09/17/2020

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Personal Finance Help Center

Welcome to SoFi’s Personal Finance Help Center

Welcome to SoFi’s personal finance help center. While you don’t need to be an expert, it is important to have a good foundational knowledge on personal finance. Start exploring the information below to help you make informed and healthy financial decisions.

Money Management Basics

When people think of money management, a few important tactics always come to mind, including setting financial goals, creating a budget, tracking spending, and managing debt. Before getting in-depth into each of those strategies here are a few articles to give you a good baseline knowledge on money management and personal finance.

Establishing Financial Goals

One of the most important steps to get your finances on track is to set your financial goals. By understanding what is important for you and your money, you can then lay out what you want to save for and how much you want to save. Not everyone will have the same financial goals—and that’s okay. If you don’t know where to start, here are some common financial goals to consider.

Building an Emergency Fund

Unexpected expenses happen all of the time. Whether it’s car maintenance, a medical bill, or home repair costs, it’s important to have extra cash on hand to cover these bills. If you don’t already have an emergency savings fund, it may be a good idea to start with this as your first financial goal. Consider setting aside three to six months worth of expenses for this fund. That way if you need new brakes next year, you’ll be able to cover that last minute cost.

How to Start an Emergency Fund

Paying Down Credit Card Debt

This is a common financial goal many Americans have. With the high interest rates that credit cards have, it can be tough to stay on top of your debt. If you have a mountain of credit card debt, making this your primary financial goal may help you stay on track and tackle that debt. It could be a good idea to create a pay-off plan and put more towards your payment each month than the minimum.

How to Escape High-Interest Credit Card Debt

Saving For Retirement

Retirement may seem far away, but saving now can help you live the life you want after your 9-to-5 is complete. It’s okay to start small—small amounts can grow over time. In fact, starting in your 20s can make a difference of hundreds of thousands of dollars by retirement age. If your company offers a 401(k) plan, you could start there and automatically transfer a certain amount of money from each paycheck to go into that account.

When to Start Saving for Retirement

Remember that these aren’t the only financial goals that are important. Maybe you want to pay down your student loan debt or you want to save up for a vacation as your number one priority. Whatever makes sense for your situation is where you should start.

Saving Money for Specific Goals

There are many reasons to save money—building retirement savings, saving for a house, creating a vacation fund, or saving for an emergency fund, to name a few. Some easy money-saving strategies that are easy to implement right away include: getting rid of unnecessary expenses, creating a budget, automating bill pay, cutting down spending, and keeping track of your finances.

Depending on how far away your goal is may determine where you keep those funds. For example, retirement savings would be best saved in an IRA or a 401(k), whereas an emergency fund may be best held in a high-interest savings account. By keeping money for different goals separated, you can better understand if you’re on the right track to achieve that goal.

         
           

Tracking Spending

This goes hand in hand with budgeting. It’s hard to build a budget when you don’t know where your money is going in the first place. This is where tracking your spending comes in. By taking a look at what you’re spending each month, you can determine areas where you’re overspending and see opportunities to cut back.

It can be tough to know what to change if you’re not measuring in the first place. You may think you spend $100 on gas each month, but it could be a lot more when you actually take a look at your monthly statement. Tracking your spending doesn’t need to be a restricting practice. Don’t feel like you can’t spend money on things you want. Instead, look at what you’re spending and shift your priorities so you can cut back in some areas for other things you want.

         
           

Importance of Budgeting

You’ve probably heard this before, but budgeting is one of the most important aspects of achieving healthy financial habits. A budget doesn’t have to be strict or hold you back from things you want to do. Building flexibility into a budget is essential to staying on track. Budgeting may seem like a lot of work in the beginning, but once you have it set up, all that’s left is tracking and refining.

Types of Budgeting Methods

There are many ways to budget, and what might work for you may not work for other people. It might help to start with your end goal and work back from there. Once you have your ultimate goal you can research different budgeting strategies and figure out which one works best for you. Below are a few popular budgeting methods to try.

Zero-Based Budgeting

This method of budgeting helps you account for every single penny. With zero-based budgeting, your income minus your expenses should equal zero. Every expense will have a purpose, whether that’s for paying bills or keeping extra money in your checking account for emergency expenses. This doesn’t mean that your budget each month has to be the same. Depending on your needs, these figures may change each month.

What is Zero-Based Budgeting?

Envelope Budgeting Method

This is an interesting method that relies on cash transactions. You allocate certain amounts of money per category in cash in an envelope (you don’t have to use an envelope, but just somewhere to keep it organized) and once all of the cash is gone for that category you have to stop spending. This system may not work for everyone, as many people like to use credit cards or debit cards for making purchases. The benefit of this method is that it makes spending tangible.

What is the Envelope Budgeting Method?

