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Q: Why Do Investors Buy Dividend Stocks?

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

Jan

2025

Dividends: What They Are and How They Work

By Michael Flannelly | Investing | Comments Off

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

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

Key Points

• Dividends are payments made by companies to shareholders, either in cash, additional shares of stock, or property.

• Dividend payments are based on the company’s dividend yield and the number of shares owned by the investor.

• Dividends can be paid out in cash or additional stock, and they usually follow a fixed schedule.

• Companies are not required to pay dividends, and dividend payments are not always guaranteed.

• Dividend stocks can provide regular passive income, offer dividend reinvestment plans, and may have tax advantages.

What Is a Dividend?

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

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

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

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

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

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

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

Types of Dividends

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

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

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How Are Dividends Paid Out?

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

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

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

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

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

Example of Dividend Pay Out

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

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

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

Why Do Investors Buy Dividend Stocks?

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

Passive Dividend Income

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

Dividend Reinvestment Plans

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

Dividend Tax Advantages

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

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

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

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

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

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

How to Evaluate Dividend Stocks

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

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

Analysis

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

Dividend Yield

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

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

Dividend Yield = Annual Dividend Per Share ÷ Price Per Share

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

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

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

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

Tax Implication of Dividends

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

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

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

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The Takeaway

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

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

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FAQ

Are dividends free money?

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

Where do my dividends go?

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

How do I know if a stock pays dividends?

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

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Jan

2025

How Much Should I Contribute to My 401(k)?

By AJ Smith | Growing Wealth, Investing, Life & Career, Preparing for Retirement | No Comments

Once you set up your retirement plan at work, the next natural question is: How much to contribute to a 401(k)? While there’s no ironclad answer for how much to save in your employer-sponsored plan, there are some important guidelines that can help you set aside the amount that’s right for you, such as the tax implications, your employer match (if there is one), the stage of your career, your own retirement goals, and more.

Here’s what you need to think about when deciding how much to contribute to your 401(k).

Key Points

• Determining the right 401(k) contribution involves considering tax implications, employer matches, career stage, and personal retirement goals.

• The contribution limits for a 401(k) are $23,000 in 2024 and $23,500 in 2025 for those under age 50. Those aged 50 and over can make an additional catch-up contribution.

• Early career contributions might be lower, but capturing any employer match is beneficial.

• Mid-career individuals should aim to increase their contributions annually, even by small percentages.

• Approaching retirement, maximizing contributions and utilizing catch-up provisions can significantly impact savings.

401(k) Contribution Limits for 2024 and 2025

Like most tax-advantaged retirement plans, 401(k) plans come with caps on how much you can contribute. The IRS puts restrictions on the amount that you, the employee, can save in your 401(k); plus there is a cap on total employee-plus-employer contributions.

For tax year 2024, the contribution limit is $23,000, with an additional $7,500 catch-up provision for those 50 and older, for a total of $30,500. The combined employer-plus-employee contribution limit for 2024 is $69,000 ($76,500 with the catch-up amount).

The limits go up for tax year 2025. The 401(k) contribution limit in 2025 is $23,500, with an additional $7,500 catch-up provision for those 50 and older, for a total of $31,000. The combined employer-plus-employee contribution limit for 2025 is $70,000 ($77,500 with the catch-up amount).

Also in 2025, there is an extra 401(k) catch-up for those aged 60 to 63. Thanks to SECURE 2.0, these individuals can contribute $11,250 instead of the standard catch-up of $7,500, for a total of $81,250.

401(k) Contribution Limits 2024 vs 2025

	2024	2025
Basic contribution	$23,000	$23,500
Catch-up contribution	$7,500	$7,500
Total + catch-up	$30,500	$31,000
Employer + Employee maximum contribution	$69,000	$70,000
Employer + employee max + catch-up	$76,500	$77,500

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How Much Should You Put Toward a 401(k)?

Next you may be thinking, now I know the retirement contribution limits, but how much should I contribute to my 401(k)? Here are some guidelines to keep in mind as you’re deciding on your contribution amount.

When You’re Starting Out in Your Career

At this stage, you may be starting out with a lower salary and you also likely have commitments to pay for, like rent, food, and maybe student loans. So you may decide to contribute a smaller amount to your 401(k). If you can, however, contribute enough to get the employer match, if your employer offers one.

