What is an Exchange Traded Fund?

An exchange traded fund, commonly referred to as an ETF, is an investment vehicle that is a hybrid between a traditional stock and a mutual fund. An ETF is traded on the open market and often used in an investment portfolio, IRA, or retirement plan such as a 401(k). ETFs offer investors a low-cost way to diversify (or leverage) their investments.

ETFs exist to fill a need for investors by offering a low-cost alternative for investing in broad markets or indexes. Although they been blamed by pundits as contributing to volatile market swings, an ETF can be leveraged in things like the total stock market, the S&P 500, the Euro, bonds, or an industry like banking with one simple fund. And the good thing is that you don’t need a masters degree to understand how to invest with ETFs.

ETFs generally have lower expense ratios than mutual funds because they are not traded as individual shares to investors. Rather, they are sold in large blocks to financial institutions who then sell individual shares to investors. This means less number of trades which translates into lower transaction costs.

ETFs are like mutual funds in that they are made up of other investments like stocks, bonds, or commodities. Each ETF has a specific purpose and the underlying investments within it are continuously adjusted to fulfill that purpose. For example, the Vanguard S&P 500 ETF exists to track the S&P 500 and the SPDR Gold Shares ETF exists to track the commodity of gold. Many of the largest ETFs in existence are tied to a market index like the S&P 500, the Russell 2000, or even a segment like small cap or large cap companies. Others focus on international markets, specific industries, or even currency values.

ETFs are a very good way to diversify a portfolio while enjoying a low expense ratio. With such a wide variety of options tracking a range of indexes, markets, commodities, or industries, it is easy for investors to find an ETF to fill a wide range of investment needs. When trading ETFs, however, investors must be diligent in understanding the risk associated with leveraged funds, a commonly-forgotten fact among investors.


Ethical Investment: A Guide to Investing with Conscience

Ethical investment opportunities can offer you the chance to keep your investments in step with your conscience, but they need not cost you the earth.

The credit crunch has made many more of us sit up and take notice of our money and the way in which it is being dealt with on our behalf. However, according to a recent Yougov poll 55% of UK investors did not understand clearly the companies and causes their investments were supporting, and 36% said that they would like to know more about investments designed to bring social and environmental benefits, as well as good returns.

What are ethical investments?  

The word ethical will mean different things to different people, even in the context of investments, and finding the right ethical investment option will depend on your definition of the term. For example, you may consider investing according to your attitude to environmental or social ills or a combination of both.

You will usually invest through a managed fund where your capital will be pooled and invested on your behalf according to predetermined ethical guidelines. There are usually a range of different funds available on the market offering many different types of ethical investment, you will need to consider these carefully in order to find a fund that is right for you.

It’s always a good idea to know exactly how your money will be invested to ensure that your investments fit with your ethical principles. Do the research and don’t make assumptions based solely on the labeling of an investment product or fund.

Which type of fund?

There are two main types of ethical investment fund, those that use positive screening and those that use negative screening.

Negative screening means that your fund manager will seek to avoid investing in companies that may be associated with practices that you may consider unethical.

Positive screening means that your fund manager will actively pursue investing in companies that have what you may consider to be a positive investment impact.

Some pension funds will also offer an ethical investment option, and you may want to ask your pension provider whether ethical investment option are available to you.

Investing ethically will often mean balancing your desire for a good rate of return with ethical principles that are important to you. Sometimes this will mean sacrificing some of the best investment rates available on the market, but ethical investments can still bring decent rates of return, that, when coupled with peace of mind, can be priceless.

saving money

The Time Value of Money

The time value of money is a critically important concept in finance and economics. Whether you’re a multi-million dollar investor, a master’s degree candidate paying off student loans, or a recent high school graduate thinking about buying a new car, grasping the time value of money concept will be highly beneficial.

