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You’ve probably seen the phrase “ACH routing number” on your bank statement, and wondered what exactly it is anyway. It shouldn’t be as hard to figure out as Wordle, so let us explain: An ACH number is a nine-digit number sequence that banks and credit unions use to move funds electronically within their financial network.
Since ACH numbers play a vital role in banking, let’s take a closer look.

What is an ACH Routing Number?

An ACH number is an ID code that banks use. It’s an important bit of data that directs funds being sent electronically between financial institutions. You might think of it as akin to GPS coordinates that get money where it needs to go.

The acronym ACH stands for the Automated Clearing House network and enables money to move across a network of thousands of institutions, quickly and securely. ACH numbers were developed in the 1970s, when the volume of checks threatened to slow down the banking system. This was the beginning of a big shift towards electronic banking. Today, the ACH network is a major financial hub, akin to the Grand Central Station or LAX of money transfers.

Note the word “clearing” in “automated clearing house.” An ACH routing number helps clear funds for quicker transfer. How fast is an ACH transfer? It often happens the same or the next business day. That tops paper checks, which can take longer to mail, deposit, and clear.

Here are a couple of examples of how ACH numbers ease your daily life: A bank uses an ACH routing number when you authorize autopay for a loan or service provider; that’s an ACH debit. When your employer puts your pay directly into your bank, that’s an ACH credit. Both of these can be seamless, speedy transactions.

Recommended: What is ACH and How Does it Work?

How to Find Your ACH Routing Number

Let’s say you want to sign up to pay your homeowner’s insurance automatically every month, or you need to enroll in a P2P app to send the money. You may not be certain about what those required ACH digits are. To find your bank’s ACH number, you have a couple of options, which we’ll share with you here. It’s actually quite easy to find them once you know where to look.

Checkbook

Banks typically print the ACH routing number right on your check. You may be used to simply calling it your bank’s routing number. It’s the nine-digit number sequence at the bottom, next to your account number.

Bank Phone App or Bank Website

Many banks provide account details, including routing numbers, right on their phone apps and websites. Log in with your user ID and password, click on your bank account, and search for details. (But please, don’t do this at, say, a bustling coffee shop, where your connection may be public.)

Internet

Another simple way to find your ACH routing number is to use your search skills. Put “ACH number” and the name of your bank into a search engine, and you should be able to find it. Keep in mind that some large banks may have multiple regional ACH numbers; make sure you are snagging the one associated with your location.

What is an ABA Routing Number?

An ABA (American Bankers Association) routing number is the first number sequence that appears on the bottom left of your paper checks. It identifies your bank, which likely holds very many accounts, while your account number indicates your personal financial product. ABA numbers have been around for over 100 years, facilitating check processing.

Given that your ABA routing number identifies your bank, you may find that it’s the same if you have both checking and savings accounts at a single financial institution. Your account numbers will differ, but that routing number is constant.

ABA vs. ACH Routing Numbers: The Differences

So, you may ask, how are ABA and ACH routing numbers different? The truth is they are likely the very same number. Strictly speaking, the ABA number is used in processing transactions with paper checks, while ACH digits are used in electronic funds transfers. It’s a vital code as money is moved electronically (often in batches) among financial institutions. But today, by and large, ABA and ACH numbers are one and the same.

Use Cases

Let’s look at how the ABA vs ACH routing number might be used in your typical banking life. Yes, they are probably the same string of digits, but here’s how it may help to think of them:

•   To set up a payroll direct deposit or, for instance, a monthly automatic debit of your mortgage payment, you will need to provide the ACH number, because these are electronic transactions.

•   If you were making a one-time payment to, say, a doctor’s office, and they asked you the account and routing number of the check, you would look at the bottom of your paper check and read them off those digits.

History

ABA numbers have been in use since 1910, which was quite a different era. These digits allow for checks to draw funds from one account and deposit them in another. More than a half century later, in the late 1960s, a group of California banks banded together to find a speedier alternative to check payments. They launched the first ACH in the U.S. in 1972; that was a key milestone in the evolution of electronic banking.