Here’s how it works: Some employers offer a matching contribution, where they “match” part of the amount you’re saving and add that to your 401(k) account. A common employer match might be 50% up to the first 6% you save.

In that scenario, let’s say your salary is $100,000 and your employer matches 50% of the first 6% you contribute to your 401(k). If you contribute up to the matching amount, you get the full employer contribution. It’s essentially “free” money, as they say.

To give an example, if you contribute 6% of your $100,000 salary to your 401(k), that’s $6,000 per year. Your employer’s match of 50% of that first 6%, or $6,000, comes to $3,000 for a total of $9,000.

As You Move Up in Your Career

At this stage of life you likely have a lot of financial obligations such as a mortgage, car payments, and possibly child care. It may be tough to also save for retirement, but it’s important not to fall behind. Try to contribute a little more to your 401(k) each year if you can — even 1% more annually can make a difference.

That means if you’re contributing 6% this year, next year contribute 7%. And the year after that bump up your contribution to 8%, and so on until you reach the maximum amount you can contribute. Some 401(k) plans have an auto escalation option that will automate the extra savings for you, to make the process even easier and more seamless. Check your plan to see if it has such a feature.

As You Get Closer to Retirement

Once you reach age 50, you’ll likely want to figure out how much you might need for retirement so you have a specific goal to aim for. To help reach your goal, consider maxing out your 401(k) at this time and also make catch-up contributions if necessary.

Maxing out your 401(k) means contributing the full amount allowed. For 2025, that’s $23,500 for those 49 and under. If, at 50, you haven’t been contributing as much as you wish you had in previous years, you can also contribute the catch-up contribution of $7,500. So you’d be saving $31,000 for retirement in your 401(k) in 2025. With the potential of compounding returns, maxing out your 401(k) until you reach full retirement age of 67 could go a long way to helping you achieve financial security in retirement.

The Impact of Contributing More Over Time

The earlier you start saving for retirement, the more time your money will potentially have to grow, thanks to the power of compounding returns, as mentioned above.

In addition, by increasing your 401(k) contributions each year, even by just 1% annually, the savings could really add up. For instance, consider a 35-year-old making $60,000 who contributes 1% more each year until their full retirement age of 67. Assuming a 5.5% annual return and a modest regular increase in salary, they could potentially save more than an additional $85,000 for retirement.

That’s just an example, but you get the idea. Increasing your savings even by a modest amount over the years may be a powerful tool in helping you realize your retirement goals.

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Factors That May Impact Your Decision

In addition to the general ideas above for the different stages of your life and career, it’s also wise to think about taxes, your employer contribution, your own goals, and more when deciding how much to contribute to your 401(k).

1. The Tax Effect

The key fact to remember about 401(k) plans is that they are tax-deferred accounts, and they are considered qualified retirement plans under ERISA (Employment Retirement Income Security Act) rules.

That means: The money you set aside is typically deducted from your paycheck pre-tax, and it grows in the account tax free — but you pay taxes on any money you withdraw. (In most cases, you’ll withdraw the money for retirement expenses, but there are some cases where you might have to take an early 401(k) withdrawal. In either case, you’ll owe taxes on those distributions.)

The tax implications are important here because the money you contribute effectively reduces your taxable income for that year, and potentially lowers your tax bill.

Let’s imagine that you’re earning $100,000 per year, and you’re able to save the full $23,000 allowed by the IRS for 2024. Your taxable income would be reduced from $100,000 to $77,000, thus putting you in a lower tax bracket.

2. Your Earning Situation

One rule-of-thumb is to save at least 10% of your annual income for retirement. So if you earn $100,000, you’d aim to set aside at least $10,000. But 10% is only a general guideline. In some cases, depending on your income and other factors, 10% may not be enough to get you on track for a secure retirement, and you may want to aim for more than that to make sure your savings will last given the cost of living longer.

For instance, consider the following:

• Are you the sole or primary household earner?

• Are you saving for your retirement alone, or for your spouse’s/partner’s retirement as well?

• When do you and your spouse/partner want to retire?

