Strategies for Becoming Debt-Free

Many people aspire to live a “debt-free” life. And for good reason: Getting out of debt means that your take-home pay is completely your own (since you won’t be sharing any of it with creditors). Having more money to work with can help you achieve your goals, whether it’s building an emergency fund, sending your kids to college, or being able to retire some day. Knocking down debt can also improve your day-to-day life by relieving stress and boosting your mental health.

The question is, how do you get there? If you’re currently living under a mountain of student loans, credit card debt, medical debt, and/or other types of debt, it can be hard to see a way out or, frankly, even a ray of sunlight. But don’t give up. We’ve got six ideas that can help you whittle down your debt and get on the road to financial independence and freedom.

What Does It Mean to Live a Debt-Free Life?

Living “debt-free” can mean different things to different people. In the purest sense, being debt-free means having absolutely zero debt — including no credit card debt, no car or student loans, and no mortgage.

However, some people subscribe to a looser definition of “debt-free,” where you’re free of so-called “bad debt,” such as high-interest credit cards and payday loans, but recognize that some debt is “good.”

A low-interest mortgage or student loan, for example, can be considered good debt, since it can help you increase your net worth or generate future income. This looser definition may work to your advantage because it allows you to achieve milestone goals like owning a home without high-interest debt burdening your monthly finances.

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Benefits of Living Debt-Free

However you define debt-free living, knocking down your debt comes with a wide range of benefits — some expected and some, perhaps, surprising.

•   More money to spend: Interest charges eat away at your income, giving you less money for other things. Once you pay off your debts (particularly those with high interest rates), you’ll have a lot more money in your pocket.

•   Financial stability: By freeing up cash, you’ll have money available to build your emergency fund (your best defense against running up costly debt in the future). You’ll also be able to put money towards other goals and investments.

•   Less stress and anxiety: Dealing with debt isn’t just a financial challenge — it also impacts mental health. In a recent Forbes Advisor survey, 54% of adults said they often or always feel stressed by their debt circumstances; another 32% said they sometimes feel stressed because of their debt.

•   A happier marriage: In the Forbes survey, 60% of respondents said financial stress has led to disagreements in their relationships. Money fights are a common cause of divorce.

•   Increased self-esteem: Eliminating debt isn’t easy — it takes hard work, discipline, and determination. Reaching your debt payoff goals can give you a huge sense of accomplishment that leads to greater self-confidence.

6 Ways to Climb Out of Debt

Having a lot of debt can feel overwhelming. The key to gaining control over the situation is to approach it one step at a time. Here are six strategies that can help.

1. Creating a Workable Budget

A smart debt-payoff plan begins with a realistic budget. Having a basic budget will help you live within your means (so you don’t get into more debt) and free up extra cash to put towards your debts each month.

The first step in creating a budget is understanding your monthly expenses. This includes everything from rent or mortgage payments, utility bills, groceries, and transportation costs to smaller expenses like subscriptions, leisure activities, and dining out. By assessing your expenses over the last several months, you may be surprised by how much you are spending in certain categories. You may also immediately find some places to cut back, such as canceling membership to a gym you rarely use and/or giving up streaming services you rarely watch.

If the idea of tracking every penny has been a barrier to budgeting, or if you’ve tried and failed in the past, try keeping things simple. The 50/30/20 rule is a simplified budgeting strategy that’s gained traction because it limits the number of spending categories you need to establish and track.

With this approach, you divide your take-home pay (what’s left after paying taxes) into three buckets:

•   50% goes to needs, including minimum debt payments

•   30% goes to wants

•   20% goes to savings and debt payments beyond the minimum

Keep in mind that these percentages are just a guideline, and can be tweaked to fit your situation. The key to becoming debt-free is to make a budget that’s strict but still doable.

2. Making More Money

Yes, this is easier said than done. But before rolling your eyes and moving on, consider the possibilities. Is it time for a pay raise? If a bump is overdue, it might be time to have a talk with the boss.

