Short-term vs. Long-term Capital Gains

For any investor, one of the most important distinctions is the one that lies between short-term capital gains and long-term capital gains. The taxes you pay on your investment earnings depend on the holding period of your investment. You will be able to better plan your investment buying and schedule, and use it to better reach your financial goals, when you plan according to your investment holding period.

Short-term or Long-term?
First of all, you need to understand the difference between short-term and long-term investments. It’s a fairly basic rule of thumb:

• Short-term investments are those held for one year or less.
  
• Long-term investments are those held for more than one year.

If you bought a stock on April 1, 2010, you need to keep it until April 2, 2011 if you want it considered long-term. This is because an investment held for exactly one year is considered a short-term investment.

There is often confusion regarding investors who make use of dollar cost averaging. After all, with this technique, you don’t just buy a few shares and let them sit. You are constantly investing more. If you decide to sell some of your shares after dollar cost averaging, you will need to figure out whether the shares you sold are long-term or short-term.

In these cases, it is generally assumed that your sale will follow the first in, first out rule. This means that the shares you sell will automatically be the first ones you bought. The IRS assumes this rule (as do brokers and fund managers), unless you specify otherwise. If the first you shares you bought are more than a year old, chances are that they will be long-term investments. (This may not be the case if you sell more shares than you originally bought more than a year ago.)

There is also a method of cost averaging, which can be used if you don’t use the first in, first out rule. Cost basis is figured by adding up your shares and dividing by prices paid for them. You might want to contact your fund manager, or a tax professional, to find out more about this. Know, though, that if you decide to go with cost averaging rather than first in, first out on a fund, you will have to follow that method of determining cost basis on each sale.

Paying Capital Gains Taxes
When it comes to paying capital gains taxes, how much you owe depends on whether the investment is a short-term gain or a long-term gain. Short-term gains are taxed at your regular income tax rate. This means that if you are in the 25% tax bracket, your gains will be taxed at the marginal rate.

Long-term gains, on the other hand, are taxed at a different rate. As of this writing, if you are in the 10% and 15% brackets, there aren’t taxes on long-term capital gains. The story changes, though, when you reach the 25% tax bracket. At that point, capital gains are taxed at 15%. If you are in a higher tax bracket, that can mean real tax savings. These levels are set to last through 2012. After that, capital gains on long-term investments will be taxed – but likely still at a lower rate than your marginal tax rate.

Understanding these differences might prompt you change your mind about when you sell an investment, since you might save money if you wait a little longer.

About the Guest Author
Miranda Marquit writes about personal finance for a variety of web sites. She has her own blog at AllBusiness.com, and provides content for InsuranceQuotes.org, a site providing online insurance quotes.
If you are interested in writing a guest post, please contact PF Stock at the Email address listed in the sidebar.

Finding the Best Credit Card for You

What's the best card in the world? It’s a low APR card with 0% balance transfer until the end of time, travel rewards so generous that you earn a free flight once a month and the most cheerful customer service you've ever experienced. And, of course, it doesn't exist.

Credit cards are about tradeoffs. If you want a low APR, you won’t get many rewards; if you want to earn airline miles, you’ll pay a higher interest rate and probably see annual fees. And if you have bad credit, your choices are more limited than most. The bottom line is that the best card for you depends on, well, you.

Credit Revolvers
Do you maintain a balance month-to-month, using the revolving credit line instead of paying off your balance every month? If so, you should look for a card that has low interest rates and fees. The easy part is finding a card with no annual fee; those come fairly standard with low APR’s. The key is to search around for a low interest rate. Credit unions are not-for-profit financial institutions that almost always have lower rates, and are more accepting of bad credit. Oh, and forget about rewards. Any rewards card will come with a high interest rate and/or annual fee, and anything you earn will be erased by the interest you accrue.