If you are the primary earner, and the amount you’re saving is meant to cover retirement for two, that’s a different equation than if you were covering just your own retirement. In this case, you might want to save more than 10%.

However, if you’re not the primary earner and/or your spouse also has a retirement account, setting aside 10% might be adequate. For example, if the two of you are each saving 10%, for a combined 20% of your gross income, that may be sufficient for your retirement needs.

All of this should be considered in light of when you hope to retire, as that deadline would also impact how much you might save as well as how much you might need to spend.

3. Your Retirement Goals

What sort of retirement do you envision for yourself? Even if you’re years away from retirement, it’s a good idea to sit down and imagine what your later years might look like. These retirement dreams and goals can inform the amount you want to save.

Goals may include thoughts of travel, moving to another country, starting your own small business, offering financial help to your family, leaving a legacy, and more.

You may also want to consider health factors, as health costs and the need for long-term care can be a big expense as you age.

4. Do You Have Debt?

It can be hard to prioritize saving if you have debt. You may want to pay off your debt as quickly as possible, then turn your attention toward saving for the future.

The reality is, though, that debt and savings are both priorities and need to be balanced. It’s not ideal to put one above the other, but rather to find ways to keep saving even small amounts as you work to get out of debt.

Then, as you pay down the money you owe — whether from credit cards or student loans or another source — you can take the cash that frees up and add that to your savings.

The Takeaway

Many people wonder how much to contribute to a 401(k). There are a number of factors that will influence your decision. First, there are the contribution limits imposed by the IRS.

While few people can start their 401(k) journey by saving quite that much, it’s wise, if possible, to contribute enough to get your employer’s match early in your career, then bump up your contribution amounts at the midpoint of your career, and max out your contributions as you draw closer to retirement, if you can.

Another option is follow a common guideline and save 10% of your income beginning as soon as you can swing it. From there, you can work up to saving the max. And remember, you don’t have to limit your savings to your 401(k). You may also be able to save in other retirement vehicles, like a traditional IRA or Roth IRA.

Of course, a main determination of the amount you need to save is what your goals are for the future. By contemplating what you want and need to spend money on now, and the quality of life you’d like when you’re older, you can make the decisions that are best for you.

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FAQ

How much should I contribute to my 401(k) per paycheck?

If you can, try to contribute at least enough of each paycheck to get your employer’s matching funds, if they offer a match. So if your employer matches 6% of your contributions, aim to contribute at least 6% of each paycheck.

What percent should I put in my 401(k)?

A common rule of thumb is to contribute at least 10% of your income to your 401(k) to help reach your retirement goals. Just keep in mind the annual 401(k) contribution limits so you don’t exceed them. For 2025, those limits are $23,500, plus an additional $7,500 for those 50 and up. In 2025, those aged 60 to 63 may contribute an additional $11,250 (instead of $7,500).

Is 10% too much to contribute to 401(k)? What about 20%?

Contributing at least 10% to your 401(k) is a common rule of thumb to help save for retirement. If you are able to contribute 20%, it can make sense to do so. Just be sure not to exceed the annual 401(k) contribution limits. The contribution limits may change each year, so be sure to check annually.

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

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.

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Jan

2025

How Much Money Should I Have Saved by 30?

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

As you near 30, you probably have lots of different financial goals. Maybe you’re planning to buy a house. Or perhaps you’re considering starting a family. And while retirement may seem a long way off, it’s never too early to start saving and planning for your future.

You might know you want to save money for all these different things, but you don’t know exactly how much you should be saving. Chances are, you may have been wondering, how much money should I have saved by 30?

The good news is, money you save now can add up. And if you invest that money in a retirement account or an investment portfolio, you can get longer-term growth on your money.

First, though, it helps to know how much you should be saving by age 30 to see if you’re on track. Learn how much you should have saved — plus tips to help you reach your savings goals.

Average/Median Savings by Age 30

The average savings for individuals by age 30 is approximately $20,540, and their median savings is $5,400, according to the Federal Reserve’s most recent Survey of Consumer Finances. It’s important to note that the Fed’s survey doesn’t look specifically at people who are age 30. Instead, it divides them into groups, including 25 to 34 year olds.

These savings amounts are in what the Fed calls “Transaction Accounts.” This includes checking and savings accounts and money market accounts.

