SpendPL Archives | Page 19 of 76

Nov

2023

When Would You Need a Student Loan Payoff Letter?

By SoFi | Debt Payoff, Student Loans, student_loan | Comments Off

Editor's Note: For the latest developments regarding federal student loan debt repayment, check out our student debt guide.

A student loan payoff letter may be needed to get a mortgage, refinance your student loans, or acquire other forms of debt. While the name implies you’ve paid off the loan, a student loan payoff letter actually just shows the details of your student loan — including the payoff amount and monthly dues.

Some people may want or need to take out more than one loan at the same time. For those who took out student loans for college, a student loan payoff letter may come into play. In this guide, we’ll run through what these letters are and some of the commonly navigated twists in understanding their use in managing loans.

What Is a Student Loan Payoff Letter?

Despite what it sounds like, a student loan payoff letter is not a document proving a student loan has been paid in full. Rather, it’s a document generated by the loan servicer stating the current loan balance, monthly payments, and other account information.

Note that a loan payoff letter is not the same thing as a monthly statement. It’s a tool for other lending institutions to weigh how a borrower manages debt on an existing loan that also forecasts future interest costs based on when the loan is due to be repaid.

There is generally a time limit placed on payoff letters — a “good-through date” — after which the amount of interest due on the loan would change.

A student loan payoff letter may be needed when the borrower is still paying off student debt and also applying for a mortgage, refinancing an existing loan, or when they’re planning to pay off the loan.

The payoff letter will play a part in determining an applicant’s debt-to-income (DTI) ratio, which many lenders look at to determine whether the applicant can afford potential future payments on a loan.

A high student loan balance, in relation to income, could limit a person’s loan options. So, it pays to pay your debt down as much as you can.

Getting a Student Loan Payoff Letter

A loan payoff letter can be requested from the lender at any stage of a loan’s term, whether the borrower hasn’t made an initial payment or they’re close to making their last. Obtaining a loan payoff letter can be done by contacting the lender and simply requesting it.

Lenders’ websites may have an option for requesting these letters via an online form. If that option isn’t available, the borrower may need to call the lender’s customer service line to request the letter.

There may be a fee charged for requesting a payoff letter. If there is one, it should be explained in the loan agreement. The lender’s customer service representative should also be able to verify whether there is a fee for the letter.

Managing Student Loans

An important factor in determining a student loan payoff strategy is figuring out when the first payment is due, information which the loan servicer will provide.

According to the Federal Student Aid Office, “For most federal student loans, there is a set period of time after you graduate, leave school, or drop below half-time enrollment before you must begin making payments.”

This period of time, known as a grace period, could last anywhere from six to nine months depending on which type of federal student loan a borrower has. It may help to think ahead about how best to take advantage of the grace period in advance.

While it might be tempting to view the grace period as a time to sink extra money into things you want or need, borrowers may want to consider instead saving up for when student loan payments will start coming due.

Interest on Direct Subsidized Loans is paid by the U.S. Department of Education while the borrower is in school at least half-time, during the grace period, or a deferment period—a factor that might make paying the loan off, in the long run, a little less burdensome.

Borrowers of Direct Unsubsidized Loans are responsible for paying interest during the entire term of the loan. Interest accrues from the time the loan is disbursed to the borrower.

Strategies for paying off student loans quickly may include looking into ways to make money outside your day job, asking if there is a student loan repayment program at your company, and paying down other debt during the grace period.

Selecting the Right Repayment Plan

Several student loan repayment options are available for eligible borrowers of federal student loans depending on the type of loan.

Standard Repayment Plan

For Federal Direct Loans and Federal Family Education Loans (FFEL), the loan servicer will automatically place borrowers on the Standard Repayment Plan unless they choose a different repayment plan.

The Standard Repayment Plan gives the borrower up to 10 years (between 10 and 30 years for consolidation loans) to repay, with fixed monthly payments of at least $50 during that time. This repayment plan may not be the best option for borrowers who are considering seeking Public Service Loan Forgiveness (PSLF).

Graduated Repayment Plan

Eligible Direct Loan and FFEL borrowers who expect their income to increase gradually over time may opt for a Graduated Repayment Plan. This plan has the same 10-year term (between 10 and 30 years for consolidation loans) that the Standard Repayment Plan does, but the payment amount differs.

Monthly payments start low and increase every two years, will always be at least the amount of accrued interest since the last payment, and will be limited to no more than three times the amount of any previous payment.

Extended Repayment Plan

Borrowers who need to make lower monthly payments over an extended time may want to consider the Extended Repayment Plan, which allows for a 25-year repayment term. This plan is for eligible Direct or FFEL borrowers who have outstanding loan balances of $30,000 or more on each loan.

Monthly payments on this plan can be either fixed or graduated and are generally lower than those made under the Standard or Graduated plans. However, you should expect to pay more in interest over the life of the loan.

