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Short-Term and Long-Term Investments: Which Is Right For You?

Short-Term and Long-Term Investments: Which Is Right For You?

Investing your hard-earned cash is inherently risky. However, the risks you take vary depending on a variety of factors – one of the most prominent being the length of time you wish to keep your money out of your pocket and in the stock market.

Before you invest your money, you should know and understand the risks involved with both short- and long-term investments.

Capital Gains

Capital gains are simply the income you earn from an investment. You find it by subtracting the amount invested from the amount you ended up with. If you invest $500 and cash out $600, you’ve made $100 in capital gains. When calculating capital gains, you don’t take other factors – such as taxable income – into consideration just yet. However, it’s beneficial to have a good idea of where you will stand once you do factor in taxes.

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Short-Term

Short-term investments are those which last less than a single year. Because they last for a short period of time, they often won’t earn you too much money – unless you’re working with short-term, high-yield investments. In exchange for smaller rewards, though, short-term investments are usually much less risky. Short-term investments are usually finite in that investors will set a goal for how much they want to earn, and will “cash out” once they hit their goal.

The capital gains from short-term investments are lumped in with the investor’s regular income – no matter how large or small these gains may be. When it comes to paying income tax, the gains you’ve made on investments may drastically affect what tax bracket you land in, and how much you owe.

Long-Term

Long-term investments, by definition, are those which last for at least one year – and can stay open for as long as the investor chooses. Since long-term investments require leaving the money you invested out of your own pocket for longer periods of time, they’re much more risky than their short-term counterparts. You’ll also usually reinvest your capital gains into your long-term investments, as well. However, the gains you receive once you decide to sell tend to be much greater.

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The capital gains from long-term investments stand alone as far as taxation is concerned. The money you make from them has no bearing whatsoever on your income tax.

Tax Rate

As previously mentioned, the amount you are taxed on investments depends on if you intend to invest for a short or long period of time. It’s incredibly important to keep this in mind when deciding how to invest your money, because the tax you’ll pay may drastically affect your bottom line, and making potentially large capital gains not worth the investment in the first place.

Short-Term

Because short-term investments are lumped in with the rest of the money you make in a year, there’s no specific tax rate for investments that last less than a year. However, the money you make on a short-term investment may actually end up costing you in the long run. For example, if you made $37,000 in 2016, your tax rate is 15% – owing roughly $5,550. However, if you make an extra $700 from a short-term investment, you’ll be pushed up into the 25% tax bracket – meaning you’ll owe $9,425. While a $700 up front gain might seem enticing, you’ll end up losing almost $3,500 in the process.

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Long-Term

On the other hand, since long-term investments aren’t lumped in with the rest of your income, it’s much easier to figure out how much you’ll owe in taxes on your capital gains. While the most you’ll pay is 20% of your investment capital, if you only make 15% profit on your investment, you won’t owe any tax at all. In exchange for a lower tax rate, though, you’ll be keeping your money “on the table” for a much longer period of time – meaning you’ll be risking it for longer.

Verdict

Short-Term

Short-term investments are good for a quick win, and allow you to take your money out immediately if you choose to do so. They’re the best option if you don’t want to become too involved with the market, and are positive you’ll quit as soon as you hit a specific dollar amount.

On the other hand, short-term investments may cause more harm than good if you’re on the cusp of a certain tax bracket. Unfortunately, this is considerably counterintuitive to the purpose of a short-term investment. Most newcomers to the stock market looking to make a “quick kill” are doing so because they need some extra income immediately, but the system is set up to discourage people from making such investments. If you’re going to make a short-term investment, make sure you have capital to invest that the gains you make are worth the extra taxes you’ll end up paying.

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Long-Term

Long-term investments have the potential to drastically increase your net worth, as long as you’re patient. If you keep your investment open for longer than a year, you won’t have to worry about being bumped up into a tax bracket that you can’t afford to be in. Additionally, if you happen to lose any of your capital over the course of your investment, you may be able to claim these losses come tax season.

However, it (obviously) takes longer to reap the rewards of a long-term investment. Long-term investments are those made with the understanding that you don’t need the money right away, and are willing to go without for some time while your investment capital grows. You’ll also have to patiently wait out any dips in the economy, during which your investment may decrease heavily in value.

As long as you can afford to lose the money you put in, long-term investments end up being the much smarter bet.

Featured photo credit: Investment / Simon Cunningham / Flickr via farm6.staticflickr.com

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Matt Duczeminski

A passionate writer who shares lifestlye tips on Lifehack

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Published on January 8, 2021

How To Pay Off Credit Card Debt Fast: 7 Powerful Tips

How To Pay Off Credit Card Debt Fast: 7 Powerful Tips

Ever wondered whether your credit card debt is the reason you’re in a bad financial situation? You can’t enjoy any fun activities because a good chunk of your money goes toward debt payment. Heck, you’re even behind on some of your monthly bills.

The effects of clumsy debt management are too many to list here. This guide is going to help you discover how to pay off credit card debt fast and start chasing your financial goals.

Debt problems are the last thing anyone wants to encounter. But things can get out of hand when all the “little debts” you take accumulate in interests.

What if you knew some simple and proven ways to be debt-free quickly? Implementing them would mean better financial health for you. It becomes possible to free up cash for your “wants.” These include taking a trip or buying something you’ve always desired. All that while paying your bills on time!

