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For some people, freelancing is the way they earn their living, relishing the freedom and flexibility of this type of work. For others, it’s a smart way to bring in some income in addition to a salary. Regardless of whether you’re managing your freelance business as a full-time endeavor or a side hustle, one fact is true: You’ve got to pay taxes on your earnings.

In this guide, you’ll learn about the steps to take in your situation, including:

•   How do you pay taxes as a freelancer?

•   Why are freelance taxes higher?

•   What are some ways to reduce taxable income?

•   What deductions should freelancers take?

•   What should freelancers know about tax refunds?

How Taxes for Freelancers Are Different

The first thing to note is that taxes for freelancers are notably different in two major ways: Freelancers pay a larger percentage of their income (because of self-employment tax), and they’ve got to make estimated tax payments every quarter.

What Is Self-Employment Tax?

The self-employment tax rate is 15.3%. That’s 12.4% for Social Security and 2.9% for Medicare.

That doesn’t mean that’s all that freelancers pay. Self-employment tax is what freelancers pay on top of regular income taxes. The percentage you pay in income taxes depends on what tax bracket you’re in but can range from 10% to 37%.

Why do freelancers pay a self-employment tax? When you’re an employee for a business who receives a W-2 form, your company pays some taxes for you.

But if you’re a freelancer — whether a writer, photographer, dog walker, or consultant — your clients don’t pay any taxes for you, so you’ve got to pick up the slack.

And don’t forget: You may also have to pay state and local taxes, depending on where you live.

What Are Quarterly Taxes?

Most people think of April 15 as the dreaded Tax Day for all Americans, when they have to pay their taxes. But taxes aren’t actually due on April 15: They’re due when you earn the money.

That’s why employers withhold taxes from every paycheck. Tax season is just that special time where the IRS wants you to go over the numbers and make sure the right amount was withheld — and pay up if you actually owe more. (Or, if you overpaid, file your return to claim a refund.)

But since taxes aren’t withheld when freelancers earn revenue from clients, the government expects freelancers to make quarterly tax payments throughout the year.

Freelancers have two options:

1.    Pay 100% of the taxes they owed the prior year, split over four payments.

2.    Pay 90% of the taxes they’ll owe for the current year, split over four payments.

Note that these percentages may be different if you’re a farmer, fisherman, or high-income earner.

Estimated taxes are among the most complicated parts of being a freelancer, and you can face underpayment penalties if you don’t send Uncle Sam your fair share throughout the years.

You can check out the IRS’s guidelines for estimated taxes , but a tax professional may be worth the cost if you’re confused.

💡 Quick Tip: Typically, checking accounts don’t earn interest. However, some accounts do, and online banks are more likely than brick-and-mortar banks to offer you the best rates.

Paying Taxes as a Freelancer

Now that you understand that freelancers must pay more in taxes and that they need to keep track of more tax deadlines, consider the actual process for freelancer tax filing.

Here’s how to pay freelance taxes in five steps.

1. Determine If You Have to Pay Freelancer Income Tax

First and foremost, it’s a good idea to make sure you actually have to pay freelancer taxes. If you fit the bill of the IRS’s definition of an independent contractor, you’ll have to file as a freelancer and will be subject to self-employment taxes.

The IRS says you’re an independent contractor “if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.”

It’s a rather broad designation and might fit traditional freelance gigs like writers and graphic designers, but it can also apply to app-based workers, like drivers for Uber and Lyft, and even doctors, lawyers, and veterinarians.

Even if you receive a W-2 from an employer but made other revenue on the side, you’re still subject to freelancer income taxes — and must make estimated payments on that income.

2. Calculate How Much You Earned

As a freelancer, you may receive 1099-NECs from clients for the work you do, detailing just how much money you made from them. For the 2025 tax year, clients must issue a 1099-NEC if they pay a freelancer $600 or more; this threshold will increase to $2,000 for payments made in 2026, with adjustments for inflation thereafter.

Even if you don’t receive a 1099, you still have to report any income you made on your tax return. This means paying taxes if you are paid on Venmo or another platform versus by check or a direct deposit.

If you don’t declare the income, you’re committing tax fraud — and the IRS can find out during an audit.

You may want to use a tax preparation checklist to help you organize these materials. You might start by compiling all your 1099-NECs and any other income forms, including 1099-INTs, 1099-Ks, 1099-MISCs, and W-2s, and then input them on your tax return or into your tax software. If you have additional income not represented by any forms, you’ll be able to report that as well.

