Advertising
Advertising

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.

Advertising

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.

Advertising

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.

Advertising

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.

Advertising

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

More by this author

12 Signs Of Self-Destructive People 7 Public Speaking Techniques To Help Connect With Your Audience 20 Little Signs You’ve Found The One 8 Signs of a Man Who Will Never Ever Stop Loving You 8 Things To Remember When Dating Someone With A Guarded Heart

Trending in Money

1 How to Develop a Millionaire Mindset in 6 Simple Steps 2 How to Eat Healthy on a Budget (The Definitive Guide) 3 9 Millionaire Success Habits That Will Inspire Your Life 4 Top 5 Spending Tracker Apps to Manage Your Budget Smart in 2020 5 How to Set Financial Goals and Actually Meet Them

Read Next

Advertising
Advertising
Advertising

Last Updated on January 21, 2020

How to Develop a Millionaire Mindset in 6 Simple Steps

How to Develop a Millionaire Mindset in 6 Simple Steps

We all like to dream about being financially wealthy. For most people though, it remains a dream and nothing more. Why is that?

It’s because most people don’t set their mind to achieving that goal. They might not be happy in their current situation but they’re comfortable – and comfort is one of the biggest enemies of growth.

How do you go about developing that millionaire mindset? By following these simple steps:

1. Focus On What You Want – And Take It!

So many people are too timid to admit they want something and go for it. When there is something that you want to accomplish don’t think “I could never actually do that”, think “I could do that and I WILL do that”.

Millionaires play to win, not to avoid defeat.

This doesn’t mean to have to become a selfish jerk. What it means is becoming more assertive and honest with yourself. You don’t have to grab off other people. There is a big pot of unclaimed gold in the middle of the table — why shouldn’t you be the one to claim it? You deserve it!

Advertising

2. Become Goal-Orientated

It’s almost impossible to achieve anything if you don’t set firm goals. Only lottery winners become millionaires overnight. By setting yourself attainable goals, you will get there eventually. Don’t try to get rich quickly — get rich slowly.

Let’s take the idea of making your first million dollars and expand on what kind of goals you might set to get there. Let’s also say you’re starting at a break-even position – you’re making enough to get by with a few luxuries, but nothing more.

Your goal for the first year can be having $10,000 in the bank within a year. It won’t be easy but it is doable. Next, you need to figure out the steps you need to take to achieve that goal.

Always look at ways to make growth before cutbacks. With that in mind, you might want to see if you can negotiate a pay rise with your boss, or if there’s another job out there that will pay better. You might be comfortable in your old job but remember, comfort stunts growth.

You may also have other skills outside of your workplace that you can monetize to boost your bank balance. Maybe you can design websites for people, at a fee of course, or make alterations to clothes.

If this is still not enough to make the money you need to save $10,000 in a year, then it’s time to look at cutbacks. Do you have a bunch of old junk that someone else might love? Sell it! Do you really need to spend $10 on your lunch everyday when you could make your own for a fraction of the cost?

Advertising

If you are to become a millionaire, you need to start accumulating money.

Here’re some tips to help you: How to Become Goal Oriented and Achieve More in Life

3. Don’t Spend Your Money – Invest It

The reason you need to accumulate money is for step three. Millionaires tend to be frugal people, and that’s because they know the true value of money is in investing. Being your own boss goes hand-in-hand with becoming a millionaire. You’ll want to quit your regular job at some point.

Stop working for your money and make your money work for you.

Rather than buying yourself a new iPad, that $500 could be used to invest in the stock market. Find the right shares (more on that later), and that money could easily double within a year.

There’s not just the stock market — there’s also property, and your own education.

Advertising

4. Never Stop Learning

The best thing you can invest in is yourself.

Once most people leave the education system, they think their learning days are over. Well theirs might be, but yours shouldn’t be. Successful people continually learn and adapt.

Billionaire Warren Buffet estimates that he read at least 100 books on investing before he turned twenty. Most people never read another book after they’ve left school. Who would you rather be?

Learn everything you can about how economics works, how the stocks markets work, how they trend.

Learn new skills. If you have an interest in it, learn everything you can about it. You’d be surprised at how often, seemingly useless skills, can become extremely useful in the right situation.

Start developing the habit of learning continuously: How to Create a Habit of Continuous Learning for a Better You

Advertising

5. Think Big

While I advise to start off with small goals, you absolutely should have a big goal in mind. If you have a business idea, then that is your ultimate goal – to start that business and make a success of it. If you want to invest your way to millions of dollars and do little work other than research, then that is your big goal.

There is no shame in not achieving a big goal. If you run a business and aim to make $1 million profit in a year and “only” make $200,000, then you’re still significantly ahead of most people.

Aim for the stars, if you fail you’ll still be over the moon.

6. Enjoy the Attention

To be successful, you have to be willing to promote yourself and enjoy the attention to a certain extent. Now the attention doesn’t need to be on yourself, it could be on your brand, but attention definitely attracts money.

Never be embarrassed to get your name out there. That means finding a spotlight and being brave enough to step right up underneath it.

If you run a business, try contacting the local papers. You’d be surprised at how amenable they often are to running a story about you and your business, and it’s all free publicity.

Above all, remember: You control your own destiny. Push hard enough for anything and you’ll get it.

More About Thinking Smart

Featured photo credit: Austin Distel via unsplash.com

Read Next