Income-Driven Repayment Plans

There are a few options for borrowers who might be having trouble making their payments. Income-driven repayment (IDR) plans allow eligible borrowers to responsibly manage their debt while remaining on track to pay it off.

The plans take into account a borrower’s income, discretionary income, family size, and/or eligible federal student loan balance. Borrowers under an IDR must recertify their income and family size each year or risk losing their eligibility for the plan.

The Takeaway

A student loan payoff letter details the specifics of your student loan, including the amount you owe, your monthly payments, and the payoff amount. A student loan payoff letter may be needed to secure a mortgage, refinance your existing debt, or acquire another form of debt, such as a personal loan.

Choosing to refinance student loans may be an option for some borrowers looking to lower their monthly payment or reduce the total amount they pay in interest. If you choose to lower your monthly payment, you’ll often have to extend your loan term, which will result in paying more in interest over the life of the loan. If you shorten your loan term and reduce your interest rate, you most likely will save money in interest.

Keep in mind that refinancing federal student loans into a private student loan means forfeiting all federal loan benefits, including income-driven repayment plans and student loan forgiveness. Borrowers are encouraged to look at all options before making a decision.

With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.

SoFi Student Loan Refinance
If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

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

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

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Nov

2023

Discretionary Income Definition and Explanation

By Diana Kelly Levey | Budgeting & Goals, Financial Independence, money | Comments Off

Discretionary income is defined as the cash you have available to spend after your necessary payments are covered. Those necessities are typically made up of basic living expenses, such as housing, utilities, food, healthcare, and insurance costs. (In some cases, minimum payments toward debt may be included as well.)

So what does discretionary income equal in daily life? It’s the post-tax money you can put toward things like eating out, entertainment, travel, clothing, electronics, and gym memberships. You might think of discretionary income as paying for the wants in life vs. the needs.

In this guide, you’ll learn more about the definition of discretionary income, read examples of this type of income and how to use it, and understand how to calculate this money in your budget. It can be an important number to know, as you’ll see, especially if you’re repaying student loans.

Key Points

• Discretionary income is the money left after paying for necessary expenses like housing, utilities, food, healthcare, and insurance.

• It can be used for non-essential expenses like eating out, entertainment, travel, clothing, and electronics.

• Discretionary income is important for budgeting and can be used to pay down debt or save for goals like vacations or home improvements.

• Some people may not have discretionary income if they struggle to cover essential expenses or have variable income.

• Calculating discretionary income involves subtracting necessary expenses from take-home pay; it’s important to have a budget to manage that money effectively.

What Is Discretionary Income?

Discretionary income is the amount of post-tax income that is left over after you have paid for all the essentials of daily life. These expenses include your mortgage or rent, utilities, and car payments or bills, as well as food, healthcare, and occasionally clothing (if it is needed, not just wanted). To phrase it another way, no, a Netflix subscription or your AM latte isn’t a “necessity.”

It’s worth noting that not everyone has discretionary income; some people struggle just to cover the “essentials” when it comes to paying their bills.

• Gig, seasonal, and part-time workers: The concept of discretionary income can get a little more complicated if you aren’t a person who gets a steady paycheck. If you have a variable income due to the nature of your work (maybe you’re a gig worker or freelancer), you’ll need to make sure you have enough money set aside in savings if you have a shortfall.

If your income dips and you can’t pay for the basics in life, let alone have some discretionary income, that could mean you’ll get hit with overdraft or late fees or wind up with excessive credit card debt to pay off.

• Discretionary income and savings: Also worth noting (warning, buzzkill ahead): Discretionary income isn’t just to be spent on cool stuff and fun experiences. It’s wise to put a portion of it toward savings. Some people will include debt payments as part of the “necessities” bucket of your budget; others will say that a portion of discretionary income is what goes toward debt.

One key kind of debt to consider in this scenario: student loans. There are four programs for repaying federal educational loans in which your discretionary income can be a factor. It’s vital to make sure you have the right income-driven repayment plan (IDR) that works for your financial situation when it comes to paying down federal student loans.

What if despite your best efforts to pay back your loans, you are still feeling the financial pinch? It’s a common situation as basic bills and student loans conspire to vacuum up all your moolah. Refinancing your student loans to a lower rate can help free up additional discretionary income each month.

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7 Examples of Discretionary Income and Expenses

Now that you know what discretionary income is, it’s worth mentioning that the phrase is sometimes used interchangeably with discretionary expenses. To be clear, discretionary income is what is spent on discretionary expenses.

And what are discretionary expense examples? Here are several:

1. Entertainment and Eating Out

This category includes such expenses as dining out, getting drinks, splurge-y takeout food (pizza delivery, we’re looking at you!), and fancy coffees. In terms of entertainment, the following would be considered discretionary: Concert, play, and movie tickets; museum admission; books, magazines, and streaming services; and similar costs.

2. Vacations and Travel

Taking a vacation, whether you go to the other side of the planet or an hour’s drive away, is not a necessity, despite how you may feel about it.