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How Much Should a 30-Year-Old Have in Savings?

If you’re still asking yourself, how much money should I have saved by 30?, know this: By age 30, you should have the equivalent of your annual salary in savings, according to one rule of thumb. That means if you’re earning $54,000 a year, you should have $54,000 saved.

This number — $54,000 — is based on the average annual salary for those 25 to 34 years old, which is $54,080, according to 2023 data from the Bureau of Labor Statistics.

Strategies to Help You Reach Your Savings Goals by 30

If you don’t have $54,000 saved by age 30, you can still catch up and reach your financial goals.

Here are some techniques that can help you get there.

Set Up an Emergency Fund

Having an emergency savings fund to pay for sudden expenses is vital. That way you’ll have money to pay for emergencies like unexpected medical bills or to help cover your expenses if you lose your job, rather than having to resort to using a credit card or taking out a loan. Put three to six months’ worth of expenses in your emergency fund and keep the money in a savings account where you can quickly and easily access it if you need it.

Pay Down Debt

Debt, especially high-interest debt like credit card debt, can drain your income so that you don’t have much, if anything, left to put in savings. Make a plan to pay it off.

For example, you might want to try the debt avalanche method. List your debts in order of those with the highest interest to those with the lowest interest. Then, make extra payments on your debt with the highest interest, while paying at least the minimum payments on all your other debts. Once you pay the highest interest debt off, move on to the debt with the second highest interest rate and continue the pattern.

With the debt avalanche technique, you eliminate your most expensive debts first, which can help you save money. You may also get debt-free sooner because, as you pay the debt off, less interest accumulates each month.

If the avalanche method isn’t right for you, you could try the debt snowball method, in which you pay off the smallest debts first and work your way up to the largest, or the fireball method, which is a combination of the avalanche and snowball methods.

Start Investing

Retirement probably feels like a long way off for you. But the sooner you can start saving for retirement, the better, since it will give your savings time to grow.

If you have access to a 401(k) plan at work, take advantage of it. Once you open an account, the money will be automatically deducted from your paycheck each pay period, which can make it easier to save since you don’t have to think about it.

If your employer doesn’t offer a 401(k), or even if they do and you want to save even more for retirement, consider opening an IRA account. There are two types of IRAs to choose from: a traditional IRA and a Roth IRA. At this point in your life, when you’re likely to be earning less than you will be later on, a Roth IRA might be a good choice because you pay the taxes on it now, when your income is lower. And in retirement, you withdraw your money tax-free.

However, if you expect that your income will be less in retirement than it is now, a traditional IRA is typically your best choice. You’ll get the tax break now, in the year you open the account, and pay taxes on the money you withdraw in retirement, when you expect to be in a lower tax bracket.

Contribute the full amount to your IRA if you can. In tax years 2024 and 2025, those under age 50 can contribute up to $7,000 a year.

Take Advantage of 401(k) Matching

When choosing how much to contribute to your 401(k), be sure to contribute at least enough to get your employer’s matching funds if such a benefit is offered by your company.

An employer match is, essentially, free money that can help you grow your retirement savings even more. With an employer match, an employer contributes a certain amount to their employees’ 401(k) plans. The match may be based on a percentage of an employee’s contribution up to a certain portion of their total salary, or it may be a set dollar amount, depending on the plan.

Save More as Your Salary Increases

When you get a raise, instead of using that extra money to buy more things, put it into savings instead. That will help you reach your financial goals faster and avoid the kind of lifestyle creep in which your spending outpaces your earnings.

Though it’s tempting to celebrate a pay raise by buying a fancier car or taking an expensive vacation, consider the fact that you’ll have a bigger car payment to make every month moving forward, which can result in even more spending, or that you may be paying off high interest credit card debt that you used to finance your vacation fun.

Instead, make your celebration a little smaller, like dinner with a few best friends, and put the rest of the money into a savings or investment account for your future.

The Takeaway

By age 30, you should have saved the equivalent of your annual salary, according to a popular rule of thumb. For the average 30 year old, that works out to about $54,000.