Consider any potential ways to make extra income from home. Do you always have nights or weekends off? Maybe a friend does catering, landscaping, house painting, or some other work and could use an extra hand from time to time.

If you have a marketable skill, like website design or creating social media content, you may be able to pick up freelance work. If you’re crafty, you might look into selling your wares online or at craft fairs and flea markets. If you love animals, you might want to offer dog walking or cat sitting services.

If you could earn an extra $500 per month, in 12 months, you’d be able to pay off an additional $6,000 of debt.
Even selling things you no longer need can bring in a nice lump sum of cash that you can use to knock down debt.

3. Applying Extra Money Towards Debt

If you get an unexpected windfall (such as a bonus at work, cash gift, tax refund, or inheritance), instead of living it up while the money lasts, consider using it to pay down some debt.

You might not think a few hundred dollars will make much of a dent, but every dollar you pay over the minimum can help reduce the interest you owe on a credit card or loan.

To get some idea of how paying even a little extra toward a bill can help, consider playing around with the numbers using a credit card interest calculator. It can be scary to see how much money you’ll pay in interest if you continue to pay only the monthly minimum, but it can also motivate you to divert as much extra money as you can toward getting that debt paid off once and for all.

4. Focusing on One Debt at a Time

Seeing progress can be inspiring. Think about how good you feel when you lose a little weight from changing your diet or gain some muscle from working out. Even small wins can be motivating.

How does that apply to downsizing your debt?

Two of the commonly recommended approaches to debt repayment are the snowball and avalanche methods. These strategies focus on making extra payments towards one balance at a time instead of trying to put a little extra money toward all your balances at once.

The Snowball Debt Payoff Method

The snowball method directs any excess free cash you might have to the debt with the smallest outstanding balance. Here’s how it works:

•   List all of your outstanding debts based on how much you owe, from the smallest balance to the largest. (Disregard interest rates.)

•   Pay as much as possible toward the debt with the smallest balance, while making the minimum payment on all other debts.

•   After you pay off the smallest debt, turn your attention to the next-lowest balance. Keep going until you are debt-free.

The Avalanche Debt Payoff Method

The avalanche method focuses on paying off debts based on interest rate. It can take longer to get a win with this approach but, ultimately, it will save you more money than the snowball method. How it works:

•   List your debts in order of interest rate, from highest to lowest. (Disregard balance amounts.)

•   Pay as much as you can each month towards the debt with the highest interest rate, making the minimum payments on all other debts.

•   Once you’ve paid off the highest-interest debt, focus on the debt with the next-highest rate, and so on, until you’re debt free.

Though the methods are different, both plans provide focus, and as each balance disappears, momentum grows.

A newer approach, the fireball method, may be a better fit for modern-day debt, which could include a large amount of low-interest student loan debt.

The Fireball Debt Payoff Method

The fireball method takes a hybrid approach to the traditional snowball and avalanche strategies. It’s called “fireball” because it can help blaze through bad debt faster by making it a priority. How it works:

•   Categorize all debts as either “good” or “bad.” “Good” debt generally refers to things that can increase your net worth, such as student loans or mortgages. (Interest rates under 6% could be considered good debt.)

•   List “bad” debts from smallest to largest based on each bill’s outstanding balance.

•   Funnel any extra cash each month toward the smallest balance on the “bad” debt list, while making the minimum monthly payment on all other debts. Once that balance is paid in full, move on to the next-smallest balance on that list. Keep blazing until all “bad” debt is repaid.

•   Pay off “good” debt on the normal schedule while investing for the future. Apply everything you were paying toward “bad” debt to investing in a financial goal.

The fireball approach can help you save money because it gets rid of your more expensive debt first, but it also provides motivation by giving you wins early in the process. These combined elements could provide an extra boost to your efforts.

💡 Quick Tip: Want a simple way to save more each month? Grow your personal savings by opening an online savings account. SoFi offers high-interest savings accounts with no account fees. Open your savings account today!

