Around a quarter of Americans say they work mostly in the gig economy, and 62% of those workers say that they’d rather not, according to a survey published Wednesday by McKinsey and Ipsos.
“Gig workers would overwhelmingly prefer permanent employment,” the survey found.
That preference is even stronger among immigrants and workers of color, who disproportionately make up the gig workforce.
Among those groups, 72% of Hispanic and Latino gig workers, 71% of Asian American gig workers, and 68% of Black gig workers said they’d rather be permanent or non-contract employees, as did 76% and 73% of first- and second-generation immigrants, respectively.
McKinsey and Ipsos surveyed 25,000 Americans over the spring of 2021, and 27% percent of those surveyed said their primary job at the time was as a contract, freelance, or temporary work.
But their resounding preference for the security, benefits, and legal protections that come with employee status could encounter some tough resistance: their bosses.
Globally, 70% of executives – mostly from large US firms – said they plan to ramp up their reliance on contract and temporary workers, according to a McKinsey study from September.
Corporate America has aggressively opposed efforts to reclassify contractors as employees, in many cases arguing that workers prefer the flexibility that gig work claim to offer. But McKinsey’s latest findings suggest that executives – often citing surveys that their own companies funded – may not be as in touch with workers’ needs and wants.
While companies like Uber, Lyft, DoorDash, Grubhub, Amazon, Facebook, and Google have played leading roles in familiarizing American consumers with the gig-based business model, they’re far from the only ones who have leveraged contractors to skirt labor laws and minimize their costs. (Insider has contacted the above companies for comment, and will update this story if they respond.)
Executives in the lodging, food service, healthcare, and social assistance sectors, are especially keen on relying more heavily on contractors, according to McKinsey.
That model also hit taxpayers hard, as they subsidized unemployment benefits for contractors laid off by multibillion-dollar corporations that, despite record profits, hadn’t contributed a dime to those funds on behalf of their workers. Taxpayers coughed up $80 million in pandemic assistance for around 27,000 Uber and Lyft drivers who lost their incomes.
State and federal lawmakers are increasingly considering ways to secure better pay, working conditions, and legal protections for contractors, from California’s AB-5 to recent talks between unions and app companies in New York, though experts say more wide-reaching labor law reforms are needed.
Does it feel like a dollar buys less than it used to? You’re not imagining things. “It’s inflation,” people sigh.
You probably have a rough idea of what inflation means. The cost of things is going up.
But what is inflation really, what causes it, and how does it affect your finances? Here’s everything you need to know about this everyday economic term.
What is inflation?
Inflation is an increase in the prices of goods and services in an economy over a period of time.
That means you lose buying power – the same dollar (or whatever currency you use) buys less, and is thus worth less. In other words: When high inflation happens, your money doesn’t go as far as it used to.
Remember that modern money really has no intrinsic value – it’s just paper and ink, or, increasingly, digits on a computer screen. Its value is measured in what or how much it can buy.
While it’s easier to understand inflation by calculating goods and services, it’s typically a broad measure that can be applied across sectors or industries, impacting the entire economy. In fact, one of the primary jobs of the Federal Reserve is to control inflation to an optimum level to encourage spending and investing instead of saving, thereby encouraging economic growth.
How is inflation measured?
Inflation is measured by the inflation rate, which is the percent change in prices from one year to another. The inflation rate can be measured a few different ways:
The US Bureau of Labor Statistics measures the inflation rate using the Consumer Price Index (CPI). The CPI measures the total cost of goods and services consumers have purchased over a certain period using a representative basket of goods, based on household surveys. Increases in the cost of that basket indicate inflation, and using a basket accounts for how prices for different goods change at different rates by illustrating more general price changes.
In contrast with the CPI, the Producer Price Index (PPI) measures inflation from the producer’s perspective. The PPI is a measure of the average prices producer’s receive for goods and services produced domestically. It’s calculated by dividing the current prices sellers receive for a representative basket of goods by their prices in a specific base year, then multiplying the result by 100.
The Bureau of Economic Analysis measures the inflation rate using a third common index, the Personal Consumption Expenditures (PCE). The PCE measures price changes for household goods and services based on GDP data from producers. It’s less specific than the CPI because it bases price estimates on those used in the CPI, but includes estimates from other sources, too. As with both other indices, an increase in the index from one year to another indicates inflation.
The PPI is useful in its ability to forecast consumer spending and demand, but the CPI is the most common measure and tends to have a significant influence on inflation-sensitive price forecasts.
The PCE is less well-known than the CPI, using different calculations to measure consumer spending. It’s based on data from the GDP report and businesses and is generally less volatile than the CPI, because its formula accounts for potential price swings in less stable industries.
Real versus nominal prices
To make meaningful historical cost comparisons – to compare apples to apples, so to speak – economists adjust prices for inflation.
When you hear a price from the past talked about in “real” dollars, that means the price has been adjusted for inflation. When you hear prices from the past talked about in “nominal” dollars, that means it hasn’t been adjusted.
Is inflation good or bad?
Inflation is certainly a problem when it comes to ready cash that isn’t invested or earning anything. Over time, it’ll erode the value of your cash and bank account. It’s also the enemy of anything that pays a fixed rate of interest or return.
But individuals with assets that can appreciate in price, like a home or stocks, may benefit from inflation and sell those assets at a higher price.
In general, economists like inflation to occur at a low, steady rate. It indicates a healthy economy: that goods and services are being produced at a growing rate, and that consumers are buying them in increasing amounts, too. In the US, the Federal Reserve targets an average 2% inflation rate over time.
When inflation starts mounting higher than that or changes quickly, it can become a real problem. It’s a problem because it interferes with how the economy works as currency loses its value quickly and the cost of goods skyrockets. Wages can’t keep up, so people stop buying. Production then stops or slows, and an economy can tumble into recession.
What causes inflation?
There’s a massive economic literature on the causes of inflation and it’s fairly complex. Basically, though, it comes down to supply and demand. Keynesian economists emphasize that it’s demand pressures that are most responsible for inflation in the short term.
Demand-pull inflation happens when prices rise from an increase in demand throughout an economy.
Cost-push inflation happens when prices rise because of higher production costs or a drop in supply (such as from a natural disaster).
