Known as the Fed “pivot”, their first reduction was a whopping 50 points – cutting the federal funds rate down from the 5.25% – 5.50% range to 4.75% – 5.00%. Although half a percent doesn’t sound like a lot, it was perceived as a sign of optimism from the Fed about the economy’s overall health and suggested that future rate cuts would follow over the next few years.

As you might guess, this announcement has also caused mortgage interest rates to drop. In the weeks following the September Fed meeting, the 30-year fixed mortgage interest rate has fallen to a current national average of 6.08%.

It wasn’t all that long ago that if someone wanted to buy a home, they’d be looking at an APR  (annual percentage rate) of 7 or 8 percent – even with good credit! This begs the question: Now that mortgage rates are falling, should I consider refinancing my mortgage?

In this post, we’ll explore a few of the reasons why refinancing does or does not make sense. We’ll also explore how much you could potentially save and if “right now” is a good time to act, or if waiting a little longer might be to your benefit.

What Does It Mean to Refinance Your Mortgage?

Simply put, refinancing your mortgage is the act of replacing your current home loan with a new one – usually with better terms. Even though most loans last 30 years, this doesn’t mean you’re stuck paying the same amount forever.

The process of refinancing is fairly straightforward. You’ll start by finding a lender. This can either be your current mortgage provider or a new company altogether.

Once you accept an offer to refinance, the new lender will pay off your current mortgage. From that point forward, you’ll make payments to your new lender under the new contract terms.

Refinancing is a very common practice in the debt industry. It’s done not just for homes but also:

• Auto loans
• RVs
• Boats
• Student loans
• Credit card debt
• Business loans

The Benefits of Refinancing Your Mortgage

Generally, the primary reason someone refinances their loan is to get a lower interest rate. The lower the APR, the lower your monthly payments will be.

However, there can also be many other benefits to refinancing besides how much gets drafted from your bank account each month. Here are a few others to consider:

• Shortened loan term – Want to pay off your mortgage faster? Many people opt to take a 15-year loan instead of a 30-year term when they refinance. The advantage is that more of each payment will go towards your principal. Plus, you can usually get a better interest rate.
• Change the loan type – If you started with an FHA or ARM (adjustable rate mortgage), refinancing gives you the chance to switch to a conventional mortgage.
• Eliminate PMI – Private mortgage insurance is typically assigned to any mortgage where the borrower puts down less than a 20 percent down payment. If you’ve made several payments and now own 20 to 25 percent of your home (or more), a refinance could be an opportunity to have PMI removed from your arrangement.
• Access to home equity – If you’ve got other high-interest debt such as credit cards, taking cash out when you refinance gives you the ability to pay it off by tapping into your existing home equity.

How Much Does It Cost to Refinance Your Mortgage? 

With every major loan, whether it’s the initial mortgage or a refinance, there’s going to be a long list of fees by the lender. Of course, these will vary based on location, your credit score, and the lender’s internal policies. 

Generally speaking, total closing costs on a refinance can range anywhere from 2 to 6% of the loan amount. That means for every $100,000 you refinance, expect to pay anywhere between $2,000 and $6,000.

What makes up the bulk of these closing costs? They typically include the following:

• Application fee – $75 to $300
• Loan origination fee – Up to 1.5% of the loan’s principal
• Appraisal fee – $300 to $700, if needed
• Title search and insurance – $700 to $900
• Discount points – Optional. If you want a lower interest rate than what’s being offered, most lenders will ask around 1% of the loan amount to decrease it by 0.25%
• Other miscellaneous fees

How Much Can You Save by Refinancing Your Mortgage? 

In most cases, a lower interest rate will result in a lower monthly payment. However, the exact amount will depend on several other factors such as the amount being refinanced, loan duration, whether or not any cash was taken out, etc. Closing costs can also make a difference.

To illustrate the benefit, let’s consider two 30-year fixed rate mortgages where the only variable that changes is the APR. Assuming $240,000 was borrowed (a $300,000 home minus a 20% down payment),

• An 8% APR would result in a monthly payment of $1,761
• A 6% APR would result in a monthly payment of $1,439
• That’s a savings of $322 per month!

Keep in mind that the monthly payment is just one way to look the potential savings. When you think about the total life of the loan, there can also be a substantial amount of money saved. Using the figures above, the total amount saved would be $115,920 over the next 30 years.

How Much of a Difference in Interest Rates Makes Refinancing Your Mortgage Advantageous?

A good rule of thumb is to consider refinancing if the current interest rate is a minimum of 1% lower than the APR of your mortgage. 

Again, that will greatly depend on the factors we’ve already highlighted above. Before moving forward, it’s a good idea to calculate the potential savings. This can be done with a simple, free online Mortgage Refinance Calculator. 

Should I Refinance Now or Wait?

The recent interest rate drop from the Fed may have been enough to make it worth your time to refinance your mortgage. However, does that mean you should take action right away? According to the expectations published by the Federal Reserve, there may still be some further savings to be had.

Periodically, the Fed publishes a widely quoted graphic known as the “dot plot”. Essentially, this is a chart over the next few years which depicts where they expect to see interest rates fall. As of the September meeting, Fed members predict the benchmark rate will be:  

• 4.4% by the end of 2024
• 3.4% by the end of 2025
• 2.9% by the end of 2026

Of course, these are only estimates, and in no way does this mean that mortgage rates will also fall by these same increments. However, the Fed dot plot does seem to paint the picture of a downward trend in interest rates over the next few years. 

Again, the only way to know for sure if a refinance is to your benefit is to crunch the numbers. Depending on your current loan terms, it could even make sense to refinance now followed by another one in a few years if rates continue to fall significantly. It will all depend on your financial situation and needs.

The Bottom Line 

Refinancing your mortgage can be a very helpful way to reduce your monthly payments and make room in budget. However, it’s essential to weigh the costs and benefits carefully. The best approach is to familiarize yourself with how these loans work and then use an online calculator to crunch the potential savings. Beyond that, keep your ears perked for further Fed meetings and rate drops that might make your situation even more adventegous. 

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Translation: Interest rates are about to start coming down!

Ever since inflation peaked in 2022, the Fed has been on a mission to tame them by slowly rasing the Federal funds rate. Economics 101 says that by doing this, businesses and consumers will pull back and slow down the economy. In turn, this should cause the prices of goods and services to fall – resulting in less demand, lower prices, and reduced inflation.

It’s been a work in progress, but after two years of sticking to this playbook, it seems the Fed’s efforts are paying off. As of July 2024, the Consumer Price Index (CPI) only rose 2.9 percent for the past 12 months. Core CPI, the same index less food and energy (and the indicator used by the Fed), only rose 3.2 percent year over year. Very promising!

Combined with the fact that unemployment numbers are also starting to creep up, analysts are one hundred percent certain that a rate cut is imminent. According to the FedWatch tool from the CME Group, it’s just a question of how much of a rate cut and how many will happen before the end of the year.

