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How to Build Wealth In Your 30s

While you may be established in your career once you reach your 30s, it’s still not that easy to build wealth. Suddenly you’ve often got a host of other financial priorities like paying down debt, saving for your first home, and paying for childcare.

However, making sure your money is working for you now matters, especially when it comes to building wealth over the long term. Saving money is a good start, but more importantly, your 30s are a prime time to develop a consistent investing habit.

Think of this decade as a great opportunity to learn new money skills and establish better money habits.

What Does Wealth Mean to You?

One way to motivate yourself to build wealth in your 30s is by thinking about the opportunities that it can create. Retiring early or being able to enjoy bucket-list vacations with your family, for example, are the kinds of things you’ll need to build up wealth to enjoy.

Beyond that, building wealth means that you don’t have to stress about covering unexpected expenses or how you’ll pay the bills if you’re unable to work for a period of time.

Investing in your 30s, even if you have to start small, can help create financial security. The more thought you give to how you manage your money in your 30s, the better when it comes to improving your financial health.

So if you haven’t selected a target savings number for your retirement goals yet, run the numbers through a retirement calculator to get a ballpark figure. Then you can formulate a plan for reaching that goal.

💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.

6 Tips For Building Wealth in Your 30s

Curious about how to build wealth in your 30s? These tips can help you figure out how to save money in your 30s, even if you’re starting from zero.

1. Set up a Rainy Day Fund

Life doesn’t always go as planned. It’s important to have a nice cushion of cash to land on, should any bad news come your way, such as a job loss, a medical emergency, or a car repair.

Not having the money for these unexpected expenses can threaten your financial security. To prevent such shocks, sock away at least three-to-six months’ worth of savings that can budget for your everyday living expenses, from rent on down.

2. Pump Up Your 401(k)

If your company offers a 401(k) plan, consider it an opportunity for investing in your 30s while potentially reducing your current taxes. This is especially true if your employer offers a match (though matching is typically only offered if you contribute a certain amount). The match is essentially free money, so you should take full advantage of it, if possible.

Aim to increase your contributions on a regular basis. This could be once a year or twice a year, and especially whenever you get a bonus or a raise. Some plans allow you to do this automatically at certain pre-decided intervals.

3. Consider Other Retirement Funds

If you don’t have access to a 401(k), there are other options that can help fund your future and help you with building wealth in your 30s.

And even if you contribute to a 401(k), you may benefit from these additional options. For example, if you’re already maxing out your 401(k), you might continue saving for retirement with an Individual Retirement Account (IRA)

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

Depending on your income, you may qualify to contribute to a Roth IRA, which lets you contribute after-tax income (that means you can’t write it off) up to a certain amount each year. You can withdraw IRA and 401(k) funds without penalty starting at 59 ½.

In addition to tax-advantaged accounts, you might consider opening a taxable investment account to make the most of your money in your 30s. With taxable accounts, you don’t get the same tax breaks that you would with a 401(k) or IRA. But you’re not restricted by annual contribution limits or restrictions around withdrawals, so you can continue growing wealth in your 30s at your own pace as your income allows.

4. Open a Health Savings Account (HSA)

If you have access to a Health Savings Account this could be a valuable resource for building wealth in your 30s. For those who qualify, this is a personal savings account where you can sock away tax-advantaged money to pay for out-of-pocket medical costs. These could include doctor’s office visits, buying glasses, dental care, and prescriptions.

The money you save is pre-tax, and it grows tax-free. Also, you don’t have to pay taxes on any money you withdraw from your HSA, as long as it’s for a qualified medical expense.

You’ll need to be enrolled in a high deductible health plan to be eligible for an HSA. If your company offers health insurance, talk to your plan administrator or benefits coordinator to find out whether an HSA is an option.

5. Give Yourself Goals

One of the best ways to build wealth in your 30s involves setting clear financial goals. For example, you might use the S.M.A.R.T. method to create money goals that are specific, measurable, achievable, timely and realistic.

Then, start working toward those goals, whether it’s sticking to a budget or paying down your credit card or auto loan. Once you experience the satisfaction of meeting these goals, you’ll be able to think bigger or longer term for your next goal.

💡 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.

6. Check Your Risk Level

Investing is about understanding risk, knowing how much risk you’re prepared to take, and choosing the types of investments that are right for you.

