When non-U.S. citizens arrive in America, a key concern can of course be keeping their money safe and getting their financial life up and running — which are two key benefits of opening a bank account. Fortunately, many financial institutions allow those who are not citizens to do just that…which is a big relief for those who are new to residing in the 50 states.
Here, we’ll share:
• How to open a bank account if you’re a non-citizen
• What kind of identification is needed
• How to secure an ITIN for identification
• Alternatives to a bank account
Read on for the full story.
Is It Possible to Open a US Bank Account as a Non-Resident?
Yes, it is possible to open a U.S. bank account as a non-resident. However, not all banks may allow this. You’ll need to check with an individual financial institution to learn their policies, including what forms of identification will be required.
It can help to be very specific with your questions. For example, you might ask about the process of opening a checking account for a non-U.S. citizen or a savings account. Find out in advance what the requirements are so you know (and can prepare) exactly the sort of credentials and paperwork are needed. The goal is no surprises, right?
Recommended: What is a Savings Account and How Does it Work?
Typical Requirements for Opening a Bank Account
Even if you are a U.S. citizen, you will have a number of documentation requirements when it comes to opening a bank account. According to the USA PATRIOT Act of 2001, financial institutions must verify the identity of someone who wants to open a bank account to the “extent reasonable and practical.”
How this is accomplished can vary by financial institution, but here are typical requirements whether you are opening a bank account online or in person:
• Contact information (name, address, phone number, email address)
• Two forms of current government IDs such as a driver’s license and Social Security card
• If you haven’t used a Social Security card as a form of ID, the financial institution will still ask for your Social Security number.
• A current bill, such as a water or electric bill, with your current address
• Minimum opening deposit (this is often $25)
Check with your bank of choice for more details.
Alternatives for Identification
Opening a bank account in a foreign country can mean, however, that you don’t have all the paperwork listed above. When applying for an account, if you can’t satisfy those requirements, you may be able to submit alternative documents. Other options can include the following:
• If you don’t have a driver’s license, then you may provide a government-issued state ID or a U.S. military ID. All must be current/unexpired.
• Other forms of secondary governmental IDs (besides a Social Security card) can include your original or certified birth certificate or your passport; a passport can also serve as your primary form of ID.
• An ITIN if you’re not eligible for a Social Security number.
Next up: More about an ITIN, which can be a vital piece of identification for non-U.S. citizens, allowing them to bank in America.
What is ITIN?
You may wonder, “What is an ITIN?” as you pursue a bank account as an immigrant. It’s an important point to learn more about and can unlock financial services for you. ITIN stands for an “Individual Taxpayer Identification Number” and, according to the IRS, this serves as a tax processing identification number.
The IRS issues this number to people who need to have an identification number in the United States but are not eligible to get a Social Security number. A person’s immigration status is not relevant when applying for an ITIN because resident and non-resident aliens may each need to have this number. Worth noting: Getting an ITIN does not authorize you to work in America. It is simply a number that is used for tax-reporting purposes.
How to Apply for an ITIN
If you are not a U.S. citizen and want to apply for an ITIN, you have a few options. The IRS lists the steps for a couple of different options:
• If you’d like to apply by mail, provide your W-7, proof of identity, tax return, and foreign status documents to the following address:
◦ IRS Austin Service Center, ITIN Operation, PO Box 149342, Austin, TX 78714-9342
◦ No return envelope is required for your documents to be returned. However, if you want your documents returned more quickly, you can include a prepaid express mail envelope or courier envelope.
• If you will need these original documents within the next 14 weeks (which can be how long processing takes), you may decide to apply in person at a Certifying Acceptance Agent (CAA). Or you can submit certified copies rather than the originals.
◦ If you’re waiting for your original documents and 14 weeks have passed, call 800-908-9982 in the United States or 267-941-1000 outside the country for an update on their return.
• Make an appointment at an official IRS Taxpayer Assistance Center . Multilingual operators are available.
Once you receive your ITIN, you can move ahead with opening a bank account.
Benefits of Opening a Bank Account
Opening a bank account can be a vital step in establishing and maintaining your day-to-day financial life in the U.S. Let’s spell out some of the benefits. The Federal Deposit Insurance Corporation (FDIC ) lists numerous reasons why opening a bank account can be beneficial:
• Safety: FDIC insurance keeps your money safe even if a bank would fail and even if an unauthorized electronic transaction is made. (With the second, you’ll need to contact your financial institution in a timely way.)
• Convenience: You can seamlessly have a paycheck directly deposited into your account, eliminating the possibility of a lost or stolen paper check. You can pay bills from your account, and transfer money to friends and family members.
• Accountability: You can track your balance and the transactions made, and you’ll have a record of all of them. You can set up alerts to stay informed about these transactions and, once you have an account with a bank, you can then benefit from other services that the financial institution offers.
Depending on your situation, you may want to open an individual account solo or you might want to bank with another person, which will provide some joint bank account benefits. In either case, if you are a new owner of a checking account, it’s important to learn how to balance bank accounts and keep on top of your cash flow to avoid overdraft fees and the like.
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Alternative Accounts for Non-US Citizens
What if you are not a citizen, want to open a bank account, but don’t have or can’t get that ITIN? Although an ITIN is one of most common ways for a non-U.S. citizen without a Social Security number to identify themselves to get a bank account, financial institutions may also accept other IDs. For example, you may be able to present a passport number and the name of the country that issued it, an alien ID number, or another type of government-issued ID that identifies residency or nationality. It’s worth doing a bit of research to see if you can open an account with these forms of identification.
If you’d like to open an account with funds other than U.S. dollars, you might also want to consider a foreign currency account, which lets you send and receive funds in a foreign currency.
The Takeaway
Yes, you can open a bank account as a non-U.S. citizen and enjoy the convenience and security of a checking or savings account. However, extra steps are involved when it comes to providing forms of ID. An ITIN can be helpful when opening a bank account as a non-U.S. citizen. This form of identification can be worthwhile in getting your financial life up and running in America.
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FAQ
Can a non-resident open a bank account in the US?
The answer to “Can an immigrant open a bank account?” is yes. Opening a bank account in the U.S. for non-residents comes with added steps: Someone who doesn’t qualify for a Social Security number must identify themself in another way, such as an ITIN, that’s acceptable to the financial institution.
How do I open a non-resident bank account?
You can check with a financial institution of choice to see whether they offer accounts to non-citizens and their specific policies on how a non-resident can open a bank account in the U.S. Ask what forms of ID you’ll need; you will likely be required to have an ITIN or an alternate form.
What identification is needed to open a bank account in the US?
Although specifics may vary by financial institution, in general, a bank will ask for contact information along with a utility bill that confirms your address; two forms of a government-issued ID; your Social Security number; and a minimum opening deposit. If someone isn’t eligible for a Social Security number, an ITIN may be an acceptable alternative.
A certificate of deposit — CD for short — is a low-risk savings account that holds a fixed amount of money for a certain time, such as six months, one year or five years.
During that time, your deposit earns a fixed interest rate. Usually, the longer the term, the higher the interest rate.
When the CD term is up, you receive your initial deposit back plus the interest earned.
Unlike a savings account, CDs typically don’t let you withdraw money whenever you want. CD accounts require you to leave funds untouched for a fixed period or else face an early withdrawal penalty.
These penalties usually range from three months of interest to one year worth of interest, depending on the term length.
You can buy a certificate of deposit from a bank or credit union. Bank CD accounts are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 — just like savings accounts and money market accounts.
Credit unions issue share certificates, which are the credit union equivalent of CDs. These are also insured for up to $250,000, but by the National Credit Union Administration (NCUA) instead of the FDIC.
CD vs. Savings Account: Which Is Better?
If you’re debating between a certificate of deposit or a savings account, ask yourself this question: Do you care more about interest rates or access to your money?
A CD account usually earns a higher annual percentage yield (APY) than what you usually find in a high-yield savings account — but your money is harder to access.
If you need easier access to your funds, a savings account is a better option.
But a traditional savings account doesn’t earn much interest. In fact, the national APY for savings accounts is just 0.07%.
So if you’re saving for a short-term goal and want to earn as much interest as possible, a certificate of deposit is likely a better choice than a savings account.
Opening a CD makes sense when you are free of credit card debt and already have an emergency fund built up in your savings account.
Best CD Rates Compared
Bank
Best for
APY
Minimum Opening Deposit
Term Length
Marcus by Goldman Sachs
No-penalty CDs
0.50% – 2.55%
$500
6 months to 6 years
SEE DETAILS
Discover Bank
CD laddering
0.30% – 2.50%
$2,500
3 months to 10 years
SEE DETAILS
Ally Bank
Bump rate CDs
0.30% – 2%
$0
3 months to 5 years
SEE DETAILS
Synchrony Bank
Rate guarantee
0.50% – 2.60%
$0
3 months to 5 years
SEE DETAILS
Capital One
No minimum balance requirement
0.60% – 2.25%
$0
6 months to 5 years
SEE DETAILS
PenFed Credit Union
5-year and 7-year CDs
0.65% – 3%
$1,000
6 months to 7 years
SEE DETAILS
Bread Savings
High APYs
1.75% – 2.55%
$1,500
1 year to 5 years
SEE DETAILS
Quontic Bank
6-month CDs
0.95% – 2.3%
$500
6 months to 5 years
SEE DETAILS
Marcus by Goldman Sachs
Best for no-penalty CDs
5 out of 5 Overall
Key Features
Above-average CD rates
$500 minimum deposit
Various term lengths
Marcus by Goldman Sachs consistently offers some of the best CD rates on the market. It’s one of the few online banks that offers a no-penalty CD option, including seven-month, 11-month and 13-month CD accounts. Term lengths for high-yield CDs range from six months to six years. Marcus by Goldman Sachs also offers a 10-day rate guarantee on CDs.
Marcus by Goldman Sachs
Annual Percentage Yield (APY)
0.50%-2.55%
Term Length
6 months to 6 years
Minimum Deposit
$500
Additional Details
Marcus by Goldman Sachs offers competitive CD interest rates with terms ranging from six months to six years.
CD rates range from 0.50% to 2.55% APY. The $500 minimum deposit requirement is lower than some other banks and credit unions.
The company offers two types of certificates of deposit: a high-yield CD and a no-penalty CD. Term lengths for no-penalty CDs range from seven months to 13 months with 0.35% to 0.75% APY.
Unlike traditional CDs, no-penalty CDs let you withdraw money at any time without paying a fee or losing interest.
Early withdrawal penalties from a standard high-yield CD are as follows: Loss of three months worth of interest on CDs with a maturity date of less than a year, nine months of interest for CD terms of one to five years and a year’s worth of interest for six-year CDs.
Marcus by Goldman Sachs is also well-known for its high-yield savings accounts, which consistently offer above-average interest rates.
Discover Bank
Best for CD laddering
4.5 out of 5 Overall
Key Features
12 different term lengths
Competitive CD rates
IRA CD
Discover Bank offers 12 different CD term lengths — more than many of its competitors. This variety of maturity dates gives customers multiple options for CD laddering. Bank CD terms range from three months to 10 years. The minimum deposit of $2,500 is somewhat high but Discover Bank CD rates are competitive.
