How Much Should You Spend on an Engagement Ring?

How Much Should You Spend on an Engagement Ring?

You may have heard that you should spend anywhere from one to three months’ salary on an engagement ring. But these rules of thumb (formulated and advertised by the diamond industry) are now considered pretty outdated.

Instead, it can be a good idea to consider not only your income, but also your savings, current debt, living expenses, other costs involved in planning the wedding, and (bottom line) what you feel comfortable spending.

How you plan to pay for the ring can also impact how much you can afford to pay for it. Options include paying cash, using a credit card, financing the ring through the jeweler, or using a personal loan. And, each payment avenue has its pros and cons.

What follows are some guidelines that can help you figure out how much you should spend on an engagement ring, as well as how you may want to make the purchase.

The Average Cost of an Engagement Ring

According to The Knot’s 2020 Jewelry and Engagement Study, the average cost of an engagement ring is around $5,500.

While that number may represent the average, the amount couples actually spend on a ring varies widely. In The Knot’s study, 25 percent of respondents spent between $1,000 to $3,000 on their engagement ring, and 11 percent shelled out less than $1,000.

Why do rings vary so much in price? The cost of an engagement ring depends on a number of factors, including the size and quality of the stone, where the gem was sourced, how the gem is set, and the type of metal chosen (such as yellow gold, white gold, or platinum). There may also be mark-ups that come along with a popular brand name.

Diamond engagement rings, sourced from a mine, tend to be the most expensive choice. But there are many other, less costly options, such as lab-grown diamonds, moissanite (a lab-grown gem that looks like a diamond), and semi-precious gemstones (such as tourmaline, morganite, and aquamarine).

Whether you’re in the market for a large, eye-catching dazzler or a more dainty design, the good news is that these days there are ways to accomplish almost any look for a range of price points.

How to Pay for an Engagement Ring

While paying in cash can be the simplest (and often the cheapest) option, it may not be feasible for all couples. Below are some other payment options that you may want to consider, along with their pros, cons, and potential costs.

Financing an Engagement Ring Through Your Jeweler

Many jewelers offer financing options, but just because you’re buying from a jeweler does not mean you have to use the financing they offer. It can be a good idea to take note of the following:

Promotional offers. Some jewelers offer a 0% introductory interest rate during a set period of time. But after that period of time, interest rates may be quite high.

Down payment requirements. Some jewelers may require a certain percentage down payment prior to financing.

Financing through a jeweler directly may make sense if you’re confident you can pay back the loan prior to the end of the promotional period. As with any loan, it’s likely that there will be a credit check prior to being approved for financing.

Recommended: When Should You Make Big Purchases?

Buying an Engagement Ring With a Credit Card

Putting a large purchase like an engagement ring on your credit card can be a simple solution at the moment, but may become a financial headache in the future. Here are some things you may want to consider before getting out the plastic.

Interest rate. Putting the engagement ring on a card with a relatively high-interest rate means that the ring will end up becoming more expensive over time. You may also want to keep in mind that many credit cards have a variable interest rate, which means the interest rate at the time of purchase could rise over time.

Credit-utilization ratio. A large purchase like an engagement ring may mean using a significant percentage of credit available on your card. Having a high credit-utilization ratio may negatively affect your credit score.

Rewards and protections. Some buyers like putting large purchases on credit cards because of the consumer protections offered by the card. They also may want to take advantage of the rewards offered by the credit card company. Those rewards, however, may only be worth it if you can pay the amount back in full at the end of the billing cycle or during a 0% interest promo rate.

Recommended: Credit Card Rewards 101

Using a Personal Loan to Finance an Engagement Ring

A personal loan is another avenue for making an engagement ring purchase. A personal loan from a bank or other lender may have a lower interest rate than a jeweler financing program.

A personal loan also works differently than a credit card or financing a purchase. With a personal loan, you’ll get the money in your bank account, and pay the jeweler as though you were paying in cash. You would then pay back the loan in monthly amounts set out in the loan agreement.

Here are some things you may want to consider before using a personal loan to pay for an engagement ring.

Interest rate. In many cases, a personal loan interest rate is fixed, meaning it doesn’t change after the agreement has been signed. This means that you know exactly how much you will need to pay back for the length of the loan.

Loan terms. You may have an option to pick the length of the loan. Shorter loans may mean you’re paying less interest over time, but you have larger monthly payments.

Loan costs. There may be fees associated with the loan, including an origination fee when the loan begins and a prepayment penalty if the loan is paid before the end of the agreed upon term.