3. Luxury Items

These expenses could be anything from a pricey sportscar to designer clothes to jewelry to wine. While clothing and a car may be necessities in life, when you pay extra for top-notch prestige brands, you enter the realm of discretionary expenses.

4. Memberships and Hobbies

Yes, joining a gym or taking up a musical instrument are admirable things. But they are not vital to your survival. For this reason, things like yoga or Pilates classes, crafting supplies, and similar expenses are considered discretionary.

5. Personal Care

A basic haircut or bottle of shampoo may not be discretionary, but pricey blowouts, manicures, massages, skincare items, and the like are.

6. Upgrading Items

If your current phone is functional but you get the latest one, that’s a discretionary expense. The same holds true for being bored with your couch and getting a new one or remodeling your bathroom just because.

7. Gifts

Of course you want to show you care for your loved ones. But buying presents for others isn’t vital to survival, so this should be earmarked as a discretionary expense.

Recommended: How to Save on Streaming Services

Income vs Disposable Income

If you are wondering how income vs. disposable income stacks up, here’s the difference. Income refers to all the funds you have coming in, whether from your salary, any side hustles, interest or dividends, and other sources.

Disposable income, however, is what is left of your post-tax money after you have paid for your necessities, as described above. If, say, you follow the popular 50/30/20 budget rule, 50% of your money goes toward needs (necessities), 30% would go toward wants (discretionary expenses), and 20% toward saving. Together, those account for all of your after-tax money, aka your disposable income.

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How Is Discretionary Income Used?

Discretionary income can be used for a number of fun things, from buying the latest mobile phone to taking a pal out for their birthday to spending a day at a theme park with the kids. You could also use discretionary income to make a future dream come true. You could, say, contribute to a fund for your next vacation or the down payment on a house. Another way to allocate discretionary income is to use it for home improvement projects, especially ones that could increase the value of your home. Heck, you could even save it in your bank account, plain and simple, if you wanted.

Also, it’s wise to recognize the fact that some people may need to use their discretionary money for an income-based repayment plan to pay down student loan debt. There may not be a lot of wiggle room there. Others must put this money toward paying down their credit card bills; those high-interest debts can grow over time and do damage to your credit score.

(One tip for those who get paid every other week: When you get an “extra” paycheck that doesn’t need to go to bills, consider it discretionary income that you could put toward an extra payment on debts or to toss into savings.)

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How to Calculate Discretionary Income

One way to calculate your discretionary income is to calculate your take-home pay each month and subtract your “fixed” or “necessary expenses” from that. The money you have left over is your discretionary income which can be used for the kinds of expenses we highlighted above.

What if, when you tally your discretionary income, you wound up with a negative number? This means you do not have any earnings left over to address discretionary expenses. In this situation, it’s important to keep spending under control and look for ways to free up funds.

One other angle to consider about this topic: If you have student loans to pay off, discretionary income can be used for an income-based repayment plan.The federal government offers income-based plans, and each one has its own discretionary income requirements.

These programs often put your student loan payments notably under what you might otherwise pay. Some of the factors taken into consideration are income and family size; you also must meet certain requirements to qualify for these repayment plans. You can see how the options stack up by plugging your details into the federal government’s loan simulator tool.

What Is A Good Amount of Discretionary Income?

When you’re considering how much discretionary income you should have, you might want to consult a discretionary income calculator. Many options for these calculators are available online.

Hopefully you have some money left each month after you’ve paid your basic living expenses. As you look at your overall budget and discretionary income, you might benefit from exploring the 50/30/20 rule, as noted above.

Example of Using 50/30/20 Rule to Calculate Discretionary Income

If your monthly net (take-home) income was $5,000, $2,500 would be siphoned off for your “needs,” $1,500 would be allotted for discretionary income, and $1,000 would go toward savings and investments. This can be a really helpful way to understand how to “bucket” your money and keep your finances healthy.

As you think about discretionary income and related concepts, you’ll probably realize how important it is to have a budget; this will inform where your money has to go as well as what’s left after those bills have been paid. It will help keep you on track for your discretionary income, reining in excessive spending and guiding you toward saving well and staying out of debt. There are a variety of different budget methods; try a couple and see which works best for you.

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Discretionary vs. Disposable Income

The phrases “discretionary income” and “disposable income” might be used interchangeably in conversations among your friends, but — sorry — that’s not necessarily correct.

• Disposable income is how much money you have left from your earnings after tax withholdings are taken out but before deductions are also removed. That’s likely going to be a much higher number than your discretionary income.

• Discretionary income is the amount left after your taxes and deductions (like health insurance, retirement contributions, etc.) are taken out, and then you’ve paid all of your essential living expenses (home, utilities, food, car).

It’s important to be aware that these definitions may be used differently in some circumstances, like if a court is going to garnish your wages or back-owed tax payments during a bankruptcy consideration. These are distressing circumstances, yes, but they happen every day to regular people, so it’s good to have the vocabulary down if you ever face these situations.