0% balance transfer: Now that you know you’re looking for a low APR, the next question is whether you’re carrying a balance. If you are, or if you want to consolidate your debt at a lower rate, take a look at a 0% balance transfer card. These offer promotions where the balance you shifted doesn't accrue interest for the 6-24 month introductory period. The Discover More Card, for example, is currently offering no interest on balance transfers for a full 24 months.You should go with one of these balance transfer cards if – and only if – you know you can pay off your debt in the promotional period; afterwards, the interest rate shoots up. Keep in mind, too, that many of these cards come with a one-time fee of around 3% of your balance. Make sure to factor that in when you make your calculations.

Low purchase APR: If you’re not carrying a balance, or if you can’t pay off your balance in time but still think shifting your balance is worthwhile, go for a straight-up low purchase APR card. For example, IberiaBank offers cards with rates as low as 7.25%, compared to the national average of nearly 15%. Like a balance transfer card, some low APR cards also offer a 0% purchase rate introductory period, and you should similarly be cautious that you don’t get caught when the rate goes up.

The Convenience Crowd
Transactors use their credit cards only as a convenience, building up a credit score but never carrying a balance month-to-month. If you’re one of these, you don’t need to worry as much about interest rates, since you pay off your balance every month. Instead, look for a good rewards card.

One aspect that’s given more weight than it deserves is the annual fee. Don’t be opposed to paying on principle; if your stellar rewards make up for the fee, the card is a good option. Three things that you should consider:

Introductory bonus: While low APR cards offer intro periods with no interest;rewards credit cards offer signing bonuses of extra miles or points, a waived first annual fee, or a free night at a hotel. Many times, these up-front rewards make up for the annual fee. Be careful, however, to weigh the signing bonus against the overall rewards rate. If the great one-time bonus comes with lukewarm rewards rates and you plan to hold the card for a while, you should reconsider.

Base rewards rate: Most cards give something like a mile per dollar or 1% cash back, but a few standout cards pay 2% on all purchases. Read the fine print: some rewards rates only kick in after a certain amount is spent. For example, a card may give 0.5% rewards on the first $5,000 spent and 1.5% thereafter. If you spend $10,000, your effective rewards rate will be 1%. The Escape by Discover Card is a great option that pays 2% back in travel rewards on all purchases, regardless of how much money you spend, and it offers $250 worth of bonuses for signing up (1,000 points per month for 25 months). This bonus more than covers the $60 annual fee for a few years.

Category rewards: Many cards give extra rewards on certain categories, some specific to the card and some that are announced every quarter. You may earn additional rewards on groceries, restaurants, retail stores, travel, and more. Some cards offer as much as 5% back on a given category. Pick a card that matches your spending patterns: if you fly a lot on American Airlines, don’t get a Southwest Rapid Rewards card; don’t waste your time on a gas credit card if you always bike. And, as always, look at the details: some cards have spending caps, and many don’t give rewards at warehouse stores like Sam’s Club or Costco.

No matter what your spending habits or priorities are, there are a few guidelines everyone should follow. Know how long you plan to keep the card, and remember that jumping from card to card impacts your credit score. Research a card before choosing. Depending on your credit score, you may not qualify for the lowest APR advertised, and if your score has taken a temporary hit, hold out for just a bit. Be smart, be thorough, be realistic.

About the Author
NerdWallet.com is a website dedicated to educating consumers about credit cards, as well as helping them to compare credit card offers.

Guest Post: Five Steps Towards Automating Your Personal Finances

Managing your own finances can be daunting, time-consuming and overwhelming. The task requires careful attention to detail and keeping track of a large amount of data. Aside from the frustration, it is a waste of time to move various amounts of money between different accounts. Making this entire process automatic will save you time and free you from the stress of manually tracking where your money goes each month.

Direct Deposit
Almost every bank and credit union nowadays uses direct deposit. Instead of receiving your wage from your employer and taking it to the bank, your employer deposits your wages directly into your checking account. Not only does this make getting paid easier, it also eliminates the risk of losing a check or having it stolen. This is only the first step. You must have money in your account before you can manage it.

