6 Birds That Make Great Apartment Pets

If you’re looking to add an animal to your apartment, consider birds as they’re great companions and affectionate pets.

When you think of getting your first pet, cats or dogs are the first species of animals that come to mind. But, have you ever considered a bird? Birds are popular pets as they’re friendly and affectionate yet they don’t take up too much space in your apartment.

Birds are great pets for apartment dwellers because they’re low maintenance while still being extremely affectionate with big personalities. Whether you want a few smaller birds or one large parrot, it’s important to discover which popular pet bird species is right for you.

Throughout this article, we’ll talk to you about all the different species and help you decide which is the friendliest pet bird species for you.

Welcome to the bird world

Are you new to pet ownership? Don’t fret. There are several bird species and they all make for wonderful pets. But before you go to the local pet store or aviary, you need to ask yourself a few questions to determine which pet is the best one for you.

Don

Don

Does your apartment complex allow birds?

Before bringing any type of animal into your apartment, you need to read your lease agreement and talk to your landlord about the pet policy. The first thing to find out is if your apartment allows pets, and specifically if they allow birds.

If your apartment is not pet-friendly, don’t sneak a pet into the apartment as there are serious negative consequences. Once you get the green light that your apartment is pet-friendly, then you can continue your search for the perfect pet.

Can you afford it?

As with any pet, you need to do some math to ensure that your budget can stretch to accommodate your first bird. In addition to purchasing the cage, which varies in price, you’ll need to calculate the cost of birdseed, fresh fruit and veggies, toys for mental stimulation, veterinary care, cleaning and grooming costs and additional money for unexpected costs that may arise.

Different species can cost different amounts, too. Owning a bird can add up, so make sure you can afford the care needed to take care of your little feathered creature.

How much time do you have to care for it?

While some birds are more low maintenance than others, all birds need some human attention every day to thrive. Ask yourself how much time you actually have each day to care for your new pet and give it the human interaction it deserves.

If you only have an hour each day to dedicate to your pet, consider a parakeet as they’re a low-maintenance bird. On the other hand, if you have ample amounts of time at home to care for and train your bird, you may consider a parrot species.

Do your research to understand the level of training, stimulation and care each different bird species needs to thrive.

Birds need stimulation with toys.

Birds need stimulation with toys.

Where is it coming from?

We don’t just mean which pet store is your bird coming from. Unfortunately, birds are illegally obtained and sold. In fact, some birds — like the African grey parrot — are on the verge of extinction from the illegal bird trade. African greys are intelligent birds that people love as pets, but they face extinction in their natural habitat due to illegal activities.

Responsible pet owners will ask the breeder where the bird came from to ensure they aren’t contributing to the illegal bird trade. Another great option is to adopt a bird from a shelter. That way, you’re saving a life and helping to give a shelter pet a friendly new home.

Is the species compatible with children and other pets?

Are you looking to add some playful birds to your house? Well, if you have children or other animals in the house, you need to make sure that your new chirpy addition is good with other animals, children or other birds.

Don’t bring a new bird into the apartment and expect it to get along well with others. Some birds are great with other species while some are better suited alone.

For example, if you have a cat, it’s probably not smart to add a bird to the mix. The cat may view it as lunch. Save yourself some tears and heartache and make sure that all family members, pets included, are compatible with your new friend.

Top 6 best pet birds

OK, so you’ve decided that you want a pet bird and want to bring one home. But, what are the best pet birds for you? Here are some different options to consider.

Pionus parrots

Pionus parrots

Pionus parrots

  • Blue and green
  • Medium size
  • ~30-year life span

The Pionus parrot is part of the parrot family and is originally found in South America. This is a great species for families to own as the species isn’t prone to attaching to a single person, as other parrots sometimes do. This intelligent one is sure to charm you as it’s relatively quiet and reserved. This pet bird does need a lot of attention, otherwise, it can get moody and demanding.

If you’re looking for a great companion for the whole family, the Pionus parrot is a good choice to consider.

Cockatiel

Cockatiel

Cockatiels

  • Gray, white and yellow
  • Small size
  • ~ 20-year life span

These little birds are some of the most popular pets for bird owners. They’re friendly, lovable and great for apartment dwellers. They love whistling and will likely serenade you throughout the day. Part of the parrot family, they do require attention and stimulation but are on the smaller side, so they won’t take up too much space in your apartment. They cost anywhere from $30 to $250 to purchase.

If you’re a new pet owner, experts recommend getting a female cockatiel as they aren’t as moody and possessive as their male counterparts. They love company so you can even consider getting two so they have each other. If you want two cockatiels, a male and a female will work well together. Keep in mind that if you only get one, they may require more attention from you. However, you’ll have the perfect companion on your shoulder.

Hyacinth macaw

Hyacinth macaw

Hyacinth macaws

  • Blue
  • Large size
  • ~30+ year life span

Native to central South America, the hyacinth macaws are the larger cousins to something like the Pionus parrot. These beautiful birds are spectacular and full of personality. They love to play and be seen. The hyacinth macaw definitely needs attention from its pet owner.

The hyacinth macaw can live for at least 30 years or more and cost anywhere from $5,000 to $12,000 to purchase. They need a large cage that’s at least six feet, as they’re the largest parrot in the world.

If you’re experienced with birds and can give these gentle giants the proper care, then they do make great pets. But, if you’re looking for a friendly pet to start off with, this is not the right creature for you.

Scarlet macaw

Scarlet macaw

Scarlet macaws

  • Blue, red and green
  • Large size
  • 30+ year life span

When you think of a parrot, you probably imagine a rainbow-colored animal that can talk like and mimic humans. The scarlet macaw is that large, glorious, rainbow-colored bird. While they can talk, they don’t mimic the voice and tone (that’s the African grey!) of their owner.

Scarlet macaws are fun birds as they’re friendly, affectionate and intelligent. However, they’re not low maintenance and require a lot of time and human attention. The scarlet macaw will form strong bonds with you if it lives alone, just like it would bond with others if it were in the wild. If you’re looking for a long-term companion, consider this creature.

Green-cheeked conurre

Green-cheeked conurre

Green-cheeked conures

  • Green
  • Small or medium
  • ~20-year life span

This smaller species is a popular pet for families. They’re friendly birds that are affectionate and will dole out sweet gestures, like cuddling, when properly tamed. The green-cheeked conure will chatter but they’re good for apartment dwellers as they aren’t too noisy. These small birds cost anywhere from $150 t0 $300.

The green-cheeked conure is a playful, energetic and cuddly creature. While they demand attention, they just want love and if they live in positive environments, they’ll become your feathered best friend.

Amazon parrot

Amazon parrot

Amazon parrots

  • Green
  • Medium to large
  • 40+ year life span

Like most parrots, the Amazon parrot requires attention, proper mental stimulation and care. These mischievous birds like attention but are a great family pet. If you have the time to commit to it, the Amazon parrot is a friendly pet bird species to consider. You can teach it basic things and bond with this gorgeous creature.

Budgie

Budgie

What’s the easiest bird to have as a pet?

One of the easiest birds to have as a pet is the budgie, also known as a parakeet. These cute creatures are friendly pet bird species who love attention, food and play. If you’re looking for a new pet that’s easy but will give you love, cuddles and companionship, the bird world often recommends starting with a budgie.

Budgies want human interaction and don’t do well completely isolated. While they’re pretty low maintenance, they still want to interact with their humans and will be extremely affectionate with pet owners who show them love.

If you’re looking for an easy pet bird, consider the budgie or parakeet.

