10 States With the Highest Sales Taxes

Before you embark on a shopping spree in any of the 10 worst states for sales taxes featured here, you’ll want to make extra room in your budget. Our biggest offender clocks in at 9.55% once both state and local sales taxes are factored in (continue reading our round-up to find out which state is the priciest culprit).

However, retirees and other relocators shouldn’t judge a state by its sales tax alone. While this expense may be costlier in some areas, residents in states with a high sales tax may be able to reap the benefits of other tax-related perks, such as not having to pay state income tax.

Got your attention? Take a look at our list to find out which states will nickel-and-dime you the most on everyday purchases.

Sales tax values are for 2020 and were compiled by the Tax Foundation. Income tax brackets are for the 2020 tax year. Property tax values are for 2019.

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10. New York

The state of New York.The state of New York.

Overall Rating for Middle-Class Families: Least tax-friendly

State Sales Tax: 4% state levy. Localities can add as much as 4.875%, and the average combined rate is 8.52%, according to the Tax Foundation. In the New York City metro area, there is an additional 0.375% sales tax to support transit. Clothing and footwear that cost less than $110 (per item or pair) are exempt from sales tax. Groceries and prescription drugs are exempt, too. Motor vehicle sales are taxable, though.

Income Tax Range: Low: 4% (on up to $8,500 of taxable income for single filers and up to $17,150 for married couples filing jointly); High: 8.82% (on taxable income over $1,070,550 for single filers and over $2,155,350 for married couples filing jointly).

Starting in 2021, the top rate is 10.9% on taxable income over $25 million (regardless of filing status).

New York City and Yonkers imposed their own income tax. A commuter tax is also imposed on residents of New York City, as well as on residents of Rockland, Nassau, Suffolk, Orange, Putnam, Dutchess, and Westchester Counties.

Property Taxes: In the Empire State, the median property tax rate is $1,692 per $100,000 of assessed home value. 

For details on other state taxes, see the New York State Tax Guide for Middle-Class Families.

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9. California

The state of California.The state of California.

Overall Rating for Middle-Class Families: Most tax-friendly

State Sales Tax: 7.25% state levy. Localities can add as much as 2.5%, and the average combined rate is 8.68%, according to the Tax Foundation. Groceries and prescription drugs are exempt from these taxes, but clothing and motor vehicles are taxed. 

Income Tax Range: Low: 1% (on up to $17,864 of taxable income for married joint filers and up to $8,932 for those filing individually); High: 13.3% (on more than $1,198,024 for married joint filers and $1 million for those filing individually).

Property Taxes: If you’re planning to buy a home in the Golden State, the median property tax rate is $729 per $100,000 of assessed home value. 

For details on other state taxes, see the California State Tax Guide for Middle-Class Families.

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8. Kansas

The state of Kansas.The state of Kansas.

Overall Rating for Middle-Class Families: Least tax-friendly

State Sales Tax: 6.5% state levy. Localities can add as much as 4%, and the average combined rate is 8.69%, according to the Tax Foundation. These rates also apply to groceries, motor vehicles, clothing and prescription drugs. 

Income Tax Range: Low: 3.1% (on $2,501 to $15,000 of taxable income for single filers and $5,001 to $30,000 for joint filers); High: 5.7% (on more than $30,000 of taxable income for single filers and more than $60,000 for joint filers).

Property Taxes: Kansans who own their homes pay a median property tax rate of $1,369 per $100,000 of assessed home value. 

For details on other state taxes, see the Kansas State Tax Guide for Middle-Class Families.

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7. Illinois

The state of Illinois.The state of Illinois.

Overall Rating for Middle-Class Families: Least tax-friendly

State Sales Tax: 6.25% state levy. Localities can add as much as 4.75%, and the average combined rate is 8.82%, according to the Tax Foundation. Food and prescription drugs are taxed at only 1% by the state. Clothing and motor vehicles are fully taxed.

Income Tax Range: There is a flat rate of 4.95% of federal adjusted gross income after modifications.

Property Taxes: For homeowners in Illinois, the median property tax rate is $2,165 per $100,000 of assessed home value — the second highest in our round-up.

For details on other state taxes, see the Illinois State Tax Guide for Middle-Class Families.

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6. Oklahoma

The state of Oklahoma.The state of Oklahoma.

Overall Rating for Middle-Class Families: Not tax-friendly

State Sales Tax: 4.5% state levy. Localities can add as much as 7%, and the average combined rate is 8.95%, according to the Tax Foundation. Prescription drugs are exempt and motor vehicles are taxed at a rate of 1.25% (a 3.25% excise tax also applies). Grocery items and clothing are taxable at 4.5%, plus local taxes. 

Income Tax Range: Low: 0.5% (on up to $1,000 of taxable income for single filers and up to $2,000 for married joint filers); High: 5% (on taxable income over $7,200 for single filers and over $12,200 for married joint filers).

Property Taxes: For Oklahomans who own a home, the median property tax rate is $869 per $100,000 of assessed home value. 

For details on other state taxes, see the Oklahoma State Tax Guide for Middle-Class Families.

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5. Alabama

Photo of AlabamaPhoto of Alabama

Overall Rating for Middle-Class Families: Tax-friendly

State Sales Tax: 4% state levy. Localities can add as much as 7.5% to that, and the average combined rate is 9.22%, according to the Tax Foundation. Prescription drugs are exempt. Groceries and clothing are fully taxable, while motor vehicles are taxed at a reduced rate of 2% (additional local taxes may apply).

Income Tax Range: Low: 2% (on up to $1,000 of taxable income for married joint filers and up to $500 for all others); High: 5% (on more than $6,000 of taxable income for married joint filers and more than $3,000 for all others). 

Some Alabama municipalities also impose occupational taxes on salaries and wages.

Property Taxes: In Alabama, the median property tax rate is $395 per $100,000 of assessed home value — the lowest on our list.

For details on other state taxes, see the Alabama State Tax Guide for Middle-Class Families.

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4. Washington

The state of Washington.The state of Washington.

