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Q: Why Do Investors Buy Dividend Stocks?

Dividend-paying stocks present unique opportunities for investors in the following ways: passive dividend income, dividend reinvestment plans, and dividend tax advantages.

Mar

2024

Dividends: What They Are and How They Work

By Michael Flannelly | Growing Wealth, invest, Investing, Terminology | Comments Off

A dividend is when a company periodically gives its shareholders a payment in cash, additional shares of stock, or property. The size of that dividend payment depends on the company’s dividend yield and how many shares you own.

Not all companies pay dividends, but many investors look to buy stock in companies that pay them as a way to generate regular income in addition to stock price appreciation. A dividend investing strategy is one way many investors look to make money from stocks and build wealth.

What Is a Dividend?

A dividend payment is a portion of a company’s earnings paid out to the shareholders. For every share of stock an investor owns, they get paid an amount of the company’s profits.

The total amount an investor receives in a dividend payment is based on the number of shares they own. For example, if a stock pays a quarterly dividend of $1 per share and the investor owns 50 shares, they would receive a dividend of $50 each quarter.

Companies can pay out dividends in cash, called a cash dividend, or additional stock, known as a stock dividend.

Generally, dividend payouts happen on a fixed schedule. Most dividend-paying companies will pay out their dividends quarterly. However, some companies pay out dividends annually, semi-annually (twice a year), or monthly.

Occasionally, companies will pay out dividends at random times, possibly due to a windfall in cash from a business unit sale. These payouts are known as special dividends or extra dividends.

A company is not required to pay out a dividend. There are no established rules for dividends; it’s entirely up to the company to decide if and when they pay them. Some companies pay dividends regularly, and others never do.

Even if companies pay dividends regularly, they are not always guaranteed. A company can skip or delay dividend payments as needed. For example, a company may withhold a dividend if they had a quarter with negative profits. However, such a move may spook the market, resulting in a drop in share price as investors sell the struggling company.

Types of Dividends

As noted, the most common types of dividends are cash dividends and stock dividends.

Cash dividends are dividends paid out in the form of cash to shareholders. Cash dividends are the most common form of dividend. Stock dividends are, likewise, more or less what they sound like: Dividends paid out in the form of additional stock. Generally, shareholders receive additional common stock.

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How Are Dividends Paid Out?

There are four critical dates investors need to keep in mind to determine when dividends are paid and see if they qualify to receive a dividend payment.

• Declaration Date: The day when a company’s board of directors announces the next dividend payment. The company will inform investors of the date of record and the payable date on the declaration date. The company will notify shareholders of upcoming dividend payments by a press release on the declaration day.

• Date of Record: The date of record, also known as the record date, is when a company will review its books to determine who its shareholders are and who will be entitled to a dividend payment.

• Ex-dividend date: The ex-dividend date, typically set one business day before the record date, is an important date for investors. Before the ex-dividend date, investors who own the stock will receive the upcoming dividend payment. However, if you were to buy a stock on or after an ex-dividend date, you are not eligible to receive the future dividend payment.

• Payable date: This is when the company pays the dividend to shareholders.

Example of Dividend Pay Out

Shareholders who own dividend-paying stocks would calculate their payout using a dividend payout ratio. Effectively, that’s the percentage of the company’s profits that are paid out to shareholders, which is determined by the company.

The formula is as follows: Dividend payout ratio = Dividends paid / net income

As an example, assume a company reported net income of $100,000 and paid out $20,000 in dividends. In this case, the dividend payout ratio would be 20%. Shareholders would either receive a cash payout in their brokerage account, or see their total share holdings increase after the payout.

Why Do Investors Buy Dividend Stocks?

As mentioned, dividend payments and stock price appreciation make up a stock’s total return. But beyond being an integral part of total stock market returns, dividend-paying stocks present unique opportunities for investors in the following ways.

Passive Dividend Income

Many investors look to buy stock in companies that pay dividends to generate a regular passive dividend income. They may be doing this to replace a salary — e.g., in retirement — or supplement their current income. Investors who are following an income-producing strategy tend to favor dividend-paying stocks, government and corporate bonds, and real estate investment trusts (REITs).

Dividend Reinvestment Plans

A dividend reinvestment plan (DRIP) allows investors to reinvest the money earned from dividend payments into more shares, or fractional shares, of that stock. A DRIP can help investors take advantage of compounding returns as they benefit from a growing share price, additional shares of stock, and regular dividend payments. The periodic payments from dividend stocks can be useful when utilizing a dividend reinvestment plan.

Dividend Tax Advantages

Another reason that investors may target dividend stocks is that they may receive favorable tax treatment depending on their financial situation, how long they’ve held the stock, and what kind of account holds the stock.

There are two types of dividends for tax purposes: ordinary and qualified. Ordinary dividends are taxable as ordinary income at your regular income tax rate. However, a dividend is eligible for the lower capital gains tax rate if it meets specific criteria to be a qualified dividend. These criteria are as follows:

• It must be paid by a U.S. corporation or a qualified foreign corporation.

• The dividends are not the type listed by the IRS under dividends that are not qualified dividends.

• You must have held the stock for more than 60 days in the 121-day period that begins 60 days before the ex-dividend date.

Investors can take advantage of the favorable tax treatments of qualified dividends when paying taxes on stocks.

How to Evaluate Dividend Stocks

Evaluating dividend stocks requires some research, like evaluating other types of stocks. There’s analysis to be done, but investors will also want to take special care to look at prospective dividend yields and other variables related to dividends.

In all, investors would likely begin by digging through a stock’s financial reports and earnings data, and then looking at its dividend yield.

Analysis

As noted, investors may want to start their stock evaluations by looking at the data available, including balance sheets, cash flow statements, quarterly and annual earnings reports, and more. They can also crunch some numbers to get a sense of a company’s overall financial performance.

Dividend Yield

A dividend yield is a financial ratio that shows how much a company pays out in dividends relative to its share price. The dividend yield can be a valuable indicator to compare stocks that trade for different dollar amounts and with varying dividend payments.

Here’s how to calculate the dividend yield for a stock:

Dividend Yield = Annual Dividend Per Share ÷ Price Per Share

To use the dividend yield to compare two different stocks, consider two companies that pay a similar $4 annual dividend. A stock of Company A costs $95 per share, and a stock of Company B costs $165.

