Jan
07
2025
What Is Forex Trading and How Does it Work?

What Is Forex Trading? A Guide for Beginners

By | Investing | Comments Off on What Is Forex Trading? A Guide for Beginners

Foreign exchange, also known as “FX,” “forex,” or currency trading, is the exchange of different global currencies. The changes in currency values reflect supply and demand. Traders aim to profit by buying and selling currencies based on their shifting values. The shifting values of currencies in the market affect the prices of goods and services all over the world.

The largest financial market in the world, forex is an extremely popular alternative investment, but many individual investors find it too challenging and risky to participate. Forex has the propensity to generate sizable returns for experienced traders, but it’s also complicated.

Key Points

•   Forex trading involves the exchange of global currencies, where traders buy and sell based on fluctuating values influenced by various international events and economic reports.

•   The forex market operates 24/5, with trading occurring over-the-counter rather than through physical exchanges, allowing for continuous trading across major global centers.

•   Leverage is a key feature in forex trading, enabling traders to control larger positions with less capital, but it also increases the potential for significant losses.

•   Understanding currency pairs is essential, as trades involve buying one currency while selling another, with major, minor, exotic, and regional pairs available for trading.

•   The forex market is characterized by its liquidity and volatility, making it attractive for investors, though it requires a solid understanding of market dynamics and associated risks.

How Does Forex Trading Work?

Forex operates differently than many other types of investments. The forex market is open for trading 24 hours a day, Monday through Friday. There are four main forex trading centers around the world, covering different time zones: London, New York, Sydney, and Tokyo.

Unlike the stock exchange, there is no physical foreign exchange market. Banks and financial institutions, rather than central exchanges, run the market and all trading takes place over the counter.

All forex trades occur in currency pairs. For instance, an investor can trade U.S. Dollars for Euros, or vice versa. With every transaction they buy one currency and sell the other.

All currencies continuously increase or decrease in value relative to other currencies. Values shift due to international or national events such as elections, wars, economic crises, natural disasters, and more. Bank and federal announcements such as gross domestic product (GDP) and inflation reports, employment figures, and quantitative easing measures can affect currency values. Based on what’s happening in the world, traders make predictions about whether a particular currency will rise or fall in relation to another currency, and trade accordingly.

Traders swap currencies in batches, or lots. A standard lot is 1000,000 units of currency. Traders can also trade mini lots of 10,000 units, or micro lots of 1000 units.

Since traders generally don’t have tens or hundreds of thousands of units of currency to trade, they often use leverage and margin trading to increase their position without having as much capital investment in a trade.

Risks of Forex Trading

One of the primary risks of forex trading involves the use of leverage. Using leverage can result in greater profits, but there is also a risk of losing more money initially invested. The associated risks are one reason that forex institutional investors, rather than individual investors, typically dominate forex trading. For this reason, it’s important to understand the market, the opportunity cost and the risks of day trading before starting to use leverage.

Many investors consider forex an alternative investment, since it may not correlate to stocks and bonds. Alternative investments may have their own unique risks, too, which investors or traders should be aware of.

Benefits of Forex Trading

The use of leverage is also one of the big potential benefits of forex trading, as it allows investors who lack significant resources to make relatively large trades, and thus, generate relatively large returns. Additionally, the forex markets are open longer than stock markets, which may be an advantage for some traders, and there are low barriers to entry, and an extremely liquid market for traders, too.

💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.

What Are the Major Currency Pairs?

There are four types of pairs in the FX market:

•   Major Pairs: Seven currencies comprise 80% of the global forex market. These major pairs include EUR/USD, USD/JPY, GBP/USD, and USD/CHF

•   Minor Pairs: Traded less often, many of these pairs don’t include USD. Minor pairs include EUR/GBP, GBP/JPY, and EUR/CHF

•   Exotics: Exotic pairs include one major currency and one currency from an emerging or smaller market. These include EUR/CZK, USD/PLN, and GBP/MXN

•   Regional Pairs: Based on geography, these pairs include, such as AUD/NZD and EUR/NOK

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Three Markets to Trade Forex

There are three ways to trade in the forex market, used by both short- and long-term traders.

Spot Forex Market

This involves the physical exchange of currencies. Since it happens physically in real time, traders can complete this type of transaction on the spot. Traders can buy and sell derivatives based on the spot forex market through over-the-counter exchanges.

Forward Forex Market

In this type of forex trading, traders agree to buy or sell a specific amount of a currency at a set price on a set future date.

Futures Forex Market

In the futures market, contracts for these forward transactions are bought and sold.