Discover Bank
Annual Percentage Yield (APY)
0.30%-2.50%
Term Length
3 months to 10 years
Minimum Deposit
$2,500
Additional Details
Discover, best known as a credit card company, boasts a strong selection of financial products — including CDs.
Discover Bank CDs are available in 12 term lengths, from three months to 10 years and with APYs ranging from 0.30% to 2.50%.
Numerous CD terms makes it easy for consumers to explore CD laddering options. A CD ladder involves opening multiple CDs with staggered maturity dates. Doing so lets you earn interest while providing easier access to your money.
Another perk: Discover offers CDs for individual retirement accounts (IRA CDs).
We’re not in love with Discover’s $2,500 minimum deposit requirement, which is higher than other online banks and credit unions on this list.
The early withdrawal penalty for Discover CDs ranges from three months of interest for term lengths of one year or less all the way up to two years of interest for CD terms of seven to 10 years.
Like all CDs on this list, there are no monthly fees or opening fees.
Aside from CDs and credit cards, Discover also offers an online savings account and checking account.
Ally Bank
Best for bump rate CDs
5 out of 5 Overall
Key Features
No minimum deposit requirements
Interest compounds daily
24/7 customer service
With no minimum deposit requirements, Ally Bank CDs are a great option for new investors. You can also open a CD account in the name of a trust. In addition to several no-penalty CDs and high-yield CDs, Ally offers Raise Your Rate CDs, which give you the option to bump up your CD interest rate if the APY increases during the term without having to wait for the maturity date.
Ally Bank
Annual Percentage Yield (APY)
0.30%-2%
Term Length
3 months to 5 years
Minimum Deposit
$0
Additional Details
Ally Bank, a popular online financial institution, offers a wide variety of online CD types and term lengths. Like many of their financial services, there’s no minimum deposit requirement to open a bank CD.
In addition to its standard high-yield CDs, Ally offers two bump-up CDs, or what the company calls Raise Your Rate CDs.
The APY is a little lower, but you can request one to two rate increases if Ally raises the rate for new CDs with the same term and balance tier as your CD.
That could be appealing as the Federal Reserve increases interest rates throughout 2022.
Ally also offers a no-penalty CD with an 11-month term and a 0.70% annual percentage yield. You can withdraw your full balance and interest any time beginning six days after you fund your account.
Ally is a full-service bank that boasts many financial products including an online savings account, checking account, investment account and more.
Synchrony Bank
Best for rate guarantee
5 out of 5 Overall
Key Features
15-day rate guarantee
9 term lengths
No minimum deposit requirement
Synchrony Bank’s nine online CD term options coupled with a $0 minimum deposit make it ideal for short-term CD laddering. In addition to competitive CD interest rates, Synchrony Bank offers a 15-day rate guarantee — more generous than the 10-day guarantee offered by most banks and credit unions. During this time, you can claim the highest interest rate if the published rate increases.
Synchrony Bank
Annual Percentage Yield (APY)
0.50%-2.6%
Term Length
3 months to 5 years
Minimum Deposit
$0
Additional Details
Synchrony Bank is a financial institution with nine different online CD term lengths ranging from three months to five years. It offers competitive rates on certificates of deposit, from 0.50% to 2.6% APY.
There is no minimum deposit requirement, and the company also offers IRA CDs.
Another perk: You get the option of withdrawing the interest earned before the CD’s maturity date without penalty.
Synchrony Bank offers a 15-day rate guarantee on any certificate of deposit, which is longer than the standard 10-day guarantee offered by most banks and credit unions.
During this time, you can claim the highest available fixed interest rate if the published rate increases.
Early withdrawal penalties are as follows: Loss of three months of interest for bank CD term lengths of one year or less, six months of interest for CDs with one- to four-year terms, and one year worth of interest for five-year CDs.
Synchrony offers other useful tools for savers, including a money market account and a high-yield savings account. However, it doesn’t offer a checking account.
Capital One
Best for no minimum balance requirement
4.5 out of 5 Overall
Key Features
Easy to open
No minimum deposit
Competitive rates
Capital One is another credit card company that offers CDs. There’s no minimum deposit and various term lengths are available. You can decide when your bank CD account interest is paid out — either at the end of the term, monthly or annually. If you withdraw money early, you’ll pay between three months to six months worth of interest, which is less than some other banks.
Capital One
Annual Percentage Yield (APY)
0.60%-2.25%
Term Length
6 months to 5 years
Minimum Deposit
$0
Additional Details
Capital One’s $0 minimum deposit requirement and competitive rates on online CDs makes the company an attractive option, especially for customers who already bank with Capital One.
The company offers nine bank CD term lengths, from three months to five years. APYs range from 0.60% to 2.25%.
Early withdrawal penalties are lower than some other online banks and credit unions: Three months of interest for terms of one year or less and six months worth of interest for longer terms.
Aside from CDs and credit cards, Capital One offers checking accounts and savings accounts.
PenFed Credit Union
Best for longer-term CDs
5 out of 5 Overall
Key Features
High APYs for 5-year terms
Competitive rates
Education Savings Certificates
Pentagon Federal Credit Union offers money market certificates — the credit union equivalent of CDs — with high APYs. Its rates for 5-year and 7-year certificates are some of the highest on the market, though early withdrawal penalties can be steep. The credit union also offers Education Savings Certificates. Like most credit unions, you must become a member of PenFed before you can buy a CD.
PenFed Credit Union
Annual Percentage Yield (APY)
1.5%-3%
Term Length
6 months to 7 years
Minimum Deposit
$1,000
Additional Details
Pentagon Federal Credit Union — PenFed for short — once exclusively served people affiliated with the military. In 2019, the credit union opened its services up to the general public.
PenFed’s money market certificates — the credit union equivalent of CDs — have terms ranging from six months to seven years with annual percentage yields from 0.65% to 3%.
The credit union really stands out for its 3% APY on a seven-year CD — the highest rate of any bank or credit union on this list.
PenFed’s $1,000 minimum deposit requirement is pretty standard for money market certificates with high APYs.
Just to be clear on some credit union jargon: a money market certificate isn’t the same as a money market account. Yields earned on credit union accounts are called dividends instead of interest.
Early withdrawal penalties can be steep. The early withdrawal penalty for its 6-month and 3-year certificates equals 90 days of dividends earned.
For all other certificate term dates, the early withdrawal penalty means losing one year of dividends or 30% of total dividends that would have been earned if the certificate reached its maturity date.
Aside from CDs, Pentagon Federal Credit Union offers a checking account that earns dividends as well as high-yield savings accounts.
Bread Savings
Best for high APYs
4.5 out of 5 Overall
Key Features
Above average APYs
Limited term length options
Interest accrued and compounded daily
Bread Savings is an online bank formerly known as Comenity Direct. It offers five different CDs with term lengths ranging from one to five years. It fetches above average APYs but lacks shorter-term online CD options. CDs are offered through Comenity Capital Bank, which started using the Bread Savings name in April 2022.
Bread Savings
Annual Percentage Yield (APY)
1.75%-2.55%
Term Length
1 year to 5 years
Minimum Deposit
$1,500
Additional Details
Bread Savings offers competitive online CD rates ranging from 1.75% to 2.55% APY and terms from one to five years.
It offers fewer term lengths than many of its competitors and its $1,500 minimum opening deposit is higher than most banks or credit unions on this list.
Early withdrawal penalties are as follows: Loss of six months of interest for one- to three-year CDs and one year of interest for four- and five-year CDs.
Interest for Bread Savings CDs is compounded daily and credited on a monthly basis.
Like most banks and credit unions on our list, this company offers a 10-day grace period once its term matures. During this grace period, you can cash out your certificate of deposit, renew it or change your term.
Bread Savings also offers a high-yield savings account.
Quontic Bank
Best for 6-month CD rates
5 out of 5 Overall
Key Features
Above average 6-month CD rate
Easy to open
Online tools
Quantic Bank offers CDs with term lengths ranging from six months to five years. Its six month interest rate is above average compared to other online banks and credit unions, which can make these CDs a good way to save for short-term goals. Its opening minimum balance of $500 is competitive with other big names in the industry, including Goldman Sachs.
Quontic Bank
Annual Percentage Yield (APY)
0.95%-2.3%
Term Length
6 months to 5 years
Minimum Deposit
$500
Additional Details
Quontic Bank offers everything you’d expect from a highly-rated online bank: competitive CD rates, innovative online tools and a user-friendly mobile app.
Quontic Bank really shines for its six-month CD rates: 0.95% APY as of May 25, 2022 — above average compared to other banks and credit unions.
In total, the company offers five different bank CD term lengths, from six months to five years.
Once a bank CD matures, Quontic gives you a 10-day grace period to withdraw funds. Otherwise, the online CD automatically renews. Early withdrawal penalties vary by CD term.
Quontic Bank offers a range of other financial products, including online savings accounts, checking accounts and money market accounts.
What Are CD Rates?
A CD’s rate is how much interest you’ll earn on your initial deposit. A CD rate is expressed as an annual percentage yield (APY).
CDs earn higher interest rates than traditional savings accounts, and may earn more than a high-yield savings account.
Online banks and credit unions tend to offer the best CD rates.
Most CD rates are fixed: They won’t go up or down after you open your account.
That can be great if you lock in a high rate because the bank can’t give you a lower rate down the road.
On the other hand, a fixed rate can prevent you from earning more money on your deposit if rates later rise.
Credit unions tend to have higher interest rates than banks, so CD rates will likely be higher at those institutions. However, a credit union can restrict membership, so make sure to check eligibility requirements first.
The best CDs offer a competitive rate and APY. They also feature reasonable minimum deposit requirements and attractive compounding schedules.
Are CD Rates Increasing in 2022?
CD rates are increasing as the Federal Reserve embarks on a series of interest rate hikes to fight inflation. These federal actions are likely to result in the best CD interest rates we’ve seen in years.
One-year online CD rates averaged 0.74% nationwide in April 2022, up from a low of 0.44% in 2021, according to Barron’s. The national average for five-year online bank CD rates hit 1.23% in April 2022 compared to 0.65% in 2021.
But before you rush to buy a CD, keep this in mind: Interest rates will likely be higher a year from now. It might make sense to wait for higher CD rates before locking your money up for a year or more.
Or look for a bump-up or step-up CD that lets you take advantage of higher interest rates down the road.
Banks and credit unions are always adjusting CD rates, so it’s important to shop around to find the best APY.
What Are The Different Types Of CDs?
Most CDs offer a fixed rate for a fixed duration — but that’s not always the case.
Here are a few specialty CDs with unique terms.
No-Penalty CDs
These CDs — sometimes called liquid CDs — give you access to your money without an early withdrawal penalty. The catch? Terms usually require a higher opening deposit and earn a lower APY.
Most financial institutions still impose some restrictions on no-penalty CDs. For example, you may not be able to withdraw money from a liquid CD penalty-free for at least a week after you open the account.
Bump-Up CDs
With this CD, you can request a rate increase if interest rates rise during the CD term.
For example, if you bought a 5-year CD, and after two years the bank or credit union increases the rate offered on that product, you can opt into that higher rate for the remaining three years of your term.
