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A budget can be a great tool for managing your money and making it work harder for you. But typically a budget involves distinguishing between fixed expenses (those that stay constant, month after month) and variable expenses, which change over time.

Understanding where your money is going in these two ways can be helpful as you work to track and optimize how you earn, spend, and save.

What’s important to know is that each kind of expense can be lowered in many cases, and fixed vs. variable expenses don’t necessarily translate as needs vs. wants.

Here, you can learn more about these two ways you spend money and how to pay less. You will likely find smart tips for how you can budget even better.

What Is a Fixed Expense?

Fixed expenses are those costs that you pay in the same amount each month — items like your rent or mortgage payment, insurance premiums (which can be an often-forgotten budget expense), and your gym membership. With fixed expenses, you know the amounts you will owe ahead of time, and they don’t change (or perhaps only annually).

Fixed expenses tend to make up a large percentage of a monthly budget since housing costs, typically the largest part of a household budget, are generally fixed expenses. This means that fixed expenses present a great opportunity for saving large amounts of money on a recurring basis if you can find ways to reduce their costs. However, cutting costs on fixed expenses may require bigger life changes, like moving to a different apartment — or even a different city, where the cost of living is lower.

Keep in mind, too, that not all fixed expenses are necessities — or big budget line items. For example, an online TV streaming service subscription, which is withdrawn in the same amount every month, is a fixed expense. It’s also a want as opposed to a need. Subscription services can seem affordable until they start accumulating and perhaps become unaffordable.

Examples of Fixed Expenses

Here are some examples of fixed expenses:

•   Mortgage payments or rent

•   Car payments

•   Student loan payments

•   Membership and subscription fees

•   Insurance premiums

•   Childcare or tuition payments

•   Internet or mobile phone fees

What Is a Variable Expense?

Variable expenses, on the other hand, are those whose amounts can vary each month, depending on factors like your personal choices and behaviors as well as external circumstances like the weather.

For example, in areas with cold winters, electricity or gas bills are likely to increase during the winter months because it takes more energy to keep a house comfortably warm. Grocery costs are also variable expenses since the amount you spend on groceries can vary considerably depending on what kind of items you purchase and how much you eat.

You’ll notice, though, that both of these examples of variable costs are still necessary expenses — basic utility costs and food. The amount of money you spend on other nonessential line items, like fashion or restaurant meals, is also a variable expense.

In either case, variable simply means that it’s an expense that fluctuates on a month-to-month basis, as opposed to a fixed-cost bill you expect to see in the same amount each month.

Examples of Variable Expenses

Here are specifics of what can constitute a variable expense:

•   Utilities

•   Food

•   Dining out

•   Entertainment

•   Personal care

•   Travel

•   Medical care

•   Gas

•   Property and car maintenance

•   Gifts

Fixed vs Variable Expenses

To review the difference between variable vs. fixed expenses:

•   Fixed expenses are those that cost the same amount each month, like rent or mortgage payments, insurance premiums, and subscription services.

•   Variable expenses are those that fluctuate on a month-to-month basis, like groceries, utilities, restaurant meals, and movie tickets.

•   Both fixed and variable utilities can be either wants or needs — you can have fixed expense wants, like a gym membership, and variable expense needs, like groceries.

When budgeting, whether you are calculating expenses for one person or a family, it’s possible to make cuts on both fixed and variable expenses.

Ways to Save on Fixed Expenses

Just because an expense is fixed doesn’t mean it can’t be downsized. Consider these possibilities.

Review Where Your Money Is Going

Take a look at your fixed expenses with a critical eye. Did your landlord raise your rent a significant sum? It might be time to look for more affordable options or get a roommate.

Has the number of subscription services you pay for crept up over time? You might save on streaming services by dropping a platform or two.

Refinance Your Loans

Interest rates rise and fall. If they are dropping, you might be able to save money by refinancing your loans, such as your mortgage. Check rates, and see if any offers are available that would reduce your monthly spend.