Other analysts cite another cause of inflation: An increase in the money supply – how much cash, or readily available money, there is in circulation. Whenever there’s a plentiful amount of something, that thing tends to be less valuable – cheaper. Indeed, many economists of the monetary school believe this is one of the most important factors in long-term inflation: Too much money sloshing around the supply devalues the currency, and it costs more to buy things.
Types of extreme inflation
Hyperinflation refers to a period of extremely high inflation rates, sometimes as much as price rises over 50% per month for several months. Hyperinflation is usually caused by government deficits and the over-printing of money. For example, hyperinflation occurred during the US Civil War when both the Union and the Confederate states printed money to finance their war efforts.
Stagflation is a rare event in which rising costs and prices are happening at the same time as a stagnant economy – one suffering from high unemployment and weak production. The US experienced stagflation in 1973-4, the result of a rapid increase in oil prices in the midst of low GDP.
How inflation is controlled
Governments can control inflation through their monetary policy. They have three primary levers.
Interest rates: Increasing interest rates makes it more expensive to borrow money. So people spend less, reducing demand. As demand drops, so do prices.
Bank reserve requirements: Increasing reserve requirements means banks must hold more money in reserve. That gives them less to lend, reducing spending and leading (hopefully) to deflation, a drop in prices.
Supply of money: Reducing the money supply reduces inflation. There are several ways governments do this; one example is increasing interest paid on bonds, so more people buy them, giving more money to the government and taking it out of circulation.
How to beat inflation with investments
Investing for inflation means ensuring that your rate of return outpaces the inflation rate. Certain types of assets may beat inflation better than others.
Stocks: There are no guarantees with the stock market, but overall and over time, share prices appreciate at a rate that typically exceeds the inflation rate. Most index funds also post returns better than inflation.
Inflation-indexed bonds: Most US Treasuries pay the same fixed amount of interest – whose value erodes if inflation is rampant. However, with one type of bond, called Treasury Inflation-Protected Security (TIPS), interest payments rise with inflation (and fall with deflation).
Physical assets and commodities: Alternative investments – often, tangible assets like gold, commodities, fine art, or collectibles – do well in inflationary environments. So does real property: Zach Ashburn, president of Reach Strategic Wealth, notes, “returns on investments in real estate have kept up with, or surpassed, rates of inflation for many periods in the past.” That’s because these physical assets, unlike paper ones, have intrinsic value, and are sold and priced in markets outside the conventional financial ones.
More generally, Asher Rogovy, chief investment officer at Magnifina, suggests that it’s best to avoid nominal assets in favor of real assets when inflation’s on the upswing. Real assets, like stocks and real estate, have prices that fluctuate or vary freely. Nominal assets, like CDs and traditional bonds, are priced based on the fixed interest they pay and will lose value in inflationary times.
The financial takeaway
Inflation means costs and prices are rising. When they do, it means that paper money buys less. Low, steady inflation is good for the economy but bad for your savings. Ashburn says, “While having cash available is important for financial security, cash will see its value slowly eaten away by inflation over time.”
To beat inflation, don’t leave your cash under your mattress – or in any place where it’s stagnant. It has to keep earning.
Instead, aim to structure your portfolio so that it provides a rate of return – one that’s hopefully better than, or at least keeps pace with, that of inflation, which is almost always happening. If you do, it means that your investment gains really are making you richer – in real terms.
After Florida Democrats lost almost every critical race, many Floridians thought the state’s party had hit rock bottom. Then came the news that the party had more than $860,000 in outstanding debt at the end of 2020, and a scandal over lapsed payment for staffers’ health insurance following the November election.
Now, four months after the election, the state’s Democratic operatives are struggling to understand how they got here and how they can fix the party.
Donald Trump won Florida in November by record margins, beating out Joe Biden by 3.3 points – a stark win in the perennial swing state. The down-ballot races were even worse. Democrats lost a majority of the state House races, as well as every battleground race for the state Senate.
But while 2020 was by far the worst year in recent history for the state’s Democrats, it was far from an isolated occurrence. Business Insider spoke with several political operatives and elected politicians, all of whom said the same thing: last year’s losses were the culmination of several cycles of strategic missteps, cultural blindness, and internal divides over the direction of the Party.
For more than two decades, Florida hovered in a strange political position. At the national level, it was a highly contested swing state with a huge population, leading many presidential campaigns to see the state as crucial to their success. But when it came to local and state elections, Florida remained overwhelmingly Republican.
Starting in the 1990s, Republicans began to organize on a grassroots level to flip state Senate seats, according to Kartik Krishnaiyer, a political analyst who runs The Florida Squeeze, a local political news site. By the time Bill Clinton swept the state in 1996 by the largest margin in modern history, Republicans already controlled the state legislature. Two years later, in 1998, Republicans would also win the governor’s seat. Since then, Democrats have not won a gubernatorial race in Florida, nor have they held a majority in the legislature.
Part of this is due to the Democratic Party’s insistence on viewing minority groups as a homogenous body, rather than a diverse electorate.
In the most recent election, Republicans took out Spanish-language ads on Telemundo and Latin radio stations, often using them as an opportunity to spread disinformation. Republicans also focused on hot-button issues like immigration, intentionally provoking divides within the Hispanic community. Still, Democratic strategists in the state held fast to their belief that they had “the Hispanic vote” locked down, and failed to counter Republican messaging. The results were devastating: in 2016, Hillary Clinton swept Miami-Dade county, which is overwhelmingly Hispanic, by more than 30 points. In November, Biden won by just seven points.
Democratic field organizers alerted party leadership to their messaging failures during the campaign, but their warnings often fell on deaf ears, according to one senior operative. As early as 2018, organizers in South Florida informed party officials that Republicans were framing Democratic policies as socialist in order to sway Cuban and Venezuelan voters away from the Democratic party. However, the party failed to take meaningful action to combat this messaging.
“Until Democrats do a better job of understanding those distinctions, and not treating the electorate as monolithic, we’re going to continue to falter in Florida,” says Juan Peñalosa, who was the Executive Director of the Florida Democratic Party during the 2020 election.
Independent consultants were behind many of these messaging failures, according to several operatives.
These consultants, many of whom double-dip as lobbyists during off years, are hired by campaigns to craft strategy and lead field organizing efforts. But consultants are not affiliated with the party. Therefore, they have little incentive to build anything beyond that specific election, according to Stephanie Porta, the Director of Florida Rising, a progressive political action group.