But don’t fret if you haven’t saved that much. It’s not too late to start. By taking such steps as paying down high-interest debt, creating an emergency fund, saving more from your salary, and saving for retirement with a 401(k), IRA, or other investment account, you still have time to reach your financial goals.

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FAQ

Is $50k saved at 30 good?

Yes, saving $50,000 by age 30 is quite good. According to one rule of thumb, you should save the equivalent of your annual salary by age 30. The latest data from the Bureau of Labor Statistics shows that the annual average salary of a 30 year-old is approximately $54,080. So you are basically on target with your savings.

Plus, when you consider the fact that the average individual’s savings by age 30 is approximately $20,540, according to the Federal Reserve’s most recent Survey of Consumer Finances, you are ahead of many of your peers.

Is $100k savings good for a 30 year old?

Yes, $100,000 in savings for a 30 year old is good. It’s almost double the amount recommended by a popular rule of thumb, which is to save about $54,000, or the equivalent of the average annual salary of a 30 year old, based on data from the Bureau of Labor Statistics.

Where should I be financially at 35?

By age 35, you should save more than three times your annual salary, according to conventional wisdom. The average salary of those ages 35 to 44 is $65,676, according to the Bureau of Labor Statistics. That means by 35 you should have saved approximately $197,000.

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

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.

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

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

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Jan

2025

Guide to Investing in Your 30s

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

Turning 30 can bring a shift in the way you approach your finances. Investing in your 30s can look very different from the way you invest in your 20s or 40s, based on your goals, strategies, and needs.

At this stage in life you may be working on paying off the last of your student loan debt while focusing more on saving. Your financial priorities may revolve around buying a home and starting a family. At the same time, you may be hoping to add investing for retirement into the mix (or increase the amount you’re already investing) as you approach your peak earning years.

Finding ways to make these goals and needs fit together is what financial planning in your 30s is all about. Knowing how to invest your money as a 30-something can help you start building wealth for the decades still to come.

5 Tips for Investing in Your 30s

1. Define Your Investment Goals

Setting clear financial goals in your 30s or at any age matters. Your goals are your end points, the destination that you’re traveling toward.

So as you consider how to invest in your 30s, think about the end result you’re hoping to achieve. Focus on goals that are specific, easy to measure and best of all, actionable.

For example, your goals for investing as a 30-something may include:

• Contributing 10% of your income to your 401(k) each year

• Maxing out annual contributions to an Individual Retirement Account

• Saving three times your salary for retirement by age 40

• Achieving a net worth of two times your annual salary by age 40

These goals work because you can define them using real numbers. So, say for example, you make $50,000 a year. To meet each of these goals, you’d need to:

• Contribute $5,000 to your 401(k)

• Save $7,000 in an IRA

• Have $150,000 in retirement savings by age 40

• Grow your net worth to $100,000 by age 40

Setting goals this way may require you to be a little more aggressive in your financial approach. But having hard numbers to work with can help motivate you to move forward.

2. Don’t Be Afraid of Risk

If there’s one important rule to remember about investing in your 30s, it’s that time is on your side.

When retirement is still several decades away, you typically have time to recover from the inevitable bouts of market volatility that you’re likely to experience. The market moves in cycles; sometimes it’s up, others it’s down. But the longer you have to invest, the more risk you can generally afford to take.

The best investments for 30 somethings are the ones that allow you to achieve your goals while taking on a level of risk with which you feel comfortable. That being said, here’s another investing rule to remember: the greater the investment risk, the greater the potential rewards.

Stocks, for example, are riskier than bonds, but of the two, stocks are likely to produce better returns over time. If you’re not sure how to choose your first stock, you may have heard that it’s easiest to buy what you know. But there’s more to investing in stocks than just that. When comparing the best stocks to buy in your 30s, think about things like:

• How profitable a particular company is and its overall financial health

• Whether you want to invest in a stock for capital appreciation (i.e. growth) or income (i.e. dividends)

• How much you’ll need to invest in a particular stock

• Whether you’re interested in short-term trading or using a buy-and-hold strategy

Past history isn’t an indicator of future performance, so don’t focus on returns alone when choosing stocks. Instead, consider what you want to get from your investments and how each type of investment can help you achieve that.