Using the formula above, we can see that Company A has a higher dividend yield than Company B. Company A has a dividend yield of 4.2% ($4 annual dividend ÷ $95 per share = 4.2%). Company B has a yield of 2.4% ($4 annual dividend ÷ $165 per share = 2.4%).

If investors are looking to invest in a company with a relatively high dividend yield, they may invest in Company A.

While this formula helps compare dividend yields, there may be other factors to consider when deciding on the suitable investment. There are many reasons a company could have a high or low dividend yield, and some insight into dividend yields is necessary for further analysis.

Tax Implication of Dividends

Dividends do, generally, trigger a tax liability for investors. There may be some special considerations at play, so if you have a lot of dividends, it may be beneficial to consult with a financial professional to get a sense of your overall tax liabilities.

But in a broad sense, regular dividends are taxed like ordinary income if they’re reinvested. If an investor receives stock dividends, though, that’s typically not taxable until the investor sells the holdings later on. Further, qualified dividends are usually taxed at lower rates that apply to capital gains – but there may be some variables involved that can change that.

Investors who do receive dividends should receive a tax form, a 1099-DIV, from the payor of the dividends if the annual payout is at least $10.

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The Takeaway

Dividends are a way that companies compensate shareholders just for owning the stock, usually in the form of a cash payment. Many investors look to dividend-paying stocks to take advantage of the regular income the payments provide and the stock price appreciation in total returns.

Additionally, dividend-paying companies can be seen as stable companies, while growth companies, where value comes from stock price appreciation, may be riskier. If your investment risk tolerance is low, investing in dividend-paying companies may be worthwhile.

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FAQ

Are dividends free money?

In a way, dividends may seem or feel like free money, but in another sense, they’re more like a reward for shareholders for owning a portion of a company.

Where do my dividends go?

Depending on the type of dividend, they’re usually distributed into an investor’s brokerage account in the form of cash or additional stock. The specifics depend on the type of account that dividend-paying stocks are held in, among other things.

How do I know if a stock pays dividends?

Investors can look at the details of stocks through their brokerage or government regulators’ websites. The information isn’t hard to find, typically, and some brokerages allow investors to search specifically for dividend-paying stocks, too.

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Mar

2024

What Is a Put Option? How They Work and How to Trade Them

By Rebecca Lake | Growing Wealth, invest, Investing | Comments Off

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.

What Is a Put Option?

In options trading, a put option is the purchase of a contract that gives an investor the right, but not the obligation, to sell a specific security at a certain price by a certain date. Put options are different from call options, the purchase of which gives buyers the right, but not the obligation, to buy a particular security at a certain price by a certain date.

Investors can use put options to trade a variety of securities, including stocks, bonds, futures and commodities. Trading options can potentially lead to greater returns, but it can also amplify losses, making it a potentially riskier strategy.

Understanding certain options terminology — including what a put option is and how it works — can be helpful if you’re thinking about incorporating options trading strategies into your portfolio.

Options Basics

Before digging into the details of put options, it’s helpful to understand a little about how options trading works in general. An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying security at a certain price — this is called the strike price. Options must also be exercised by a specific expiration date.

An investor who buys an options contract pays a premium to do so, which can be determined by the volatility of the underlying asset and the option’s expiration date. If the option holder does not exercise the option by the expiration date, they lose their right to buy or sell the underlying security and the option has no value.

Options are derivative investments, since they derive their value from the underlying assets. They can be bought and sold on an exchange, just like the underlying assets they’re associated with.

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How Does a Put Option Work?

A put option is a specific type of options contract. Here’s an example: The buyer of the put option has the right, but not the obligation, to sell shares of an underlying asset at the agreed-upon strike price up until the option’s expiration date. Meanwhile, the seller of the put option has an obligation to buy those shares from the buyer if the buyer chooses to exercise the put option.

Put options increase in value as the price of the underlying security decreases. Likewise, put options lose value as the price of the underlying stock increases. Depending on where the underlying asset’s price is in relation to a put option’s strike price, the option can be one of the following:

• In the money: An in-the-money put option has a strike price that’s higher than the underlying asset’s price.

• At the money: An at-the-money (or on-the-money) put option has a strike price that’s equal to the underlying asset’s price.

• Out of the money: An out-of-the-money put option has a strike price that’s below the underlying asset’s price.

Of the three, the in-the-money put option is more desirable because it means a put option has intrinsic value. If you’re the buyer of a put option and that option is in the money, it means you can sell the underlying asset for more than what it’s valued at by the market.

Put Option Example

An example might make things even more clear.

Assume you own shares of XYZ stock. The stock is currently trading at $50 a share but you believe its price will dip to $40 per share in the near future.
You purchase a put option which would allow you to sell the stock at its current price of $50 per share. The options contract conveys the right to sell 100 shares of the stock, with a premium of $1 per share.

If your hunch about the stock’s price pays off and the price drops to $40 per share, you could exercise the option. This would allow you to sell each of the 100 shares in the contract for $10 more than what it’s worth, resulting in a gross profit of $1,000. When you factor in the $1 per share premium, your net profit ends up being $900, less any commission fees paid to your brokerage.

Difference Between Put and Call Option

It’s important to understand the difference between put and call options in trading. A call option is an options contract that gives the buyer the right, but not the obligation, to purchase shares of an underlying asset at the strike price by the expiration date. The seller of the call option is obligated to sell those shares to the call option buyer, should they decide to exercise the option.

Like put options, call options can also be in the money, at the money, or out of the money. An in-the-money call option has a strike price that’s below the underlying asset’s actual price. An out-of-the-money call option has a strike price that’s above the underlying asset’s actual price.

Here’s a simple way to think of the differences between put options and call options: With buying put options, the goal is to sell an underlying asset for more than its market value. With buying call options, the goal is to buy an underlying asset for less than what it’s worth.

Pros and Cons of Trading Put Options

Options trading may appeal to a certain type of investor who’s comfortable moving beyond stock and bond trading. Like any other investment, put options can have both advantages and disadvantages. Weighing them both in the balance can help you decide if options trading is something you should consider pursuing.

Pros	Cons
• Low initial investment required compared to trading stocks. • The option buyer has the right but no obligation to sell the underlying asset. • Higher return potential, on a percentage basis.	• Losses may be amplified. • The option seller has the obligation to buy the underlying asset at the strike price if the buyer decides to execute the contract, which could result in greater downside for the seller. • Unforeseen volatility may drastically affect price movements.

Pros

Cons

• Low initial investment required compared to trading stocks.