These consultants have become a flashpoint between the Party’s progressive wing and the centrists who make up the bulk of it, and who often rely on consultants to run their campaigns. For progressives, consultants embody the hands-off, myopic approach that has led the Party to consistently fail at growing its base. “You can’t just show up in people’s neighborhood when there’s a campaign, you have to show up all the time,” says Anna Eskamani, a progressive state representative from Orlando.
When it comes to showing up, Eskamani says that many centrists are unwilling to match their words to their actions. She points to the fact that many Democrats wavered on a $15 minimum wage law, for which a majority of Floridians voted in November. By failing to identify the Party with concrete, actionable policies, Democrats have kept away large swaths of the electorate.
There are signs that the Florida Democratic Party is starting to change, however.
In January, the party elected Manny Diaz, the former mayor of Miami, as its new chairman. Diaz, who is known for his fundraising prowess, came into the position promising to restructure the party and assuage donors’ concerns about investing in the state. For many donors, the losses the party suffered in the last election were “almost the last straw,” Diaz said in an interview with Business Insider. “I’ve gotten the sense from many donors that they were getting tired of investing in Florida and not seeing results,” he added.
Diaz seems to have been successful, at least in reversing the party’s nearly million-dollar deficit. The Florida Democratic Party raised around $2 million over the last three months and its latest federal report shows that it has almost $200,000 in cash on hand. When accounting for its state accounts, which aren’t listed on the FEC filing, the Party says it has around $750,000 in cash available.
The 2022 election will be a watershed for the party. With both Gov. Ron DeSantis and Sen. Marco Rubio up for reelection in 2022, Democrats have a chance to restructure the party and gain a modicum of control over the state. The roster of potential names runs the gambit, from centrists like Nikki Fried and Charlie Crist to progressives like Eskamani.
To win, the party will have to define itself, both internally and to voters. For many, “it’s not a re-education, but something they will hear for the first time,” says Peñalosa. “What does the Florida Democratic Party stand for? Who are we? And why should you vote for us?”
If you’ve avoided mutual funds because of high management fees or how frequently they can be traded, you might benefit from a closer look at the unit investment trust, or UIT.
Like mutual funds, UITs pool investor funds to purchase a series of assets, which are then bundled and offered up as a single unit – making them great for portfolio diversification.
Unlike mutual funds, UITs are designed to be bought and held until a specific maturity date, with extremely limited trading in the meantime. Because of this, the funds tend to be particularly popular with buy-and-hold investors where stability is more highly valued.
As of December 2020, the Investment Company Institute (ICI) reported that there were 4,310 outstanding UITs, representing $77.85 billion invested, so a booming industry awaits the interested investor.
What is a UIT?
A UIT is one of three basic types of investment companies. The other two types of investment companies are open-end funds and closed-end funds, which we’ll cover later.
UITs offer investors a fixed portfolio that can include stocks, bonds, or other securities in the form of redeemable units. They’re public investments that are bought and sold directly through the company issuing them, or through a broker working as an intermediary. Investors can redeem UITs after a set period of time passed, known as the maturity date.
How does a UIT work?
The goal of a UIT is that the passively held assets it contains will provide capital appreciation or dividend income throughout the life of the trust. And while that outcome isn’t guaranteed, UITs are regulated through the Securities and Exchange Commission (SEC), so concerned investors can breathe easier. Every UIT must register through the commission, which then enforces requirements about everything from where the fund can invest to under what circumstances trades can be made.
Money managers select assets for inclusion at the creation of the trust, aiming for securities they think will offer the most capital appreciation over time. They also set the maturity date for the fund, which can be anywhere between 15 months and 30 years. After that, the fund remains largely undisturbed until its maturity date.
A prosperous UIT will earn its investors income in two different ways: in the form of quarterly or monthly dividends throughout the life of a fund, and as capital appreciation when the fund matures. Once your UIT expires, you have the option of taking delivery of the underlying assets into your own brokerage account, reupping into a similar or identical trust, or liquidating your holdings, which would give you the current cash value.
UITs vs. mutual funds
Mutual funds and UITs are similar in that they’re pooled funds overseen by a professional money manager, and are subject to SEC regulation. Here’s how the two assets diverge:
Mutual funds are actively managed and UITs are not: The ability to buy and sell assets within a mutual fund increases the potential for capital gains – and, of course, losses. Since UITs don’t actively trade, fees are lower, and as fixed income investments, their underlying securities do not change except in rare cases like bankruptcy or merger.
Mutual funds and UITs structure dividends differently: While mutual funds are designed to reinvest your dividends, UIT investors can miss out during market upswings, as the latter doesn’t allow for the purchase of additional shares.
UITs have a maturity date, while mutual funds do not: Much like bonds or CDs, UITs have defined lifespans and set metrics to hit before their expiration. This makes UITs, by their nature, a more long-term investment than mutual funds.
Mutual funds and UITs offer different ways to invest: If you have the cash to invest in a mutual fund, you can purchase shares on demand, as their quantity is limitless. But since UITs have a set limit or shares released upon its initial public offering (IPO), you have to invest within that window or be subject to the whims of the secondary market.
Each investment type has its own limits. But by and large, the reason you’d see a portfolio organized as a UIT instead of a mutual fund is to minimize both short-term and long-term expenses.
UITs come with much lower expense ratios and also come with favorable tax terms. Because of the way capital gains taxes are structured, it’s possible to lose money on a mutual fund and pay taxes on gains you never actually appreciated. For example, if the shares were sold right before you got your hands on them, you could find yourself with a shared tax liability for someone else’s capital gains.
But that won’t happen with a UIT. Because the securities are bundled when you place the order and not before, the original value – or cost basis, as it’s termed – is specific to you and can’t burn you down the road.
Who should buy UITs?
UITs have benefits to offer every investor, but they’re particularly compelling for those who aren’t interested in building a portfolio security by security, or who don’t want to pay the high expense ratios on actively managed mutual funds. Plus, the lower buy-ins on UITs make them more accessible for newer investors or those with less capital.
UITs are also quite popular with those at or close to retirement age because they tend to be more stable investment vehicles. While UITs might not have the growth potential of a different asset class, their buy-and-hold strategy is lighter on risk as well. From the very start, you’ll know exactly where you’re invested, how long that investment will last, and roughly how much income you can expect from your investment, all without having to wait to pore over a prospectus.
