer has received the shipment of corn. However, 30 days have passed, and the buyer hasn’t paid.

•   The seller can then go to the buyer’s bank, which issued to SBLC, and provide the necessary documentation about this deal and lack of payment.

•   If the bank agrees that the buyer hasn’t held up their end of the agreement, the bank will then pay the seller for the corn. The bank would then collect payment and additional charges from the buyer.

Recommended: Do Personal Loans Affect Your Credit Score?

Advantages of a Standby Letter of Credit

SLOCs have a few advantages worth noting:

•   Guarantee of payment The main benefit of SLOCs is they guarantee payment for the seller. Even if the buyer can’t pay, the seller can ask the buyer’s bank to reimburse them.

•   Helps buyers land contracts A seller might hesitate to ship goods to a buyer they don’t know and trust, even if credit monitoring reveals they seem like a good bet. There’s still an element of risk. The SLOC can make a seller more confident about doing a deal since they will be more likely to get paid.

Disadvantages of a Standby Letter of Credit

There are disadvantages to SLOCs, too. These include:

•   Increased costs The bank that guarantees the SLOC will charge the buyer a fee for every year the contract is in effect. And if the bank has to pay the seller, they will charge the buyer principal plus interest.

•   Not always a guarantee Although SLOCs guarantee sellers will be paid, there can be many hurdles involved before payment is issued. For example, shipping delays or problems with the product itself can lead to denial of reimbursement.

How to Obtain a Standby Letter of Credit

Obtaining a standby letter of credit is generally the responsibility of the buyer. Their bank will reimburse the seller in the event they don’t pay promptly. The bank will also have to determine how creditworthy the client is and decide if collateral is required. (One of the benefits of good credit can be not having to put up collateral in situations like this one.)

To issue the letter, the buyer might work with either a domestic or international trade division of a bank, depending on the deal’s particulars. At this point, it’s also wise for the buyer to have an attorney on site to review the terms of the agreement.

A seller can ask that the buyer obtain an SLOC as part of the contract. All parties should have legal experts involved to ensure the accuracy and conditions of the agreement.

Recommended: Do Credit Scores Update Often?

The Takeaway

Standby letters of credit (SLOCs) are useful legal documents for both buyers and sellers doing business, especially if they are working on an international deal. These letters can act as a safety net, saying that if a buyer doesn’t complete a deal, their bank will step in and make payment. For sellers, these letters can help increase confidence that they will be paid for goods or services. For buyers, they can be helpful in securing new contracts.

Not all banking involves international business deals, however. If you are looking for a reliable bank for your daily personal finance needs, see what SoFi offers.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with 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 does standby mean in letter of credit?

A letter of credit is a legal document that provides a safety net for a financial deal. “Standby” in this context refers to the fact that these letters are only implemented (and funds then issued) by the bank if the buyer fails to pay. If the buyer pays within the expected timeframe, no action is taken. The letter of credit has stayed on standby status.

What is the difference between a letter of credit and a standby letter of credit?

The difference between a letter of credit and a standby letter of credit is what each of them promises. A letter of credit is a guarantee from a bank that the buyer will pay. On the other hand, a standby letter of credit is a guarantee from the bank that they will pay if the buyer fails to do so.

Can SBLC be used as collateral?

The SBLC itself is not usually considered collateral. However, a bank may require the buyer to provide collateral before issuing an SBLC if the bank feels the buyer’s creditworthiness is not up to par.

Photo credit: iStock/BartekSzewczyk

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 recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit 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, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

As an alternative to direct deposit, 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.

*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

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.

SOBK-Q224-1945743-V1

Sometimes life throws a few curveballs your way. When those curveballs include unexpected expenses (like an emergency car repair or medical bills) or a job loss, it can be hard to keep your budget on track. This may lead to paying some bills late, or not at all, which only puts you further in the hole, thanks to interest and late fees. Your credit can also take a hit.

While you may not be able to get back in the black overnight, there are ways to regain control of your finances and work toward financial stability. Read on for simple strategies that can help you get caught up on bills, plus tips on how to avoid getting behind in the future.

6 Tips for Getting Caught up on Bills

Falling behind on bills can feel overwhelming, but it’s a challenge that many people face at some point. The key is to face missed payments head on and come up with a plan to gradually bring all of your accounts up to date. These tips can help.

1. Make a Master List of Bills

A good place to start is by organizing your bills and making a master list of everything you owe. This includes rent/mortgage, utilities, insurance, credit card payments, personal loans, and any other debts. Consider organizing them by due date, amount owed, and interest rates. Having a clear picture of your financial obligations helps you prioritize and plan your payments more effectively. This list will serve as a roadmap to ensure you don’t overlook any bills and can systematically address each one.