“What if” scenarios. Some lenders provide temporary deferment for people facing financial hardship, such as a job loss.

Recommended: Why February Is a Good Month to Buy Wedding Bands

The Takeaway

Spending between one and three month’s salary for an engagement ring is a long-standing tradition, but these days there is no one-size-fits-all formula.

How much you spend on an engagement ring is a very personal decision and will depend on your current and predicted income, current debt, expenses, savings, and preference.

If paying for an engagement ring upfront in cash isn’t feasible, you may want to look into different financing options and compare their pros, cons, and costs.

Your jeweler may offer financing, for example. Or, you may be able to take advantage of a credit card that has a 0% or low introductory interest rate and pay the balance off before the rate goes up.

Another option is to take out a personal loan. SoFi personal loans, for instance, offer fixed, competitive interest rates and come with no fees.

Learn more about SoFi’s personal loan options today.

Photo credit: iStock/ljubaphoto

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SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see

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: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s


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Where to Find Book Now, Pay Later Vacations

Where to Find Book Now, Pay Later Vacations

Book now, pay later vacations are on the rise.

As more people set off on adventures around the world, they’re realizing that travel can be expensive. However, there are a growing number of options to pay for those getaways, including vacation payment plans.

Here’s what would-be travelers need to know about this travel hack and newer payment option and how to decide if it’s right for them before they take off in a plane, train, or automobile.

What a Payment Plan Vacation Really Means

Buy now, pay later vacation plans work in a similar way to traditional layaway options at stores. Travelers pay a little upfront and pay off the rest over an agreed-upon timeline. However, unlike traditional layaway where a person can pick up their item only when payments are complete, travelers get their item — their trip — upfront.

There are several book now, pay later payment options on the market including Afterpay, Affirm, and Uplift. When booking a vacation using a payment plan option, you’re actually paying the financing company rather than the travel company itself. For example, if you book a Carnival cruise (one of the companies now offering this as an option), you’ll pay via Uplift. Uplift will then pay Carnival directly for the vacation in full. When you make payments, you’ll be paying Uplift, not Carnival.

Payments can be made over weeks or months, depending on the trip you’re taking, how much it costs, and which payment option you choose. Before signing on the dotted line, you’ll be assigned an interest rate based on data including your credit score, much like you would when applying for a credit card or loan. The rate will always be displayed before you click “book,” but reading the fine print is important so you are aware of all the terms of the agreement, not just the interest rate.

Recommended: Top Apps to Use When Traveling

Many Popular Travel Companies Are Now Offering This Option:

The love for vacation payment plans is growing across the travel industry. Here are a few of the major players entering the game.

Expedia: Expedia is now offering book now, pay later vacations. Travelers can choose monthly payments at checkout via Affirm. The website and Affirm offer three-, six- or 12-month payment plans.

Priceline: Like Expedia, Priceline also offers book now, pay later vacation payment plan options with Affirm. Interest rates range from 10% to 30% APR, with 0% APR for eligible customers. is offering payment plan options with Quadpay. Customers can split their payments into four installments over six weeks.

VRBO: VRBO is also getting in on the book now, pay later vacation option with Affirm. Customers can pay the total cost of the trip in three, six, or 12 monthly installments. Fixed payments come with interest rates ranging from 10% to 30% APR based on your credit profile.


Airlines are also utilizing book now, pay later for those looking to fly to their destination. United, Alaska Airlines, Air Canada, Allegiant, and Spirit are all offering this option as well as some of the airline subsidiaries Delta Vacations and United Vacations .

Cruise lines:

Cruise lines are also getting into the act. Carnival, Norwegian, and Royal Caribbean are all offering vacation payment plan options to cruise lovers looking to stretch their vacation budgets out over months.

Recommended: Tips For Finding The Top Travel Deals

The Pros and Cons of Book Now, Pay Later Vacations

An obvious benefit of utilizing book now, pay later for vacations is that you can book a vacation now and pay for it later, rather than having to save money in a travel fund to pay for a vacation you take only after it’s paid for in full. Globetrotters can live out their vacation dreams sooner rather than later, maybe even taking advantage of fare sales that only last for a few hours or a few days, rather than once again having to wait to book until they’ve saved enough cash.

However, there are drawbacks to this option as well. Travelers may run the risk of overextending themselves financially when they see a vacation option they want to book, but are financially unprepared to pay back. One study by C+R Research found that 57% of online consumers polled said they overspent when they used a buy now, pay later program and they now regret using the option.