If you’re looking to join the ranks of UIT investors, these funds can be purchased directly from the issuer, or bought and sold on the stock exchange. Talk to your financial adviser about which UIT might be a match for you and your situation.
The financial takeaway
As an investment, UITs are a different option from mutual funds or closed-end funds that offer a winning combination of low costs, reliability, tax protection, and fairly predictable gains.
There are certain pitfalls, of course, like a lack of flexibility and a potential cap on earnings, since dividends can’t be reinvested. But if you’re nearing retirement or simply trying to stretch a dollar, UITs can prove to be a plum choice for the (semi) conservative investor looking to diversify their portfolio.
Imagine a relatively safe, long-term investment that generates income, allows you to save on taxes, and funds public projects crucial a community.
That’s essentially what happens when you invest in municipal bonds, which allow you to invest in the infrastructure of state and local communities while adding diversity and tax efficiency to your portfolio.
Here’s what you need to know about municipal bonds, from why they’re popular among tax-smart investors to how they can benefit your portfolio.
What are municipal bonds?
A municipal bond, or “muni” for short, is a type of bond issued by a state or municipality to help fund necessary public works projects.
Munis are popular with investors because of their tax advantages. Interest earned on municipal bonds is usually exempt from federal income tax. If you purchase a muni in the state you live, it could also be exempt from state and local taxes. Earning tax-free income is especially attractive to investors in higher tax brackets.
Investors also like the inherent safety of municipal bonds. In most cases, because you are investing in a bond used to help finance infrastructure backed by a local government, you can usually count on getting your principal back at maturity.
How do municipal bonds work?
At its most basic level, a bond is a loan made by an investor to a borrower. Whereas treasury bonds are issued by the US government and corporate bonds are issued by companies, municipal bonds are issued by local and state governments.
State and local governments issue municipal bonds to help pay for a wide range of projects including roads, schools and hospitals. Investors who purchase these bonds lend money to the municipality in return for regular interest payments (usually semiannual) for a set amount of time.
It’s important to pay special attention to the type of account you use to purchase these bonds. In a traditional IRA or 401(k) retirement account, earnings already grow tax-free. Most investors find holding munis in taxable brokerage accounts help make the most of munis’ tax-free status.
In rare cases, municipal bond interest may not be exempt from federal taxes if they are used to fund an activity not qualified for tax-exempt status under IRS rules, like paying pension fund liability. It is usually obvious to you, your broker or your advisor when a muni is not exempt from federal taxes.
Investors who buy and sell municipal bonds may be liable for capital gains tax on profits from those sales or for bonds purchased at a discount price. In addition, if you are subject to the alternative minimum tax, you may be required to pay some taxes on municipal bond interest.
Are municipal bonds safe investments?
Municipal bonds are considered relatively safe investments because they have lower default rates and higher credit ratings than corporate bonds. Plus, many munis are backed by insurance that guarantees payment in the event of a default.
That’s not to say munis are immune from default. For example, during the Puerto Rican debt crisis and the Detroit city bankruptcy, there were several muni bonds that could no longer make payments.
If municipal bonds pique your interest, it’s important to understand credit ratings. There are three major credit ratings agencies – Standard & Poor’s (S&P), Moody’s and Fitch – all of which rate the issuers of municipal bonds based on their ability to meet their financial obligations. This makes it easier for investors to evaluate risk.
Although many munis receive the highest ratings from the agencies, such as AA+ or Aa1, it’s important to remember that ratings can be downgraded during the life of the bond if a municipality’s financial situation changes.
Like all bonds, munis also carry interest rate risk. When interest rates fall, prices for existing bonds paying higher rates will rise. In turn, when interest rates rise, prices on existing bonds paying lower rates will decline. If you hold muni bonds to maturity, price risk is not a factor. You only experience the ups and downs if you are buying and selling muni bonds.
How much will I earn from municipal bonds?
In return for safety and the tax advantages, investment-grade municipal bonds often yield less than their taxable counterparts, such as corporate and government-issued bonds.
High-yield munis, or munis that come from less-creditworthy issuers, can have significantly higher yields than investment-grade munis ,but they come with more investment risk. Investors in high-tax brackets may find that the tax advantages of investing munis help bridge the gap between muni and taxable bond rates.
How to buy municipal bonds
In most cases, you buy and sell municipal bonds through a broker. There are three main ways you can invest in munis:
Individual bonds bought through a broker require you to do your own research and decide whether to buy new issues or bonds sold through the secondary market, where you can buy munis already issued to other investors. You’ll also need to investigate credit risk carefully, since your own portfolio of muni bonds will likely not be as diversified as a mutual fund or ETF.
Municipal bond mutual funds invest in a wide-range of muni bonds, offering investors the diversity they can’t get on their own, while still providing the federal tax advantages on income and in some cases some limited state and local tax breaks. If the upside is instant diversification and professional management, the downside is recurring management fees. You’ll also be subject to capital gains tax when you sell your shares.
Mutual bond ETFs are a good way to invest in a diverse array of municipal bonds. Like mutual funds, income is exempt from federal taxes and some interest earned may also be tax exempt at the state and local level, depending on where you live.
ETFs trade like stocks on the market with prices fluctuating throughout the day, so you may experience more volatility with an ETF than a mutual fund. Like mutual funds, you’ll be subject to capital gains tax when you sell your shares.
Whatever investment you choose, be sure to pay attention to the account you are using to purchase muni bonds. You likely don’t want them as part of your tax-deferred retirement accounts such as traditional IRAs or 401(k)s where you won’t get the full force of the tax exemptions. Better to put them in a taxable brokerage account.
The financial takeaway
Municipal bonds can offer a relatively safe, tax-advantaged way to diversify your fixed-income portfolio. While yields may not be as high as taxable bonds, the tax exemptions on interest earned can help even the playing field. Investors in high-tax brackets looking to diversify their taxable investment accounts may be best suited to municipal bond investing.
All investments generate income in one way or another – sometimes as you hold them, sometimes only when you sell them for a profit. And that investment income tends to be taxable.
Bonds are no exception. But as an asset class, they’re a particularly diverse group. And so is the way they’re taxed. Some bonds are fully taxable, some partially taxable, and some not at all.
And because they generate income in a few different ways, their tax rates vary too.
Let’s examine bonds and taxes in more detail.
How are bonds taxed?
Bonds and bond funds generate two different types of income: interest and capital gains.