2. Reach Out to Your Creditors

Communication with your creditors is crucial when you’re struggling to keep up with payments. Companies and creditors may be willing to work with you if you explain your situation honestly. They may offer solutions such as extended payment deadlines, reduced interest rates, or temporary payment plans. And you don’t have to wait until your accounts are severely delinquent — reach out as soon as you know you’re having trouble. Proactive communication can prevent additional fees and negative marks on your credit report.

Recommended: How to Negotiate Medical Bills

3. Pay Priority Bills

All bills are not equally important, and when funds are limited, it’s essential to prioritize which bills to pay first. You might start with necessities that ensure your basic living conditions, such as housing, utilities, and food. These are critical to maintain your daily life and stability. Next, you may want to focus on any bills that have legal consequences if left unpaid, such as child support and taxes. Secured debts, like car loans, should also be a priority to avoid repossession. Once these essentials are covered, you can move on to other debts.

4. Pay Bills with the Highest Interest Rates

High-interest debt can quickly spiral out of control, making it harder to catch up. After prioritizing essential bills, consider paying down debts in order of interest rate, from highest to lowest. This repayment strategy, known as the avalanche method, can save you money in the long run by reducing the amount of interest you’ll pay over time. Consider making larger payments toward these debts while maintaining minimum payments on lower-interest obligations.

5. Cut Unnecessary Expenses

To free up more money for paying bills, take a close look at all of your monthly expenses and identify areas where you can cut back. Dining out, subscription services, gym memberships, and entertainment are examples of expenses you may be able to cut until your finances are in better shape. Creating a bare-bones budget can help you focus on what’s necessary until you’re caught up. Redirect the money saved from cutting expenses toward paying down your debts. Even small savings can add up and make a significant difference over time.

6. Boost Your Income

Increasing your income can provide a much-needed boost to catch up on bills and put more padding in your checking account. Consider taking on a part-time job, freelancing, or selling items you no longer need. If you have any special skills or hobbies, you might look into starting a side business. Or you might explore opportunities to work extra hours or seek a raise at your current job. While increasing your income may require additional effort and time, the extra money can help you get back on track faster.

How to Avoid Falling Behind After You’re Caught Up

Once you’ve managed to catch up on your bills, it’s important to implement strategies to avoid falling behind again. Here are some ways to help you stay on track.

Create a Budget

A well-structured budget is the cornerstone of good financial management. Now that things are more stable, you might want to take a closer look at what’s coming and going out each month to ensure that your spending aligns with your priorities. One simple budgeting framework to consider is the 50/30/20 rule. This suggests dividing your after-tax income into three main categories, with 50% going to “needs,” 30% going to “wants,” and 20% going to savings and debt payments beyond minimums.

Enroll in Autopay

Automating your bill payments is one of simplest ways to avoid missing payments and getting hit with late fees. Consider setting up autopay for your recurring bills, such as rent, utilities, and credit card payments. To make sure you don’t accidentally overdraft your account, put reminders on your calendar or set up alerts on your phone before each bill is due. That way you can make sure you have sufficient funds in your account to cover these automated payments.

Build an Emergency Fund

An emergency fund acts as a financial safety net, allowing you to cover unexpected expenses without disrupting your regular budget. Aim to save at least three to six months’ worth of living expenses in a separate, easily accessible account, such as a high-yield savings account. Start small if necessary and gradually build up your fund over time. Having an emergency fund can prevent you from relying on credit cards or loans if you get hit with an unexpected expense or loss of income and can help you maintain your financial stability.

The Takeaway

Catching up on bills when you’re behind can be challenging. Fortunately, by assessing your situation and coming up with a strategic pay-off plan, it’s possible to get back on track. Staying proactive and disciplined can help you avoid falling behind again and allow you to work toward long-term financial stability and growth.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with 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 to do when you can’t catch up on bills?

Consider making a list of all your outstanding bills, then prioritizing the ones that are for necessities (housing, for instance) and those with the highest interest rates. To free up funds to pay off your bills, you may need to temporarily cut or reduce unnecessary expenses, like dining out, streaming services, and entertainment. It’s also a good idea to reach out to your creditors and explain your situation. They may be willing to work with you by offering a more manageable payment plan and crediting late fees.

What bills should I prioritize?

If you’re behind on bills, you’ll want to prioritize any bills relating to necessities, such as housing and utilities. Next, you might focus on obligations that, if neglected, could have legal consequences (like past-due taxes or child support), followed by secured debts (like an auto loan or mortgage) to avoid repossession. After that, you might prioritize high-interest debts (like credit cards), since the longer it takes to pay them off, the more expensive they get.

Why is it so hard to catch up on bills?

Catching up on bills can be challenging due to high-interest rates that make debts grow quickly. Having a limited income, getting hit with unexpected expenses, and poor financial habits (such as lack of budgeting or overspending) can also make it difficult to catch up once you fall behind.

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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 recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit 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, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

As an alternative to direct deposit, 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.

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.

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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