You’ll likely earn a lower rate and need to put down a larger opening deposit. Most financial institutions with bump-up CDs limit you to one or two rate increases per term.
Step-Up CDs
These CDs include predictable rate increases at specified times throughout the term of the CD.
Unlike a bump-up CD, the bank automatically increases your APY to the new, higher rate so you don’t need to ask the bank to let you opt into the higher rate.
Jumbo CDs
Jumbo CDs carry a high minimum balance requirement (think $100,000 and up).
Surprisingly, you might not earn much more interest with a jumbo CD than you would with a traditional CD.
Frequently Asked Questions
Are CDs Safe?
CDs are considered a low-risk investment.
You’re guaranteed a specific fixed rate of return, so you assume less risk by placing your money in an FDIC-insured CD or NCUA-insured certificate.
In this way, a CD is as safe as any other FDIC-insured account, like a money market account or a savings account.
Do CDs Have Fees?
Most CDs have no monthly fees or ongoing costs.
However, taking money out of your CD before the maturity date usually results in an early withdrawal penalty.
Early withdrawal penalties vary based on the term of your online CD, but they typically equal the loss of 60 to 365 days worth of accrued interest earnings.
Do You Pay Taxes on CDs?
The amount you pay to buy a CD generally is not taxable, even when you cash it in. However, you will be responsible for paying taxes on any interest you earned from the CD before it matured. This interest must be reported to the IRS as taxable income.
According to the IRS, interest is taxable in the year it is paid.
If your CD earns more than $10 of interest in a year, the bank or credit union should send you a 1099-INT statement. You can see how much interest you earned that year in box 1.
What Is an IRA CD?
An IRA CD is simply an individual retirement account full of certificates of deposit. Many banks and credit unions offer IRA CDs.
You get the tax-advantages of an IRA along with the fixed term and rate of a certificate of deposit.
Some people choose to invest part of their retirement savings in an IRA CD to provide stable, dependable income in their portfolio.
What is a CD Ladder?
A CD ladder is a savings strategy where you stagger certificates of deposit with different maturity dates. It can help you take advantage of higher rates on longer-term CDs while still keeping some liquidity short-term.
Here’s an example of a CD ladder.
You split your deposit into fifths and spread it across multiple CDs: a one-year, two-year, three-year, four-year and five-year CD.
When the one-year CD matures, you can pocket the interest and invest the initial amount in a five-year CD. You can do the same when the two-year CD matures a year later. Eventually, you will have five five-year certificates of deposit so one CD matures each year.
This helps make your money more accessible while still achieving the overall higher interest rate of a five-year CD versus a one-year CD.
Rachel Christian is a Certified Educator in Personal Finance and a senior writer for The Penny Hoarder.
When financial aid like scholarships and grants comes up short, federal student loans can help bridge the gap.
Unsubsidized Direct Loans may be offered to undergraduate and graduate students in a financial aid package.
Subsidized Direct Loans may be offered to undergrads only, and have benefits in terms of who pays the interest during certain periods.
When a college sends an aid offer, the student must indicate which financial aid to accept.
What Is an Unsubsidized Student Loan?
The Department of Education provides Federal Direct Unsubsidized Student Loans as one of four options under the William D. Ford Federal Direct Loan Program. (Direct Subsidized Loans, Direct PLUS Loans, and Direct Consolidation Loans are the other types.)
The unsubsidized loans provide undergraduate and graduate-level students with a fixed-rate financing option to help fund their college education.
Unlike Direct Subsidized Loans, unsubsidized student loans are not based on financial need. This means that any student may receive unsubsidized loan funding, as long as it meets the Department of Education’s general eligibility requirements.
How Do Unsubsidized Student Loans Work?
If you’re eligible for Direct Unsubsidized Student Loans, the amount you’re offered for the academic year is determined by your school, based on its cost of attendance minus other financial aid you’ve received (such as scholarships, grants, work-study, and subsidized loans).
You will need to complete entrance counseling to ensure you understand the terms and your obligation to repay the loan. Then you’ll sign a master promissory note stating that you agree to the loan terms.
The government will send the loan funds directly to your school. Your institution will then apply the money toward any unpaid charges on your school account, including tuition, fees, room, and board.
Any remaining money will then be sent to you. For example, if you were approved for $3,800 in unsubsidized loans but only $3,000 was applied to your education costs, the school will send the remaining $800 to you.
The Education Department’s Federal Student Aid office recommends accepting grants and scholarships first, then work-study, then loans. And it advises accepting a subsidized loan before an unsubsidized loan, and an unsubsidized loan before a PLUS loan.
A Matter of Interest
As soon as any student loan is disbursed, it starts accruing interest. For federal student loans and most private student loans, you can defer payments until after your grace period, which is the first six months of leaving school or dropping below half-time status.
Here’s the kicker: With a subsidized student loan, the government pays the interest while you’re in school and during your grace period and any hardship deferment.
With an unsubsidized federal student loan or private student loan, unpaid interest that accrues will be added into your loan’s principal balance when you start repayment.
Pros and Cons of Unsubsidized Student Loans
Although unsubsidized student loans offer many benefits, there are also some downsides to know.
Unsubsidized Loan Pros
Unsubsidized Loan Cons
Eligibility is not based on financial need
Interest accrues upon disbursement
Available to undergraduate and graduate students
You’re responsible for all interest charges
Can help cover educational expenses up to an annual limit
Graduate students pay a higher rate
No credit check or cosigner required
Interest capitalizes if payments are deferred
Can choose to defer repayment
Multiple payment plans are available
Applying for Unsubsidized Student Loans
Applying for federal financial aid starts with the FAFSA® — the Free Application for Federal Student Aid. Students seeking aid complete the FAFSA each year.
Where to Apply
Applying for the FAFSA can be done at studentaid.gov, or you can print out a paper FAFSA and mail it.
Based on the information you included in your FAFSA, each school that you listed will determine your financial aid offer, including whether you’re eligible for an unsubsidized loan.
Typical Application Requirements
You must have an enrollment status of at least half-time to be eligible for a Direct Loan. You must also be enrolled in a degree- or certificate-granting program at a school that participates in the Direct Loan Program.
The Department of Education has general requirements to be eligible for federal aid. Applicants must:
• Be a U.S. citizen or eligible noncitizen
• Have a Social Security number
• Prove that they qualify for a college education
• Maintain satisfactory academic progress
• Sign a certification statement
In the certification statement, you’ll need to confirm that you aren’t currently in default on a federal student loan and don’t owe money on a federal grant, and affirm that you’ll only use aid funds toward educational costs.
How Long Will You Have to Wait?
After submitting your FAFSA, it can take the Department of Education three to five days to process your application. If you submitted your FAFSA by mail, processing can take up to 10 days.
Once you’ve told your school which financial aid you want to accept, loan disbursement timelines vary. Generally, first-time borrowers have up to a 30-day waiting period before they receive their funds. Other borrowers may receive funding up to 10 days before the start of the semester.
How Much Can You Borrow?
There are annual limits to how much in combined subsidized and unsubsidized loans you can borrow. These limits are defined based on the year you are in school and whether you’re a dependent or independent student.
Here’s an overview of combined subsidized and unsubsidized loan limits per year for undergraduate students:
Undergraduate Year
Dependent
Independent
First-year student
$5,500
$9,500
Second-year student
$6,500
$10,500
Third year and beyond
$7,500
$12,500
Graduate students are automatically considered independent and have an annual limit of $20,500 for unsubsidized loans (they cannot receive subsidized loans).
There are also student loan maximum lifetime amounts.
Subsidized vs Unsubsidized Student Loans
Another type of loan available through the Direct Loan Program is a subsidized loan. Here’s a quick comparison of subsidized vs. unsubsidized loans.
Subsidized Loans
Unsubsidized Loans
For undergraduate students
For undergraduate and graduate students
Borrowers aren’t responsible for interest that accrues during in-school deferment and grace period
Borrowers are responsible for interest that accrues at all times
Borrowers must demonstrate financial need
Financial need isn’t a requirement
Annual loan limits are typically lower
Annual loan limits are generally higher
Alternatives to Unsubsidized Student Loans
Unsubsidized student loans are just one type of financial support students can consider for their education. Here are some alternatives.
Subsidized Loans
Direct Subsidized Loans are fixed-rate loans available to undergraduate students. As discussed, borrowers are only responsible for the interest charges that accrue while the loan is actively in repayment.
Scholarships and Grants
In addition to accessing potential scholarships, grants, and loans through the FAFSA, students can seek financial aid from other entities.
Scholarships and grants for college may be found through your state or city. Businesses, nonprofits, community groups, and professional associations often sponsor scholarships or grants, too. The opportunities may be based on need or merit.
Private Student Loans
Private lenders like banks, credit unions, and other financial institutions offer private student loans. Some schools and states also have their own student loan programs.
Private student loan lenders require borrowers, or cosigners, to meet certain credit thresholds, and some offer fixed or variable interest rates. Many lenders offer pre-qualification without a hard credit inquiry.
Private student loans can be a convenient financing option for students who are either ineligible for federal aid or have maxed out their federal student loan options. One need-to-know: Private student loans are not eligible for federal programs like Public Service Loan Forgiveness and income-driven repayment.
SoFi Private Student Loan Rates
If your federal financial aid package doesn’t quite cover all the bases, or if you’re not eligible for federal aid, a private student loan from SoFi could be just the ticket.
You can borrow up to your school’s certified cost of attendance, at a low fixed or variable rate, and pay no loan fees.
Find your rate for a SoFi Private Student Loan in three minutes.
FAQ
What are unsubsidized loan eligibility requirements?
To be eligible for a Direct Unsubsidized Loan, undergraduate and graduate students must be enrolled at least half-time at a qualifying school. They must also meet the basic eligibility requirements for federal aid, including being a U.S. citizen or eligible noncitizen, have a Social Security number, and complete the FAFSA.
How long does it take to receive a Direct Unsubsidized Loan?
Loan disbursement for first-time borrowers can take up to 30 days after the first day of enrollment. For others, disbursement takes place within 10 days before classes start.
What is the maximum amount of unsubsidized loans you can borrow?
Dependent students can borrow a maximum of $5,500 and $6,500 per year during their first and second academic years, respectively. Students in their third year of school and beyond can borrow an annual maximum of $7,500. The aggregate loan limit for dependent students is $31,000 in combined subsidized and unsubsidized loans.
Graduate or professional students may receive up to $20,500 per year in unsubsidized loans. Their aggregate loan limit is $138,500 (which includes all federal student loans received for undergraduate study).
SoFi Loan Products SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC), and by SoFi Lending Corp. NMLS #1121636 , a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law (License # 6054612) and by other states. For additional product-specific legal and licensing information, see SoFi.com/legal. SoFi Private Student Loans Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs.
SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change. 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 or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Community colleges offering two-year programs can be a wonderful option for students looking to gain a higher education in less time. It can also be a great option for those looking to save a little cash while bettering their current skills, prepping for a four-year university, or going for an associate’s degree.
Moreover, it can often save students thousands of dollars in the long run toward the career of their dreams too. Though community college can cost far less than a four-year school, it still isn’t free. Here are a few helpful ways to gain a little financial assistance for your personal education journey.