• The option buyer has the right but no obligation to sell the underlying asset.

• Higher return potential, on a percentage basis.

• Losses may be amplified.

• The option seller has the obligation to buy the underlying asset at the strike price if the buyer decides to execute the contract, which could result in greater downside for the seller.

• Unforeseen volatility may drastically affect price movements.

Pros of Trading Put Options

• Lower investment. When you purchase a put option, you’re paying a premium and your brokerage’s commission fees. When you purchase shares of stock, you may be investing hundreds or even thousands of dollars at a time. Between the two, put options may be more attractive if you don’t want to tie up a lot of cash in the markets.

Also, buying a put option gives you the right to sell a particular asset at a set strike price but you’re not required to do so. You can always choose to let the option expire; you’d just be out the premium and commission fees you paid.

• Return potential. Trading put options can be lucrative if you’re able to sell assets at a strike price that’s well above their actual price. That might result in a higher profit margin than if you were trading the underlying asset itself.

Cons of Trading Put Options

• Loss amplification. While trading put options can potentially lead to better returns, it can also potentially amplify your losses. If you’re selling put options, you’re obligated to sell the underlying asset at the strike price, even if that strike price is not in your favor.

• Volatility. Volatility can threaten returns with put options if an asset’s price doesn’t move the way you were expecting it to. So it’s possible you might walk away with lower gains than anticipated if you choose to exercise a put option during a period of heightened volatility.

How Do You Trade Put Options?

It’s possible to trade put options inside an online brokerage account that allows for options trading (not all of them do). When deciding which put options contracts to buy, it’s important to consider:

• Where the underlying asset is trading currently

• Which way you think the asset’s price is most likely to move

• How much of a premium you’re willing to pay to purchase an options contract

It’s also important to consider the expiration date for a put option. Keep in mind that options with a longer expiration period may come with a higher premium.

Different Put Option Styles

There’s a difference between European-style and American-style put options.

With European-style options, you can only exercise the option on its expiration date.

With American-style put options you can exercise the option at any time between the date you purchased it and its expiration date, offering more flexibility for the investor.

Put Option Trading Strategies

Different options trading strategies can be used with put options. These strategies vary in terms of reward potential and risk exposure. As you get more familiar with how to trade stock puts, you might begin exploring more advantaged techniques. Here are some of the most common put option plays.

Long Put

A long put strategy involves purchasing a put option with the expectation that the underlying asset’s price will fall. For example, you might want to buy 100 shares of XYZ stock which is trading at $100 per share, which you believe will drop to $90 per share. If the stock’s price drops to $90 or below, you could exercise your contract at the higher $100 per share price point.

Short Put

A short put is the opposite of a long put. In a short put strategy, you’re writing or selling the put option with the expectation that the underlying security’s price will rise or remain above the strike price until it expires. The payoff comes from being able to collect the premium on the option even if the buyer doesn’t exercise it.

Recommended: How to Sell Options for Premium

Married Put

A married put strategy involves holding a long position in an underlying security while also purchasing an at-the-money option for the same security. The idea here is to minimize downside risk by holding both the asset itself and an at-the-money put option.

Long Straddle

A long straddle strategy involves buying both a call option and a put option for the same security, with the same strike price and expiration date. By straddling both sides, you can still end up turning a profit regardless of which the underlying asset’s price moves.

The Takeaway

Options trading may be right for retail investors who are comfortable taking more risk in exchange for a chance to potentially earn higher returns. Getting familiar with put options and how a stock put works is the first step.

Qualified investors who are ready to try their hand at options trading, despite the risks involved, might consider checking out SoFi’s options trading platform. The platform’s user-friendly design allows investors to trade through the mobile app or web platform, and get important metrics like breakeven percentage, maximum profit/loss, and more with the click of a button.

Plus, SoFi offers educational resources — including a step-by-step in-app guide — to help you learn more about options trading. Trading options involves high-risk strategies, and should be undertaken by experienced investors.

Trade options with low fees through SoFi.

Photo credit: iStock/Drazen_

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INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
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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.

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. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
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New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For SoFi’s allocation procedures please refer to IPO Allocation Procedures.

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Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

Fund Fees
If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.
SoFi Invest may waive all, or part of any of these fees, permanently or for a period of time, at its sole discretion for any reason. Fees are subject to change at any time. The current fee schedule will always be available in your Account Documents section of SoFi Invest.

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

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Mar

2024

Where To Keep Your Travel Fund

By Janet Siroto | Budgeting & Goals, money | No Comments

Are you a little obsessed with planning your next big trip? We hear you! The excitement of seeing new places — whether that means a faraway tropical island or a neighboring state — is a powerful lure. But there’s one thing that may get in the way: Money.

Let’s be real, travel can be expensive. Even if you’re hopping in the car for a short weekend road trip, the cost of gas, food, entertainment, accommodations, and more can get a bit overwhelming. Fortunately, with a little bit of planning, you can make your travel dreams a reality. And it can all begin by creating a travel fund.

What Is a Travel Fund?

A travel fund is exactly what it sounds like — a fund exclusively used for gallivanting around the world. It’s a place to stash some cash that you don’t use for rent, bills, repaying student loans, or any other monthly financial obligations. This fund is just for your passion in life. And your passion is clearly traveling.

How to Fund Traveling

Unfortunately, a travel savings account will not grow by magic. If only! You’ll need to find ways to funnel some cash towards your travel plans. There are a variety of ways to do this. Perhaps you got a raise recently (nice!) and can put that amount directly towards travel. Or, maybe you can automatically whisk $25 or $50 per paycheck into your savings. Or, you might give up concert tickets or takeout food for a while to allow some wiggle room in your budget that goes towards paying for your next getaway. There are many options — some of which we’ll explore below.

Recommended: 15 Easy Ways to Save Money

Setting Up a Dedicated Travel Savings Account

There are a few options for where to keep your travel fund. Yes, you could keep your vacation fund in the same account as your day-to-day savings, but separating the fund could provide even more clarity.

Keeping your travel fund in a separate account can make it easy to see how close you are to reaching your travel goal. It allows you to see exactly how much money you’ve saved for the cause with ease. Having the money in a separate account also allows you to set up automatic contributions, just as you might already be doing with your other accounts.

Automating your savings towards travel means you can eliminate another task from your to-do list. You’ll be making progress toward your dream of cruising down the Nile without even having to think about it. And since it’s stashed separately, you don’t need to worry that you’ll use it on, say, entertainment or new shoes without realizing it.