The other major caveat travelers should be wary of is how these book now, pay later options could affect their credit scores. Though not all companies run a credit check, some do. If you are asked for your Social Security number when booking a trip, the service provider may run a credit check, which could affect your credit score. The service may also report late payments to the national credit bureaus, which could also affect your score. If this is something that concerns you, try reaching out to the service directly to see if they run a credit check before booking.

Before utilizing a book now, pay later option, travel consumers can consider if it’s the right choice for them by calculating the true cost of the vacation—including both principal and interest—to ensure they feel financially comfortable and confident they can make these payments on time.

Recommended: Ways to Be a Frugal Traveler

Personal Loan as an Alternative to Buy Now, Pay Later

If you want to take a vacation without having to save the money to pay for it first, an alternative to a book now, pay later vacation may be an unsecured personal loan. Taking out a personal loan is still taking on debt, but the rates and terms of a personal loan may vary from financing companies that offer book now, pay later vacation options.

An unsecured personal loan allows a borrower to take out the amount needed to pay for a vacation with fixed interest rates that are generally lower than credit card rates and possibly lower rates than those offered by buy now, pay later financing options. Comparison shopping for rates and terms will help you find the best option for your financial situation. SoFi personal loans have no fees and have fixed rates, so payments stay the same over the life of the loan. Eligible SoFi members can also access perks like a rate reduction or discount on a new loan, the Unemployment Protection Program for borrowers with loans in good standing, and others.

The Takeaway

Book now, pay later vacations are on the rise. Many popular travel retailers, airlines, and cruise companies are now offering the option as a way for travelers to book their vacations upfront and then pay them off over time. However, vacation payment plans do come with their own pros and cons, including potentially high interest rates upon repayment. Travelers should look at all their payment options, including personal loans when deciding which payment option is best for them.

Ready to get away? Checking out vacation financing options with a SoFi Personal Loan is a great place to start.

Photo credit: iStock/hudiemm

SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. A hard credit pull, which may impact your credit score, is required if you apply for a SoFi product after being pre-qualified.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
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Applying for No Interest Student Loans

No-interest loans or interest-free loans, also known as scholarship loans, are offered by nonprofit organizations, state governments, private companies, religious organizations, and even some sororities or fraternities. Unlike grants and scholarships, an interest-free loan is still a loan at the end of the day, and will need to be paid back over time, even if you aren’t paying interest on the initial amount.

While they can be somewhat tricky to find, and not so simple to apply for, no-interest student loans do exist and may be worth looking into for the potential savings.

What Is a No Interest Student Loan?

Interest-free loans are loans that do not accrue interest. Unlike grants and scholarships the loan amount must be repaid. Because there are no interest charges the amount repaid by the borrower remains the same as the original amount borrowed. Traditional student loans, whether federal or private, all come with interest rates that are either fixed or variable.

For the 2021 to 2022 school year, the government raised the undergraduate interest rates from the previous 2.75% to 3.73%. Private loans have a much larger range of interest rates, and may range anywhere from around 1% to up to 13% APR.

No-interest loans might help you get out of debt faster. On a standard 10-year federal student loan repayment plan, with $30,000 in debt and a 5% interest rate, you would end up paying more than $8,000 in interest alone.

Federal student loans accrue interest daily. So, on that same $30,000 loan with 5% interest rate, every day $4.11 is added to the amount you owe. So with a traditional loan, the amount of interest that adds up between your monthly payments is determined by the daily formula:

Daily Interest Rate = (Interest Rate / 365) x Principal Balance Due

Interest is charged on the principal balance, meaning the initial amount you owe for the loan.

While it’s not as common as a traditional loan, a no-interest student loan is an intriguing option, since it will never accrue interest.

Applying for Interest Free Student Loans

The application process for most interest-free loans resembles the application process for grants or scholarships more closely than a traditional loan application.

Students will generally still want to fill out the Free Application for Federal Student Aid (FAFSA®), even if you want to focus on loans without interest. Some interest-free loans use the FAFSA to determine financial need. And while federal loans generally accrue with interest, they typically have lower rates than private lenders, and federal loans come with benefits such as income-based repayment that private lenders don’t often offer.

Interest-free student loans are often local and state-based, rather than national. They may require proof of residency in a certain state. Some may also have an essay requirement, as well academic requirements, and might even require an interview.