One option can be to get a lower payment over a longer period. You will likely pay more interest over the life of the loan, but it could help you out if you are living paycheck to paycheck right now.

Consolidate Your Debt

If you have a significant amount of high-interest debt, such as credit card debt, you might consider paying it off with a personal loan that offers a lower interest rate. This could save you money in interest and help lower your fixed expenses.

Bundle Your Insurance

Many insurance companies offer a lower premium if you sign up for both automotive and homeowners insurance with them. Check available offers to potentially reduce your costs.

Ways to Save on Variable Expenses

As you delve into variable vs. fixed expenses, here are some possible ways to minimize the ones that vary.

Scrutinize How You Spend

When you track your spending, you may find ways to cut back. For instance, you could look for ways to do your grocery shopping on a budget by planning meals in advance and shopping with a list. You might be able to challenge yourself to go for one month without, say, takeout food and the next without movies and then put the savings towards paying down debt.

Hit “Pause” on Impulse Purchases

If you feel the urge to buy something that isn’t in your spending plan, try the 30-day rule. Mark down the item and where you saw it and the price in your calendar for 30 days in the future. When that date arrives, if you still feel you must have it, you can find a way to buy it. But there is a very good chance that sense of urgency will have passed.

Try Different Budget Methods

If you find you need more help reining in your variable expenses, you might benefit from trying different budgeting tactics. There is the popular 50/30/20 budget rule, which says to allocate 50% of your take-home pay to needs, 30% to wants, and 20% to savings.

Other people prefer the envelope budget method or using a line-item budget to dig into where their money is going. You might also benefit from apps and digital tools to help you track where your money is going. Many banks offer these to their customers.

Check in With Your Money Regularly

The exact cadence is up to you, but it can be helpful to review your money on a regular basis. Some people like to check in on their account balances a few times a week; others prefer to review their accounts in-depth monthly. Find a system that works for you so you can see if your spending is on-target or going overboard.

Benefits of Saving Money on Fixed Expenses

If you’re trying to find ways to stash some cash, finding places in your budget to make cuts is a big key. And while you can make cuts on both fixed and variable expenses, lowering your fixed expenses can pack a hefty punch, since these tend to be big line items — and since the savings automatically replicate themselves each month when that bill comes due again.

Think about it this way: if you quit your morning latte habit (a variable expense), you might save a grand total of $150 over the course of a month — not too shabby, considering it’s just coffee. Even small savings can add up over time when they’re consistent and effort-free — it’s like automatic savings.

But if you recruit a roommate or move to a less trendy neighborhood, you might slash your rent (a fixed expense) in half. Those are big savings, and savings you don’t have to think about once you’ve made the adjustment: They just rack up each month. The savings you reap can help you pay down debt or save more, which can help you build wealth.

Saving Money on Variable Expenses

Of course, as valuable as it is to make cuts to fixed expenses, saving money on variable expenses is still useful — and depending on your habits, it could be fairly easy to make significant slashes.

As mentioned above, by adjusting your grocery shopping behaviors and aiming at fresh, bulk ingredients over-packaged convenience foods, you might decrease your monthly food bill. You could even get really serious and spend a few hours each weekend scoping out the weekly flyer for sales.

If you have a spendy habit like eating out regularly or shopping for clothes frequently, it can also be possible to find places to make cuts in your variable expenses. You can also find frugal alternatives for your favorite spendy activities, whether that means DIYing your biweekly manicure to learning to whip up that gourmet pizza at home. (Or maybe you’ll find a way to save enough on fixed expenses that you won’t have to worry as much about these habits.)

Saving and Budgeting With SoFi

Fixed expenses are those costs that are in the same amount each month, whereas variable expenses can vary. Both can be trimmed if you’re trying to save money in your budget, but cutting from fixed expenses can yield bigger savings for less ongoing effort.

Great budgeting starts with a great money management platform — and SoFi can help you with that, thanks to our dashboard and smart features.

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 examples of variable expenses?