Overall Rating for Middle-Class Families: Most tax-friendly

State Sales Tax: 6.5% state levy. Municipalities can add up to 4% to that, with the average combined rate at 9.23%, according to the Tax Foundation. Grocery items and prescription drugs are exempt. Clothing is taxable, as are motor vehicles. However, there’s an additional 0.3% tax on sales of motor vehicles.

Income Tax Range: Washington has no state income tax.

Property Taxes: Home buyers in the Evergreen State can expect to pay a median property tax rate of $929 per $100,000 of assessed home value. 

For details on other state taxes, see the Washington State Tax Guide for Middle-Class Families.

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3. Arkansas

The state of Arkansas.The state of Arkansas.

Overall Rating for Middle-Class Families: Mixed tax picture

State Sales Tax: 6.5% state levy. Localities can add as much as 5.125%, and the average combined rate is 9.51%, according to the Tax Foundation. Prescription drugs are exempt. Grocery items are taxed at 0.125% (additional local taxes may apply). Motor vehicles are taxed if the purchase price is $4,000 or more (7% tax rate in Texarkana). However, starting in 2022, the rate on sales of used motor vehicles priced between $4,000 and $10,000 will only be 3.5%. Clothing is taxed at the standard rate.

Income Tax Range: Low: 2% (on taxable income from $4,500 to $8,899 for taxpayers with net income less than $22,200), 0.75% (on first $4,499 of taxable income for taxpayers with net income from $22,200 to $79,300), or 2% (on on first $4,000 of taxable income for taxpayers with net income over $79,300); High: 3.4% (on taxable income from $13,400 to $22,199 for taxpayers with net income less than $22,200), 5.9% (on taxable income from $37,200 to $79,300 for taxpayers with net income from $22,200 to $79,300), or 6.6% (on taxable income over $79,300 for taxpayers with net income over $79,300). Beginning in 2021, the top rate for taxpayers with net income over $79,300 will be 5.9% (on taxable income over $8,000).

A “bracket adjustment” of between $40 and $440 is subtracted from the amount of tax due for taxpayers with net income from $79,301 to $84,600.

Property Taxes: For homeowners in the Natural State, the median property tax rate is $612 per $100,000 of assessed home value. 

For details on other state taxes, see the Arkansas State Tax Guide for Middle-Class Families.

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2. Louisiana

The state of Louisiana.The state of Louisiana.

Overall Rating for Middle-Class Families: Tax-friendly

State Sales Tax: 4.45% state levy. Localities can add as much as 7%, and the average combined rate is 9.52%, according to the Tax Foundation. Groceries and prescription drugs are exempt from the state’s sales tax, but localities may tax these. Clothing and motor vehicles are taxable.

Income Tax Range: Low: 2% (on $12,500 or less of taxable income for individuals, $25,000 for joint filers); High: 6% (on more than $50,000 of taxable income, $100,000 for joint filers). 

Property Taxes: The median property tax rate in Louisiana is $534 per $100,000 of assessed home value. 

For details on other state taxes, see the Louisiana State Tax Guide for Middle-Class Families.

 

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1. Tennessee

The states of TennesseeThe states of Tennessee

Overall Rating for Middle-Class Families: Most tax-friendly

State Sales Tax: 7% state levy. There’s also an additional state tax of 2.75% on sales of single items that applies to the portion of the sales price from $1,600 to $3,200. Localities can add up to 2.75%, with an average combined rate of 9.55%, according to the Tax Foundation. Groceries are taxed at 4% by the state, in addition to any additional local taxes. Clothing is taxed at the standard rate. Motor vehicles are taxed at the basic 7% rate, plus the additional 2.75% on purchases between $1,600 and $3,200. There’s no tax on prescription drugs. 

Income Tax Range: There’s no state income tax in Tennessee. However, dividends and some interest are subject to the Hall Tax at a 1% rate in 2020. The first $1,250 in taxable income for individuals ($2,500 for joint filers) is exempt. 2020 is the last year for this tax, which is being phased out. Also, the tax is waived if you’re over the age of 100.

Property Taxes: In Tennessee, the median property tax rate is $636 per $100,000 of assessed home value. 

For details on other state taxes, see the Tennessee State Tax Guide for Middle-Class Families.

Source: kiplinger.com

What Is a Bond Mutual Fund – Risks & Different Types of This Investment

Investing is an important part of saving for the future, but many people are wary of putting their money into the stock market. Stocks can be volatile, with prices that change every day. If you can’t handle the volatility and risk of stocks or want to diversify your portfolio into a less risky investment, bonds are a good way to do so.

As with many types of investments, you can invest in bonds through a mutual fund, which gives you easy diversification and professional portfolio management — for a fee.

Are bond mutual funds a good addition to your portfolio? Here are the basics of these investment vehicles.

What Is a Bond?

A bond is a type of debt security. When organizations such as national and local governments, government agencies, or companies want to borrow money, one of the ways they can get the loan they need is by issuing a bond.

Investors purchase bonds from the organizations issuing them. Typically, bonds come with an interest rate and a maturity. For example, a company might sell bonds with an interest rate of 5% and a maturity of 20 years.

The investor would pay the company $1,000 for a $1,000 bond. Each year, that investor receives an interest payment of $50 (5% of $1,000). After 20 years, the investor receives a final interest payment plus the $1,000 they paid to buy the bond.


What Is a Mutual Fund?

A mutual fund is a way for investors to invest in a diverse portfolio while only having to purchase a single security.

Mutual funds pool money from many investors and use that money to buy bonds, stocks, and other securities. Each investor in the fund effectively owns a portion of the fund’s portfolio, so an investor can buy shares in one mutual fund to get exposure to hundreds of stocks or bonds.

This makes it easy for investors to diversify their portfolios.

Mutual fund managers make sure the fund’s portfolio follows their stated strategy and work towards the fund’s stated goal. Mutual funds charge a fee, called an expense ratio, for their services, which is important for investors to keep in mind when comparing funds.

Pro tip: Most mutual funds can be purchased through the individual fund family or through an online broker like Robinhood or Public.


Types of Bond Mutual Funds

There are many types of bond mutual funds that people can invest in.

1. Government

Government bond funds invest most of their money into bonds issued by different governments. Most American government bond funds invest primarily in bonds issued by the U.S. Treasury.