The process is more intense than a regular student loan because funds are limited. Some state agencies and philanthropic organizations use the term “scholarship loan” to refer to interest-free loans. Scholarship loans may also be repaid through public service.

Keep in mind though that those organizations are still separate from the government, and do not offer the same repayment plans as the loans offered through the US Department of Education.

Subsidized Loans: No Interest Until After Graduation

Interest-free loans are relatively rare, so it’s possible that students will still need to rely on federal student aid. There are two types of federal Direct loans available to undergraduate students: subsidized and unsubsidized.

Subsidized loans are available to undergraduates who demonstrate financial need. The US Department of Education pays the interest accruing on the loans while you’re in school, during your six-month grace period, and when your loans are in deferment.

Recommended: Comparing Subsidized vs. Unsubsidized Student Loans

On the other hand, unsubsidized student loans are available to grad students and undergrads, and they don’t require that students demonstrate need in order to qualify for these loans. Interest accrues while you’re in school, and during grace periods, deferment, or forbearance—and you’re responsible for paying the interest.

Federal student loans also offer a few different payment plans, including income-driven repayment plans, so that borrowers can find the option that works best for them. There are also borrower protections like deferment or forbearance, that may act as a safety net for borrowers who find themselves facing financial difficulties down the road.

The Takeaway

No-interest loans, sometimes called scholarship loans or interest-free loans, are loans awarded to students that do not accrue interest at all. While rare, there are some nonprofits, corporations, and religious organizations that may offer interest-free loans to students. In the case that students don’t qualify for a no-interest loan, they may want to see what aid they were offered by the federal government or their college.

Sometimes, financial aid and scholarships don’t provide enough funding to pay for college. In that case, some students may look into private student loans as an option. While private student loans can be helpful tools when it comes to paying for college, they do not have the same borrower protections as federal student loans, so should only be considered after all other aid options have been reviewed.

Interested in using a private student loan to pay for college? You can find out what a SoFi student loan could look like in two minutes or less.

SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see

SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. A hard credit pull, which may impact your credit score, is required if you apply for a SoFi product after being pre-qualified.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.


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Family Loans: Guide to Borrowing & Lending Money to Family

Whether it’s to repay debt, put a down payment on a house, start a business or start a band, borrowing money from family members—or lending it to them—can be a risky business. And although all debt is risky, family loans carry different kinds of dangers.

Although family lenders don’t have to worry about pulling (or affecting) anyone’s credit score, private loans can quickly put otherwise strong relationships on ice if a borrower doesn’t pay up. Depending on the size of the loan, there may also be tax implications to complicate the situation even further.

That said, there are ways to more safely issue and receive family loans. Here are our best tips for stacking the odds in your favor.

Risks and Benefits to Both Parties

No matter which end of the dynamic you might find yourself on, there are both risks and benefits to family loans. But while both the borrower and lender risk putting a strain on the family relationship involved, the lender is likely to carry the greater financial risk—after all, it can be pretty hard to recoup your losses when you have no official financial authority.

Risks of Family Loans

Here’s how family loans can get tricky on both sides of the transaction.

For the Borrower:

• There is risk to the interpersonal relationship if the loan repayment plan falls through.

• Although avoiding a credit check—and possible negative credit consequences—is a plus, family loans also fail to help borrowers build their credit history since they’re not reported to credit bureaus.

For the Lender:

• There is risk to the interpersonal relationship if the loan repayment plan falls through—which puts the lender into a particularly tricky situation if they really need the cash back for their own financial situation.

• It’s easy for family lenders to lose their money outright if the borrower constantly defers to an IOU.

• Since family lenders don’t have any financial authority or backing, it can be difficult to recoup losses or enforce any substantial consequences for borrowers who go into default.

• If the loan is interest-free and for an amount in excess of the IRS gift tax exclusion , it may trigger the need to file a gift tax return (and potentially pay taxes on the gift).

Recommended: Should You Borrow Money from Friends and Family?

Benefits of Family Loans

Despite their risks, family loans do have some attractive qualities.

For the Borrower:

• Obviously, family loans present a low-cost alternative to traditional credit options. Family lenders usually don’t assess fees and may not charge interest.

• Family loans can carry much easier approval standards than their official counterparts. At a financial institution, borrowers are subject to a financial deep-dive involving their credit and employment history, income verification, and more. At the Bank of Mom & Dad, you’re probably a shoe-in; the only qualifier you need is your blood and a bit of good faith.