As a steward of your household finances, it’s important to understand what is likely to happen to the economy and your personal wealth if and when the Fed does eventually decrease interest rates. Based on past events, here’s what you can expect.

1) Better Loan Rates

The first thing most people will notice is that the cost of borrowing will become cheaper. Usually, when the Fed reduces interest rates, banks follow in tandem for each of their products such as loans and savings accounts. This is welcomed news for people looking to make a big ticket purchase like a home, car, go to college, etc.

For some industries such as the housing market, an interest rate cut could increase demand. Prospective buyers who have wanted to move but were waiting due to the higher interest rates may find it’s a good time to get off the sidelines and take action.

Consumers won’t be the only ones to benefit. Businesses, both small and large, will find it cheaper to finance everything from making short-term payments to long-term expansions. For publicly traded companies, this can help improve their financial health and potentially lead to rising stock prices.

2) Refinancing Opportunities

If you were one of the many Americans who’s purchased a house in the last three years, then there’s a good chance you got stuck with a mortgage carrying an APR of 7 or 8 percent. Thankfully, a Fed rate cut could mean some relief is on the way via refinancing.

Refinancing is replacing when you replace your high-interest-rate loan with a new, lower-rate loan. As a general rule of thumb, when there’s a difference of about 1.0% or more between these two loans, then refinancing should be considered. Doing so could potentially shave a hundred dollars or so off your regular monthly payment.

The same will be true for other fixed-rate arrangements such as auto loans and student loans. Check online periodically to see what’s being offered in your area and then run the numbers to find out how much you might save your budget.

3) Lower APY on Credit

Variable-rate loans (such as credit cards and HELOCs) have always been a double-edged sword. Before the surge of inflation, consumers enjoyed rock-bottom interest rates on everyday purchases and the financing of big projects (like a home renovation). However, ever since the Fed started hiking rates, the variable interest rate on these loans was free to escalate to highs we haven’t experienced in some time.

Luckily, once rates go down, the cost of using these financial products won’t be as bad as they were one or two years ago. In fact, they may even begin to look like attractive options once again to people in need of flexible financing.

4) Increased Job Growth

Between businesses being able to borrow for less and increased consumer demand, the textbook expectation of a Fed rate cut is that the economy should prosper. As businesses borrow money to finance their growth, they will also need to hire more people to do the work.

This can be good for both new and current employees. Recent grads may find it easier to land the job they were after and for a competitive salary. Current employees could change companies in search of more pay or a better career trajectory.

5) Potential for Inflation to Return

As you might guess, reducing the Fed funds rate is not without its consequences. Consider the possibility that as businesses borrow for less and economic activity grows, the demand for goods and services will most likely rise. Hence, there is the danger that inflation could return and start climbing back up again.

This same phenomenon occurred during the late 1970s. After the Fed began prematurely reducing interest rates, inflation shot back up essentially undoing their progress. That led to a few more interest rate hikes until the Fed was absolutely convinced that it was safe to begin lowering them again. Fast forward to today, and this is why the current Fed officials have been very careful to hold rates as high as they have for so long.

6) Risk of a Recession

Even though the general expectation of a rate cut should be economic prosperity, the initial reaction is sometimes the opposite. Over the past 40 years, there have been several instances where the economy entered into an official recession even though interest rates were heading downward.

The reason can be attributed to the lag effect of the data used to make interest rate decisions. By the time the Fed reverses its position, there may have been months or several quarters of economic decline that led the country into recession territory.

Again, keeping monetary policy in check is not an easy task for the Fed. They have to walk a fine line between not cutting rates too soon while also holding out just long enough to keep inflation down.

7) Lower Bank Interest on Your Savings

When the Fed begins cutting interest rates, savers will find that their high-yield savings accounts don’t earn as much interest as they used to. This is because, just like with loans and credit cards, banks also tie their savings account interest rates to the Fed funds rate. Therefore, the more they cut, the less interest you’ll earn.

This can be mitigated by locking into longer-term fixed-interest products (like CDs or bonds) before the Fed makes its announcement. However, as interest rates are further reduced, consumers will need to look to potentially riskier investments like stocks, mutual funds, and ETFs for more attractive returns.

Overall, the best thing you can do no matter what the Fed does (or does not) decide is to manage your own budget. Tracking it using an app such as Buxfer is a good approach because you’ll always have a real-time summary of how you’re progressing. That way if the economy does begin to surge, you’ll be able to take the money you’re saving and seize whatever financial opportunity awaits.

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One of the hardest things about money is the act of managing it. On the surface, tasks like writing a check or periodically making some investments may seem pretty routine. But they can easily get lost in the shuffle of everyday life once priorities from work or family take precedence.

That’s why for the best chances of success, you need to establish a system for your finances that operates with as little intervention as possible. How? By removing yourself from the equation and automating every transaction available. Here are five areas where this can be implemented so that you can spend your time focusing on what’s really important in life.   

Bills

As it’s often said in sports, a good offense is the best defense. This policy also works great when it comes to paying your bills – having the payment pre-scheduled ahead of time. Not only does it help keep your account in good standing, but it can also keep your credit rating in good standing by not getting reported to any of the major bureaus.

Thankfully, nearly every service provider makes it incredibly easy to set up automated payments. Usually, this involves little more than logging into your mobile phone or utility account, entering your bank information, and then agreeing to regular automatic payments every month.

Even if one of your providers doesn’t have this payment option, most major banks and credit unions offer a bill-paying service. This is a feature where you authorize the financial institution to automatically send electronic payments or physical checks directly to the service provider.  

Bonus tip: If you’re good with credit cards and like to regularly rack up rewards points, then it may be good to use your credit card as the payment option for as many of your bills as possible. Since you were going to make these payments anyway, why not get rewarded with cash back, gift cards, or travel points? 

Just be sure to check if the provider charges a fee for using a credit card. Some have started tacking on an extra 3% or so, negating the credit card’s rewards benefit. In this situation, have the automated payment come from a free option like your checking account instead.

Retirement

Today’s modern retirement plans make it easier than ever to be mechanical about saving for the future. After establishing a relatively diverse portfolio of investments, the name of the game is to contribute as much to your plan as possible.

For most working Americans, this will involve a defined contribution plan like 401(k), 403(b), or 457. With each of these plans, all that’s needed is a form or electronic authorization to automatically pull the money out of every paycheck before your earnings hit your bank account. This can be a huge tax saving because the more you contribute, the lower your taxable income and resulting tax bill will be.

401(k)s can also be extra awesome if your employer offers matching contributions. This is where they also contribute anywhere from $0.25 to $1 for every dollar you save. Again, the more you save, the more matching contributions you also earn – automatically.