The best bird to have as a pet

What’s the best bird to have in your apartment? Well, that depends on what you’re looking for. Birds, in general, need attention, proper care and love from their owners. If you want a low-maintenance pet, then a parakeet is the best pet bird for you. If you want a lifelong companion you can train, then the African grey is a great option.

We can’t tell you the best bird as that depends on you and your lifestyle. But, we can walk you through all of the basic pros and cons to help you determine the best one for you.

Here are some of the common pros and cons bird owners share. Consider these when determining which feathered creature to take home.

Pros of having a feathered friend

Animals bring joy and birds are no exception. These are some of the best benefits of having a feathered friend in your apartment.

They can learn basic commands

Talking parrots aren’t just found on pirate ships. If you take the time to train your bird, you can teach it easy commands and different words and it’ll talk to you! This is one of the most fun and memorable aspects of owning a bird. We’d like to see a talking Golden Retriever!

Birds love a snuggle

Birds love a snuggle

They’re affectionate pets

You might think that only cats or dogs cuddle with their human, but you’d be wrong. Birds are affectionate creatures who will cuddle you if you love them. Let them perch on your shoulder or arm and you’ll have a featured friend who loves you just as much as you love them.

They’re extremely sweet

All birds have personalities and most are very sweet. Birds want love and attention, but in return, they’ll love you back. Some will charm you with little chirps while others will speak to you. They’re popular pets because of how sweet they are.

Cons of having a feathered friend

As with any pet, there are parts of pet parenting that aren’t so glamorous. Here are some cons to know.

Birds make a lot of noise.

Birds make a lot of noise.

They’re incredibly noisy

We all know that birds tweet, but some are very loud, especially when ignored. If you live in a small apartment space next to other neighbors, your bird’s continual chirping may not appeal to everyone.

They’re expensive

While some smaller birds cost $50 to purchase, their larger cousins can cost upwards of $12,000. And that’s just for the bird itself! That doesn’t factor in food, toys, vet bills, training and other pet-related costs. Birds are expensive to purchase and maintain, compared to other pets.

They require proper care and space

You don’t just buy a bird and call it good. Birds need the right cage with enough room to spread their wings, the right space and the right care. If you can’t commit to the proper training and attention needed, which is hours a day, then this is not the right animal for you.

Becoming a pet bird owner

Are you sold that these extremely sweet, feathered creatures are right for you? Make sure you’ve done your research, checked your budget and found the bird that you can grow to love and form strong bonds with. We know they won’t disappoint with their sweet and affectionate cuddles and beautiful birdsongs.

Source: rent.com

8 Facts You Must Know About Bear Markets

There are few things scarier than a bear market, but steep and sustained drawdowns in stocks are an absolute fact of investing life. Markets go through cycles; always have, always will. 

It’s also true that despite being inevitable and unpleasant, bear markets are not entirely all bad. An irony of bear markets is that they’re one of the exceedingly rare times when long-term retail investors can actually have an advantage over the pros.

Traders and tacticians are under constant pressure to do something, even as a receding tide lowers all boats. Contrast that with retail investors, who are luxuriously free from clients yelling at them all day. Normies can just sit back and dollar-cost average into stocks at increasingly cheaper prices.

Most importantly, a patient long-term investor who is diversified in accordance with his or her age, stage in life and risk tolerance can not only wait out a bear market, but profit from it. Remember: The market can be miserable at times, but its long-term trend is always to the up and right.

A familiarity with the basics of bear markets should help investors better cope with the next one. To that end, we’ve compiled the following eight facts you must know about bear markets.

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Why Is It Called a Bear Market?

what is a bear marketwhat is a bear market

It has nothing to do with the way bears sneak up on their prey and attack suddenly, in the same way that bear markets feast on investors. Neither is it because bears are notorious for ransacking campsites and stealing provisions, in the same way bear markets can destroy your financial well-being.

Though both would be fitting.

Believe it or not, the term “bear market” originates with pioneer bearskin traders. The country’s early traders would sell skins they’d not yet received – or paid for. Because the traders hoped to buy the fur from trappers at a lower price than what they’d sold it for, “bears” became synonymous with a declining market.

There is, however, an alternative explanation, according to Wall Street lore: A bear attacks by swiping its claws downward, similar to the downward trend of a declining market.

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What Is a Bear Market, Anyway?

A 3D rendering of S&P 500 stocks heading lowerA 3D rendering of S&P 500 stocks heading lower

First, let’s look at what a bear market is not.

It’s not when stock prices end lower in the majority of trading days within a 90-day period. Neither is it a condition proclaimed by the National Bureau of Economic Research. And it is certainly not when at least two major business publications proclaim a bear market on their magazine covers.

Rather, a bear market is when a broad market index, such as the S&P 500, falls 20% or more from its peak.

There still is some debate among market watchers about whether the downturn that lasted from July 16 to Oct. 11, 1990, was officially a bear. The S&P fell 19.9% during that period. And the 2018 correction that lopped 19.8% off the S&P 500 was within rounding distance of a bear market. Since 1929, S&P 500’s average bear-market decline stands at 33.5%, according to Dow Jones Market Data. The median drawdown comes to 33.2%.

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How Often Do Bear Markets Occur?

bear hiding in tall grassbear hiding in tall grass

Since 1932, bear markets have occurred, on average, every 56 months (about four years and eight months), according to S&P Dow Jones Indices.

The Nasdaq Composite index entered a bear market on March 7, when it closed 20% below its Nov. 19, 2021, high. The S&P 500, for its part, set a high of 4,976.56 on Jan. 3. Thus, any close at 3,837.25 or lower puts the benchmark index into an official bear market.

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What Is Least Likely to Cause a Bear Market?

Tank against Ukraine flagTank against Ukraine flag

A number of events can lead to a bear market: higher interest rates, rising inflation, a sputtering economy, military conflict or geopolitical crisis are among the usual suspects. But which is the rarest?

Fortunately, military or geopolitical shocks to the market have been mostly fleeting. Two of the longest downturns followed the attack on Pearl Harbor in 1941 (308 days) and Iraq’s invasion of Kuwait in 1990 (189 days).

But the average time to the market bottom after such events, which also include the terrorist attacks on the U.S. in 2001 and the North Korean missile crisis of 2017, is 21 days, with a full recovery in 45 days, on average.

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Bear Markets Don’t Automatically Equal Recessions

what is a bear marketwhat is a bear market

There are actually two types of bear markets: recessionary and non-recessionary. 

Bear markets often precede or coincide with economic downturns, which is part of what makes them so scary. Happily, there are almost as many instances of past bear markets in which stocks tanked but the economy did not. 

Since 1928, 14 bear markets heralded or happened during recessions, notes Ben Carlson, director of institutional asset management at Ritholtz Wealth Management. However, another 11 bear markets since 1928 had nothing to do with recession. 

Surprise, surprise: Bear markets that occur outside of recessions tend to be shallower and shorter. 

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What Was the Worst Bear Market of All Time?

what is a bear market in stockswhat is a bear market in stocks

Contrary to popular belief, the worst bear market on record was not the 2007-09 crash when the financial crisis ushered in the Great Recession.

Neither was it the tech wreck of 2000 when dot-com stocks collapsed.

The drawn-out decline from the start of 1973 through the fall of 1974 – during which the Arab oil embargo sent oil prices soaring, the so-called Nifty-Fifty stocks sank, and Richard Nixon resigned the presidency – doesn’t take the cake either.

Rather, the bear market that began just ahead of Black Monday that precipitated the Crash of 1929 was the worst one to date.