The Government Looks at Community College the Same Way It Does a Four-Year School
Federal student loans are available for both two- and four-year colleges. The process of applying for federal aid is the same, regardless of the school, as long as the Department of Education sees it as an “eligible degree or certificate program.” Vocational, career, trade, or online schools often offer federal loan options, but it’s not a guarantee. If you’re not sure whether your school participates in federal loan programs, you can confirm with your school before moving forward.
To apply for federal aid, including student loans, a potential student must fill out the Free Application for Federal Student Aid (FAFSA®). On the FAFSA, all would-be students will list the schools they are interested in attending using the Federal School Code. The schools listed will use the FAFSA application answers to determine the types and amounts of aid a student can receive.
After submitting the FAFSA, the applicant will receive an award letter from each school listed on the FAFSA application. This will tell you what aid you qualified for. If you plan on applying for federal aid to attend community college, consider applying as early as possible.
Some federal aid is determined on a first-come, first-served basis, so the earlier you submit your FAFSA, the better position you may be in to receive aid.
Those hoping to obtain a federal loan for community college can apply for one of three: Direct Subsidized, Direct Unsubsidized, and Direct Plus. Here’s how to determine which one of those may be the best fit for your education goals.
Direct Subsidized and Unsubsidized Loans for Community College
When it comes to borrowing federal student loans, the government offers both subsidized and unsubsidized loans to assist students in covering the cost of higher education. For both subsidized and unsubsidized loans, the school a potential student hopes to attend will determine how much a student is eligible to borrow.
Direct Subsidized Loans are based on financial need and they come with a major benefit — the U.S. Department of Education pays the interest while the student is still enrolled in school at least half-time and for the loan grace period (usually the first six months after leaving school).
Direct Unsubsidized Loans are similar to subsidized loans except that they are not based on financial need, they are based on your cost of attendance and other financial aid you receive. As such, the borrower would be responsible for all accrued interest on the loan. While not required to make payments as a student, there is an option to make interest-only payments on the unsubsidized loan.
When the interest on a Direct Unsubsidized Loan is not paid during periods of deferment, such as the grace period, the accrued interest will be capitalized. That means, when graduation day comes and the grace period ends, the interest that has accumulated on the loan will be added to the principal value of the loan and you’ll be responsible for paying off both. Interest will also continue to accrue based on that new principal.
There is an annual limit to how much money undergraduate students can borrow in Direct Subsidized and Unsubsidized Loans. For example, the limit for your first undergraduate year is $5,500 for dependent students (and $9,500 for independent students).
Direct PLUS Loans for Community College
There is another option from the government, known as the Direct PLUS Loan . This loan is available to parents of dependent students. Unlike both Direct Subsidized and Unsubsidized Loans, when a person borrows via a Direct PLUS Loan, he or she will be subject to a credit check. If the person has an adverse credit history, they may not be approved to borrow the loan.
If you are a parent of a dependent undergraduate student, you can receive a Direct PLUS Loan for the remainder of your child’s college costs not covered by other financial aid.
It’s important to note when a person borrows a Direct PLUS Loan, there are fees in addition to interest. With this loan, parents can borrow up to the cost of attendance (determined by the school) minus any other financial aid received. In order to obtain this loan, parents must qualify and their credit history will be checked. Interest will also accrue.
Private Student Loans
If a student does not receive enough aid through federal student loans or maxes out his or her eligibility for federal student loans, they can seek additional funding through private student loans. Private student loans can be borrowed from banks, credit unions, or other lenders.
Each institution has its own eligibility requirements so each borrower will have to check with individual lenders to see about qualifications. Like federal loans, there is usually a limit to the amount you can borrow with private loans, which can vary by lender. The limit might be the cost of tuition, less the amount of aid the student is already receiving, for example. However, the limit on some private loans may be higher than the federal loan limit.
Furthermore, government student loans come with deadlines to apply , while students may apply for private student loans at any time. But one major downfall of private student loans is the fact that they may also come with higher eligibility requirements, like a specific credit score, to even be considered. Additionally, private lenders aren’t required to offer the same borrower protections as federal student loans, such as a grace period or income-driven repayment plans. Because of this, private student loans are generally considered only after all other financing options have been thoroughly reviewed.
Other Options For Community College Student Loans
Federal and private student loans aren’t the only options. And this is where, as a student, you can really do some homework.
Several states also offer their own student loan programs to help students. To qualify for many of these loans, a student must be a resident of the state program you’re applying for, or an out-of-state student enrolled in a college or university within that particular state. Check out each state’s student loan offerings here .
Saving Post-Graduation
Even if you went to community college, you may still graduate with student loan debt. But, there’s a way you can save after graduation as well. Upon completion of your degree (or, if you’ve already finished school), you may want to consider looking into student loan refinancing with SoFi.
This way, you may be able to get a better interest rate than what you originally qualified for or change the terms of your loan to fit your post-grad life. And you can focus on earning and saving for your future thanks to your hard-earned education.
When you refinance with SoFi there are no prepayment penalties or origination fees. Plus you’ll gain access to benefits like community events, career coaching, and unemployment protection. To see what your student loans could look like after you refinance with SoFi, take a look at our easy to use student loan refinance calculator.
Private Student Loans With SoFi
Community college students have a variety of options available to them when paying for their education. In addition to some scholarships or grants, students may use student loans, either federal or private, to help pay for college.
Private student loans can be an option for students who are looking to fill in financing gaps. SoFi offers no fee student loans with competitive interest rates available for qualifying borrowers. SoFi student loans also allow borrowers to select one of four flexible repayment plans.
Find out more about the student loan options available from SoFi. You can get a quote from SoFi in just a few minutes.
FAQ
Will student loans pay for all of college?
Student loans can be used to pay for college expenses. There are borrowing limits depending on the loan type. For example, first-year dependent students may be eligible to borrow up to $5,500 in Direct Loans. Of this, no more than $3,500 can be subsidized loans. Students may look to alternatives like private student loans to fill in gaps. The borrowing limit for federal student loans is determined by the individual lender.
How much are student loans for an associate’s degree?
Student loans for community college are available, including for associate’s degrees. In order to borrow a federal student loan, potential borrowers must be enrolled in an eligible degree granting program, as defined by the U.S. Department of Education. These programs may include associate degree programs.
What do you do if you can’t afford college?
If you can’t afford college, consider evaluating the costs and programs available at different colleges. Consider factors like location and room and board, in addition to tuition. Also fill out the FAFSA form, which allows students to apply for federal financial aid including grants and scholarships (which don’t typically need to be repaid) and federal student loans (which do need to be repaid). Consider contacting the financial aid office at your school for more personalized information.
SoFi Loan Products SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC), and by SoFi Lending Corp. NMLS #1121636 , a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law (License # 6054612) and by other states. For additional product-specific legal and licensing information, see SoFi.com/legal. SoFi Private Student Loans Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs.
SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change. SoFi Student Loan Refinance IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL SEPTEMBER 1, 2022 DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE FOR MORE INFORMATION. Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation. External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement. Third-Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners. 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. SOSL19035
Robert Bruce is a senior writer for The Penny Hoarder.
Corinthian Colleges had more than 110,000 students enrolled across 105 campuses in 2010 at its height. After the 2015 findings, the school sold or closed all its campuses, which included schools under the names of Heald, Everest and WyoTech.
The Department’s findings allowed borrowers to apply for “borrower defense”, a provision that, if approved, allows a defraudent student to receive loan cancellation. Around 100,000 borrowers have had their loans canceled because of the provision, according to the DOE. Thousands of other borrowers may also be eligible for automatic student loan forgiveness.
This most recent move enables borrowers who have yet to apply for borrower defense to have their loans canceled.
What do former, defrauded Corinthian students need to do to get their loans forgiven? Source: thepennyhoarder.com
The DOE followed up on Harris’ case with its own findings in 2015, determining that Corinthian made “pervasive misrepresentations related to a borrower’s employment prospects, including guarantees they would find a job.” Corinthian also effectively lied about students’ ability to transfer credits and its own public job placement rates.
This move is the latest by the Biden administration to address student loan forgiveness. In the last year, the administration has revamped the Public Service Loan Forgiveness program and erased .8 billion in loans for borrowers with disabilities.
Next Steps for Corinthian Students
The plan to discharge nearly billion in student loans originated in 2013, when California’s then-attorney general, Kamala Harris, sued Corinthian for deceptive advertising and recruiting practices.
Students took on debt based on those false promises — and saw it all forgiven this week when the DOE announced the discharge of .8 billion in student loans for 560,000 borrowers affected by Corinthian’s deceptive practices. This is the largest single loan discharge in U.S. history, according to the DOE.
It’s been a long road for former students of Corinthian Colleges, a chain of for-profit schools that closed in 2015 after the U.S. Department of Education found Corinthian had misrepresented borrowers’ future job prospects. Students wait outside Everest College in Industry, Calif., hoping to get their transcripts and information on loan forgiveness and transferring credits to other schools on April 28, 2015. Their wait recently ended when the U.S. Department of Education discharged .8 billion in student loans for 560,000 borrowers affected by deceptive practices at Everest and other Corinthian Colleges. Christine Armario/AP Images
Absolutely nothing, according to a statement released by the DOE: “The department will soon begin notifying students who attended Corinthian of this decision, with the actual discharges following in the months after. Borrowers will not have to take any actions to receive their discharges.”
Conventional financial wisdom says buying in bulk is smart. When you buy en masse, the price per unit tends to drop. So the thinking goes, if you buy more, the less each unit winds up costing you. Seems simple enough, but like anything financial, there’s a bit more to the story.
It’s worth doing a deep dive on buying in bulk. What do you need to know, what mistakes should you avoid, and do you really save money?
The Pros of Buying in Bulk
Who isn’t looking for ways to save money? A firm financial foundation starts with saving. While the big deal is the potential for saving money on the cost per item, there are other reasons to shop in bulk.
For one thing, it’s typically more socially responsible and environmentally friendly because bulk purchases usually have significantly less packaging per use than smaller purchases have. (Envision a mammoth pickle jar or tub of frosting.)
Ideally, buying in bulk also means you shop less, and that’s less time spent on the road and burning gas.
Then too, who knows what additional savings you might rack up just by being in the store less frequently and having fewer opportunities to pick up things that weren’t on your list?
If you’re the organized type who is big on preparing meals in advance, cooking lots of food and freezing it, buying in bulk can make that endeavor easier.
For sure it’s cost efficient to prepare your family’s favorite pasta dishes and soups and have enough for today and whenever you’re ready for round two, or three.
Finding the Price Per Unit
This is one time you need to do the math. To capitalize on a bulk buy, determine the cost per unit. What is a unit? Think measurements like ounces, square feet, grams, and gallons.
A bottle of olive oil is not a unit. A fluid ounce of olive oil is.
A roll of paper towels is not a unit. A square foot of paper towels is.
Figure out how many units you are buying. Take the total cost of your purchase and divide that by the number of units.
Then compare the unit prices of a few packages of the same product to determine which is the better value.
Ideally, the cost per unit of a bulk buy should be at least 50% below what you would normally pay.