• Family loans often carry more flexible repayment standards than traditional loans do, and family lenders may be more lenient if the borrower faces extenuating circumstances that make it difficult to pay up.

• Failure to pay private family loans in a timely manner—or at all—won’t impact the borrower’s credit score the way such behavior would with a “real” loan.

For the Lender:

• It can feel rewarding to help out a family member in need, particularly if they’re putting the money toward a major life goal like homeownership.

• If the lender chooses to charge interest on the loan, they can earn interest as the loan is repaid.

Family Loans: Tax Implications You Might Not See Coming

It can be surprising to learn that shelling out some cash to Uncle Earl could be a big enough deal to land on the IRS’s radar. But it’s the truth.

Fortunately, most family loans fall outside of the purview of Uncle Sam. It’s only when they’re above IRS-defined amounts and interest-free that lenders have to worry.

Here’s how it works. If a family lender offers an interest-free loan to a family borrower, the IRS still sees the transaction as a loan—and assumes that the interest that should have been charged counts as a gift to the recipient. (The government publishes minimum interest rates on a monthly basis.)

That’s no big deal if the loan is for, say, $300. But if the unpaid interest—or unpaid loan balance—tops the annual gift-giving exclusion, which is $15,000 for 2020 and 2021, the lender might be responsible for filing a gift tax return and potentially paying extra taxes on the gift.

The IRS might also count the should-be interest toward the lender’s gross income, even if no interest is charged or received. Again, this isn’t a big deal with rates under 1% on loans of just a few hundred dollars, but with a big enough loan, it could impact the lender’s finances.

Tips to Make Borrowing and Lending Money to Family More Successful

If you’re considering lending money to or borrowing money from a family member, adding some structure to your loan can help minimize the risks while still allowing everyone involved to reap the benefits.

Planning it Out

All too often, a family loan takes place in a single, impromptu transaction: The borrower asks for some money, and the lender shells it out.

Instead, making a concrete plan together specifying all the loan’s terms, such as repayment installments and timing, is a better idea. Lenders might want to seriously consider charging interest, especially on large loans, due to the tax implications outlined above. Even a low-interest rate can motivate a borrower to get serious about repayment.

Making it Official

Clear communication and boundary-setting skills make pulling off a family loan a positive experience for all involved—and oftentimes, the best way to achieve those goals is to write things down.

Plus, drafting a formal money-lending contract makes your loan official in the eyes of the IRS, which can help keep loans from being classified as gifts for tax purposes.

Terms to include in your personal loan agreement include:

• The amount loaned.

• The loan’s repayment terms, such as frequency and amount, as well as a due date for when the loan must be repaid in full.

• The loan’s interest rate and fees, if any (for instance, the lender may decide to charge late fees if the loan repayment terms are not honored).

• Clauses concerning what happens if the loan is repaid early (is there a prepayment penalty?) and what happens if the borrower goes into default for any reason.

Recommended: Can I Pay off a Personal Loan Early?

Considering Alternatives

If all of these caveats and warnings are making family loans sound like a less-than-prudent idea, there’s good news. Folks in need of a fast cash infusion do have other alternatives to consider before they start knocking on family members’ doors. (And yes, if a family member asks you to borrow money, you’re allowed to say no and steer them in a different direction.)

Obviously, the most ideal financial strategy for making a big purchase is to save your money so you don’t have to go into debt at all. Although this isn’t always possible or realistic, it might be worth taking a second look at your budget, working on a promotion, or starting up a side hustle to generate cash.

Furthermore, unsecured personal loans are available from certain banks and financial institutions and make it possible to fund a wide variety of expenses upfront. Of course, these may come with higher interest rates and more stringent qualification requirements than family loans do.

The Takeaway

While borrowing money from or lending money to a family member can be tempting, it can have long-lasting impacts on interpersonal relationships as well as the lender’s finances. While drafting a structured loan agreement can help, personal loans can be an alternative worth considering.

SoFi offers a range of no-fee, low-fixed-interest-rate personal loans that can be used to fund medical expenses, home renovations, moving costs, and more.

Curious to know how a SoFi personal loan could help you? Check your rate today—it won’t affect your credit score.1

Photo credit: iStock/Ridofranz

1Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. A hard credit pull, which may impact your credit score, is required if you apply for a SoFi product after being pre-qualified.
SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see

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.

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How to Calculate the Dividend Payout Ratio

The dividend payout ratio is a metric that helps investors understand how much of a company’s net income it pays out in the form of dividends relative to how much it keeps to reinvest or pay down debt. Here’s a quick look at dividend basics and how investors can calculate the dividend payout ratio themselves.