3. Compile Your Business Expenses

As a freelancer, there are several tax deductions that can cut your business tax bill and protect your profits. These deductions include a broad range of ordinary and necessary costs associated with running your business.

Common Tax Deductions for Freelancers

Business expenses can vary significantly depending on the kind of work you do, but you may be able to to use some of these freelancer tax deductions, like:

•   A portion of your rent or mortgage (your home office deduction)

•   Phone and internet bills

•   Any computer and software expenses

•   Automotive expenses, including miles on your car when used for business (and only for business)

•   Office supplies

•   Travel expenses

•   Marketing and advertising expenses

•   Continuing education

Freelancers may also be able to take the qualified business income deduction and self-employment tax deduction.

Other Tax Deductions and Tax Credits

Business expenses may apply to freelancers specifically, but independent contractors can take advantage of other common tax deductions and credits.

If you itemize rather than take the standard deduction, you may be able to deduct mortgage interest payments, charitable contributions, and the state and local taxes. And if you have education debt, you may be able to take the student loan interest deduction.

Tax credits are also a useful tax tool and can greatly reduce your tax bill as a freelancer. Some popular tax credits include the child tax credit, Earned Income Tax Credit, and electric vehicle tax credit.

Recommended: Fastest Ways to Get Your Tax Refund

4. Account for Estimated Payments

If you made estimated tax payments the previous year, don’t forget to apply those to your tax form when filing. After all, if you’ve handed over a chunk of change to the IRS already, you’ll want credit for it.

You’ll add your total payments to line 26 on Form 1040 if filling out the form yourself, but most tax software and accountants should prompt you for this information.

5. File and Calculate Estimated Payments

The last step in how to pay freelance taxes: You’re now ready to complete your forms, and send in your tax return and any payments that you owe. And it’s not necessarily just federal taxes that are needed for freelancer tax filing: Depending on where you live, you may owe state, local, and school district income taxes as well.

After filing, surprise: You’re not done yet. You’ll also need to estimate taxes for the current year. Your first quarterly payment is due on Tax Day in April.

If you’re working with an accountant, they can help you calculate how much you’ll likely owe and print out vouchers for you to mail in with your payments. If you wind up making significantly more or less throughout the year, you can adjust your estimated payments to match. That’s part of learning how to budget on a fluctuating income.

Freelancer Tax-Filing Tips

Freelancing and taxes can seem complicated. Here are tips to help you save money and hit all your deadlines.

Plan for Retirement as a Freelancer

Reducing your taxable income is helpful when you have to pay significantly more in taxes on your earnings. One way to do this — and prepare for your future — is to open a retirement account and make pre-tax contributions.

You can contribute to a traditional IRA, but there are also retirement plans designed for self-employed individuals, including a SEP IRA and a solo 401(k). It’s worth educating yourself about how these work and contribution limits so you can find the best option for your financial situation and aspirations.

Research Deductions

You may be tempted to take the standard deduction when filing, but if you have a lot of business expenses, you may earn a larger tax break by itemizing. Tax software and accountants generally know all the different types of taxes and guidelines. They can help you find all the tax deductions you qualify for, but it never hurts to do some research on your own.

Stay Organized

Organization is crucial when running your own business — and that holds true at tax time. By organizing your bills and tracking your income throughout the year (even on a daily basis), you should have good records of all your revenue and expenses.

Find record- and receipt-keeping systems that work for you. You may also want to set calendar reminders so you never miss a quarterly tax payment deadline.

Work with a Tax Professional

Freelancer income taxes can be challenging and confusing. If you’re overwhelmed and worried about making a mistake, it may be worth the money to hire an accountant or tax preparer.

Plus, the tax-filing fee may count as a deductible business expense for next year.

Understand Tax Refunds for Freelancers

Know that it is unlikely that you’ll get a tax refund as a freelancer. What often triggers a tax refund is that a full-time employee had too much money withheld for taxes from each paycheck and their overpayment comes back to them. (They can adjust their W-4 employee withholding tax form to avoid this situation in the future.)

But as a freelancer, it is unlikely you are overpaying your taxes, especially if you are tracking your income and paying the appropriate amount of quarterly taxes.

Recommended: Maximizing Your Time and Money

The Takeaway

Taxes can get more complicated if you’re a freelancer. You likely will pay more in taxes (thanks to the self-employment tax), and you’ll probably need to make quarterly estimated payments. It’s wise to regularly track and review your earnings and expenses so you can stay on top of how you are doing. For many freelancers, working with a tax professional is the best path forward.