At the same time, you may also wish to start a Roth IRA. IRAs are similar to workplace retirement plans except they are set up by you (i.e., not your employer) with a financial institution of your choice. To make things easy, nearly every provider will allow you to set up regular automatic contributions to your IRA. Just be sure not to save more than the IRS contribution limits for the year.

Emergency Savings

You never know when an unplanned repair or sneaky bill is coming your way. But they happen all the time, and for that reason, it’s highly recommended that every household have at least 3 to 6 months’ worth of living expenses on hand in cash. This will help protect you from having to turn to high-interest debt options like credit cards and personal loans.

In theory, you could keep this extra money inside your regular checking account. But that may prove to be too tempting for some people to spend it. A better approach would be to create a completely separate account – preferably one that earns high interest so that you’re making money while it sits idle.

As with most financial accounts, setting up regular contributions is easy. Simply log in to your account, designate the amount and frequency, and then let the money flow from one bucket to the other.

Investment Accounts

Depending on how you handle your finances, you may wish to have some investments outside of your long-term retirement accounts. Those assets won’t be tax-advantaged the same way that a 401(k) or Roth IRA will be, they also don’t have the same restrictions on withdrawals – so that can be advantageous.

Just like your bank and retirement accounts, investment accounts can be set up to receive automatic contributions. Again, set the frequency and amount, and the brokerage will take care of the rest.

Bonus tip: If you invest in assets that pay dividends, then you’ll have to dictate to your brokerage what to do with those payments. An easy and automatic way to put them to good use is to use a DRIP (dividend reinvestment plan) strategy. This is essentially where you use the dividend payments to buy even more shares of securities, which in turn increases the amount of dividends you’ll receive. The longer this process continues, the more your portfolio will snowball in size!

Budget

As you’ve probably noticed by now, none of the above automation techniques will be possible unless you do one very important thing: ensure you have enough money coming in and available in your bank account to fund each of these activities!

For that reason, it’s absolutely critical that you budget your money. A budget is just a plan for not spending more money than you earn. It takes into consideration both your expenses as well as other financial goals you may be working towards such as those we’ve highlighted above (i.e., retirement, emergency savings, and investing).

Thankfully, there are even automation tools that can help you to better manage your budget. Apps like Buxfer collect all of your transactions and summarize them into one central location for review. This can help reveal spending trends or other areas where potential improvements could be made.

No matter how you decide to handle your budget, what’s important is that you’re actively always trying to cut out the things that don’t add value to your life. Instead, put your money to good use doing the things that bring you joy. After all, the whole point of automating your finances is to free your time up to worry less about money, not more.

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However, summer travel can also be quite pricey. The average vacation cost for a single person in the U.S. is now approximately $1,984 and $3,969 for a couple. If you plan to take the whole family, it gets even worse with costs mounting up to $7,936 for a group of four.

In the majority of cases, traveling means some combination of booking flights, hotels, rental vehicles, etc. – all things that can add up very quickly. However, that doesn’t mean you necessarily need to pay an arm and leg just to enjoy a little leisure. The following are ten tips to reduce your summer vacation expenses.

1) Research the Destination

First and foremost, the most important part of any trip is to know where you’re going and what you want to do when you get there. 

Start by doing a simple Google search of the area. You’ll find:

• Reviews of past traveler’s experiences – what they liked and didn’t like
• Sites and activities to try
• Reviews of the available hotels and restaurants
• Travel blogs with mock itineraries
• Videos where you can get a different vibe of what you’ll encounter

Knowing where the action is will help you to better choose your overnight accommodations, such as staying within walking distance of a popular hot spot. This will also help you avoid falling victim to tourist traps where you might be tempted to spend more time and money than you probably planned.

2) Play with the Dates

Once you’ve got a place in mind to go to, the next thing to do is investigate the best time to travel. This may be dependent on your work schedule or availability. However, if you can be flexible, then you might uncover some days or weeks that are better than others.

Begin by checking out:

• Flights – Use a free tool like Google Flights to see how the rates change day to day. Often, a midweek flight will be cheaper than one that leaves on a Friday or Saturday. Whenever possible, book several months in advance to get the best rates. 
• Accommodations – In conjunction with your flights, compare the prices of hotels or vacation rentals. This can also be done with Google, or you may prefer to use your favorite travel booking site for better results. Similar to flights, you’ll find there’s generally some variation in the pricing from week to week. Plus, the earlier you book, usually the better your rates will be.

For the ultra-flexible and spontaneous, you can sometimes scoop up some great last-minute deals on flights or hotels. However, they often require that you travel within a few days or weeks (as these are usually just airlines and hotels trying to fill unsold seats and rooms).

3) Consider Non-Hotels

Hotels are nice because you know exactly what to expect pretty much everywhere you go. However, if you haven’t tried out a vacation rental yet (such as Airbnb or Vrbo), then consider them as a worthy alternative. 

With a vacation rental, you usually get:

• A much bigger place to stay – often a full-size apartment or house (versus a 400 sqft hotel room)
• Sometimes more than one bathroom
• A full or partial kitchen
• In-unit washing machine and dryer
• Freebies like parking and WiFi included

Before making any commitments, be sure to read the fine print. Some accommodations come with specific rules, instructions, and potential fees that may impact your stay, so be aware.

4) Bring Only the Essentials

If you’re flying, then it’s extremely important to understand your airline’s bagging rules. Otherwise, the fees can add up pretty quickly.

Generally speaking, most premium airlines will charge for large checked bags but allow each traveler to bring one carry-on. If you’re clever, you can sometimes get all your belongings into these carry-ons and avoid having to check a bag at all.

Discount airlines will usually only allow you to bring a small personal item (like a backpack or purse) and charge for both checked and carry-on bags. Take this into consideration when tallying up the overall price.

For checked bags, discount airlines are also notorious for having lower weight requirements limiting bags to 40 lbs instead of 50 lbs. Either way, target to leave about 10 lbs of room in your bag for the trip back home. You’re almost certain to buy a few things that will cause your bags to become heavier, and you don’t want to get stuck paying a massive overweight fee.

5) Know Your Insurance

If you’re planning on renting a vehicle, then one question you’ll surely be asked is if you’d like to buy their auto insurance. To know whether this is needed, reach out to your current private auto insurance provider ahead of time and see if it extends to rented vehicles. Generally, most full coverage policies do – meaning you can skip this up-charge at the vehicle rental counter.

6) Use Your Travel Rewards

If you’ve got a rewards credit card or are signed up for frequent flyer miles, then put them to work! These points can often be exchanged for free flights or used as credit towards partner hotels and vehicle rentals. Depending on the rewards program, you can sometimes even get more bang for your buck if you book through their travel portal versus a conventional one.