Tips on Selecting an Account to Use

When it comes to setting up a dedicated travel fund, the first order of business is usually to pick an account type. There are a variety of options to choose from. Part of what will likely influence your decision is how long you plan on saving. If you want to take a trip in just a few months, a savings account may be a good vehicle. You can easily contribute to it, and you’ll earn some interest.

To help your travel fund grow faster, you may want to go with a high yield savings account. These accounts typically pay a much higher annual percentage yield (APY) than traditional savings accounts, giving you the ability to earn more on your money while still enjoying the security of a federally insured account. These days, many high-yield savings accounts offer APYs of up to 5% or more — many times more than the average national rate of 0.46%.

Some of these accounts may come with certain restrictions, like a limited number of withdrawals a month or maintaining a minimum balance, so be sure to read the fine print on each account you might be considering.

Another is a certificate of deposit (CD), which locks up your money for a particular term, typically from six months to a few years. This type of account can sometimes offer a more competitive interest rate than a traditional savings account but comes with withdrawal restrictions. If you choose to withdraw the money before the term ends, you’ll likely have to pay a penalty or fee.

Yet another option is to use a cash management account with a brokerage firm. These accounts are meant as an option for your uninvested money. They can also be great for putting away some extra money to save, but again — do read the fine print. Fees may be involved, plus commissions if a broker steps in to help you with your investments. Make sure that these won’t cut into your savings.

All of these options will allow you to keep your vacation fund separate from your checking account, emergency savings, or regular savings account. You may even be able to give it a unique name like “travel fund” or even more specific like “Tahiti fund.” It’s much more exciting to watch “dream trip to Bali fund” grow than just “account: 3283052.”

Growing Your Travel Fund

After you’ve created your unique travel fund, it’s time to put in some savings work. And that begins with your budget. If you already have a budget, that’s great. All you need to do is add in “travel fund” as a new line item and shift as much money as you feel comfortable moving to this new account each month.

But, if you’re starting from scratch, that’s OK too. Trying to save for the trip of a lifetime is just as good an excuse as any to start budgeting.

To build a budget, you’ll want to start by figuring out your average monthly take-home income (what you earn after taxes are taken out). Next, it’s good to create a list of all your monthly expenses. You’ll want to include all the basics like rent or mortgage, car payments, student loans, credit card statements, food, gas, insurance, gym memberships, streaming accounts, and any money you currently put towards saving and investing. Make sure to get as granular as possible about your spending.

Next, subtract your average monthly expenses from your average monthly income to see how much you have leftover. If it’s more than $0, that’s excellent news! You can put the excess towards your travel fund. If not, you’ll need to find some places to cut back on spending.

Recommended: How to Make a Budget in 5 Steps

Finding Extra Cash for Your Travel Account

If you’d like that leftover number in your budget to be higher, maybe it’s time to take a look at both your spending and your current income level. Perhaps you can see where changes can be made.

One of the potentially easiest ways to create more cash for your travel fund is to look deeply at your monthly spending. Are you still subscribing to that streaming service you never (or rarely) watch? Are you signed up for the premium version of that social media platform you haven’t been on in months?

What about that gym membership? How’s that going for you? Go ahead and get rid of things that aren’t bringing you joy or are dispensable. Then, refocus those funds in your travel fund.

If there’s no room for cuts, then it might be time to increase your income. Of course, you could always ask for a raise at work, but if that doesn’t come through, explore some other options — like a side hustle. A side hustle is a gig you take on outside your normal work to make some extra money. If you can, pick something you really enjoy doing so it feels less like “work.” For example, if you love dogs but aren’t ready to own one, maybe walking dogs before work would be fun for you.

If you are a handy person who likes to fix things, creating a listing on a site like Thumbtack or TaskRabbit may be a good idea. If you have other talents like photography, writing, or graphic design, you might do some networking to see if you can drum up some freelance work. That way, you can get paid for what you love to do and save for what you love too.

SoFi: Your Partner in Creating a Travel Fund

By now, you’ve committed to adjusting your budget and setting aside cash in a new fund. The only thing left to do is find the best place to stash your cash.

When choosing where to put your travel fund, you’ll want to find an account that pays a competitive yield, keeps your money safe, and allows you to easily access your funds when it’s time to set off for your next adventure.

SoFi Travel has teamed up with Expedia to bring even more to your one-stop finance app, helping you book reservations — for flights, hotels, car rentals, and more — all in one place. SoFi Members also have exclusive access to premium savings, with 10% or more off on select hotels. Plus, earn unlimited 3%** cash back rewards when you book with your SoFi Unlimited 2% Credit Card through SoFi Travel.

Wherever you’re going, get there with SoFi Travel.

FAQ

How much should I keep in my travel fund?

To come up with a travel savings goal, you’ll want to determine how much you’ll need for your trip and when you want to take it. From there, you can determine how much you’ll need to transfer into your travel fund each month to reach your goal. For example, if your trip will cost $2,500 and you plan to travel in six months, you’ll need to set aside around $33 a month.

How do I set up a travel fund?

Setting up a travel fund can take only a matter of minutes. It can be as easy as opening a savings account online and then directing money towards it. You can also go into a brick-and-mortar bank to set up an account.

How can I save money on a travel fund?

To save money on a travel fund, look for a savings account that doesn’t charge monthly fees and offers a competitive interest rate. These two factors will help boost your savings and get you on your dream vacation as quickly as possible.

**Terms, and conditions apply: The SoFi Travel Portal is operated by Expedia. To learn more about Expedia, click https://www.expediagroup.com/home/default.aspx.
When you use your SoFi Credit Card to make a purchase on the SoFi Travel Portal, you will earn a number of SoFi Member Rewards points equal to 3% of the total amount you spend on the SoFi Travel Portal. Members can save up to 10% or more on eligible bookings.
Eligibility: You must be a SoFi registered user.
You must agree to SoFi’s privacy consent agreement.
You must book the travel on SoFi’s Travel Portal reached directly through a link on the SoFi website or mobile application. Travel booked directly on Expedia's website or app, or any other site operated or powered by Expedia is not eligible.
You must pay using your SoFi Credit Card.
SoFi Member Rewards: All terms applicable to the use of SoFi Member Rewards apply. To learn more please see: https://www.sofi.com/rewards/ and Terms applicable to Member Rewards.
Additional Terms: Changes to your bookings will affect the Rewards balance for the purchase. Any canceled bookings or fraud will cause Rewards to be rescinded. Rewards can be delayed by up to 7 business days after a transaction posts on Members’ SoFi Credit Card ledger. SoFi reserves the right to withhold Rewards points for suspected fraud, misuse, or suspicious activities.
©2023 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender. NMLS #696891 (Member FDIC), (www.nmlsconsumeraccess.org).