How to Read Forex Quotes

It can be a bit confusing at first to read and understand forex pairs. This is how to read them.

Here’s an example: EUR/USD 1.13012

The currency on the left (EUR) is the base currency. It is always equal to one unit, which in this case would be 1€.

The currency on the right (USD) is called the quote currency or counter currency.

The number 1.13012 is the value of the quoted currency relative to one unit of the base currency. In this example, 1€ = $1.13012. If the base currency (EUR) rises in value, the quoted currency number increases since one unit of the base currency can buy more of the quoted currency, and vice versa.

When trading forex, investors are buying the base currency, in this case EUR. So, if they want to buy EUR they buy the EUR/USD pair, and if they want to buy USD they sell the EUR/USD pair.

Understanding Bid and Ask

Another important part of reading forex quotes are the bid and ask prices. The bid price is the amount that the dealer pays for the base currency, while the ask price is the price for which they will sell it. Bid prices are always lower than ask prices. The difference between these two prices is known as the spread. A lower spread is better for traders.

Using the example above, the ask price tells a trader how much USD they will need to spend to purchase one unit of EUR. The bid price tells them how much USD they will buy when they sell one unit of EUR.

Generally, the bid and ask are shown as bid/ask. For example, EUR/USD 1.13012/23 would mean that the bid price is 1.13012 and the ask price is 1.13023. A trader could sell 1€ for $1.13012 or buy 1€ for $1.13023.

Forex Trading Terms to Know

“Pips” may be the most important term for forex traders to know.

In forex trading, the units that measure the spread, earnings, and losses are called pips, which are the smallest price movement between pairs of currencies. These are similar to points in the stock market. The actual value of a pip changes depending on the currency pair, but it generally refers to a movement in the fourth decimal place of a currency pair. Micro pips or pipettes are the decimal places after the fourth decimal place.


💡 Quick Tip: The best stock trading app? That’s a personal preference, of course. Generally speaking, though, a great app is one with an intuitive interface and powerful features to help make trades quickly and easily.

The Takeaway

Forex trading involves trading foreign currencies, and typically involves a handful of main currency pairs. The forex markets are relatively easy to learn, have low barriers to entry, and allow for the use of leverage, making them attractive to many investors.

Forex is a popular alternative investment and can be a great way to diversify a portfolio. However, it does involve a significant amount of understanding and practice, and can be very risky. If direct forex investing seems daunting, you can still get exposure to forex markets by purchasing ETFs or other funds that focus on foreign currencies.

Ready to expand your portfolio's growth potential? Alternative investments, traditionally available to high-net-worth individuals, are accessible to everyday investors on SoFi's easy-to-use platform. Investments in commodities, real estate, venture capital, and more are now within reach. Alternative investments can be high risk, so it's important to consider your portfolio goals and risk tolerance to determine if they're right for you.


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FAQ

Why does forex trading matter for average consumers?

The forex markets can have an impact on prices for consumers, which is why they may be a matter of concern for the typical person. Exchange rates internationally may be affected, which can possibly change prices.

What are the biggest differences between investing in stock and forex?

The forex markets tend to be more liquid and volatile than the stock market, as well as more voluminous, which may make them more attractive to investors. The markets are also open longer, and applicable fees for forex trades may be lower, too.

What is considered a large investment in forex trading?

Forex trades are done in “lots,” and a large lot may involve $100,000 trades while using leverage. This could only include $1,000 in actual capital, and if executed, would likely be considered a large trade for the forex markets.

Photo credit: iStock/g-stockstudio


An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. This and other important information are contained in the Fund’s prospectus. For a current prospectus, please click the Prospectus link on the Fund’s respective page. The prospectus should be read carefully prior to investing.
Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. Alternative investments often employ leveraging and other speculative practices that increase an investor's risk of loss to include complete loss of investment, often charge high fees, and can be highly illiquid and volatile. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information. Registered and unregistered alternative investments are not subject to the same regulatory requirements as mutual funds.
Please note that Interval Funds are illiquid instruments, hence the ability to trade on your timeline may be restricted. Investors should review the fee schedule for Interval Funds via the prospectus.
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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.

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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Jan
07
2025
The Growth of Socially Responsible Investing

Guide to SRI Investing

By | Investing | Comments Off on Guide to SRI Investing

Socially responsible investing (SRI) strategies help investors put their capital into a range of securities — e.g., stocks, bonds, mutual funds — that focus on socially positive aims: e.g., clean energy, air and water; equitable employment practices, and more.

Despite market volatility driven by interest rate changes and geopolitical conflicts in recent years, SRI investing strategies have garnered steady interest from investors.