Variable expenses are changeable costs that include such items as groceries, utilities, entertainment, dining out, and credit card debt. They differ month by month.

What are examples of fixed expenses?

Fixed expenses are constant month after month. These can include such things as rent, car payments, student loan payments, and subscription services.

Are utilities fixed or variable?

Utilities may be a need vs. a want in life, but they often vary. For instance, if you live in a cold climate, your heating bill will rise in the winter. Or you might run the dishwasher more over the holiday season, increasing your bill.

Photo credit: iStock/LaylaBird

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

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

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

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

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

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

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

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

SOBK0723044

The phrase canceled check may confuse many people, but it’s actually a simple concept. A canceled check generally refers to a check that was processed, cleared, and paid by the bank. It means the check-writing system worked as it should and money has been transferred appropriately.

What Is a Canceled Check?

A canceled check is a check that is processed and paid and cannot be used again. If you write a check to your sister or to the electrician and they deposit or cash it, the funds are taken from your checking account and put into their hands (or account). Your bank will cancel the check, meaning that the rectangle of paper has done its job.

Sometimes you may be asked to show a canceled check to prove that payment was made. For instance, if you paid a bill by check but the payee believes they haven’t received the funds, you could send an image of the canceled check from the bank to prove that you settled the account. You may be able to obtain such images within a certain time frame by reviewing your bank account online via your financial institution’s website or app.

How to Write a Canceled Check

If you’re wondering how to write a canceled check, sorry: You can’t. In truth, only a bank can cancel a check. What you as a banking customer can do is void a check (by writing the word “void” across it, as you may need to do when you set up direct deposit or autopay). In some countries, the term canceling is used instead of voiding when doing this to a check, which can cause a bit of confusion.

Another possibility in this realm is to put a stop payment on a check via your financial institution to prevent it from being paid (more on that below).

Examples of Canceled Checks

What are canceled checks? Here’s what is usually meant by that term:

•   A canceled check is likely one that is cleared and paid by the bank. Funds have been transferred, so the transaction it triggered is completed. (Incidentally, you can even cash a check if you don’t have a bank account and get the funds due to you.)

•   The term is sometimes used to refer to a check you put a stop payment request on. You might say, “I canceled that check,” meaning you instructed your financial institution not to pay it.

•   You may hear some people say “canceled check” when they are referring to a voided check. A voided check is usually one that you write “void” on and provide when setting up an ACH transaction, such as direct deposit.

•   What these checks all have in common is that they are out of circulation and not to be reused. (One exception: In certain cases, a stop payment might have to be renewed after six months if you feel the check could still be circulating).

Canceled Check Fees

When a bank cancels a check after clearing it, there is no fee. This is a standard transaction at your bank or credit union. But a stop payment request can run about $15 to $35, depending on the bank. When you void a check, no fee is involved.

Canceled Checks vs Returned Checks

What are canceled checks and returned checks? Not at all the same thing. They differ considerably: One is paid, the other isn’t. Here’s a closer look.

•   Payment. A canceled check has been paid (cleared) by the bank it was drawn on. A returned (or bounced) check is not paid or cleared by the bank because the account holder has insufficient funds.

•   Consequences. Since canceled checks are standard practice, there are no negative consequences for you. However, with returned checks, you may have issues. Your bank will likely charge you an overdraft fee of up to $35, and the business you tried to pay may bill you for their bank’s returned check fee of about $25. In addition, your payment is probably now considered late, which might trigger more charges and affect your credit standing.

•   Your good standing. A check canceled by the bank once it zips through as usual should not cause you any problems. But banks and businesses tend to look unfavorably on returned checks and the fees and headaches that come with them. Banks do not report returned checks to credit bureaus, but this activity may turn up on your banking record, which is monitored by agencies like ChexSystems. Too many returned checks, and you may find it hard to open a bank account in the future. It’s also important to keep payments up to date at places where you do business so as not to lower your credit score.

Canceled Checks vs Stop Payment Requests

Canceled checks and stop payment requests are two very different animals. Here are some of the most significant differences.