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

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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.

SOTL0324001

Mar

2024

How to Grocery Shop on a Budget: 31 Tips

By Stacey Leasca | Budgeting & Goals, money | Comments Off

It’s not your imagination: Grocery prices are rising, having gone up 2.2% between February 2023 and 2024, after the sticker shock of an 11% increase between 2021 and 2022.

You may think there’s not much you can do about the high cost of groceries (after all, a person has to eat!), but there are many easy ways to slash your weekly spending on groceries. And, saving at the supermarket doesn’t have to mean skimping on quality, taste, or nutrition.

What follows are 31 simple tricks that can help you shop smarter and spend less whenever you visit the supermarket.

Key Principles Behind Saving Money on Groceries

Before diving into the ideas for saving money on groceries, consider the big-picture principles at work when it comes to frugal living for food. Consider these concepts:

• Plan your meals

• Understand pricing

• Don’t shop when hungry

• Buy in bulk when possible

• Choose generic products

• Shop in season

• Comparison-shop like a pro; no grabbing the first item you see

• Stick to your list

• Buy local or grow your own food.

💡 Quick Tip: Help your money earn more money! Opening a bank account online often gets you higher-than-average rates.

How Much Do Groceries Cost on Average?

The average household spends about $270 a week on groceries; those with kids spend more, or about $331 per week. Using Census Bureau data, the average monthly costs for groceries therefore tops $1,000.

These costs are strictly for groceries. If you eat out or grab takeout (whether a flat white or fancy salad), your total food costs will of course be higher.

How Can I Determine What My Budget Is?

It’s important to set aside an amount of money for food that fits into your overall financial planning. In terms of how to make a budget, you might try the popular 50/30/20 budget rule. With this plan, you take your after-tax income and allocate 50% to needs, such as housing, utilities, health care, minimum debt repayment, basic transportation, and food. Thirty percent is for the “wants” in life, such as travel, dining out, and cute (but not vital) clothes. The last 20% goes to savings and additional debt payment.

If you use this budget or another method, you will want to make sure that your food costs fall in line with the other necessities of life, perhaps trimming from your spending on “wants,” if needed.

Tips for Grocery Shopping on a Budget

Now, dive in and learn how to trim your grocery bill and live on a budget.

1. Make – and Stick to – a List

Impulse buys can quickly bust your budget. So before going to the supermarket it can be wise to plan out your meals and make a detailed list of all the things you will need, including any household supplies.

At the store, you’ll want to be strict about sticking to the list. Yes, those pineapples look great and they’re on sale, but are they on your list? No? Then you should probably keep walking. Otherwise, you may well wind up blowing your budget.

Shopping with a list not only helps save money but can also cut down on food waste — the items that tend to sit idle in the fridge or on the countertop are often the ones that never had an assigned meal to begin with.

2. Eat Before You Shop

If you enter a supermarket hungry, there’s no telling what you’ll end up putting into your cart because, since just about everything is going to look good. Some popcorn? Why not? Pomegranate juice? It’s healthy, so into the cart it goes. And maybe some cookies as a little treat.

Walk into the grocery store with a full stomach, on the other hand, and you might be shocked by how much lower your grocery bill is.

3. Plan for Leftovers

In America, 80 million tons of food go to waste every year. One reason that food goes to waste is that it can be difficult to buy the exact amount of food you need to make the meals we’ve planned. This can result in leftover ingredients languishing in the fridge or pantry, and then landing in the trash can.

You can help reduce wasted food (and money) by doubling your recipe and then having leftovers for lunch and/or putting some in the freezer so you’ll have a meal at the ready when you need it.

4. Grocery-Shop Online

Think you’ll be tempted to go off-script if you enter a grocery store? You might want to try online grocery shopping instead. Many local supermarkets offer online ordering, and allow you to choose either curbside pick-up or delivery.

Or, you may want to try one of the many online grocery services, such as Instacart or Amazon Fresh. You can often choose one-off delivery, as well as recurring delivery of staples (like toilet paper) so you never run out.

It can be easier to avoid the temptations when you can type everything you need into a search bar. Plus, shopping online makes it easy to compare brand prices, see what’s on sale, and watch the total tally up in real time.

5. Develop a Green Thumb

Even if you’re not much of a gardener, you might want to try growing one or two of your favorite vegetables in a container or a small garden area outdoors. You can then step outside and pick your tomato or bell pepper rather than buying them at the store.

If you don’t have any outdoor space, you might consider starting an indoor herb garden. If you have parsley, basil, or dill right on your windowsill, you can just pick what you need rather than buy a whole bunch at the market. It’s a fun and tasty way to stick to your budget.

6. Shop at Stores You Know

Having a tried-and-true grocery store may be good for your wallet. Walking into a store you’re familiar with means you already know where to get the items on your list.

Head into an unfamiliar store and you may be left wandering the aisles for what seems like an eternity trying to find your goods. That’s because grocery stores are set up to be a little confusing and to drive consumers to have to do a bit of strolling, as that’s when you’re more likely to make random purchases.

7. Bring Your Own Bags

One quick way to potentially drive down the cost of your grocery store run is to BYOB — bring your own bags. Many cities and states have imposed plastic bag bans. If you show up empty-handed, you’ll be stuck purchasing reusable bags at the checkout.

In areas where plastic bags are allowed, many stores will reward customers who bring reusable bags by reimbursing them about 5 to 10 cents a bag at checkout. BYOBing is also kinder to the environment.

Keeping some reusable bags in your car is a good way to avoid forgetting them at home.

8. Join Loyalty Programs

Many stores now offer discounts for regular shoppers and even secret sale items only for those who’ve signed up.

It’s typically quick, easy, and free to join, though some stores like Whole Foods require customers to be part of its Amazon Prime membership service (which comes with a yearly fee). Still, it may be worth it as discounts at the register can add up to real savings.

9. Embrace Meatless Mondays

Here’s another way to buy groceries on a budget: Buy and eat less meat. Reducing meat consumption and eating more plant-based meals has benefits for the environment, your waistline, and your wallet.

