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How much you spend on groceries each month will depend on the number of people in your household, your lifestyle, even your dietary preferences. There’s no way around the fact that food is a significant line item in any budget, but there are ways to spend less at the store without resorting to beans and rice or ramen noodles every day (getting takeout doesn’t count).

Whether eating at home or in a restaurant, it’s helpful to give yourself some guidelines so that you and your bank accounts are on good terms. We cover several rules of thumb for how much to spend on food a month so you can better ensure you’re staying on track with your budget.

What Is the Average Cost of Groceries Per Month?

The average U.S. household spends $7,316 on food every year, according to a recent Bureau of Labor Statistics (BLS) consumer expenditure survey. That amount — about $609.67 a month, or $152.42 each week — represents nearly 12% of consumers’ income.

A note on inflation: The BLS report used data from 2021. The subsequent year saw food prices increase by a staggering 11% (typically, food prices rise about 2% annually). Over the next year, food prices are projected to rise between 5% and 10% — something to keep in mind as you compare your grocery bill to the national average.

Of course, the amount people spend on sustenance can vary widely, depending on age, household size, dietary restrictions and where they live. For instance, the consumer expenditure survey noted that single-parent family households with children spent more on food compared to single folks. Your eating habits, including how often you dine out or order in as well as a penchant for impulse grocery buys, also affect your bottom line.

What Should My Monthly Grocery Budget Be?

When it comes to how much you should spend on groceries each month, the answer will depend on your situation. However, you can use the following guidelines to help you develop a reasonable monthly allowance for your grocery budget.

By USDA Guidelines

The U.S. Department of Agriculture offers a series of monthly food budgets that represent the cost of a healthy diet at four price levels: thrifty, low cost, moderate cost and liberal. These budgets can serve as a benchmark against which you can measure your own monthly spending on food.

Keep in mind that the USDA assumes that all meals and snacks will be prepared at home, and that costs will vary by age, gender, and family size. It updates each plan to current dollars every month using the Consumer Price Index for food.

For example, in March 2023, the USDA pegs the monthly cost of food for a female who is 20 to 50 years old at $241 for the thrifty plan. For females ages 19 to 50, it’s $257 for the low-cost plan, $313 for the moderate-cost plan and $401 for the liberal plan.

The USDA budgets more for couples within the same age ranges. For instance, a household of two might spend $530 on a thrifty plan, $565 on a low-cost plan, $689 on a moderate-cost plan and $882 on a liberal plan.

By Household Size

Your household size should determine how much you spend on groceries each month. As you saw in the USDA guidelines above, different household sizes as well as the ages of individuals affected the amount spent on food each month.

Let’s say you are a family of four with one child aged 6 to 8 and another between the ages of 9 to 11. According to the USDA guidelines, you might spend $979 a month on a thrifty plan, $1,028 on a low-cost plan, $1,252 on a moderate-cost plan and $1,604 on a liberal plan.

The USDA guidelines can provide a starting point for a food budget, but they don’t consider all the variables that can affect cost. That’s why building a personal food budget while using these numbers as a benchmark is best. To do so, you can look at your past monthly spending on food and then compare that number to the USDA food budget guides.

If your spending is much higher than the USDA’s estimates, it’s essential to determine why. It could be due to unavoidable factors like where you live, or it may stem from discretionary decisions, such as eating out at restaurants. If it’s the latter, it may be helpful to look for ways to cut back on spending, so you can redirect money to other goals like building an emergency fund.

How Dining Out Fits Into the Equation

The USDA’s budgets only consider food prepared at home, yet a food budget will likely also need to account for meals eaten at restaurants. The BLS reports that the average household spends $5,259 a year on food at home and $3,030 a year on food away from home.

Eating at restaurants is more costly than preparing food at home, so restaurant spending can be an excellent place to start making cuts when looking for wiggle room in a food budget.