U.S. government debt is seen as some of the safest debt available. There is very little chance that the United States will default on its payments. That security can be appealing for investors, but also translates to lower interest rates than other bonds.

2. Corporate

Corporate bond funds invest most of their assets into bonds issued by companies.

Just like individuals, businesses receive credit ratings that affect how much interest they have to pay to lenders — in this case, investors looking to buy their bonds. Most corporate bond funds buy “investment-grade” bonds, which include the highest-rated bonds from the most creditworthy companies.

The lower a bond’s credit rating, the higher the interest rate it will pay. However, lower credit ratings also translate to a higher risk of default, so corporate bond funds will hold a mixture of bonds from a variety of companies to help diversify their risks.

3. Municipal

Municipal bonds are bonds issued by state and local governments, as well as government agencies.

Like businesses, different municipalities can have different credit ratings, which impacts the interest they must pay to sell their bonds. Municipal bond funds own a mixture of different bonds to help reduce the risk of any one issuer defaulting on its payments.

One unique perk of municipal bonds is that some or all of the interest that investors earn can be tax-free. The tax treatment of the returns depends on the precise holdings of the fund and where the investor lives.

Some mutual fund companies design special municipal bond funds for different states, giving investors from those states an option that provides completely tax-free yields.

The tax advantages municipal bond funds offer can make their effective yields higher than other bond funds that don’t offer tax-free yields. For example, someone in the 24% tax bracket would need to earn just under 4% on a taxable bond fund to get the equivalent return of a tax-free municipal bond fund offering 3%.

4. High-Yield

High-yield bond funds invest in bonds that offer higher interest rates than other bonds, like municipal bonds and government bonds.

Typically, this means buying bonds from issuers with lower credit ratings than investment-grade bonds. These bonds are sometimes called junk bonds. Their name comes from the fact that they are significantly riskier than other types of bonds, so there’s a higher chance that the issuer defaults and stops making interest payments.

Bond mutual funds diversify by buying bonds from hundreds of different issuers, which can help reduce this risk, but there’s still a good chance that some of the bonds in the fund’s portfolio will go into default, which can drag down the fund’s performance.

5. International

Foreign governments and companies need to borrow money just like American companies and governments. There’s nothing stopping Americans from investing in foreign bonds, so there are some mutual funds that focus on buying international bonds.

Each country and company has a credit rating that impacts the interest rate it has to pay. Many stable governments are seen as highly safe, much like the United States, but smaller or less economically developed nations sometimes have lower credit ratings, leading them to pay higher interest rates.

Another factor to keep in mind with international bonds is the currency they’re denominated in.

With American bonds, you buy the bond in dollars and get interest payments in dollars. If you buy a British bond, you might have to convert your dollars to pounds to buy the bond and receive your interest payments in pounds. This adds some currency risk to the equation, which can make investing in international bond funds more complex.

6. Mixed

Some bond mutual funds don’t specialize in any single type of bond. Instead, they hold a variety of bonds, foreign and domestic, government and corporate. This lets the fund managers focus on buying high-quality bonds with solid yields instead of restricting themselves to a specific class of bonds.


Why Invest in Bond Mutual Funds?

There are a few reasons for investors to consider investing in bond mutual funds.

Reduce Portfolio Risk and Volatility

One advantage of investing in bonds is that they tend to be much less risky and volatile than stocks.

Investing in stocks or mutual funds that hold stocks is an effective way to grow your investment portfolio. The S&P 500, for example, has averaged returns of almost 10% per year over the past century. However, in some years, the index has moved almost 40% upward or downward.

Over the long term, it’s easier to handle the volatility of stocks, but some people don’t have long-term investing goals. For example, people in retirement are more concerned with producing income and maintaining their spending power.

Putting some of your portfolio into bonds can reduce the impact of volatile stocks on your portfolio. This can be good for more risk-averse investors or those who have shorter time horizons for their investments.

There are some mutual funds, called target-date mutual funds, that hold a mix of stocks and bonds and increase their bond holdings over time, reducing risk as the target date nears.

Income

Bonds make regular interest payments to their holders and the majority of bond funds use some of the money they receive to make payments to their investors. This makes bond mutual funds popular among investors who want to make their investment portfolio a source of passive income.

You can look at different bond mutual funds and their annual yields to get an idea of how much income they’ll provide each year. For example, if a mutual fund offers a yield of 2.5%, investors can expect to receive $250 each year for every $10,000 they invest in the fund.

Pro tip: Have you considered hiring a financial advisor but don’t want to pay the high fees? Enter Vanguard Personal Advisor Services. When you sign up you’ll work closely with an advisor to create a custom investment plan that can help you meet your financial goals. Read our Vanguard Personal Advisor Services review.


Risks of Bond Funds

Before investing in bonds or bond mutual funds, you should consider the risks of investing in bonds.

Interest Rate Risk

One of the primary risks of fixed-income investing — whether you’re investing in bonds or bond funds — is interest rate risk.

Investors can buy and sell most bonds on the open market in addition to buying newly issued bonds directly from the issuing company or government. The market value of a bond will change with market interest rates.

In general, if market rates rise, the value of existing bonds falls. Conversely, if market rates fall, the value of existing bonds rises.

To understand why this happens, consider this example. Say you purchased a BBB-rated corporate bond with an interest rate of 2% for $1,000. Since you bought the bond, market rates have increased, so now BBB-rated companies now have to pay 3% to convince investors to buy their bonds.

If someone can buy a new $1,000 bond paying 3% interest, why would they pay you the same amount for your $1,000 bond paying 2% interest? If you want to sell your bond, you’ll have to sell it at a discount because investors can get a better deal on newly issued bonds.

Of course, the opposite is true if interest rates fall. In the above example, if market rates fell to 1%, you could command a premium for your bond paying 2% because investors can’t find new bonds of the same quality that pay that much anymore.

Interest rate risk applies to bond funds just as it applies to individual bonds. As rates rise, the share price of the fund tends to fall and vice versa.