The bear market from September 1929 to June 1932 resulted in an 86.2% loss for the S&P. Those other historical examples aren’t even close, with losses of 56.8% in 2007-09, 49.1% in 2000-02 and 48.2% in 1973-74.

Indeed, it took the market more than two decades to recover from the 1929-32 slump. Stocks didn’t regain their prior peak until 1954. 

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How Long Do Bear Markets Last?

Calendar and hourglass on office desk table. With copy space. Shot with ISO64.Calendar and hourglass on office desk table. With copy space. Shot with ISO64.

Ask a random sample of investors and some folks might guess that it’s a year or less. Others will figure it’s a minimum of two years. Regardless of duration, a bear market usually feels like it lasts forever.

And yet the average length of a bear market since 1929 is just 9.6 months, according to Ned Davis Research. True, those months will be agonizing, but consider the bright side: bears don’t live as long as bulls. Indeed, since 1929, the average lifespan of a bull market is 2.7 years.

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Good and Bad Investments for Getting Through a Bear Market

Wall Street sign bear market Wall Street sign bear market

What’s the best investment for a bear market? Is it U.S. Treasury bonds? Or perhaps gold or gold funds? How about classically defensive plays including utilities, consumer staples companies and healthcare companies? Or perhaps the highest-growth stocks with the broadest following?

When stocks are in free fall and worries about the economy abound, there’s nothing more soothing than the full faith and credit of the U.S. government. And a “flight to quality” often leads to gains in U.S. Treasury bonds. In 2008, the Bloomberg Barclays US Aggregate Bond Index – a broad-based, high-quality fixed-income benchmark – gained 5%, making it the only U.S. financial asset in the black that year.

Defensive stocks will lose ground in a bear market, but tend to lose less than average, supported by steady demand for their products and, often, generous dividends. Gold, which Kiplinger recommends as a portfolio diversifier only in small amounts, often zigs upward when stocks zag downward.

As for the worst place to hide out in a bear market, it’s the highest-growth stocks with the broadest following. Indeed, these stocks can be among the worst performers in a bear market if their popularity led them to have outsized gains before everything collapsed. The higher they fly, the harder they fall.

Source: kiplinger.com

3 Investment Ideas for Retirees Right Now

Ah, retirement. Picture long, blissful walks on the beach. Or you’re watching the sunset from the balcony of your cruise ship and thinking: This is it – the way life should be. Then you casually check your smartphone to see how your investment accounts are doing and, gasp! You might not be as rich as you thought were.

Retirees are facing major headwinds right now when it comes to investing: Troubles in Ukraine, higher inflation and stock market jitters to name a few. If you are in or near retirement and wondering what you can do with your portfolio, here are three ideas I share with some of my clients:

1. Consumer defensive stocks

I want clients to be as diversified as possible. However, I may tilt their portfolio to consumer defensive stocks for retired or more conservative clients. Defensive stocks generally include utility companies like natural gas and electricity providers, healthcare providers and companies whose products we use day-to-day, like toothpaste companies or food and grocery stores.

According to the Center for Corporate Finance, a leading finance educator to financial professionals, defensive stocks tend to be less volatile than other types of stocks. Less volatility can mean less upside potential, but it can also mean less downside risk, which I find is what many retirees want – less downside (and hopefully better sleep at night).

2. Bonds for retirees – but not just any bonds

I like municipal bonds for retirees. Municipal bonds are issued by states, cities or local municipalities. There are many types of municipal bonds. General Obligation municipal bonds are backed by the taxing authority of the issuer – meaning the state or municipality uses taxes to pay the interest to bondholders. Revenue bonds are municipal bonds backed by a specific project. A toll road uses tolls as the revenue to pay bondholders.

Interest from municipal bonds is usually exempt from federal taxes (though there may be alternative minimum tax (AMT) considerations for certain types of investors). If you live in the state where the bond is issued, the interest may be exempt from state taxes as well.

I like tax-free interest for retirees for several reasons. Retirees may have other sources of taxable income, such as pensions, annuities or rental income, whose income may push them into a higher-than-expected income tax bracket. Retirees may also take money out of 401(k)s and traditional IRAs in retirement for required minimum distributions, which are taxable as ordinary income. Having some tax-free interest may prevent the retiree’s income from creeping up into the next higher tax bracket in retirement.

Findings from the 2019 Municipal Finance Conference suggest there is less risk of default with general obligation bonds than revenue bonds. This is because revenue bonds typically depend on the vitality of a project, which is more uncertain than the state or municipality’s ability to raise taxes to pay for a general obligation bond. For this reason, I may tilt a portfolio more toward general obligation municipal bonds than revenue bonds for retirees.

Municipal bonds are not without risk. There is no guarantee of principal and market value will fluctuate so that an investment, if sold before maturity, may be worth more or less than its original cost. Like any bond, municipal bond prices may be negatively impacted by rising interest rates. Also, municipal bonds may be more sensitive to downturns in the economy – investors may fear a struggling state’s economy may be unable to repay the bond.

For these reasons, I like to be as diversified as possible. I may use short-term muni bonds for more principal stability and less interest rate risk. I might also blend in intermediate-term municipal bonds for additional yield. If the portfolio is larger than $250K I prefer to buy individual municipal bonds for greater customization and tax-loss harvesting opportunities.

3. Beyond stocks and bonds

I like to sprinkle in small amounts of other investments. I call these my “satellites.” Depending on the client’s financial situation and tolerance for risk, I may add in real estate or small amounts of commodities, including coal, gold, corn and natural gas. I generally use mutual funds or exchange-traded funds for the diversification and the relatively low cost. I usually only buy small amounts, maybe 2%-5% of a portfolio, to help diversify the portfolio and provide an inflation hedge.

Inflation is a significant real enemy for retirees. Rising prices erode the purchasing power of a portfolio. One nice thing about owning real estate is the owner often can raise rents, which is a hedge against rising prices. I may buy Real Estate Investment Trusts (REITs) which pool together various properties. I may also use Private REITs, which are not traded on the public market, so they are less liquid, for more sophisticated investors. Private REITs are not suitable for everyone, as they tend to carry higher fees, don’t have published daily prices, but they often provide higher yield than publicly traded REITs.

For more on fighting inflation see my blog post Could Inflation Affect Your Retirement Plans?

Parting thoughts

Investing in retirement is different than investing while working. In retirement, an investor’s time horizon shrinks – they need the money sooner to live off and there’s no paycheck coming in to replenish the account. There is also less time for a retiree’s portfolio to recover from a stock market correction. Because of this, I find retirees fear losses more than they enjoy their gains.

Understanding these differences is important for successful investing in retirement. Using these three approaches – shifting slightly more to consumer defensive stocks, using municipal bonds to help prevent further taxable income, and adding small amounts of inflation-fighting investments like real estate and possibly commodities – in my opinion can all help smooth out the ride for retirees.

The author provides investment and financial planning advice. For more information, or to discuss your investment needs, please click here to schedule a complimentary call.

Disclaimer: Summit Financial is not responsible for hyperlinks and any external referenced information found in this article. Diversification does not ensure a profit or protect against a loss. Investors cannot directly purchase an  index. Individual investor portfolios must be constructed based on the individual’s financial resources, investment goals, risk tolerance, investment time horizon, tax situation and other relevant factors.  