Various analyses of SRI funds suggest that the philosophy of doing well by doing some good in the world may have an upside worth exploring.

Key Points

•   Socially responsible investing (SRI) involves allocating capital into securities that promote positive social and environmental outcomes, aiming for both impact and financial returns.

•   The popularity of SRI has grown, with a notable increase in assets allocated to ESG-focused ETFs, rising from $5 billion in 2006 to $480 billion in 2023.

•   Different investing strategies exist within the realm of SRI, including impact investing, ESG investing, and sustainable investing, each with distinct criteria and goals.

•   Historical phases of SRI have evolved from exclusionary strategies to proactive investing, ultimately leading to a focus on measurable impacts and accountability.

•   Recent data indicates that sustainable funds often perform on par with traditional funds, suggesting that ethical investing can also be financially advantageous.

What Is Socially Responsible Investing?

While SRI investing goes by many names — including ESG investing (for environmental, social, and government factors), sustainable, or impact investing — the fundamental idea is to channel capital into entities that are working toward specific environmental and/or social policies in the U.S. and worldwide. The aim of SRI is to generate both positive changes across various industries, while also delivering returns.

Generally, investors that embrace SRI strategies find ways to assess an organization’s environmental and social impact when deciding whether to invest in them. However, there are important distinctions between the various labels in this sector of investing.

Socially responsible investing can be seen as more of an umbrella term (similar to impact investing). Within SRI, some strategies focus specifically on companies that meet certain criteria — either by supporting specific practices (e.g., green manufacturing, ethical shopping) or avoiding others (e.g., reducing reliance on fossil fuels).

For that reason it’s incumbent on each investor to assess different SRI options, to make sure they match their own aims. This is no different from the due diligence required for anyone starting to invest.

Interest in SRI Investing Strategies

The tangible merits of socially responsible investing have always been subject to debate. But in the last couple of years there has been criticism of some of the underlying principles of SRI, as well as questions about the overall financial value of this investing approach.

Nonetheless, the value of global assets allocated to ETFs with an ESG focus have shown steady growth in the last two decades. As of November 2023, according to data from Statista, the value of these assets was $480 billion — a substantial increase since 2006, when the value of those assets was about $5 billion.

And according to a report published in 2023 by Morningstar, a fund rating and research firm, investors in conventional funds as well as SRI funds are likely to see returns over time.

Recommended: Beginner’s Guide to Sustainable Investing

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SRI vs ESG vs Other Investing Strategies

While the various terms for SRI investing are often used interchangeably, it’s important for investors to understand some of the differences.

Impact Investing

Impact investing is perhaps the broadest term of all, in that it can refer to a range of priorities, goals, or values that investors may want to pursue. To some degree, impact investing implies that the investor has specific outcomes in mind: i.e. the growth of a certain sector, type of technology, or societal issue.

Impact investing may also refer to strategies that avoid certain companies, products, or practices. This could include so-called sin stocks (e.g. alcohol, tobacco), companies that adhere to principles that are in opposition to an investor’s or institution’s belief system, and more.

Socially Responsible Investing

SRI or socially conscious investing are two other broad labels, and they’re typically used to reflect progressive values of protecting the planet and natural resources, treating people equitably, and emphasizing corporate responsibility.

While SRI can be considered a type of impact investing, there may be impact investing strategies that are diametrically opposed to SRI, simply because they have different aims.

ESG Investing

Securities that embrace ESG principles, though, may be required to adhere to specific standards for protecting aspects of the environment (e.g. clean energy, water, and air); supporting social good (e.g. human rights, safe working conditions, equal opportunities); and corporate accountability (e.g. fighting corruption, balancing executive pay, and so on).

For example, some third-party organizations have helped create ESG metrics for companies and funds based on how well they adhere to various environmental, social, or governance factors.

Investors who believe in socially responsible investing may want to invest in stocks, bonds, or exchange-traded funds (ETFs) that meet ESG standards, and track ESG indexes.

Sustainable Investing

Sustainable investing is often used as a shorthand for securities that have a specific focus on protecting the environment. This term is sometimes used interchangeably with green investing, eco-friendly investing, or even ESG.

Unlike ESG — which is anchored in specific criteria having to do with a company’s actions regarding environmental, social, or governance issues — the phrase “sustainable investing” is considered an umbrella term. It’s not tied to specific criteria.

Corporate Social Responsibility (CSR)

Last, corporate social responsibility (CSR) refers to a general set of business practices that may positively impact society. Often, companies establish certain programs to support local or national issues, e.g. educational needs, ethical labor practices, workplace diversity, social justice initiatives, and more.