Also worth noting: As a freelancer, you need several tools to stay organized and run your business, including a bank account.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

Why is freelance tax so high?

Freelance taxes are higher because they include self-employment tax. This additional 15.3% is what employers traditionally pay on behalf of their employees. In the case of freelancers, they’re both the employer and the employee so they have to cover that amount.

Do I need to declare freelance income?

Yes, you must declare all freelance income. Even if you didn’t make enough to trigger a 1099 from a client — or that client forgot to send you a 1099 — you must report any and all income to the IRS.

What happens if you don’t file freelance taxes?

If you don’t make quarterly tax payments as a freelancer, you could be subject to underpayment penalties when you go to file. If you don’t pay at all, you’ll be subject to Failure to File and Failure to Pay penalties. You’ll owe interest on top of the fines — and eventually could face jail time if you don’t pay.

Can freelancers pay taxes annually?

While freelancers must file taxes annually like everybody else, they are usually required to make quarterly estimated taxes since no taxes are being withheld from their payments throughout the year.

Photo credit: iStock/pcess609

SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC. The SoFi® Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 12/23/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
SOBK0224010
CN-Q425-3236452-133

First-time parents can be so preoccupied with the love they feel for their new babies and the constant care required that they may lose sight of their larger financial goals. When you’re busy getting to know your little human, you may not prioritize money management.

But securing your growing family’s finances is an important consideration. You have new needs and goals evolving, such as your child’s education and your retirement. Here’s smart advice to help you manage your money well during this new life stage and beyond.

7 Financial Tips for New Parents

Raising a child can cost more than $15,000 a year, according to one recent calculation using U.S. Department of Agriculture data. That can put some serious stress on your finances. Here’s guidance on making your money work for you and your family.

1. Avoid Overspending on Baby Gear

As a first-time parent, you likely have quite a bit of work to do before the baby arrives. You may need to create and furnish a nursery for your child, and stock up on diapers, bottles, clothes, toys, and so much more.

As you’re setting up your new life with a baby, it can feel like buying everything brand-new is the only option, but that can be costly. You might consider taking advantage of used or gifted items so as not to deplete your bank account.

You can buy a lot of items secondhand at a lower cost through online marketplaces or used goods and consignment stores. Or you might see what “freecycle” networks in your area have available at no charge. That’s one way to save money daily.

And if you have friends, family, or neighbors that already have children, they may be looking to unload some of the gear their children no longer use. Families with older kids are often happy to pass on items such as clothes, cribs, playpens, toys, and books. You might check Nextdoor.com and other community sites, which can be a good resource for local families seeking to offload these items.

2. Don’t Live Without a Safety Net

As a parent, you have a host of new responsibilities, and expenses you never imagined may pop up. So consider these moves:

•   An emergency fund becomes even more important when you have a child or one is on the way. You’re now responsible for all of their needs, and there may be unplanned costs that pop up along the way. Or, if you were to endure a job loss, you’d need to continue to provide for your child.

•   Saving for an emergency is a process, and it’s okay to start small — even just $25 a week will add up over time. Some people opt to store their emergency fund in a high-yield savings account or checking account. Earning interest that way will help your money grow faster.

•   Review your health insurance. You may want to opt for a different plan now that you have a child. An addition to the family is usually a qualifying life event (QLE) that can allow you to make changes regarding your plan outside of the usual open enrollment period.

•   Consider life insurance and disability insurance if you don’t already have it or, if you do, see if you want to update your coverage. When a little one is depending on you, you probably want to protect their future if you weren’t able to earn your usual income. Maybe you can only afford a modest policy at this moment. That can be fine; it’s a start and something you can revisit later as you grow your wealth.

3. Keep a Budget

With a baby on board, you likely have a host of new expenses, from the life insurance mentioned above to daycare to toys (and more toys). Making a budget can help you prepare to pay for the extra expenses.

The word “budget” can conjure up fear, but it’s really just a helpful set of financial guardrails that help you balance how much you have coming in and how much is going out towards expenditures and savings.

•   You might try the popular 50/30/20 budget rule which says that 50% of your take-home pay should go toward needs, 30% toward wants, and 20% toward savings.

•   You could check with your financial institution to see what kinds of tools they provide for tracking your money. This can be a great resource as you work to improve your money management and hit your goals.

•   To make a budget, you might also see what apps or websites offer products that could work for you. Check with trusted friends to see what they may recommend.