Although a supersized item usually has a lower cost per unit than its smaller brethren, crunch the numbers to see.
How Much Can You Save By Buying in Bulk?
stop spending so much and begin buying in bulk, you need a game plan. It’s a good idea to reach for the familiar and sweeten the deal by looking for familiar items that are also on sale. That will snag you the best prices and help keep your bank account well padded.
Stick With What You Know
This is not the time to experiment. If you’re loading your cart with goods, you don’t want to be guessing about whether you’ll love them or not. Go for the family’s beloved items.
Buying in bulk and getting a deal is worthless if nobody wants to eat or use what you buy. That’s money down the drain.
Search for Your Favorites on Sale
Just like you don’t want the tax tail to wag the investment dog, you don’t want to buy what’s on sale solely because it’s on sale.
When trying to cut your grocery bill, the goal is to get what you know and love on sale, not to be overly adventurous. The latter can leave you disappointed, with a few fewer dollars in your pocket to boot.
What to Buy in Bulk
Some products are perfect for stockpiling. While your list will depend on your family, think items like paper towels, toilet paper, detergent, dishwashing liquid, sponges, aluminum foil, toothpaste, canned goods, frozen foods, beans, rice, sugar, flour, and nonperishables.
On the flip side, generally, you don’t want to load up on fresh produce unless you are cooking for a crowd, as your family may not be able to eat it all before it perishes.
The Cons of Buying in Bulk
For sure buying in bulk can work to your advantage, but it’s not without caveats. You have to come out of your pocket big time.
Let’s say you pay $40 for $60 worth of lotion, but what if $40 puts a bigger squeeze on your budget than buying them one at a time, weeks apart? If you use a credit card, fine — if you can pay off the entire bill when it’s due. If you incur interest charges, that will eat into your “savings.”
Keep in mind, too, that you need space to store all that stuff and a car to pile it in to take home. If either of these are issues, buying in bulk may not be ideal for you.
Know thyself. Maybe you are the person who gets bored quickly and takes to heart that variety is the spice of life. When you’ve got mega amounts of the same product, be prepared for sameness for a long stretch, which is all the more reason to purchase only what you love, as you may be using it for months.
If you’re going deep into bulk buying, you likely won’t settle only for what you can get in bulk at the grocery store but will want to shop at the warehouse stores like Costco and BJ’s. Consider the annual membership fees that are required.
Costco’s “Gold Star” membership is $60, and the “Executive” level is $120. BJ’s tiers are $55 and $115. Sam’s Club advertises membership fees of $45 and $100.
Will you frequent the store enough to make the fee worthwhile?
Mistakes to Avoid When Buying in Bulk
As with all shopping, you need to be mindful of a few things. Understand that more is more. If you have something in abundance, it’s all too easy to be less conscious of how much you’re using, meaning you could overuse.
There’s also the issue that if you’re earning a lower income and/or have considerable debt, you may not be able to come up with enough money to purchase bulk products versus their smaller and less expensive single-use versions. One big purchase could blow your weekly budget. If you spend a chunk of money to buy a mega-pack of toilet paper, can you then afford other necessities?
way to save money, but don’t get so giddy grabbing great buys that you forget important things like expiration dates. Products like bleach and sunscreen may expire in 12 months or less.
The Takeaway
Buying in bulk has its advantages. Getting a good deal can keep you motivated to save money, but you’ll need to be savvy. Buy only what you need and what you can use in a timely fashion.
Like all shopping, but particularly in warehouse stores, temptation is everywhere. It’s best to know how to compare cost per unit and to have a list.
Speaking of planning, you can make your money grow faster, which can help you meet your financial goals, with SoFi. Open Checking and Savings, an online bank account that has no account fees or monthly fees, and with direct deposit, you’ll earn a whopping 1.25% APY.
A non-deductible IRA is what it sounds like: An IRA, or IRA contributions, that cannot be deducted from your income. So whereas contributions to a traditional IRA are tax-deductible, non-deductible IRA contributions offer no immediate tax break.
In both cases, though, contributions grow tax free over time — and in the case of a non-deductible IRA, you wouldn’t owe taxes on the withdrawals in retirement.
Why would you open a non-deductible IRA? If you meet certain criteria, e.g. your income is too high to allow you to contribute to a traditional IRA, or even a Roth IRA, a non-deductible IRA might help you increase your retirement savings — or convert to what’s known as a backdoor Roth IRA.
It helps to understand how non-deductible contributions work, what the rules and restrictions are, as well as the potential benefits and risks.
Who Is Eligible for a Non-Deductible IRA?
Several factors determine whether an individual is ineligible for a traditional IRA, and therefore their contributions could fund a non-deductible IRA. These include an individual’s income level, tax-filing status, and access to employer-sponsored retirement plans like a 401(k) (even if the individual or their spouse don’t participate in such a plan).
If you and your spouse do not have an employer plan at work, there are no restrictions on fully funding a regular, a.k.a. deductible, IRA. You can contribute up to $6,000 in 2022; $7,000 if you’re 50 and older. And those contributions are tax deductible.
However, if you’re eligible to participate in an employer-sponsored plan, or if your spouse is, then the amount you can contribute in 2022 to a deductible IRA phases out — e.g. the amount you can deduct gets smaller — based on your income:
• For single filers/head of household: from $68,000 to $78,000. Above $78,000 you can only contribute to a non-deductible IRA.
• For married, filing jointly:
◦ If you have access to a workplace plan, the phaseout is from $109,000 to $129,000
◦ If your spouse has access to a workplace plan, the phaseout is from $204,000 to $214,000.
Non-Deductible IRA Withdrawal Rules
Now for the important part: Taxes. The other big difference between an ordinary, deductible IRA and a non-deductible IRA is how withdrawals are taxed after age 59 ½. (Remember that IRA withdrawals prior to that may be subject to an early withdrawal penalty.)
• Regular (deductible) IRA: Contributions are made pre-tax. Withdrawals after 59 ½ are taxed at the individual’s ordinary income rate.
• Non-deductible IRA: Contributions are after tax (i.e. you’ve already paid tax on the money). Withdrawals are therefore not taxed, because the IRS can’t tax you twice.
To make sure of this, you must report non-deductible IRA contributions on your tax return, but you use Form 8606 to do so. Form 8606 officially documents that some or all of the money in your IRA has already been taxed and is therefore non-deductible. Later on, when you take distributions, a portion of those withdrawals will not be subject to income tax.
If you have one single non-deductible IRA, then the treatment is similar to a Roth IRA. You deposit money you’ve paid taxes on, and your withdrawals are tax free.
It gets more complicated when you mix both types of contributions — deductible and non-deductible — in a single IRA account. Here’s an example of different IRA withdrawal rules:
Let’s say you qualified to make deductible IRA contributions for 10 years, and now you have $50,000 in a regular IRA account. Then, your situation changed, perhaps your income increased, and now only 50% of the money you deposit is deductible; the other half is non-deductible.
You contribute another $50,000 in the next 10 years, but only $25,000 is deductible; $25,000 is non-deductible. You diligently record the different types of contributions using Form 8606, so the IRS knows what’s what.
When you’re ready to retire, the total balance in the IRA is $100,000, but only $25,000 of that was non-deductible (meaning, you already paid tax on it). So when you withdraw money in retirement, you’ll owe taxes on three-quarters of that money, but you won’t owe taxes on one quarter.
Contribution Limits and RMDs
There are limits on the amount that you can contribute to an IRA each year, and deductible and non-deductible account contributions have the same contribution caps. People under 50 years old can contribute up to $6,000, and those over 50 can contribute $7,000 per year.
IRA account owners are required to start taking required minimum distributions (RMDs), similar to a 401(k), from their account once they turn 72 years old. Prior to that, account holders can take money out of their account between ages 59 ½ and 72 without any early withdrawal penalty.
Individuals can continue to contribute to their IRA at any age as long as they still meet the requirements.
Benefits and Risks of Non-Deductible IRA
While there are benefits to putting money into a non-deductible IRA, there are some risks that individuals should be aware of as well.
Benefits
There are several reasons you might choose to open a non-deductible IRA. In some cases, you can’t make tax-deductible contributions to a traditional IRA, so you need another retirement savings account option. Though your contributions aren’t deductible in the tax year you make them, funds in the IRA that earn dividends or capital gains are not taxed, because the government doesn’t tax retirement savings twice.
Another reason people use non-deductible IRAs is as a stepping stone to a Roth IRA. Roth IRAs also have income limits, but they come with additional choices. High income earners can start by contributing funds to a non-deductible IRA, then convert that IRA into a Roth IRA. This is called a backdoor Roth.
One thing to keep in mind with a backdoor Roth is that the conversion may not be entirely tax free. If an IRA account is made up of a combination of deductible and non-deductible contributions, when it gets converted into a Roth account some of those funds would be taxable.
Risks
The primary benefits of non-deductible IRAs come when used to later convert into a Roth IRA. It can be risky to keep a non-deductible IRA ongoing, especially if it’s made up of both deductible and non-deductible contributions, which can be tricky to keep track of for tax purposes. You can keep a blended IRA, it just takes more work to keep track of the amounts that are taxable.
As noted above, it requires dividing non-deductible contributions by the total contributions made to all IRAs one has in order to figure out the amount of after-tax contributions that have been made.
Non-Deductible IRA vs Roth IRA
With a non-deductible IRA, you contribute funds after you’ve paid taxes on that money, and therefore you’re not able to deduct the contributions from your income tax. The contributions that you make to the non-deductible IRA earn non-taxable interest while they are in the account. The money isn’t taxed when it is withdrawn later.
Roth contributions are similarly made with after-tax money and one can’t get a tax deduction on them. Also, a Roth IRA allows an individual to take out tax-free distributions during retirement.
Unlike other types of retirement accounts, a Roth IRA doesn’t require the account holder to take out a minimum distribution amount.
There are income limits on Roth IRAs, so some high-income earners may not be able to open this type of account. The non-deductible IRA is one way to get around this rule, because one can start out with a non-deductible IRA and convert it into a Roth IRA.
How Can I Tell If a Non-Deductible IRA Is the Right Choice?
Non-deductible IRAs can be a great way for high-income savers to make their way into a backdoor Roth account. This strategy can help them reduce the amount of taxes they owe on their savings. However, they may not be the best type of account for long-term savings or lower-income savers.
The Takeaway
For many people, contributing to an ordinary IRA is a clearcut proposition: You deposit pre-tax money, and the amount can be deducted from your income for that year. Things get more complicated, however, for higher earners who also have access (or their spouse has access) to an employer-sponsored plan like a 401(k) or 403(b). In that case, you may no longer qualify to deduct all your IRA contributions; some or all of that money may become non-deductible. That means, you deposit funds post tax and you can’t deduct it from your income tax that year.
In either case, though, all the money in the IRA would grow tax free. And the upside, of course, is that with a non-deductible IRA the withdrawals are also tax free. With a regular IRA, because you haven’t paid taxes on your contributions, you owe tax when you withdraw money in retirement.