Numerical Differences

In the past, ABA and ACH numbers were slightly different, with the first two digits varying. Today, they are typically identical. Your bank’s ABA routing number and ACH routing number are likely to be the same.

The Takeaway

An ACH (automated clearing house) number is a routing code: nine digits a bank uses to transfer funds electronically in a fast-paced web of banks. The ACH system has been used for decades and makes life easier by keeping transactions safe and speedy. While ACH numbers used to be different from ABA routing codes (the kind traditionally used on checks), today these two strings of digits are usually exactly the same. To find your ACH number, just look at your checks, your bank’s app or website, or use a search engine. It’s that easy!

Speaking of easy, allow us to tell you a bit about banking with SoFi. We make storing, spending, and managing your money super simple with our linked Checking and Savings accounts. Sign up with direct deposit, and you’ll pay no fees while earning a competitive APY.

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

Which routing number do I use to transfer money?

To transfer funds domestically, you’ll use the ACH routing number and your account number. International wire transfers, however, may require different codes.

What is the difference between ACH and direct deposit?

ACH is a system of moving funds electronically between banks. Direct deposit is a specific kind of transaction that uses this ACH network. It allows your employer to send your paycheck directly into your bank account.

Should I use ACH or the wire routing number?

Which routing number you use will depend on the kind of transaction you are conducting. If you are moving money around domestically, the ACH and wire routing number may be the same; check with your bank. If, however, you are wiring money to a foreign account, you will probably need to use SWIFT codes instead to complete the money transfer.

Do I use my ACH number for direct deposit?

Yes, you need to provide your employer with your ACH number as well as your bank account number to set up direct deposit.

What is ABA on a wire transfer?

When you arrange a wire transfer, the banks involved will need to use a routing number. If this is a domestic transfer of money, your ABA/ACH routing number may or may not be used; check with your bank to be sure. A different wire routing number might be required. If you are sending or receiving money internationally, a SWIFT code will be used instead. These codes help ensure the funds get to the right account.

What does ABA stand for?

ABA stands for the American Bankers Association, an industry organization.

What is the difference between the ABA and wire routing number?

These may be the same nine-digit number. The ABA code is the series of numerals on your check, next to your account number. You can check with your bank representative or with its app to see if the wire routing number is the same or if you need a different series of numbers. A wire routing number will usually be different when you are sending funds internationally; in that instance, you’ll need your bank’s SWIFT code.

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Photo credit: iStock/fizkes

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

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

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

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

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

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

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

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

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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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.

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.

Recommended: How Long Does It Take a Mobile Deposit to Clear?

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%.

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.

Recommended: What to Do If Your Check Is Lost or Stolen?

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.

Sign up with SoFi: It’s the smarter way to bank.

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.

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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.

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Setting financial goals is an important step toward becoming financially secure.

If there is something you hope to achieve in the not-too distant future — say, to buy a car or make a downpayment on a home — it may not be enough to simply hope you get there. Making a plan can significantly increase the likelihood of you meeting the goal.

Going day to day without any financial goals in place can cause you to spend too much, then come up short when you need money for unexpected bills and have to rely on high interest credit cards.

Short-term financial goals are generally things you want to achieve within roughly one to three years. They can be singular goals, and once reached you are done. Or, they might be incremental steps to much larger financial goals (such as funding your retirement, paying off a mortgage, or paying for a child’s college tuition).

Setting and reaching short-term money goals can also give you the confidence boost and foundational knowledge you need to achieve larger goals that will take more time.

While everyone’s goals are different, here are some short-term financial goals you may want to start working towards.

What Are Short-Term Financial Goals?

Short-term financial goals are typically achievements you want to attain within the next couple of years. Unlike long-term financial goals (retirement, paying off a mortgage), they represent things you want to check off your money management list in the near term. Of course, everyone’s short-term aspirations will differ, but some financial goal examples include:

•   Paying off credit card debt

•   Saving for a vacation

•   Saving for a wedding

•   Stashing away money in an emergency fund.

Read on to learn more about some of the most common of these short-term financial goals.

Building an Emergency Fund

Often, a short-term financial goal might include saving for an emergency fund. This is often considered to be a smart financial goal example.