💡 Quick Tip: When people talk about investment risk, they mean the risk of losing money. Some investments are higher risk, some are lower. Be sure to bear this in mind when investing online.

3. Diversify, Diversify, Diversify

Investing in your 30s can mean taking risk but you don’t necessarily need or want to have 100% of your portfolio committed to just a handful of stocks. A diversified portfolio with multiple investments can spread out the risk associated with each investment.

So why does portfolio diversification matter? It’s simple. A portfolio that’s diversified is better able to balance risk. Say, for example, you have 80% of your investments dedicated to stocks and the remaining 20% split between bonds and cash. If stocks experience increased volatility, your lower risk investments could help smooth out losses.

Or say you want to allocate 90% of your portfolio to stocks. Rather than investing in just a few stocks, you could spread out risk by investing and picking one or more low-cost exchange-traded funds (ETFs) instead.

ETFs are similar to mutual funds, but they trade on an exchange like a stock. That means you get the benefit of liquidity and flexibility of a stock along with the exposure to a diversified collection of different assets. Your diversified portfolio might include an index ETF, for example, that tracks the performance of the S&P 500, an ETF that’s focused on growth stocks, a couple of bond ETFs, and some individual stocks.

This type of strategy allows you to be aggressive with your investments in your 30s without putting all of your eggs in one basket, so to speak. That can help with growing wealth without inviting more risk into your portfolio than you’re prepared to handle.

💡 Quick Tip: Distributing your money across a range of assets — also known as diversification — can be beneficial for long-term investors. When you put your eggs in many baskets, it may be beneficial if a single asset class goes down.

4. Leverage Tax-Advantaged and Taxable Accounts

Asset allocation, or what you decide to invest in, matters for building a diversified portfolio. But asset location is just as important.

Asset location refers to where you keep your investments. This includes tax-advantaged accounts and taxable accounts. Tax-advantaged accounts offer tax benefits to investors, such as tax-deferred growth and/or deductions for contributions. Examples of tax-advantaged accounts include:

• Workplace retirement plans, such as a 401(k)

• Traditional and Roth IRAs

• IRA CDs

• Health Savings Accounts (HSAs)

• Flexible Spending Accounts (FSAs)

• 529 College Savings Accounts

If you’re interested in investing for retirement in your 30s, your workplace plan might be the best place to start. You can defer money from your paychecks into your retirement account and may benefit from an employer-matching contribution if your company offers one. That’s free money to help you build wealth for the future.

You could also open an IRA to supplement your 401(k) or in place of one if you don’t have a plan at work. Traditional IRAs can offer a deduction for contributions while Roth IRAs allow for tax-free distributions in retirement. When opening an IRA, think about whether getting a tax break now versus in retirement would be more valuable to you.

If you’re not earning a lot in your 30s but expect to be in a higher tax bracket when you retire, then a Roth IRA could make sense. But if you’re earning more now, then you may prefer the option to deduct what you save in a traditional IRA.

Don’t count out taxable accounts either for investing in your 30s. With a taxable brokerage account, you don’t get any tax breaks. And you’ll owe capital gains tax on any investments you sell at a profit. But taxable accounts can offer access to investments you might not have in a 401(k) or IRA, such as individual stocks, cryptocurrency or the ability to trade fractional shares.

5. Prioritize Other Financial Goals

Retirement is one of the most important financial goals to think about in your 30s but planning for it doesn’t have to sideline your other goals. Financial planning in your 30s should be more comprehensive than that, factoring in things like:

• Buying a home

• Marriage and children

• Saving for emergencies

• Saving for short-term goals

• Paying off debt

As you build out your financial plan, consider how you want to prioritize each of your goals. After all, you only have so much income to spread across your goals, so think about which ones need to be funded first.

That might mean creating a comfortable emergency fund, then working on shorter-term goals while also setting aside money for a down payment on a home and contributing to your 401(k). If you’re still paying off student loans or other debts, that may take priority over something like saving for college if you already have children.

Looking at the bigger financial picture can help with balancing investing alongside your other goals.

The Takeaway

Your 30s are a great time to start investing and it’s important to remember that it doesn’t have to be complicated or overwhelming. Taking even small steps toward getting your money in order can help improve your financial security, both now and in the future.

Invest with as little as $5 with a SoFi Active Investing account.