Bonds are a type of debt instrument. When you buy a bond, you’re loaning money to the government or company that issued it; in return, that entity pays you interest. Most bonds pay a fixed, predetermined rate of interest over their lifespan.
That interest income may be taxable or tax-free (more on the types of bonds that generate tax-free income later). For the most part, if the interest is taxable, you pay income taxes on that interest in the year it’s received.
The rate you’ll pay on bond interest is the same rate you pay on your ordinary income, such as wages or income from self-employment. There are seven tax brackets, ranging from 10% to 37%. So if you’re in the 37% tax bracket, you’ll pay a 37% federal income tax rate on your bond interest.
If you buy a bond when it’s first issued and hold it until maturity – the full length of its lifespan – you generally won’t recognize a capital gain or loss. The money you get back is considered a return of your principal – what you originally invested in it.
However, after they’re issued, bonds often trade on financial exchanges, just like stocks. If you sell them before their maturity date on the secondary market, the bonds can generate capital gains and losses, depending on how its current price compares to your original cost. Bond funds can also generate capital gains and losses as the fund manager buys and sells securities within the fund.
So, the profit you make from selling a bond is considered a capital gain. Capital gains are taxed at different rates depending on whether they’re short-term or long-term.
Short-term capital gains apply if you hold the bond for one year (365 days) or less. Then the gain is taxed at your ordinary income tax rates.
Long-term capital gains apply if you hold the bond for more than one year. Then you can benefit from reduced tax rates, ranging from 0% to 20%, depending on your filing status and total taxable income for the year.
Are all bonds taxed?
Bonds are divided into two classes: taxable and tax-exempt.
A bond’s tax-exempt status applies only to the bond’s interest income. Any capital gains generated from selling a bond or bond fund before its maturity date is taxable, regardless of the type of bond.
The interest income from taxable bonds is subject to federal, state (and local, if applicable) income taxes.
Taxable bonds include:
Global bond funds
Diversified bond funds
Municipal bonds, aka munis, are the main type of tax-exempt bonds.
Munis are issued by states, counties, cities, and other government agencies to fund major capital projects, such as building schools, hospitals, highways, and other public buildings.
Interest income from muni bonds is generally not subject to federal income taxes. It can also be exempt from state or local income taxes if your home state or city issues the bond. Interest income from muni bonds issued by another state or city is taxable on your state or local income tax return.
Fast fact: Muni bonds exempt from federal, state, and local taxes are known as “triple tax exempt.”
US Treasuries, bonds issued by the US Dept. of the Treasury, and savings bonds are also tax-exempt – to a degree. If you own them, you owe federal income tax on them. However, they are generally free from state and local income taxes.
How can I avoid paying taxes on bonds?
Here are a few strategies for avoiding – or at least reducing – the taxes you pay on bonds.
Hold the bond in a tax-advantaged account. When you invest in bonds within a Roth IRA or Roth 401(k), the returns are tax-free, as long as you follow the withdrawal rules. Bond income and profits from sales earned within a traditional IRA or 401(k) are tax-deferred, meaning you don’t pay taxes until you withdraw the money in retirement.
Use savings bonds for educational purposes. Consider using Series EE or Series I savings bonds to save for education. When you redeem the bond, the interest paid is tax-exempt as long as you use the money to pay for qualified higher education expenses and meet other qualifications.
Hold bonds until maturity. Holding a bond until maturity, instead of selling it early on the secondary market can help you avoid paying taxes on capital gains. However, you still owe tax on any taxable interest generated by the bond while you owned it.
The financial takeaway
Minimizing the tax consequences of bonds comes down to investing in tax-exempt bonds, such as muni bonds and US Treasuries, and using tax-advantaged accounts where your money can grow on a tax-free or tax-deferred basis.
If you invest in bonds outside of tax-advantaged accounts, you’ll receive a Form 1099 from the bank or brokerage holding your investments around January 31 of each year. Hold on to these forms, as you’ll need them to report bond interest and capital gains on your tax return. The IRS also gets a copy of those 1099s.
If you miss reporting any income, they’ll be sure to let you know.
You probably know that you have to pay taxes on just about all your income. But while the taxes on your work income is fairly straightforward – based on your tax bracket, and often automatically withheld from your paycheck – the tax on investment income can be more complex.
Not all investment income is taxed equally.
In fact, your investments are taxed at different rates, depending on the type of investment you have. Some investments are tax-exempt, some are taxed at the same rates as your ordinary income, and some benefit from preferential tax rates.
When you owe the tax can also vary. Some taxes are due only when you sell the investment at a profit. Other taxes are due when your investment pays you a distribution.
And finally, where you hold the investments matters. If the asset is in a tax-deferred account, such as an IRA, 401(k), or 529 plan, you won’t owe taxes on the earnings until you withdraw money from the account – or, depending on the type of account, ever.
See what we mean by complex? Never fear – here’s everything you need to know about the taxes on investment income, and the tax rates on different investments.
Interest income derives from the Interest earned on funds deposited in a savings or money market account, or invested in certificates of deposit, bonds or bond funds. It also applies to interest on loans you make to others.
Capital gains. Capital gains come from selling an investment at a profit. When you sell an investment for less than you paid for it, it creates a capital loss, which can offset capital gains.
Dividend income. If you own stocks, mutual funds, exchange-traded funds (ETFs), or money market funds, you may receive dividends when the board of directors of the company or fund managers decides to distribute the excess cash on hand to reward their investors.
Annuity payments. When you purchase an annuity, a contract with an insurance company, you pay over a lump sum. The insurance company invests your money, and converts it into a series of periodic payments. A portion of these payments can be taxable.
How is investment income taxed?
With so many variables, how can you estimate the tax bite on your investments? Here are the tax rates for different types of investment income.
For the most part, interest income is taxed as your ordinary income tax rate – the same rate you pay on your wages or self-employment earnings. Those rates range from 10% to 37%, based on the current (2021) tax brackets.
Some interest income is tax-exempt, though. Interest from municipal bonds is generally tax-free on your federal return; when you buy muni bonds issued by your own state, the interest is exempt from your state income tax as well.
Another exception is granted US Treasury bonds, bills, and notes, as well as US savings bonds. They are exempt from state and local taxes, though not federal taxes.
The tax rate you’ll pay on capital gains depends on how long you owned the investment before selling it.