4. Don’t Put Off Retirement Savings

Another financial mistake new parents: Learning to pay yourself first isn’t easy for a lot of parents to do, but it’s vital. (For instance, while you can borrow money for college expenses for your child, you can’t likely borrow for your retirement.)

For retirement saving, one way to start is by enrolling in your company’s 401(k) plan if one is offered. Some employers will match your contribution, up to a certain percentage, and you’ll be able to have your contribution taken directly from your paycheck.

If your employer doesn’t offer a 401(k), you could open an individual retirement account, or IRA, instead. Getting in the habit of saving at least a little for your own future can be important as your focus shifts to your new addition.

It’s never too early to start saving for retirement.

5. Start Savings for Your Child’s College

Saving for your children’s tuition can be an important step for many new parents. That’s because the sooner you start, the better. Your money will have that much more time to grow. College is a big-ticket expense, with estimates of tuition in 18 years being calculated as follows:

•   $25,039 per year for a public college

•   $48,380 per year for a private college

While a standard savings account may seem like the easy choice, there are other options designed to help you or grandparents save for a child’s education.

•   You might opt for the benefits of a 529 college savings plan. There are two types: education savings plans and prepaid tuition plans.

•   With an education savings plan, a tax-deferred investment account is used to save for the child’s future qualified higher education expenses, like tuition, fees, room and board, computers, and textbooks. Funds used for qualified expenses are not subject to federal income tax.

•   With a prepaid tuition plan, an account holder purchases units or credits at participating colleges and universities for future tuition and fees at current prices for the beneficiary. Money in this fund is guaranteed to rise at the same rate as tuition. Most of the plans have residency requirements for the saver and/or beneficiary.

•   A Coverdell Education Savings Account may also be worth looking into. In general, the beneficiary can receive tax-free distributions to pay for qualified education expenses. Contributions to a Coverdell account are limited to $2,000 per year, per beneficiary. The IRS sets no specific limits for 529s.

6. Make the Most of Tax Breaks

Another bit of financial advice for parents is that when you have a child, you may be eligible for certain tax benefits.

•   The Child and Dependent Care Credit: If your child is in daycare or preschool or you pay for another kind of caregiving, you may be eligible to claim this credit, which varies based on your income. In 2025, you can get a credit of between 20% and 35% of qualifying expenses up to $3,000 for one dependent or $6,000 for two or more. In 2026, the credit will increase to 50% of qualifying care expenses — up to $3,000 for one child or $6,000 for two or more. 

•   The Child Tax Credit: This allows parents to get a tax credit of up to $2,200 per child under the age of 17 for 2025 and 2026. Parents may qualify for the full amount per child if their modified adjusted gross income (MAGI) is less than $200,000 as an individual filer or $400,000 for joint filers.

•   The Earned Income Tax Credit: Lower-income parents may be able to claim this credit, which varies with income and number of children. The Internal Revenue Service (IRS) offers a calculator to check eligibility.

•   Adoption Tax Credit: This offers tax incentives to cover the cost incurred if you adopted a child. In 2025, the maximum credit is $17,280 per qualifying child. The credit begins to phase out for taxpayers with a MAGI above $259,190; it completely phases out once your MAGI reaches $299,190. In 2026, the adoption tax credit is worth up to $17,670; the credit phase-out begins at a MAGI of $265,080 and phases out completely at $305,080 or above.

You might consult a tax professional to see which of these you can claim.

7. Teach Your Kids About Money

If kids aren’t taught the basics of financial literacy at a young age, they may struggle to make a budget, avoid credit card debt, or save money when they’re older. You can help your children learn what it means to manage money in these ways:

•   Kids often love to play store, so go ahead and join in. By exchanging goods for money, they’re already beginning to understand the basic principles of commerce.

•   As they get older, you may want to give them an allowance in exchange for chores or homework completion.

•  You could even have them make a budget with their earnings, and encourage them to spend, save, and donate.

•  You could open a checking account with them, once they are old enough, and teach them how it works.

•  You might give them a gift card or prepaid debit card and coach them on sensible spending.

Can You Ever Be Fully Financially Ready for Parenthood?

It’s probably not possible to be fully financially ready for parenthood or for adult life in general. Part of each person’s financial journey is learning how to plan for the unexpected and navigate curveballs. That might mean financing a child’s dance lessons or speech therapy. You might wind up moving to what you consider a better school district and paying more for your mortgage and taxes.