Paying Your Bills
For monthly bills that are a fixed amount, such as mortgage payments, making them automatic is easy. Most banks offer an automatic bill payment system. What they require are the names, addresses and account numbers from each of your billing statements. You then set up a recurring debit for a specific amount on a specific date each month from your checking account.

Recurring annual expenses, such as car insurance, automobile club fees and registration and license fees can also be automated. Since these are usually fixed, you can take the annual lump sum and divide it by 12. This gives you the amount you need to save each month so you will have the money when the bills are due. Set up an automatic debit each month into your savings account.

Savings and Investment Accounts
Automatic debits are not just for paying bills. You can also use them to transfer money every month into your savings and retirement accounts. With a savings account, you can start with a small amount and if you want to increase it, just login to your account and change it. A retirement account often has a cap on the amount of money that can be invested each year. Divide the cap by 12, schedule an automatic monthly debit for that amount into your retirement account, and you are set.

Overdraft Protection
Having direct debits from your checking account raises the concern about potential overdrafts. Many banks allow you to set up a savings account specifically for overdraft protection. Should the balance of your checking account ever hit zero, the bank will automatically debit your savings account with the outstanding amount.

Automatic Reminders
Sometimes money just gets screwy. You can tell your bank or credit card company to notify you if anything strange happens, like an unusually large debit over a certain amount. You can also have them notify you if your entire balance goes over or under a defined limit.

There are some transactions that simply can't be automated if you are self-employed. An example is invoicing a client or supplier. For these, use a calendar service to send you emails or text messages reminding you of what needs to be done.

Does Automation Help?
Automation helps in the following ways:

• cuts down trips to the bank teller
• reduces check writing
• saves postage costs
• erases worrying about due dates
• eliminates scheduling your monthly cash flow
• reduces stress
• saves time
• makes bounced check and late fees obsolete

About the Author
Matt is a blogger who works for an Australian-based credit card comparison website, which is designed to help Aussies compare balance transfer offers and low rate cards to reduce the amount of interest they pay per month.

Guest Post: Planning a Vacation When You Have Credit Card Debt

Excessive credit card debt is highly stressful. Working your way out of credit card debt may well be a very long-term project with many luxuries falling by the wayside. However, one item that simply can’t be neglected is a vacation. This is particularly true if the family has always gone on vacation and you use this time to relax and rejuvenate before facing another year.

Most individuals with excessive credit card debt immediately stop using the credit cards. This is important so as not to accumulate more debt and interest charges. That means vacations may need to be budgeted carefully and some corners cut so the family can enjoy the holiday but the credit card debt doesn’t become larger.

Use Prepaid Credit Cards
One of the most valuable features of a credit card on vacation is that there is no need to carry cash. However, when planning a budget vacation and avoiding more credit card debt using pre-paid cards can keep the family on a budget but relieve the necessity of carrying cash.

Car rental is not possible usually when using pre-paid cards but a budget vacation usually won’t include car rental anyway. Decide how much cash and load the prepaid card with that amount, usually it is wise to go with the highest estimate. Prepaid credit cards can be used at almost any ATM to withdraw cash.

Budget Vacation Accommodations
Take the family camper, recreational vehicle or tent. Rather than spending a lot on hotels, renting a camping spot or parking at an RV spot can save hundreds of dollars that might have been spent on hotels. Additionally family cookouts and camp cooking are possible in these venues. They can give the holiday a picnic feel and are much less expensive than eating at a restaurant.

Vacation apartments can be the most budget friendly choices when planning a trip lasting over a week or two. Often these apartments can be found at a very modest price for a short period of time and most will include kitchenettes. Cooking breakfast in the apartment before going out for the day, packing lunches and returning to cook dinner can save a lot of money when in a strange city.

Bed and breakfast lodgings are available in some areas. They can range from very expensive and luxurious to charming and moderately priced. Most owners of B&B are happy to accommodate families and, off-season in most areas will see a reduction in pricing for all accommodations.
If you do elect to stay at a hotel or motel then make sure you choose one that allows kids to stay free. This can save a lot of money over children being charged the same as adults.