Generally, the longer the bond’s maturity, the greater the effect a change in market interest rates will have on the bond’s value. Short-term bonds have much less interest rate risk than long-term bonds. Bond funds usually list the average time to maturity of bonds in their portfolio, which can help you assess a fund’s interest rate risk.

Credit Risk

Bonds are debt securities, meaning they’re reliant on the bond issuer being able to pay its debts.

Just like people, companies and governments can go bankrupt or default on their loan payments. If this happens, the people who own those bonds won’t get the money they lent back.

Bond mutual funds hold thousands of bonds, but if one of the issuers defaults, some of the fund’s bonds become worthless, reducing the value of the investors’ shares in the fund.

Bonds issued by organizations with higher credit ratings are generally less risky than those with poor credit ratings. For example, most people would consider U.S. government bonds to have a very low credit risk. A junk bond fund would have much more credit risk.

Foreign Exchange Risk

If you’re buying shares in a bond fund that invests in foreign bonds, you should consider foreign exchange risk.

Currencies constantly fluctuate in value. Over the past five years, $1 could buy anywhere between 0.80 and 0.96 euros.

To maximize returns, investors want to buy foreign bonds when the dollar is strong and receive interest payments and return of principal when the dollar is weak.

However, it’s incredibly hard to predict how currencies’ values will change over time, so investors in foreign bonds should consider how changing currency values will affect their returns.

Some bond funds use different strategies to hedge against this risk, using tools like currency futures or buying dollar-denominated bonds from foreign entities.

Fees

Mutual funds charge fees, which they commonly express as an expense ratio.

A fund’s expense ratio is the percentage of your invested assets that you pay each year. For example, someone who invests $10,000 in a mutual fund with a 1% expense ratio will pay $100 in fees each year.

Expense ratio fees are included when calculating the fund’s share price each day, so you don’t have to worry about having cash on hand to pay the fee. The fees are taken directly out of the fund’s share price, almost imperceptibly. Still, it’s important to understand the impact fees have on your overall returns.

If you invest $10,000 in a fund that produces an annual return of 5% and has a 0.25% expense ratio, after 20 years you’ll have $25,297.68. If that same fund had an expense ratio of 0.50%, you’d finish the 20 years with $24,117.14 instead.

In this example, a difference of 0.25% in fees would cost you more than $1,000.

If you find two bond funds with similar holdings and strategies, the one with the lower fees tends to be the better choice.


Final Word

Bond mutual funds are a popular way for investors to get exposure to bonds in their portfolios. Just as there are many different types of stocks, there are many types of bonds, each with advantages and disadvantages.

If you don’t want to pick and choose bonds to invest in, bond funds offer instant diversification and professional management. If you want an even more hands-off investing experience, working with a financial advisor or robo-advisor that handles your entire portfolio may be worth considering.

Source: moneycrashers.com

From Bitcoin to GameStop to SPACs: 8 Tips for Mania Investing

Market speculation is seemingly everywhere.  From new SPACs being issued, to the prevalence of Reddit stocks such as GameStop to the popularity of electric vehicle stocks and the rise of cryptocurrency – speculation is alive and well in the markets today. 

“Mania” is a good word to describe the energy surrounding these types of investments.  Dramatic daily swings are the new normal in these holdings.  Hollywood elites and business moguls are attaching their names to crypto and the latest SPAC investments. 

The top mania investment areas are electric vehicles, cryptocurrency, Reddit stocks, space, SPACs, precious metals and pot stocks.  The dictionary definition of mania describes “excessive or unreasonable enthusiasm.”  That seems about right.  The result has been a meteoric rise in value not tied to business fundamentals but tied to hype, expectations or projections. 

Investors looking to boost performance often wonder how much exposure to these types of investments should they have.  With strong appreciation in some of the holdings, it is tempting to get into the game.  Here are our top eight tips for mania investing. 

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1. Admit that it is a mania

A woman is swept away on waves of water.A woman is swept away on waves of water.

Have some honest reflection about the investment environment you are in.  Mania investing can be fun, it can be thrilling and, ultimately, it can be painful.  But mania investing is not your conventional long-term investing strategy.  Admit you are being swept up in a mania and acknowledge what that might mean regarding your tactics.  It’s impossible to explain to yourself or your friends the fundamentals of a company with no earnings, so stop trying to make sense of it.  It is a mania, not an investment based on fundamentals. 

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2. Have an exit strategy & set a price target

Price tags.Price tags.

How far are you willing to watch your investment drop before you pull out?  Set a price target and stick to it.  Some of the biggest mistakes happen with investors who fall in love with a company or a product and hold it while closing their eyes.  Mania investments are not typically long-term plays, and you must plan for how much risk you are willing to take.  Set a target to get out and limit your downside exposure.

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3. Limit your overall portfolio exposure

A colorful pie chart.A colorful pie chart.

If you are going to be a mania investor, maybe you limit your exposure to 3%, 5% or 10% of your total portfolio.  Understand it is the high-risk portion of your portfolio and do not allocate more than you are willing to lose.  The older you are and the closer to retirement, the less you can afford to lose.  The younger you are, the more you might be willing to allocate to more aggressive strategies. 

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4. Diversify your manias 

A woman balances a bitcoin on a red tightrope.A woman balances a bitcoin on a red tightrope.

Maybe you like cryptocurrency — go ahead and invest in it, but buy into three different types, instead of just one, to diversify.  Maybe you like electric vehicles. If so, consider adding some exposure to space or precious metals as well.  Even in your mania investing, you do not want to concentrate all that allocation to just one mania strategy.  Diversification can help reduce risk even in a risky space.  Although, be careful of too much diversification.  In a world like electric vehicles, there is a possibility of there being few winners and many losers. 

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5. Understand performance in context 

Woman standing under an orange umbrella in the rainWoman standing under an orange umbrella in the rain

The S&P 500 10-year average over the past 100 years is around a 10% return per year.  Warren Buffett has averaged about 15% per year.  If your mania investments have made 100% in a year, understand how rare that is and that the odds of duplicating that performance year after year are incredibly remote.  Part of good investment performance is not just making money in good times, but also weathering losses during challenging times. 