That’s why embracing some of the guidelines above, such as making a budget, stocking an emergency fund with cash (perhaps sending some money there via direct deposit), and saving for the future can be so important.

The Takeaway

Being a new parent is a joyful time but also a challenging one. One priority not to lose track of is your financial health, especially since you are now providing for a little one and their future. By budgeting and spending wisely, saving for the future, and knowing which tax credits you may be able to claim, you can help yourself get on the path to financial security for your family.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.


Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy 3.30% APY on SoFi Checking and Savings with eligible direct deposit.

FAQ

How can you plan financially for parenthood?

Planning financially for parenthood can involve updating your budget, allocating funds to the right insurance policies and long-term goals (such as your child’s education and your own retirement), and creating an emergency fund, if you don’t already have one. Also educate yourself on any tax credits you might qualify for once you become a parent.

What are the biggest unforeseen expenses of parenthood?

Some of the unforeseen expenses of parenthood include your child’s medical, dental, and mental health costs; academic support (such as tutors and prep classes); hobbies (taking tae kwon do classes, perhaps, or traveling with their soccer club); and funding any family travel and vacations.

How much does a child cost per year?

The cost of raising a child per year can vary widely, depending on such factors as medical needs and whether they are attending public or private school. That said, recent studies suggest the current average figure is around $15,000 to $17,500 per year per child.

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SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC. The SoFi® Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 12/23/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
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.

SOBNK-Q324-101
CN-Q425-3236452-138

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While every investor has their own unique approach, certain best practices have been developed and refined over time by seasoned professionals.

That’s not to say that one investing strategy is inherently better or more successful than another — after all there are no guarantees or crystal balls in the market. However, understanding a few timeless principles can help you make more informed and confident investment decisions.

Basic Investing Principles

The following fundamentals hold true for many investors across a wide range of situations. While bearing them in mind won’t guarantee specific results, they can help you manage risk, control costs, and stay disciplined through the emotional ups and downs of investing.

1. The Sooner You Start, the Better

In general, the longer your investments remain in the market, the greater the odds that you might see positive returns. That’s because long-term investments may benefit from time in the market, not timing the market.

Markets inevitably rise and fall. The sooner you invest, and the longer you keep your money invested, the more likely it is that your investments can recover from any volatility or downturns.

Starting early also allows you to potentially benefit from compounding returns, which is when your returns earn returns of their own. The longer your money is invested, the more time it has to generate earnings, which you can opt to be reinvested to earn even more earnings, creating a powerful snowball effect.

💡 Quick Tip: Did you know that opening a brokerage account typically doesn’t come with any setup costs? Often, the only requirement to open a brokerage account — aside from providing personal details — is making an initial deposit.

2. Make It Automatic

One of the easiest ways to build up an investment account is by automatically contributing a certain amount to the account at regular intervals over time. If you have a 401(k) or other workplace retirement account, you likely already do this via paycheck deferrals. However, most brokerages allow you to set up automatic, repeating deposits in other types of accounts as well.

Investing in this way also allows you to take advantage of dollar-cost averaging. This is an investment strategy where you invest a fixed amount of money into a specific investment at regular intervals, regardless of its current market price. This approach may help mitigate the impact of market volatility by smoothing out the average purchase price over time.

3. Take Advantage of Free Money

“If you have access to a workplace retirement account and your employer provides a match, contribute at least enough to get your full employer match,” advises Brian Walsh, CFP® and Head of Advice & Planning at SoFi. “That’s a return that you can’t beat anywhere else in the market, and it’s part of your compensation that you should not leave on the table.”

Recommended: Investing 101 Guide

4. Build a Diversified Portfolio

Creating a diversified portfolio may reduce some of your investment risk. Portfolio diversification involves investing your money across a range of different asset classes — such as stocks, bonds, and real estate — rather than concentrating it in one area. Studies indicate that diversifying the assets in your portfolio may offset a certain amount of investment risk by reducing exposure to any single asset or risk source.

Taking portfolio diversification to the next step — further differentiating the investments you have within asset classes (for example, holding small-, medium-, and large-cap stocks, or a variety of bonds) — may also be beneficial.

5. Reduce the Fees You Pay

Whether you take an active, passive, or automatic approach to investing, you’re likely going to have to pay some fees. For example, if you buy mutual funds or exchange-traded funds (ETFs), the main annual costs, known as the expense ratio, are automatically deducted from the fund’s total assets, directly reducing the fund’s net asset value (NAV) and lowering your overall investment returns.