Understanding Dividends and How They Work

Companies may pay out a portion of their profits to shareholders in the form of a dividend. Investors can take their dividend payments in cash or reinvest them in the market. Not all companies pay dividends, and those that do tend to be large, established companies with predictable profits. If an investor owns a stock or fund that pays dividends, they can expect a regular payment from that company, usually quarterly. Some companies may pay dividends more frequently.

Recommended: How Often Are Dividends Paid?

What is the Dividend Payout Ratio?

The dividend payout ratio expresses the percentage of income that a company pays to shareholders. Ratios vary widely by company. Some may pay out all of their earnings, while others may hang on to a portion to reinvest in the company or pay off debt. Generally speaking, a healthy range for payout ratios is from 35% to 55%. There are certain circumstances in which a lower ratio might make sense for a company. For example, a relatively young company that plans to expand might reinvest a larger portion of its profits into growth.

How to Calculate Dividend Payout

The simplest dividend payout ratio formula divides the total annual dividends by net income, or earnings, from the same period.

The equation looks like this:

Dividend payout ratio = Dividends paid / Net income

For example, if a company reported net income of $120 million and paid out a total of $50 million in dividends, the dividend payout ratio would be $50 million/$120 million, or about 41%. That means that the company retained about 59% of its profits.

An alternative dividend payout ratio calculation uses dividends per share and earnings per share as variables:
Dividend payout ratio = Dividends per share / Earnings per share

A third formula uses retention ratio, which tells us how much of a company’s profits are being retained for reinvestment, rather than paid out in dividends.

Dividend payout ratio = 1 – Retention ratio

Determine the retention ratio with the following formula:

Retention ratio = (Net income – Dividends paid) / Net income

Total dividends paid and a company’s net income are figures you can find in a company’s financial statements, such as its earnings report or annual report.

Why Does the Dividend Payout Ratio Matter?

Dividend stocks often play an important part in individuals’ investment strategies. Dividends are one of the primary ways stock holdings earn money. (Investors also earn money on stocks by selling holdings that have appreciated in value.) Investors may choose to automatically reinvest the dividends they do earn, increasing the size of their holdings, and therefore, potentially earning even more dividends over time.

The dividend payout ratio can help investors gain insight into the health of dividend stocks. For instance, a higher ratio indicates that a company is paying out more of its profits in dividends, and this may be a sign that it is established, or not necessarily looking to expand in the near future. It may also indicate that a company isn’t investing enough in its own growth.

Lower ratios may mean a company is retaining a higher percentage of its earnings to expand its operations or fund research and development, for example. These stocks may still be a good bet, since these activities may help drive up share price or lead to large dividends in the future.

Dividend Sustainability

Paying attention to trends in dividend payout ratios can help you determine a dividend’s sustainability—the likelihood a company will continue to pay dividends of a certain size in the future. For example, a steadily rising dividend payout ratio could indicate that a company is on a stable path, while a sudden jump to a higher payout ratio might be harder for a company to sustain.

It’s worth noting dividend payout ratios that are more than 100% as well. That means the company is paying out more money in dividends than it is earning, something no company can do for very long. While they may ride out a bad year, they may also have to lower their dividends, or suspend them entirely, if this trend continues.

Dividend Payout Ratio vs. Dividend Yield

The dividend yield is the ratio of a stock’s dividend per share to the stock’s current price:

Dividend yield = Annual dividend per share/Current stock price.

For example, if a stock costs $100 and pays an annual dividend of $7 the dividend yield will be $7/$100, or 7%

Like the dividend payout ratio, dividend yield is a metric investors can use when comparing stocks to understand the health of a company. For example, high dividend yields might be a result of a quickly dropping share price, which may indicate that a stock is in trouble. Dividend yield can also help investors understand whether a stock is valued well and whether it will meet the investor’s income needs or fit with their overall investing strategy.

The Takeaway

Dividend stocks can be an important component of an investment strategy, creating income or serving as a low-risk way to grow a portfolio. The dividend payout ratio is one measure to help investors evaluate stocks that pay dividends, often providing clues about company health and long-term sustainability.

If you’re interested in adding dividend stocks to your portfolio, you can get started by opening an account on the SoFi Invest® brokerage platform. You can use the platform to build your own portfolio containing stocks and exchange-traded funds.

SoFi Invest®
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