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FAQ

What is the meaning of discretionary income?

Discretionary income is defined as the cash you have available to spend after your taxes are deducted and necessary payments are covered.

What is an example of discretionary income?

Here’s an example of discretionary income: If your post-tax earnings were $100K and you spent $50K on necessities and $20K went into your retirement savings, the remaining $30K would be discretionary income.

What is the difference between discretionary and disposable income?

Discretionary income is the money that you spend on non-essential items, or the wants in your life vs. needs. Disposable income, however, is your total after-tax income.

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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.

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Nov

2023

Current Balance vs Available Balance: Key Differences

The Difference Between Current Balance and Available Balance

By Krystal Etienne | Financial Independence, money, Terminology | Comments Off

If you’ve ever wondered about the difference between what shows up on your bank account as an available balance vs. current balance, you are not alone. It can be perplexing to sometimes see two different figures for the amount of cash sitting in your account.

The truth is, both are correct. A current balance reflects the amount of money in a checking or savings account at any given moment. The available balance, on the other hand, shows you the current balance, plus or minus any transactions that are pending but have not yet been processed fully.

Financial institutions share these two balances with their customers to give as detailed a picture of funds on deposit as possible. While it may be confusing at first glance, once you understand the difference, it can actually help you stay in better control of your cash.

Read on to learn more about current vs. available balances on your bank accounts.

Key Points

• Current balance reflects the amount of money in an account at any given moment.

• Available balance shows the current balance minus any pending transactions that have not been fully processed.

• Current balance includes both credits and debits, while available balance represents the amount available for spending.

• The time it takes for a current balance to become an available balance depends on the processing time of pending transactions.

What is Current Balance?

The current balance of an account is a reflection of the amount of funds that are moving throughout a checking account or savings account at any given time.

This is a compilation of both credits and debits — incoming and outgoing funds — within an account. It includes transactions that have been completely processed on both ends and posted to an account.

Pending transfers or payments that have been authorized but have not been fully processed yet may be listed in your transaction history but are not included in the tally. So any debit card payments, mobile deposits, or automatic bill payments that haven’t been fully processed will not be calculated into the current balance.

For example, let’s say Brian’s checking account balance is $200.

• On Monday, his employer deposits an $800 payment into his account that clears and posts on the same day, raising Brian’s current balance to $1,000.

• On Wednesday, Brian uses his debit card to pay $100 for dinner, and the restaurant places a hold on his account for the amount. Because the payment is pending and awaiting processing, Brian’s current balance is still $1,000.

• However, if on Friday the restaurant charge is fully processed and posted onto his account, his current balance would drop to $900.

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What is Available Balance?

An available balance is the current balance of a checking account or whatever type of savings account you may have, minus any pending payments and deposits. In essence, it takes the total amount of all fully processed and posted credits and debits, and subtracts the total amount of any pending payments that have yet to be fully processed, providing a more accurate reflection of the money in your account that remains available to be spent.

For example, Danielle’s checking account balance is $500. She uses her debit card to pay a $100 internet bill, and her landlord cashes her $300 check for her rent — both payments appear on her account as pending.

Despite her current balance being $500, her available balance is only $100 due to the pending payments. If she were to make other payments totaling more than $100, she will risk an overdraft fee and having a negative bank balance.

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What is the Difference Between Current Balance and Available Balance?

If an account goes a week or two without any activity, its available balance and current balance will likely be in sync. However, once purchases and payments are made with a debit card, that is when the available balance is likely to fluctuate.

The key difference between a current balance and an available balance is “promised payments.” A current balance is the total amount of money in an account including money that has been promised to other people or businesses. An available balance, on the other hand, is the specific amount of money available that has not been promised to any person or business. While spending the full amount of a current balance with pending payments could result in overdraft or NSF fees, spending the full amount of an available balance should not.

Generally, when a current balance and available balance differ, here’s the likely situation:

• The available balance is the lower of the two, and it’s nearly always due to a pending payment.

• In some less common cases, an available balance may appear larger than the current balance. This could be due to receiving a refund from a purchase or the reflection of a bank overdraft protection buffer on an account. Either way, in this case, it would be wise to contact your bank for a better understanding of your current account standing.

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How Long Does It Take for a Current Balance to Become an Available Balance?

The amount of time it takes for an available balance to sync back up with a current balance depends on the specific amount of processing time needed to complete each pending transaction.

Those times can vary depending on the type of transaction and how quickly the establishment processes it. The account holder’s ability to refrain from spending with their debit card and adding more pending payments to the account is also a major factor.

As a general rule of thumb, individual pending payments can take as little as 24 hours or as long as 3 days to be completely processed and posted to an account. The process requires communication and confirmation between the banks of the account owner and the establishment they purchased from.

If a transaction remains pending for up to a week, it would be wise to contact the merchant or your bank for clarity.

Which Balance Should I Rely On?