5. Consolidating Debts

If your credit is strong, a debt consolidation loan could potentially help you repay your debts at a lower interest rate, saving you money over time. It also simplifies repayment by merging multiple payments into one. With this approach, you take out a personal loan and use it to pay off multiple high-interest debts. The key is to find a lender that is willing to give you a lower annual percentage rate (APR) than what you’re currently paying. Keep in mind that the shorter your loan term, the lower your APR may be.

Another way to consolidate credit card debt is to move it to a balance transfer credit card. This can be a smart move if you can qualify for a 0% intro credit card. This way, you can avoid paying interest for the first several months and all the money you pay towards the card goes to knocking down debt. Keep in mind, though, that you may have to pay a fee when utilizing a balance transfer credit card. And, once the 0% intro period is over, you’ll have to start paying interest on the remaining balance.

6. Negotiating With Your Creditors

If your debt has become too much to handle and you’re delinquent on payments, you may want to reach out to your creditors, explain your financial situation, and see if they may be able to work with you. They might be willing to set you up on a payment plan, reduce your monthly payments, or settle your debt for less than what’s owed.

If you go this route, be sure to take notes on your conversation with the customer service rep (including the name of the person you spoke with, when you called, and what they said) and get the proposed repayment or debt settlement plan in writing before you make any payments.

Also keep in mind that debt settlement can negatively impact your credit, so this option is generally considered a last resort.

Recommended: Debt Settlement vs Credit Counseling: What’s the Difference?

The Takeaway

When it comes to debt, the deeper the hole you’re in, the longer it may take to climb out. But having the right plan in place before can help stick to a budget and methodically reduce your debt in a way that keeps you motivated and saves you money.

Becoming entirely (or nearly) debt-free comes with a substantial payoff: The money you were once spending on debt repayment each month can now go towards savings — and an opportunity to earn, rather than pay, interest.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with 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 up to 4.60% APY on SoFi Checking and Savings.


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SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

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

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30 Best High Paying Good Jobs For Extroverts That Pay Well in 2023

25 Best Jobs for Extroverts That Pay Well in 2024

The right career is one that capitalizes on an individual’s unique combination of skills, interests, and personality. Extroverts, for instance, tend to flourish in certain jobs and industries that introverts may not care for. And the worst jobs for extroverts are likely ones that attract introverts.

For all you extroverts out there, we’ve rounded up dozens of well-paying jobs that would be lucky to have you on board.

How to Know If You Are an Extrovert

Before we look at jobs for extroverts that pay well, it’s important to understand what an extrovert is. An extrovert is someone who draws their energy from the outside world. Extroverts often feel comfortable in group settings and social situations. They tend to make good leaders because they enjoy working with people.

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Common Characteristics of Extrovert Jobs

Good jobs for extroverts are ones that involve working with other people to solve problems. Because extroverts thrive on the energy they get from connecting with others, they tend to do well in jobs that require a lot of collaboration and human interaction.

On the other hand, good jobs for introverts allow them to focus intensely without interruptions from colleagues.

Do Extroverts Make More Money Than Introverts?

Being an extrovert can lead to a high-paying career. But extroverts don’t necessarily make more money than introverts. Education level, age, experience, and career choice can all greatly impact how much someone earns. Even your location factors in, as high-paying jobs vary by state.


💡 Quick Tip: When you have questions about what you can and can’t afford, a spending tracker app can show you the answer. With no guilt trip or hourly fee.

30 Best Jobs for Extroverts That Pay Well

What jobs are good for extroverts? Anyone looking to start a career or switch careers might consider one of these well-paying jobs for extrovert personalities. This list includes both jobs that don’t require college and those that do. Some even offer six-figure salaries.

Recommended: What Trade Makes the Most Money?

1. Insurance Sales Agent

Median Pay: $57,860 per year

Job Growth Outlook: 6%

Job Description: Work in an office or travel to meet clients. The role also has potential as a work-at-home job for retirees.