If you’re working out how to build wealth in your 30s, consider two things: Risk tolerance and risk capacity. Your risk tolerance reflects the amount of risk you’re comfortable taking. Risk capacity, meanwhile, is a measure of how much risk you need to take to meet your investment goals.

As a general rule of thumb, the younger you are the more risk you can take on. That’s because you have more time until retirement to smooth out market highs and lows. Investing consistently through the ups and downs using dollar-cost averaging can help you generate steady returns over time.

If you’re not sure what level of risk you’re comfortable with, taking a free risk assessment or investing risk questionnaire can help. This can give you a starting point for determining which type of asset allocation will work best for your needs, based on your age and appetite for risk.

The Takeaway

Investing in your 30s to build wealth can seem intimidating, but once you set clear goals for yourself and start taking steps to reach them, it can get easier.

Watching your savings grow through budgeting, paying down debt, and investing for retirement can motivate you to keep working toward financial security and success.

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).


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


About the author

Rebecca Lake

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.



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.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.


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.

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What Is the Coupon Rate of a Bond?

Understanding the Coupon Rate of a Bond

A bond’s coupon rate represents the annual interest rate paid by the issuer, as determined by current market interest rates and based on the bond’s face value. Bond issuers typically pay coupon rates on a semiannual basis.

The coupon rate of a bond can tell an investor how much interest they can expect to collect on a yearly basis. The bond coupon rate is not the same as the bond yield, which investors who buy bonds on the secondary market use to estimate the total rate of return at maturity.

Investment-quality bonds can help with diversification in a portfolio while providing a consistent stream of interest income. Understanding the coupon rate and what it means is important when choosing bonds for your portfolio.

What Is the Coupon Rate?

Bonds represent a debt where the bond issuer borrows money from investors and agrees to pay interest at regular intervals in exchange for the use of their capital. Both governments and non-government entities, like corporations, may issue bonds to raise capital to fund various endeavors.

The coupon rate of a bond is usually a fixed interest rate, typically paid out twice per year. That said, there are some variable-rate bonds, as well as zero-coupon bonds (more on those below). Investors often use the term “coupon rate” when discussing fixed-income securities, including bonds and notes.

Recommended: How Does the Bond Market Work

The Role of Coupon Rates in Bond Investments

Investors can buy individual bonds, bond funds, or bond options, which are derivatives similar to stock options.

The coupon interest rate tells you what percentage of the bond’s face value, or par value, you’ll receive yearly. The rate won’t change during the life of the bond, which is why some bonds are worth more than others on the secondary market.

Coupon rates are typically lower for investment-grade bonds and higher for junk bonds, due to their higher risk.

Example of a Bond’s Coupon Rate

Assume you purchase a bond with a face value of $1,000. The bond has a coupon rate of 4%. This means that for each year you hold the bond until maturity, you’d receive $40, regardless of what you paid for the bond.

If you buy a bond on the secondary market, the story changes somewhat. That’s because bonds trade either at a premium to the par value (higher than the face value), or at a discount to par (lower than the face value). Because the coupon rate of the bond stays the same until maturity, it may represent a higher or lower percentage of the par value — this is called the yield.

History of the Term Coupon

Bond holders used to get literal coupons as a way of collecting their interest payments. This is no longer the case, as interest is paid on a set schedule to the investor directly.


💡 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.

Calculating the Coupon Rate

The bond coupon rate formula is fairly simple:

Bond coupon rate = Total annual coupon payment/Face or par value of the bond x 100

To apply the coupon rate formula you’d need to know the face or par value of the bond and the annual interest or coupon payment. To find this payment, you’d multiply the amount of interest paid by the number of periodic payments made for the year. You’d then divide that by the par value and divide the result by 100.

Recommended: How to Buy Bonds: A Guide for Beginners

Step-by-Step Calculation of the Coupon Rate

Say you have a bond with a face value of $1,000, which pays $25 in interest to you twice per year.

•   To find the annual coupon payment you’d multiply $25 by two to get $50.

•   You’d then divide the $50 annual coupon payment by the $1,000 par value of the bond. 50 / 1000 = 0.05

•   Then multiply the result by 100 (0.05 x 100) to find that your bond has a coupon rate of 5%.

The Impact of Market Interest Rates on Coupon Rates

How is the coupon rate determined? This is where current market interest rates come into play.