Photo credit: iStock/katleho Seisa

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

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Jan

2025

What Is a Credit Spread? Explained and Defined

By Colin Dodds | Growing Wealth, invest, Investing | Comments Off

The term “credit spread” refers to two distinct financial concepts: the difference in yield between Treasury and corporate bonds, which can serve as a market indicator, or an options strategy that capitalizes on premium differences.

As a market indicator, a credit spread uses these differing yields as an indicator of investor sentiment, and as a way to gauge how optimistic or risk-averse investors are feeling.

In options, a credit spread refers to a trading strategy in which an investor sells a higher-premium option while simultaneously purchasing a lower-premium option on the same underlying security.

Key Points

• Credit spreads reflect yield differences between Treasury and corporate bonds, which can indicate investor sentiment versus credit quality.

• Credit spreads can serve as a market risk indicator, with wider spreads suggesting higher perceived risk.

• Macroeconomic factors and market sentiment cause credit spreads to fluctuate.

• In options trading, a credit spread involves selling a higher-premium option and buying a lower-premium option.

• Strategies like bear call spreads and bull put spreads are types of credit spreads that try to benefit from option premium differences.

Credit Spread – the Market Indicator

A credit spread is the gap between the interest rate offered to investors by a U.S. Treasury bond versus another debt security with the same maturity. The differences in the yield of the different bonds– or credit spread – typically reflects differences in credit quality between Treasuries and other bonds.

Investors will also sometimes call credit spreads “bond spreads” or “default spreads.” For investors, credit spreads give investors a quick method for comparing a particular corporate bond versus its Treasury-based, lower-risk alternative.

When investors refer to credit spreads, they usually describe them in terms of basis points, each of which is a 1/100th of a percent (or a percent of a percent). For example, a 1% difference in yield between a Treasury bond and a debt security of the same duration would be called a credit spread of 100 basis points.

For example, if a 10-year Treasury note offers investors a yield of 3%, while a 10-year corporate bond offers to pay investors a 7% interest rate, there would be a 400 basis-point spread between them.

Recommended: What is Yield?

U.S. Treasury bonds are widely considered the benchmark of choice because the financial services industry views them as being relatively low-risk, given their backing by the U.S. government. By contrast, corporate bonds are generally seen as carrying higher risk even when they’re issued by well-established companies with good credit ratings.

Investors look for compensation in the form of extra yield when purchasing corporate bonds, given their additional risk. This is where a debt security’s credit spread comes in handy as an indicator of perceived risk.

Because they have a lower risk of defaulting, higher quality bonds can offer lower interest rates – and lower credit spreads – to investors. Conversely, lower quality bonds have a greater risk of default, and so they must offer higher rates – and higher credit spreads – to compensate investors for taking on additional risk.

Why Do Credit Spreads Fluctuate?

The credit spreads of corporate bonds may change over time for a number of reasons. This could be due to macroeconomic fluctuations such as inflation, or the degree of market enthusiasm for the company issuing the bond.

When equity markets appear to be heading for a downturn, both institutional and retail investors may sell stocks and corporate bonds, and then reinvest in U.S. Treasuries. This shift can lower the yields on U.S. Treasury bonds as investors seek safer assets, while corporate bond yields may rise in order to compensate for the perceived increase in risk. The result is often a widening of credit spreads.

This is one reason investors look at average credit spreads as a window into the overall market sentiment. Wider credit spreads indicate declining investor sentiment. Narrower credit spreads typically signify more bullish sentiment among investors.

What Is a Credit Spread in Options Trading?

In options trading, a credit spread takes on a new meaning. In an option credit spread strategy (also known as a “credit spread option” or a “credit risk option”), an investor buys and sells options on the same underlying security with the same expiration, but at different strike prices.

The hope is that the premium received for the option they sell is higher than the premium paid for the option they buy, resulting in a net credit for the investor.

The strategy takes two forms:

Bull Put Spread

In a bull put spread, an investor buys and sells options in which they’ll make a maximum return if the value of the underlying security goes up.

A bull put spread, also called a put credit spread, involves an investor selling a put option and purchasing a second put option with a lower strike price. The investor buys the same amount of both options with the same expiration date.