Requirements: High school diploma or equivalent

Duties:

•   Build relationships with potential customers

•   Sell insurance policies

•   Answer product questions

2. Musician and Singer

Median Pay: $39.14 per hour

Job Growth Outlook: 1%

Job Description: Perform music in a studio or live setting for an audience. Professionals can make union wages or charge by the song or performance.

Requirements: No formal educational credential

Duties:

•   Play instruments live or in studio

•   Sing songs live

•   Record songs

3. Actor

Median Pay: $17.94 per hour

Job Growth Outlook: 3%

Job Description: Perform in a live setting or for film and television recordings. Professionals make union wages.

Requirements: Professional or on-the-job training

Duties:

•   Perform in live theater

•   Promote products in commercials

•   Act in movies and television shows

4. High School Teacher

Median Pay: $62,360 per year plus excellent benefits

Job Growth Outlook: 1%

Job Description: Teach academic lessons to high school students and prepare them for college or the job market.

Requirements: Bachelor’s degree

Duties:

•   Prepare lesson plans

•   Teach students in a classroom

•   Grade papers

5. Human Resources Manager

Median Pay: $130,000 per year

Job Growth Outlook: 5%

Job Description: Plan and coordinate the administrative functions of a workplace.

Requirements: Bachelor’s degree

Duties: Work in office environments to help recruit and retain talent, and achieve business goals.

•   Recruit and hire employees

•   Make decisions about competitive pay and benefits

•   Mediate workplace conflicts

Recommended: Is $100,000 a Good Salary?

6. Public Relations Specialist

Median Pay: $67,440 per year

Job Growth Outlook: 6%

Job Description: Develop and maintain the public image of the individuals and businesses they represent. Those with high-profile clients tend to earn the most.

Requirements: Bachelor’s degree

Duties:

•   Write press releases

•   Create public image strategies

•   Provide damage control in crisis situations

7. Physician and Surgeon

Median Pay: $229,300 per year

Job Growth Outlook: 3%

Job Description: Diagnose and treat illnesses and injuries.

Requirements: Medical doctor degree

Duties:

•   Diagnose illnesses

•   Prescribe medications

•   Perform surgeries

Recommended: Is $100,000 a Good Salary?

8. Barber and Hairstylist

Median Pay: $33,400 per year plus tips

Job Growth Outlook: 8%

Job Description: Cut, color, and style client hair. Stylists at higher-end salons can make good money in salary and tips.

Requirements: Postsecondary nondegree award

Duties:

•   Cut and color hair

•   Style hair for special events

•   Provide other appearance services such as shaving

9. Bartender

Median Pay: $29,380 per year plus tips

Job Growth Outlook: 3%

Job Description: Mix and serve cocktails, wine, and beer to customers. Bartenders at higher-end establishments make most of their money in tips.

Requirements: No formal educational credential

Duties:

•   Mix and serve drinks

•   Offer beverage recommendations

•   Track inventory

10. Skincare Specialist

Median Pay: $38,060 per year plus tips

Job Growth Outlook: 9%

Job Description: Provide face and body treatments to clients in a spa or salon setting.

Requirements: State-approved cosmetology or esthetician license

Duties:

•   Assess clients’ skin needs

•   Offer skincare services like facials

•   Consult on skincare regimens

11. Dentist

Median Pay: $159,530 per year

Job Growth Outlook: 4%

Job Description: Diagnose and treat dental problems.

Requirements: Doctoral degree

Duties:

•   Treat patients’ gums, teeth, and mouth

•   Create treatment plans

•   Check for cavities and other dental issues

12. Registered Nurse

Median Pay: $81,220 per year

Job Growth Outlook: 6%

Job Description: Provide patient care.