How Interest Rate Fluctuations Affect Bonds

Interest rates can influence coupon rates. An interest rate is the rate a lender charges a borrower. Individual lenders determine interest rates, often based on movements in an underlying benchmark rate. When discussing bond coupon rates and interest rates, it’s typically in the context of changes to the federal funds rate. This is the rate at which commercial banks lend to one another overnight.

Movements in the federal funds rate directly influence other types of interest rates, including coupon rates and bond prices on the secondary market.

When interest rates rise, based on changes to the federal funds rate, that can cause bond prices to fall. When interest rates decline, bond prices typically rise. When bond prices change that doesn’t impact the coupon rate, which stays the same. But a bond’s price is an important consideration for investors who trade on the secondary market because it impacts the yield to maturity.

Strategies for Investors in a Changing Rate Environment

Bond prices can move up or down based on the coupon rate, relative to movements in interest rates.

When interest rates are higher than the bond’s coupon rate, that bond’s price may fall in order to offset a less attractive yield. If interest rates drop below the bond’s coupon rate, the bond’s price may rise if it becomes a more attractive investment opportunity.

When comparing coupon rates and bond prices, it’s important to understand the relationship between the bond’s face value and what it trades for on the secondary market. If a bond is trading at a price above its face value, that means it’s trading at a premium to par. Conversely, if a bond is trading at a price below its face value, that means it’s trading at a discount to par.

An investor who purchases a bond with the intent to hold it until it reaches maturity does not need to worry about bond price movements. Their end goal is to collect the annual interest payments and recover their principal on the assigned maturity date, making it a relatively safe investment as long as the issuer fulfills their obligation.

Investors looking to buy bonds and resell them before they mature, however, may pay attention to which way bond prices are moving relative to the coupon rate to determine whether selling would yield a profit or loss.

Understanding Coupon Rate vs. Yield

Coupon rate tells investors how much interest a bond will pay yearly until maturity. But there are other metrics for evaluating bonds, including yield to maturity and interest rates. Understanding the differences in what they measure matters when determining whether bond investments are a good fit and what rate of return to expect.

Coupon Rate vs. Yield to Maturity

A bond’s yield to maturity or current yield reflects the interest rate earned by an investor who purchases a bond at market price and holds on to it until it reaches maturity. A bond’s maturity date represents the date at which the bond issuer agrees to repay the investor’s principal investment. Longer maturity dates may present greater risk, as they leave more room for the bond issuer to run into complications that could make it difficult to repay the principal.

When evaluating yield to maturity of a bond, you’re looking at the discount rate at which the sum of all future cash flows is equal to the price of the bond. Yield to maturity can be quoted as an annual rate that’s different from the bond coupon rate. In figuring yield to maturity, there’s an assumption that the bond issuer will make coupon and principal payments to investors on time.

The coupon rate is the annual interest earned while yield to maturity reflects the total rate of return produced by the bond when all interest and principal payments are made.

Coupon Rate vs Interest Rate

While coupon rate and interest rate seem similar, they are distinct. The coupon rate is set by the issuer of the bond, and the amount paid to the bondholder is tied to the face value.

But the prevailing interest rate set by the government is what determines the coupon rate. If the central bank, i.e. the Federal Reserve, sets the interest rate at 6%, that will influence what lenders are willing to accept in the form of the coupon rate.

Also, the price of a bond on the secondary market hinges on the coupon rate. A higher-coupon bond is more desirable than a lower-coupon bond, so its price will be higher.


💡 Quick Tip: It’s smart to invest in a range of assets so that you’re not overly reliant on any one company or market to do well. For example, by investing in different sectors you can add diversification to your portfolio, which may help mitigate some risk factors over time.

Variable-Rate and Zero-Coupon Bonds

Not all coupon rates are fixed. Investors can also consider whether buying variable-rate bonds or zero-coupon bonds might make sense.

Fixed vs. Variable Coupon Rates and Investment Impact

Although bonds typically offer fixed-income payments, some bonds do offer coupon rates that adjust periodically. For that reason these bonds are sometimes called floating-rate or adjustable-rate bonds.

In these cases, the coupon rate adjusts according to a formula that’s linked to an interest rate index such as the SOFR (Secured Overnight Financing Rate), the new benchmark in the U.S. that has largely replaced the LIBOR (London Interbank Offered Rate).