Strategies to Keep Track of Your Food Spending

There are a number of budgeting strategies that can help you keep track of your spending. Here are some to consider if you’re trying to keep better track of your food spending:

The 50/30/20 Rule

The 50/30/20 rule is a simple strategy for proportional budgeting that breaks down a budget into three categories of spending. Here’s how it works:

•   50% goes to essential needs. These are necessary expenses, such as rent, groceries, and health insurance.

•   30% goes to discretionary spending. These are fun purchases that you don’t technically need to survive.

•   20% goes to savings. The 50/30/20 method separates discretionary spending and saving for financial goals, such as retirement, a down payment on a house, or paying off debt faster.

The 50/30/20 rule is a relatively simple form of budgeting, so it can help individuals keep their eyes on the big picture and avoid getting bogged down in minute details. That said, because it isn’t detail-oriented, it can be hard to pinpoint problem areas, such as places where overspending occurs.

Recommended: Input your monthly income to find out how much to spend on essentials, desires, and savings with our 50/30/20 Budget Calculator.

The Envelope Method

The envelope method seeks to make budgeting more concrete by limiting most spending to cash transactions. It works by allocating a set amount of cash each month to different spending categories, such as groceries or entertainment.

At the beginning of the month, write each category on individual envelopes. Decide how much you want to spend in each category for the month, and put enough cash to cover that amount in each respective envelope.

This method takes discipline. You can only use the cash in each envelope to make purchases in that category. When the money’s gone, it’s gone for the month. That means you can no longer do any spending in that category.

Zero-Based Budgeting

A zero-based budget is one in which you assign each dollar of your income a specific purpose. For example, you may decide to spend $1,000 on rent, $325 on food, $200 on student loan payments, $100 on savings and so on, until there are zero dollars left without a job to do. While this type of budget can take a lot of effort, it can help you think carefully about every dollar you spend and be mindful of setting aside savings.

By getting your budget on track with a checking and savings account with SoFi, you’ll have enough to work toward financial goals, like paying off student loans and saving for retirement.

Tips to Help Reduce Your Food Spending

Whether your food budget has gone out of control or you’re interested in spending less in general, there are several ways to lower your food budget.

Try Meal Prep

Shopping at a store without a plan can be a budget-buster, as it can lead to unneeded purchasing. To stay on track, create a meal plan that lays out breakfast, lunch, and dinner for every day of the week.

Once you’ve created a menu, check to see what ingredients are already in the kitchen. Make a list of the items you’re missing and the amounts that are needed. Buy only those items at the store.

Consider planning some meals that have overlapping ingredients, as buying ingredients in larger quantities can be cheaper. You’ll also want to consider preparing meals you like and can cook relatively quickly. That way, you’re not tempted to get takeout one day when you’re tired and don’t feel like cooking.

Take Advantage of Coupons

Using coupons can help buyers save money at the checkout counter. Grocery stores or major brands often offer discounts in coupons — look for them online, in a grocery store flier or in the mail.

Before you buy, however, make sure you actually need the food item. If there isn’t anyone in your household who will drink that carton of oat milk, it’s better to leave it on the shelf than to cash in your coupon.

While taking advantage of an individual coupon may not add up to much savings, using many coupons over time can start to open up space in your food budget. The same is true of buying store brands, which may be a dollar or two cheaper than their name-brand counterparts. Over time, and multiple purchases, those couple of dollars can add up to significant savings.

Freeze Meals

Having meals or ingredients ready in the freezer encourages you to eat at home instead of making the excuse of having nothing to eat in your house. It can be as simple as buying frozen vegetables, some form of protein or straight-up frozen meals (it’s still cheaper than dining out). You can even make your own freezer-ready meals by cooking additional portions of meals — eat some for dinner, then freeze the rest for later.

Shop at Discount Grocery Stores

The cost of food can vary widely from store to store, so consider visiting different stores to find budget-friendly prices. A great way to check if a grocery store offers lower prices is to look at their weekly flier. You’ll be able to find sales and other advertised goods and identify which stores offer the best deals on items you’re most likely to purchase.

Some stores may offer certain foods in bulk, such as grains, nuts, coffee, and dried fruit, which can be cheaper than buying the same packaged food items.