Requirements: Bachelor’s degree and professional licensing

Duties:

•   Provide care in hospitals, physicians’ offices, home healthcare settings, and nursing care facilities

•   Communicate with patients about their needs

•   Educate patients and the public about health conditions

13. Waiter

Median Pay: $29,120 per year plus tips

Job Growth Outlook: -3% (decline)

Job Description: Take customer orders and serve food and drinks. Waiters at higher-end restaurants and catering companies can make a decent salary and excellent tips.

Requirements: Relevant work experience

Duties:

•   Take orders from customers

•   Serve food and drinks

•   Keep a clean and organized work environment

Recommended: What Trade Makes the Most Money?

14. DJ

Median Pay: $20.46 per hour

Job Growth Outlook: -4% (decline)

Job Description: Act as an emcee for events such as weddings and award ceremonies. Popular DJs can earn hefty appearance fees for a few hours of work.

Requirements: Relevant work experience

Duties:

•   Play music

•   Create playlists

•   Host events

15. Political Scientist

Median Pay: $128,020 per year

Job Growth Outlook: 7%

Job Description: Study the origin, development, and operation of political systems and plan political strategies.

Requirements: Master’s degree

Duties:

•   Study political systems

•   Create reports and presentations

•   Consult on strategy

16. Advertising Sales Agent

Median Pay: $58,450 per year

Job Growth Outlook: -7% (decline)

Job Description: Sell advertising space to businesses. Many sales agents work on commission and can bring in high incomes.

Requirements: Relevant work experience

Duties:

•   Sell advertising space for radio, television, newspapers, and other media platforms

•   Meet sales quotas

•   Maintain client relationships

17. Real Estate Broker and Sale Agent

Median Pay: $52,030 per year

Job Growth Outlook: 3%

Job Description: Assist clients in the buying and selling of real estate. Successful agents can make big commissions on home sales.

Requirements: High school diploma or equivalent

Duties:

•   Help clients find properties

•   Negotiate sales contracts

•   Host open houses

18. Interpreter and Translator

Median Pay: $53,640 per year

Job Growth Outlook: 4%

Job Description: Convert information from one language into another.

Requirements: Bachelor’s degree

Duties:

•   Translate between languages for a variety of organizations

•   Speak simultaneous translations during meetings

•   Translate documents, such as books and business materials

19. Advertising, Promotions, and Marketing Manager

Median Pay: $138,730 per year

Job Growth Outlook: 6%

Job Description: Plan advertising and marketing efforts to generate interest in a business’s products and services.

Requirements: Bachelor’s degree

Duties:

•   Develop marketing campaigns

•   Create special promotions

•   Oversee the creation of advertisements

20. Flight Attendant

Median Pay: $63,760 per year

Job Growth Outlook: 11%

Job Description: Assist passengers and respond to safety issues and emergencies.

Requirements: High school diploma or equivalent and certification from the Federal Aviation Administration

Duties:

•   Navigate safety issues

•   Serve food and beverages

•   Assist with putting away luggage

21. Lawyer

Median Pay: $135,740 per year

Job Growth Outlook: 8%

Job Description: Advise and represent businesses, government agencies, and individuals on legal matters.

Requirements: Law degree and passing a state bar exam

Duties:

•   Advise clients

•   Represent clients in court

•   Review and draft contracts

22. Physical Therapist Assistant

Median Pay: $57,240 per year

Job Growth Outlook: 19%

Job Description: Help patients regain movement and manage pain after an illness or injury

Requirements: On-the-job training

Duties:

•   Set up equipment

•   Care for patients

•   Work with physical therapists to help patients make progress

23. Marriage and Family Therapist

Median Pay: $56,570 per year

Job Growth Outlook: 15%

Job Description: Work with couples and families to resolve relationship challenges.

Requirements: Master’s degree

Duties:

•   Provide counseling to patients

•   Help mediate conflict

•   Offer mental health support

24. Interior Designer

Median Pay: $61,590 per year

Job Growth Outlook: 4%

Job Description: Work with individuals or businesses to plan, source, and arrange decor.