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5. Know the difference between investing and speculating

A stack of gambling chips tumbles over.A stack of gambling chips tumbles over.

Investing for the long term carries its own set of disciplines and rules and expectations.  Mania investing is more akin to speculating or even gambling.  It often has dramatic movements in price over a short period of time.  It might include hype in the media, memes on social networks and inexperienced people giving investment advice.  Be careful and realize speculating is a high-risk game — it is not the same as sound investment on fundamentals.   

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6. Take some winnings off the table

A man cashes in his gambling pot.A man cashes in his gambling pot.

Maybe you own one of the stock names that have doubled or tripled in value over the past year.  Consider selling some of the holdings and locking in your gains.  Maybe reduce your exposure by 50%.  Keep some of the holdings a bit longer, but diversify into something more stable or consistent.  Setting a price target on the upside can be just as important as setting one on the downside. 

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7. Do not gamble the farm

The sun sets over the red barn of a farm.The sun sets over the red barn of a farm.

A smart gambler, if they go to Vegas, will set their own personal limit on what they are willing to lose.  Whether that is $100, or $10,000 — set a limit when it comes to mania investing.  Also, do not raid all your retirement money on a whim to chase manias.  While a portion could make sense, the lion’s share of your retirement should be focused on fundamental investment strategies that are consistent.  Pulling all your retirement money to buy into different manias would likely be a crazy idea, just like putting your house keys in the pot of a poker table would be ill advised. 

Investing in some of these sexy stocks and industries has appeal, and there is money to be made.  But there is also money to be lost, and it is important to have a rule set for investing even if you are investing in mania stocks.  Finally, know how risk taking can fit in your overall financial plan and realize that the risk you are willing to tolerate is likely to be different from someone else. 

Investing carries an inherent element of risk, and it is possible to lose principal and interest when investing in securities. Strategies are used to assist in the management of your account. Even with these strategies applied to the account, it is possible to lose money. No strategy can guarantee a profit or prevent against a loss. There may be times when the strategy switches between equities or fixed income at an inopportune time, causing the account to forfeit potential gains.

CEO – Senior Wealth Adviser, Sterling Wealth Partners

Scot Landborg has over 17 years of experience advising clients on retirement planning strategies. Scot is CEO and Senior Wealth Adviser for Sterling Wealth Partners. He is host of the retirement planning podcast Retire Eyes Wide Open. Scot is a regular contributor to Kiplinger.com and has been quoted in “U.S. News & World Report,” Market Watch, Yahoo Finance, Nasdaq and Investopedia. He also formally hosted the nationally syndicated radio show “Smart Money Talk Radio.”

Investment Adviser Representative of USA Financial Securities. Member FINRA/SIPC A Registered Investment Advisor. CA license # 0G89727 https://brokercheck.finra.org/

Source: kiplinger.com

Getting Good Rate on a Car Loan

Buying a new car? Planning to get a car loan for it? Then keep the following tips in mind to get a good interest rate – and avoid the crucial mistakes that cost you even more money over the long run.

Tip #1: Don’t Get Financing at the Dealership

The vast majority of car buyers get their car loans at the same dealership where they buy the car. Their reasoning: It’s convenient, and/or the dealers give great interest rates. Do you have the same sentiment?

Here’s the problem: As attractive as the dealer’s advertised interest rates are, they’re likely reserved only for buyers with excellent credit scores. What’s more, there’s a pretty good chance you can find an even better deal elsewhere, such as with community banks and credit unions.

Our advice: Do your homework, and get your loan lined up and ready before you visit the dealer. If the dealer offers you an even better deal, you can still have the loan canceled.

Tip #2: Check Your Credit Score

Do you know your credit score? If not – and if you let the dealer come up with your car loan for you – you’re in BIG trouble! The dealer might convince you that your credit rating is worse than it actually is, and jack up your interest rates accordingly.

Get your credit score by requesting your credit ratings from TransUnion, Equifax, and Experian. You can also check your credit score by applying for preapproved car financing. Car loans from banks and credit unions can give you a pretty good idea of the vehicles and interest rate your credit score qualifies you for.

Click here to learn how you can improve your credit score. 

Tip #3: Watch Out For Scams.

Another risk you run when you let your dealer set up your financing for you is getting scammed. A common scam is carried out when, a few days after you sign the dotted line and bring your new car home, the dealer calls you and tells you the car loan “didn’t work out,” and that you’ll need to re-negotiate a new loan with a higher interest rate – or give the car back, losing your deposit in the process.

Protect yourself by getting your car loan elsewhere, or by not buying the car until you’re 100% sure the dealer’s financing is finalized.

Tip #4: Don’t Focus on the Monthly Fee

Lastly, one of the biggest mistakes car buyers make is going for the loan with the lowest monthly fees. Low monthly fees normally mean higher interest rates and longer payment periods. If you’re not careful, you might end up paying over twice the car’s value throughout the life of the loan.

Remember that there are at least two things that go into the monthly fee: The price of the car and the car loan’s premium. (If you’re trading in your old car, that’s an additional factor.) A single monthly fee won’t tell you how much of each is going into it – and there’s no way of knowing whether you’re paying too much for your loan or getting too little from your trade-in.

So if the car salesman asks you how much you can afford to pay each month – you don’t need to answer. Don’t get trapped! Focus instead on the total amount you’ll be paying for the car loan over its lifetime. It’s the best way to save money and get a decent car at the same time.

Source: creditabsolute.com

What Are Bonds – Basics of Investing in Corporate vs. Municipal Bonds

When building a balanced investing portfolio, you’ll want to include bonds in your asset allocation. These assets provide safety and stability, offering relatively slow growth and reliable returns.

As you begin to research which bonds to buy, you’ll realize there are several different types of bonds,  with the two most common being corporate bonds and municipal bonds.

What’s the difference, and what are the pros and cons that come along with investing in each type of bond? Let’s review the basics of bonds and then look at the two types side by side to help you choose which is right for you.

What Are Bonds?

Bonds are a form of fixed-income security known for providing a relatively safe store of value that are often used to offset risk in a well-balanced investment portfolio. Bonds are essentially loans given to the issuer by the investor, making them a debt instrument.