CFP®, Summit Financial, LLC

Michael Aloi is a CERTIFIED FINANCIAL PLANNER™ Practitioner and Accredited Wealth Management Advisor℠ with Summit Financial, LLC.  With 21 years of experience, Michael specializes in working with executives, professionals and retirees. Since he joined Summit Financial, LLC, Michael has built a process that emphasizes the integration of various facets of financial planning. Supported by a team of in-house estate and income tax specialists, Michael offers his clients coordinated solutions to scattered problems.

Investment advisory and financial planning services are offered through Summit Financial LLC, an SEC Registered Investment Adviser, 4 Campus Drive, Parsippany, NJ 07054. Tel. 973-285-3600 Fax. 973-285-3666. This material is for your information and guidance and is not intended as legal or tax advice. Clients should make all decisions regarding the tax and legal implications of their investments and plans after consulting with their independent tax or legal advisers. Individual investor portfolios must be constructed based on the individual’s financial resources, investment goals, risk tolerance, investment time horizon, tax situation and other relevant factors. Past performance is not a guarantee of future results. The views and opinions expressed in this article are solely those of the author and should not be attributed to Summit Financial LLC. Links to third-party websites are provided for your convenience and informational purposes only. Summit is not responsible for the information contained on third-party websites. The Summit financial planning design team admitted attorneys and/or CPAs, who act exclusively in a non-representative capacity with respect to Summit’s clients. Neither they nor Summit provide tax or legal advice to clients.  Any tax statements contained herein were not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state or local taxes.

Source: kiplinger.com

What Is Bond Valuation?

Bond valuation is a way of determining the fair value of a bond. Bond valuation involves calculating the present value of the bond’s future coupon payments, its cash flow, and the bond’s value at maturity (or par value), to determine its current fair value or price. The price of a bond is what investors are willing to pay for it on the secondary market.

When an investor buys a bond from the issuing company or institution, they typically buy it at its face value. But when an investor purchases a bond on the open market, they need to know its current value. Because a bond’s face value and interest payments are fixed, the valuation process helps investors decide what rate of return would make that bond worth the cost.

Here’s a step-by-step explanation of how bond valuation works, and why it’s important for investors to understand.

How Bond Valuation Works

First, it’s important to remember that bonds are generally long-term investments, where the par value or face value is fixed and so are the coupon payments (the bond’s rate of return over time) — but interest rates are not, and that impacts the present or fair value of a bond at any given moment.

To determine the present or fair value of a bond, the investor must calculate the current value of the bond’s future payments using a discount rate, as well as the bond’s value at maturity to make sure the bond you’re buying is worth it.

Some terms to know when calculating bond valuation:

•   Coupon rate/Cash flow: The coupon rate refers to the interest payments the investor receives; usually it’s a fixed percentage of the bond’s face value and typically investors get annual or semi-annual payments. For example, a $1,000 bond with a 10-year term and a 3% annual coupon would pay the investor $30 per year for 10 years ($1,000 x 0.03 = $30 per year).

•   Maturity: This is when the bond’s principal is scheduled to be repaid to the bondholder (i.e. in one year, five years, 10 years, and so on). When a bond reaches maturity, the corporation or government that issued the bond must repay the full amount of the face value (in this example, $1,000).

•   Current price: The current price is different from the bond’s face value or par value, which is fixed: i.e. a $1,000 bond is a $1,000 bond. The current price is what people mean when they talk about bond valuation: What is the bond currently worth, today?

The face value is not necessarily the amount you pay to purchase the bond, since you might buy a bond at a price above or below par value. A bond that trades at a price below its face value is called a discount bond. A bond price above par value is called a premium bond.

How to Calculate Bond Valuation

Bond valuation can seem like a daunting task to new investors, but it is not that onerous once you break it down into steps. This process helps investors know how to calculate bond valuation.

Bond Valuation Formula

The bond valuation formula uses a discounting process for all future cash flows to determine the present fair value of the bond, sometimes called the theoretical fair value of the bond (since it’s calculated using certain assumptions).

The following steps explain each part of the formula and how to calculate a bond’s price.

Step 1: Determine the cash flow and remaining payments.

A bond’s cash flow is determined by calculating the coupon rate multiplied by the face value. A $1,000 corporate bond with a 3.0% coupon has an annual cash flow of $30. If it’s a 10-year bond that has five years left until maturity, there would be five coupon payments remaining.

Payment 1 = $30; Payment 2 = $30; and so on.

The final payment would include the face value: $1,000 + $30 = $1,030.

This is important because the closer the bond is to maturity, the higher its value may be.

Step 2: Determine a realistic discount rate.

The coupon payments are based on future values and thus the bond’s cash flow must be discounted back to the present (thanks to the time value of money theory, a future dollar is worth less than a dollar in the present).

To determine a discount rate, you can check the current rates for 10-year corporate bonds. For this example, let’s go with 2.5% (or 0.025 as a decimal).

Step 3: Calculate the present value of the remaining payments.

Calculate the present value of future cash flows including the principal repayment at maturity. In other words, divide the yearly coupon payment by (1 + r)t, where r equals the discount rate and t is the remaining payment number.

$30 / (1 + .025)1 = $29.26

$30 / (1 + .025)2 = 28.55

$30 / (1 + .025)3 = 27.85

$30 / (1 + .025)4 = 27.17

$1030 / (1 + .025)5 = 1,004.87

Step 4: Sum all future cash flows.

Sum all future cash flows to arrive at the present market value of the bond : $1,117.70

Understanding Bond Pricing

In this example, the price of the bond is $1,117.70, or $117.70 above par. A bond’s face or par value will often differ from its market value — and in this case its current fair value (market value) is higher. There are a number of factors that come into play, including the company’s credit rating, the time to maturity (the closer the bond is to maturity the closer the price comes to its face value), and of course changes to interest rates.

Remember that a bond’s price tends to move in the opposite direction of interest rates. If prevailing interest rates are higher than when the bond was issued, its price will generally fall. That’s because, as interest rates rise, new bonds are likely to be issued with higher coupon rates, making the new bonds more attractive. So bonds with lower coupon payments would be less attractive, and likely sell for a lower price. So, higher rates generally mean lower prices for existing bonds.

The same logic applies when interest rates are lower; the price of existing bonds tends to increase, because their higher coupons are now more attractive and investors may be willing to pay a premium for bonds with those higher interest payments.

Is Investing in Bonds Right for You?

Investing in bonds can help diversify a stock portfolio since stocks and bonds trade differently. In general, bonds are seen as less risky than equities since they often provide a predictable stream of income. All investors should at least consider bonds as an investment, and those with a lower risk tolerance might be better served with a portfolio weighted highly in bonds.

Performing proper bond valuation can be part of a solid research and due diligence process when attempting to find securities for your portfolio. Moreover, different bonds have different risk and return profiles. Some bonds — such as junk bonds and fixed-income securities offered in emerging markets — feature higher potential rates of return with greater risk. “Junk” is a term used to describe high-yield bonds. You can take on higher risk with long-duration bonds and convertible bonds. Some of the safest bonds are short-term Treasury securities.

You can also purchase bond exchange-traded funds (ETFs) and bond mutual funds that own a diversified basket of fixed-income securities.

The Takeaway

Bond valuation is the process of determining the fair value of a bond after it’s been issued. In order to price a bond, you must calculate the present value of a bond’s future interest payments using a reasonable discount rate. By adding the discounted coupon payments, and the bond’s face value, you can arrive at the theoretical fair value of the bond. A bond can be priced at a discount to its par value or at a premium depending on market conditions and how traders view the issuing company’s prospects.