Chickpeas, pinto beans, peas, Brussels sprouts, quinoa, tofu, along with many other beans, whole grains, and vegetables are all excellent (and inexpensive) sources of protein without the added saturated fat that comes with animal products.

You may want to consider going meatless at least one day a week, and then building up to a few meat-free meals per week.

10. Buy Larger Containers

Buying the largest size of packaged, canned, and frozen foods can sometimes help you save money on food. That’s because some of the cost of every grocery item is in the packaging.

If your grocery store has a “bulk foods” section you might save even more by buying the amount of food you need in plastic bags.

11. Think Beyond Fresh Produce

Another way to save money at the grocery store is to buy fruits and vegetables in the frozen or canned foods aisle. The savings can add up, especially when the food is out of season.

If you’re looking to add pineapple to a recipe in the winter, for example, you can save money by opting for canned pineapple over a fresh one that’s not in season. Canned and frozen fruits and vegetables also don’t go bad as quickly as fresh, so they may be less likely to get wasted.

12. Try a CSA

A Community-Supported Agriculture (CSA) program can help you save money on fresh produce, eggs, and herbs. You can look for one using the USDA’s CSA directory and see if they’ll deliver to your front door.

Not only will you be saving money but you’ll be supporting local farmers and eating food that’s close by helps ensure it’s fresher.

13. Clip Coupons

While it’s not rocket science, this tried-and-true technique is still one of the best ways to cut your grocery bill. You may want to consider scanning the local circulars that come in the mail to see which stores are having deals on the food items you need that week. You can also look for manufacturers’ coupons (online and in circulars inserted into Sunday newspapers).

When it comes to how to coupon successfully, however, it’s wise to make sure that you’re only buying items you need and usually buy — otherwise you could end up adding to, not shrinking, your grocery bill.

💡 Quick Tip: Want a simple way to save more everyday? When you turn on Roundups, all of your debit card purchases are automatically rounded up to the next dollar and deposited into your online savings account.

14. Shop in Season

Another way to spend wisely is to cook and shop seasonally. It’s typically cheaper to buy fruits and vegetables that are in season than ones that have been shipped to the store from a far-away place where it can be grown year-round.

Also, since in-season produce is in large supply, it tends to be sold at affordable prices to maintain demand. In-season produce also tends to be tastier.

15. Use Apps

There are a number of rebate apps you can download onto your phone for free that allow you to get cashback on items you purchased. Options include Ibotta, Checkout 51, and Fetch.

While rebates don’t give you a discount upfront (like a traditional coupon), you should see savings in the long run.

If you frequently shop at large chains like Walmart or Target for groceries, getting their apps may help you earn rewards and get discounts for being a loyal shopper. You just need to scan your mobile app when you check out.

Get up to $300 when you bank with SoFi.

Open a SoFi Checking and Savings Account with direct deposit and get up to a $300 cash bonus. Plus, get up to 4.60% APY on your cash!

16. Stock up on Shelf-Stable Items

When your grocery store is having a sale on canned goods, dried goods, or other pantry items, you may want to consider buying multiples. Items like beans, sauces, soups, nuts, peanut butter, pretzels, shelf-stable snacks like unpopped popcorn won’t expire for a long time.

You’ll be able to enjoy the cost savings and will likely appreciate having them on hand when preparing meals.

17. Buy Store-Brand or Generic

You don’t have to sacrifice flavor and taste in order to save money while grocery shopping. While It’s easy to overlook no-name or store brands, in many cases these items are actually made by the brand name companies, just with a different label.

And the savings can be real. Using generic (rather than brand name) products can save as much as 40% off your grocery bill. You can put that extra cash right into your bank account.

18. Shop the Outside Aisles

The inside aisles of the grocery store are where pricier processed foods are typically stocked, The outer edges, on the other hand, is where you tend to find fresh fruits and vegetables, grains and beans.

Shopping on the edge — and filling your cart with nutrient-dense items and fresh, seasonal food — can help your wallet, as well as your waistline.

19. Portion Food Out Yourself

It can be tempting to buy convenience items where food is pre-portioned into single servings so you can just grab-and-go. Smaller items can also help you keep from overeating. But all of that packaging tends to increase the cost of the item.

If your kids love crackers, you may want to buy a full-size box and portion them out in zip-top bags or reusable containers. You can do the same with other favorite snacks so you won’t be tempted to eat the whole bag in one sitting. You can also spoon yogurt into small containers for school lunches and cut cheese into slices from a block for easy snacks.

20. Drink Tap Water

To avoid spending money on bottled water, you may want to get a filtered pitcher and switch to drinking tap water. Depending on how much you typically sip, you can save a bundle. By drinking from a reusable water bottle or a glass throughout the day, you’ll also reduce the amount of plastic waste you’re putting into the environment.

Getting your kids used to drinking water instead of juice or soda can also reduce your supermarket bills.

21. Use a Smaller Cart

Here’s a little swap that can help you save: If you’re not shopping for a full week’s worth of groceries, consider grabbing a small cart or, even better, a hand-held basket. This will automatically limit how much you can buy because only so much will fit.

When you have a smaller cart — or a basket that will get heavy quickly — you’re forcing yourself to ask, “Do I really need this?” every time you pick up something to buy in the store.

22. Minimize Trips to the Store

One way you can save money on your grocery bill is to only shop when you need to and to minimize the frequency that you set foot in the supermarket door.

The reason is that the less often you’re physically in the store, the less likely you’ll be tempted to buy something you don’t absolutely need. It can be all too common to go to the grocery store for “one thing” and come out with a few items.

23. Shop Off-Peak

Most of us don’t want to spend our weekends grocery shopping, right? Unfortunately, Saturdays and Sundays are the days when many of us have the time to go to the supermarket — along with everyone else in our town.

Shopping during peak times can hurt your budget in a few ways. You might try to speed through the supermarket crush and be more likely to buy an item at the end of the aisle because it’s convenient, rather than grab a similar product on the shelf a few feet away. This could mean they are buying a more expensive version of what they need.

You might also run into trouble shopping during peak times because you’re more likely to get stuck in a long line — and become tempted by miscellaneous items stocked near and along the checkout line.

24. Calculate the Bill While You Shop

Shopping with a calculator or getting out your phone and adding things up as you put them in your cart can help you stick to your spending plan<. (If you’re shopping with kids, you can give them the job to tally what’s in the cart.) By keeping a running tally of how much money is in your cart, you can save yourself from any unpleasant surprises during check-out. Plus, it can make you think twice before putting any extras in your cart.