An emergency fund is cash savings that can cover three to six months’ (or more in some cases) worth of living expenses. The idea is that, just in case something unexpected comes up, such as a medical bill, job loss, or a major car or home repair, you can afford it without resorting to high-interest forms of funding.

Knowing that you have money in the bank in case of an emergency can bring peace of mind and also make it easier to work toward your other financial goals.

An emergency fund can also act as a buffer to keep you out of debt, since you’ll be less likely to have to rely on credit cards should something unexpected happen.

You can build an emergency fund by putting some money towards it every month, or you make it happen more quickly by funneling a large payment, such as tax refund or bonus, right into this fund.

Tracking Your Spending

Getting a sense of how much you are actually spending each month is a critical step in working towards both short-term and long-term financial goals.

You can do this by tracking your expenses for a month or so, then setting up a realistic budget to help you prioritize your spending, rather than spending haphazardly (which can lead to trouble when it comes time to pay bills and/or having any money leftover for savings).

You can track your spending by using a budgeting app. SoFi Relay, for example, allows you to connect all of your accounts on one dashboard and then categorizes your credit card and debit card transactions by budgeting categories.

You can also create a budget the old-fashioned way by going through your bank statements, bills, and receipts from the last few months and categorizing each expense with a spreadsheet or on paper.

Once you see where your money is actually going, you may discover some surprises (such as $200 a month on lunches out) and also find places where you can easily cut back. You might decide to bring lunch from home a few more days per week, for example. Or you might want to get rid of rarely used subscriptions or streaming services or ditch the gym membership and work out at home.

This money you free up can then be redirected towards your savings goals, like creating an emergency fund, buying a house, or funding your retirement

Paying Down Credit Card Debt

Another important financial goal example is paying down credit card debt. If you carry a balance, you may want to make paying it off one of your top short-term financial goals. The reason is that the interest on credit card debt can be so costly, it can make achieving any other financial goals much more difficult.

One strategy for paying off credit card debt is what’s known as the avalanche method, which involves paying the minimum on all but your highest-rate debt. You then put extra money toward the card with the highest interest debt. When that one is paid off, you would roll the extra payment to the card with the next-highest interest rate, and so on.

Another option is the snowball method, in which you pay the minimum on all cards, but use extra money to pay off the debt with the smallest balance. When that’s paid off, you move to the next smallest debt and so on. This can give you a sense of accomplishment that helps keep you motivated.

Or you might consider consolidating your debt by taking out a personal loan to pay off all of your cards. Personal loans usually offer lower interest rates than credit cards, and having only one payment each month can help simplify the payoff process.

Paying Off Student Loans

Student loans can be a drag on your monthly budget. Paying down student loans, and eventually getting rid of these loans, can free up cash that will make it easier to save for retirement and other goals.

One strategy that might help is refinancing into a new loan with a lower interest rate. You can check your balances and interest rates across your federal and private loans, and then plug them into a student loan refinancing calculator to see if refinancing offers an advantage.

It’s important to keep in mind, however, that not all refinancing options are created equal. There are scores of bad actors on the internet who might promise to get rid of all your debt but will only damage your credit score. If you do refinance your student loans, you’ll want to make sure you’re working with a reputable lender.

You may also want to keep in mind that refinancing federal student loans with a private lender could mean losing some of the benefits associated with federal student loans, such as income-based repayment or deferment if you fall on hard times.

If you have multiple student loans and won’t benefit from consolidating, consider using the avalanche or snowball method of repayment (described above) to pay them off faster.

Contributing to Your Retirement Fund

If you’re not yet saving for retirement, a great short-term financial goal may be to start doing so. Or, if you’re putting in very little each month, you may want to work on upping the amount.

If your employer offers a 401(k) and gives matching funds, for example, it’s normally wise to contribute at least up to your employer’s match. You can then start increasing your contributions bit by bit each year.

If you don’t have access to a 401(k), you may be able to set up an IRA online and start funding your retirement there. (Keep in mind that there are limits to how much you can contribute to a retirement per year that will depend on your age.)