The concept of the time value of money is useful when determining the value of a sum of money or asset over time. The time value of money states that, all other things being equal, spending money now instead of in the future is preferable when inflation is positive, while saving money to spend later is preferable when inflation is negative (a rare event in today’s economy).

Here’s an example. Let’s say you have a choice between receiving $1 million today versus $1 million in three years. If you think you can invest that $1 million today — or even leave it in a high yield savings account — and end up with more than $1 million after three years, you would choose to receive that money today. But if you think that you do not have any investment option that could break even after three years, you might be better off in the long run if you choose to wait.

Most investors would likely take a sum of money now as opposed to waiting for three years, since inflation usually positive to reflect economic growth. The whole idea of the time value of money is explicitly related to maintaining present value or increasing future value.


Present vs. future value is nowhere better expressed than with the phenomenon of inflation. Inflation is simply continuous rising prices for goods and services. Put another way, increasing the amount of money without increasing the amount of goods gives consumers and businesses more money to spend on those goods. Essentially through creating more money, the value of each unit of currency decreases, incentivizing people to spend money in the near future instead of hoarding cash.

Saving a sum of money now is simply the decision to have cash despite the risk of inflation. Low inflationary risk favors saving the money now while high inflationary risk favors spending it in now before the value of your money becomes eroded. The inflation risk is the reason why investors who choose to have the sum in the future demand to be paid for the future value of an investment. In finance, this is known as the risk premium, which is why interest is usually paid on all forms of investments.

Lower interest rates leads to higher inflation. Since interest rates can be viewed as a tax on holding currency, lower interest rates make money cheaper, theoretically allowing people to spend more frequently. Essentially, the higher the inflation rate, the quicker the value of a currency erodes. Investors who set money aside for the future demand higher interest rates to compensate them for inflation. In other words, investors who leave a sum alone for future consumption will lose money because each of the dollars in that sum will be “worth” less. Each new dollar introduced into the economy devalues every dollar already in the economy.

Nominal vs. Real Interest Rates

The problem with using inflation to determine interest rates is that current interest rates are actually “nominal” interest rates. Nominal rates are not adjusted for inflation. To find “real” interest rates, they must be adjusted using an inflation rate, such as the one produced by the Consumer Price Index (CPI).

In the United States, nominal interest rates are set by the Federal Reserve through the Federal Funds Target Rate. Currently, that target rate is set between zero and 0.25 percent, which is the overall nominal interest rate for the economy. To find the real interest rate, the inflation rate must be subtracted from the nominal rate.

According to the Bureau of Labor Statistics, the annual inflation rate for September 2011 was 3.9 percent.  Taking 0.25 percent and subtracting 3.9 percent yields a negative real interest rate of -3.65.

Interest and Savings

Savings is decimated by negative real interest rates. Anyone who keeps money in cash is actually losing value. Holding $1,000 cash for one year will have lose $36.50 by the end of that year. Ordinarily, interest rates would rise to compensate for negative real rates, but currently the Federal Reserve is holding interest rates low to stimulate and stabilize the economy, so that will not happen. With interest rates so depressed, investors will be forced out of treasury and money market investments due to dismal returns.

As you can see, the time value of money is an important concept because it is an important factor in everyone’s daily spending, saving, and investment decisions. Although grandiose interest rate changes and and fiscal changes by the Federal Reserve and Treasury may seem overwhelming, it is important to understand how such policies can affect your personal savings accounts.


Top 5 Telltale Signs That You’re A Credit Card Abuser

Once upon a time, credit shared a correlative relationship with how much someone was “good for”—essentially what he or she could afford to pay back over an extended period of time. These days, just about anyone can open a line of credit, and with retail stores, hotel chains, and airlines offering specialty cards, it’s almost too easy to find yourself with a wallet full of cards and no cash. Getting a credit card is simple; keeping balances low and paying making monthly payments towards one or more cards is challenging, yet nevertheless imperative.