Plan off Season Family Vacations Where Practical
Family vacations that include visits to theme parks are usually much more budget friendly when planned during the slower seasons and during the week. Weekends are usually resort, beach, and park areas busiest times. Tickets to events and entry to theme parks are almost always less expensive during the off-season and during the week. When visiting places like theme parks it is wise to remember that accommodations located closest to the theme parks and attractions are usually the most expensive.

Reducing Travel Expenses When Planning a Vacation with Excessive Credit Card Debt
Although air travel is often, the fastest way to get to a destination it is not always the most budget conscious. Travelling by car may be far more budget friendly and allow the family to enjoy some of the countryside as well. If the travel is to be by air, consider travelling on a standby basis during off-season. The reduction in price can be astounding and shop for deals on flights offered by some airlines.

Have a friend or family member drive your family to the airport and make arrangements to pick them up. This can save quite a bit on airport parking. When the family arrives at the destination, consider using an airport shuttle to take you to your hotel or accommodations or use public transportation. Taxis at airports often charge an airport fee and this can add up. Many historic cities feature bus tours that are reasonably priced and far less expensive than using a taxi to get around.

An entire family vacation can also be planned in a rural setting. Renting a lake cabin in off-season can provide plenty of entertainment for the kids and relaxation for the adults at a budget price. Camping hiking and outdoor sports are often very budget friendly vacations and also healthy.

Choose Closer to Home Vacation Spots
Although exotic destinations may have been your vacation spots in former years when taking a vacation with excessive credit card debt, choosing vacation attractions closer to home may be more economical and help you keep to your budget. Many local destinations and theme parks, camping sites and attractions are overlooked in vacation planning. However, they can be less expensive to get to, pose fewer problems as far as lodging and home is just a few hours away in some cases.

Avoid Unnecessary Purchases
On a budget family vacation especially if excessive credit card debt is already a problem there can be a lot of expense avoided by not purchasing a new set of luggage, new outfits or making do with the old ice chest another year. Souvenirs are another area where expenses can be cut; park and city souvenirs are lovely but can be very expensive and add to the price of a vacation.

Although planning a family vacation with excessive credit card debt will require more planning than perhaps in other years, the vacation experience can be just as relaxing, thrilling, and enjoyable with a little planning. The difference may only be that you have a budget this year you will stick to and avoid spending more than you can afford or intend to spend. Vacations are incredibly valuable tools for recharging the family for another year and do not necessary have to sink you further into credit card debt.

About the Author
This is a guest post was written by Mirsad Hasic. If you are interested in writing a guest post, please contact PF Stock at the Email address listed in the sidebar.

PFStock Readers Have Above Average Retirement Savings

For several months, readers have been responding to a survey of retirement saving on PFStock. The poll is now closed and the final results are in. A total of 32 readers voted on this poll. The poll is based on my April 2010 post about retirement savings. This post contains data from the Employee Benefit Research Institute (EBRI) about retirement savings in the United States. One conclusion of their research is that the majority of Americans have less than $25,000 saved for retirement. However, PFStock's reader survey paints an entirely different picture.

Below are the results of the reader poll compared against the data in the EBRI survey.

How much have you saved for retirement (exclude primary residence and defined benefit plans)?

Retirement Savings	EBRI Survey	PFStock Survey
less than $1,000	27%	0%
$1,000 - $9,999	16%	3%
$10,000 - $24,999	11%	6%
$25,000 - $49,999	12%	9%
$50,000 - $99,999	11%	15%
$100,000 - $249,999	11%	25%
Over $250,000	11%	40%

Note that the percentages do not add up to 100% due to rounding.

From these statistics, I found it interesting that a large percentage of PFStock readers fall into the higher retirement savings categories. Fully 80% of PFStock readers have more than $50,000 saved up for retirement.