Owning bonds can help add diversification to your portfolio. Many investors also find bonds appealing because of their steady payments (one reason that bonds are considered fixed-income assets). When you open an online brokerage account with SoFi Invest, you can build a diversified portfolio of individual stocks as well as exchange-traded bond funds (bond ETFs). You can also invest in a range of other securities, including fractional shares, IPOs, crypto, and more. Also, SoFi members have access to complimentary professional advice. Get started today!


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What Is a Stock Market Benchmark? – How to Measure Index Performance

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Additional Resources

When researching investment opportunities or financial markets, you often hear something compared to something called a benchmark. You might see statements like “outperforming benchmark returns” or “lagging the benchmark.” 

Based on context, we can surmise that these terms mean an investment is performing better or worse than something, but what exactly is that something? What does a stock market benchmark mean for the average investor? 

Find out what benchmarks are and how you can use them to your advantage when investing.


What Is a Stock Market Benchmark (Index)?

A stock market benchmark, sometimes called a market index or benchmark index, is a carefully selected group of stocks meant to measure the overall performance of a group of equities or the market as a whole. Benchmarks are used as a standard or baseline against which specific investments or a portfolio’s performance can be measured.


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History of the Stock Market Benchmark

The first market index was created by Charles Dow and Edward Jones in 1884. The index was called the Dow Jones Transportation index and tracked the performance of the large railroad companies that were seen as a reflection of the United States economy at the time. 

That index evolved to become one of the best-known benchmarks, the Dow Jones Industrial Average, which today includes 30 of the largest industrial companies that represent the U.S. economy.  

Another classic market index was created by the Standard Statistics Company in 1923. Within a few years, the company developed 90 indexes that would be computed on a daily basis. 

The Standard Statistics Company evolved to become one of the biggest names on Wall Street: Standard & Poor’s, or S&P. Through a merger, the company’s name recently changed once again to S&P Dow Jones Indices. The company’s flagship index, the S&P 500 composite, is the most widely used benchmark in the U.S. today. 


Types of Benchmarks

Over the past century or so, benchmarks have become a crucial part of the complex machine that is the stock market. However, it’s important that you use the appropriate benchmark for what you plan to measure and compare — more on this later. 

There are several types of benchmarks investors use, each measuring different market segments. The most common types of benchmarks are:

Market Capitalization-Focused

The central theme to some indexes is market cap, or size of the constituents listed within it. There are four primary types of market-cap-focused indexes:

1. Blue Chips

A blue-chip benchmark is designed to track the results of the largest, most successful companies on the market. These companies are known for producing relatively predictable gains and revenue growth. 

The flagship blue-chip index in the United States is the Dow Jones Industrial Average. The Dow tracks 30 of the largest and most successful publicly traded companies in the U.S. 

2. Large-Cap

Large-cap stocks represent companies worth $10 billion or more. These are some of the largest companies in the world and tend to be leaders within their respective industries. Large-cap indexes list a diverse group of stocks in this category, tracking and measuring the performance of very large companies. 

The most popular large-cap index is the S&P 500, which tracks the 500 largest publicly traded companies in the U.S. It represents around 85% of the country’s total market cap.  

3. Mid-Cap

Mid-cap stocks represent companies worth between $2 billion and $10 billion. These companies tend to be just finding their footing in their respective industries. They’re not quite as predictable as large-cap stocks, but offer the potential for meaningful growth as these companies continue to grow and evolve. 

Mid-cap indexes are made up of a diversified list of these companies, giving investors the ability to track the performance of mid-sized companies. 

One of the most popular benchmarks in this category is the Russell Midcap Index, which is made up of the 800 smallest companies on the Russell 1000. 

4. Small-Cap

Small-cap indexes include stocks representing companies worth between $500 million and $2 billion. 

These companies are often in the beginning to intermediate stages of business, or may be experienced players in relatively small markets. A small-cap benchmark shows investors how smaller publicly traded companies are faring.

One of the most popular small-cap indexes is the S&P 600, the small-cap index also maintained by Standard & Poor’s that includes 600 smaller U.S. companies.. 

Sector-Focused

There are several sectors across the stock market. Some of the most popular include technology, biotechnology, energy, and consumer goods. Each sector is represented by a long list of benchmarks. 

One of the best examples of a sector-focused index is the Nasdaq. Known as a tech-heavy index, a large percentage of its constituents are within the technology and biotechnology sectors. 

Strategy-Focused

Some indexes have a central focus on an investment strategy. These usually fall into one of the following categories:

  • Growth Stocks. Growth-focused indexes track a diversified group of stocks known for producing compelling revenue, earnings, and price growth. One of the most popular in this category is the Russell 3000 Growth Index. 
  • Value Stocks. Value-focused indexes track a diversified group of stocks that are believed to be undervalued when compared to their peers. Investors believe that by investing in these stocks, they’ll outperform the market as the stocks recover from recent lows. One of the most popular in this category is the S&P 500 Value Index. 
  • Income Stocks. Income-focused indexes track stocks known for paying the highest dividends. One of the most popular benchmarks in this category is the S&P 500 Dividend Aristocrats. 

Asset Class Focused

Stocks aren’t the only asset class on the market, nor are they the only class of assets with a benchmark index to track them. Indexes exist to track bonds, commodities, futures, and more. If it’s an asset class, there’s likely an index that covers it.

A great example of indexes in this category is the S&P U.S. Treasury Bond Index, which tracks the performance of a highly diversified group of bonds issued by the U.S. Treasury.  

Risk-Focused

Risk-focused indexes are largely used to determine the level of volatility and variability in the market, helping investors understand what they’re up against in the battle between the bears and bulls. 

One of the most popular risk-focused indexes is the CBOE Volatility Index (VIX). 


How to Use a Benchmark

Benchmarks have become incredibly valuable tools for investors. Here are the different ways to use them:

Index Investing

With so many people tracking benchmark indexes, it was only a matter of time before they were used as investments themselves. These days, there’s a long list of index funds, which are mutual funds or exchange-traded funds (ETFs) that make investments that track the movement of an underlying index. These funds are based on an underlying index instead of the investment decisions of a fund manager. 

The index investment strategy (indexing) is centered around investing in these funds. Individuals investing in a benchmark index’s performance benefit greatly from heavy diversification. Indexing removes much of the research and decision-making from the process of managing investment portfolios. Index investors know the fund’s performance is likely to be very similar to that of the underlying index. 

Measure Portfolio Performance

Another common use for benchmarks is to measure the performance of your investment portfolio. All you need to do is compare your portfolio’s performance to the appropriate benchmark to see how well you’re stacking up. 

For example, if your portfolio is tech-heavy, consider comparing your performance to that of the Nasdaq. If your portfolio is outpacing the index, you’re in good shape. If it’s underperforming a comparable benchmark, it’s time to adjust your holdings because there’s more money to be made elsewhere. 

Gauge Economic Performance

Stock market indexes aren’t just a tool for understanding the performance of different segments of the market. Widespread benchmarks that focus on the market as a whole also tell you quite a bit about the state of the economy. 

After all, the economy and equities market are closely correlated. 

When economic conditions are good, stocks tend to be up. Conversely, when economic conditions look grim, stocks tend to be down. Paying attention to the movement in the largest flagship benchmarks for any economy will paint a picture of that economy’s health. 

Gauge Market Performance

The stock market is known for moving through a series of peaks and valleys. Benchmarks can be used to give you a clear picture of the market and market sentiment. 

In the U.S., the best benchmark for this is the S&P 500 index. That’s because the index lists 500 of the largest publicly traded companies in the U.S., representing 85% of the country’s market cap. 