A responsible individual will maintain constant vigilance when using credit cards: He or she knows the balances for each card; sets limits for spending; and keeps track of due dates. Not engaging in these behaviors could lead to the slippery slope of negligent spending. Missing a payment will cause an interest rate to skyrocket and will bury someone underneath a mountain of debt if  not careful. Neglecting to pay off your balances is precarious. If any of the following behaviors describe you, you may be a credit card abuser.

1. The line between need and want has become indistinguishable. You have unworn clothes or items still in original packaging. You buy perishable food in mass quantities because “it’s a good deal”, and then throw away the majority of it when it spoils. You don’t have to be so tightfisted as to only purchase what you deem a necessity, but giving into your every whim is a sign you are a compulsive shopper. When compulsive shopper’s expenses are larger than his or her income, credit cards seem like a quick and easy source for cash.

2. Credit cards balances are growing. Ideally, all purchases charged should be paid off every month. Paying your credit card off each month demonstrates an understanding of how to live within your means, and it keeps you from owing interest. People who mismanage money tend to have an ever expanding debt accumulating. Even if you are making the minimum payment every month, it covers little more than the interest accrued and leaves your balance, the source of your debt, virtually untouched.

3. All your credit cards have been maxed out. Your solution to free up some credit is to open a new card instead of paying off your current balance like a responsible person. A rational individual would recognize the need to pay off the balance of a maxed out card. A credit card abuser, conversely, sees a maxed out card as an opportunity to open a new line of credit.

4. The amount owed is a mystery to you. Advances in technology make it almost impossible for someone to be unaware of your finances. Computers allow us to transfer funds and monitor our money with just a few clicks of a button. Most major banks have smart phone applications that allow instant access to accounts. Regardless if you have no idea how much money you owe because either you do not checking your balance or you spend money so fast you have a knack for wearing out your cards’ magnetic strip, it’s irresponsible.

5. Lying about finances has become a normal occurrence. Distorting your ability to handle money is reckless; furthermore, it has the potential to destroy relationships and trust. You have developed the habit of sprinting to the mailbox to snag the credit card bills and collections notices to save face from your roommates. You tell your mom you got a “great deal” on the new phone you really couldn’t afford so she won’t castigate you for poor spending habits. When you share financial responsibilities with a family or roommate, it is best (maybe not the easiest) to be upfront when it comes to money. Dishonesty concerning your economic situation leads to unnecessary stress and strains on relationships and friendships.


9 Ways NOT to Save Money

You are no doubt being told continually to save money, especially if you are somewhat of a spendthrift. A good way of doing this is to open an online savings account and start making regular contributions. This will not be the end of things however, as having a savings account doesn’t do you any good if you continuously delve into it to pay everyday living expenses. This means once you have opened your online savings account, you must leave it alone for it to work. The only way of doing this to have a separate account, such as a checking account or another savings account, for everyday use.

How to start saving money

You will need to draw up a budget and after you have determined how much it will cost you to live each week, month or fortnight (whatever it is between pay days) put that amount into your daily living account and anything left over into the online savings account that you never touch, unless it is for an emergency or the purpose that you originally set it up.

Some people find they can save money easily, others find it a struggle, whichever group you fall into you must make certain that saving money doesn’t make you a miserable person to be around. At the same time you don’t want your life to fly by in a whirl of debt without you being able to enjoy any experiences.

Therefore, when deciding the amount to deposit into your online savings account choose an amount which will ensure you are financially secure, without having to give up on important life experiences.

9 Ways NOT to Save Money

Following are nine quite effective ways to save money when done in moderation, but if you take any of these tips too far, you will find saving money a miserable experience:

1. All Work and No Play. If you find you are only living for your work, something is wrong, seriously wrong. You rise in the morning, go off to work, come home and watch TV until ready for bed. This is not what life was meant to be like. Sure, you will save money, lots of it, but are you really living? An important part of life is interacting with others, sharing experiences, seeing and doing new things so get off the couch, go for a stroll and stop off at the cafe for a coffee, whenever you feel like it.