Ideally, CSR strategies work in tandem with traditional business objectives of hitting revenue and profit goals. But since CSR goals are specific to each company, they aren’t formally considered part of socially responsible, sustainable, or ESG investing.

A Focus on Results

Investors may want to bear in mind that, with the steady growth of this sector in the last 20 or 30 years, there are a number of ways SRI strategies can come together. For example, it’s possible to invest in sustainable pharmaceuticals and even green banks.

Either way, the underlying principle of these strategies is to make a profit by making a difference. By putting money into companies that embrace certain practices, investors can support organizations that embody principles they believe in, thereby potentially making a difference in the world, and perhaps seeing a financial upside as well.

Socially Responsible Investment Examples

These days, thousands of companies aim — or claim — to embrace ethical, social, environmental, or other standards, such as those put forth in the United Nations’ Principles of Responsible Investing, or the U.N.’s 17 Sustainable Development Goals. As a result, investors today can choose from a wide range of stocks, bonds, ETFs, and more that adhere to these criteria.

Understanding SRI Standards

In addition, there are also standards set out by financial institutions or other organizations which are used to evaluate different companies. It may be useful when selecting stocks that match your values to know the standards or metrics that have been used to verify a company’s ESG status.

Depending on your priorities, you could consider companies in the following sectors, or that embrace certain practices:

•   Clean energy technology and production

•   Supply chain upgrades

•   Clean air and water technology, products, systems, manufacturing

•   Sustainable agriculture

•   Racial and gender equality

•   Fair labor standards

•   Community outreach and support

Exploring Different Asset Classes

Investors can also trade stocks of companies that are certified B Corporations (B Corps), which meet a higher standard for environmental sustainability in their businesses, or hit other metrics around public transparency and social justice, for example. B Corps can be any company, from bakeries to funeral homes, and may or may not be publicly traded.

Companies issue green bonds to finance projects and business operations that specifically address environmental and climate concerns, such as energy-efficient power plants, upgrades to municipal water systems, and so on.

These bonds may come with tax incentives, making them a more attractive investment than traditional bonds.

Another option for investors who don’t want to pick individual SRI or ESG stocks is to consider mutual funds and exchange-traded funds (ETFs) that provide exposure to socially responsible companies and other investments.

There are a growing number of index funds that invest in a basket of sustainable stocks and bonds. These funds allow investors to diversify their holdings by investing in one security.

There are numerous indexes that investors use as benchmarks for the performance of socially responsible funds. Three of the most prominent socially responsible indexes include: the MSCI USA Extended ESG Focus Index; Nasdaq 100 ESG Index; S&P 500 ESG Index. (Remember, you cannot invest directly in an index, only in funds that track the index.)

Recommended: Portfolio Diversification: What It Is and Why It’s Important

The Growing Appeal of Socially Responsible Investments

While many investors find the idea of doing good or making an impact appealing, the question of profit has long been a point of debate within the industry. Do you sacrifice performance if you invest according to certain values?

Unfortunately, the lack of consistency in terms of what constitutes a sustainable or socially/environmentally responsible investment has made it difficult to compare SRI strategies to conventional ones. One financial company may use one set of criteria when developing its sustainable offerings; another company may use its own proprietary set of standards.

That said, as the universe of sustainable offerings continues to grow, it’s possible to create more apples-to-apples comparison sets. According to Morningstar data, sustainable equity funds saw median returns of 16.7% for 2023 versus 14.4% for traditional equity funds. The relative outperformance of SRI strategies was consistent across equity fund styles and most market caps, but particularly large-cap equities. Over 75% of SRI and conventional funds include large-cap equities.

In addition, sustainable fund assets under management (AUM) globally were up 15% over 2022, growing to $3.4 trillion.

The Evolution of Responsible Investing

Socially conscious investing is not a new concept: People have been tailoring their investment strategies for generations, for a number of reasons, not all of them related to sustainability. In fact, it’s possible to view the emergence of socially conscious investing in three phases.

Phase 1: Exclusionary Strategies

Exclusionary strategies tend to focus on what not to invest in. For example, those who embrace Muslim, Mormon, Quaker, and other religions, were (and sometimes still are) directed to avoid investing in companies that run counter to the values of that faith. This is sometimes called faith-based investing.

Similarly, throughout history there have been groups as well as individuals who have taken a stand against certain industries or establishments by refusing to invest in related companies. Non-violent groups have traditionally avoided investing in companies that produce weapons. Others have skirted so-called “sin stocks”: companies that are involved in alcohol, tobacco, sex, and other businesses.