The current balance and available balance each serve their own purpose and both can be relied upon as an accurate representation of a checking or saving account. However, there are specific instances when it would be better to reference one over the other.

• If you’re planning on making a purchase or withdrawal, that is an instance where it would be more beneficial to reference the available balance on your account. It’s the best way to know exactly how much money is available to be spent without disrupting any other pending payments.

Checking the available balance will give the most exact account of what is freely available to be spent and will also help you avoid incurring any overdraft fees.

• If you’re more interested in your account balance as a whole and how much money you have flowing through your account at any given time, that is when you’ll want to reference your current balance. It accounts for every dollar entering and exiting your account at the very moment you check it.

Do keep in mind, however, that the available balance total may change quickly due to any sudden pending transactions, therefore it would be wise to check it daily for the most up-to-date tally.

The Takeaway

Knowing what your account balances mean and how to interpret them is a basic financial skill that can literally save you money. Even the slightest misinterpretation of the two could result in costly overdraft fees and disrupt your financial goals.

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Nov

2023

How Much Retirement Money Should I Have at 40?

By Pam O’Brien | Budgeting & Goals, Growing Wealth, invest, Investing, Preparing for Retirement | No Comments

At some point or another, you’ve probably wondered if you have enough money for the future and asked yourself, “how much retirement should I have at 40?”

It’s an important question. Hopefully, you’re already saving some money for retirement. However, you might not be saving enough to retire when you want.

There are different ways to save money for retirement. The sooner, the better—so that it can start adding up. Here’s how to maximize your retirement savings at age 40 and beyond.

Understanding Your Retirement Savings at 40

Now, to answer the question: How much money should I have saved by 40? A general rule of thumb recommended by many financial advisors is to have about three times your annual salary saved in retirement money by the time you’re 40.

Knowing this general benchmark is helpful for your retirement planning.

What Does the Average 40-Year-Old Have Saved?

According to a recent study from Northwestern Mutual, people in their forties say they currently have $77,400 saved for retirement. However, that’s a long way from the amount they expect to need for retirement, which is $1.28 million.

How Your Retirement Savings Compare to National Averages

Compared to the guideline of having three times your annual salary saved by the time you’re 40, if you only have the amount reported by the respondents in the Northwestern study — $77,400 — you’ve got some work to do. The good news is, you’ve probably got around 20 years or more to help get where you need to be by the time you’re ready to retire.

Factors Influencing Your Retirement Savings So Far

As you reach your 40s, it’s likely that your income is increasing, but so are the obligations that are tied to your money.

You might be saving money for your kids’ college; you probably have mortgage payments and existing debt, including your own student loans; you may even be taking care of aging parents. It’s a lot of financial multitasking and you have to prioritize.

In addition to all that, inflation over the past couple of years has made many prices higher, which could increase your cost of living. Overall, prices are 13% higher than they were two years ago, according to Consumer Price Index data. You might also be dealing with unemployment or a job layoff. All these factors can make saving for retirement more challenging.

The Right Retirement Savings Path for You

To map out a savings plan that makes sense, you can start by estimating how much money you’ll need for retirement. It’s also a good idea to look at your goals. That includes figuring out when you might want to retire, what kind of lifestyle you want in retirement, and how much money you might have coming in during your golden years. That will help you determine how much you need to save.

Projecting Your Retirement Needs

Start by thinking about the kind of lifestyle you’d like to have in retirement. Will you move to a smaller home? If so, you may save money on housing costs. On the other hand, if you’d like to travel frequently, your expenses may increase.

Also, estimate what your budget as a retiree might be. Include housing, utilities, insurance, food, transportation, clothes, and so on. And don’t forget entertainment expenses like movies, concerts, and meals out.

Next, factor in healthcare expenses. Health-related costs can be significant in retirement, depending on your medical situation.

Retirement Savings Rate: How Much of Your Income to Save

While each person’s situation and needs are unique, there are some general guidelines that can help project your financial needs during retirement.

For instance, according to Fidelity, you should try to save 15% of your pre-tax income each year if you plan to retire at age 67.

Another rule, known as the 80% rule, says you should have enough money by the time you retire to cover 80% of your pre-retirement income.

Milestones for Retirement Savings By Decade

As discussed, when you plan to retire and what kind of lifestyle you’d like to have in retirement are two of the main factors that affect how much money you’ll need to save. The milestones below are general, but they will give you an idea about how much to save at various ages.

Retirement Savings By:

• Age 30: 1x your annual income

• Age 40: 3x your annual income

• Age 50: 6x your annual income

• Age 60: 8x your annual income

• Age 67: 10x your annual income

Maximizing Your Retirement Savings in Your 40s

If you haven’t saved 3 times your annual income by your 40s, or even if you have, here are some ways to make the most of your retirement funds in this decade.

Benefits of a Roth 401(k) and When to Consider It

Some 401(k) plans give you the opportunity of choosing a Roth 401(k) to save for retirement. If your employer offers such a plan you may want to consider it.