25. Shop Your Pantry First

It’s easy to accidentally buy an extra item at the supermarket that you didn’t realize you already had stored at home. That’s why after you write your grocery list, it can be a good idea to double-check pantry shelves, spice racks, the fridge, and the freezer to make sure you truly need what’s on your list.

You may even want to shop your pantry and fridge before making your meal plan and shopping list to see if you can think of meals that incorporate foods you already have on hand.

26. Pay with Cash

Another idea for grocery shopping on a budget: A simple trick for lowering your grocery bill is to set your budget and then only bring that much money in cash, leaving the plastic at home.

This will help ensure that you stick to your list and avoid grabbing any tempting extras. You can only spend what you have in your wallet. Full stop. (A variation on the theme: Use your debit card, not your credit card, to keep your spending in line.)

Recommended: Envelope Budgeting Method

27. Make Breakfast for Dinner

Eggs are one of the most affordable protein sources out there. By making simple breakfast-style food for dinner, you’re offering your family a fun meal and using up some of your (affordable) breakfast foods.

You might consider making an omelet or frittata with eggs, cheese, and leftover vegetables or creating a bacon, egg, and cheese burrito. Not only are many breakfast recipes a delicious dinner option, but they’re affordable and often quick to prepare.

28. Avoid Eye-Level Items

Grocery stores are designed to get you to spend more money, which is why the most expensive products tend to be stocked at eye level. Brands often pay more money for their products to be displayed prominently so you’re more likely to buy them.

Searching high and low when you’re shopping may help you stop spending money (or at least more than you budgeted for). Once you start looking, you may even notice a price differential between the eye-level item cost and the one at your feet.

29. Bake Your Own Treats

Many impulse buys happen in the bakery and snack sections of the supermarket. Before you succumb, you may want to ask yourself if you could bake it at home. You may already have the baking basics on your pantry shelves and could whip up some muffin or cookies fairly quickly. Or, you might want to buy a mix to save time (you’ll still save money).

Before buying chips and snacks, you may also want to consider if there is a more affordable DIY option, like buying popcorn kernels to cook on the stove.

Asking yourself, “Can I make this?” will likely result in saving money and getting the freshest item possible. This way, you can reward yourself without breaking your budget.

30. Hit the Store on a Wednesday

When it comes to snagging good deals, shopping on a Wednesday may be beneficial. That’s because grocery stores tend to restock their shelves and make new markdowns in the middle of the week. Since they’re in the process of changing the discounts, they may still honor the price cuts from last week’s sale as well as the new ones, which could help boost your savings.

31. Do the Prep Work Yourself

Those packaged baby carrots and bagged pre-washed salads make it easier to eat healthier, but if you’re willing to do the cleaning, prepping, and chopping of fresh produce, and even meats and poultry, you can save money.

A boneless, skinless chicken breast package will cost more than buying a whole chicken. You’re paying for the convenience. By setting aside time to prep and chop your foods after you get home from grocery shopping, you’ll likely reap savings.

The Takeaway

A little planning and knowing some money-saving tricks can help you lower your monthly grocery bill and stick to your budget.

By following these budget shopping tips, you may find that you have more money left over each month to pay down debt, invest for the future, or save for something fun. And those funds can grow if you put them in an interest-bearing bank account.

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.

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

FAQ

What is a realistic budget for groceries?

The average household spends $270 a week on groceries, but how much you need to spend will vary on family size, location, and other considerations.

Which store is cheapest to buy groceries?

Which grocery store is cheapest will vary from location to location, but among the most affordable are Aldi, Lidl, Market Basket, WinCo, and Trader Joe’s.

How can I make my grocery bill cheaper?

Some ways to go grocery shopping on a budget include buying in bulk, buying generic products, planning your meals in advance, and using coupons, apps, and loyalty clubs.

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.

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.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

SOBK0324010

Mar

2024

What Is a High-Yield Checking Account?

By Jamie Cattanach | Budgeting & Goals, Financial Independence, money | Comments Off

A high-yield checking account is a secure place to deposit, store, and withdraw money, but with an enhanced interest rate vs. other similar accounts. Typically, money in a checking account doesn’t earn any interest — or maybe a nominal fraction of a percent.

With a high-yield checking account, there’s the potential to turn your regular deposit account into a passive income machine. While it’s unlikely to make you rich, a high-yield checking account can help pad your pockets with a few extra interest dollars, which can add up over time.

However, these accounts can come with certain conditions that may or may not make them the right choice for you. Here’s what you need to know.

How High-Yield Checking Accounts Work

High-yield checking accounts, as their name implies, are checking accounts that offer a high “yield,” or interest rate, on the balance held in the account.

Whereas the national average for an interest-bearing checking account is about 0.07% APY (annual percentage yield) per the FDIC, a high-yield account might offer 3% to 5% APY or even higher — which still might not make you a fortune, but is a significant upgrade and on a par with some savings accounts.

High-yield checking accounts make it possible to create a passive income stream, albeit a small one, just by holding money in your checking account (which you likely already do). A high-yield checking account can augment interest earnings from other financial products you may hold, such as a high-interest savings account or investments like high-yield bonds.

However, there can be account minimums to contend with or potential fees.

Does a High-Yield Checking Account Come With Fees?

Although some high-yield checking accounts come with monthly maintenance fees that could easily eclipse whatever interest you stand to earn, these fees can commonly be waived so long as you maintain a certain minimum monthly balance or meet other requirements. These may include making a certain number of debit card transactions or receiving a certain threshold in direct-deposit income each month.

These days, there are even some free high-yield checking accounts — usually offered through online banks — but the level of interest you’ll earn may depend on your ability to meet the same kind of transaction minimums we just mentioned. (If you don’t meet the requirements, you might not earn any interest at all.)

So, in short, while you might not have to pay for your high-yield checking account, you’ll likely need to perform the basic minimum monthly transaction requirements in order to glean the full benefits of the account.

Get up to $300 when you bank with SoFi.

Open a SoFi Checking and Savings Account with direct deposit and get up to a $300 cash bonus. Plus, get up to 4.60% APY on your cash!

Top 3 Pros of a High-Yield Checking Account

High-yield checking accounts can be very beneficial — here’s how.