Getting a handle on how much you spend on food can help you build a larger household budget. That way, you may be able to set aside money for savings or other financial goals.

The Takeaway

As you can see, there’s no hard-and-fast rule for how much you should spend on groceries each month, as that varies based on your unique situation. However, everyone can likely benefit from giving their grocery budget a hard look and seeing if there’s anywhere they’re overdoing it.

Envelope and spreadsheet averse? Another way to track your grocery budget is with the SoFi money tracker app, which lets you easily set monthly spending targets and see where you’re spending the most.

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SORL0523017

Income is money earned, plain and simple, right? While that statement is true, it doesn’t tell the full story. If you look more closely, you’ll learn that there are two kinds of income — active income and passive income.

Active income is money you make by actively participating in work, and generally comes in the form of salary, wages, commissions, and tips. Passive income, on the other hand, is money that you earn without active participation. Examples might be money generated by investments, a rental property you own, or a YouTube account you started but haven’t updated.

While passive income may sound like the better deal, both types of income are important. Read on for a closer look at the differences between active and passive income, including potential earnings, tax implications, and how they can impact your lifestyle.

What Is Active Income?

Active income is the income you actively work for, such as a salary or hourly wage, and is the most traditional form of earning money. This type of income requires continuous effort, meaning you need to trade your time and labor for money.

Active income is typically tied to a specific time commitment, such as working 9-to-5. The amount of active income you earn also tends to be directly related to the amount of work you complete. Once you stop working, the income stops too.

With enough active income, you may be able to invest in something that generates passive income down the road (more on that below).

Recommended: What Is Residual Income?

Examples of Active Income

Active income can come from a number of different sources. Here’s a look at the some of the many ways you can earn active income.

•   Your job: One of the most common ways to earn active income is through salaried employment. Whether you receive a fixed salary or an hourly wage in exchange for your work, your income is directly tied to the time and effort you put into your job.

•   Freelance work: Since you are providing a service in exchange for pay, freelancing is considered a form of active income. Whether you’re a writer, graphic designer, programmer, or do any other type of contract work, you earn money only when you complete specific tasks or projects.

•   Gig work: Taking on a side hustle like driving for a rideshare or food delivery service, or any other involvement in the gig economy, qualifies as active income.

•   Commissions: Many professionals involved in sales earn active income through commissions. This type of income depends on performance, where you earn money based on sales or completed deals.

•   Bonuses: Some jobs offer bonuses in addition to a regular salary. These bonuses are often tied to performance metrics and are considered active income since they require achieving specific goals.

Recommended: 33 Ways to Make Money From Home

What Is Passive Income?

Passive income refers to money you earn with minimal effort or direct involvement after an initial setup. Unlike active income, which requires continuous labor, passive income flows regularly without the need to trade time for money on a daily basis. Passive income can come from investments, royalties, or business ventures where you’re not involved in the daily operations.

While passive income often requires upfront work or capital investment, the idea is that the income will continue to flow with little or no day-to-day labor. This type of income is appealing because it can help you build wealth and financial security over time.

Examples of Passive Income

Like active income, there are a number of ways to earn passive income. Here are some of the most common sources of passive income.

•   Dividend stocks: Dividend-paying stocks offer a way to earn passive income by investing in shares of companies that distribute part of their profits to shareholders. Investors receive regular dividends without needing to manage the company.

•   Bank interest: When you deposit your money into a savings account, you earn interest just by letting it sit there — the ultimate form of passive income. The higher the interest rate, the more you can earn. High-yield savings accounts offered by online banks typically generate more passive income than traditional savings accounts.

•   Rental Income: Owning real estate and renting it out is a popular form of passive income. Once the property is rented, the owner collects monthly rent without much day-to-day involvement, especially if they hire a property management company.

•   Royalties from intellectual property: Authors, musicians, and inventors can earn royalties from their intellectual property. Once a piece of work is published or a patent is licensed, the creator can receive passive income from each sale or usage.