7) Be Strategic About Your Meals

It’s often underestimated how much food can add up when traveling. However, eating out for every meal can quickly become pricey – especially if you’ve got a full family to feed. To save a few bucks, consider the following instead:

• Eat twice a day instead of three times. Try eating brunch to cover both breakfast and lunch.
• Avoid big-name, sit-down restaurants. Buy from local food vendors or smaller establishments.
• Shop at the grocery store. You’d be surprised how many grab-and-go options they have and how much cheaper they are than restaurants.

8) Book Activities In Advance

If there are particular places you’d like to visit or excursions you’d like to go on, it may be helpful to buy them ahead of time. Most will usually give you a discount for booking online (or charge more if you wait to buy your tickets at the gate). This will also help you to make fewer impulse purchases once you’re there.

9) Find Free Stuff to Do

Not every activity on your vacation needs to cost you money. If you do enough research, you may find there are plenty of free things to do and enjoy, such as:

• Attending a local festival
• Going to the beach
• Visiting a park
• Going hiking
• Taking a walking tour

10) Track Your Spending

It’s way too easy to get in the YOLO mindset when you’re on vacation. But just because you’re in a new place and having fun doesn’t mean you’re suddenly made of money. Instead, ease the pain in your wallet after you return home by keeping track of your purchases daily while you’re on your trip.

This doesn’t have to be labor intensive. Rather than do it manually, try using a helpful budgeting app like Buxfer. Earmark those purchases or credit card swipes that are travel-related, and ensure that the grand total stays within your budget. After all, half the fun of a good trip is knowing that you got it for a deal! 

Featured image credit: Pexels

While there are certainly some financial and economic indicators to take note of, the truth is that most of it is just noise! What happens on a day-to-day basis with your money has very little to do with the outside world. In fact, the grand majority of successful financial behavior can be attributed to focusing on just a handful of important areas.

This is true not just for money but also for many other fields. It’s a phenomenon known as the 80-20 rule, and in this post, we’ll explain how it can be used to help improve your financial well-being.

The 80-20 Rule

Simply put, the 80-20 rule is an observation that 80 percent of the effects come from 20 percent of the causes. It’s also sometimes referred to as the Pareto Principle, named after the Italian economist Vilfredo Pareto who first developed it.

In the 19th century, while studying income distribution, Pareto recognized that 80 percent of the land was owned by only 20 percent of the population – hence they controlled most of what was happening in the country. This theory can be generalized to say that only a handful of the inputs determine most of the outputs. It’s applied to many fields of study including economics, business management, quality control, time management, and productivity.

Focus on the Top 20 Percent

One of the main benefits of using the 80-20 rule for personal finance is that it demonstrates that you don’t have to be an expert money manager or stock-picking wizard. All a person needs to succeed with their finances is to really hone in on a few key critical activities.

1- Budgeting

The root of many money problems comes down to a simple discrepancy between how much money a person thinks they spend in a month versus how much they actually spend. As humans, we’re really bad at estimating this figure, and that usually leads to more money going out than coming in.

We could all learn something by modeling our household finances after successful businesses. Profitable companies regularly prepare budgets to ensure they’re making money. If you adopt the same strategy of tracking and planning your finances, you’ll be more likely to stick to your budget and stay within the confines of how much you earn.

There are plenty of good ways to budget. You can use a helpful app like Buxfer, or you can do it manually by making a list of your expenses. It may be helpful to think of them in categories such as:

• Fixed expenses – Regularly recurring monthly expenses such as your mortgage/rent, mobile phone, utilities, insurance, etc.
• Variable expenses – Costs that are subject to change such as entertainment, groceries, household needs, auto maintenance, etc.
• You can even factor in some monthly buffer for unplanned expenses such as a bill that’s larger than normal or a necessary repair. 

Compare the total of these expenses against your income and see if you’re making money or losing money every month. If you’re ever in the red, then there’s work to be done. Look through your spending and determine where cutbacks can be made.  

2- Debt Reduction

Debt is usually a negative force working against your financial well-being. Because nearly all debt incurs interest, you’ll end up paying far more for the thing you purchased than you would have originally if it had just been bought with cash. 

What’s worse is that when left unchecked, that interest will build on top of itself. This can lead to situations where even though you’re making payments, the balance never seems to go down – feeling like you’re stuck with this bill forever. People with high-interest credit card debt often get stuck in this type of vicious cycle.

When it comes to debt, the first thing to know is the terms of your loans. Whether it is a credit card, loan, or pay now pay later arrangement, make a list of the following:

• The remaining balance
• The minimum payment amount and when it’s due
• The APR (i.e., interest rate) you’re being charged. If it is currently zero, find out when that is set to change
• Any applicable late fees or other misc. charges

To get on track, ensure that you’re always making at least the minimum payment. This will help ensure that your credit history doesn’t take a hit.

From there, make a plan for how you’ll eliminate each debt you have one by one. A good place to start is by focusing on high-interest debt. The longer this accumulates, the more detrimental it will become. Devote all available resources to paying down the principal as quickly as you can. Rinse and repeat this process with every debt on your list.

3- Investing for the Future

Setting aside money is great. However, to really make it grow, you’ll want to do two things:

• Avoid taxes
• Invest it for compound growth.

Despite how complicated those objectives may sound, it is really just as simple as joining your employer’s retirement plan, such as a 401(k), and then contributing as much as possible. Chances are they have a matching incentive, which is basically being rewarded for saving your own money with even more money.

If your employer doesn’t have a retirement plan, you can always open a Roth IRA at any brokerage offering one. Pick plain vanilla funds like a stock market index and contribute regularly.

Until the Federal Reserve decides to reverse interest rates, high-yield savings accounts are also a great place to save for emergencies. With many of them currently paying interest as high as 5%, that’s not a bad return for just letting your money sit there.

4- Credit Rating

Credit is something that most people don’t think about until they really want to buy something big (like a house or vehicle) and need a loan. However, the problem is that if your credit score isn’t already that great by the time you want to apply, then it’s already too late.

Working on your credit score (specifically your FICO Score) is something you need to be doing now and always. This can be done by managing your credit as follows:

• Find out your FICO Score. Go to Experian and check it for free.
• Download a copy of your credit report and check it over for errors.
• Sign up to auto-pay your credit cards (as well as your other bills) every month approximately one week before they’re due. Then check on them a few days later to make sure the payment went through.
• Use your credit sparingly. Try to keep the utilization to less than 30 percent of your credit limit. 
• If possible, pay your credit card balance in full each month. This will not only help prevent you from being charged interest but also keep the utilization ratio down.

For more great credit improvement tips, check out this article here.

5- Insurance

Finally, there’s going to come a time when you’ll be faced with a medical dilemma or home repair that you can’t pay for on your own. For these situations, you’ll need the help of insurance to provide you with the right coverage.