1. More Earnings

These accounts offer an opportunity for interest earnings simply by holding a checking account. In some cases, the interest rate may rival that of certain kinds of savings accounts.

2. Motivation to Keep More in Your Account

These high-yield checking accounts can incentivize account holders to keep a higher minimum balance due to interest-earning requirements — which can help you generate a cash cushion.

3. Availability

These accounts are becoming increasingly available, especially thanks to the proliferation of online-only banks. You likely don’t need to invest much time and energy in research when looking for one.

Cons of a High-Yield Checking Account

On the other side of the coin (pun totally intended), high-yield checking accounts can have their drawbacks.

Transaction Requirements

These high-yield accounts may come with transaction requirements to secure interest earnings. If the account holder doesn’t meet them, little or no interest will be earned. These obligations might suit your money style, or they might prove to be a major hassle.

Modest Interest (If We’re Honest)

Many interest-bearing accounts generate just a fraction of a percentage in interest. Even the highest-yield checking accounts currently only offer about 5.00% APY. Yes, every little bit helps but this certainly isn’t enough money to retire on.

Additional Fees

In some cases, high-yield checking accounts may come with fees. Waiving them may require holding a significant minimum monthly balance — which can be challenging for individuals and families living paycheck to paycheck.

Here, you can review the pros and cons again in table format:

Pros of High-Yield Checking Accounts	Cons of High-Yield Checking Accounts
Potential to earn interest on checking, which normally offers little or no earning potential	May have many monthly transaction minimums to meet in order to qualify for interest earnings
Can incentivize account holders to keep more money in their accounts	May have fees that can only be waived by maintaining a significant minimum monthly balance or meeting minimum transaction requirements
Are increasingly available — and increasingly fee-free — from online banks	Even the best high-yield checking accounts typically offer far less than the average return on stocks and bonds (though when FDIC-insured, these checking accounts can be a safer investment vehicle)

Recommended: What Is a Certificate of Deposit (CD)?

Is a High-Interest Checking Account Worth It?

Whether or not a high-interest checking account is worth it will probably depend on a couple of key factors.

• First of all, how high is the interest rate? If it’s just a fraction of a percentage above the norm, it may not be worth it. But if it’s a multiple of the standard rate, it might be a good way for your money to make money.

• Next, what fees or minimum requirements are involved? If your money would make $10 more in interest per year in a high-yield account but you need to tie up funds that could be working harder elsewhere, then it’s probably not a money-wise move.

Factors to Look For in a High-Yield Checking Account

If you’re shopping for a high-yield checking account, consider these factors:

Interest Rate

Of course, you will likely want to shop around and see what are the highest rates available for a checking account. Currently, the highest rates are 5.00% or slightly higher.

Minimum Balance

With this kind of checking account, you may be required to make a specific size of deposit to open the account. You may also need to keep a certain balance in order to earn the high interest rate or to avoid fees. If that’s the case, make sure you can meet that number.

Fees

In addition, when opening a checking account, be sure you understand what fees might be charged. These can include maintenance, overdraft, ATM, and foreign transaction fees, among others. You’ll probably want to avoid being charged fees so that they don’t eat away at the interest you are earning. Online banks may be more likely to waive such fees.

How to Qualify for High-Yield Checking Accounts

In order to qualify for a high-yield checking account — and actually get the benefits — you’ll need to be able to fulfill whatever that account specifies as far as transaction requirements or minimum opening deposits.

In addition, if your banking history is marked by overdrafts and other negative factors, this may be reported by ChexSystems, which is kind of like a credit score bureau but for banking. If you have many negative factors (unpaid fees, say, or many overdrafts), you may not be able to qualify for a high-yield checking account — or other types of deposit accounts, either. (If your ChexSystems report contains errors, you can always dispute false information with ChexSystems online.)

How to Open a High-Yield Checking Account

Now that you know what it is, you may wonder how to open a high-yield checking account. The process is similar to opening any other type of account. You’ll be asked to provide:

• Basic personal information, such as your name and address

• Proof of address (such as a utility bill)

• Government-issued photo ID

• Your Social Security number or other taxpayer identification number

In addition, your chosen bank may also require a certain minimum opening deposit, which you’ll need to provide to activate the account. The bank will offer specific details as far as what documentation is required and how to deliver it.

High-Yield Checking Accounts vs High-Yield Savings Accounts

If you are comparing high-interest checking and high-yield savings accounts, you will likely want to consider the following points:

• A high-interest checking account does generate money on your deposit, but it may come with minimum transaction or balance requirements. These could be difficult for some people to meet.

• A high-interest savings account can offer good earning power, but the number of transactions you are allowed could be limited. Although Regulation D, which limits savings accounts to six transactions a month, was largely suspended since the pandemic, some financial institutions may still apply this rule and charge fees if you conduct more transfers.

Depending on your needs, one of these may be a better option than the other. Also, it is likely to be easier to find a solid interest rate with a high-yield savings account than with the checking variety. In other words, many high-interest checking accounts don’t offer all that much earning power.

Opening a Checking and Savings Account With SoFi

A high-yield checking account is a great way to augment whatever passive income you might earn from savings accounts, investments, and other holdings. Some interest is better than none, after all — every little bit of interest earned counts.

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

FAQ

Is a high-yield checking account worth it?

This all depends on whether or not you can meet any minimum monthly transaction requirements. If you can fairly easily do so, a high-yield checking account is an easy way to earn passive income just by keeping an active bank account. But if you can’t, you might not earn any interest at all — or even pay additional fees for the account.

What is the difference between a high-yield checking and savings account?

A high-yield checking account is designed to be the hub of your financial life and typically doesn’t have any limits on the number of transactions you may make; savings accounts may restrict this. However, this kind of checking account likely pays less interest than a high-yield savings account, which may do a better job of helping you generate passive income.

Can you withdraw money from a high-yield savings account?

Yes, you can withdraw money from a high-yield savings account. However, there may be restrictions on how many transactions you can make per month. Going over that number could result in fees or the account being converted to a checking account.

What bank has the highest checking interest rate?

Currently, some of the banks offering the highest checking interest rates are Axos Bank, Presidential Bank, Heritage Bank, and Quontic Bank.

Can you ever lose your money with a high-yield savings account?

A high-yield savings account is typically a very safe place to keep your money, especially if it’s FDIC- or NCUA-insured. The risk of losing money is extremely low.

Photo credit: iStock/MicroStockHub

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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.

Our account fee policy is subject to change at any time.
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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