You have a short-term capital gain if you own the asset for one year (365 days) or less before selling it. Short-term capital gains are taxed at the same rate as your ordinary income.
You have a long-term capital gain if you hold on to the investment for more than one year before selling it. Long-term gains are taxed at preferential rates, ranging from 0% to 20%, depending on your total taxable income.
Capital gains are not taxable while the funds remain within a tax-advantaged IRA, 401(k), HSA, or 529 plan.
The rate you pay on dividends from stock shares or stock funds depends on whether the dividend is qualified or unqualified.
Qualified dividends are taxed at the same rates as long-term capital gains. Unqualified dividends are taxed at the same rates as ordinary income.
To count as qualified, you must have owned the dividend-producing investment for more than 60 days during the 121-day period that started 60 days before the security’s ex-dividend date. The ex-dividend date is the date after the dividend’s record date, which is the cut-off date the company uses to determine which shareholders are eligible to receive a declared dividend.
The taxation of annuity payments is a little more complex. While you may earn interest, dividends, and capital gains within your annuity, you don’t owe any taxes on this income until you actually start receiving your annuity payouts. You only have tax due on the sums you receive each year.
What you owe also depends on whether you purchased the annuity with pre-tax or after-tax dollars. If you purchase an annuity with pre-tax dollars (by rolling over money from your 401(k) or IRA), payments from the annuity are fully taxable.
But if you purchase an annuity with after-tax dollars – that is, you didn’t use retirement account money, you only pay taxes on the earnings portion of your withdrawal. The rest is considered a return of principal (the original lump sum you paid into the annuity).
When you receive your 1099-R from your insurance company showing your annuity payouts for the year, it will indicate the total taxable amount of your annuity income.
Whether you pay tax on 100% of the annuity payments or only the earnings portion of your withdrawal, all annuity payments are taxed at the ordinary-income rate.
How do I avoid taxes on investment income?
Most investment income is taxable, but there are a few strategies for avoiding – or at least minimizing – the taxes you pay on investment returns.
Stay in a low tax bracket. Single taxpayers with taxable income of $40,400 or less in 2021 qualify for a 0% tax rate on qualified dividends and capital gains. That income limit doubles for married couples filing jointly. If you can take advantage of tax deductions that will keep your taxable income below that amount, you may be able to avoid paying taxes on a significant portion of your investment income.
Hold on to your investments. Hanging on to stocks and other investments can help ensure you take advantage of preferential rates for qualified dividends and long-term capital gains.
Invest in tax-advantaged accounts. Interest, dividends, capital gains – almost all forms of investment income are shielded from annual taxes while they remain in one of these accounts. With a traditional IRA or 401(k), the money is only taxable once you withdraw funds from the account. Money earned in a Roth IRA is never taxable, as long as you meet the withdrawal requirements. Interest income from a health savings account (HSA) or 529 plan is not taxable as long as you use the money to pay for qualified medical or educational expenses, respectively.
Harvest tax losses. Tax loss harvesting involves selling investments that are down in order to offset gains from other investments. If you have investments in your portfolio that have poor prospects for future growth, it could be worth it to sell them at a loss in order to lower your overall capital gains. Many robo-advisors and financial advisors will take care of harvesting for you, trying to net out the winners and the losers.
The financial takeaway
A few tax-exempt assets aside, investment income is taxable. And it’s taxed in two basic ways: at ordinary income rates or at a lower preferential rate, generally known as the capital gains rate.
All assets accrue income tax-free while they remain in tax-advantaged accounts.
While it’s never a good idea to make investment decisions based solely on the tax implications, it is wise to consider the tax consequences of any investment moves you make. Taxes might not be the only reason you choose one investment over another, but tax breaks can be a bonus on any well-thought-out investment strategy.
A long position in investing basically means to buy or own a stock. Generally, you do so because you expect it to increase in value in the future – hence, you’re holding it for the long-term.
But a long position also has a specialized meaning, having to do with options and options trading. It refers to buying a specific kind of option, based on your belief as to where the price of a stock (or another asset) is headed.
Let’s examine how a long position in options, or “going long” as the traders say, works.
What is a long position in options?
In the options-trading world, taking a long position, or going long, means you’re purchasing an option. An option is a contract that gives you the right to buy or to sell shares for a preset price (or “strike price”) on or before a future date, usually within the next nine months. It’s an opportunity to do this trade, but not a commitment – so, an option.
There are two types of long options, a long call and a long put.
A long call option gives you the right to buy, or call, shares of a named stock for a preset price at a later date.
A long put option does the opposite: It gives you the right to sell, or put, shares of that stock in the future for a preset price.
How a long call option works
If you believe a certain stock is going to go up in price in the coming days, weeks, or months, you can purchase a long call option to buy that stock for today’s price sometime in the future and make a profit by selling it on the stock market at the then- higher price.
Example: You believe ABC stock, selling today for $100 a share is going to be worth more in a couple of months. You purchase a long call option contract for 100 shares, set to expire in three months, at a strike price (a preset price) of $100 per share, and a premium (fee) of $3 per share for the option itself.
ABC does as you expect and in two months shares are worth $150 apiece. You exercise your option, buy 100 shares at $100 each, sell them for $150 each, and you’ve made a tidy profit of $4,700.
How a long put option works
If you believe a company’s stock is due for a drop, you would purchase a long put option contract giving you the right to sell shares of that stock in the future for today’s (higher) price.
Example: You believe ABC is going to decline in a couple of months. You purchase a long put option contract for 100 shares, set to expire in three months, with a strike price of $100 per share, and a premium of $3 per share.
ABC does as you expected and in two months shares are selling for $50. You buy 100 shares at $50 each, exercise your option, and sell them for $100 each, and you’ve made a tidy profit of $4,700.
Exercising your long call or long put option
Whether you buy a long call or a long put, you can’t make money unless you exercise your option. Exercising your option means to buy or sell before the expiration date set in the option contract.
Naturally, you’d exercise the option if things go the way you expect – the stock moves in the manner you thought it would, so you get to buy it (with a call) or sell it (with a put) at a price that’s better than the current market rate.
Why would you let the option expire without exercising it? Simple: The price of the stock goes against your prediction, moving in an opposite direction from the strike price. If that happens, the option becomes worthless. You let it expire, and you lose the premium you paid.
The good news is, that’s all you lose.
Why take a long position in options?