There are many different types of insurance policies. The top ones to carry are:

• Healthcare – Medical, dental, and vision. 
• Auto – Protects you and your vehicle in case you’re in an accident.
• Home (or Renters) – Helps pay for any damage to your home caused by fire, wind, or other perils.
• Life – Provides a death benefit to your loved ones in case the worst was ever to occur.

Similar to your credit score, most people don’t think about insurance until it’s already too late. Therefore, get all the protection you can afford now so that you’re ready for whatever life throws your way. 

Start by checking on what your employer provides. Most offer health and even life for a discount. For auto and home coverage, it helps to bundle with the same provider because you’ll get a lower price and only have to work with one agent.

The Bottom Line

Money doesn’t have to be as complicated as everyone would like you to believe it is. Use the 80-20 rule to focus on the top activities influencing your financial health. This will not only help to reduce your stress but also do more for your financial future.

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Going forward, that’s about to change! As of this summer (pending court approval), homeowners may soon only have to share a much smaller portion of the sale of their home. 

However, for every force, there’s an equal and opposite force – meaning that this good news for home sellers could possibly translate into bad news for home buyers … or not depending on the circumstances. In this post, we’ll discuss what’s going on and what this might mean the next time you buy or sell a home. 

How Real Estate Agents Currently Get Paid

For decades now, real estate agents have relied on a simple payment structure. When a home is sold, the party selling the house pays their agent a fee of approximately 6 percent of the sale price. For example, if your house goes for $300,000, then your agent would receive $18,000.

The seller’s agent then splits that fee 50-50 with the agent representing the party buying the house – typically 3 percent for both. This was an agreement known as “cooperative compensation”. Following our example, that would be $9,000 for each agent.

This means that there is no out-of-pocket expense to the buyers. Instead, the burden of compensation falls solely on the seller, reducing the equity they should receive once the sale is complete.

What Changed?

If the arrangement described above doesn’t sound fair, then you’re not alone. Even though that’s how it’s been for some time now, a group of homeowners decided to challenge this practice. And surprisingly, they won!

According to the Sitzer-Burnett case, the NAR (National Association of Realtors) was found to be promoting anti-competitive practices among its real estate brokerages and listing services. As a result, there was a verdict in October 2023 to pay $1.8 billion in damages.

In March of 2024 after months of negotiation, the NAR reduced this settlement down to just $418 million. However, one important stipulation was made: No more cooperative compensation.

As was argued, this arrangement is anti-competitive because it basically fixes commission rates for all agents making it nearly impossible to shop around for a better deal. Essentially, it wouldn’t matter which broker you used because they would all expect this same 6% compensation.

If the proposed settlement by the NAR is accepted, then it would prevent listing agents from posting buy-side commissions in the MLS (multiple listing service). This would mean that the seller’s agent is no longer obligated to give the buyer’s agent a commission. 

How This Change Affects Everything

This seemingly small rule change will be pretty influential – for both sides of the table.

Less Out of Pocket for Sellers

If sellers are only responsible for paying their listing agent (instead of both), then it would cut the amount they have to pay by half. In our previous example, that would mean an extra $9,000 of home equity that the sellers get to keep.

More Out of Pocket for Buyers

Buyer agents aren’t going to work for free, and if the seller’s agent isn’t compensating them, then they’ll be looking to their clients for payment.

For the already cash-strapped, especially first-time homebuyers, that’s likely to be a major hurdle. It’s already tough for most people to come up with the 20 percent they need for the down payment. Asking another 3 percent to pay an agent will make it even more challenging.

At the moment, buyers cannot roll agent commissions into their mortgages. However, the industry widely expects the Federal Housing Finance Agency, overseer of mortgage giants Fannie Mae and Freddie Mac, to change those rules.

Would Home Prices Decrease?

If sellers don’t have to shell out as much to agents, does that mean they’d be more willing to accept a lower amount? Thus, wouldn’t home prices go down?

Not likely. Most sales prices are established based on comps (i.e. comparable property listings). In other words, if everyone in your neighborhood has a comparable house to you and they sold for $350,000, then why wouldn’t you? Lower brokerage fees or not, most sellers are going to be motivated to get the top dollar they can get.

How Home Buying Might Further Change

No one knows how exactly the real estate landscape will look after this rule goes into effect. However, being such a significant update, there might be some new developments take shape that we haven’t seen previously.

Here are a few possible scenarios:

• Buyer’s agents could be willing to accept less than 3 percent. To be competitive, they may possibly be willing to take 2 percent or even 1 percent.
• Even though listing a commission on the MLS would be forbidden, this wouldn’t stop seller and buyer agents from negotiating rates offline. This would keep things essentially the same as they already are.
• If the market ever swings in favor from sellers to buyers, then shoppers might be able to bake their agent’s commission into the offer. This would again make it so that the seller pays for both.
• Given the popularity of sites like Zillow or Redfin, home buyers might skip real estate agents altogether. Instead, they could use these online platforms paying a discounted commission or nothing at all.
• Alternatively, home buyers who cannot afford an agent may have no choice but to use a self-serve website. Agents could become exclusive to the wealthy.

When Do These New Rules Take Effect?

If the judge signs off on the NAR’s settlement, these changes could occur as soon as mid-July. From there, time will tell how this will all play out and who really ends up paying for who.

In the meantime, mortgage rates don’t appear to be going anywhere soon. It’s been estimated that they’ll be relatively high until at least 2025 – possibly never going back down to where they were during the COVID pandemic.

Therefore, the best thing you can do is to be prepared. Plan your budget, allow for some flexibility in your cash flow, and stash away as much on the side as you can for a solid down payment. That way, when the right opportunity strikes, you’ll be ready – no matter what the real estate commission rules work out to be.

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Receiving an unplanned sum of money like this is referred to as a windfall. Although there is no set amount to define a windfall, you’ll know one when it lands in your hands.

The problem with windfalls is that if you don’t do something productive with them, there’s a good chance they’ll slip between your fingers. For instance, take lotto winners. According to the National Endowment for Financial Education (NEFE), 70 percent of recipients lose all the money they received within several years. 

This is why many financial professionals often suggest using a windfall to do something positive for your finances – namely paying off unwanted debts like credit cards, student loans, or even your mortgage. However, is this really the best option for your windfall, or could there be even better uses? In this post, we’ll discuss when paying down debt makes sense and explore some other possibilities. 

When Should You Pay Off Your Debt?

Paying off your outstanding debts is generally a good thing. If nothing else, you’ll be releasing yourself from the financial and (let’s not forget) legal obligation of paying someone back for the money you borrowed.

Here are a few of the most common instances when it makes good sense to eliminate your debt – especially if you’ve recently come into a large windfall.

High Interest is Crushing You

Not all debt is created the same – especially when it comes to the APR or annual percentage rate (i.e. interest you owe) of the money that’s been borrowed. If that number is too high, then you may be hemorrhaging money without even realizing it.