•   Contact with the bank. A canceled check sails through the system. The bank handles the process. You don’t need to do anything; it’s even better than one-click convenience. But a stop payment request requires a call or visit to your bank right away or for you to engage with the bank’s website or app. This process needs to be done quickly, before the check is presented to deposit or cash. If your check or checkbook is lost, you think your check was stolen, or you need to halt a payment, know that many bank phone support lines operate 24/7.

•   Fees. Canceled checks don’t cost you, but stop payment requests do. (See above.)

•   Time window. Checks are typically canceled within a couple of days of their submission, though timing can vary depending on how they were submitted (say, via your bank’s app or into an out-of-network ATM). Once checks are paid by your financial institution, they cannot be reused, and that’s final. Stop payment requests, however, usually last only up to six months, and you may need to renew them after that if you think there’s a chance someone might still try to cash the check.

How Long Until a Check Becomes Canceled?

As mentioned above, it typically takes about two business days for a deposited check to clear, but it can take a little longer — about five business days — for the bank to receive the funds. The length of time depends on the amount of the check, your relationship with the bank, how and where you deposited it, and whether your account is in good standing (no frequent overdrafts or prolonged negative balances). Another factor that could impact processing: If you let a check sit for a few months before depositing it, that check could reach its expiration date and no longer be valid.

Recommended: How Long is a Check Good For?

Tips on Using Checks

With the advent of online banking and bill pay, as well as P2P platforms, checks aren’t used as often as they once were. However, many people still order checks and they remain an important financial tool. For these reasons, it can be worthwhile to brush up on how to use them most effectively. Some tips:

•   Record each check you write and each checking account deposit you make in the transaction register. Include check number, date, payee (or source of deposit), and amount.

•   Use the columns with a check mark on top to check off deposits or checks paid once they are cleared by your bank and reflected in your balance.

•   Keep your checkbook in a safe place, as you would a debit or credit card. Checks can be forged by someone who is not you.

•   For important payments, such as rent, child support, healthcare, and donations, consider keeping a copy (front and back) of canceled checks. Banks used to return these checks with paper statements, but no more. At many banking websites, you can download PDF images to save or print. Bank of America, for example, keeps canceled check images on its customer website for 18 months. Or call your bank to request scanned images up to seven years old (sometimes for a fee).

If you still have questions about checks (say, about how to sign over a check written to you or how cashier’s checks are different from others), it’s easy to get answers. Visit your bank’s website or talk with a bank representative in person or by phone.

Banking With SoFi

With SoFi Checking and Savings, you can smoothly manage your money all in one place. Click on the app or website to see transactions at a glance, including checks you wrote that have been cleared and deposits you’ve made.

SoFi makes storing, spending, and managing your money stress-free with our linked Checking and Savings accounts. Sign up with direct deposit, and you’ll pay no fees while earning a competitive APY.

FAQ

Is a canceled check the same as a voided check?

People sometimes use the terms interchangeably, but technically speaking, they have different meanings. While both checks are unable to be used, a canceled check is one that has been paid by a financial institution. A voided check is one that you, the account holder, has written the word “void” on to make sure it isn’t used to transfer funds.

Can you use a canceled check?

No, you cannot use a canceled check. It has been processed, meaning the funds were transferred as directed, so its job has been completed.

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

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

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

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

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

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

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.

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.

Photo credit: iStock/PeopleImages
SOBK0522015

If you ever see a bank error made in your favor, you might think, “Free money!” but the truth is, you need to report the error ASAP.

An unfortunate fact of life is that people — and sometimes technology — can make mistakes. Every once in a while, your bank might make an error and deposit cash into your account that wasn’t meant for you. A teller at a bank branch could have entered the wrong digit in an account number as a customer tried to deposit a check or transfer funds, for example. Whatever the reason, you’ll notice that your bank account balance is higher than it ought to be.

While this may seem like a cash windfall and you might be tempted to keep the money, you should report the error to your bank as soon as you notice it. That way, the mistake can be corrected as quickly as possible.