With such a large representation of the domestic market, when the S&P is up, you can safely assume that stocks are generally trending in the upward direction, and vice versa. 

Measure Historical Performance

History tends to repeat itself. Although past performance isn’t always indicative of future results, the world’s most successful investors often use historical performance as a way to predict the returns they may generate. 

Tracking benchmarks throughout history gives you an idea of how the index has performed over time, the levels of volatility generally experienced, and the risk and reward associated with investing in the section of the market measured by the index.  

Determine Market Timing

Warren Buffett famously told investors to buy when fear is high and sell when greed sets in. Benchmarks can tell you when those emotions are taking hold in the market. 

CNNMoney created the Fear & Greed Index to help investors measure market sentiment when determining the best time to buy and sell stocks. Many other benchmarks can also be used to determine market sentiment to help you decide when to make your moves. 


Final Word

Stock market benchmarks have been around for more than a century and have proven to be valuable tools for investors and economists alike. Whether you compare your portfolio to a benchmark during rebalancing or invest directly in index funds, these tools are integral in the search of stock market success. 

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Joshua Rodriguez has worked in the finance and investing industry for more than a decade. In 2012, he decided he was ready to break free from the 9 to 5 rat race. By 2013, he became his own boss and hasn’t looked back since. Today, Joshua enjoys sharing his experience and expertise with up and comers to help enrich the financial lives of the masses rather than fuel the ongoing economic divide. When he’s not writing, helping up and comers in the freelance industry, and making his own investments and wise financial decisions, Joshua enjoys spending time with his wife, son, daughter, and eight large breed dogs. See what Joshua is up to by following his Twitter or contact him through his website, CNA Finance.

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The 5 Best High-Yield (Junk) Bond Funds to Buy in 2022

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A well diversified portfolio includes a mix of multiple assets. One option that’s received quite a bit of attention, both good and bad, is high-yield junk bonds. These are bonds of companies with less than ideal credit ratings. 

The interest rates, or coupon rates, junk bonds pay are typically higher than more traditional investment-grade corporate bonds because of the higher risk of these issuers defaulting. 

Because of the higher default risk, investors who don’t have adequate time or market knowledge to choose junk bonds should consider investing in high-yield bond funds rather than individual opportunities. Mutual funds and exchange-traded funds (ETFs) focused on high-yield bonds offer diversified access to these fixed-income assets that’s easy for everyday investors to tap into. 

The Best High-Yield (Junk) Bond Funds

Our pick for the best high-yield junk bond fund on the bond market offers a high level of diversification, access to a wide range of assets, a compelling historic performance, and a strong management team. 


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Other bond funds on this list shine in their own respect. Some offer access to municipal bonds while others are the best way to tap into emerging markets or offer more active management. 


1. Best Overall: iShares iBoxx High Yield Corporate Bond ETF (HYG)

Boasting net assets under management (AUM) of over $21 billion, the iShares iBoxx High Yield Corporate Bond ETF is arguably the best junk bond fund on the market. It doesn’t hurt that iShares has one of the most capable management teams on Wall Street today.

The fund focuses its exposure on high paying bonds from U.S.-based companies, keeping investments domestic. Moreover, as one of the most popular high-yield funds on the market, investors won’t have any liquidity issues when they decide to exit the investment. 

The fund’s performance has been stellar as well. Iit has only spent three years in the red since its inception in 2007 and has a Morningstar rating of three out of five stars. 

With an expense ratio of 0.48%, the fees associated with investing in the fund are slightly above the industry average, but in this case it’s easy to argue the cost is worth it. 

The HYG fund lands as the best overall high-yield fund on this list for the same reasons it is one of the most popular junk bond funds on the market today. 


2. Best for Emerging Markets: VanEck Emerging Markets High Yield Bond ETF (HYEM)

If you only invest in domestic assets, you’re missing out on about half of the opportunities the global financial markets have to offer. As such, mixing in international assets — especially those from high-growth, emerging markets — is a compelling idea. 

The VanEck Emerging Markets High Yield Bond ETF is a simple way to do just that. 

With $1.2 billion under management, the fund isn’t the largest on this list, but it’s definitely a great way to access junk bonds from emerging markets. The fund is made up of a diversified list of high-yield bonds from non-sovereign emerging markets around the world. 

The fund has had a rocky history, being up five years and down three. But there’s a strong argument that with an overvalued market in the United States, investors will start looking more closely at opportunities in emerging markets, which could give this ETF a boost. 

The fund currently has a three out of five star rating at Morningstar and a 0.40% expense ratio, suggesting it offers access to reasonable growth with fees just below the industry average. 


3. Best for Tax-Exempt Investments: Vanguard Tax-Exempt Fund Investor Shares VWAHX 

If you’re looking for access to high-yield bonds but want to enjoy the tax benefits of tax-exempt bonds, the Vanguard Tax-Exempt Fund (VWAHX) is for you. 

The fund invests 80% of its assets in investment-grade municipal bonds, which offer tax benefits. The other 20% of the asset allocation in the fund is invested in non-investment-grade bonds, — junk bonds — in order to increase the level of income the fund generates. 

With more than $18 billion in assets under management, the VWAHX fund is one of the more popular high-income funds on the market today. It also boasts a five out of five star Morningstar rating, suggesting it’s one of the better performing funds in its category. All told, the fund has only closed eight years in the red since its inception in 1979 — an impressive feat. 

Vanguard is known for low expense ratios, and with a ratio of just 0.17%, the VWAHX fund doesn’t disappoint. The low costs help you hold onto even more of your tax-exempt earnings.


4. Best for Active Management: Invesco High Yield Bond Factor ETF (IHYF)

The vast majority of ETFs — both those centered around stocks and those investing inbonds — are passively managed. Passive ETFs track the movements of an underlying benchmark in an attempt to achieve the same results. 

If you’re more interested in an actively managed option, the Invesco High Yield Bond Factor ETF might be the best fit for you. 

The fund is managed by the professionals at Invesco, so you can trust your money’s in the right hands. The fund has multiple active traders that are constantly looking for opportunities in the high-yield bond market. 

The fund is very new and not yet highly traded, which could lead to liquidity issues. But it’s had a stellar performance, ending its first year well into the green. At the same time, its 0.39% expense ratio makes it one of the lower-cost actively managed funds on the market today. 


5. Best for Diversification: iShares Broad USD High Yield Corporate Bond ETF (USHY)

This list started with an iShares bond fund and it’s going to end with one.This particular fund was chosen because of the significant diversification found in its portfolio. Although most bond funds are diversified, the iShares Broad USD High Yield Corporate Bond ETF takes it to the next level by tracking a broad index of the entire U.S. high-yield corporate bond market, offering a more robust shield against risk. 

With an expense ratio of 0.22%, it’s one of the lowest cost funds on this list as well. 

The performance of the fund has been compelling throughout its short history, and if the beginning of 2022 is any indication, this trend is likely to continue. All told, if you’re looking for a healthy mix of high-yield junk bonds to add to your list, the USHY fund is a great option. 


Methodology: How We Select the Best High-Yield Junk Bond Funds

We used six key metrics when determining which bond funds would make this list. We focused on highly diversified funds that come with a relatively low cost, include a mix of credit quality to provide safety through diversification, have a history of solid performance, produce compelling income, and offer at least some level of liquidity. 

Here are the criteria we used to find the best junk bond funds:

Expense Ratio

The expense ratio of a fund is the percentage of your holdings you’ll pay each year in fees. High expense ratios have the potential to cut deep gashes into your profitability. 