The difference between a Roth 401(k) and a traditional 401(k) is that with a Roth 401(k), contributions are made using after-tax funds. That means they aren’t tax deductible, but the withdrawals you make in retirement are tax-free. In addition, you don’t pay taxes on your annual investment earnings in a Roth 401(k). With a traditional 401(k), the contributions you make are tax deductible, however, you will pay taxes on your retirement withdrawals. So a Roth 401(k) can be beneficial if you expect to be in a higher tax bracket by the time you retire.

The good news is, you can contribute to both a Roth 401(k) and a traditional 401(k) as long as your plan allows it. Just know that there are yearly limits on your contributions. Across both plans, individuals under age 50 can contribute $22,500 annually in 2023.

If you have a traditional 401(k), there are a number of strategies to max out your 401(k) that are worth looking into. For example, it makes sense to contribute at least enough to qualify for any employer matching that your company offers. Why lose out on the “free” money your employer is willing to contribute to your retirement savings?

Catch-Up Contributions: Leveraging Them When the Time Comes

Once you reach age 50, you can make catch-up contributions to your 401(k) plan, as long as your plan allows them, which could help you save even more for retirement. In 2023, the catch-up contribution is an additional $7,500. That means, in total, individuals 50 and older could contribute up to $30,000 to their 401(k) in 2023.

Knowing about catch-up contributions when you’re in your forties could help you plan and prepare for them when you reach 50. Catch-up contributions can help you make the most of your retirement plan.

Investment Strategies for Mid-Career Savers

There are many other ways to save for retirement, even beyond the employer-sponsored 401(k) and Roth 401(k).

Some people choose to put their retirement savings in more than one type of account. This is useful if you want to set aside more than the yearly contribution limits on 401(k) plans. In that case, it might make sense to open an IRA savings account to save beyond the 401(k) limits, as long as you meet the necessary criteria.

Recommended: A Look at Traditional IRAs vs Roth IRAs

The Role of Expenses in Retirement Planning

Figuring out how much your retirement living expenses will be is important for calculating how money you’ll need to save. These are some of the things you may want to consider and budget for.

Emergency Savings vs. Retirement Savings

Your retirement savings are extremely important. However, if you don’t have an emergency fund that can cover three to six months’ worth of living expenses, consider putting that at the top of your priority list.

Why? While retirement is still likely to be years away if you’re 40 now, an emergency could happen at any time. For instance, you may be faced with an unexpected medical procedure that you’ll need to pay for if insurance doesn’t cover it all. Or your heater might break in the middle of winter and need to be replaced. If you don’t have the emergency funds to cover these things, you risk taking on debt. And that could in turn limit your retirement savings as you work to pay off that debt.

Of course, if you can afford to contribute to both an emergency fund and your retirement savings, by all means, do so.

Planning for Healthcare Expenses in Retirement

As people grow older, their healthcare needs and costs typically increase. For many, healthcare can be one of the biggest retirement expenses.

Fidelity estimates that the average person may need $157,500 to cover healthcare costs in retirement. If you have a high-deductible health insurance plan, you might want to look into a Health Savings Account (HSA), which could potentially help you save money to cover some healthcare costs.

Incorporating Home Costs Into Retirement Savings

Housing costs are another major retirement expense. You may have mortgage payments, homeowner’s insurance, and home maintenance and repairs to pay for. If you rent, you’ll have to cover your monthly rental fee plus renters’ insurance.

Additionally, where you live — the city and state — can impact how much you pay for housing. In general, living on the coasts can be more expensive. You may want to take the cost of living into consideration when you’re thinking about where you want to live in retirement.

Family and Retirement: Balancing the Present and Future

Of course, along with saving for retirement, you have present-day expenses and events to pay for as well. This includes important family milestones, such as college and a child’s wedding. Fortunately, with proper budgeting and planning, it is possible to help cover these expenses and save for retirement at the same time.

Budgeting for College Savings While Prioritizing Retirement

To keep building a retirement nest egg while saving for college for your kids, consider some college-savings plans. One good option to consider: a 529 plan that you fund with after-tax dollars. You can contribute to the plan on a regular basis, or whenever you have extra money, and family members and friends can contribute as well. For instance, instead of birthday gifts, ask loved ones to contribute to your child’s 529 instead.

Virtually every state offers a 529 plan and you can shop around to find one that has the best tax benefits and lowest costs. Open the plan as early as you can when your child is young so that the money invested has more time to grow.

Weddings and Other Major Family Expenses

If you’d like to help pay for your child’s wedding, you could put some money in a savings or investment account so that it can grow over time. If the wedding is coming up relatively soon, you could put your money into a high-yield savings account, for instance, to get a higher interest rate than you’d get from a regular savings account. If the wedding is farther in the future, you might want to invest in mutual funds or a stock index fund, which could deliver more growth.