In a bull put spread strategy, as long as the price of the underlying security remains above a certain level, the strategy will begin to produce profits as the differences between the value of the two options begins to evaporate as a result of time decay. Time decay is how much the value of an options contract declines as that contract grows closer to its expiration date.

The maximum profit is limited to the net credit received, and losses are limited to the difference between the strike prices, minus the premium received.

As the name indicates, the bull put spread is a strategy used by investors who are bullish on a security. The higher the underlying security rises during the options contract, the better the investor will do. But if the underlying security falls below the long-put strike price, then the investor can lose money on the strategy.

Bear Call Spread

The other type of credit spread in options trading is known as a bear call spread (or a call credit spread). A bear call spread is essentially the opposite of a bull call spread: investors expect that a security’s price will go down. Thus, the investor buys and sells two options on the same security with the same expiration date, but at different strike prices.

A bull put spread can be a profitable strategy if the investor remains under a certain level over the duration of the options contracts. If the security is below the short call’s strike price at expiration, then the spread seller gets to keep the entire premium, giving the investor a healthy return. But the risk is that if the price of the security rises above the long-call strike price at the expiration of the strategy, then the investor faces a loss.

The Takeaway

A credit spread is an important indicator of investor sentiment. It’s also an options investing strategy where a high premium option is written and a low premium option is bought on the same security. Understanding the meaning of terms like credit spread is an important step for both new investors and experienced investors interested in options trading.

🛈 While investors are not able to sell options on SoFi’s options trading platform at this time, they can buy call and put options to try to benefit from stock movements or manage risk.

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

Plus, SoFi offers educational resources — including a step-by-step in-app guide — to help you learn more about options trading. Trading options involves high-risk strategies, and should be undertaken by experienced investors. Currently, investors can not sell options on SoFi Active Invest®.

Explore SoFi’s user-friendly options trading platform.

Photo credit: iStock/Astarot

SoFi Invest®

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit 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.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
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.

Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

SOIN-Q424-052

Dividends: What They Are and How They Work

What Is a Dividend?

Types of Dividends

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How Are Dividends Paid Out?

Example of Dividend Pay Out

Why Do Investors Buy Dividend Stocks?

Passive Dividend Income

Dividend Reinvestment Plans

Dividend Tax Advantages

How to Evaluate Dividend Stocks

Analysis

Dividend Yield

Tax Implication of Dividends

The Takeaway

FAQ

Are dividends free money?

Where do my dividends go?

How do I know if a stock pays dividends?

How Much Should I Contribute to My 401(k)?

401(k) Contribution Limits for 2024 and 2025

401(k) Contribution Limits 2024 vs 2025

How Much Should You Put Toward a 401(k)?

When You’re Starting Out in Your Career

As You Move Up in Your Career

As You Get Closer to Retirement

The Impact of Contributing More Over Time

Factors That May Impact Your Decision

1. The Tax Effect

2. Your Earning Situation

3. Your Retirement Goals

4. Do You Have Debt?

The Takeaway

FAQ

How much should I contribute to my 401(k) per paycheck?

What percent should I put in my 401(k)?

Is 10% too much to contribute to 401(k)? What about 20%?

How Much Money Should I Have Saved by 30?

Average/Median Savings by Age 30

How Much Should a 30-Year-Old Have in Savings?

Strategies to Help You Reach Your Savings Goals by 30

Set Up an Emergency Fund

Pay Down Debt

Start Investing

Take Advantage of 401(k) Matching

Save More as Your Salary Increases

The Takeaway

FAQ

Is $50k saved at 30 good?

Is $100k savings good for a 30 year old?

Where should I be financially at 35?

Guide to Investing in Your 30s

5 Tips for Investing in Your 30s

1. Define Your Investment Goals

2. Don’t Be Afraid of Risk

3. Diversify, Diversify, Diversify

4. Leverage Tax-Advantaged and Taxable Accounts

5. Prioritize Other Financial Goals

The Takeaway

What Is a Credit Spread? Explained and Defined

Credit Spread – the Market Indicator

Why Do Credit Spreads Fluctuate?

What Is a Credit Spread in Options Trading?

Bull Put Spread

Bear Call Spread

The Takeaway

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