While retirement is a long-term vs. short-term, financial goal, taking advantage of this savings vehicle can reduce your taxes starting this year. Here’s why: Money you put into a retirement fund is taken out of your income before taxes are calculated.

Even more importantly, starting early can pay off dramatically down the line. Thanks to the power of compounding interest (when the money you invest earns interest, and that interest then gets reinvested and earns interest as well), monthly contributions to a retirement fund can net significant gains over time.

Saving More Money

If you already have an emergency fund, you may want to start thinking about what you are hoping to buy or achieve within the next several years, and also beyond.

This could be anything, including buying a new high-tech toy, going on a great vacation, making a downpayment on a home, or doing a major renovation.

Saving up for this goal, rather than paying for it with a credit card, helps you avoid paying more for those things in the form of high-interest payments.

For financial goals you want to reach in the next few months or years, consider putting this money in a bank account online that earns more than a traditional savings account, but allows you access when you need it. Options may include a money market account or an online savings account.

For longer-term savings, you may want to look into opening a brokerage account.

This is an investment account that allows you to buy and sell investments like stocks, bonds, and mutual funds. A taxable brokerage account does not offer the same tax incentives as a 401(k) or an IRA (individual retirement account), but is much more flexible in terms of when the money can be accessed.

What are S.M.A.R.T. Financial Goals?

In addition to the short-term financial goals examples and guidance you’ve just learned, there’s another way to think about this topic: using the acronym S.M.A.R.T. This system can help you both with identifying and achieving your goals. Here’s what this stands for and how considering your financial aspirations through this lens can be helpful:

•   Specific: A goal should identify exactly what you are saving for, whether that’s paying off credit-card debt or buying a used car.

•   Measurable: How much is your goal? How much do you need to save? Perhaps your credit card balance is $5,673. That would be your measurable goal.

•   Attainable: Make sure your goal is realistic (you don’t want to attempt to pay off that credit card debt next month) and develop strategies to achieve it, such as working on alternate Saturdays to bring in more money (a benefit of a side hustle).

•   Relevant: Check that your goal really matters to you and isn’t just something you’re doing to, say, keep up with your friend group. Do you really need to save towards a potentially budget-busting vacation?

•   Time-bound: Set “by when” dates for your goals. This helps to keep you accountable. If you want to save $3,600 for an emergency fund within a year, figure out how you will come up with the $300 per month to put aside.

Using the S.M.A.R.T. method can help you crystallize and achieve your short-term financial goals.

The Takeaway

While day-to-day spending tends to grab most of our most attention, it is important to also focus on bigger goals.

Short-term financial goals are the things you want to do with your money within the next few months or years. Some key short-term goals include setting a budget, starting an emergency fund, and paying off debt.

From there, you may want to start saving for things you want to buy or do in the relatively near future, and also start thinking about investing your money to help you build wealth over time.

SoFi can help give you a boost in reaching your money goals. When you open an online bank account with us, you’ll have an array of benefits that help you bank smarter. You’ll be able to spend and save all in one place, earn a competitive APY, pay zero account fees, and access the Allpoint network of 55,000+ fee-free ATMs globally.

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 are the 7 key components of financial planning?

Financial planning for your personal goals can be thought of as involving seven key components: Creating and following a budget, making sure you have access to cash (such as an emergency fund), saving and paying for large purchases (a car or home), managing your risk (avoiding high-interest debt, perhaps), investing your money to grow it, building a retirement fund and doing estate planning, and keeping track of your financial life and communicating about it with those closest to you.

How do you write a 5 year financial plan?

If you are creating a personal 5 year financial plan, it’s wise to include these elements: Save for goals like an emergency fund, a down payment on a house and retirement while paying off high-interest debt. You’ll likely want to create a budget that allows you to understand your cash flow and put a chunk of money towards savings (many experts recommend between 10% and 20%) every month.

How do you create a short-term financial goal?

To create a short-term financial goal, identify what you want and how much money you need. Then, looking at your budget and seeing what cash you have available, see how long it will take to save up enough money. For instance, if you want to have $2,400 in a travel fund from now, you will need to put $200 a month aside. Check your cash flow and see where you can free up funds (maybe less takeout food and fancy coffees, for starters) to meet this goal.