Requirements: Bachelor’s degree

Duties:

•   Make indoor spaces functional and aesthetically pleasing

•   Consult with clients

•   Choose essential and decorative objects

25. Career Counselor

Median Pay: $60,140 per year

Job Growth Outlook: 5%

Job Description: Help clients choose a career path.

Requirements: Master’s degree and licensure for career counselors and advisors in some states

Duties:

•   Guide clients toward appropriate career paths

•   Interview prep

•   Review resumes and cover letters



💡 Quick Tip: Income, expenses, and life circumstances can change. Consider reviewing your budget a few times a year and making any adjustments if needed.

The Takeaway

There are many jobs for extroverts that pay well, from business roles to creative performers. Many jobs don’t offer traditional salary or hourly wages; instead, a large portion of income is made through commission or tips. Some of the jobs we list require college degrees or professional certifications, but many only require a high school diploma or on-the-job training.

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

With SoFi, you can keep tabs on how your money comes and goes.

FAQ

What jobs are good for an extrovert?

Many jobs that are a good fit for extroverts are those that involve working with clients or patients in a collaborative setting, such as doctor, lawyer, or hairstylist.

What is the most fun, high-paying job?

A lot of fun, rewarding jobs pay well. For example, a bartender at a high-end restaurant can earn hundreds of dollars a night in tips.

What odd job makes the most money?

A job many people may not expect to make a lot of money is political scientist. This career path can lead to a median annual salary of $128,020.


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

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Should I Use a Dividend Reinvestment Plan?

Dividend Reinvestment Plans: How DRIP Investing Works

A dividend reinvestment plan, or DRIP, allows investors to reinvest the cash dividends they receive from their stocks into more shares of that stock. Hundreds of companies, funds, and brokerages offer DRIPs to shareholders. Reinvesting dividends through a DRIP may come with a discount on share prices or no commissions.

Of course, it’s possible to simply keep the cash dividends to spend or save, or use them to buy shares of a different stock. If you’re wondering, should I reinvest dividends?, it helps to know the pros and cons of dividend reinvestment programs and how they work.

What Is Dividend Reinvestment?

Dividend reinvestment typically means using the dividends you receive to purchase additional shares of stock in the same company rather than taking the dividend as a payout.

When you initially buy a share of dividend-paying stock, you typically have the option of choosing whether you’ll want to reinvest your dividends automatically.

Need a refresher on dividends? Check out what a dividend is and how they work.

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What Is a Dividend Reinvestment Plan?

Depending on which stocks you invest in, you may have the option to enroll in a Dividend Reinvestment Plan or DRIP. This type of plan, offered by about 650 companies and 500 closed-end funds, allows you to automatically reinvest dividends as they’re paid out into additional shares of stock.

💡 Quick Tip: Investment fees are assessed in different ways, including trading costs, account management fees, and possibly broker commissions. When you set up an investment account, be sure to get the exact breakdown of your “all-in costs” so you know what you’re paying.

Types of Dividend Reinvestment Plans

There are two main types of dividend reinvestment plans. They are:

Company DRIPs

With this type of plan, the company operates its own DRIP as a program that’s offered to shareholders. Investors who choose to participate simply purchase the shares directly from the company, and DRIP shares are often offered to them at a discounted price. Some companies allow investors to do full or partial reinvestment, or to purchase fractional shares.

DRIPs through a brokerage

Many brokerages also provide dividend reinvestment as well. Investors can set up their brokerage account to automatically reinvest in shares they own that pay dividends.

DRIP Example

Here’s a dividend reinvestment example that illustrates how a company-operated DRIP works. If you own 20 shares of a stock that has a current trading value of $100 per share, and the company announces that it will pay $10 in dividends per share of stock, then the company would pay you $200 in dividends that year.

If you choose to reinvest the dividends, you would own 22 shares of that stock ($200 in dividends/$100 of current trading value = 2 new shares of stock added to your original 20). If the stock price was $200, you’d be able to purchase a single share; if it was $50, you could theoretically reinvest and own an additional four shares.