Investors make money by investing in bonds in one of two ways:

  • Coupon Rates. The most common return on investment derived from bonds is known as the coupon rate, or the interest rate on the bond. As with many other types of loans, the investor pays the full face value of the bond upon purchase and receives interest payments until the maturity date of the bond, at which point their initial investment is returned to them.
  • Premium. In some cases, bonds can be purchased at a discount to their face value. When the bond matures, the investor receives the full face value of the asset, providing a return on investment. For example, an investor may purchase a $1,000 bond for $950. Once the bond matures, the full $1,000 is repaid, leaving the investor with $50 in profits.

What Are Municipal Bonds?

Municipal bonds are commonly referred to as muni bonds, or simply munis. These bonds are issued by local governments, generally on the state or county level, and should not be confused with Treasury bonds, which are issued on a federal level and backed by the full faith and security of the U.S. federal government.

There are two common types of munis on the market today:

  1. Revenue Bonds. Revenue bonds are bonds issued by a municipality that are backed by the revenue generated from a specific project. For example, local municipal governments often issue water and sewer bonds, which are paid back with the revenue collected by the local government for the provision of clean drinking water and sewage services to residents within the locality.
  2. General Obligation Bonds. General obligation bonds aren’t backed by any project revenue. Instead, they’re backed by the taxing authority of the issuers at hand and paid back with tax dollars paid for local income taxes, sales taxes, property taxes, or any other tax revenue received by the local authorities that issued the muni.

What Are Corporate Bonds?

Rather than being issued by a local, state, or federal government, these bonds are debt instruments issued by corporations; they act as loans made from the bondholder to the corporation that issued the security. There are different categories of corporate bonds, including:

  • Collateral Trust Bonds. Collateral trust bonds use collateral other than real estate to secure the bond. For example, a company may secure bond issues with shares of stock, bonds, or other securities.
  • Debenture Bonds. Debenture bonds are corporate bonds that aren’t secured by any collateral. These bonds are generally issued by corporations with the best credit ratings, because companies with poor credit won’t be able to attract investors to these securities.
  • Convertible Debentures. Convertible bonds give the investor the ability to convert the bond into a specified number of shares at a specified time. For example, a company may sell a convertible bond that may be converted into 25 shares of its common stock after two years. Because these bonds can be converted into common stock, they are generally more attractive to investors, but it’s a tradeoff. These types of bonds generally come with low coupon rates.
  • Guaranteed Bonds. Guaranteed bonds are guaranteed not only by the corporation that issues them, but also by a second company. This greatly reduces the level of risk because another company guarantees to step in and fulfill the obligations of repaying the bond if the original borrower defaults.
  • High-Yield Bonds. High-yield bonds, also known as junk bonds, are bonds that have been rated by rating agencies to be below investment grade. These companies generally have significantly high credit risk and must offer higher yields in order to attract investors.

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Key Factors to Consider

There are several factors you should take into account when making a decision to buy either corporate or municipal bonds. Some of the most important of these factors include the quality of the entity issuing the bond, the tax implications, yield, liquidity, and how the money raised through the issuance of the bond will be used.

Here’s how corporate and municipal bonds compare:

Quality of Issuer

One of the first details you should look into before purchasing a bond or any other debt instrument is the quality of the issuer. Bond issuers will have different credit ratings, meaning that when you invest in the securities they’ve made available, you’ll be taking on credit risk.

There are two agencies that provide bond issuer credit ratings: Moody’s and Standard & Poor’s. Moody’s rating scale ranges from C to AAA, with AAA being the best possible rating. Standard & Poor’s follows a scale ranging from D to AAA, with AAA also being the best possible rating.

Higher ratings mean the bond is generally at lower risk of the issuer defaulting. After all, if the entity that issues the security fails to meet its obligations, those who invest in it stand to lose.

Corporate Bonds Come With Higher Default Rates

Corporate bonds are issued by corporations, and every corporation is different. Some make more money than others, some are managed by better management teams, and some will fulfill their obligations consistently while others fail.

Compared to municipal bonds, instruments issued by corporations come with a higher default risk, making it especially important to pay attention to how rating agencies rate the bond in question before you invest.

The good news is that even corporations rarely default. According to the Corporate Finance Institute, only about 0.13% of corporations that issue a bond will default.

Municipal Bonds Come With Lower Default Risk

Municipal bonds are generally an even safer bet than corporate bonds. According to ETF.com, only about 0.08% of munis end up in default. Because these bonds are issued by local governments, entities known for top-notch credit quality, and generally rated AAA by S&P Global, investors can rest assured that they will be paid as agreed in the vast majority of cases.

Tax Implications

Any time you make money — whether from a side hustle, income from your day job, or investment returns — you typically have to pay taxes. However, not all income is taxed equally. Here are the tax implications you’ll need to consider when deciding whether to invest in corporate or municipal bonds.

How Corporate Bonds Are Taxed

Bonds issued by corporations are often called taxable bonds because earnings generated through these investments will be susceptible to both federal income tax and state income tax at the general income tax rate. The exact rate you’ll pay on your returns depends on your tax bracket.

How Municipal Bonds Are Taxed

Gains generated through investments in municipal bonds are always tax exempt on the federal level and are often tax free on the state level as well. The tax exemption is essentially a “thank you” from both federal and local governments for using your investment dollars to invest in projects that support your community.

While in the vast majority of instances, munis are exempt from state and local taxes, there are some cases in which this is not true. For example, if you purchase a municipal bond offered by a municipality other than the one in which you reside, your local authorities may choose to tax returns on that bond at the standard local income tax rate.

For example, if you live in New York City and you invest in a municipal bond issued by a government body in Florida New York City may charge you its normal local tax rate on the returns generated through that investment.

Yields

Returns on bonds are known as yields, and they vary wildly from one to another depending on the credit of the issuing entity, the maturity date of the bond, and other factors.

Generally speaking, here’s how yields compare between corporate and municipal bonds:

Corporate Bonds Generally Have Higher Yields

Local governments are highly trusted entities that are known for maintaining excellent credit. On the other hand, corporations will vary wildly in financial strength and creditworthiness.