Can I Keep the Money from a Bank Error in My Favor?

So what happens when money is accidentally deposited into your account? You may wonder if it’s a case of “finders, keepers.” Well, the only time that you can keep funds added to your account is when the money deposited was legitimately meant for you.

When a bank error occurs in your favor, you cannot keep the money — even if the error seems small and likely to fly under the radar. The money isn’t legally yours, so you must return it.

What’s more, the customer whose money accidentally landed in your account will probably notice the mistake and ask the bank to track down the money. Or, the bank will catch the mistake in one of the regular audits that it makes on accounts and withdraw the money again. If the money isn’t in your account, they may ask you why you didn’t report the mistake earlier.

Recommended: Ways to Deposit Money into a Bank Account

What Is the Penalty for Attempting to Spend or Keep the Money?

Now, let’s consider what would happen if you didn’t report and return the money mistakenly put in your account. Even if you are a person who doesn’t pay much attention to your banking details and assume the money is yours, it is still a big problem if you use it. If you spend the money from a bank error in your favor, move it to another account, invest it, or give it away, you could wind up in a lot of hot water.

Failing to return the money may be tantamount to theft, and you could face criminal charges, such as theft of property lost by mistake or receiving stolen property. Criminal charges may be made to get a court order to force you to repay the amount, and in some cases, you could end up with probation or prison time. That’s a very good reason to get the funds back to your bank as soon as you realize there’s been an error.

A few years ago, a Pennsylvania couple went on a spending spree when their bank accidentally deposited $120,000 in their account instead of a business’ account due to a teller error. The couple bought various vehicles with the money and also gave $15,000 away to friends in need.

The bank requested that the couple return the money and then reversed the transfer, causing an overdraft on the couple’s account of over $100,000. The couple was eventually convicted of theft, sentenced to seven years’ probation, 100 hours of community service, and ordered to repay the money they stole. Surely, this is a good example of why there’s no such thing as free money in this situation.

When Should I Report the Error?

If you discover money in your account and can’t explain where it came from, contact your bank right away, and ask them to figure out the origins of the funds. If it turns out the money really was for you — perhaps a relative deposited it in your account as a gift, for example — your bank will let you know that you are free to access the funds and use them for whatever you’d like.

If the funds weren’t originally meant for you, the bank can start the process of reversing the transaction.

To report the error, first call your bank. Take down the name of the person you talked to and make a note of the time and date. Follow up your call with an email that outlines the details of the error. That way, you’ll have a paper trail of your attempts to correct the issue. The time frame in which to report a bank error varies, so check with your particular account’s fine print to know the specifics.

What Happens if the Bank Does Not Respond?

Generally speaking, banks have 10 days to complete an investigation into an account error. But it is possible the investigation could take as long as 45 days. You can take a look at your deposit account agreement to find out how long it should take your bank.

If nothing has changed after that period of time, contact your bank again to check in on the progress of the investigation. Do not assume the money has somehow become rightfully yours. You don’t want to make a bad situation worse, cause legal action, and wind up eventually having to hire a lawyer to represent you.

What Should I Do So That I Don’t Get in Trouble?

When an erroneous deposit is made to your account, here are the steps you should take to help ensure that you don’t get into any trouble.

Do Not Touch or Transfer Money

First things first, if you notice money in your account that’s not yours, don’t touch it. Don’t spend, don’t give it to someone else, and don’t move it into a different account. Don’t even spend the money if you plan to repay it and report the mistake later. Anything you do to tamper with the money, no matter how benign it seems, could have big consequences later.

Contact Your Bank

As we mentioned above, contact your bank immediately when you notice the error, and keep records of your interactions.

Monitor Your Account

Get in the habit of scoping out your financial accounts regularly, whether it’s checking your credit report, bank account, or even checking medical bills for errors. The fact that even your bank can accidentally deposit money into your account illustrates the necessity of reviewing your bank account regularly.