Going long lets you take chances with less risk. Both long calls and long puts limit your loss to the premium, the cost of the options contract. You don’t have to buy the stock (in a call) or sell the stock (in a put) unless you expect to profit – by the shares moving as you anticipated before the contract ends.
In contrast, in regular investing, you’re committed to an actual purchase. And that could cause you to lose a lot of money if the stock doesn’t move in the direction you expected.
In addition to being less risky, long options also include an unlimited profit potential to the upside in the case of a long call option or the downside with a long put option. As long as the stock is above or below your option’s strike price – for the call or the put, respectively – you stand to win.
Both types of options are considered long, in the sense that both are buy positions and both let you make money on the direction of the underlying stock. However, the long call is the more bullish sentiment, because you’re betting that the stock price will rise.
The long put option is a more bearish view because you’re anticipating, and hoping to profit from, a fall in the stock price.
A long put option can also serve as a hedge, or insurance, against a bad outcome with a long call option or an outright purchase of stock. Yes, you’re betting against yourself, in a way, but at least you stand to benefit a bit if the stock falls instead of rises, mitigating your overall loss.
The financial takeaway
With options, going long refers to a position in which you buy:
a long call option, meaning that you expect the underlying asset to increase in price, which increases the value of the option. This option is bullish on both the underlying stock and the option itself.
a long put option, meaning you expect the underlying asset to decline in price, which increases the value of the put option. A long put option is bearish on the underlying stock but bullish on the outcome of the option.
Long option positions require less investment, or cash down, than outright investments. Instead of spending thousands on a stock, you just spend a few hundred on the option, giving you more leverage for less money.
Of the two options, long calls are more common – or at least, what’s more commonly thought of as a long options position. And, like buying stock outright, they are essentially optimistic. Long puts, pessimistic bets that a stock will fall, are more often used as insurance against a bad outcome with a long call, or with an actual ownership position.
But in a way, both long options can be considered bullish: Both are buy positions, affording you a chance to make money on the moves of the underlying stock.
Seeing as we’re all online anyway, you might as well make money surfing the web.
There are many ways to do this from online website testing to mystery shopping. Some of these are more complicated and time consuming than others.
One way that requires you to do very little is an app run by Ipsos Mori, the respected market research company – in fact they’ll pay you just for signing up!
The Ipsos Iris UK app quietly collects user behaviour in the background while you use your phone or tablet. It sends the info to Ipsos without you needing to do anything at all.
The Ipsos App pays you £5 per month plus £10 for signing – so that’s £15 in your pocket
Make £500 this month by Selling your stuff
Do you have old clothes in the back of your wardrobe you never wear? Or maybe books you don’t read or needed for courses you’ve now completed? Rather than leaving them to gather dust, get some cash for them instead.
Sites like Depop are great for selling clothes, while eBay and Facebook Marketplace are perfect for selling anything and everything – from books to wardrobes.
If you sell 5 items at £10 a pop, that will make you £50 in a month. Don’t forget to account for shipping and postage costs if you’re selling though, as these can eat into your profits if you don’t add them to your selling price.
Of course, there’s no limit to the amount you can sell or the amount you can make from this. The only limit is the amount you have to sell!
Sign up to Shepper to make Extra Cash this month
Shepper is a service for businesses across the UK that runs checks on their marketing, retail displays, even rental properties, to make sure everything is running smoothly.
The app uses Shepherds to undertake tasks for businesses. This saves the business so much money, gives you the opportunity to make extra cash in your spare time, and improves service for customers.
Check your tax status to see if you can get a refund
Tax isn’t usually seen as a way to make money – more a way to lose money! But, you may be entitled to a tax refund.
There’s a surprising amount of reasons why you could get a tax refund, so check here to see if you fit the criteria. More people than ever could qualify for a tax refund this year, thanks to Covid-19 impacting working hours (and even redundancies). If you’re self-employed and made Payments on Account in July for your current tax year, you could also be due a refund if it turns out you overpaid.
Each situation is unique, so it’s hard to say exactly how much money a tax refund could make you. However, if you’re entitled to a refund it’s likely to be at least £50 in a month.
Are you due a Council Tax refund?
One lesser known thing is that if you’re the only person living in your home, you’re entitled to a Council Tax discount of 25%. If you’re now receiving Universal Credit or some other benefits, your low income could mean you’re entitled to additional Council Tax support. Some councils have a backlog at the moment – so your refund will be backdated to the date you applied.
Due to Covid-19, local councils currently have the power to give council tax reductions of up to 100 percent on bills – meaning you’ll pay nothing – for many people on benefits. They also may offer one-off grants to low income households to reduce the bill by £150.
Some people have managed to negotiate a Council Tax refund by getting their home re-evaluated for the Council Tax banding. It’s a complicated process, starting with lots of legwork and research with the VOA – but if you think your property should be in a lower band (based on similar houses around you), it’s worth claiming. You could get thousands of pounds refunded if your property is moved into a lower tax band.
Claim Money Back From Your Energy Supplier
A staggering number of people overpay their energy bill and actually have a surplus on their account.
According to 2019 research, around 12 million of Britain’s households are in credit to their energy suppliers to the tune of £1.5 billion collectively. One in 10 that were owed a tax refund were owed over £200.
You can claim this money back or use it to lower your next bill if you are in credit.
There’s also a number of people that have missed out on money left in their account when they’ve switched suppliers. If you’ve switched in the past 6 years while you were in credit, you could be able to claim an average of £50 back from your old supplier.
If you’re on a low income and you’re struggling to pay your bills, you could also be entitled to receive an energy grant to reduce or eliminate your energy debts. Find out more here.
Taking the average you could claim back £50 this month. Of course, you may be entitled to far more, so make sure you check carefully!
Set Up a Side Hustle That Helps in the Community
Making money can often be seen as a self-focused act that only benefits you and your family. But, you can also help your community.
There are plenty of side hustles that can help your neighbours and make you some cash on the side. Popular options are dog walking and car washing – both things many of your neighbours will really appreciate.
For more suggestions of how to make money ethically in your community click here.
These odd jobs can quickly add up for you too without taking a large amount of your time.
If you walk a dog twice a week while charging £10 an hour, you’ll have an extra £80 in your pocket at the end of the month!
Freelance Online to Make £500
The internet can be a big distraction but also offers lots of opportunities to make money.