Although these are income-producing bonds, and there is always the possibility that they could offer a higher yield under the right conditions, they are not technically fixed-income instruments, which is something for investors to bear in mind. In addition they come with the risk of default.

Zero-Coupon Bonds Explained

Some bonds, called zero-coupon bonds, don’t pay interest at all during the life of the bond. The upside of choosing zero bonds is that by forgoing annual interest payments, it’s possible to purchase the bonds at a deep discount to par value. This means that when the bond matures, the issuer pays the investor more than the purchase price.

Zero-coupon bonds typically have longer maturity dates, which may make them suitable when investing for long-term goals. This type of bond may experience more price fluctuations compared to other types of bonds sold on the secondary market. Investors may still have to pay taxes on the imputed interest generated by the bond, though it’s possible to avoid that by investing in zero-coupon municipal bonds or other tax-exempt zero-coupon bond options.

The Takeaway

Investing in bonds can help you create a well-rounded portfolio alongside stocks, and other securities, which is why knowing the coupon rate of a bond is important. The coupon rate is the interest rate paid by the issuer, and it’s fixed for the life of the bond — which makes it possible to create a predictable income stream, whether you buy the bond at issuance or on the secondary market.

As you get closer to retirement, bonds can be an important part of your income and risk management strategy, whether you’re investing through an IRA, a 401(k), or a brokerage account.

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).


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

Photo credit: iStock/Inside Creative House


About the author

Rebecca Lake

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.



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.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.


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

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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What Is a Derivative? How Financial Derivatives Work

What Is a Derivative?


Editor's Note: Options are not suitable for all investors. 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. Please see the Characteristics and Risks of Standardized Options.

A derivative is a financial instrument that derives its value from an underlying asset, such as a stock or bond, or a benchmark such as a market index. Derivatives are considered leveraged products because, for a minimal investment, the investor can control a much larger position.

Derivatives work as a contract between two parties: a buyer and seller. The derivative is a secondary security, meaning it is not an asset itself, but rather it tracks the value of an underlying asset. The value of a derivative is based on market events, price changes, and other factors related to the underlying asset.

Experienced investors often use derivatives to place bigger bets, to help hedge their investments against future loss, or to profit from upcoming market shifts. Some investors also use them to profit or speculate on commodities, such as gold or oil. They can serve different purposes for different people, such as limiting risk related to possible future events.

Key Points

•   Derivatives are financial contracts that derive value from underlying assets such as stocks, bonds, or commodities.

•   Derivatives are considered leveraged products.

•   Options, futures, and swaps are common types of derivatives, each with unique features and purposes.

•   Derivatives are used for hedging to manage risk and for speculation to profit from market movements.

•   Trading derivatives involves significant risks, including potential for large losses.

•   Potential advantages of derivatives include leverage, flexibility, and the ability to hedge against market volatility.

How Does a Derivative in Finance Work?

A derivative is a legally binding contract that can apply to various asset classes, including futures, swaps, and options trading. It outlines the terms, rules, and costs for a potential future transaction based on the performance of an underlying asset.

For instance, if an investor has a significant amount of a particular stock with an unrealized gain, they might choose to enter into a derivative contract that gives them the ability to sell it at today’s prices on a future date. This may provide them with some protection against future losses.

Derivatives are also a way to give investors exposure to a certain asset class without having to actually buy the assets. Derivatives are leveraged contracts, in that the investor pays a smaller fee to control the underlying position.

The seller of a derivative doesn’t have to actually own the underlying asset, and in many cases the buyer never owns the asset directly either. Derivatives provide exposure to the asset’s value rather than trading it directly.

Derivative Example

A derivative contract, such as a call option, grants the options buyer the right, but not the obligation, to purchase shares of a particular stock at a predetermined price of $1,000 per share (the strike price) within a six-month period (the expiration). The standard options contract is for 100 shares.

The appeal of this strategy, and the appeal of derivatives in general, is that the buyer is able to purchase the right to buy the underlying asset, at the strike price, on or before the expiration — and only pay the cost of the contract, which is the premium. In other words, options (like other types of derivatives) enable investors to make bigger trades than they could with just cash.

Types of Derivatives

There are two categories of derivatives: obligation-based contracts and option-based contracts. Obligation-based contracts include swaps and futures. These form an obligation between both parties to fulfill the terms of the agreement.

Option contracts give the parties the right, but not necessarily the obligation, to fulfill the contract transaction.