Over the years, I've written several posts about Net Worth for PFStock. Sometimes I've received very insightful comments that try to explain why such a large discrepancy exists between my blog readers and the general population. This one reader comment seems to provide some insight into the discrepancy:

This poll brings to light several questions including are readers of financial blogs more financially savvy? Are they taking the information they gain from online and putting it to practice? Even the fact that they are on a financial blog demonstrates their interest in properly managing their finances and their financial security and thus impacts the way they spend and save. It's a very interesting poll to say the least.

Another reader submitted this comment:

Whether or not the figures reported [in the poll] are accurate, they're not representative. People with a high net worth (or at least an above average interest in personal finance) will be over-represented due to self-selection.

Since you, PFStock readers, answered the poll, I'll ask if you would like to share your insights on this data? As always, anonymous comments are welcome on PFStock.com.

For reference, the original EBRI survey can be found here.

Additional related posts:
Annual Income and Net Worth (7/10)
Annual Income Survey (2/10)
Net Worth Update (8/09)
How Much Do You Make? (4/09)
Net Worth Comparison (6/08)
Are You Wealthy? (3/08)
Calculating Net Worth (9/06)

PFS

Guest Post: 5 Ways to Overpay Your Mortgage

There are obvious advantages to paying off debt as early as possible. First, there’s the availability of more money. Second, nothing feels better than being in a debt-free position. For most people, purchasing a home comprises the largest amount of debt for the longest period of time. Many people no longer find comfort or security in 30-year loans since it means they’ll be in debt for a major portion of their lives. Given the instability of the economy and job market, deciding to pay off a home as soon as possible would insure that no matter what happens, a family has a roof over their heads. There are several options available to homeowners, but there are rules that must be considered before deciding on a particular procedure.

Considerations Before Selecting a Plan

• While paying down the balance means less interest will be paid, it’s important to find out from the lender whether there are stipulations on the amounts that can be overpaid.
• Some lenders have little appreciation for paying off mortgages earlier than scheduled. Find out if there’s an early redemption penalty for paying off the loan early, as having to pay a penalty could defeat the purpose of attempting to pay off the loan early. Also, make sure the payments will be credited to the principal.
• The general rule is to pay off the most expensive loans first. If there’s heavy credit card debt, it may be wiser to concentrate on paying off this debt first since the interest rates are higher (possibly 15 – 20%) than mortgage loan interest rates (approx. 6%).
• If paying off earlier, the homeowner could fall short if an emergency occurs. Homeowners must remember that money paid into their mortgage will be locked into the mortgage so if needed, the only option may be to borrow by refinancing at higher rates of interest.

Options for Overpaying Mortgages

1. Make bi-weekly payments instead of monthly mortgage payments. Bi-weekly payments result in 26 weeks of payments which is 13 payments per year instead of the standard 12 payments. With this method, homeowners will find that a significant amount of interest payments and term years can be eliminated. However, if this option is offered, it will likely come with an enrollment fee, and monthly fees to be paid thereafter.
2. Perhaps choosing the extra amounts to pay and making those additional payments either each month or when convenient is the better thing to do. This method is beneficial because there are no fees attached. Adding as little as $25, $50 or $100 each month can make an enormous difference in the final balance paid and the number of years erased over the life of the loan. Since interest is calculated according to balances due, ask the lender to recalculate the loan periodically so the charges for interest rates can be properly reflected (don’t assume that the lender will automatically do this). Incidentally, it’s best to make the overpayments during the first half of the loan since this is when the most interest will be charged.
3. Take out the loan for less than the standard 30-year term; the lower the term, the less interest will be paid and the sooner the loan will be paid off. Before signing for a lesser-term loan, homeowners have to be reasonably sure that they’ll be able to make the higher monthly payment, as well as be able to handle all their other expenses and have money left over to take care of the basics like utilities, food, clothing, emergencies and leisure activities. If the loan has been paid off by the time they're ready to sell, homeowners stand to make a sizable profit no matter what the condition of the real estate market.
4. Plan to make a yearly lump-sum payment. Paying as little as $500 extra per year can result in a substantial difference in the overall amount paid and the number of years it takes to pay it.
5. Taking the above scenario a step further, by depositing a certain amount of money each month into an interest-bearing savings account, homeowners can then keep the interest earned in the account and make the lump-sum payment with the actual cash balance in the account whenever they choose. Thus, make lump-sum payments and make a little extra money at the same time!