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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.

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.

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If you’re lucky enough to find yourself in possession of a bundle of cash that isn’t immediately needed to pay bills, you have some thinking to do. How to use that money? Whether it came your way via an on-the-job bonus, an inheritance, or an unexpected refund, you have the opportunity to put it to work for you in a variety of ways.

Instead of going on a shopping spree, you could deploy the funds to improve your financial situation and build wealth. Options include paying down debt, contributing to retirement goals, and beyond. Read on to learn the full story.

The Opportunity of Extra Money

At some point, you may find some extra money heading your way. Perhaps you get a bonus for wrangling a complicated project at work. Or you didn’t realize that you’d overpaid your taxes one year. Or maybe an inheritance comes your way.

When funds turn up that you weren’t expecting, it may be tempting to buy a bunch of cool items you’ve been admiring or to take friends and family out to a lavish meal or away for a weekend. But then, once that cash is gone, there’s no getting it back.

Instead, you might look at the money as a means to enrich your financial standing. (Or use most of it that way, and go shopping with a small amount of it.)

A windfall can be a once-in-a-blue-moon opportunity to pay off debt or plump up your emergency fund. It can help you boost your retirement savings or kick your savings for a future goal into high gear.

Yes, it takes discipline to put that money to work vs. splashing out with it at your favorite store. But doing so can have a long-term positive impact on your finances.

1. Build a Solid Emergency Fund

If your emergency fund is low (or nonexistent), you might use your new windfall to build it up.

Having an emergency fund gives you a financial cushion, along with the sense of security that comes with knowing you can handle a financial set-back (such as a job loss, medical expenses, or costly car or home repair) without hardship.

Having this buffer can also help you avoid having to rely on credit cards for an unexpected expense and then falling into a negative spiral of high interest debt.

How Much to Save in an Emergency Fund

A general rule of thumb is to keep three to six months’ of monthly expenses in cash as an emergency fund. Two-income households may be able to protect themselves with three months’ worth of savings. If you’re single, however, you may want to aim closer to having six months’ worth of living expenses saved up.

Consider keeping your emergency fund in a separate high-yield savings account, such as a money market account, online saving account, or a checking and savings account. These options typically offer higher interest rates than a standard savings account, yet allow you to access the money when you need it.

2. Tackle High-Interest Debt

While mortgage loans and car loans tend to offer lower interest rates since they’re secured by collateral, the same can’t be said of unsecured debts, such as credit card balances, student loans, and personal loans. Credit card debt can be especially hard to pay off, given that the current average interest rate is over 20%.

If you carry any credit card or other high-interest debt, you might want to use your windfall to jumpstart a strategic debt payoff plan, such as the debt avalanche or debt snowball method, in order to pay it off as quickly as possible.

Strategies for Paying Down Debt

The avalanche method involves ranking your debts by interest rate. You then put any extra money you have towards paying off the debt with the highest interest rate (while continuing to pay the minimum on other debts). After the balance with the highest interest rate has been completely paid off, you move on to the next highest interest-rate balance (again, putting as much money as you can toward it), and then move down the list until your debt is repaid.

With the snowball method, you focus on paying off your smallest debt first (while paying the minimum on your other debts). Once that balance is paid off, you take the funds you had previously allocated to your smallest debt and put them toward the next-smallest balance. This cycle repeats until all of your debt is repaid.

Using your extra cash to pay off debt has added benefits. You may build your credit score as your credit utilization ratio (the amount of available credit you’ve used vs. your credit limit) goes down.

In addition, once you clear your debt, you won’t have to budget for debt payments anymore, which is essentially getting extra cash all over again.

3. Invest in Retirement Accounts

Here’s another idea for what to do with extra money. You might use it to grow your retirement accounts. There are a couple of options to consider here.

401(k) and Employer Match

Does your employer offer a 401(k) with matching contributions? If so, this can be a powerful tool to help you save for retirement.

Not only does a 401(k) help lower your taxes (since this money comes out of your salary before taxes are deducted), your employer’s matching contributions are essentially free money and can provide a nice boost to your retirement savings.