Options

Options are a common type of derivative that give traders the right, but not the obligation, to buy or sell an underlying asset at a predetermined price within a set time frame. Since the value of an option contract depends on the price movements of the underlying asset, it’s considered a derivative.

Traders use options for speculation or to hedge against potential losses, but they carry risks, including the possibility of losing the premium paid upfront (for buyers), and the potential for significant losses, particularly for uncovered (naked) option sellers.

Recommended: Popular Options Trading Terminology to Know

Futures

With futures contracts, the buyer and seller set a price for the future exchange of an asset or commodity. The contract includes the price, the amount, and the future settlement date. The contract obligates both parties to fulfill the contract.

Traders are required to deposit margin funds, which is a fraction of the contract value. They may also need to post additional funds, known as maintenance margin, to cover potential losses.

Once the contract is entered into, the price of the underlying asset is tracked daily, and any gains or losses are added to or removed from the trader’s account until the contract is sold or expires. Futures contracts are traded on regulated exchanges, while similar contracts, known as forwards, are sold over the counter (OTC), allowing for more negotiation but less regulatory oversight.

Swaps

Swaps are contracts traded over the counter for the exchange of financial terms or cash flows such as interest rates and currencies.

Companies can swap types of interest rates in order to get better terms. Often, one rate is variable and the other rate is fixed.

With currency swaps, companies can invest overseas with a lower risk of exchange rate fluctuations.

What Is Margin?

Margin requirements for derivatives trading differ somewhat from standard margin trading in stocks. In futures trading, traders must deposit an initial margin, which is a fraction of the total contract value, to open a position. They may also need to post maintenance margin to cover potential losses if the trade moves against them.

In options trading, margin requirements depend on whether an investor is buying or selling an option. Buyers pay a premium upfront, while sellers (writers) may need to post margin to ensure they can fulfill their obligations if the option is exercised.

Swaps may also involve margin requirements, particularly in over-the-counter markets, to mitigate counterparty risk. The specifics vary based on the contract terms and the regulatory environment.

How Derivative Trading Works

A derivatives contract says that the investor will either earn or pay money related to the underlying asset. Although there is an initial cost for the derivative contract, traders may be required to contribute additional maintenance margin if the underlying asset moves against their position.

Once a derivative contract is entered into, the buyer can either hold onto it until the expiration date when they purchase the asset at the agreed upon price, or they can sell the contract to someone else, potentially for a profit. Trading one derivative for another one prior to the contract end date is common.

Generally the contract will sell for only a tiny amount of the value of the underlying asset, but the value of the contract can fluctuate along with the underlying asset price fluctuations — and as the expiration date draws closer.

There is a small initial deposit required to enter into the contract. This amount varies depending on the type of derivative and market conditions. For example, there could be a contract to purchase 100 shares of a stock for $3,000 per share, and the option contract might trade at a premium of $3 per share.

Before entering into a derivative contract, it’s important to understand how derivatives work and read what the contract entails, including the disclosure statement. There will be an agreement to sign stating that both parties have read and understand the terms.

Trading derivatives also requires ongoing work and attention. Markets can change quickly, and there may be obligations throughout the contract period, such as tracking the value of the underlying asset.

Costs

Derivative contracts come with various costs depending on the type of contract and the market where they are traded. Common costs include:

•   Options: Premiums, commissions, and potential assignment fees

•   Futures: Initial margin, maintenance margin, and exchange fees

•   Swaps and Other OTC Derivatives: Transaction fees and counterparty costs

Derivatives are best suited for experienced investors who understand the potential risk of loss involved. Consider consulting with a financial professional to understand the full costs for specific trades.


💡 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.

Pros and Cons of Trading Derivatives

There are several pros and cons to trading derivatives. Some of the main ones are:

Pros

Derivatives traders enjoy several advantages, including:

•   A hedge against the risk of future losses

•   An opportunity for speculation

•   Exposure to an asset without having to purchase it

•   Can help predict future cash flows

•   Provides the ability to lock in prices

Cons

In addition to the advantages, there are several drawbacks that derivatives traders should understand.