On a more global scale, widespread divestment of investor funds from companies in South Africa helped to dismantle the system of racial apartheid in South Africa in the 1980s.

Phase 2: Proactive Investing

Just like exclusionary strategies, proactive strategies are values-led. But rather than taking an avoidant approach, here investors put their money into companies and causes that match their beliefs.

For example, one of the earliest sustainable mutual funds was launched in 1971 by Pax World; the founders wanted to take a stand against chemical weapons in the Vietnam war and encourage investors to support more environmentally friendly businesses.

This approach gained steady interest from investors, as financial companies launched a range of funds that focused on supporting certain sectors. So-called green investing helped to establish numerous companies that have built sustainable energy platforms, for example.

Phase 3: Investing With Impact

With the rise of digital technology in the last 30 years, two things became possible.

First, financial institutions were able to create screening tools and filters to help investors gauge which companies actually adhered to certain standards — whether ethical, environmental, or something else. Second, the ability to track real-time company behavior and outcomes helped establish greater transparency — and accountability — for financial institutions evaluating these companies for their SRI fund offerings.

By 2006, the United Nations launched the Principles for Responsible Investment (PRI), a set of global standards that helped create a worldwide understanding of Environmental, Social, and Governance strategies.

ESG became the shorthand for companies that focus on protecting various aspects of the environment (including clean energy, water, and air); supporting social good (including human rights, safe working conditions, equal opportunities); and fair corporate governance (e.g. fighting corruption, balancing executive pay, and so on).

Why Choose Socially Responsible Investing?

While the three phases of socially responsible investing did emerge more or less chronologically, all three types of strategies still exist in various forms today. But the growing emphasis on corporate accountability in terms of outcomes — requiring companies to do more than just green-washing their policies, products, and marketing materials — has shifted investors’ focus to the measurable impacts of these strategies.

Now the reasons to choose SRI strategies are growing.

Investors Can Have an Impact

The notion of values-led investing is that by putting your money into organizations that align with your beliefs, you can make a tangible difference in the world. The performance of many sustainable funds, as noted above, indicates that it’s possible to support the growth of specific companies or sectors (although growth always entails risk, and past performance is no guarantee of future results).

Socially Responsible Strategies May Be Profitable, Too

As discussed earlier, the question of whether SRI and ESG funds are as profitable as they are ethical has long been a point of debate. But that skepticism is ebbing now, with new performance metrics suggesting that sustainable funds are on par with conventional funds.

Socially Responsible Investing May Help Mitigate Risk

The criteria built into ESG investment standards may also help identify companies with poor governance practices, or those with exposure to environmental and social risks that could lead to financial losses.

Do Retirement Accounts Offer Socially Responsible Investments?

Generally speaking, individual retirement accounts may include socially responsible or ESG investment options. For example, when investing in different types of IRAs, e.g., a traditional, Roth, or SEP IRA, investors typically have access to all the securities offered by that financial institution, including stocks, bonds, and ETFs that may reflect ESG standards. The choice is up to individual investors.

That hasn’t always been the case with employer-sponsored 401k or 403b plans. But in 2023, the Department of Labor issued a rule allowing plan fiduciaries to consider ESG investment options for plan participants.

While some plans may now offer socially responsible or ESG investments, there is a push from some lawmakers to restrict or eliminate the availability of these funds. ERISA standards for retirement plans dictate that the investment options offered by employer-sponsored plans “must be based on risk return factors that the fiduciary prudently determines are material to investment value.” Some lawmakers argue that ESG funds are higher risk and not suitable for employees in company plans.

The Takeaway

Socially responsible investing is a broad term that can mean different things to different groups, but no matter which term you use — socially conscious investing, impact investing, ESG investing — it comes down to the compelling idea that by investing your money in organizations that match your values, you can make a difference in the world.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).


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FAQ

Is socially responsible investing profitable?

Socially responsible investing can be profitable, as multiple reviews of fund performance have shown over the last several years. That said, some believe that the financial strength of ESG or SRI strategies is debatable. While any investment strategy has its own risks, it’s best to assess them according to your own aims.

What is the difference between ESG investing and socially responsible investing?

Socially responsible investing is considered a broad term that can encompass a range of practices and standards. ESG investing stands for environmental, social, and governance factors, is a set of principles that is often used to assess how well companies meet specific, measurable criteria. While there is no single industry-wide metric for ESG standards, investors can consider various proprietary tools.

How many socially responsible investment opportunities are there?