If you’re ready to open your own IRA, you’ve come to the right place. You can open an Active Invest account with SoFi Invest in minutes. The online trading platform lets you research, track, buy and sell stocks, ETFs, crypto, and other assets right from your laptop or phone. If you need help getting started, SoFi has a team of professional financial advisors available to answer your questions and help you create a personalized investing plan to reach your goals.
Get started investing for your future today.
SoFi Invest® The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below. 1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates. 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. Photo credit: iStock/Drazen Zigic SOIN0422011
Market overhang is a market phenomenon whereby investors hold off trading a stock that’s seen a drop in price, because the expectation is the price will drop even further.
A market or stock overhang can be precipitated by the awareness that a large block of shares — say, from an institutional investor — is about to hit the market, potentially driving a stock’s price down. But it can result from other factors as well. Although the event has not happened, investors may hesitate to sell or buy shares in anticipation of price drop — and this can further depress the stock price.
While there is also a business use of the term “overhang,” we’ll primarily focus on how market overhang works in finance and what it means for investors.
Market Overhang Definition
In its broadest use, an overhang describes a somewhat artificial market condition brought on by an anticipated shift in supply and demand (a.k.a. the price of a stock). Market overhang has a couple of uses in the business and finance worlds, and in an IPO market as well.
What Is an Overhang in Business?
An overhang in a business context can refer to the practice whereby a company, typically an industry leader, delays the release of a new product in order to stoke greater consumer demand for that product.
A familiar example might be the release of a new technology product or video game. The anticipation of the new release may cause consumers to avoid buying other products as they wait for the arrival of the new one. The overhang may result in lower purchases for existing products — and higher purchases of the newly released product. While this practice can be considered manipulative, it’s not uncommon.
What Is an Overhang in Finance?
More commonly: An overhang in finance is used to describe a dynamic that’s specific to how investors’ expectation about supply and demand can impact a company’s share price.
A market overhang is when a stock’s price declines because investors expect a further price drop on the horizon. Thus, some shareholders may hesitate to sell their shares, because that could further drive down the share price. Other investors may also hesitate to buy shares because of the anticipated price drop.
The business use of the term and the finance use describe different situations, but the common element is how investors’ anticipation of a future event can impact a company’s revenues or share price.
Needless to say, a market overhang can cast a shadow over a company’s performance, influencing share price, liquidity, and more, especially if the situation is prolonged. In many cases, though, market overhang is relatively short-lived and temporary. The difficulty for investors is knowing when the overhang, like bad weather, is finally going to pass. To that end, it helps to know some conditions that can cause a market overhang.
How Market Overhang Is Created
There are a few conditions that can lead to a market overhang. Often these conditions can overlap.
A Stock Decline
The first is where a stock is already declining, perhaps owing to a change in key economic indicators or market conditions, and there is a buildup of selling pressure as investors hesitate to let go of their shares in a down market. This type of market overhang may be resolved once there are signs of price stability (even if it’s at a lower level).
The Role of Institutional Investors
Another type of stock overhang can be created by institutional investors — or companies that manage investments on behalf of clients or members of a firm. Institutional investors tend to have a larger stake in a particular stock compared with individual investors. This means that when the institutional investor plans to sell a large portion of their shares, a market overhang could kick in when investors become aware of this possible sale.
The anticipation of a large block of shares entering the market could drive prices down, and thus investors might hold off trading this particular stock — impacting its price, even before the institutional investor has made a move.
The stock overhang might be worse if it occurs during a price decline. In that case, investors may see the decline in share price, become aware that a large investor may sell a block of shares (which could further depress the price), become even more wary of buying or selling the company’s shares.
IPOs and Market Overhang
A third way that market overhang may occur is after an initial public offering (IPO). An IPO market can be a hot market, after all, and a company may get significant press coverage as its IPO approaches, which can drive up the stock price.
But if the IPO isn’t a big hit, and the share price isn’t what investors hoped (in IPO terms), there might be a bit of an overhang as investors wait for the lock-up period to end. The lock-up period is when company insiders can sell their shares, potentially flooding the market and further lowering the price.
Understanding the Effects of Market Overhang
Market overhang can last for a few weeks or even months — sometimes longer. The chief impact of a market overhang is that it can artificially depress the price of a stock, and if the market overhang is prolonged, that can have a negative impact on company performance.
As noted above, a market overhang typically ends when a stock price stabilizes. Unfortunately that often occurs at a lower price point than before the shares began to decline.
Example of Market Overhang
While some consider the market overhang phenomenon more anecdotal than technical, it’s something to watch out for. It could present an opportunity. And it doesn’t require a complicated, technical stock analysis to understand.
For example, let’s say a large tech company is trading at $300 a share. But there are reports that the company has been facing some headwinds, and it may undergo a rebranding and repositioning. In the face of this change and uncertainty, it’s natural that it might impact company performance and the share price might wobble a bit. But then, if enough investors are concerned about the company’s “new direction,” there could be a bigger shift in trading behavior that might further depress the share price in advance of the company pivot — creating an overhang.
While this isn’t ideal for current shareholders, a market overhang like this could be a “buy” opportunity for other investors. It depends on a number of factors, and it’s always important to understand market trends as well as company fundamentals. But it’s possible that some investors may view the company as a good prospect, despite a currently undervalued share price, and buy shares with the hope they might rise to their previous levels.
Why Market Overhang Matters
Market overhang is a valuable phenomenon for investors to be aware of, largely because it reflects many of the basic tenets of behavioral finance, which is the study of how emotions can impact financial choices. A market overhang could be viewed as the result of loss aversion and herd mentality — two well-documented behavioral patterns among investors.
Loss aversion is, as it sounds, the wish to avoid incurring losses. Herd mentality is, not surprisingly, the tendency for investors to behave as a group: buying or selling in waves. You can see how these two very human impulses — to protect oneself from losses, and to follow the herd — might create a market overhang.
The good news, though, is that investors are capricious and markets can be volatile, which means the market overhang will usually pass, and the stock will regain its normal momentum, whatever that may be. As an investor witnessing the changing weather, so to say, it’s up to you whether a stock overhang might present a buy opportunity or a sell opportunity — if you need to harvest some losses, for tax purposes.
What Market Overhang Means for Shareholders
Market overhang affects different shareholders differently. Since institutional investors tend to be the ones who create market overhang, they also tend to have the upper hand on what it means for their investments.
Regular investors might worry that some of their shares are losing value. But with the ebbs and flows of the stock market, a price can rise and fall at various times throughout the year — even throughout a given day. Fluctuation is normal and this is part of the risk in investing in the stock market. Consider waiting out the storm to make an informed decision. There’s a chance the stock could rise to new highs and your investment will be worth even more.
The Takeaway
What is a market overhang? While this type of trend is considered more behavioral in nature, it’s worthwhile for investors to keep it in mind when a stock isn’t performing as expected. In some cases, when investors anticipate an event that could drive down a stock’s price, they may hold off on trading that stock, further depressing the price and creating a market overhang.
In that sense, a market overhang can become a self-fulfilling prophecy. Institutional investors can create a market overhang, for example, when they contemplate selling a large portion of their holdings. This might spook other investors, who likewise decide not to trade their shares, creating a sort of temporary downward spiral in the share price. But because two common investor dynamics are at play here — the fear of losses, and the desire to comply with what other investors are doing — the emotions are usually temporary, and the market overhang passes. And just because a price decline might upset some investors, it could present a buying opportunity for others.
If you’re ready to start your own portfolio, consider opening an Active Invest self-directed brokerage account with SoFi Invest. You can set it up easily on your phone or laptop, and start trading stocks, ETFs, crypo, IPO shares, and more. SoFi members even have access to complimentary financial advice from professionals. Get started investing for your future today!
SoFi Invest® The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below. 1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates. 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.
Save more, spend smarter, and make your money go further
Creating a budget can offer you peace of mind and give you more confidence in managing your finances. A budget can help make you more aware of how you spend your money, and the places where you may be spending too much, so you can figure out how much to save.
So, what is a budget?
A budget is essentially a summary of how much money you bring in and how much money you spend on a monthly basis. The idea of creating a budget might be intimidating, but it actually doesn’t have to be all that complicated. You just have to calculate the amount of money you make and compare it to your expected expenses. A basic budget is one of the most important things you need to take charge of your money—and help achieve more of your financial dreams.
In this series, we’ll be answering important questions like “What does budget mean?”, “Why is Budgeting important?”, and more. This is the first chapter of our budgeting series, and we will go over the basics of what budgeting is and how to create one. To learn more about budgeting, continue reading, or use the links below to jump to a section of your choice.
Intro to Budgeting: What is a Budget?
So before we get into any more details about budgeting and how to create one, let’s first answer the question of: What is the meaning of budget?
A budget is a financial outline designed to measure and guide your income and expenditures for a certain period of time, such as one month, a quarter, or a year. With an understanding of the budget basics, you can track the amount you’re making compared to what you’re spending and saving.
Why do I want a budget? Consumer.gov says making a budget can help you determine your spending plan and in turn, show you where you should limit your spending and what you can afford to spend more money on.
There are many ways you can maintain a budget — with a spreadsheet, paper and pen, or through a budgeting app.
Whether you’re new to managing your own finances, never learned how to budget, or are tired of living paycheck to paycheck, this post is for you. In our Budgeting 101 guide, we’ll go over some budgeting basics, show you how to create a budget, teach you how to avoid common budget-related mishaps, and ultimately, give you a budget calculator and some budgeting tips to create a budget that’s efficient and functional for your lifestyle.
Who Needs to Use a Budget?
Any person who wants to take control of their finances and feel more financially secure could benefit from a budget. A budget isn’t just for people who want to cut back their expenses and save money. A budget can be for anyone! Even if you’re comfortable with your income and your expenses, you can still benefit from being aware of how and where you spend your money.
A budget is especially beneficial for people who need to save money for various reasons, like if you need to budget for your wedding or save for a down payment on a house. Having a budget can also be helpful for people whose income is unpredictable or who are going through a career change and need to be more aware of their finances.
To make a financial plan, you need to have a budget. A financial plan is a great way to organize your financial situation and figure out your goals and how you can achieve them. Without a budget, there’s no way to find out how much money you’re saving vs spending, which is imperative in achieving your personal and financial goals.
Everyone’s budget will look different, but generally speaking, a budget will include your various living expenses, like how much you spend on rent, groceries, transportation, healthcare costs, and loans.
You might overlook some things when it comes to your expenses, but having a budget can really help you hone in on how you spend your money. Your living expenses can easily add up, so it might be helpful to do things like calculate your monthly grocery budget so that you can figure out exactly how much you have to spend.
Living expenses will also differ for every person depending on where they live, but you can use a cost of living calculator to help figure out if it’s possible to maintain your current standard of living based on your income.
Why Is Budgeting Important?
There are countless reasons why having a budget is important and how it can positively impact your finances, such as:
It Helps You Control Your Spending
Without a budget, you would have no idea if you were spending beyond your means. A budget will help you control your spending by making you more aware of how much you spend on a daily basis in comparison to how much you’re bringing in. It also might be a good idea to try a more minimalist lifestyle so you can cut back on unnecessary costs.