•   Trading derivatives is very complex and can be risky for inexperienced traders

•   The derivative contract may not be liquid or easily sellable on the open market

•   There is a risk of losing more than you invest

•   Online scams in derivatives trading are common, adding to the risk

•   There are fees and costs associated with the contract

•   There may be ongoing maintenance and time commitment required

Financial Derivatives Regulations

Regulations around derivatives vary depending on where they are traded. The Securities and Exchange Commission regulates derivatives traded on registered national securities exchanges, while over-the-counter (OTC) derivatives are typically subject to less oversight and may involve bilateral agreements between parties.

In the latter case, the parties negotiate the terms of contracts on their own. Sometimes these parties include banks and financial institutions regulated by the SEC. Futures brokers and commercial traders must be registered with the National Futures Association (NFA) and the Commodity Futures Trading Commission (CFTC).

The Chicago Board Options Exchange (CBOE) is the most well known options exchange platform and is regulated by the SEC. These regulating bodies help to prevent fraud and abusive trading practices and promote fair, orderly markets.

The Takeaway

Derivatives can be a riskier type of investment but they can provide value to both institutional and retail investors’ portfolios when used appropriately, and with a clear understanding of the risks involved. Trading derivatives requires more work than simply buying and selling more traditional securities, but the additional risk and additional work can also yield greater rewards.

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/fizkes

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.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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.
*Borrow at 11%. Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.

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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15 Ways to Invest $10,000 Right Now in 2024

If you have $10,000 that you can earmark for investing purposes, count yourself lucky. There are many ways to invest $10,000 right now, whether you’re thinking about long-term goals like retirement, or you’re interested in learning more about how to invest in the stock market.

A $10,000 investment can compound over the years into a substantial sum — although there is always the risk of loss when investing any amount of money. Whether you are a beginner or an experienced investor, investing $10,000 takes research and discipline to follow through on the choices that make sense for you.

Key Points

•   Identify your financial goals and risk tolerance before choosing a strategy for investing $10,000.

•   Retirement plans such as IRAs and 401(k)s offer tax advantages that may help you boost your savings.

•   Putting your money in low-risk, high-yield savings accounts, which typically offer rates that are 8x or more those of average savings accounts, can help your money grow.

•   Investing in ETFs, index funds and other mutual funds, alternatives, or individual stocks is higher risk, but may offer higher returns in time.

•   One of the most effective ways to spend $10,000 is to pay off high-interest debt, which can cost thousands in interest payments over time.

What to Know Before You Invest $10,000

Before you review some of the different ways you can invest your money, it helps to identify what your goals are. After all, you don’t have to put the entire amount into a single option; you can split your money into various pots, so to say.

It may help to ask yourself some questions about what is important to you:

•   Do you want to invest for a specific purchase or life event, such as buying a home or welcoming a child?

•   Do you want to invest toward a more secure retirement and old age, perhaps by funding a retirement account?

•   Are you interested in using the money you have to help you learn more about investing basics?

•   Would it be prudent to pay off credit card debt, since eliminating debt is an investment by effectively increasing your net worth?

Understanding Growth vs. Risk

In addition to thinking about your goals, it’s important to consider what your risk tolerance is. While there are many ways to invest, some may involve more risk (or reward) than others. Some investors may want to swing for the fences with a high-risk venture, while others prefer to keep their cash as safe as possible.

As you weigh your investing choices, from stocks and bonds to alternative investments, keep in mind that higher-risk investments tend to offer more growth — with the downside that there’s a higher risk of losing money. Lower-risk investments, like buying bonds, generally offer lower returns (but also less risk of losing money).

15 Ways to Invest $10,000

Whether you want to be a hands-off type of investor or more of an active investor, there are countless choices to consider. We summarize 15 possibilities here.

While some of these may count as conventional options (e.g., investing via a retirement or college savings account), some are less so (e.g., investing in a business).

1. Start With an IRA

Opening an IRA provides you with the opportunity to save for your retirement, supplement existing retirement plans, and potentially benefit from tax advantages. A traditional or Roth IRA can be a great vehicle for tax-advantaged, long-term investments.

The annual IRA contribution limit for 2024 is $7,000; $8,000 for those 50 and older.
Traditional IRAs allow for pre-tax contributions and tax-deferred growth, while Roth IRAs involve after-tax contributions and qualified tax-free withdrawals in retirement.

Other types of IRAs include SEP and SIMPLE IRAs. SEP IRAs are for small business owners and self-employed individuals, while SIMPLE IRAs are for employees and employers of small businesses. These have different contribution limits and rules than ordinary traditional or Roth IRAs.