It’s impossible to say how many SRI opportunities there are, as the stocks, bonds, and other securities that embrace ESG standards continue to grow. More than 120 new sustainable funds entered the SRI landscape in 2021, in addition to 26 existing funds that took on a sustainable mandate.

What is the socially responsible investment theory?

The theory behind socially responsible investing can be summed up by the old saying about “Doing well by doing good.” In other words, by investing in companies that support positive social and environmental products and policies, it’s possible to help investors realize a profit.

How do you start socially responsible investing?

Investors who are interested in SRI or ESG investing can begin by getting to know companies that adhere to certain eco-friendly or socially responsible standards. In addition, many financial institutions offer clients a way to screen for stocks or mutual funds that have an ESG focus.

Photo credit: iStock/luigi giordano

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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.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at https://sofi.app.link/investchat. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

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.

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.

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Jan
07
2025
Average Cost of a Wedding in 2021

How Much Does the Average Wedding Cost, According to Data?

By | Budgeting & Goals, Family Finances, Money & Life, personal_loan | Comments Off on How Much Does the Average Wedding Cost, According to Data?

Currently, the average cost of a wedding is approximately $33,000, according to data from Zola, a wedding registry platform. When you think about all that goes into a wedding, you may understand how the figure can get so high. There’s the venue, food and drink, music, photography and videography, the dress and the ring, hair and makeup, flowers, and more.

But whether you want to have a destination wedding or one held in your parents’ backyard, you’ll likely want to understand what others spend, whether the average expense accurately reflects what most people pay, and how you can develop and wrangle your own budget. Read on for the need-to-know info so you can plan for what may just be the happiest day of your life.

Key Points

•   The average wedding cost in 2024 is $33,000, with a median of $10,000, which may be a more accurate figure to work with.

•   Costs vary by location; New York averages $49,000, while Utah weddings ring in at $17,000.

•   Gen Z weddings average $25,500, Millennials $39,400, and Gen X $24,300.

•   Wedding costs fluctuate by month, with July to September averaging $35,600.

•   Careful planning and budgeting can help you control wedding costs, as can wise use of funding sources, such as relatives’ gifts and personal loans.

What Is the Average Cost of a Wedding?

As noted above, the average cost of a wedding ceremony and reception in 2024 was $33,000, according to Zola, a wedding registry platform. However, before thinking that you need to spend that much to get hitched, keep in mind a bit of basic math about average vs. median wedding costs.

•   Averages can be inflated by a few super-luxe weddings in the mix. To get the average, you add up the data points and then divide by the number of data points.

For instance, if eight out of 10 people spend $10,000 for their big day and two people spend $125,000 each, the average cost would be $33,000. Even though just two couples splashed out, it looks as if everyone is spending a sum of over $30K.

•   Because of how a few high figures can skew data, it may be more meaningful to look at the median cost. When a median is calculated, the data points are arranged from smallest to largest, and the median is the middle value for sets with an odd number of data points. When there is an even number of data points, the median is the average of the middle two.

If you use the same values as above, the median would be 10,000, because you are only looking at the middle two values when the 10 data points are arrayed from smallest to largest. In other words, the big spenders get eliminated.

So what would the current median cost of a wedding be? SoFi’s most recent research found that the median cost of a wedding is about $10,000.

Wedding costs will vary based on how elaborate the event and the unique vendor and venue costs of the region. And whether typical costs are closer to $10,000 or $33,000, that’s a considerable investment: a five-figure amount to pull together or to finance.

Average Wedding Cost by State

You’ve just learned that average wedding costs may be inflated vs. median costs. However, most of the world tallies data as averages. Here, you’ll see how much an average wedding costs by state, according to the most recent (2023) data from the wedding platform The Knot. Keep in mind that if you were to use medians, the dollar amounts could be significantly lower.

Now, the price tag associated with this fantastic celebration for the couple and their friends and family differs by state. The variations in amounts may reflect how the cost of living by state can vary.