If you’re not currently taking full advantage of matching funds, you may want to adjust your contributions to help ensure you’re making the most of this benefit. And if a windfall comes your way, you may want to deposit it right into your account.

Start or Fund an IRA

What do you do if you don’t have a company plan or you’ve hit your contribution limit there? You might consider using your new influx of cash to open up (or add to) an individual retirement account (IRA).

While retirement may feel a long way off, starting early can be a smart idea, thanks to the magic of compound earnings (that’s when the money you invest earns interest/dividends, those earnings then get reinvested and also grow).

There is also a possible immediate financial benefit to investing in an IRA: Just as with a 401(k), your IRA contributions can possibly reduce your taxable income, which means that any money you put in this year can lower your tax bill for this year.

You’ll want to keep in mind, however, that the federal government places limitations on how much you can contribute each year to retirement funds.

Recommended: IRA vs. 401(k): What’s the Difference?

4. Explore Additional Investment Options Money

A little windfall can offer a nice opportunity to buy investments that can possibly help you create additional wealth over time.

Stock Market Investments

For long-term financial goals (outside of retirement), you might consider opening up a brokerage account. This is an investment account that allows you to buy and sell investments like stocks, bonds, and funds like mutual funds and exchange-traded funds (ETFs).

A taxable brokerage account does not offer the same tax incentives as a 401(k) or an IRA but is much more flexible in terms of when the money can be accessed.

Though all investments come with some risk, generally the longer you keep your money invested, the better your odds of overcoming any down markets. Your investment gains can also grow exponentially over time as your earnings are compounded. Worth noting: Past performance doesn’t guarantee future return, and while your money may be insured against broker-dealer insolvency, it is not insured against loss.

While investing can seem intimidating, a financial planner can be a helpful resource to help you create an investment strategy that takes into consideration your goals and risk tolerance.

Real Estate Investments

Another option might be to look into real estate investments. One possibility: REIT investing, which stands for Real Estate Investment Trust. This is a kind of company that operates or owns income-generating properties.

You can buy shares of REITs as a way of investing in different aspects of the real estate market, and you can do so for small amounts vs. buying an actual property. In this way, REITs can make it possible for people to affordably invest in real estate projects, including those involving large-scale construction.

5. Save for Future Goals

Still wondering what to do with extra money? If you already have a solid emergency fund and your retirement account is growing nicely, you may want to think about what large purchases you are hoping to make in the next few years. That could be buying a new car, accruing a down payment for a home, doing a renovation project, or going on a family vacation.

A lump sum of cash can be a great way to jumpstart saving for your goal or, if you’re already saving, to quickly beef up this fund.

Short-Term vs. Long-Term Goals

When thinking about goals, it can be helpful to divide them into short-term goals and long-term ones. Typically, short-term goals are ones you want to achieve within a year, while long-term ones are those that have a longer runway to save.

So a short-term goal might be saving for a vacation next year, and a long-term one could be accumulating enough money for a down payment on a property.

Creating a Savings Plan

For things you want to buy or do in the next few months or years, consider setting up multiple bank accounts so you have a separate savings account that is safe, earns competitive interest, and will allow you to access the money when you’ve reached your goal.

Some good options include a high-yield savings account at a bank, an online savings account, a checking and savings account, or a certificate of deposit (CD).

Keep in mind, though, that with a CD, you typically need to leave the money untouched for a certain period of time or else pay a penalty.

The options directly above may also be a good place to put your extra money as you save up for a longer-term goal. But you might also look into whether there are suitable investments (see #4 on this list) that involve a bit more risk but offer potentially higher reward.

The Takeaway

Wondering what to do with a lump sum of extra money is a good problem to have.

Some options you might want to consider include: setting up an emergency fund, paying down high-interest debt, starting a savings account earmarked for a large purchase, or putting the money into your retirement fund or another type of long-term investment.

If you are looking for a place to bank your funds for a future goal, compare account features, such as the annual percentage yield (APY) offered and fees assessed.

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.