So, we paid close attention to expenses and only listed funds that offered lower expense ratios.

Credit Quality

Junk bonds are defined by a credit rating of BBB or lower, offering investors higher returns in exchange for accepting increased credit risk. 

However, the best high-yield funds invest in a mix of both junk bonds and investment-grade bonds. This gives investors a way to tap into the larger gains offered by junk bonds while keeping their portfolios relatively safe. 

When choosing bond funds to list, we looked closely at the asset allocation within the portfolio and gave heavier weight to funds that offered a healthy mix of both junk and investment-grade bonds. 

Historic Performance

Investing is all about making money, and we didn’t want to point you to a bond fund that was going in the wrong direction. We looked at the historic performance of many comparable bond funds to determine which of the options should claim the top positions. 

Asset Allocation

Some investors prefer a mix of domestic and international assets. Some prefer a mix of short-term and long-term assets. Some want to be as diversified as possible. 

We attempted to address the needs of all investors by including funds with allocations to assets in a wide range of categories. 

Income

The reason investors want to invest in junk bonds is for access to increased income. When determining which funds deserved to be listed, we considered the dividends each pays investors. 

Liquidity

Even if an investment grows dramatically in value, it’s not worth much if you can’t get out of it. Liquidity represents the ease of turning the investment into cash when you decide it’s time to exit your position. 

When curating this list, we looked at the daily trading volume of each ETF we assessed. Although some of the options on the list have relatively low trading value, investors who wish to exit their positions should be able to do so within at least a 24-hour period. 


High-Yield Junk Bond Funds FAQs (Frequently Asked Questions)

It’s only natural if you have questions about junk bond funds. Here’s what you need to know:

Do Bond Funds Pay Dividends?

Like other bonds, junk bonds offer income by paying interest, or coupon rates, to investors. ETFs hold a variety of bonds and distribute the income generated from them to investors as dividends. 

Are High-Yield Bond Funds a Good Investment?

The answer to this question depends on your investment objectives and your appetite for risk. Junk bonds come with increased credit risk and should only be used by investors who are comfortable accepting that risk. 

With that said, if you’re not happy with the returns offered by traditional bonds in your investment portfolio, junk bonds do offer higher yields. As with any investment decision, it’s important to weigh the chance for higher returns against your risk appetite and investment objectives before diving in. 

Are Junk Bonds Risky?

Junk bonds are riskier than their investment-grade counterparts because these companies have had credit difficulties or little to no use of credit in the past. As such, the borrowers, or the issuers behind these bonds, aren’t the best candidates for lenders. They stand a higher chance of defaulting than do well established companies with excellent credit ratings.

Moreover, junk bonds experience more volatility than investment-grade bonds, further adding to the risk of the investment. The trade-off is in the potential to generate higher returns. 

Why Would Investors Buy a Junk Bond?

Investors are willing to accept the increased risk of investing in junk bonds because these bonds offer the highest returns among bonds. 

Is It Safe to Buy BBB Bonds?

BBB is the highest credit rating that still earns the label of “junk bonds.” If you’re going to invest in this category and you’re new to high-yield bond investing, this is likely the safest place for you to start. 

Should I Invest in Fallen Angels?

Fallen angels are companies that have recently experienced financial troubles. In some cases these companies make a quick recovery, and in others, bankruptcy may be around the corner. 

Before investing in a fallen angel, do some research to determine why the company has found itself in financial trouble. You can judge whether that financial trouble will be resolved in short order or poses a more serious risk to the company’s future viability. 


How to Choose the Best High-Yield Junk Bond Fund

Choosing a high-yield fund is a relatively simple process. There are many junk bond funds that offer a healthy mix of returns and safety thanks to diversification. When you invest in any bond fund, any one bond issuer defaulting won’t bring the value of your investment to zero.

When comparing your options for high-yield bond funds, consider the same criteria we used to select our favorites: performance, expenses, liquidity, asset allocation, income, and mix of credit quality. 

As with any other investment, when investing in these funds, a little research goes a long way. 

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GME is so 2021. Fine art is forever. And its 5-year returns are a heck of a lot better than this week’s meme stock. Invest in something real. Invest with Masterworks.

Joshua Rodriguez has worked in the finance and investing industry for more than a decade. In 2012, he decided he was ready to break free from the 9 to 5 rat race. By 2013, he became his own boss and hasn’t looked back since. Today, Joshua enjoys sharing his experience and expertise with up and comers to help enrich the financial lives of the masses rather than fuel the ongoing economic divide. When he’s not writing, helping up and comers in the freelance industry, and making his own investments and wise financial decisions, Joshua enjoys spending time with his wife, son, daughter, and eight large breed dogs. See what Joshua is up to by following his Twitter or contact him through his website, CNA Finance.

Source: moneycrashers.com

5 Ways to Avoid Taxes on Social Security Income

Social Security and money
J.J. Gouin / Shutterstock.com

The Tax Cuts and Jobs Act of 2017 changed a lot of rules, but one thing remains the same: It is exceedingly difficult to evade the long reach of the taxman.

That’s even true of Social Security benefits. Many people know that if you work while collecting benefits before reaching your full retirement age, it can result in a reduced benefit. But earn too much money — even by simply making withdrawals from some types of retirement plans — and you also can end up owing income taxes on your Social Security benefits.

According to the Social Security Administration (SSA):

“Some of you have to pay federal income taxes on your Social Security benefits. This usually happens only if you have other substantial income in addition to your benefits (such as wages, self-employment, interest, dividends and other taxable income that must be reported on your tax return).”

Whether you owe taxes on these benefits depends on your “combined income.” The SSA defines this as the sum of:

  • Your adjusted gross income
  • Your nontaxable interest
  • One-half of your Social Security benefits

If you file an individual tax return and your combined income is between $25,000 and $34,000, you may owe income taxes on up to 50% of your Social Security benefits. Earn more than that, and up to 85% of your benefits could be subject to taxes.

If you file a joint return and your combined income is between $32,000 and $44,000, you may owe taxes on up to 50% of your benefits. Earn more than that, and up to 85% could be taxable.

Fortunately, there are ways to reduce your income and reduce — or even avoid paying — taxes owed on your Social Security benefits. They include:

1. Delay collecting your benefits

Retiree with money and a clock.
Just dance / Shutterstock.com

Choosing to delay collecting Social Security benefits until your full retirement age — or even beyond — might be the simplest way to avoid paying taxes on your Social Security benefits, at least for a while.

Waiting to file for benefits also means you will get a bigger check each month once you finally do start collecting.

For more on the pros and cons of delaying Social Security benefits, check out:

2. Don’t work, or work less, in retirement

Seniors happy and relaxed in retirement
Monkey Business Images / Shutterstock.com

Every dollar you earn doing part-time work can push you a little closer to owing taxes on your Social Security benefits. Of course, it’s silly to quit a job you enjoy — or need — simply to trim your tax bill.

But if the job is a low-wage pain in the neck that only provides you with a modest financial benefit, you might be better off — at least emotionally — quitting so that you can reduce your income for the tradeoff of lowering or eliminating taxes on your Social Security benefits.

3. Avoid municipal bonds

Senior woman preparing for retirement
insta_photos / Shutterstock.com

A lot of people turn to municipal bonds as a way to lower their tax bill. Interest earned from these types of bonds typically is not subject to income taxes.

However, municipal bond interest is included in the formula that determines whether you will pay taxes on your Social Security benefits.