Because corporations are usually less creditworthy than governments, bonds issued by corporations generally offer higher interest rates. After all, if the yields on corporate bonds were the same as the yields on government bonds, nobody would lend to riskier corporations. Who would want to buy a bond from a corporation when the same returns can be generated by investing in lower-risk munis?

Munis Provide Small Gains

Bonds issued by the government come with a lower default risk and therefore are the safer option for investors. However, when investing, safer options generally provide lower returns, and municipal bonds are no exception.

The extremely low default risk is considered in the pricing of these bonds, resulting in lower interest rates, smaller interest payments, and lower overall returns.

That is, until you account for taxes. For example, a high income earner may find that investing in municipal bonds is a better fit because they are exempt from state and federal taxes. By contrast, much of the returns on corporate bonds would be erased by taxes for an investor in the highest tax bracket.

Liquidity

Liquidity should always be a consideration for investors, whether they’re investing in bonds or any other asset. Liquidity refers to the ease or difficulty of converting an investment back into cash if desired.

Investors will find it difficult to convert bonds with low levels of liquidity into cash prior to their maturity dates, while bonds with high levels of liquidity are easy to offload and turn into spendable money on demand.

Corporate Bonds Are Often Less Liquid

While any form of bond can be sold on a secondary market, for a bond to be sold, there must be a buyer. In some cases, investments in high-risk bonds and other bonds issued by corporations may become illiquid if no other investors are interested in purchasing them.

Moreover, bond liquidity decreases in general in times of economic and market positivity. During bull markets, investors tend not to want their money tied up in fixed-income assets, instead focusing on the larger potential for returns offered by stocks.

Municipal Bonds Are Highly Liquid

The municipal bond market is very active, with these bonds often being easier to offload than bonds issued by corporations. That’s because muni bonds are issued by entities that are all but guaranteed to cover their obligations while providing tax benefits, making them attractive investments for high income earners.

How Funds Are Used

Investors are becoming increasingly concerned with the way in which their investments are spent. In fact, there’s an entire movement surrounding social impact investing, or investing in assets that use your funds to make an impact for causes you care about.

So, how exactly is your money spent when you invest in these two different types of bonds?

How Corporations Use Money Raised Through Bond Sales

Corporations may be looking to raise money for a wide variety of reasons. Some of the most common are:

  • Working Capital. It costs money to make money, and running a business can be a very expensive endeavor. In some cases, corporations will have their money tied up in inventory, new equipment, and other assets necessary to keep it moving in the right direction and need working capital for general purposes. Companies can issue bonds as a way to raise cash for their operational needs today by promising to repay investors in the future.
  • Acquisitions. Companies often acquire one another, merging two companies into one in transactions where the sum of all parts has a greater value than the original assets. However, acquisitions are expensive business, and corporations often need additional funding to execute merger and acquisition agreements.
  • Research. Research and development are major expenses for just about every publicly traded company on the market today. In some cases, corporations will issue bonds in order to fund this research.

How Municipalities Use Money Raised Through Bond Sales

The vast majority of bonds issued by government agencies are issued to fund public projects.

For example, when a major thoroughfare is riddled with potholes or your county’s library is in need of repair, governments often issue bonds in order to cover the costs associated with these projects. Governments can repay investors either through revenue generated by the project they fund or through tax revenues.


The Verdict: Should You Choose Corporate or Municipal Bonds?

As you can see above, there are several reasons to invest in both types of bonds, with each having its own list of pros and cons. As with any other investment vehicle, each type of bond will be suitable for different investors with different goals.

You Should Invest In Corporate Bonds If…

Bonds issued by corporations are best suited for bond investors who have a relatively low income tax burden and are looking to generate larger gains out of their safe-haven investments. These bonds are best suited for investors who:

  • Are In a Low Tax Bracket. Returns from bonds issued by corporations are taxed at the standard income tax rate, which varies wildly depending on the amount of money you earn on a regular basis. As your tax rate increases, bonds issued by corporations become less attractive than tax-exempt munis.
  • Are Willing to Accept Higher Levels of Risk. Based on historical default rates, corporations are nearly twice as likely to default on bond obligations than governments. As a result, corporate bond investors should be comfortable with a higher level of risk.
  • Want to Generate Larger Returns. Due to the higher risk associated with bonds issued by publicly traded companies, these bonds come with higher yields than bonds issued by governments.

You Should Invest In Municipal Bonds If…

Municipal bonds are worth considering if you’re an investor with a generally low risk tolerance, you’re a high income earner and tax implications mean quite a bit to you, or you’re interested in funding public projects with your safe-haven investing dollars. These bonds are best suited for you if:

  • You’re In a High Tax Bracket. High-income earners are taxed at a higher rate. Because bonds issued by the government are generally tax-free investments, they are well suited for investors who have a relatively high tax burden, acting not only as safe havens, but also tax havens.
  • You Have a Low Risk Tolerance. Municipal bonds are about as safe as investments come. Most local governments have never defaulted and enjoy a high credit rating; investments in these entities are very unlikely to result in default.
  • You’re Looking For a Store of Value. Investments in bonds issued by the government are a great store of value, which is what makes them so attractive as safe-haven investments. Even in times of economic concern, these bonds are known to generate returns rather than losses.
  • You’re Interested in Funding Public Projects. Government bonds are used to fund public projects that improve conditions for the community around you. Not only are these investments capable of generating returns and stability, there’s a feel-good effect involved in making these investments.

Both Are Great If…

If you aren’t in the uppermost income tax brackets, have a moderate tolerance for risk, and are looking to generate greater diversification across your safe-haven investments, you might invest in a mix of corporate and municipal bonds. This approach offers you a balance of the larger gains from corporate bonds and the tax benefits from munis. Investors who would benefit most from a mix between the two:

  • Want Higher Returns While Minimizing Tax Burden. By investing in both types of bonds, you’ll reduce your tax burden compared to corporate bond investments alone while enjoying higher earnings potential than provided by municipal bond investments alone.
  • Have a Moderate Tolerance for Risk. Bonds in general — with the exception of junk bonds — are relatively safe investments. However, some assets within the class are safer than others. Mixing corporate investments into your portfolio of municipal investments will lead to a slight increase in the overall risk level across your portfolio. As an investor, you’ll have to be comfortable with that added risk in exchange for the greater returns.
  • Want High Levels of Diversification. Diversification helps to reduce risk across investment portfolios. By investing in multiple assets across multiple categories, investors don’t have to fear detrimental declines should one, or even a handful, of these assets experience losses.