A good example of this situation is a revolving credit card balance. Because credit card interest compounds daily, it doesn’t take very long for your balance to double in size – you can see this for yourself using a free online calculator. In this case, it would make sense to pay off the balance immediately.

Free Up Cash Flow

Another thing debt can do is get in the way of how much money you have available to spend. A few hundred dollars here or there for your vehicle or a personal loan can easily take a bite of a thousand dollars or more out of your monthly budget. 

This is precisely the reason that many financial professionals will recommend that people who are about to enter retirement should pay off their homes first before separating from employment. By eliminating what is probably their biggest monthly payment, the mortgage, their retirement income will stretch a lot further.

Mental Relief

There is something very satisfying about becoming debt-free. Especially if you’ve ever felt anxiety or panic over waiting for your next paycheck or how you’ll make ends meet, the act of eliminating what you owe others can be an undeniable feeling of accomplishment and positivity. If putting your mind at ease is something you prioritize above all other financial goals, then pay off what you owe until you’re at a level where you feel comfortable.

What Else Should You Use Your Windfall to Do?

Paying off debt certainly has a lot of great benefits, but it may not always be the most sensible financial move. There may be other places where your money could be better utilized. The following are a few examples.

Contribute More to Your Retirement Accounts

If you’re not already maxing out each of your retirement accounts such as your Roth IRA or 401(k), then you could use your new-found windfall to assist. Not only would saving more help increase the potential growth of your nest egg, but you’d also be taking advantage of sheltering your contributions as well as future earnings. 

Though you wouldn’t be able to make a direct contribution to an employer plan, you could use the extra funds to offset your income and increase your contribution limits for the year. For example, if your windfall is $10,000, then you could raise your 401(k) contribution by the equivalent amount and then spend the $10,000 windfall on your basic living expenses.

Buy Income Producing Assets

Ever thought about becoming a landlord? What about owning stocks, ETFs, or REITs that pay monthly distributions? There are plenty of investments that you could purchase and will produce additional income streams. 

A good rule of thumb is to compare the interest you owe on your debt versus what you may potentially receive. For example, if you were lucky enough to have gotten a mortgage a few years ago when interest rates were around 3%, then it makes more sense to keep your windfall in a CD where the distributions are closer to 5%.

Improve Your Home

For most Americans, their home is their greatest asset. However, if you have important maintenance or major upgrades that are left undone (such as a new roof or outdated appliances), then this could impact the marketability of your house someday when you go to sell it. Therefore, you could pump some or all of the windfall into home improvements that will have a good ROI.

Finance Your Education

It’s often said that the best investment a person can make is in themselves. If you’ve always wanted to finish college or get a specific certification, now could be the time to do so with these new funds. Carefully consider what your potential income or job prospects could be first.

How to Decide What To Do With Your Windfall

Before taking any action with your new windfall, you’ll want to do the following.

Take a Minute

You don’t have to rush into any major decisions. Your windfall isn’t going anywhere. 

Take the time to list out your options and weigh the potential pros and cons. If you’re in a relationship, be sure to include your partner in that discussion too since it will likely affect them as well.

Don’t Get Scammed

One of the worst things to do with new money is to fall for a “get rich quick” scam. This might be things like putting all your money into cryptocurrency, listening to bad financial advice online, or handing it over to some unknown financial representative. 

In these cases, follow your gut. If it’s a path that you can’t understand or at a minimum explain to someone else why it makes sense, then that’s probably not the option for you or your money.

Pace Yourself

It’s easy when you’ve got newfound money to think you’ve got more at your disposal than you really have. This is why budgeting your money, no matter how much you have, is always strongly recommended.

If you’re not already, use a budgeting app like Buxfer to help keep track of your spending. Buxfer connects to all of your bank accounts and consolidates them into one real-time report. That way you’ll always know where you stand and if your finances are on track.

Receiving a nice large windfall can be a fairly rare event. For this reason, it is important that you carefully consider how it might be used to improve your situation. – whether that means paying off debt or pursuing other worthwhile financial avenues.

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With more than 75 percent of stocks and ETFs (exchange-traded funds) paying a dividend, it’s a pretty safe bet that many Americans will report these earnings in some form on their tax return. However, the big question will be: Should they be claimed as qualified or ordinary dividends?

In this post, we’ll explore the difference between the two and give you an easy way to tell the difference. We’ll also explain why making qualified dividends a part of your portfolio is so lucrative to investors.

What Are Qualified Dividends?

Qualified dividends are simply dividends that “qualify” to receive preferential treatment from the IRS. In other words, you’ll pay lower taxes on this income. 

To be considered qualified, these distributions must:

1. Come from shares that were held for at least 61 days within a 121-day period that begins 60 days before the ex-dividend date.
2. Be issued by domestic corporations and certain qualifying foreign corporations.

If the dividends are considered qualified, then they’ll be subject to more favorable capital gains tax rates. These brackets are currently 0%, 15%, and 20%. By contrast, the tax brackets for ordinary income go all the way up to 37%, and income thresholds are much lower.

Example of Qualified Dividends

Suppose you bought shares of popular dividend stock Verizon Communications (symbol: VZ) over a year ago. Since Verizon is a U.S. company and you’ve clearly held the stock longer than 61 days, then the dividends you’re receiving would be classified as qualified dividends.

What Are Ordinary Dividends?

Ordinary dividends (also called non-qualified dividends) are those distributions that do not meet the IRS requirements to be considered “qualified”. This will usually be because the shareholder didn’t own the shares for long enough, or that the dividends came from a non-domestic company.

Ordinary dividends are paid by various types of assets, including certain stocks, mutual funds, and ETFs. The dividends from REITs (real estate investment trusts), another popular high-yield security, also are considered non-qualifying because of the special tax treatment for these types of organizations.

Unlike qualified dividends, ordinary dividends do not receive special tax treatment. They will be taxed at the same rates as the money you earn from your job.

Example of Ordinary Dividends

Let’s again use Verizon in our example. We already established Verizon as a domestic company, so no issue there. 

Let’s assume you bought your shares right before the ex-dividend date so that you’ll receive a dividend payment. However, you then sold the shares four weeks later to pursue another investment. Since you did not meet the IRS 61-day minimum holding requirement, the dividend income you’ll receive will be taxed as ordinary.

How Do I Know When Dividends Are Qualified or Ordinary?

The easy way to tell the difference between qualified and ordinary dividends is to let your brokerage tell you. Each year, all U.S. financial institutions are required to send out IRS tax form 1099-DIV to those customers who receive dividend income. This form will clearly state how much of their distributions counts as qualified versus ordinary (boxes 1a and 1b).

What Are the Benefits of Qualified Dividends?

The main advantage of income from qualified dividends is better tax treatment. Depending on how much of your money comes from these distributions, you may pay several thousand dollars less each year to the government than your peers.