Let’s not wait any longer. Here are 7 powerful tips for paying off credit card debt fast:

1. Pay More Than the Minimum Credit Card Payments

Many people only pay the monthly minimum on their credit cards. Truly, that’s the right amount for staying on good terms with your credit card company. But you need a different approach if you’re looking to achieve financial independence within a short time.[1]

Most of your payments go toward interest costs when you only pay the minimum amount. A substantial sum of your balance remains standing. As a result, it becomes more expensive to eliminate your debts.

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You don’t want to wait more than 10 years to get rid of debt while it’s possible to do it sooner. All you have to do is double that $100 minimum payment to $200 or go higher.

The good thing is that minimum credit card payments are affordable in most cases. By paying a higher amount, you reduce your interest costs, lessen your borrowing period, and boost your credit score.

2. Start With High-Interest Credit Card Debt

If you have more than one credit card debt, prioritize putting the extra money toward the ones with the highest interests. This debt pay-off strategy, known as the debt avalanche method, is essential for being debt-free quickly.[2]

First, you need to list down all the credit card debts you have in the order of their interest rates. Next, you choose the one with the highest interest and pay a significant amount toward it each month. It can be an amount twice or even thrice larger than the minimum payment.

At the same time, you make monthly minimum payments on the other debts. Their interest charges won’t be as costly as that of the first debt on your list. You only move on to the next high-interest debt after the first one is gone. Remember that your focus is on the interest rates and not the balances.

3. Revisit Your Budget

Budgeting is useful for tracking your financial moves. Once you create a budget, some tweaks along the way can make it work for you better. One situation that requires you to revisit your budget is when you’re struggling with debts. It might hurt a bit to slash some expenses. But you also don’t want to miss out on achieving financial freedom in the long run.

You can reduce some variable expenses to free up more cash for credit card debt payments. They’re the ones that change from time to time. Some examples are groceries, fuel, and clothing.

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Other opportunities for cutting down your spending lie in non-essential expenses. Instead of dining out all the time, you can cook at home more to save money. You can also share some subscriptions with friends and pay a fraction of the cost.

If you’re determined enough, you can eliminate all your unnecessary expenses and focus on paying off your credit card debt first.

4. Avoid Using Your Credit Cards

Do you want to know how to pay off credit card debt with a low income? One simple way is to stop using them. Having your credit cards everywhere you go means that you’ll be more tempted to buy unnecessary stuff. In this case, you spend money that you don’t really own and get deeper into debt.

The quickest fix to stop the debt build-up is spending with cash. You’ll be more aware of everything you can afford at any particular time. If you decide to keep one or two cards to ease the transition, always make wise choices. For instance, only use them when experiencing financial difficulties.

It’s best to categorize your fun activities under “discretionary spending” in your budget. This way, you won’t need more debt to kill your boredom. By halting your credit debt from accumulating, it’s easy to pay down what you already owe and be happy with the progress.

5. Start a Side Hustle to Boost Your Income

You’re probably turning away a lot of money by not monetizing your skills. Everyone has something that they’re good at doing. And you can use that to generate extra income for attacking your credit card debt.

If you look around your neighborhood, you can find several side hustle opportunities. It can be pet sitting, tutoring, or lawn mowing. You can start an online business by offering services such as digital marketing, content creation, and web development. Such skills go in high demand on freelance sites and job boards.

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Finding clients on social media is also a good strategy to utilize your skills and make more money. Facebook groups, Quora Spaces, and subreddits are some places to look for side jobs. You only have to join a niche-specific platform, share your services, and respond to any opportunities.

It’s possible to learn a skill, practice it, and earn from it. Use the free resources online or purchase some e-courses to get started.

6. Sell Your Used Items for Extra Cash

Starting a side hustle isn’t the only way to generate extra money. You can turn unwanted items into cash for paying off credit card debt. Whether it’s an old TV, book, or furniture, there is always someone itching to buy your used stuff.

A garage sale, as much as it’s old-fashioned, is perfect for getting your neighbors and passers-by to buy from you. You keep all the money because there are no business permits or taxes involved. While you may not make much cash, it’s better than leaving your stuff to go defunct in your storage.

Other than that, you can sell your used stuff on online marketplaces. Facebook groups are great places to start if you want quick approvals and hence sales. You only have to ensure that your listing follows Facebook’s commerce policies.

When selling any pre-owned items online, ensure they’re in good shape to avoid problems with your buyers.

7. Know When to Seek Help With Your Debt

Asking for help with your credit card debt can be challenging to do. But letting it drown you is a road you don’t want to take. While you may feel embarrassed at first, it’s the best way to get back on track when you run out of options.

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There are tons of non-profit credit counseling organizations that can offer you free guidance on how to escape the debt trap. An example is The National Foundation for Credit Counseling. They simply review your finances and help you determine the source of your financial problems. After that, they match you with an actionable debt management solution.[3]

In extreme cases, the debt solution can be:

  • Debt relief – where your debt is partially or wholly forgiven
  • Debt consolidation – taking out one loan to repay others
  • Debt settlement – the creditor forgives a significant portion of your debt
  • Bankruptcy – legal process for seeking relief from some or all your debts

It’s necessary to carefully weigh your options before deciding on the way to go. Find out how it might affect your credit score and any other risks.

Wrapping It Up

Debt is a major setback when you’re trying to prosper in life. Paying off credit card debt is essential if you want to reach your financial goals. That means having more free income, a good credit card score, and even a chance to retire early. You become more productive each day because of the peace in your mind.

So, you now have some tips on how to pay off credit fast. Go ahead and get rid of that good life progress killer!

More Tips on How to Pay Off Debt

Featured photo credit: rupixen.com via unsplash.com

Reference

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