2. Shirking Your Responsibilities. When drinking with friends do you excuse yourself to go to the bathroom when your shout comes around? Do you make the excuse that you must go now and make a hurried exit as your turn get closer? Do you let your date pay for her own meal when you take her out for dinner? Don’t pay your share of the pooled transport costs when you travel to work with friends in someone-else’s car. If this is you, it won’t be long before you become known as a cheap-skate. Once again it is a sure fire way of saving money but you’ll probably save yourself from having any friends to worry about too.

3. Becoming Obsessed With Getting Good Deals. This happens when collecting coupons for great deals becomes a passion. You soon find you are purchasing things a half price or lower just to save money but many of these things are not what you really need. Just items that you felt you must have because you saw yourself as saving money.

4. Chasing That Elusive Lottery. You buy your lottery ticket and wait eagerly for the result as you believe you have the winning number. You have even worked out how you will spend it, in your head. Then comes the inevitable disappointment. Your life can become involved in chasing lotteries. Sure if you win it will be worth many years of frugal savings, but have you ever considered the odds. Your savings habit could soon be lost to chasing a dream that will never eventuate for the majority.

5. Gambling. Sitting in front of a poker machine for hours. You have already won a considerable amount but have gone through it all trying to make more. It is your savings you are using here and eventually you will even gamble more than that. It is a no win situation you have found yourself in, and you can only end up feeling miserable and broke.

6. Fast Food Addict. There is no argument that fast food is cheaper than eating out at a good restaurant. Often cheaper than what you could knock up yourself. However, it is actually false savings as this too can become addictive and could be adversely affecting your health at the same time – something that may be quite expensive to remedy in the future.

7. Buying in Bulk. Have you noticed that when you see an item for sale you can often buy cheaper if you buy in bulk. This is a sales gimmick. Sure the individual item will be cheaper when you buy in bulk, but you have actually spent more in order to get the bargain. Such purchasing will often load you up with products that you wouldn’t have bought otherwise.

8. Not Buying Quality. You find you need another car. The old one has gone past its use-by date so you visit a few car yards to see what’s available. Two cars of the same make and model take your eye. One has done 200,000 miles, the other 100,000. One has been religiously serviced its whole life the other has no service book in the glove-box. The more neglected car with the extra miles is several thousand dollars cheaper, so you grab the bargain while you can. Six months later the gearbox crashes and it costs you more than you saved to have it fixed and you’re miserable again catching the bus to work until you can afford to have it repaired.

9. Relying on Debt. If you plan your financial life responsibly right from the start you will stay out of any serious debt. Once you get into debt it can take many miserable years to become financially free again. By putting some of your earnings in an online savings account regularly you will be building up a financial cushion that you can fall back on to pay for things such as car repairs and other emergencies. Such extra costs can come about at any time without warning.

Live your life responsibly but never mistake the obsessive saving of money for savings sake as a magic way to find happiness. Financial happiness comes from using your online savings account as a means to save money that would otherwise be wasted. Not just a means to get rich.


Be A Credit Card Connoisseur

It’s not difficult to see why there are over 60 million cards now in circulation in the UK, as many people are tempted by the lure of free credit. But as national and personal debt seems to spiral out of control on both sides of the Atlantic, there never has been a more pressing reason or time to get sensible with your finances. Credit cards and the term ‘debt’ have unfortunately become intrinsically embroiled with one another. However, with a bit of financial common-sense, credit cards can be a useful method of purchasing without leading to debt.

When used correctly, credit cards do give their users various advantages such as the opportunity to purchase items on credit, paying for them at a later date. This may be handy if your next pay check is not due for another 3 weeks as buying an item on a credit card may give you up to 60 days interest free credit before you must pay the outstanding amount.