It Helps You Figure Out Your Long-Term Goals
We all have different long-term goals that we want to achieve, and creating a budget can help you achieve them. For instance, if one of your goals is to retire by 50, a budget can help you figure out how much you need to save for retirement each month. There are various tricks to help you save so that you can feel like your long-term goals are actually attainable.
It Can Make You Feel More Financially Secure:
There’s nothing worse than feeling overwhelmed with your finances. Fortunately, having a budget can make you feel more confident and secure in your financial health, so you’re always prepared for any unexpected expenses.
It Can Help You Get Out of Debt
There are a lot of different things that can put you in debt: credit cards, medical bills, college loans, unpaid taxes, the list goes on. Being in debt is terrifying, but one way you can get out of debt is by budgeting. Budgeting can help you save part of your paycheck so you can put that towards paying off your debt.
It Keeps You Organized
It’s easy to get disorganized when it comes to your finances, but having a budget can help you manage and organize your monthly bills, debt payments, and other expenses.
It Helps You Save Money
One of the main benefits of budgeting is that it helps you save money. Rather than living pay-to-paycheck, budgeting helps you stay ahead of the curve so you can save money for the present and future. You can also increase your income streams at home and make even more money to put towards savings.
How to Create a Budget: 5 Actionable Steps
To plan your budget, you’ll need a few key pieces of information. With these basic components, you’ll have a foundation for your budget that you can tweak as the months go by and as your financial circumstances change. To get you a step closer to your financial goals, let’s go over how to create a budget step-by-step.
1. Calculate your monthly income after taxes
An accurate monthly income is the cornerstone of a successful budget. Without figuring out how much money you actually have in your wallet, it’s pretty hard to allocate funds towards saving, spending, and settling outstanding debts. But calculating your monthly income takes a little bit more effort than glazing over your monthly paychecks.
To find out how much you’re actually earning, you’ll need to do a little bit of simple math—don’t worry, we’ll walk you through the entire way.
Calculating your monthly income as a salaried employee
One of the benefits of being a salaried employee is knowing exactly what to expect on your paycheck—month in and month out—and this pay structure will serve as an added perk when you’re building a monthly budget. To calculate your pre-tax monthly income as a salaried employee, all you need to do is divide your annual salary by 12.
Let’s look at an example:
Laura is a salaried employee who makes $60,000 a year. To calculate her pre-tax monthly income, she would divide $60,000 by 12, which equals $5,000 gross monthly pay.
Now that you have your gross monthly income figured out, you’ll need to deduct taxes and other expenses that may dock your pay—such as medical benefits and contributions to an employer-sponsored retirement plan. We’ll show you how to estimate this number in just a moment, but first we’ll go over how hourly employees can calculate monthly income.
Calculating your monthly income as an hourly employee
If you’re an hourly employee, your monthly income isn’t always as consistent as you might like it to be, but with the proper budgeting technique you can definitely nail down a budget that maximizes your monthly income and gets you closer to meeting your greater financial goals. Here’s how to figure your monthly income as an hourly employee:
Let’s take a look at an example:
Keith is an hourly employee who makes $15 an hour working 40 hours per week, making his gross weekly income $600. Keith multiplies this number by 50 to reflect the weeks he plans to work throughout the year (minus his two-week vacation). Then, he divides by 12 and estimates that his gross monthly pay is $2,500.
Remember, this number does not factor in the deductions that may impact his take-home pay, so now he’ll have to subtract these from his gross monthly income to get an accurate picture to build his monthly budget.
Subtract taxes and other deductions from your gross monthly income. If you’re unsure of where to find this information, one place you can look is your employer-provided pay stub. You’ll be able to see how much is deducted by checking the net pay that’s deposited to your checking account.
To get the most accurate picture of your monthly take-home pay, you’ll need to subtract taxes and other deductions from your income.
Federal Taxes: To find out your federal tax liability each month, refer back to your annual gross income that you calculated before. Then, compare your income to the federal income tax rates to find out what percentage of your income will go toward your federal income taxes. Once you’ve found this number, divide by twelve to estimate your monthly tax liabilities.
State Taxes: Calculating your state income taxes is essentially the same as finding your federal tax liability, but this time, you’ll need to refer to your state’s income tax rates. Multiply your annual income by your tax rate, then divide by twelve to see how much you’ll owe in taxes each month.
Social Security and Medicare Taxes: According to the IRS, the federal withholding rates for FICA are: -6.2% for Social Security -1.45% for Medicare
Misc: Depending on your financial situation, you may have other deductions to consider when calculating your monthly take-home pay. Use previous paychecks to help you determine how much money will be withheld to account for 401k contributions, benefits, etc.
2. Identify fixed and variable expenses
Once you have a clear picture of how much money you’re actually working with each month, it’s time to figure out how you’re spending it…or how you should be spending it. There are two main types of expenditures you need to account for as you build your budget: fixed and variable expenses. The difference between the two is that fixed expenses tend to cost you the same amount each month while variable expenses…vary.
You can look for payments toward your living expenses on your monthly bank statements and credit cards.
Fixed expenses
Your fixed expenses like rent payment, groceries, transportation, and health care costs are likely to absorb a large chunk of your budget, which makes them all the more important to track as the months go by.
To determine how much of your budget is going towards fixed expenses, start by creating a list of your regular expenditures. Here’s a list of common fixed expenses to help you get started:
Rent
Mortgage
Car payments
Student loans
Once you’ve built a complete list, calculate a monthly estimate for each one, so you know how much of your income should be dedicated to it. If you’re not sure how much something costs, review previous bills and credit card statements to see what you’ve spent in the past.
Variable expenses
Whether you belong to a gym, go on a weekly date, or make a purchase on a shopping app, make sure you account for these costs in your budget. As opposed to fixed expenses that stick to relatively the same cost each month, these miscellaneous items may change month over month.
Some examples of variable budget expenses include:
Entertainment
Groceries
Dining out
Gas
Clothing
Dating
Ride-sharing
Utilities
Determining how much you spend on variable living expenses each month can be tricky since it may be rarely consistent, but it’s important to get a close estimate so that you can determine whether you can maintain the same spending habits or if you need to cut back in certain areas. Use your monthly bank statements to help you estimate your variable expenses, and in turn, set limits for each category.
How to factor expenses into your budget
If you’re using one of our free budgeting templates, simply input the values of these fixed expenses into your budgeting spreadsheet to help plan out your financial strategy each month. In the Mint app, you can connect your bank account to easily identify recurring expenses, or enter in your own budget for fixed expenditures.
3. Set savings and debt payoff goals
As you saw in step two, if you have student loans and credit card balances, you’ll want to attribute part of your monthly budget to paying them off. Each month, allocate a certain amount to these monthly payments. The sooner you pay off debts, the less interest you’ll pay overall, and the closer you are to meeting your greater financial goals.
When creating a personal budget, include these types of debts into your planning:
If you’re all caught up on your bills and want to stow away funds for retirement or save up for a new car, it’s helpful to establish concrete goals, then break them down into achievable bite-size chunks. Having trouble coming up with realistic, meaningful financial goals? Take a look at these short-term and long-term examples:
Short-term financial goals
Long-term financial goals
Establish a retirement budget to build a retirement account
Pay off your mortgage or student loans
Start your own business
If you’re using the Mint app, you can set up custom goals for your savings in the budgeting section. Simply add a budget, define a dollar amount, and monitor your progress.
4. Record your spending
You know that feeling when you’re checking out at the grocery store, the cashier announces your total, you swipe your card, and by the time you’re loading your grocery bags into your car, you realize you didn’t even register the total amount you paid. It’s a concerning, out-of-body experience—but we’ve all been there.
This is why tracking your spending is so important. It’s easy to become complacent about the amount of money you’re spending and end up with revolving debt ruling your finances. Depending on the budgeting method you choose—budgeting app, pen and paper, or online budgeting tool—you can pick a way to record your spending that best suits your lifestyle.
Here are a few tips to make expense tracking easier and more efficient:
Ditch the Cash: Stick to card payments if you have trouble keeping tabs on how much money you spend each month. This way, you can refer to your online bank statements to easily monitor your spending.
Check Yourself Before You Wreck Yourself: Make it a point to analyze your spending habits on a weekly basis. Collect any receipts or statements you have and check to see if you’re on budget or if you need to reel in your spending for the rest of your budgeting cycle. Budgeting will help monitor your spending so you are able to keep living within your means.
Go Old-School: If you’d rather skip the technology and take a more tactile approach to budgeting, a pen and a checking book will do just fine. Just be sure to make a habit of recording your expenses as soon as you’ve swiped your card.
Try the New-School Way: If you can’t be bothered to whip out a pen and paper each time you check out at the register, automated expense tracking might be a better alternative. Using the Mint app, you can connect your bank account to effortlessly record your spending and monitor transaction trends.
5. Track your budgeting progress, review, and revise
Creating a basic budget is a huge financial victory. It helps you ensure you can cover your expenses and reach for exciting milestones, like buying a house or paying off your student loans. As you continue to budget, make adjustments as you see fit. Your income, expenses or lifestyle might change, and it’s important to ensure your budget keeps working for you and your future.
Set up a budget schedule and make it a point to review your budget on a regular basis—each week, every month, or at least every quarter to see if any major changes, or milestones have taken place. Not only will this help you recognize and celebrate your successes, but it will also encourage you to reevaluate and tailor your strategy as needed.
Budgeting Breakdown for Beginners
Now that you know how to make a budget, it’s time to discuss best practices and budgeting basics to ensure your budget works for your money and your lifestyle.
How to Choose the Budgeting Style That Works for You
Here’s the thing about budgeting. There’s not really a one-size-fits-all approach that works for every individual. Depending on your spending habits, financial goals, lifestyle, and your relationship with money in general, one budgeting tactic might make more sense for you than another. Let’s take a look at a few budgeting methods you can try.
Starting simple with your bank statements
One easy way to start budgeting is to take your previous month’s bank statements and create a budget using the deposits as your monthly income and categorize all the withdrawals on the bank statement for:
Living expenses
Food
Auto
Housing
Health
Other expenses
Then you can see what last month’s budget looks like to be able to make adjustments to this month’s spending. This allows you to better accomplish your life goals and ensure you’re placing money where it needs to be in order to make progress.
Keep tabs on transactions with the envelope method
The envelope system is a simple budgeting approach that involves spending with cash instead of plastic.
If you budget $100 for eating at restaurants, put that amount into an envelope. When the money’s gone, you have to wait until next month to eat out again.
If you budget $200 for groceries</span id=”anc6″>, put $200 in a “grocery” envelope. If you’re at the checkout line and the total comes to $203, you’ll need to put something back.
The envelope method helps you be more strict with your budget. The pockets of cash are a visual and tangible reminder of how much money you’re dedicating to each area of your life.
Follow the 50/30/20 rule
Financial experts recommend the 50/30/20 guideline as a basic financial strategy, especially for young professionals. You can also use the new 50/30/20 budget calculator to help create your new budget.