Sites like Fiverr and Upwork can be great for picking up freelance tasks as they have thousands of listings from all over the world.
They have a range of jobs on offer from copywriting to graphic design and even social media. Whatever your skillset, you’re bound to find a job that fits.
The amount you’re paid depends on the job and your experience, but you could make at least £10 an hour.
Working two hours a week could therefore make you £80 in a month!
Become a Part-Time Virtual Assistant
Virtual assistants (VA) are essentially freelancers who work in an administrative role for a company or client remotely. They hire out their administrative or creative assistance to various clients and businesses and assist with their needs from home.
Some people hire VAs full time, but you can also work on a part time for a number of clients depending on their requirements each week. This gives you the flexibility to work when you want and make some extra cash without overwhelming yourself with too much work.
Still not convinced this adds up to over £500 in one month? Here’s the maths:
Online website testing – £15 Selling your stuff – £50 Signing up to Shepper – £80 Claiming back tax – £50 Claiming from your energy supplier – £50 Setting up a side hustle – £80 Freelancing – £80 Becoming a virtual assistant – £120 Total – £525
More Money Making Tips
If you need to set up a passive income (or two!) for continued extra revenue, try these articles next.
In late January 2021, shares of a company called GameStop stock, which had been trading around $2.57 per share, suddenly shot up, eventually as high as $500 – when users of the Reddit website subgroup Wall Street Bets began buying up shares.
This was bad news for a lot of other investors, known as short-sellers, who had bet the stock would keep falling. Unlike most investors, who want their stocks to appreciate, short-sellers make money when stock prices go down and lose money when they go up.
So when GameStop started gaining, these short-sellers were caught in what’s called a short squeeze. They had borrowed to support their pessimistic investment, and they now had to pay it back – by buying GameStop shares at the higher prices. Or else, hang on – and risk losing even more money.
A short squeeze is a stock market phenomenon, something that happens to investors and traders who have acted on the assumption that an asset (a stock, usually) is going to fall – and it rises instead. Here’s how it happens.
What is a short squeeze?
To understand a short squeeze, it helps to understand short selling, aka shorting, a sophisticated investment strategy in which traders or investors sell stocks they don’t actually own, in hopes of buying them back later for less money.
It works like this: A short-seller borrows shares (usually from their broker) they think are due for a fall or to keep on falling, and sells them on the open market at the current price. When the stock’s price drops, as the short-seller was betting it would, they then buy the shares back for the new, lower amount. They return the borrowed shares to their stockbroker, keeping the difference in price as profit. In the interim, they’re charged margin interest on the shorted shares until they pay them back.
The entire strategy hinges on the bearish view that the stock is going to drop in value. But what if it goes up instead? That’s when a short squeeze happens.
When a stock rises sharply and suddenly, short-sellers scramble en masse to buy shares to cover their position (their loan from their broker). Each of these buy transactions drives the stock even higher, “squeezing” the short-seller even more. They have to keep covering their positions or get out totally – at a loss.
How does a short squeeze happen?
Here is how a short squeeze scenario unfolds:
You identify a stock you believe is overvalued, and take a short position: borrowing and selling shares at today’s high price in anticipation the price will go down and you will be able to buy replacement shares at a much lower price.
Instead, something happens causing the price of the stock to start going up. That “something” can be the company issuing a favorable earnings report, some sort of favorable news for its industry – or simply many other investors buying the stock (as happened with GameStop).
You realize you are unable to buy the stock back at a low price. Instead of sinking, it’s climbing – and it exceeds the price you bought it for. At this point, you must either buy replacement shares at a higher price and pay back your broker at a loss, or buy even more shares than you need – in hopes that selling them for profit will help cover your losses.
All this increased buying causes the stock to keep going up, forcing even more short-sellers like yourself into a tighter vise. You have the same choices as above, only the stakes keep mounting, and so do your potential losses.
Protecting yourself against a short squeeze
There are specific actions you can take to try to protect yourself against a short squeeze or to at least alleviate its grip.
Place stop-loss or buy-limit orders on your short positions to curb the damage. For example, if you short a stock at $50 per share, put in a buy-limit order at a certain percentage (5%, 10% or whatever your comfort level is) above that amount. If the shares rise to that price, it’ll automatically trigger a purchase, closing out your position.
Hedge your short position with a long position – that is, buy the stock (or an option to buy the stock) to take advantage of rising prices. Yes, you’re betting against yourself, in a way, but at least you lessen the damages of the losses and benefit from the price appreciation.
Predicting a short squeeze
Short squeezes are notorious for descending quickly and unpredictably. Still, there are signs a short squeeze may be coming:
Substantial amount of buying pressure. If you see a sudden uptick in the overall number of shares bought, this could be a warning sign of a pending short squeeze.
High short interest of 20% or above. “Short interest” is the percentage of the total number of outstanding shares held by short-sellers. A high short interest percentage means a large number of all a stock’s outstanding shares are being sold short. The higher the percentage, the more likely a short squeeze may be building.
High Short Interest ratio (SIR) or days to cover above 10. SIR is a comparison of short interest to average daily trading volume. It represents the theoretical number of days, given average trading volume, short-sellers would need to exit their positions. The higher this number, the more likely a short squeeze is coming. Both short interest and SIR are on stock quote and screener websites such as FinViz.
Relative Strength Index (RSI) below 30. RSI indicates overbought or oversold conditions in the market on a scale of 0 to 100. A stock with a low RSI means it’s oversold – that is, trading at a very low price – and possibly due to increase; a high RSI indicates the stock is extremely overbought – trading at a high price – and possibly due to drop. Any RSI below 30 signals an imminent price rise, which could lead to a short squeeze. A company’s online stock listing usually includes its RSI, often under its Indicators section.
The financial takeaway
A short squeeze can result when a stock – especially one that had been declining in price – suddenly goes up for whatever reason.
This puts short-sellers, who bet the stock would drop or to keep on dropping, in a bind. They sold shares they didn’t actually own, and now, to cover their positions – repay the stock they borrowed -they have to buy increasingly expensive shares. Each of these buy transactions drives the stock even higher, forcing more short-sellers to spend more or get out at a loss. They call it a squeeze but it becomes more like a vicious cycle.
There are indicators to predict a short squeeze, and ways to protect yourself against one. But overall, a short squeeze is one of the facts of life for a short-seller – and a reminder of the risks that sophisticated trading strategies like short selling carry.