Line Item Budget

If you are looking for a budgeting method that offers specific insights, the line item budget may work for you. This method is very easy to create in a spreadsheet by grouping related costs together, tracking both income and expenses. Traditionally used by businesses, it can be modified for personal use as well.

Building a Line Item Budget

50/30/20 Budget

For this method, there are three categories you’ll allocate your spending and savings to. Fifty percent will go to essential needs (groceries, health insurance, mortgage payments etc.), 30% for discretionary spending (personal spending like clothes or a video streaming account), and then 20% will go to savings. For this budgeting method it is important to prioritize savings.

The 50/30/20 Rule Demystified

Automating Finances

One way to help stay on track of your finances is by automating everything you can. Automating your finances can help avoid late fees and stay on top of your budget. It may seem like a lot of work, but once you have everything set up, it will run on its own.

The first thing to automate is the deposit of your paychecks. Setting up direct deposit is an easy way to make sure your paychecks are added to your account each pay cycle. From there, you can set up an automatic transfer from your checking to your savings. This may make it easier to save as it will automatically get taken out.

Another way to automate your finances is by setting up autopay for your bills. Whether it’s for utility bills, credit card payments, or student loan payments, this could be a great way to stay on top of your monthly bills and avoid fees.

Similar to automating transfers to your savings account, you can do the same thing for your retirement account. Choose a specific account each month you want to save and set up an automatic deduction from your paycheck or your checking account to go into a retirement account.

Paying Down Debt

Debt can be overwhelming and may seem impossible to conquer. Although it may not be a simple process, there are specific strategies you can put in place to help become debt free.

A good first step is to take account of all the debt you’ve incurred, which could include student loans, credit card debt, or car loans. From there you can create a debt reduction plan. You can mix and match strategies to create a plan that works best for the debt you have.

Debt Payoff Strategies

Here are some of the most common debt payoff strategies that people have seen success with.

Snowball Method

This is quite a simple method of paying off your debts in order of smallest balance to largest. You gain momentum as each debt is paid off, like a snowball rolling down a hill. First, list your debt balances from smallest to largest, then make the minimum payments on all of your debt except for the smallest one. For your smallest debt, you’ll want to pay as much as you can each much towards it. Then, repeat this for all remaining debt.

Exploring the Snowball Method of Paying Down Debt

Avalanche Method

This is slightly different from the snowball method, as it focuses on interest rate rather than debt balance. For this method you would list out your debts in order from highest interest rate to lowest. Pay the minimum on all your debts except the one with the highest interest rate, instead you’ll throw everything you can at it. Repeat this process until all of your debt is conquered.

Using the Avalanche Method of Paying off Debt

Balance Transfer

This is a potential strategy to check out if you have a mountain of credit card debt. When you have a large balance and a high interest rate it can be hard to tackle that debt. A balance transfer credit card will let you transfer your current credit card debt to a lower interest or no interest credit card. But, that introductory interest rate only lasts for a certain period of time, so it’s important to pay off your debt before that period ends.

Basics of Balance Transfer Credit Cards

Debt Consolidation

Debt consolidation is another option to consider. For credit card debt, you could take out a credit card consolidation loan to pay off your current debt. You’ll then have a brand new loan (hopefully with a lower interest rate) with one monthly payment. Qualifying for a lower interest rate could help you save money over the life of the loan vs. continuing to pay the high interest that credit cards have.

What is Credit Card Consolidation?

Understanding Your Credit Score

Another important aspect of organizing your finances is to understand your credit score, which is a number that shows lenders how risky it would be for them to lend money to you. There are a few different factors that determine your credit score including:

Payment history (35%) Amounts owed (30%) Length of credit history (15%) Credit mix (10%) New credit (10%)

Payment history looks at your past bill payments. Did you pay all your bills on time? How many times have you had a late payment? Amount owed is the amount of debt you currently have. Lenders like to see a low credit utilization (the amount of credit you are using compared to how much you have).

Length of credit history is pretty straightforward. That takes a look at how long you have had a credit card account. Credit mix considers the different types of debt that you have. Do you have student loan debt or credit card debt? New credit takes a look at any new accounts you have opened recently or any new debts you have taken on.

FICO® credit scores are broken down into various categories to understand how good or bad your credit score is:

Exceptional: 800-850 Very Good: 740-799 Good: 670-739 Fair: 580-669 Very Poor: 300-579

Your credit score is not stagnant, meaning there are strategies you can employ to change your score. Paying off debt is one of the main ways to help improve your credit score. Also, paying your bills on time or taking on good debt (like a mortgage).

Not sure what your credit score is? SoFi Relay offers credit score monitoring at no cost. You’ll be able to track your credit score and get weekly updates to stay on top of fluctuations. Plus, you’ll gain understanding of the key factors contributing to your credit score and learn about the influence you have on them.

SoFi Money

Learn more about how a SoFi Money® cash management account can help you spend, save, and earn cash back.

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