Credit cards also offer their users extra consumer protection compared to that of a debit card. This may prove invaluable when something goes wrong as your credit card provider should be able to offer a refund. This proved invaluable for many holiday makers last year as many travel companies went into administration and flights were cancelled due to the volcanic ash cloud. It might also be worth mentioning that credit cards have got many a holiday maker out of difficult situations abroad when other cards have been lost, stolen or rejected.

With these advantages in mind, it is of utmost importance to be aware of the terms and conditions on your credit card.

Be sure of the APR or Annual Percentage Rate of your card. This is the standard method of indicating the cost of borrowing and will vary from lender to lender, card to card. This will include the level of interest you will be paying. Lenders will usually entice users with an initial introductory offer of 0% interest for a certain period. It may be useful to set a reminder for when this period ends to make sure you will not be charged for any unpaid purchases, or to consider switching to a different deal.

Interest rates may also vary depending on the different uses of your card. For example, using your credit card for cash withdrawals, foreign currency transactions or credit card cheques may involve a larger interest rate, as well as an additional lender charge. It most cases it may be cheaper to find an alternative method of carrying out these transactions.

Charges may also be added regarding late payments and the credit limit, or the amount you are permitted to spend, on each particular card. The lender sets a limit to each credit card and higher risk borrowers such as students will have a lower credit limit than an academically trained professional. As well as a charge for breaching your credit limit you may find your card frustratingly refused and blocked until you contact your provider.

Finally, try not to fall into the habit of making minimum repayments. Whilst you are taking some action towards paying of your bill, the interest rates will be gradually increasing meaning that you will eventually pay more in the long run.

Using credit cards correctly can offer the user great deals and the freedom to ‘buy now, pay later’ but they need to be used with caution. Ensuring that monthly repayments are met builds a responsible profile with credit rating agencies, thus improving your credit rating and opening up future financial options such as loans and mortgages. At the other end of the scale, missed or late repayments can send you into a downward spiral, seriously damaging your credit rating and making it extremely difficult to get any further financial products.

This illustrates the importance of financial awareness and planning to avoid debt and huge problems in the future. There are ways of successfully managing your fiances, but there are also strategies in debt managing should you find yourself in trouble.


Simple Answers to Questions about Gold

With the price of gold skyrocketing to record levels, many consumers are questioning the wisdom of selling their gold jewelry and coins or tucking them away as an investment. The television and radio hucksters would have you believe that the price never drops, but that’s just not true.

Should You Invest in Gold?

While it’s true the current prices have reached all time highs, between 1979 and 2000 the price dropped by nearly fifty percent. Though gold can have some short-term uses in a broad portfolio, it’s rarely a good candidate for long-term investment because of its volatility. The myth that it will rise indefinitely has many unsuspecting investors buying without the knowledge that gold has a long history of pricing bubbles (times when the price cannot be justified by any rational assessment of the real value it may generate.) Bubbles inevitably lead to a price crash.

Who’s Buying?

Dealers, private owners and scrap collectors are doing a booming business buying the gold that consumers are looking to profit from. These items are then sold to refineries where they’re melted down and its purity determined. The higher the karat, the greater the value: 18 karat gold is 75% pure gold, for example; 12 karat is 50%.

Questions to Ask Before Selling Your Gold?

With the price of gold fluctuating every day, selling your gold at top dollar can be a little tricky but profitable when the price is high. With so many places offering to buy gold, it’s no wonder that consumers are confused as to which way to go. Even eBay has gotten into the act with their new site feature, the Bullion Center. But before you even begin to choose a buyer there are some important questions to be answered to be sure you aren’t going to unwittingly dispose of a pricey piece and not what you think is a hunk of gold.

  • Do you know what you’re selling and its estimated value?
  • Is the item worth more as is than if it were to be melted down and recast?
  • Could it have historic value or be of interest to a collector?

If you can answer these questions and still want to sell, it’s time to find a reputable buyer. In our next post, we’ll share tips on choosing the best buyer for your gold.