Expert Strategies to Increase Retirement Savings

There are a number of smart ways to maximize your savings and be on track for retirement. Here are a few strategies experts advise.

Salary Negotiations and Their Long-Term Impact on Savings

If it’s been a while since you’ve received a raise, this may be a good time to ask for one. By age 40, you’ve probably developed skills that make you valuable to your employer.

If you need some incentive for negotiating for a higher salary, consider this: Even an extra $100 a week invested for the next 20 years with a 10% annual return could give you approximately $300,000 more in retirement savings.

Building a Solid Financial Foundation with a Six-Month Emergency Fund

As we discussed earlier, having an emergency fund is critical for any unexpected expenses that arise. Ideally, it’s wise to have six months’ worth of expenses saved up. That can help tide you over in case of job loss or some other significant event that affects your income.

You can open a high-yield savings account for your emergency fund to help it grow. Consider automating your savings to make sure you’re contributing to your emergency fund regularly.

Then, once you’ve reached six month’s worth, you can allocate the money you had been contributing to the emergency fund to your retirement savings.

Why Prioritizing Roth Retirement Accounts Can Pay Off

Investing in a Roth IRA can be helpful if you want to withdraw money in retirement without paying taxes on it. After-tax accounts can be appealing to individuals who plan to achieve financial independence at a younger age and retire early. Unlike qualified plans, which place penalties on withdrawing funds before a certain age, an after-tax account is a pool of money that you can withdraw from without having to worry about penalties if you access the account before age 59 ½.

Even if you wait until age 67 to retire, if you expect to be in a higher tax bracket at retirement, a Roth IRA can make sense since you won’t have to pay taxes on retirement withdrawals.

For 2023, you can contribute up to $6,500 annually in a Roth IRA. Individuals 50 and older can contribute $7,500. That said, there are income limits on Roth IRAs. The amount you can contribute starts to phase out if you earn more than $138,000 as a single tax filer, or $218,000 for married couples who file jointly.

The Takeaway

While there are conventional rules of thumb as to how much money you should have saved by 40, the truth is everyone’s path to a comfortable retirement looks different. One piece of advice is universal, however: The sooner you start saving for retirement, the better your chances of being in a financially desirable position later in life.

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).

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Nov

2023

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How Long Does a Direct Deposit Take to Go Through?

By Julia Califano | Budgeting & Goals, Financial Independence | No Comments

Is there anything worse than waiting for a check to clear? If you can relate to that (awful) feeling, it’s likely that you love direct deposit. It can be a huge convenience when you’re getting paid or otherwise receiving funds. This process often transfers money into your account almost instantaneously.

No paper checks are ever issued. The money is transferred electronically, and you can typically access that money on that same day — sometimes even before your scheduled payday.

Even with all of the financial tech available at your fingertips, like online banking and mobile apps, it can still be a drag to deposit a check.

Whether it’s trying to take a clear photo of the front and back to submit to the bank, which will deposit it pending review, or physically bringing it into a branch, these hassles are easily avoided by signing up for direct deposit.

Key Points

• Setting up direct deposit can be done in minutes, but it may take a few weeks or pay cycles for it to become active.

• The exact timeline for direct deposit to go through depends on the entity issuing the funds and your financial institution.

• Some direct deposits can be available on the same day they are transferred, while others may take one to three days.

• To determine when your direct deposit will be available, you can contact your bank or observe the timing of previous direct deposits.

• Direct deposit can offer the advantage of faster access to funds compared to waiting for a paper check to clear.

How Does Direct Deposit Work?

Direct deposit allows someone to electronically send money from their bank or financial institution directly into someone else’s.

The money is sent via the Automated Clearing House (ACH) network, which transfers money between banks and financial institutions.

ACH transfers eliminate the need to send physical checks or cash. These transfers can also happen almost instantaneously because they’re digital and you don’t need to worry about things like proving that a check is legitimate. That means direct deposit can be faster and more convenient.

Most employers now offer direct deposit as an option, and, in some states, even require it. Employers typically find direct deposit convenient because they can process payroll much faster without having to deal with issuing, signing, and mailing checks.

Direct deposit is a popular way to get your paycheck, but that isn’t the only use. It may also be the way you get a tax refund, Social Security benefits, unemployment benefits, investment-related dividends, as well as other payments.

How Do You Set Up Direct Deposit?

Setting up direct deposit is likely to be very simple — and fast. If you’re wondering how long it takes to set up direct deposit, all you have to do is fill out a direct deposit authorization form. Typically, this just takes a few minutes, provided you have the right information on hand (such as bank account and routing numbers; more on that below).

This usually happens on your first day of work, but you can often choose direct deposit or change your information later on. Some companies handle this process entirely online and some use a third party to sign you up.

