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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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Published on September 17, 2018

How Being Smart With Your Money Leads to Financial Success

How Being Smart With Your Money Leads to Financial Success

Achieving financial success is not something that just happens. Maybe if you win the lottery or something, but for the average person like you or me, it comes from a series of small steps you take over a long period of time.

With each step, you form a new smart money habit. And with each smart money habit, you build towards financial independence.

So what sort of habits can you form to get on that path? Let’s take a look at smart money habits you can start today to get you closer to a financially independent future.

1. Avoid being “penny wise but pound foolish”

It’s tempting to try saving a couple cents here and there when buying small items. However, that’s not where the real money is saved. You’re putting in extra effort for something that doesn’t move the needle.

You get the most bang when you’re able to cut down on your bigger bills. For example, finding a lower interest rate for your mortgage could save you $50+ per month. And cutting your transportation bill by purchasing a cheaper car or taking public transportation can provide large gains as well.

So, look at your recurring expenses such as housing, transportation, and insurance, and see where there’s wiggle room. It’s a much better use of your time than trying to pinch pennies here and there on smaller purchases.

2. When you want something big, wait

Impulsivity can get you in trouble in most aspects of life. Finances are no different.

It’s human nature to see something and want it right then and there. It starts as a kid in the checkout line at the grocery store, and it continues on through adulthood.

We get an idea in our head of something we want, and it’s hard not to go out and get it right then.

A good example is wanting a new car. Perhaps you’ve had your car for several years. It’s crossed the 100k mile mark. Maybe maintenance is due, and you’re annoyed that you need to replace the timing belt or purchase new tires.

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So, you get the itch.

You start digging around online, and you realize you could trade in your current car for something newer and more exciting… all for a few hundred bucks a month. Then you get obsessed.

Here’s where you have to take a step back.

Your newfound obsession is clouding your judgement. Rather than giving into the impulse, wait it out.

Set a timeframe for yourself. Maybe you come back to the decision three months down the road. See if the obsession lasts.

It might, but often, a funny thing happens. Often, you forget about it. And often, you find that the new car wasn’t a need at all.

The impulse faded. And you just saved yourself a ton of money.

3. Live smaller than you can afford

You finally get that big raise. And you want to celebrate – and why not?

You’ve been looking forward to this forever. And after all, it was all due to your hard work.

That’s fine, splurge a little. However, make it a one-time deal and be done.

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Don’t get caught in the trap that just because you’re now making more money, you should spend more.

Too often, people get more money and feel like they that gives them the means to buy a bigger house, a bigger car… you know the drill. Resist.

The fact is that living smaller than what you can afford is one of the fastest ways to build savings.

But if you constantly upgrade as you begin to make more, then you’ll never get ahead. You’ll just build up more debt along the way and have just as little wiggle room as before.

4. Practice smart grocery shopping

Food… it’s one of the biggest portions of any budget. And if you’re not careful, it can be one of the biggest drains on your wallet.

But luckily, there are a few things you can do to ensure that you stay smart with your money when buying groceries.

Create a grocery budget

Set a strict weekly grocery budget. When you know how much you can spend on groceries, you can then plan your weekly menu around it.

Once you know what all you need, you can go shopping and keep a running tally as you shop to ensure you’re on track.

I tend to do this in my head, rounding for each item. However, writing it down as you go would probably work best for most people.

Make a list… and never deviate

Never go to the grocery store without a list. If you go to the store with a ballpark idea in mind, you don’t have a true ide of what you need.

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You’re not well-researched. You don’t know what the sales are. As a result, you’re going to make decisions on the fly.

These impulse decisions will lead to overspending, which will derail your grocery budget.

Eat before going grocery shopping

It’s also important to eat prior to going to the grocery store. Hunger is a powerful force.

If you’re shopping on an empty stomach, everything is going to look good. In particular, you may find a lot of ready-made, processed snacks will look enticing.

After all, you’re hungry now and that food is easily available. So subconsciously, you may lean towards those items.

Unfortunately, not only are those items typically less healthy, but they’re likely more expensive. You pay for convenience.

However, when you eat prior to shopping, then you’ll shop with a clear mind. Your hunger won’t cloud your judgement, influencing you to make poor decisions like a cartoon devil resting on your shoulder whispering in your ear.

This makes it much easier to stick to your grocery plan.

5. Cancel your gym membership

Now that you’re all set on your food, it’s time to get smart about managing your budget in terms of physical fitness. And let’s begin by avoiding the gym. The gym bill, that is.

The average gym membership costs around $60 per month. That’s $720 a year.

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Yet, two out of three gym memberships go unused. That means two-thirds of people who have a gym membership are literally giving away almost a thousand bucks a year. It’s crazy!

I recommend seeking an alternative. One good alternative is to look into fitness streaming services.

Streaming services allow you to stream hundreds of workouts like Insanity and p90x, right in your own home for around $10-20 a month. That’s $40-50 less a month than the average gym membership.

Of course, then there’s the free option. The internet is full of free workouts that you can do on your own with minimal or no equipment.

For example, there’s the Couch to 5K program, that I personally used a decade ago to ease myself from couch potato to running my first 5K race. If I could do it, anyone could.

Then there are free resources like reddit that have limitless information on workouts. The Fitness subreddit has done all the research for you, populating workout tips and detailed workout routines for anyone to use in their wiki.

There are several routines that require no equipment. And you can join in on the subreddit to become part of the community, making it easier for those seeking comraderie and encouragement in their fitness goals. All for free.

It’s baby steps… And baby steps can start now!

I’ve never met anyone that can’t stand to be a bit smarter with their money. And on the flip side, anyone can get smarter with their money. But remember, it doesn’t happen all at once.

Begin by fighting your impulses. Prepare for the week and be smart at the store. And cut monthly expenses like gym memberships that are overpriced and you probably aren’t getting your money’s worth out of anyway.

The devil is in the details. And the details can change your lifestyle and prep you for a financially independent future.

Featured photo credit: Unsplash via unsplash.com

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