If you don’t look at your account statement frequently, you may not notice small errors, and these can have a big impact on your personal finances. How often should you check your bank account? There’s no precise answer, but between once a week and once a month can be a good place to start.

For example, say a small deposit of just a few hundred dollars is accidentally made to your checking account. Say, too, that you don’t notice the deposit and spend some of the funds. When the bank discovers the mistake, they can withdraw the funds without your permission, freeze your account, or put a hold on your funds. If you’re still operating unaware of the erroneous deposit, this can wreak havoc on your account. It could cause overdrafts or your checks to bounce. It might gum up the works on any automated bill pay that you may have set up.

As a result, you may be on the hook for overdraft fees, or you may end up paying some bills late.

Keeping careful tabs on your account can help you catch errors so you can avoid these situations and improve your financial health. Consider setting up alerts for deposits in your account. That way you can spot any mistakes as soon as they happen. You may want to consider other automatic ways to monitor your finances, such as credit score monitoring and card security and protection, to help keep your accounts safe.

The Takeaway

Now you know what to do if money is accidentally deposited into your bank account. If a financial institution makes a mistake in your favor, sorry to say, this isn’t the moment to go on a spending spree. The best thing you can do is act quickly to alert your bank. That way, the error can be corrected, the right person can receive the money they need, and you can continue banking as usual. If you fail to do so, you could wind up with overdrafts and other issues when the bank takes the money back. Worse still, you could face legal consequences with far-reaching effects. So do the right thing, and keep your financial life on the up and up.

Here’s a no-funny-business way to help your money grow: Bank with SoFi. We’re committed to zero account fees as well as superior interest rates. Sign up for our Checking and Savings with direct deposit, and you’ll earn a super competitive 4.60% APY which is 41 times the current national checking account average. Plus, we won’t deduct any monthly, minimum balance, or overdraft fees.

FAQ

Can I keep money credited in error to me?

No, you cannot keep money that is deposited in your account in error. You should alert your bank and have the funds redirected to their rightful owner.

Do I have to report a bank error?

Yes, you should report the error. Contact your bank and report the mistaken deposit as soon as you notice it so the problem can be corrected.

What happens if the bank makes a mistake? Who is responsible and why?

If your bank makes a mistake, you should alert them as soon as you notice it. Your bank will also run regular audits of your accounts, which can help them catch errors. When they do catch a mistake, it must be resolved with the funds going back to the correct account. To do so, the bank can reverse transfers, withdraw funds from your account, freeze your account, or place a hold on the funds without your permission. If the money isn’t there, you will be asked to repay it, and you may face criminal charges.

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

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

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

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

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

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

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

This article is not intended to be legal advice. Please consult an attorney for advice.

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Leverage in finance involves using a relatively small amount of capital to make larger trades or investments, increasing the potential of larger returns. In the world of finance, it’s critical to understand leverage if you plan to day trade or make other types of short-term investments, and the additional risks involved.

In general, leverage means doing a lot with a little. Think about how you may use an actual, physical lever to turn a switch, for instance. The switch itself may be small, and require a turn that’s a quarter of an inch to flip from off to on. But by using a lever — which is much bigger, physically, than the switch itself — the work becomes easier.

What Is Leverage?

In finance, leverage refers to using a small amount of capital to do a relatively big amount of work — making big investments with a small amount of money. The rest of the money used to make the investment is borrowed, or investors are trading on margin.

In short: Leverage is about borrowing capital to make bigger bets in an effort to increase returns.

How Leverage Works

In leveraged investing, the leverage is debt that investors use as a part of their investing strategy. While it’s easy to think that all debt is bad, in fact it can actually be useful when folded into a specific investing tactic, although it also introduces additional risks and costs.

Leverage typically works like this: A person or company wants to make an outsized investment, but doesn’t have enough capital to do it. So, they use the capital they do have in conjunction with margin (borrowed money) to make a leveraged investment. If they’re successful, the return on their investment is far greater than it would’ve been had they only invested their own capital.