Final Word

Deciding between corporate and municipal bonds is a decision that should be based on your comfort with risk and your needs for yield and liquidity from your safe-haven investments

It’s also important to consider your returns from a tax perspective. Compare the yields on bonds issued by corporations to those on available munis to make sure the increased returns aren’t outweighed by the taxes you’d pay on your gains.

As is always the case, investors should take the time to research the bonds they’re investing in, considering historic returns, the issuer of the bond, and where the money they’re investing is going. By doing your research before making your investment, you’ll rest assured that they fall in line with your goals.

Source: moneycrashers.com

Understanding Single-Family Home HOAs

Before you buy a home in an HOA-governed community, make sure you review the rules thoroughly.

What does HOA mean?

HOA means homeowners association. It can also be referred to as HOD or Home Owners Dues. HOAs can exist in planned housing developments, town homes, and condos. It is generally billed on a monthly basis.

Most people think of homeowners associations (HOAs), legally known as Common Interest Developments, as related to attached housing structures like condominiums or town homes. But this is not always the case.

Around the 1980s, developers started building communities of single-family homes that were actually Common Interest Developments. These communities came with their own sets of rules, regulations and HOA fees.

The reason builders starting developing communities in the HOAs structure was to maintain order and the aesthetics of a community. Their rules keep home paint colors and front yards in harmony, restrict building additions that don’t fit into the neighborhood, and stop owners from parking broken-down vehicles in their driveways or front yards. Such regulations assure new and existing owners that a neighbor’s behavior and choices will not diminish property values.

But they also mean that you must follow the rules yourself, and typically contribute monthly fees to manage and run the HOA for the benefit of all owners. When residents violate these rules — which can cause stress for other owners and hurt property values– the HOA will typically step in and enforce them with violation notices, fines and possibly litigation, if the issue gets that far.

The root of the issue

Often, the problem is not the rules, it’s that people don’t read the rules and regulations before they buy into a community, and then they violate the rules. But ignorance is no excuse — those rules are recorded on the property title, and likely given to every buyer to review before they purchase a home in a standard transaction. Owners are still bound by those rules whether they received and read them or not.

If you are buying into an HOA-governed community, be sure to read the rules and regulations before you buy. Once you’ve read them, if you don’t like them, then you should avoid buying a property in that community.

What if you already own in an HOA, and don’t like the rules or how the elected HOA board of directors interprets and enforces them? Luckily, an HOA is a democracy and the owners can vote out the board of directors and change the rules!

Any member-owner can try to get elected to the board and change the regulations. They just have to get enough other community members to support their opinion and vision for the community.

Unfortunately, most community members never go to a board meeting and never get involved. They just complain about the board — who are all volunteers, by the way — and complain about HOA fees, rules, and special assessments, etc.

If you are one of those owners who doesn’t like the rules, then get involved and take the time to campaign in your community, get on the board, and change the regulations.

Do Renters Pay HOA Dues?

“The landlord cannot force you to pay the HOA unless that is what is required in the lease. If it is part of the lease, then you have to pay. If not, you don’t, but the owner may decide to find another tenant when the lease is up.

If the HOA is not doing their job in clearing snow, I would write them a letter and send copy to the landlord. You are not the owner so they may not listen, but it gives you proof of the issue and may prompt the owner to act.”

Related:

Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.

Source: zillow.com

Improving Your Financial Freedom

Did you know that you could use your tax refund to improve your financial freedom? It’s true – in fact, it’s a hot topic among American homeowners. Everyone wants to know how to best use their tax refunds to secure financial security.

First, it’s important to know what a tax refund exactly is, as well as why you get it every year. Getting a tax refund simply means you paid a little too much for the previous year’s taxes. You basically gave the government a zero-interest loan, and now they’re paying you back. How thoughtful.

So what are the best ways to use your tax refunds? Here are our Top 3 ideas:

Tip #3: Invest It 

Securing a comfortable retirement is always a part of anyone’s plan for financial freedom. And in case you’re already strapped for cash throughout the year, your tax refunds just might be enough to secure your retirement for you over the next few decades. 

The idea is to invest your tax refunds faithfully, every single year for 20-30 years or more, in an investment vehicle (or collection of vehicles) that give you at least 8% interest per year. If, say, you received an average of $3,000 in tax refunds each year, and put it in an investment fund that gave you 8% per year, you’d have well over a half million dollars at the end of 36 years. 

And if you could wait another 9 years, that will double to a million dollars. That’s why this approach is best started as early as you can – the longer you can wait, the more comfortable your retirement will be. 

Tip #2: Keep It In an Emergency Fund

Some statistics say that only 2 out of every 5 American households have enough savings tucked away for emergencies. You can use your tax refunds to join that statistic, so you can sleep tight at night knowing you have a financial safety net in place.

How much is “enough savings,” anyway? Good question. A good practice is to set aside around 3 months’ worth of household expenses. That’s a substantial amount that will cover most unexpected emergencies, and it will also cover you in the event you find yourself out of work for three months.

And lastly:

Tip #1: Pay Off Your Debts 

On the road to financial freedom, debt is your biggest roadblock. In fact, debt pushes you further and further away from financial security – and the longer you stay in debt, the deeper in trouble you get.

So if you’re in debt, it’s a good idea to use your tax refund money to pay towards those debts. The goal is to erase ALL your debt, or at least reduce it to a very manageable level.

Our advice: Pay off the debts with the highest interest first, then pay off the debts with lower interest rates. If you have the option, go for debt consolidation to lower the rates even further, simplifying your payments. 

These are our Top 3 ways you can use your tax refund to achieve financial freedom. Start paying off your debts, filling an emergency fund, and building a comfortable retirement… starting with your very next tax refund.

Source: creditabsolute.com