•   Alabama: $34,000

•   Alaska: Not available

•   Arizona: $32,000

•   Arkansas: $25,000

•   California: $41,000

•   Colorado: $34,000

•   Connecticut: $44,000

•   Delaware: $39,000

•   District of Columbia: $42,000

•   Florida: $34,000

•   Georgia: $30,000

•   Hawaii: Not available

•   Idaho: $20,000

•   Illinois: $39,000

•   Indiana: $26,000

•   Iowa: $24,000

•   Kansas: $25,000

•   Kentucky: $20,000

•   Louisiana: $37,000

•   Maine: $44,000

•   Maryland: $39,000

•   Massachusetts: $42,000

•   Michigan: $29,000

•   Minnesota: $31,000

•   Mississippi: $33,000

•   Missouri: $27,000

•   Montana: $20,000

•   Nebraska: $22,000

•   Nevada: $21,000

•   New Hampshire: $44,000

•   New Jersey: $55,000

•   New Mexico: $26,000

•   New York: $49,000

•   North Carolina: $31,000

•   North Dakota: $22,000

•   Ohio: $33,000

•   Oklahoma: $25,000

•   Oregon: $30,000

•   Pennsylvania: $38,000

•   Rhode Island: $44,000

•   South Carolina: $39,000

•   South Dakota: $23,000

•   Tennessee: $28,000

•   Texas: $32,000

•   Utah: $17,000

•   Vermont: $44,000

•   Virginia: $38,000

•   Washington: $30,000

•   West Virginia: $36,000

•   Wisconsin: $29,000

•   Wyoming: $26,000

Finding the Wedding Vendors You Need

As you begin to make a budget for your wedding, there are plenty of ways to find the vendors (from a string quartet to someone who can bake the cake of your dreams). Some options:

•   Reputable online directories

•   Bridal shows and expos

•   Wedding magazines

•   Recommendations from friends and family

•   Sources provided by your venue (once you’ve chosen it)

•   A wedding planner, if you choose to work with one

•   Reliable social media accounts and blogs

Average Wedding Cost in Major US Cities

In general, cities can be expensive. The cost of living can be higher because the demand is more intense.

Here, according to The Knot, is how much it costs on average to finance a wedding in some popular American cities, in descending order:

•   New York City: $63,000

•   Chicago: $56,000

•   San Francisco: $51,000

•   Boston: $50,000

•   Los Angeles County: $48,000

•   Philadelphia: $40,000

•   Miami/Fort Lauderdale: $39,000

•   Houston: $37,000

•   Dallas/Fort Worth: $35,000

•   Denver: $35,000

•   Atlanta: $32,000

•   Detroit: $32,000

•   Seattle: $32,000

•   Cleveland: $31,000

•   Phoenix: $31,000

•   Minneapolis/St. Paul: $30,000

•   Tampa: $30,000

How Much Will Different Wedding Vendors Cost?

Vendors are the suppliers you work with when getting married to make your ceremony and reception unforgettable and exactly how you imagine it. Here, the average amount that Americans spent by vendor on their big day:

•   Wedding reception venue: $12,800

•   Engagement ring: $5,500

•   Live band: $4,300

•   Photographer: $2,900

•   Alcohol: $2,800

•   Florist: $2,800

•   Rehearsal dinner: $2,700

•   Videographer: $2,300

•   Wedding planner: $2,100

•   Event rentals (such as tables, chairs, linens, and tableware): $2,000

•   Wedding dress: $2,000

•   Lighting and decor: $1,900

•   DJ: $1,700

•   Transportation: $1,100

•   Wedding cake: $540

•   Invitations: $530

•   Wedding favors: $450

•   Officiant fee: $250

•   Hairstylist (per person): $150

•   Makeup artist (per person): $140

•   Catering per person: $85

Average Wedding Cost by Number of Guests

If you’re curious about how the number of guests will impact your wedding costs, consider this data about getting married from The Knot. In 2023, the most recent year studied, the average number of guests at a wedding was 115, down slightly from the year prior.

Of course, just because that’s the average number of attendees doesn’t mean it’s right for you. Some people with large families and circles of friends could have twice that amount, while others might prefer an intimate ceremony with just one or two dozen guests.

In terms of cost per guest, the latest figures are $304 per person. Once again, keep in mind that these are averages, and the median cost could be significantly lower.

Additional Factors for Average Wedding Costs

More guests will typically mean a higher price tag for your wedding, as will more vendors. The costs of a destination wedding, especially transportation and lodging for guests, can make the celebration more expensive as well.

But many engaged couples these days are finding ways to control costs with a DIY approach. In terms of finding more affordable wedding venues, you might get married in a local park or garden versus a pricier catering hall, for instance. Or you could ask a friend to arrange flowers for your wedding versus hiring a professional florist.

Other ways to cut your spending and control costs can be to think about what matters most to you: Is it treating your guests to an elaborate gourmet meal, or could you trim food costs and instead hire a band for a dance-fest everyone will remember for years to come? The choice is yours.