The world of today isn’t trustworthy and the general rule for businesses now is to seriously consider what will be best and most profitable for the business. Therefore, homeowners have to look out for their own best interests and conduct research on their own. With the help of knowledgeable brokers or agents, they should strive to gain the best understanding possible of all mortgage plans and the rules that regulate these plans. Only then will homeowners have reasonable assurances of achieving their goals.

About the Author
David works at Money Choices, an Australian service where consumers can quickly compare home loans from a variety of providers.

Reader Submitted Tax and Money Saving Tips

The fifth and final winner in the PFStock Tax Tips Giveaway 2011 is Holly Blanco. She (and the other four winners) will be receiving free H&R Block At Home Online Tax Preparation. The drawing is now concluded. Thanks to everybody who entered.

I've compiled a list of the tips that were submitted by PFStock readers. Here are some of the great tax tips that PFStock readers sent in:

• My advice is to not lie about your income. Be honest and pay your taxes.
• I use the internet as a tool to make sure I'm claiming every deduction and credit that I can qualify for.
• My father was an accountant and used to say the best thing was to break even every tax year and not give the government an interest-free loan of your money (by getting a refund). I know that I'd never be able to save the money otherwise so I always made sure to have plenty of tax deducted in order to get a nice refund check. Now I make that money work for me; I put some aside every year and put it into a CD.
• I make sure that I organize all year. I have folders I make in January for that year's taxes so that come tax time, I don't have to hunt for my receipts and paperwork.
• Contribute the most you can to a 401(k) plan at work.
• Spend some time learning about every single deduction you are eligible for and then take them. Think; give away lots of stuff to charity; contribute as much as possible to retirement savings plans at work.
• File your taxes for free online. Many websites let you e-file and offer free online filing if you meet their criteria.
• Bloggers should keep track of all expenses throughout the year whether it is for mailing books for giveaways or hosting fees.
• Contact your local libraries, chamber of commerce, or city officials, to find out which agencies offer free tax filing for low-income families.
• Buy a copy of J.K. Lasser's Your Income Tax or the Ernst & Young Tax Guide to help with understanding tax laws and with preparing your taxes. Better yet, check out a copy of either one from your local library for free.
• I'm just anxious to get this done. Get your taxes done early so you don't get stressed about it come April 15.
• I came to realize the tax I paid on my car last year was tax deductible. Check for all the credits!
• I have added extra to my payroll deductions in order to make sure that I don't owe any additional taxes.
• Read PFStock and other personal finance blogs. (I think that this contributor has his own personal finance blog.)
• Order your credit report from the 3 major reporting agencies—Equifax, Experian, and TransUnion—for free once per year at annualcreditreport.com. I joined creditkarma.com to monitor my actual credit score for free too.
• If you have a complicated return work on it a little at a time so you will not be overwhelmed.
• If you find you owe every year and adjusting your with holdings just isn't working out make sure to take the number you owe each year, divide it by the amount of paychecks you get per year, and stick it in a high yield online savings account. I say add at least $5-$10 more per paycheck so you have a cushion. In the worst case, you will have extra savings!

PFStock readers also contributed these great money saving tips:

• I look at sales fliers online weekly and match coupons and sales. 
• My money saving tip is to use coupons.
• My tip is to avoid impulse purchases. Make yourself go to a store 2 times before you make a big purchase.
• My best money saving tip is to use coupons and match them up with sales.

Thanks again to everybody who participated. If you have more tax or money saving tips, feel free to share them in the comments below. Please visit PFStock again, and check back for additional giveaways in the future.

PFS

Disclaimer: Comments are user submitted tax tips. PFStock does not provide tax advice. I encourage readers to consult with a tax adviser if they have specific tax questions.