About the Author: Noreen Ruth writes for several popular finance websites. She is interested in educating consumers about using credit responsibly and about legislative action that will affect their ability to borrow the money they need. She has contributed hundreds of articles to various online sites that provide content to educate consumers on credit card offers, debt consolidation, loans and other finance related topics.


Ten Most Innovative Collaborative Consumption Websites

The Times recently named it as a “movement that’s going to change the world.”  Entire marketplaces have been influenced by the incredible ideas that have generated from it.  And when it comes to consumer spending, there’s nothing that compares to the economic power of collaborative consumption websites.

Not quite sure what this means?  Not to worry: chances are that if you’ve indulged in a bit of Ebay shopping or have rented a new apartment from Craigslist, then you’ve indulged in what’s known as “collaborative consumption.”  Collaborative consumption is a name that’s given to the movement where consumers purchase goods and items from each other, rather than from a third-party store or traditional merchant.  Also known as “peer-to-peer spending”, collaborative consumption relies on the concept that consumers should be free to name their own prices on the goods and services that they use the most.

In terms of the World Wide Web, collaborative consumption has become the order of the day – and it’s highly likely that you’ve indulged in this movement yourself.  So which websites are the heralds of the collaborative consumption movement?  Grab a cup of coffee, sit back and relax, because this article will highlight the ten most innovative collaborative consumption websites:

  1. Ebay: Undoubtedly the granddaddy of all collaborative consumption websites, Ebay has been connecting consumers the world over for over a decade.  Ebay members can upload items and set their own prices, while buyers can bid against other users to make the final purchase.
  2. Craigslist: This online marketplace is known as one of the greatest websites for collaborative consumption in the 21st century.  At Craigslist, users can surf through listings for apartments, vehicles, and other items that have been uploaded by members.
  3. ParkatmyHouse: If you’re looking for a place to park your car and commute into the city, then Park at my House will let you rent out another user’s driveway or parking space for a set price. Users can save plenty of money by paying for parking through private users, rather than through traditional (and expensive) parking garages.
  4. Carpooling:  If you want to do your part to protect the environment, then consider finding your carpooling buddy at Carpooling, a collaborative consumption website that connects users who want to share the commute to work.
  5. CampusBookRentals:  If you’re sick of experiencing sky-high bills from buying your college textbooks every semester, then you can visit CampusBookRentals, where you’ll find several users who are willing to rent out their textbooks for a small fee.
  6. Swap:  Have a few DVDs that you’re not interested in anymore?  Are you looking to upgrade your music collection without spending hundreds of dollars for the privilege?  Then head to Swap, where you’ll find a community of users who are looking to exchange their social media (such as DVDs and music) in exchange for your own.  Grab the DVDs and music you don’t want anymore and list them to start swapping for the latest songs and movies.
  7. CouchSurfing:  If you want to travel without racking up a major credit card bill, then head to CouchSurfing, where you’ll find users from different countries who are willing to let you sleep on their couches in exchange for a small fee or the promise of similar services.  It’s a great way to see the world without making a major dent in your bank account balance.
  8. BarterQuest: Consider yourself to be a great barterer?  Do you pride yourself on your ability to drive a hard bargain?  Then grab the gear you want to toss and head to BarterQuest, where you’ll find users interested in exchanging their goods in favor of your own.  You have the freedom to determine what you receive from your bartering skills, so be sure to sharpen up on your haggling before making the deal.
  9. GrubWithUs: If you’re looking to enjoy the local restaurant scene with a new group of people, then join up with GrubWithUs, a collaborative consumption website that allows you to connect with fellow foodies, post reviews and share tips.
saving money

Comparative Cost Analysis of Healthy Cooking vs. Eating Fast Food Regularly

During the worst economic recession in decades, the simple act of putting food on the table can be difficult for working class families, not to mention those near or below the poverty line. When parents are desperate to get their children fed, they don’t always have the luxury of worrying about whether their kids are getting the daily nutrition they need for real health. Sometimes, just providing a kid with calories is all one can do..