The risk, of course, is that those returns do not materialize, putting the investor in debt. Investors will also need to consider how their overall costs could increase, as they’ll likely pay interest on the money they borrow, too.

Example of Leverage

Here is an example of how leverage could be used:

Let’s say that you found a startup. To get the company off the ground, you take in $10 million from investors, but you want to expand operations fast — hire employees, ramp up research and development efforts, and build out a distribution network.

You can do that with the $10 million, but if you were to borrow another $10 million, you would be able to double your efforts. That would allow you to hire more employees, improve your products faster, and distribute them further and wider, though you’d need to pay interest on the loan, too, factoring into overall costs.

That $10 million you borrowed is allowing you to do more with less. Of course, you run the risk that the company won’t be able to sustain a quick growth pace, in which case you may not be able to pay back the loan, or end up paying additional costs for interest and fees. But if things do work out, you’d be able to grow faster and accrue more value than if you hadn’t taken on any additional debt.


💡 Quick Tip: Are self-directed brokerage accounts cost efficient? They can be, because they offer the convenience of being able to buy stocks online without using a traditional full-service broker (and the typical broker fees).

Pros and Cons of Leverage

On the surface, leverage can sound like a powerful tool for investors — which it can be. But it’s a tool that can cut both ways: Leverage can add to buying power and potentially increase returns, but it can also magnify losses, and put an investor in the hole.

What’s important to remember is that there are both pros and cons to a tool like leverage.

Leverage vs Margin

Margin is a type of leverage that is specifically tied to use in the financial markets by investors. It is basically like a line of credit for a brokerage or investment account.

Here’s how margin works: An investor has a cash balance, which acts as collateral, and there are interest rates at play, like any other type of loan. With a margin account, investors can tradesome, but not all stocks or other assets on margin.

Using margin, an investor can effectively supercharge their potential gains or losses. It’s also important to note — and it’s worth repeating over and over — that using margin as an investor can increase overall costs and risks. Not every investor will be comfortable assuming those risks and costs (such as interest charges), so you’ll want to know what you’re doing before using margin.

Margin and leverage are related, and it’s easy to confuse the two. Even if you know what margin trading is and how margin accounts work, it’s important to make sure you know what the differences are. This chart should help.

Types of Leverage

So far, we’ve mostly discussed leverage as it relates to the financial markets for investors. But there are other types of leverage, too.

Financial Leverage

Financial leverage is used by businesses and organizations as a way to raise money or access additional capital without having to issue additional shares or sell equity. For instance, if a company wants to expand operations, it can take on debt to finance that expansion.

The main ways that a company may do so is by either issuing bonds or by taking out loans. Much like in the leverage example above, this capital injection gives the company more spending power to do what it needs to do, with the expectation that the profits reaped will outweigh the costs of borrowing in the long run.

Operating Leverage

Operating leverage is an accounting measure used by businesses to get an idea of their fixed versus variable costs.

When discussing financial leverage, math needs to be done to figure out whether a company’s borrowing is profitable (called the debt-to-equity ratio). When calculating operating leverage, a company looks at its fixed costs as compared to variable costs to get a sense of how the costs of borrowing are affecting its profitability.

Leverage Investing

Leverage trading is the use of borrowed money to try and increase profits or returns. A company can use leverage investing by purchasing a new factory, allowing it to expand its ability to create products, and as such, increase profitability. An individual investor can borrow money to buy more stocks, increasing their potential returns.

It’s important to keep in mind, though, that leverage trading, or the use of borrowed money to invest, increases overall costs for investors, as they will need to pay interest on the money they borrow, and may be subject to other fees, too.

With that in mind, there are a few ways that leverage can be used in investing, either by individuals, or organizations.

Buying on Margin

Margin is a form of leverage, and trading on margin means that an investor is using money borrowed from their brokerage to execute a trade. In other words, an investor is borrowing money from their trading platform or brokerage — paying an applicable interest rate to do so, which can vary and should be considered as a part of overall trading costs — and making trades with it. It’s similar to using a credit card for investing, in some ways.