In all cases, though, an IRA is just a tax-advantaged type of account. You must select investments to fill the IRA you choose.

Recommended: IRA Contribution Calculator: Check Your Eligibility

Get a 1% IRA match on rollovers and contributions.

Double down on your retirement goals with a 1% match on every dollar you roll over and contribute to a SoFi IRA.1


1Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.

2. Increase Your 401(k) Contributions

Another way to invest $10,000 is to increase your 401(k) contributions at work. Like IRAs, these are tax-advantaged accounts. Generally, you establish your 401(k) contributions through your workplace plan, and the money is deducted from your paycheck.

You could, however, increase your withholdings so that you’re adding $10,000 more to your accounts (or a percentage of that), as long as you don’t exceed the annual contribution limit.

Unlike IRAs, which have a fairly low annual contribution limit, you can save as much as $23,000 in your 401(k) for tax year 2024. If you’re 50 and up, you can save an additional $7,500, for a total of $30,500.

3. Open a High-Yield Savings Account

If you open a high-yield savings account with a competitive interest rate, this is a lower-risk way to save. As of August 2024, top high-yield savings accounts were offering as much as 5.50% annual percentage yield (APY). Just remember that terms vary considerably from bank to bank, and there are no guarantees the rate will remain constant.

Still, that means a $10,000 deposit in a high-yield savings account with a 5.0% APY could yield roughly $511 in interest in one year, assuming interest is compounded monthly, and there are no further deposits that year, and that the APY doesn’t change.

Another benefit of putting your money in a bank account is that your funds are typically FDIC-insured, up to $250,000, per depositor, per insured bank, for each account ownership category.

4. Be Debt Free

Knowing how to invest $10,000 today does not have to mean finding a high-performing stock. Simply paying off high-interest-rate debt can be like earning a guaranteed rate of return.

Think about it: If you’re carrying a $5,000 balance on a credit card that charges a 15.99% annual percentage rate (APR), paying off your balance means you are “saving” all that interest, rather than paying it to your card.

Given that most credit card issuers compound interest daily, those charges can add up to hundreds or even thousands of dollars per year (depending on your actual balance, and APR).

5. Beef Up Your Emergency Fund

Putting some or all of your $10,000 into an emergency fund could also pay off down the road. Having cash on hand to cover life’s inevitable curveballs means that you wouldn’t have to put more expenses on a credit card in a crisis, or take out a home loan or line of credit, and end up paying interest on borrowed funds.

Keeping your emergency fund in a high-yield savings account, as noted above, could offer another potential upside in the form of interest gained.

6. Get Healthy with an HSA

Another way to invest is to max out your Health Savings Account (HSA) contributions. Individual contributions are limited to $4,150 for 2024; $8,300 for a family. The money in the HSA account is yours, even if you switch jobs or health plans.

An HSA can be triple-tax advantaged. That means your contributions, which are typically made via withholdings from your paycheck, are tax-deductible, investment growth within the HSA builds tax-free, and you can withdraw funds for qualifying health-related expenses tax-free, too.

If you use HSA funds for non-qualified expenses before age 65, you could face a 20% penalty on the withdrawals.
However, if you don’t use the account much over the years, then you can use the account like a traditional IRA once you reach age 65. That means: You’d owe tax on the withdrawals, but you wouldn’t face a penalty — and you could use the funds for any purpose (not only health-related expenses).

7. Try U.S. Treasuries

Investing $10,000 in government bills, notes, and bonds is another way to help your money grow over time. U.S. Treasury bonds are often considered one of the safest investments, as they have the full faith and credit of the U.S. government backing them. Treasuries are available in short-, medium-, and long-term maturities.

Treasury bills are short-term debt securities that mature within one year or less.Treasury notes are longer-term and mature within 10 years.Treasury bonds mature in 30 years and pay bondholders interest every six months. Treasury Inflation-Protected Securities, or TIPS, are notes or bonds that adjust payments to match inflation. Investors can buy tips with maturities of five, 10 and 30 years; they pay interest every six months.

Recommended: How to Buy Treasury Bills, Bonds, and Notes

8. Explore Alternative Assets

Experienced investors who have a sizable portfolio and a sophisticated understanding of various markets might want to explore the world of alternative assets.

Alternative investments — commonly known as alts — differ from conventional stock, bond, and cash categories. Alts include a variety of securities such as commodities, foreign currencies, real estate, art and collectibles, derivative contracts, and more.