•   Automated online businesses: E-commerce stores that use drop shipping or automated sales systems can generate passive income. Once the system is set up, little involvement is required to maintain the flow of revenue.

Recommended: 12 Ways to Make Money on YouTube

Active vs Passive Income: What’s the Difference?

Active and passive income serve different purposes and offer distinct advantages and disadvantages. Here’s a look at some of the key differences.

Potential Yearly Income Made

Active income is generally more dependable and predictable, especially if it’s from a salaried or hourly job with a set number of weekly hours. However, the potential for active income often depends on how much time and effort you can dedicate. The ceiling for active income may also be capped by your line of work and industry standards.

Passive income, by contrast, can be hard to predict and is generally less dependable, since it may be susceptible to market volatility and other external factors. However, the potential for income can be higher, since earnings aren’t limited by how much you can work. Once established, a source of passive income can continue to generate money indefinitely and potentially provide a significant annual income stream.

How These Are Taxed

Active income and passive income are taxed differently by the internal revenue service (IRS). Wages, salaries, and commissions are all taxed as ordinary income, meaning they fall under the standard federal and state income tax brackets.

The tax rate on passive income, however, can vary, depending on how it is earned. For instance, long-term capital gains (from selling investments held for more than a year) and qualified dividends are generally taxed at lower rates than ordinary income. However, rental income, interest payments, and royalties may be taxed at ordinary rates.

Since this is a complicated area of tax law, it’s a good idea to work with a licensed tax professional when managing taxes for passive income streams.

How These Incomes Affect Lifestyle

Active income requires that you regularly work to generate money. People who rely solely on active income are typically bound to a fixed schedule, which can limit flexibility and put limits on leisure time.

Because passive income requires minimal (or no) participation, it can lead to a more flexible lifestyle. However, this assumes you have enough passive income flowing in each month to pay your bills and other expenses. If that’s the case, you might be able to travel more freely, focus on volunteer work, or spend time pursuing personal passions. Or, passive income might supplement your full-time active work, allowing you to save more for retirement or meet other financial goals.

The Takeaway

Many people rely on active income, which requires active, ongoing participation in the workforce and related to how much time you can dedicate to working. Passive income, by contrast, provides the opportunity for ongoing earnings with minimal effort after the initial setup.

While active income is generally more predictable and secure, passive income can help you build financial security over time and improve your work-life balance. Even if active income is your main source of income, generating some degree of passive income can boost your emergency savings and help you meet your short- and long-term financial goals.

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FAQ

What are the pros and cons of active and passive income?

Active income provides immediate, predictable earnings but requires continuous work. A key benefit of this type of income is a dependable paycheck, but it’s limited by your available time and energy. If you stop working, the income stops too.

Passive income, once established, requires minimal ongoing effort. The downside is that it often takes time, capital, or initial effort to set up, and the income may be less predictable at first. Over time, however, it can grow and supplement active income without any increase in daily labor.

Do all people need to have passive income?

You do not need passive income, especially if you’re content with your career earnings and you’re building savings for the future. That said, having passive income can be beneficial. After the initial setup, passive income allows you to earn money without much additional effort. Passive income can supplement active income and allow for more flexibility and financial freedom.

Can you live solely off of passive income?

Yes, living solely off passive income is possible, but reaching this goal often involves years of saving, investing, and cultivating sources of passive income. Many people strive for this through financial planning and investments that eventually generate enough income to cover living expenses.

Is active income better than passive income?

Both active and passive income have pros and cons. Active income requires ongoing work but can mean a steady paycheck. Passive income typically requires an initial investment of time and money and may be less dependable than active income. Once established, however, passive income can then keep cash flowing your way without ongoing work. Ideally, you want to have both active and passive income.

Photo credit: iStock/Adrian Vidal

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SOBNK-Q324-089

Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.

A derivative is a financial instrument that derives its value from an underlying asset, such as a stock or bond, or a benchmark such as a market index. Derivatives are considered leveraged products because, for a minimal investment, the investor can control a much larger position.