If, instead, you want cash, then you’d receive $200 to spend or save, and you’d still have the initial 20 shares of the stock.

Pros and Cons of DRIPs

If you’re wondering, should I reinvest dividends?, it’s a good idea to weigh the advantages and disadvantages of DRIPs. But note, too, that some of the pros and cons may be specific to one of the two types of DRIPs: Those offered through a company, and those through a brokerage.

Pros of Dividend Reinvestment Plans

On the “pros” side, one reason to reinvest your dividends is that it may help to position you for potentially greater long-term returns, thanks to the power of compounding returns, which may hold true whether investing through a company-operated DRIP, or one through a brokerage.

Generally, if a company pays out the same level of dividends each year — whether that’s 2%, 3%, or another amount — and you take your dividends in cash, then you’ll keep getting the same amount in dividends each year (assuming you don’t buy any additional shares).

But if you take your dividends and reinvest them through a DRIP, then you’ll have more shares of stock next year, and then more the year after that — which means, ideally, that the dollar amount of the dividends (at least in our example where the payout percentage is the same each year) will keep rising. Over a period of time, the amount you would receive during subsequent payouts could increase.

An important caveat, however: Real-life situations aren’t often as straightforward as this example, of course. For one thing, stock prices aren’t likely to stay exactly the same for an extended period of time.

Plus, there’s no guarantee that dividends will be paid out each period; and even if they are, there is no way to know for sure how much they’ll be. The performance of the company and the general economy can have a significant impact on company profitability and, therefore, typically affect dividends given to shareholders.

There are more benefits associated with DRIPs:

•   You may get a discount: Discounts on DRIP shares can be anywhere from 1% to 10%, depending on the type of DRIP (company-operated) and the specific company.

•   Zero commission: Most company-operated DRIP programs may allow you to buy new shares without paying commission fees. However, many brokerages offer zero-commission trading outside of DRIPs these days, too.

•   Fractional shares: DRIPs may allow you to reinvest into fractional shares, rather than whole shares that may be at a pricier level than you wish to purchase. This may be an option with either a company-operated or brokerage-operated DRIP.

•   Dollar-cost averaging: This is a common strategy investors use to manage price volatility. You invest the same amount of money on a regular basis (every week, month, quarter) no matter what the price of the asset is.

Cons of Dividend Reinvestment Plans

Dividend reinvestment plans also come with some potential negatives.

•   The cash is tied up. First, reinvesting dividends obviously puts that money out of reach if you need it, which may be particularly true for company-operated DRIP plans. That can be a downside if you want or need the money for, say, home improvements, a tuition bill, or an upcoming vacation.

•   Risk exposure. You should also keep potential risk factors in mind. For example, you may have concerns about the stock market in general, or about the particular company where you’re a shareholder, and reinvesting your cash into more equities may seem unwise.

Or you may need to rebalance your portfolio. If you’ve been reinvesting your dividends, and the stock portion of your portfolio has grown, using a DRIP could inadvertently put your allocation further out of whack.

•   Flexibility concerns. Another possible drawback to consider is that when your dividends are automatically reinvested through a DRIP, they will go right back into the company that issued the dividend. Though some company-operated DRIPs do give investors options (such as full or partial reinvestment), some investors may find that those DRIPs offer limited options as to where to reinvest their funds.

Perhaps you’d simply rather buy stock from another company – an option which may be available through a brokerage-operated DRIP. Note, though, that even brokerage-operated DRIPs may reinvest dividends as soon as they’re paid, so investors may not have a chance to redirect the investment.

•   Less liquidity. Also, when you use a company-operated DRIP, and later wish to sell those shares, you must sell them back to the company in many cases. DRIP shares cannot be sold on exchanges. Again, this will depend on the specific company and DRIP, but is something investors should keep in mind.