As MunicipalBonds.com states:

“When it comes to taxing Social Security benefits, tax-free municipal bond interest can become a ‘stealth tax’ that quietly eats away at income. Bondholders should be aware of these potential tax consequences when deciding between tax-free muni bonds and other kinds of fixed-income investments.”

Consider consulting with a financial adviser to help you determine whether municipal bond holdings might cause such trouble for you.

4. Withdraw money from a Roth account

investing
designer491 / Shutterstock.com

If you have socked away money in a traditional IRA or 401(k) plan, expect Uncle Sam to come calling during your retirement. After years of deferring taxes on those contributions, the bill is due once you begin making withdrawals on the money.

Additionally, these withdrawals will boost your combined income, which could make the difference in whether or to what extent your benefits are taxed.

One way to avoid such taxation is to withdraw only as much money as the government obligates you to do each year — known as the required minimum distribution (RMD) — and to take any additional cash that you need from a Roth IRA or Roth 401(k) plan, if you have one. No taxes are due on Roth distributions, and these withdrawals will not impact your combined income.

However, there are many good reasons not to withdraw money from a Roth account — including that RMDs do not apply to Roth IRAs.

So, consult with a tax professional before making this decision. A pro can help you decide whether withdrawing money from a Roth account — or making a combination of withdrawals from both a Roth and a traditional account — is the best strategy for you.

5. Distribute your RMD to a charity

Senior man working on a laptop
Monkey Business Images / Shutterstock.com

Giving money to charity is a great way to help make the world a better place. While doing good for others, you can also lower the odds that your Social Security benefit will be taxed.

If you are at least 70½, you can take up to $100,000 of your annual required minimum distribution, give it to a charity and avoid income taxes on the money. This is known as a qualified charitable distribution.

Since the money is not taxed, it will not boost your adjusted gross income. But you need to be aware of some key rules.

For starters, the money must be directed to a qualified 501(c)(3) organization.

Also, you cannot use funds from a 401(k) or other employer-sponsored plan to make this type of distribution. There are ways around this — such as rolling over money to an IRA — but again, this strategy should not be used without consulting your tax adviser.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Source: moneytalksnews.com

Invest in I Bonds And Earn 9.62% Risk-Free

Freaking out over inflation?

If you want a nearly risk-free way to grow your cash, Uncle Sam has an attractive offer for you.

The U.S. government announced a new eye-popping 9.62% interest rate for Series I savings bonds now through October 2022 — the highest interest rate ever for these investments.

Series I bonds — also known as inflation bonds or I bonds — are the only inflation-protected security sold by the Treasury Department.

With inflation at a 40-year high, there’s literally never been a better time to buy I bonds.

At 9.62%, I bonds are not only outpacing inflation, they’re earning more than the stock market so far this year — and even more than bitcoin. (The stock market is down 13.8% in 2022 and bitcoin is down 18.5%).

At 9.62%, these bonds offer a rate about 13 times higher than what you’d currently earn from high-yield savings accounts.

And since I bonds are backed by the full faith and credit of the U.S. government, your risk of losing money is basically zero. (Historically, the U.S. government has never defaulted on bonds.)

But before you rush to buy I bonds, there are a few things you need to know.

What Are I Bonds and How Do They Work?

I bonds are issued by the U.S. government and they can be purchased at TreasuryDirect.gov.

The interest rate on I bonds adjusts twice a year (in May and November) based on changes in the Consumer Price Index.

I bond rates actually combine two different figures:

  • A semiannual (twice a year) inflation rate that fluctuates based on changes in the Consumer Price Index.
  • A fixed rate of return, which remains the same throughout the life of the bond. (It’s currently at 0%.)

In April 2022, inflation increased 8.5% year-over-year, the biggest surge in more than 40 years. As inflation keeps rising, so does the variable rate on I bonds:

  • May 2021:  3.34%
  • November 2021: 7.12%
  • May 2022: 9.62%

While new buyers will enjoy 9.62% on these bonds for now, that rate can change after six months. It goes up or down, depending on national inflation.

Pro Tip

Check out this chart from the U.S. Treasury to see how I bond rates have changed over time. 

On November 1, 2022, The Treasury will calculate a new variable rate. If inflation continues to heat up, you could get more interest on your I bonds. If it cools off, your variable rate declines.

But you won’t lose money if the interest rate goes down — you just won’t earn as much. (The I bond inflation rate in May 2015, for example, was just 0.24%.)

New I bond buyers will miss out on the fixed rate enjoyed by purchasers in years past. That’s because the current fixed rate for I bonds is 0% — where it’s been since May 2020.

Since this half of the bond rate is locked in, your 0% fixed rate won’t increase over time. Instead, all the money you make from an I bond purchased today will be interest earned from the inflation-based semiannual rate.

Must-Know Facts About I Bonds

While I bonds are virtually risk-free, they still come with rules and restrictions.

First, these are 30-year bonds. Your cash isn’t locked up for three decades but you absolutely can’t access your money for at least 12 months. The government won’t allow you to cash out an I bond any sooner.

After a year, you can cash it in, but you’ll lose three months worth of interest if you cash out less than five years after purchase.

I Bond Fast Facts

  • I bonds are sold at face value (no fees, sales tax, etc.)
  • They earn interest monthly that is compounded twice a year.
  • The bond matures (stops earning interest) after 30 years.
  • You have to wait at least one year to cash in I bonds.
  • You’ll lose three months of interest payments if you cash in a bond you’ve owned for less than five years.
  • Minimum investment is $25.
  • Maximum digital I bond investment is $10,000 per person, per year.
  • The value of your I bond will never drop below what you paid for it.
  • It’s exempt from state and municipal taxes.
Pro Tip

You can also buy up to $5,000 in paper I bonds per year. The only way to get paper bonds is at tax time with your federal refund. 

Speaking of taxes, you can choose to either pay federal income tax on the bond each year or defer tax on the interest until the bond is redeemed.

You may be able to forgo paying federal tax altogether by using the bonds for higher education costs. Your adjusted gross income needs to be under $83,200 for a single filer in 2021 to qualify for this education tax perk, or $124,800 for couples.

How to Purchase I Bonds

The fastest and easiest way to purchase I bonds is on the TreasuryDirect website. It’s a free and secure platform where you can view all your account information, including pending transactions.

You can also give I bonds as a gift.

Another option is buying I bonds at tax time with your refund. You can buy I bonds in increments of $50 this way. You don’t need to put your entire refund in bonds — you can earmark just part of it.

FYI: You can’t resell I bonds and you must cash them out directly with the U.S. government. Also, only U.S. citizens, residents and employees can purchase these bonds.

The Treasury also offers a payroll savings option, which lets you purchase electronic savings bonds with money deducted from your paycheck.

Who Are I Bonds Right For?

There are a few ways investors can benefit from purchasing I bonds at the current 9.62% rate.

Scenarios When It Makes Sense to Buy I Bonds

  • You’re worried about inflation and stock market fluctuations.
  • You want to diversify your stock-heavy portfolio with a safe investment.
  • You’re nearing retirement and are shifting your portfolio toward bonds.
  • You want to save money for a child’s future college expenses.
  • You’re saving up for a big purchase that’s at least a year away, and want to earn a little interest on your cash in the meantime.

Because I bonds can’t be cashed in for a year, it’s important to keep enough money in your cash emergency fund to cover immediate expenses.

I bonds won’t make you rich. But for everyday Americans, these investments offer a safe way to grow your cash and hedge against inflation.

Rachel Christian is a Certified Educator in Personal Finance and a senior writer for The Penny Hoarder. 

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Source: thepennyhoarder.com