The rule says that you should allocate a 50%, 30%, and 20% of your income to the following categories:
Personal Expenses: 30% -Entertainment -Dining out -Date night -Shopping for non-essential items
Savings: 20% –Emergency savings -Retirement account -Travel fund –Rainy day fund
50/30/20 Calculator
50/30/20 Budget Calculator
Here’s how much you have for:
Essentials$0.00
Wants$0.00
Savings$0.00
Consider a zero-based budget
With the zero-based budgeting technique, each month begins and ends with zero dollars. When you build out your zero-based budget, every dollar has a purpose. Let’s take a look at a sample budget using the zero-based method. If you make $3,500 every month, attribute each dollar to an expense. You might put $1,750 toward living expenses, $700 toward paying off debt, and $1,050 toward personal expenses like going to the movies or saving for vacation. At the end of the month, your balance is zero, because every dollar is accounted for.
Keep in mind, the zero-base doesn’t mean you’re spending every dollar that you earn, but rather, that each one is allocated to a different category—savings account included!
Selecting a Budgeting Tool That Suits Your Lifestyle
As we mentioned before, the one-size-fits-all methodology is a no-go when it comes to personal budgeting. Your financial situation is completely unique to you whether we’re talking about your income, expenses, or your financial goals, so it only makes sense to tailor your budgeting strategy to your individual preferences.
Here are a few tips to help you find a budgeting tool that makes sense for you:
Read reviews, or ask around: Although money can be considered a taboo topic, that doesn’t mean you need to tip-toe around budgeting techniques in your relationship or with your friends. You probably trust their opinions more than anyone else, after all. See which tools they use and ask what they like and don’t like about their current budgeting method.
Test it out: Before buying into any paid budgeting subscriptions, give the free trial a go. This way, you’ll be able to familiarize yourself with the features and decide if it’s a tool you’d continue using.
Consider compatibility: If you’d like to automate your expense tracking, make sure that the budgeting tool you want to use can be integrated with your bank and credit card issuers.
Use a template or tool tailored to your needs: Depending on your financial circumstances, you may need a simple budget, or one that’s specific to your income and expenses. Or perhaps you’ll need additional functionality like investment capability or the ability to make peer-to-peer transactions. According to a recent survey, 85% of people use either banking apps or online banking platforms.
As you select a budgeting tool, consider how you’ll use it and how the tool fits into your lifestyle and financial goals. Our budget templates include the following categories:
Common Budgeting Obstacles and Mistakes
Before you set sail on your journey towards better budgeting, it’s time to talk about some of the obstacles you may encounter on your way. Like most things in life (or the sea in this case), budgeting isn’t always clear-cut—there can be aspects that are difficult or ambiguous. Factoring in random, one-time expenses or calculating a part-time gig can complicate your budget, but trust us, your voyage can (and must) continue! Here are a few tips to ensure you have the most accurate budget—no matter the circumstance.
1. Estimating irregular income
If you’re a freelancer or work a side hustle, you likely have an irregular income that can be hard to predict. In these cases, it’s best to estimate a conservative (low) amount, so you don’t overspend. Review the past 3-6 months of income and watch for any patterns. Can you find an approximate hourly rate or weekly rate for what you bring in? If you’re new to a job, like being a waitress, ask a coworker how much they typically make in tips to help you forecast your monthly tip outs. Above all, do your best to create an income estimate—knowing you can tweak it along the way.
2. Paying for emergency expenses
Unfortunately, accidents and unexpected bills happen to everyone. From car troubles to job loss and medical expenses, emergencies can be expensive and having a backup emergency budget can help cut down expenses. An unexpected bill can throw off our budget, and set you back. If an incident does occur, try to factor the expense into your budget while paying your other bills. For instance, you may want to cut back on dining out for the month, or pick up an extra shift to help you cover a bill. If you can, build an emergency fund into your budget to safeguard your finances against future unexpected situations.
3. Forgetting one-time expenses
Items like annual memberships, vacations, and gifts for family and friends are often forgotten when creating budgets. If you can, set aside a small amount of cash every month for these extra expenses. You can estimate the expected cost for the year and account for them in your monthly budget. For example, if you typically spend $300 on Christmas gifts, set aside an extra $25 every month to account for these added expenditures. By the time December comes, you’ll have the cash available to spend on gifts.
How Often Should You Review Your Budget?
So now that you’ve learned how to actually create a budget, you’re probably wondering: How often should I review my budget?
It’s ultimately up to you, but you should aim to review your budget at least once every few months. Some people even prefer to do it each week or new month, so that they can ensure they’re always on top of their expenses.
You may want to consider checking in quarterly and doing annual budget reviews so you can see if you’re on track for your long-term financial goals. Budgeting isn’t just something you do one month and then never again. Budgeting is a long-term process, so it’s crucial to regularly review your budget to make sure you’re living within your means and not overspending.
A budget tracking template is a good way to keep your finances organized so you can create a reviewing system that works for you.
Key Takeaways: Budgeting 101
Creating a budget is really as simple as following these five steps:
Calculating your take-home pay
Estimating your expenses
Setting savings and debt payoff goals
Recording your spending
Tracking your progress
To find the right budgeting method and tools for you, consider compatibility, ask around, and try out different options
Avoid budgeting pitfalls by preparing for unexpected circumstances and tailoring your budgeting strategy as needed
Bottom Line: Budgeting Can Help You Take Control of Your Finances
So, now that you have a better idea of what a budget is and how to create one, you can answer the question: What is your budget?
Every person’s budget will look different, and creating a budget that works for you may take some time. So for help with your budgeting journey, you should continue reading this series which will cover budgeting tools, tips for managing your budget, and more. And once you have a good understanding of what a budget is, you can move on to the next chapter in the series, which covers what to include in a budget.
Sign up for Mint to help you stick to your budget and goals Let the Mint app do the heavy lifting for you. It can calculate your income, total your spending by category, and help you conquer your savings goals. Tracking expenses with the app is simple and accessible—no matter where you are.
Save more, spend smarter, and make your money go further
Mint is passionate about helping you to achieve financial goals through education and with powerful tools, personalized insights, and much more. More from Mint
Pests in our homes are gross but seeing slimy creatures crawling along bathroom walls or slug trails is enough to cause concern. Slugs, which are often described as snails without a shell, are often found in gardens or farms. They’re attracted to food and moisture and love to eat vegetables and flowers. Since slugs and snails like damp conditions, some people might find themselves with a slug infestation in and around bathrooms, including the shower, shower floor or toilet.
If you ever wondered why slugs are in your bathroom and how to get rid of them, here’s a quick primer on what they are, what attracts bathroom slugs, where you might find them around your house and how to prevent slugs or get rid of them at the first sight of slime trails.
What’s a yellow cellar slug?
The yellow cellar slug, sometimes called a cellar slug or tawny garden slug, is yellow-brown or green-yellow in color. They’re part of the Gastropod family, which consists of slugs and snails. They’re pests and can do a fair amount of damage outdoors, especially in gardens. Slugs like to eat decaying plants, including plant leaves or materials.
Why are there slugs in the bathroom?
Slugs and snails are food-driven and like dark damp refuges. They don’t need larger gaps to find their way inside a house. Ideal entry points are as simple as a small hole in a wall or crawl space.
If you see evidence of a slug in your bathroom, whether it’s hiding by a tub drain or you see slime along a bath or shower, you’ll want to look for possible leaky boundaries or other possible entry points. Do you have pet food lingering that will attract slugs? Slugs have been found eating leftovers. Since slugs also eat mold (or, as the British like to say “eats mould”), like those dark spaces in your house where there’s warmth and chill out where algae are growing, you’ll want to look for evidence in those areas.
Look for a possible entry point in your house, look for a hole near a shower wall or near drain lines. If you see a snail or slug’s tell-tale sign of their slime line underneath a drain pipe or near a shower, which often looks like a thread runs along the bathroom floor, either during the night or in the morning, you may have to figure out how to create a bait to trap them.
Are there slugs in other rooms in the house?
Most often, a snail or slug will find its way to a bathroom during the night since that has the conditions it loves best: dark and damp. Also, there are holes via drain lines. That’s not to say they can’t make it into other rooms in your house. As long as there are easy-to-access holes to get into a house and access to food, especially in the form of decaying plants or pet food, they don’t need to make their entry through a bathroom.
If they originally posted their flag in a bathroom, it’ll be that much easier for them to slide their way into other rooms in the house so it’s best to consider ways to get rid of slugs when you first notice them.
How to deter slugs from making their way into your home
The best way to not attract slugs into your house in the first place is to cut off any entry points and not have food available for them to eat. If you notice any holes along windows or flooring, seal them with silicone sealant. You may have slugs feasting on your plants outdoors or on a patio, so line the planters and your entryways with copper tape as a deterrent.
If slugs or snails do make it indoors, some have resorted to pellets and other attempts to get rid of them.
Can I kill slugs with slug pellets?
Slug pellets or slug bait are small cylindrical “bullets” that contain metaldehyde, a substance that’s poisonous to slugs. According to the Florida Department of Agriculture and Consumer Services about the use of using slug pellets to eradicate slugs, “metaldehyde works by disrupting the mucus production ability of snails and slugs. This reduces their digestion and mobility and makes them susceptible to dehydration. Snails and slugs that have eaten metaldehyde often seek hiding places, become inactive and begin to die within days.”
It’s important to note these pellets contain poison and the United Kingdom banned their sale as of April 1, 2022, because they pose an unnecessary risk to birds, dogs and mammals. While they’re still permitted in the United States, it’s important to consider where they’re placed so an animal doesn’t mistake it for pet food or a child doesn’t accidentally consume it by crawling along the floor.
Ways to get rid of slugs in your apartment
Slugs, in general, don’t pose a health risk. But slugs and snails do serve as a host for some parasites during the larval stage. You really don’t want them in your home if you can help it.
If you don’t want to go the pellets route, some people opt for other methods to show these slimy nuisances they’re not welcome. They may also trap or kill them and dispose of their squishy bodies.
According to the National Pesticide Information Center (NPIC), iron phosphate is a compound that combines phosphorous and oxygen with iron and can kill slugs and snails when eaten. Another product NPIC recommends that’s non-poisonous to humans is products that contain “food grade” diatomaceous earth. “Diatomaceous earth causes insects to dry out and die by absorbing the oils and fats from the cuticle of the insect’s exoskeleton,” according to NPIC. “Its sharp edges are abrasive, speeding up the process. It remains effective as long as it’s kept dry and undisturbed.”
As mentioned earlier, the copper tape can fend off slugs. Other easy, affordable and do-it-yourself approaches are placing eggshells around the perimeter of where slugs might enter. Or, placing beer in a bowl since they’re attracted to the yeasty odors found in beer. You can also add a bowl that holds standing water so they can slide their slimy bodies into the water trap and drown.
Slugs also avoid salt because salt crystals bind moisture. Salt draws water from slugs and dehydrates them. You can always try an experiment and sprinkle salt in half of an area and not the other area. Then you can see if you notice the telltale signs of slugs in the area you didn’t sprinkle.
Keeping slugs out of your apartment
Any pests are not welcome inside your apartment and slugs are no exception. We want our bathrooms as a place of calm and respite and our homes clean and dust-free and without unwelcome guests. Finding how slugs are getting in is one way to not put out the welcome mat. But if they do find their way indoors, it’s comforting to know there are several ways to stop them in their slimy tracks.