Derivatives work as a contract between two parties: a buyer and seller. The derivative is a secondary security, meaning it is not an asset itself, but rather it tracks the value of an underlying asset. The value of a derivative is based on market events, price changes, and other factors related to the underlying asset.

Experienced investors often use derivatives to place bigger bets, to help hedge their investments against future loss, or to profit from upcoming market shifts. Some investors also use them to profit or speculate on commodities, such as gold or oil. They can serve different purposes for different people, such as limiting risk related to possible future events.

How Does a Derivative in Finance Work?

A derivative is a legally binding contract that can apply to various asset classes, including futures, swaps, and options trading. It outlines the terms, rules, and costs for a potential future transaction based on the performance of an underlying asset.

For instance, if an investor has a significant amount of a particular stock with an unrealized gain, they might choose to enter into a derivative contract that gives them the ability to sell it at today’s prices on a future date. This may provide them with some protection against future losses.

Derivatives are also a way to give investors exposure to a certain asset class without having to actually buy the assets. Derivatives are leveraged contracts, in that the investor pays a smaller fee to control the underlying position.

The seller of a derivative doesn’t have to actually own the underlying asset, and in many cases the buyer never owns the asset directly either. Derivatives provide exposure to the asset’s value rather than trading it directly.

Derivative Example

A derivative contract, such as a call option, grants the options buyer the right, but not the obligation, to purchase shares of a particular stock at a predetermined price of $1,000 per share (the strike price) within a six-month period (the expiration). The standard options contract is for 100 shares.

The appeal of this strategy, and the appeal of derivatives in general, is that the buyer is able to purchase the right to buy the underlying asset, at the strike price, on or before the expiration — and only pay the cost of the contract, which is the premium. In other words, options (like other types of derivatives) enable investors to make bigger trades than they could with just cash.

Types of Derivatives

There are two categories of derivatives: obligation-based contracts and option-based contracts. Obligation-based contracts include swaps and futures. These form an obligation between both parties to fulfill the terms of the agreement.

Option contracts give the parties the right, but not necessarily the obligation, to fulfill the contract transaction.

Options

Options are a common type of derivative that give traders the right, but not the obligation, to buy or sell an underlying asset at a predetermined price within a set time frame. Since the value of an option contract depends on the price movements of the underlying asset, it’s considered a derivative.

Traders use options for speculation or to hedge against potential losses, but they carry risks, including the possibility of losing the premium paid upfront (for buyers), and the potential for significant losses, particularly for uncovered (naked) option sellers.

Recommended: Popular Options Trading Terminology to Know

Futures

With futures contracts, the buyer and seller set a price for the future exchange of an asset or commodity. The contract includes the price, the amount, and the future settlement date. The contract obligates both parties to fulfill the contract.

Traders are required to deposit margin funds, which is a fraction of the contract value. They may also need to post additional funds, known as maintenance margin, to cover potential losses.

Once the contract is entered into, the price of the underlying asset is tracked daily, and any gains or losses are added to or removed from the trader’s account until the contract is sold or expires. Futures contracts are traded on regulated exchanges, while similar contracts, known as forwards, are sold over the counter (OTC), allowing for more negotiation but less regulatory oversight.

Swaps

Swaps are contracts traded over the counter for the exchange of financial terms or cash flows such as interest rates and currencies.

Companies can swap types of interest rates in order to get better terms. Often, one rate is variable and the other rate is fixed.

With currency swaps, companies can invest overseas with a lower risk of exchange rate fluctuations.

What Is Margin?

Margin requirements for derivatives trading differ somewhat from standard margin trading in stocks. In futures trading, traders must deposit an initial margin, which is a fraction of the total contract value, to open a position. They may also need to post maintenance margin to cover potential losses if the trade moves against them.

In options trading, margin requirements depend on whether an investor is buying or selling an option. Buyers pay a premium upfront, while sellers (writers) may need to post margin to ensure they can fulfill their obligations if the option is exercised.

Swaps may also involve margin requirements, particularly in over-the-counter markets, to mitigate counterparty risk. The specifics vary based on the contract terms and the regulatory environment.