Given that margin concerns interest charges and additional costs, using it to trade or invest involves additional risks, particularly for inexperienced investors.

Leveraged ETFs

ETFs, or exchange-traded funds, can also have leverage baked into them. Leveraged ETFs are tradable funds that allow investors to potentially increase their returns by using borrowed money to invest in an underlying index, rather than a single company or stock. Leveraged ETFs utilize derivatives to increase potential returns for investors.

Using Borrowed Money to Invest

While many investors utilize margin, it’s also possible to borrow money from an outside source (not your broker or brokerage) to invest with. This may be appealing to some investors who don’t have high enough account balances to meet the thresholds some brokerages have in place to trade on margin. For example, a platform may require an investor to have a minimum balance of $25,000 in their account before they’ll offer the investor margin trading.

If an investor doesn’t have that much, looking for an outside loan — a personal loan, a home equity loan, etc.— to meet that threshold may be an appealing option.

But, as mentioned when discussing margin, borrowing money to invest can rope in additional risk, and investors will need to consider the additional costs associated with borrowing funds, such as applicable interest rates. So, before doing so, it may be a good idea to consult a financial professional.

Leverage in Personal Finance

The use of leverage also exists in personal finances — not merely in investing. People often leverage their money to make big purchases like cars or homes with auto loans and mortgages.

A mortgage is a fairly simple example of how an individual may use leverage. They’re using their own money for a down payment to buy a home, and then taking out a loan to pay for the rest. The assumption is that the home will accrue value over time, growing their investment.

Leverage in Professional Trading

Professional traders tend to be more aggressive in trying to boost returns, and as such, many consider leverage an incredibly important and potent tool. While the degree to which professional traders use leverage varies from market to market (the stock market versus the foreign exchange market, for example), in general most pro traders are well-versed in leveraging their trades.

This may allow them to significantly increase returns on a given trade. And professionals are given more leeway with margin than the average investor, so they can potentially borrow significantly more than the typical person to trade. Of course, they also have to stomach the risks of doing so, too — because while it may increase returns on a given trade, there is always the possibility that it will not.

Leveraged Products

There are numerous financial products and instruments that investors can use to gain greater exposure to the market, all without increasing their investments, like leveraged ETFs.

Volatility and Leverage Ratio

A leverage ratio measures a company’s debt situation, and gives a snapshot of how much debt a company currently has versus its cash flows. Companies can use leverage to increase their profitability by expanding operations, etc., but it’s a gamble because that profitability may not materialize as planned.

Knowing the leverage ratio helps company leaders understand just how much debt they’ve taken on, and can even help investors understand whether a company is a potentially risky investment given its debt obligations.

The leverage ratio formula is: total debt / total equity.

Volatility is another element in the mix, and it can be added into the equation to figure out just how volatile an investment may be. That’s important, given how leverage can significantly amplify risk.


💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.

The Takeaway

Leverage can help investors, buyers, corporations and others do more with less cash on hand in their accounts at a given time. But there are some important considerations to keep in mind when it comes to leverage. In terms of leveraged investing, it has the potential to magnify gains — but also to magnify losses, and increase total costs.

Utilizing leverage and margin as a part of an investing or trading strategy has its pros and cons. But investors should give the risks some serious consideration before getting in over their heads. It may be a good idea to speak with a financial professional accordingly.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

FAQ

What is leverage in simple terms?

In simple terms, the concept of leverage means to do a lot with a little. As it relates to finance or investing, this can mean using a small amount of capital to make large or outsized trades or investments.

What is an example of leverage?

An example of leverage could be a mortgage, or home loan, in which a borrower makes a relatively small down payment and borrows money to purchase a home. They’re making a big financial move with a fraction of the funds necessary to facilitate the transaction, borrowing the remainder.

Why do people want leverage?

Leverage allows investors or traders to make bigger moves or take larger positions in the market with only a relatively small amount of capital. This could lead to larger returns — or larger losses.

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