💡 Quick Tip: How to manage potential risk factors in a self-directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

Cash vs Reinvested Dividends

Should I reinvest dividends or take cash instead? How you approach this question can depend on several things, including:

•   Your short-term financial goals

•   Long-term financial goals

•   Income needs

Accepting the cash value of your dividends can provide you with ongoing income. That may be important to you if you’re looking for a way to supplement your paychecks during your working years, or for other income sources if you’re already retired.

As mentioned earlier, you could use that cash income to further a number of financial goals. For instance, you might use cash dividend payouts to pay off debt, fund home improvements or put your kids through college. Or you may use it to help pay for long-term care during your later years.

You might consider a cash option for dividends rather than reinvesting dividends if you’re already building sufficient wealth for retirement in your portfolio. That way, you can free up the cash now to enjoy it or address other current priorities.

Cash may also be more attractive if you’re comfortable with your current portfolio configuration and don’t want to purchase additional shares of the dividend stocks you already own.

On the other hand, reinvesting dividends automatically through a DRIP could help you to increase your savings for retirement. This assumes, of course, that your investments perform well and that the stocks you own don’t decrease or eliminate their dividend payout over time.

Tax Consequences of Dividends

For those wondering, do you have to pay taxes on reinvested dividends?, one thing to keep in mind is that dividends — whether you cash them out or reinvest them — are not free money. There may be tax consequences when you receive dividends because if the amount is significant enough, you might need to pay income taxes on what you’ve earned.

Each year, you’ll receive a tax form called a 1099-DIV for each investment that paid you dividends, and these forms will help you to determine how much you owe in taxes on those earnings.

Dividends are considered taxable whether you take them in cash or reinvest them — even though when you reinvest, the money isn’t currently available for you to spend.

The exception to that rule is for funds invested in retirement accounts, such as an online IRA, as the money invested in these accounts is tax-deferred. If you have received or believe you may receive dividends this year, it can make sense to get professional tax advice to see how you can minimize your tax liability.

Should You Reinvest Dividends?

Reinvesting dividends through a dividend reinvestment plan is partly a short-term decision, and mostly a long-term one.

If you need the cash from the dividend payouts in the near term, or have doubts about the market or the company you’d be reinvesting in (or you’d rather purchase another stock), you may not want to use a DRIP.

If on the other hand you don’t have an immediate need for the cash, and you can see the value of compounding the growth of your shares in the company over the long haul, reinvesting dividends could make sense.

The Takeaway

Reinvesting dividends and using a dividend reinvestment plan (DRIP) is an automatic feature investors can use to take their dividend payouts and use them to purchase more shares of the company’s stock. However, it’s important to consider all the scenarios before you decide to surrender your cash dividends to an automatic reinvestment plan.

While there is the potential for compound growth, and using a DRIP may allow you to purchase shares at a discount and with no transaction fees, these dividend reinvestment plans are limiting. You are locked into that company’s stock during a certain market period, and even if you decided to sell, you wouldn’t be able to sell DRIP shares on any exchange but back to the company. Whether you use a DRIP or not, you may want to consider having some dividend-paying stocks as part of a balanced portfolio in your investment account.

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FAQ

How do you set up a dividend reinvestment plan?

There are two ways to set up a dividend reinvestment plan. First, you can set up an automatic dividend reinvestment plan with the company whose stock you own. Or you can set up automatic dividend reinvestment through a brokerage. Either way, all dividends paid for the stock will automatically be reinvested into more shares of stock.

Can you calculate dividend reinvestment rates?

There is a very complicated formula you can use to calculate dividend reinvestment rates, but it’s typically much easier to use an online dividend reinvestment calculator instead.

What is the difference between a stock dividend and a dividend reinvestment plan?

A stock dividend is a payment made from a company to its shareholders (people who own shares of their company’s stock). A dividend reinvestment plan allows investors to reinvest the cash dividends they receive from their stocks into more shares of that stock.


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

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

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