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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.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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In your financial life, overdrafting your bank account is bad enough; no one likes to feel as if they’ve run out of money. But being charged an overdraft fee can dig you even deeper into the hole.

That’s why it can make sense to take some simple steps to avoid overdraft fees. You may be able to get a reprieve by contacting your bank or by linking accounts, among other moves.

In this guide, you’ll learn more about overdrafting and the charges involved, plus smart ideas for how to avoid overdraft fees.

What Is an Overdraft Fee?

If you pay out more than is in your bank account, your bank may go ahead and process the payment you’ve initiated, taking your balance into negative territory. They will likely charge you for this privilege (that is, letting you spend more than you have), and that is an overdraft fee.

How Much Do Overdraft Fees Cost?

Overdraft fees aren’t cheap. The cost can vary somewhat depending on the bank or financial institution, but they generally run around $35.

It’s important to note that the overdraft fee is generally per overdraft. So if you overdraft your account and don’t realize you overdrafted, you might make multiple purchases and incur a fee on each one.

And these fees can add up quickly. At $35 a pop, just three small purchases could set you back over $100.

Some banks may also charge extended overdraft fees (sometimes called continuous or sustained fees) if your account doesn’t go back into positive territory within a few days.

It’s no wonder that Americans paid $7.7 billion in overdraft and the related non-sufficient funds (NSF) fees each year.

However, a bit of hope: Over the last year or two, some banks are beginning to lower their overdraft fees. For instance, Bank of America reduced their fees to $10, and some financial institutions, often online banks, don’t charge any fees for, say, the first $50 of overdraft.

10 Ways to Avoid Overdraft Fees

Next, consider these ways to avoid overdraft fees. These strategies can keep overdraft fees from accumulating — or ever being charged in the first place.

1. Keep an Eye on Your Balances

How often do you monitor your balance typically? It’s a good idea to make a habit of checking your accounts weekly or even more frequently to make sure your balances aren’t too low.

This can be done quickly online, via mobile app, when you take money out of the ATM, and/or by calling the bank and getting an automated update on your account.

2. Maintain a Cushion

One simple way to avoid overdraft fees is to keep a cash cushion in your checking account. A cushion means you have a little more stashed in your account than you typically spend each month in order to cover unexpected or forgotten charges.

This cash cushion can prevent overdraft. You might even add it as an item on your budget to make sure it gets replenished if you use it up.

3. Set up Balance Alerts

An easy way to help avoid unexpected overdrafts, plus those high overdraft fees, is to set up some automatic alerts.

•   One that is particularly helpful is a low balance alert, which means you will be notified (by text, email, or cell phone notification) whenever your balance falls below a certain amount.

You could then immediately transfer money from savings, or hold off on making any purchases until another paycheck comes in.

•   Another useful alert you may be able to set up is the overdraft alert. This means you would be notified whenever you overdraft your account.

This alert won’t help you avoid the initial overdraft fee, but it could stop you from continuing to make payments and incurring more overdraft fees.

4. Opt Out of Overdraft Coverage

It is possible to prevent your bank from using the automatic overdraft. You just need to opt out of overdraft coverage.

Customers typically have to “opt-in” to a bank’s overdraft protection program, which many do without thinking much about it when they open their accounts.

This gives the institution permission to clear a transaction even if there is not enough money to cover it in the account. If you’re unsure about whether you’re enrolled in an overdraft program when you opened your account, you can contact your bank to find out whether you have this coverage or not.

There are pros and cons of overdraft coverage. If you have overdraft coverage, you may want to consider opting out. Without overdraft coverage for debit card purchases and ATM withdrawals, you will not be able to overdraft.

Instead, if you try to withdraw more than you have in the account, your charge will simply be declined — no money will be withdrawn from your account, and no fees will be triggered. This may help some people stay more mindful and accountable about their spending.

Keep in mind, though, that opting out of overdraft coverage programs typically does not protect you from fees charged for bounced checks.

5. Link to Another Account

Next on the list of how to avoid overdraft fees: Connect your accounts.

Your bank or financial institution might offer an overdraft protection service that is different from overdraft coverage. This service, which typically involves signing a contract to set up, will link your checking account to another account at the same institution.