cost of fast food vs healthy foodCombine the jobless rate and house foreclosures with rising gas prices and awful weather patterns, and you don’t need an online PhD to realize you have a recipe for disaster. These factors have contributed to rapidly increasing food prices. This is especially true in the produce section, where the cost of growing crops and transporting harvests can make fresh produce a lot more expensive than processed foods. Buying healthy foods can certainly hurt the grocery budget. However, few people ever stop to think just how expensive eating the cheaper and less healthy foods can be in the long run. McDonald’s dollar menu might not seem like such a good deal when you realize it can result in massive healthcare bills.

A study conducted by Andrew McDermott and published in the Family Medicine Journal found the overall cost of fast food was actually greater than that of healthy foods bought in supermarkets. In fact, the cost per calorie of a diet based on fast food was 24 percent higher than that of homemade diet of healthy food. Costs were calculated at three urban grocery stores, showing that it is possible for families to eat healthy for less, even when living in an urban setting.

Because not all foods are affordable, the study looked primarily at the lower-cost foods found in supermarkets. These spanned all of the food groups and included bananas, apples, frozen spinach, frozen peas, skim milk, chicken breasts, beans, cornflakes, and more. The cost of diets based on fast food was calculated using the breakfast, lunch, and dinner meals at a large fast food chain. The fast food diet included fries, burgers, soft drinks, and chicken nuggets.

The study proved that in the short term, it’s more than possible to eat healthy without spending a lot of money. In fact, the participants eating at fast food restaurants actually spent a lot more money than those buying groceries. However, the study didn’t show the high cost of healthcare commonly paid by those who eat fast food on a frequent basis. When this factor is added in, savings for people eating grocery store food skyrocket.

New York Times columnist Mark Bittman says the true cost of eating fast food is typically underestimated. Frequent consumption of junk food can take a serious toll on physical and mental health. In his column, Bittman cites a 2009 study by the Scripps Research Institute in which fast food was proven to trigger “addiction-like neuroaddictive responses.” Even if they consciously know other food is less expensive, frequent consumers of fast food will have a hard time switching over because they are literally addicted.

Just as the long-term consequences of of cigarette use are devastating, so are the long-term costs of eating a convenience diet. People eating at fast food establishments are at greater risk for obesity, diabetes, heart disease, and a whole host of other conditions. These problems can be devastating to one’s health and are very expensive to treat. Once the cost of health care is added into the mix, fast food quickly becomes the more expensive option.

Photo credit – ebruli


Knowledge of Capital Gains Rates Can Help You Reduce Taxes

Most of us are familiar with the taxes that we pay on the money earned through our jobs – ordinary income such as wages, salaries and commissions. Normally, the tax amount that we owe is calculated and withheld by our employer and sent to the Federal government, and usually the state and local government as well, without us having to worry about it.

But what about when you earn money simply by selling something that you own – such as property, stocks, mutual funds, bonds and other capital assets that are not in a tax-deferred account such as an IRA – that has increased in value since you purchased it? These increases in value are called capital gains. Generally, for most taxpayers, the tax rate on capital gains is much lower than on ordinary income. Fortunately, the taxes on capital gains are normally easy to calculate, and with knowledge of how capital gains tax rates work, you can save a significant amount on your tax bill.

Short-Term vs. Long-Term

The most important consideration when determining your capital gains tax rate is whether it is a “short-term” gain or a “long-term” gain. The difference? A day. Short-term gains are the profits you made from selling an asset that you owned for one year or less, and long-term gains are profits you made from selling an asset that you owned for a year and a day or more. The amount of time for which you owned the asset is known as the “holding period” and it’s why proper recordkeeping is crucial. Additionally, knowing the holding period for your assets helps you plan when to sell, and since there is such a small difference between short-term and long-term gains, waiting to sell until the holding period is more than a year can mean a rather large savings in taxes.