For example, consider two people with AGIs (adjusted gross income) of $100,000. One person gets all their income from a regular job while the other makes their money solely from qualified dividends.

Using 2023 tax rates and assuming each file a joint return with their spouse:

• The person with the job (i.e. ordinary income) would be in the 22% marginal tax bracket and pay approximately $12,615 in federal taxes.
• The person with qualified dividend income wouldn’t even pay any taxes on the first $89,250 of distributions they received. The remaining $10,750 would be taxed at 15% for a total of $1,613 in federal taxes.

As you can see, that’s quite a major difference in tax liability. This is why the wealthy often pay a lower effective tax rate than lower and middle-class citizens. Since the upper class is more likely to receive distributions from investment returns, there’s a good chance that this income will be considered qualified and taxed lower than money earned from a traditional job.

This can be a powerful strategy for anyone looking to retire with the lowest tax bill possible. In conjunction with other tax-efficient moves (such as utilizing a Roth IRA), investing in qualified dividends can be another way to keep your federal taxes to a minimum.

How to Acquire More Qualified Dividends

If owning more dividend-paying securities sounds like something that you’d like as part of your overall investment strategy, then here are a few tips for acquiring them.

Do Your Homework

First things first, look for stocks or funds whose distributions will count as qualified according to the IRS. These will typically be large blue-chip companies that are common household names such as IBM or Johnson and Johnson. 

During your research, you’ll probably discover that REITs and some foreign stocks may pay higher dividends. While it’s okay to own these types of securities as well, again – be mindful that they won’t qualify for preferential tax treatment.

Invest for the Long Term

With your investment targets selected, the next thing to do is to buy and hold them – preferably longer than the IRS 61-day requirement. In general, adopting a long-term mindset for your portfolio is a better strategy anyway because most securities tend to do better with time.

Consider the Type of Account

Tax-deferred retirement accounts like 401(k)s and traditional IRAs are great for building your nest egg. However, the withdrawals from these accounts are typically treated as ordinary income – regardless of whether they are contributions, capital gains, or dividends. To qualify for better tax treatment, your securities would need to be held in a regular taxable brokerage account and not a retirement account.

This doesn’t automatically mean that you should stop contributing to your 401(k) or IRA. Again, you’ll have to consider the whole picture. In instances where you already invest outside of your retirement accounts, buying assets that produce qualified dividends can be more tax efficient over other options such as putting your money into a high-interest account.

Are Qualified Dividends Right for You?

Dividends are great for investing and smart passive income. However, they can be even more lucrative if they qualify for preferential tax treatment. Do this by paying attention to which securities you buy, how long you own them, and which accounts you hold them in. Be sure to weigh the tax benefits with your overall investment strategy. 

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If so, then you’re not alone. Gen Zers (as well as many others) are becoming fed up with the “quiet luxury” trend of 2023. This is when someone casually wears certain expensive items or spends their money in ways that signal to others how supposedly wealthy they are.

In response, more and more people are taking to social media to inspire a new financial lifestyle trend for 2024: loud budgeting. 

What is Loud Budgeting?

Have you ever received a compliment on the shirt you’re wearing, and then proudly told that person that it only cost $5 or came from a thrift store? Or maybe you declined an expensive dinner out with friends because you knew that it would impact your ability to pay your other bills this month?

If so, then you’re already familiar with the concept of loud budgeting. Loud budgeting is being obvious and forthcoming about your frugality.

This is not to be confused with being cheap or tightfisted. Loud budgeting is about taking the power back. You’re acknowledging publicly how you’re managing your finances and showing no regrets – despite the judgment it may bring from others. This enables those who practice it to have a better sense of control over their money instead of the other way around.

It’s no surprise that loud budgeting is a growing trend on TikTok, especially among Gen Z. While many videos on these platforms appear to show young people vacationing at exotic locations and eating at fancy restaurants, the reality for most is quite different.

According to a study by consulting firm EY, 52% of Gen Zers are afraid of not having enough money while another 39% are afraid of making the wrong choices financially. Combine this with the constant imagery of other people appearing to “have it all” and live a life of luxury, and it can bring about some unnecessary feelings of anxiety and inadequacy. Hence, loud budgeting can be a healthy alternative to consumerism by helping young people make more pragmatic financial choices and stay within their means.

The Principles of Loud Budgeting

Although the name may be new, loud budgeting is not much different from the fundamentals of good frugality. Essentially, it comes down to five important characteristics. 

1) Be True to Who You Are

Everyone is guilty at one time or another of having used their money to find external validation. Yet, the flaw in this approach is that we’re asking for something from an environment that will never be satisfied.

Playing “Keeping Up with the Joneses” never leads to true happiness or fulfillment. Instead, find that sense of worth in yourself and be whoever you want to be. Express this to the world and don’t let the opinions of others cloud the goals you’ve chosen for yourself.

2) Put Your Financial Priorities First

Again, when we don’t control our money, money controls us. This can originate from the expensive influence of others, or even from an internal insatiable human instinct to acquire more than what we need. To defy this part of our brain’s programming, we need to decide what it is we want to accomplish with our money and how we’ll get there.

If that means having to say “no” once in a while, then so be it. The emphasis of loud budgeting is to unapologetically make your position known. If saving for a down payment or simply trying to stay within your budget is what you want to accomplish, then who is anyone else to tell you otherwise? 

3) It’s Not “I Don’t Have Enough Money”

Loud budgeting isn’t just for those who are poor or struggling. In fact, many people who are saying no to certain purchases can certainly afford them! They’re just making a conscious choice not to. 

This is an exercise in self-resilience that good budgeting develops. Anyone with an income – whether it’s $50,000 or $500,000 – can improve their financial position by being disciplined in their financial motives. After all, just because you “can” buy something doesn’t mean you have to.  

4) Challenge Yourself to Do Better

One of the exciting aspects of frugality that most people never get is what a game it can be. Instead of paying full price for something you want, why not see if you can do better?

• Is it going on sale soon?
• Can I find a coupon code?
• Is it available at another retailer for a discount?
• Can I negotiate a better price?
• Could buying it used help me save some cash?

Imposing a friendly challenge upon yourself to get something at a lower price not only helps your budget but also can help you feel more like you really earned that purchase.

5) Send a Message to Corporate America

Since the COVID pandemic, inflation has been out of control. Big business has stopped at nothing to cash in on the economic disruption that was caused and turn it into an opportunity to pocket as much profit as they could for themselves. This has left many working-class families stretched beyond thin trying to keep up with rising prices, let alone basics like food and shelter.

Therefore, loud budgeting can be our opportunity to say, “Enough is enough”. We don’t have to give in to the pressures of consumerism or buying the latest trend because some brand or corporate sponsor says so. Our message can be that we’re in control of how we choose to spend our hard-earned money. 