When setting up a direct deposit, especially at a new job, you’ll want to remember to have the following information available to make it as simple as possible:

• Your bank account number(s) and type of account

• Bank routing number

• Bank name and address

• Whether your putting money in a checking or savings account

• How much of your paycheck you want to deposit in the account (you may want to split the deposit; read on for details)

• A blank, void personal check

Much of this information can all be found on a personal check, by checking your banking website or app, or by contacting your financial institution directly.

Splitting Your Direct Deposit

If you want to split your paycheck between multiple accounts, you can typically add each account to the direct deposit form and specify how much of your pay should go into each. Most forms ask what percentage of your pay goes into each, instead of just a dollar value. You may need to fill out a new form for each account.

For example, you might designate a set amount of money to move automatically into whatever kind of savings account you have, while leaving what you know you’ll need in checking for bills and smaller payments.

It’s up to you, of course, to determine how much of your paycheck to save; many financial experts recommend 10%.

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How Long Does It Take to Get Direct Deposit?

Signing up for direct deposit can be done in minutes. However, it may not take effect for a few weeks or even more because the payor has to confirm your bank account information.

With your employer, direct deposit may take one or two pay cycles to become active. During that time, you may receive a paper check as payment instead.

In some cases, an employer may hire an employee at the start of the pay cycle so that the direct deposit authorization process is done just in time for the new employee to receive his or her first payment via direct deposit.

Is Direct Deposit Instantaneous?

How long does it take direct deposit to actually go through? Exactly when you will have access to your direct deposit income will depend on the entity issuing the funds and perhaps your financial institution that receives the funds.

For example, if your employer uses payroll software to process your paycheck and send the transfer, they’ll set a pay date, which might be a day or two before your regular payday.

That’s the date the funds will be transferred into your bank account, and you can typically access the funds by the end of that day.

That said, other direct deposits may process on a different timeline. The funds could take one to three days to become available. To learn how long direct deposits take to post to your account, you can contact your bank directly, or watch to see what time of day the first few direct deposits come into your account.

Advantages of Direct Deposit

Receiving your paycheck or other income via direct deposit can simplify your life.

You won’t have to worry about waiting for a check or making time to take the check to the bank for deposit. And, you typically have access to your money sooner, since you don’t have to wait for a check to clear.

Direct deposit also makes it easier to stay on top of your personal finances because you know exactly when money is coming into your account.

This accuracy can help you manage your money and work towards short-term financial goals, such as paying all your bills on time or saving for an upcoming expense.

If you know when you have access to your paycheck, for example, it’s possible to schedule your other bills or an automatic transfer to your savings account soon after the direct deposit is scheduled.

Other advantages of direct deposit include:

• Your bank might waive your account maintenance fee if you receive regular direct deposits.

• It reduces the risk of check fraud or identity theft from a lost or stolen check.

• You can’t lose or misplace the funds.

• Electronic records don’t clutter draws or fill file cabinets.

• You can easily track your paychecks and make sure none have been missed, since there is an electronic record of each payment in one place.

The Takeaway

Direct deposits are a convenient, electronic way to receive funds. This process is typically used when an employer, government agency, or other third party instructs its financial institution to digitally deposit funds into your spending or savings account on a specific date.

Direct deposit eliminates the hassle of depositing paper checks and, once the funds are transferred into your bank account, they are available to you, often almost instantaneously.

Direct deposit can make it easier to keep track of your finances, pay bills on time, and avoid negative balances and overdraft fees.

Looking for more ways to simplify your financial life? Consider opening a bank account online with SoFi. When you open our Checking and Savings with direct deposit, you can earn a hyper competitive up to 3.00% APY — and never have to worry about fees or overdraft charges. Plus eligible account holders have access to their paycheck up to two days early.

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3 Great Benefits of Direct Deposit

It’s Faster

As opposed to a physical check that can take time to clear, you don’t have to wait days to access a direct deposit. Usually, you can use the money the day it is sent. What’s more, you don’t have to remember to go to the bank or use your app to deposit your check.

It’s Like Clockwork

Whether your check comes the first Wednesday of the month or every other Friday, if you sign up for direct deposit, you know when the money will hit your account. This is especially helpful for scheduling the payment of regular bills. No more guessing when you’ll have sufficient funds.

It’s Secure

While checks can get lost in the mail — or even stolen, there is no chance of that happening with a direct deposit. Also, if it’s your paycheck, you won’t have to worry about your or your employer’s info ending up in the wrong hands.

FAQ

Is direct deposit instant?

While direct deposit is intended to be instantaneous, the exact timeline will vary with who is sending you the money and the system they use to transfer funds. It could take one to three days to clear.

Why hasn’t my direct deposit hit yet?

Direct deposit funds are often available almost instantaneously, but sometimes the transfer takes longer to go through and be processed by the receiving bank. Direct deposits can take between one and three days. Contact your bank and/or the payor if your funds have not arrived when due.

Why does direct deposit take 2 days?

While direct deposits are often available immediately, in other cases the funds can take a couple of days to hit your account and be accessed. This may be due to the software the payor is using or your bank’s way of processing and clearing the direct deposit.