Average Wedding Cost by Generation

Here’s a look at how age may impact your wedding costs. The wedding cost data from the most recent year studied (2023) reveals the following:

•   Average cost for Gen Z wedding: $25,500

•   Average cost for Millennial wedding: $39,400

•   Average cost for Gen X wedding: $24,300

Notably, Gen Z weddings tend to be smaller in size than those of older couples, which could explain the lower price. In addition, Gen Xers (born between 1965 and 1980) may have lower costs since they are older and have other financial priorities than a blowout bash (such as educational costs for children from a prior marriage or a mortgage).

Average Wedding Cost by Month

The time of year during which you host your wedding can impact the cost. Interestingly, in generations past, June used to be the most popular and in-demand month for weddings. That’s a factor that can drive up costs. Now, September and October are the most popular months to get hitched.

However, there are regional differences in when people marry (for instance, a Florida February wedding will be very different from one in Maine), and many other factors impact which date you’ll pick. Here, a look at average costs by time of year to help you plan your budget well:

•   January-March wedding: $34,900

•   April-June wedding: $33,900

•   July-September wedding: $35,600

•   October-December wedding: $34,700

How Has the Cost of Wedding Changed Over Time?

You probably have first-hand experience with the fact that costs tend to go up over time, thanks to the impact of inflation and other factors. The same holds true for weddings. With the exception of 2020, the year that COVID-19 changed so much about daily life, wedding costs have been steadily rising. The cost of an average wedding by year that you see here reflects a 25% increase from 2019 to 2023:

•   2023: $35,000

•   2022: $30,000

•   2021: $28,000

•   2020: $19,000

•   2019: $28,000

Note: Again, these are average costs; median costs could be considerably lower.

If the wedding cost statistics above are any indication, prices will likely continue to climb this year. With that information in mind, here are steps to take to help you keep costs under control, finance your wedding, and still have an absolutely wonderful celebration as you embark upon married life with your beloved.

Plan Early

The more time you have to plan, research options, and budget wisely, the better off you can be. Getting a jump on the big day can also give you the best choice of vendors vs. taking whatever or whomever is available on a given date.

Advance planning can also give you an edge as you may be able to lock in prices before inflation sends them any higher.

Build Your Budget

The nitty gritty of wedding planning can involve listing all the expenses you foresee and pricing those out. It’s wise to create a 5% buffer, or additional funds in case prices run over or an unexpected wedding charge comes up.

You’ll also want to think about what sources of funding are available. Have you and your soon-to-be spouse saved up in, say, a high-yield savings account? Will family members contribute? Or will you look into a wedding loan to help cover the costs?

Establish Your Priorities

Planning a wedding can literally be a “go for broke” moment if you pay for every possible bell and whistle. With your partner, create a vision of what you want the wedding to be like and what are the most important memories you hope to create. You may decide that the ultra-posh ballroom at an elite hotel isn’t the only place in town where you can say your vows and spend time celebrating with loved ones.

Hire Your Vendors

A critical step is signing up your vendors once you’ve done your research and made your decisions. Waiting to the last minute can lead to disappointment and sticker shock. Once you’ve found the right players for the right price, lock them in.

Be Flexible

Planning a wedding can be a challenging process with many moving parts. Parents may want to invite all of their friends, potentially driving up costs; a venue may go out of business months before your big day. It’s a wise idea to remember that your wedding is a major, happy life event, having loved ones join you as you move through this rite of passage and declaration of your couplehood.

If your cake winds up being made by your second-choice bakery versus your first, this is likely not going to ruin your celebration.

This is also a moment to check in with yourself and your partner about how much you really want to spend on your wedding and how you’ll pay for it.

•   Do you want to deplete funds available from relatives, or scale down your wedding plans and save some money for the down payment on a house?

•   Could you take out a personal loan for wedding costs instead of using your credit card to save on interest changes?

•   Are you expecting wedding gifts to be funds that will help you defray costs?

A wedding marks the start of your life with your special person, and that doesn’t have to mean being saddled with major debt.

Recommended: The Cost of Being in Someone’s Wedding

The Takeaway

The current average cost of a wedding in the U.S. according to the data is $33,000. However, median costs of a wedding reveal a significantly lower figure of $10,000 for the big day. Keep in mind that average costs are just that: an average made up of numerous data points. It’s not how much you will or must spend. Planning a wedding doesn’t have to be a budget breaker, and there are various ways to finance the event, including gifts from family and personal loans.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.


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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.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

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Jan
07
2025
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Dividends: What They Are and How They Work

By | Investing | Comments Off on Dividends: What They Are and How They Work

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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For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

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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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.

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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Jan
07
2025
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How Much Should I Contribute to My 401(k)?

By | 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.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Help grow your nest egg with a SoFi IRA.

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.

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.

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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