Americans typically have similar major purchases in life, the main culprits being the purchase of a home, purchase of a new car, paying for a child’s college for 4 years, and any medical procedures that may arise, both elective and non-elective. With enough preparation, coupled with the correct budget, timeline, and expectations, these big purchases can be handled with ease. Listed below are the general guidelines for saving and investing for these large life events, along with some tips and tricks that you may not have considered:
- Establish a Realistic Budget and Timeline – Setting expectations correctly from the beginning can be difficult, but it will make saving and potentially investing for these large-scale purchases much more data driven than emotionally driven. Associating a timeline with this budget allows for more accurate tracking of savings and investing targets.
- Putting Money Aside – Once a budget and timeline are established, setting money aside from wages/salary each week or month is critical. The money saved can then be invested in conservative assets like money market funds or Certificates of Deposit (CD’s) for safety, or invested into equities, Mutual Funds, or ETF’s for potentially higher growth with more risk.
- Avoiding Analysis Paralysis and Executing the Plan – For some, it’s very easy to get into savings/investing mode, and then never pulling the trigger on these bigger purchases for fear of spending such a large amount of money at one time. This “Analysis Paralysis” can be all consuming, so it’s very important to keep an eye on the objective, whether that be a new home, new car, or an elective medical procedure.
Home Buying Tips and Tricks:
- Generally, if you’ve lived in a primary residence for any 24 months of the last 60 months (2 of the last 5 years), you should be eligible for the Section 121 Exclusion. This means you’ll get an exclusion of up to $250,000 ($500,000 if married and filing jointly) in capital gains when the property is sold.
- Traditionally, when interest rates increase, real estate prices decrease as additional inventory sits on the market – this is known as a buyer’s market. When interest rates decrease, real estate prices increase as inventory sells quickly – this is known as a seller’s market. The reality for the US currently is that the US faces both high interest rates and high real estate prices that are not coming down. This is due to lack of inventory because many potential sellers don’t want to lose their mortgages with interest rates generally below 4% only to have to pick up a new mortgage at an interest rate of over 6%. Only recently has the Federal Reserve indicated that they will begin to reduce interest rates, albeit very slowly and with constant caution against inflation picking up again. Nonetheless, there may still be some real estate deals to be had in certain markets and price tiers where it would make sense to buy now, suffer for the next 12 to 18 months as the interest rates fall back to equilibrium, and then refinance to a lower mortgage payment. This strategy should be pursued with caution as bidding wars are still common in most markets and price tiers. Consulting with a knowledgeable real estate agent who truly understands current market conditions is invaluable and should be able to help guide you to the diamonds in the rough. As real estate agents say, “Marry the price and date the rate!”
- When buying a new primary residence, it can be very advantageous to look at properties that don’t present well due to awkward layouts, weird paint colors, or have strange odors. Many people overlook these particular properties because they don’t have the vision to see them renovated into something special. It pays to proceed with a little caution though and bring along a reputable contractor or home inspector to tour these properties, as they will be able to point out potentially costly pitfalls. Always keep in mind the total overall budget and the timetable for all home renovations.
Saving for College Tips and Tricks
- College might be the goal for most, but depending on future career goals, type of work associated, and projected salary throughout adulthood, this may not be the best option for everyone. Certain majors are more advantageous for certain people, and some majors do not lead as easily to well-paying jobs. Vocational schools and programs should not be looked down upon as there have been fewer people going into the trades over the past decades due to the big push from parents to send all children to college. With solid starting salaries due to scarcity and opportunities to own your own business, these trades jobs are sorely needed and will have increased value for the foreseeable future.
- Once a college or vocational program is selected, finding the right school is paramount – one that doesn’t break the bank and fits the child’s and parent’s expectations.
- Saving in a 529 Education Plan for your child’s college/vocational school costs can be very advantageous, due to investment compounding and potential tax benefits in each year contributions are made.
- Scholarships are another fantastic way to get some education funds for minimal effort.
For more in-depth information about navigating the costs of higher education, please check out Baldwin’s “The Costs of College and Its Alternatives: A Guide for Parents and Grandparents” article that was recently released at the following link:
For more in-depth information about 529 Plans, check out Baldwin’s “529 Plans for Higher Education – What You Should Know” article that was recently released at the following link:
Medical Procedures (Elective and Non-Elective)
- Having appropriate insurance for yourself and your family for both elective and non-elective medical procedures is the first and best line of defense when accidents happen. Having solid health, dental, and vision insurance, along with other more specialized insurance options within these categories, is something that all employees want, and smart employers offer. From an employee’s standpoint, understanding the different types of insurance and comparing the different packages offered can potentially save hundreds, if not thousands of dollars every year. From an employer’s perspective, offering a comprehensive menu of medical insurance options is a prudent way to attract and retain top talent, while keeping your workforce generally healthier.
- Always having an Emergency Fund for rainy days is a good idea with generally 6 months to a year’s worth of anticipated monthly bill payments as a goal. Your Emergency Fund can be the buffer needed to pay medical bills at a critical time when recovery is most important, and you’re not working.
- Having short-term and/or long-term disability benefits, either through your employer’s benefit package or outside of it, should be something to investigate. Understand that everyone thinks they won’t need them until they do, and about one-fourth of employees run into situations where they utilize them every year.
- If you choose a high deductible health plan, utilizing the HSA feature of the plan can supercharge savings for elective and non-elective medical procedures. Money can be saved in these accounts tax-free and be invested to grow tax-free. When any funds are needed, if they are used strictly for medical expenses, then the distributions are tax-free as well.
- Staying healthy and avoiding risky behavior are the easiest ways to avoid situations where medical expenses come into play, so eating healthfully, exercising, and taking care of your mental health can be very valuable throughout life.
If you have any questions regarding your next major life purchase, we at Baldwin would love to help in any way that we can. For over 25 years, we’ve helped save our clients money, invest for the future, and optimize their financial lives.
Matt Civitello
Tax/Accounting Associate
Matt joined Baldwin Family Office in 2023 after working in various small and mid-sized tax firms, focusing on High and Ultra High Net Worth clients. He specializes in clients with real estate holdings, constructions companies, unique investment and retirement situations, as well as payroll. Matt graduated from Temple University with a B.S.B.A. in Accounting and is working towards his EA designation. He is a member of the National Association of Tax Professionals.