How Derivative Trading Works

A derivatives contract says that the investor will either earn or pay money related to the underlying asset. Although there is an initial cost for the derivative contract, traders may be required to contribute additional maintenance margin if the underlying asset moves against their position.

Once a derivative contract is entered into, the buyer can either hold onto it until the expiration date when they purchase the asset at the agreed upon price, or they can sell the contract to someone else, potentially for a profit. Trading one derivative for another one prior to the contract end date is common.

Generally the contract will sell for only a tiny amount of the value of the underlying asset, but the value of the contract can fluctuate along with the underlying asset price fluctuations — and as the expiration date draws closer.

There is a small initial deposit required to enter into the contract. This amount varies depending on the type of derivative and market conditions. For example, there could be a contract to purchase 100 shares of a stock for $3,000 per share, and the option contract might trade at a premium of $3 per share.

Before entering into a derivative contract, it’s important to understand how derivatives work and read what the contract entails, including the disclosure statement. There will be an agreement to sign stating that both parties have read and understand the terms.

Trading derivatives also requires ongoing work and attention. Markets can change quickly, and there may be obligations throughout the contract period, such as tracking the value of the underlying asset.

Costs

Derivative contracts come with various costs depending on the type of contract and the market where they are traded. Common costs include:

•   Options: Premiums, commissions, and potential assignment fees

•   Futures: Initial margin, maintenance margin, and exchange fees

•   Swaps and Other OTC Derivatives: Transaction fees and counterparty costs

Derivatives are best suited for experienced investors who understand the potential risk of loss involved. Consider consulting with a financial professional to understand the full costs for specific trades.


💡 Quick Tip: When people talk about investment risk, they mean the risk of losing money. Some investments are higher risk, some are lower. Be sure to bear this in mind when investing online.

Pros and Cons of Trading Derivatives

There are several pros and cons to trading derivatives. Some of the main ones are:

Pros

Derivatives traders enjoy several advantages, including:

•   A hedge against the risk of future losses

•   An opportunity for speculation

•   Exposure to an asset without having to purchase it

•   Can help predict future cash flows

•   Provides the ability to lock in prices

Cons

In addition to the advantages, there are several drawbacks that derivatives traders should understand.

•   Trading derivatives is very complex and can be risky for inexperienced traders

•   The derivative contract may not be liquid or easily sellable on the open market

•   There is a risk of losing more than you invest

•   Online scams in derivatives trading are common, adding to the risk

•   There are fees and costs associated with the contract

•   There may be ongoing maintenance and time commitment required

Financial Derivatives Regulations

Regulations around derivatives vary depending on where they are traded. The Securities and Exchange Commission regulates derivatives traded on registered national securities exchanges, while over-the-counter (OTC) derivatives are typically subject to less oversight and may involve bilateral agreements between parties.

In the latter case, the parties negotiate the terms of contracts on their own. Sometimes these parties include banks and financial institutions regulated by the SEC. Futures brokers and commercial traders must be registered with the National Futures Association (NFA) and the Commodity Futures Trading Commission (CFTC).

The Chicago Board Options Exchange (CBOE) is the most well known options exchange platform and is regulated by the SEC. These regulating bodies help to prevent fraud and abusive trading practices and promote fair, orderly markets.

The Takeaway

Derivatives can be a riskier type of investment but they can provide value to both institutional and retail investors’ portfolios when used appropriately, and with a clear understanding of the risks involved. Trading derivatives requires more work than simply buying and selling more traditional securities, but the additional risk and additional work can also yield greater rewards.

SoFi’s options trading platform offers qualified investors the flexibility to pursue income generation, manage risk, and use advanced trading strategies. Investors may buy put and call options or sell covered calls and cash-secured puts to speculate on the price movements of stocks, all through a simple, intuitive interface.

With SoFi Invest® online options trading, there are no contract fees and no commissions. Plus, SoFi offers educational support — including in-app coaching resources, real-time pricing, and other tools to help you make informed decisions, based on your tolerance for risk.

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