Then, in the event that there’s not enough cash in your checking account to cover a transaction, the needed money would then be transferred from the linked account to cover it.

It’s important to remember, however, that some savings accounts have a limit of six withdrawals per month. Also, there may be a fee involved for the funds transfer, but these charges are typically lower than overdraft fees.

Another perk of overdraft protection is that it can help you avoid the awkwardness of having your transaction denied.

Recommended: Can You Overdraft Your Savings Account?

6. Be Careful About Where You Use Your Debit Card

Here’s another way to avoid incurring overdraft fees:

•   You may want to use something other than your debit card to check into a hotel or rent a car. These companies may put a hold on your card equal to or sometimes greater than the full amount of your bill.

In this case, money wouldn’t actually be withdrawn from your account, but it also wouldn’t be available for you to use. If you use your debit card to make another purchase and don’t realize that the hold is tying up your money, you may put yourself at risk for overdrafting.

If you’re planning to use your debit card to book a hotel or rent a car, you might want to check company policies in advance.

•   You may also want to avoid using your debit card to make lots of small purchases. These might be harder to keep track of and could add up quickly, making it more difficult for you to know how much money is flowing out of your account.

If you lose track of your spending, this too could put you more at risk for overdrafting.

7. Use Prepaid Debit Cards

Another tactic for avoiding overdraft fees is to do your spending with prepaid debit cards. These cards are often branded with a credit card logo and can be bought in a variety of sums. They come preloaded with that amount of money, and you spend until the cash value is gone. In this way, overdrafting isn’t a possibility. This might help some people stick to their budget.

8. Schedule Payments Carefully

You might also eyeball when payments are due, and see how that dovetails (or doesn’t) with your paycheck schedule. For instance, you might be more likely to overdraft your account if your credit card payment is due a couple of days before your paycheck hits. If that’s the case, you might try contacting your credit card issuer and see if they could move your due date slightly to better accommodate your cash flow. Many companies will do that.

9. Use Mobile Banking Apps

Here’s one more way to avoid overdraft fees: Use a mobile bank app, which can let you see your balance, pending payments, and spending in one click glance at your mobile device.

This can make it easy to eyeball how your money looks and avoid overspending.

10. Consider a Bank With No Overdraft Fees

Some banks are recognizing what a pain point overdraft fees can be for consumers. You may find that some are lowering their charges, and others are actually providing fee-free overdraft coverage. This may be limited to a certain amount (such as covering the first $50 of an overdraft) and may require the customer to get back to a positive balance within a certain period of time (say, until your next direct deposit hits). It can be wise to shop around for this feature; you may find it more often at online vs. traditional banks.

What to Do If You Overdraft

If you overdraw your account, here are some steps to take:

•   The best first step is generally to transfer money into the account right away. You might still be able to prevent an overdraft fee.

You may then want to see if your provider has a daily cutoff time or deadline for adding money to an account to correct a negative balance that same day to avoid fees.

Even if you miss the cutoff, transferring money into the account soon can prevent other fees. That’s because leaving a balance negative for several days can sometimes result in an extended overdraft fee.

•   If you are charged an overdraft fee, however, that doesn’t automatically mean you are stuck paying it. It doesn’t hurt to negotiate to try to have the fee reimbursed.

You can try to get overdraft fees waived by calling the bank and politely asking if they will remove the charge—if it’s your first offense, you might prevail. You may also want to ask your bank if it has a formal forgiveness program. Some institutions have policies to waive the first fee charged each year or if a customer is experiencing economic hardship.

The Takeaway

Overdrafting is when you try to spend more money from your checking account than you actually have in that account. Banks will often let your charge go through instead of declining it, but then will charge you an overdraft fee that can be around $35. These fees can add up quickly, especially if you don’t realize you overdrafted your account and continue to make purchases.

But there are a few simple ways to avoid hefty overdraft fees, such as opting out of overdraft coverage, setting up an automatic low-balance alert, linking your accounts, keeping a little cushion in your account, or banking where you get a level of no-fee overdraft coverage.

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.

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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.

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