How You Can Practice Loud Budgeting

If you’re sold on the idea of loud budgeting but unsure of how to make it a part of your everyday life, then rest assured you’re only a few steps away from integrating it into your financial habits.

Decide What’s Most Important to You

The first thing to do is to figure out what you value. Set your goals for who you want to be and how money can help you accomplish them.

In terms of what you like to buy, one of my favorite quotes comes from financial guru Ramit Sethi when he says, “Spend extravagantly on the things you love and cut costs mercilessly on the things you don’t.” Essentially, he’s saying to prioritize purchases that will bring you joy and ignore everything else.

Make Your Position Known

This is where you put the “loud” in loud budgeting. When someone suggests you should buy something you don’t want or need, don’t be afraid to let them know why you won’t be doing that. 

This of course should never be done in a mean or hurtful way. Again, you’re just reiterating the commitment you’ve already made to yourself and reinforcing why that position is important.

Try this out and you’ll quickly realize who your real friends are and who they aren’t. Anyone who truly has your best interests at heart won’t chastise you for staying within your budget. Instead, they’ll support and respect it because they recognize it as a form of accomplishment.

Practice What You Preach

It’s not enough to simply go around telling everyone what you are or aren’t going to spend your money on. You have also to do the things you say you’re going to. Otherwise, you’ll never come any closer to actually reaching your financial goals.

This can be done by regularly monitoring your budget. Get in the habit of reviewing your transactions and ensuring that your overall spending patterns align with the limits you’ve set for yourself. 

Overall, the goal of any good budget is to have a plan for your money and then make sure you’re sticking to it. By expressing your goals to others, you’re already putting yourself in a position of accountability to others. Therefore, be the good financial steward you aspire to be.

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While it’s admirable to see younger people embracing their financial future, it does also open the door to other potential money-saving opportunities – mainly in the area of taxes. If you trade stocks outside of your retirement accounts using one of these trading apps, then here’s what you need to know about the way they will be taxed and how the IRS treats this income differently from other types of money you earn.

How Is Income Taxed?

Generally speaking, when you make money from your job, it will be taxed as what’s called “ordinary income”. In the U.S., the federal tax system is a progressive tax system where the more money you earn, the higher the tax rate imposed on the top dollar. This is also called your marginal tax rate.

There are currently seven tax rates or “brackets” as they’re often referred to. Under the Tax Cuts and Jobs Act of Jan. 1, 2018, those rates are:

• 10%
• 12%
• 22%
• 24%
• 32%
• 35%
• 37%

Taxpayers move from one bracket to the next based on their tax filing status (single, married filing jointly, etc.) and the amount of AGI (adjusted gross income) they report on their annual federal tax return. These income thresholds are refreshed by the IRS each year for inflation and can be found here.

Now that interest rates are high once again and banks are offering customers significant payouts on their deposits, many people will be reporting interest income on their tax returns. The IRS treats these interest payments as ordinary income and taxes them the same as your paycheck.

How Are Stocks Taxed?

Unlike the money you make from your job, the earnings you can make from stocks or other equities such as ETFs (exchange-traded funds) are taxed differently.

Long-Term vs Short-Term Capital Gains

The first question is how long you’ve held the equity before selling it.

• If you owned the asset for more than one year, the earnings are considered long-term capital gains and will be subject to long-term capital gains tax rates.
• If you owned the asset for one year or less, the earnings are considered short-term capital gains and will be taxed as ordinary income.

The long-term capital gains tax rates are quite a bit less than those for ordinary income. Currently, there are just three tax brackets:

• 0%
• 15%
• 20%

The income thresholds at which these tax rates start are also more generous than those for ordinary income. For example, in 2024, a single filer earning over $100,525 of ordinary income would find themselves in the 24% tax bracket while the same amount from long-term capital gains would land you in the 15% bracket.

At the beginning of each year, your brokerage should send you tax form 1099-B summarizing which capital gains were long-term vs short-term.

Qualified vs Non-Qualified Dividends

If your equities pay dividends, then a similar question will be asked to determine if the distribution was qualified or non-qualified. In general:

• Qualified dividends will enjoy lower long-term capital capital gains tax rates
• Non-qualified dividends will be taxed as ordinary income.

Similar to a 1099-B, your brokerage should also send you tax form 1099-DIV summarizing which dividends were qualified vs non-qualified.

How to Maximize Your Income for Tax Efficiency

Since long-term capital gains tax rates are so much lower than ordinary income tax rates, it makes sense to derive as much of your income from equities as possible. This is a well-known tax optimization strategy that frequently gets used by the wealthy. High-paid executives and business owners will often forgo traditional compensation in place of something more valuable – stock.

For example, the CEOs of many big-name tech companies will often pay themselves a ridiculously low base salary. However, their actual total compensation including stock options could be worth several millions for the year. Case and point: Mark Zuckerberg of Meta (formerly Facebook) was paid just one dollar as a base salary but received $27 million in total compensation for the year. 

This is why top earners and extremely wealthy people are able to pay so much fewer taxes than those in the middle class earning significantly less. Through trading equities and receiving dividends, they have very little ordinary income and therefore aren’t levied as heavily for taxes. 

To put this in perspective, a single filer in 2024 earning up to $518,900 for the year would be subject to the 35% tax bracket. Meanwhile, another individual making the same money from their stock portfolio would pay just 15%.

Tax Loss Harvesting

Another useful aspect of the way stocks are taxed is that you also have the ability to deduct losses against your gains. Depending on how your portfolio performed over the year and what was traded, you may be able to lower what you owe the IRS.

For instance, let’s say you took in $60,000 in long-term capital gains and qualified dividends for the year. However, you also sold a few of your positions and incurred a $25,000 loss. In this case, your net gain would be $35,000. Since the long-term capital gains tax rate is 0% for single filers earnings up to $47,025 for single filers in 2024, this means you’d essentially have to pay nothing.

The Ultimate Way to Reduce Your Taxes

While trading stocks inside of a regular taxable brokerage account can be fun, a better way is in a retirement savings account. This could be through an IRA or even an employer-sponsored plan like a 401(k) – if they allow individual stock purchases.

Trades that take place in these accounts aren’t subject to the normal capital gains rules as mentioned above. Essentially, all trading that takes place from within the account is isolated from taxes. 

You only have to pay taxes when the money is officially withdrawn from the retirement account. This can be done penalty-free any time after age 59-½. Therefore, if you don’t need the money any time soon, then it pays to grow it from within a retirement account.

The ultimate way to do this is with a Roth IRA. Because Roth IRA withdrawals can be made tax-free after age 59-½, they’re the optimal account to use for stock trading.

If you’re not already, consider funding your Roth IRA each year up to the maximum limit. Review your budget if needed and make spending cuts so that you’ll have extra cash to set aside. In the future when you’re collecting tax-free income from your Roth IRA, you’ll be glad you invested the effort into it now.

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