Fees can be one of the biggest drags on investment returns over time, so it’s important to look carefully at the fees that you’re paying and to occasionally shop around to see if it’s possible to get similar investments for lower fees.

6. Stick with Your Plan

When markets go down, it can feel like the world is ending. New investors might find themselves pondering questions like: How can investments lose so much value so quickly? Will they ever go back up? What should I do?

During the crash of early 2020, for example, $3.4 trillion in wealth disappeared from the S&P 500 index alone in a single week. And that’s not counting all of the other markets around the world. But over the next two years, investors saw big gains as markets hit record highs.

The takeaway? Investments fluctuate over time and managing your emotions can be as important as managing your portfolio. If you have a long time horizon, you may not need to be overly concerned with how your portfolio is performing day to day. It’s often wiser to stick with your plan, rather than buy or sell based on emotional reactions to short-term external factors.

7. Maximize Tax-Advantaged Accounts

Like fees, the taxes that you pay on investment gains can significantly eat away at your profits. That’s why tax-advantaged accounts, those types of investment vehicles that allow you to defer taxes, or enjoy tax-free withdrawals, are so valuable to investors.

The tax-advantaged accounts that you can use will depend on your workplace benefits, your income, and state regulations, but they might include:

•   Workplace retirement accounts such as 401(k), 403(b), etc.

•   Health Savings Accounts (HSAs)

•   Individual Retirement Accounts (IRAs), including Roth IRAs, SEP IRAs, SIMPLE IRAs, etc.

•   529 Accounts (college savings accounts)

Recommended: Benefits of Health Savings Accounts

8. Rebalance Regularly

Once you’ve nailed down your asset allocation, or how you’ll proportion out your portfolio to various types of investments, you’ll want to make sure your portfolio doesn’t stray too far from that target. If one asset class, such as equities, outperforms others that you hold, it could end up accounting for a larger portion of your portfolio over time.

To correct that, you’ll want to rebalance once or twice a year to get back to the asset allocation that works best for you. If rebalancing seems like too much work, you might consider a target-date fund or an automated account, which will rebalance on your behalf.

9. Understand Your Personal Risk Tolerance

While all of the above rules are important, it’s also critical to know your own personality and your ability to handle the volatility inherent in the market. If a steep drop in your portfolio is going to cause you extreme anxiety — or cause you to make knee-jerk investing decisions — then you might want to tilt your portfolio more conservatively.

Ideally, you’ll want to land on an asset allocation that takes into account both your risk tolerance and the level of risk required to have a reasonable chance of reaching your specific financial goals.

If, on the other hand, you get a thrill out of market ups and downs (or have other assets that make it easier for you to stomach short-term losses) and a long time horizon, you might consider taking a more aggressive approach to investing.

💡 Quick Tip: If you’re opening a brokerage account for the first time, consider starting with an amount of money you’re prepared to lose. Investing always includes the risk of loss, and until you’ve gained some experience, it’s probably wise to start small.

The Takeaway

The rules outlined above are guidelines that can help both beginner and experienced investors build a portfolio that helps them meet their financial goals. While not all investors will follow all of these rules, understanding them provides a solid foundation for creating the strategy that works best for you.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.

FAQ

How much will $100 a month be worth in 30 years?

The value of $100 invested monthly for 30 years depends on the rate of return. If you consistently invest $100 per month, your total contribution is $36,000. If you earn an average 5% annual return, you’d have about $83,800, assuming returns are compounded daily. At 7%, it’s closer to $123,000 and at 10%, you’d have around $230,000. Keep in mind, however, that investment returns are not guaranteed and these examples do not account for investment fees, expenses, or taxes, which would reduce actual returns.

What are the four golden rules of investing?

While there is no single, universally agreed-upon list, four fundamental and time-tested principles of investing are: starting early to take advantage of compounding returns; diversifying your portfolio to manage risk; keeping costs and fees low; maintaining a long-term perspective and avoiding emotional, short-term reactions to market volatility.

What is the 70/20/10 role in finance?

The 70/20/10 rule in finance is a simple budgeting guideline for allocating your after-tax income. According to this rule:

•   70% of your income should go toward needs (like living expenses) and daily spending.

•   20% is dedicated to saving and investing, building your long-term wealth and financial security.

•   10% is allocated to debt repayment (beyond minimum payments) and charitable contributions.

This breakdown helps individuals prioritize financial health by ensuring savings and investment are part of the core budget.