Alts are considered high-risk, but they may offer the potential for portfolio diversification. It’s also important to know they typically aren’t as regulated or transparent as traditional assets.

9. Build a Business

Starting your own venture is an intriguing idea in today’s tech-driven world. Taking $10,000 to fulfill an entrepreneurial dream could lead to future profits. But as with any business, success isn’t guaranteed and there is always the possibility of loss.

That said, it doesn’t have to take much capital to start a small business online or just offer your services to the market. Maybe you’re a professional with expertise in a certain area or perhaps you’ve honed a particular craft. You could consult with the Small Business Administration or other resources that might help you develop a solid business plan and put your $10,000 investment to good use.

10. College Savings

You could also invest $10,000 to help your kids or other family members via a college savings plan. The most common of these is a 529 college savings account.

These accounts, also known as qualified tuition plans, give individuals the option to save for college (or even elementary and secondary school and some training programs) on behalf of a beneficiary, while providing tax advantages. All states offer 529 plans; some offer a tax deduction for your contributions. Withdrawals for qualified educational expenses are tax free.

Be sure to understand the rules pertaining to the 529 plan you choose, because contribution limits vary from state to state, as do the investment options within the account.

11. Consider Low-Cost ETFs and Index Funds

If you’re looking for a low-cost investment option, you might want to consider
looking into index funds. Index funds are a type of mutual fund that utilize a passive investing strategy, i.e. they track an index like the S&P 500. They are not actively managed like some mutual funds, which have a live portfolio manager at the helm.

Most exchange-traded funds (ETFs) also rely on passive strategies, and as such typically have very low expense ratios. Lower investment fees can help investors keep more of their returns over time.

One of the advantages of investing in low-cost index funds and ETFs is that there are so many flavors of different funds these days. Stocks, bonds, REITs, small caps, large caps, sector funds, and dividend companies — these are just some of the fund types available.

12. Explore Municipal Bonds

If taxes are a concern, you may want to explore municipal bonds or bond funds, as these bonds are issued by state and local governments to pay for infrastructure and other amenities. Munis, as they’re called, feature interest income that is exempt from federal income tax, and sometimes state and local tax in the state where the bond was issued.

Investors might be helping to build a city park, better roads, or a new football stadium, for example. Those who like the idea of investing in a way that aligns with their personal values might find munis appealing.

13. Use a Robo Advisor

One way to go about building an investment portfolio is through a robo advisor service, also known as an automated portfolio. These computer-based platforms use sophisticated algorithms to select investments (typically low-cost ETFs), based on the risk tolerance and other objectives you indicate through a questionnaire.

The robo advisor then builds a portfolio, and provides services such as rebalancing and, in some cases, tax-loss harvesting for you.

You can invest in a robo advisor portfolio within an IRA or other type of account, as long as it’s offered by your broker or plan sponsor.

14. Get Real Estate Exposure with REITs

A real estate investment trust, or REIT, offers a way to invest in income-producing real estate without owning the properties directly. REITs can be advantageous because they must distribute at least 90% of taxable income to shareholders as dividends.

You can invest in REITs through buying REIT shares, mutual funds, or ETFs. While the benefits of REITs include passive income and portfolio diversification, REITs can be illiquid and sensitive to interest rate changes.

15. Pick Individual Stocks

Learning how to pick stocks is a lifelong endeavor. A committed stock investor typically does research on company fundamentals and other factors — such as its leadership team, reputation, and comparison to industry averages — before buying actual company shares.

For many investors, investing in individual stocks can be more rewarding than buying shares of a mutual fund, which may contain hundreds of stocks. Investing in individual shares allows you to put your money directly into organizations or products you believe in. Depending on the company, you may be able to choose between common or preferred stock (preferred shares qualify for dividend payouts).

And while equity markets can be volatile, over the last 20 years, the average return of the stock market as represented by the S&P 500 Index has been about 7.03%, adjusted for inflation.

The Takeaway

Deciding how to invest $10,000 is an exciting proposition. You can begin by recognizing your ideal level of risk, and identifying what your short- and long-term goals are. Once you set those key parameters, it’s easier to choose among the many investment options to find one that suits your aims and your comfort level.

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).


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


Photo credit: iStock/Ridofranz

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.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.


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.

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.

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.

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.

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