Taxes on Short-Term Gains

The tax rate for short-term gains – with the exception of a few special circumstances that we will discuss below – is your marginal tax rate, meaning that is the same as the rate that you would pay on income. Unfortunately, if you have a short-term gain, the tax treatment that you receive will be no more favorable than if the money had come from wages. For this reason, most investors choose to hold their investments long enough to qualify them for the long-term gains rates.

Determining the Tax Rate on Long-Term Gains

If you have a long-term gain, congratulations! You’re now able to claim one of the lowest tax rates on any kind of income available under the current tax code. Long-term gains are taxed at either 15% or nothing, depending on which tax bracket you fall into for that year.

What’s Your Tax Bracket?

To determine the tax rate of your long-term capital gain, you must first figure out which tax bracket you will end up in for the year. The amount of income that you can earn before having to pay capital gains taxes depends on how you file your taxes. (Note that your income level includes the income earned from your capital gains, as well as any other income that you earned or received during that year.) If you file as single, you can make up to $34,500 (for 2011) before paying capital gains taxes. If filing as married filing jointly or as a qualified widower, you can make up to $69,000 (for 2011), and if filing as married filing separately, you can make up to $34,500. Those filing as head of household can make up to $46,250 without paying capital gains taxes on long-term gains.

If your total income (which, again, includes the capital gain itself as well as all other income) exceeds those amounts then your tax rate on the capital gain is 15% of the gain.

Just Over the Line?

Keep in mind that if your income without the capital gains is less than the above amount that applies to you, and adding the capital gains puts your total income amount over the line, then you will only pay the 15% rate on the amount of capital gains that is over the line. For example, if you are single and your other income totals $31,000, but you have $5,000 in capital gains, your total income is $36,000, which means that you have to pay the 15% rate. However, you only have to pay the 15% rate on the amount above the maximum – so you will end up paying 15% tax on $1,500 in capital gains, as opposed to $5,000.

Notable Exceptions to the Rules

As with all IRS regulations, there are several circumstances under which special rules apply. The most common situations that cause people to run into tax problems are profits on primary residences, profits on collectibles, and dividends.

Profit on a Primary Residence

If your primary residence has increased in value, you may be looking forward to booking a tidy profit when you sell, and as long as you meet certain restrictions, you will not owe capital gains taxes on that profit. In order to qualify for this tax break, you must have lived in the home for at least 24 months out of the previous five years. However, if you must sell your home because of a job relocation or due to health problems, you may still qualify even if you have not lived there that long.

If you are single, you can take in up to a $250,000 profit tax-free from the sale of your home, and if you are married, you can pocket up to $500,000 tax-free in profit. Any amount of profit that you make in excess of those points is treated as a capital gain.

Profit on Collectibles and Precious Metals

This is another reason that collecting Precious Moments figurines might not beat the stock market. Regardless of how long or short of a time you have owned an item, the profit on collectibles that you own for investment purposes is taxed at 28%. If you fall within the 33% or 35% tax bracket, a short-term gain, this actually helps you out a little bit since 28% is the maximum.

Also, for those of us who like to invest in gold and other precious metals as a hedge against the stock market (or inflation, depending on how you look at it), whether it’s in coins or Exchange Traded Funds (ETFs), the IRS considers these to be collectibles as well. (Note that closed-end precious metal funds are not ETFs but are taxed as capital gains). So even though your gold ETF is managed like a stock, it is taxed like a Beanie Baby.


Many people slip up when reporting dividends because they assume that since they’ve owned the stock for years, they can report all the dividends as a long-term gain. However, that is not the case. Ordinary dividends are taxed as ordinary income and therefore do not qualify for special long-term gain tax rates. However, qualified dividends can be taxed at long-term rates and will be separated out for you on your 1099-DIV.