Invest, Save, Spend: How to Put Your Home Sale Proceeds Toward a Better Financial Future

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The proceeds from the sale of your home might be the biggest lump sum dropped into your bank account at any one time. And when you sell your home while the market’s on an upswing, you stand to see a nice windfall come your way.

If the prospect of this instant cash infusion both excites and terrifies you, well, it should.

Remember your first home payment—the one that went 90% toward interest? You wondered if you’d ever make a dent in the principal, let alone benefit financially from this scam called a mortgage.

And now, look how far you’ve come. Too far to gamble your profits on risky investments, go on a reckless spending spree, or worst of all…do nothing.

According to expert financial advisors and real estate agents who walk sellers through this transition every day, a successful home sale offers homeowners a tremendous opportunity to secure their financial future and make that money work for them. Here are the smartest solutions to keep your feet on the ground as you rake in the rewards of being a diligent homeowner.

How much money will you make? Calculating your home sale proceeds

When you put your home on the market, it’s nice to know how much you’ll make on the sale when the dust finally settles.

You’ll get an estimation from the seller’s net sheet, an organizational worksheet that your agent will fill out to show you how much you’ll pocket from your home sale after factoring in expenses like taxes, your real estate agent’s commission, your remaining mortgage, and escrow fees.

Then, near the end of your transaction, a seller’s closing statement will give you the final number.

But with some simple math at the outset, you can get a ballpark amount in mind and plan accordingly.

Here’s how to determine the proceeds from the sale of your home:

  • Take the target list price for your house based on comparable homes in your area and the market analysis provided by your real estate agent. Let’s use a target list price of $300,000 as an example.
  • Add updates or features that increase the value of your home. Hypothetically, we’ll say your house has hardwood floors—so we’ll add $5,000 onto your target price.
  • Subtract value for any issues with the house. Let’s say $2,500.
  • With this new adjusted list price of $302,500, subtract the following home sale fees:
  • The total amount after those deductions is the amount you’ll walk away. In our example, the home sale proceeds equal roughly $75,050.

Think about your home sale proceeds in 3 financial buckets

Essentially, there are three main things you can do with the money you receive from the sale of your home: invest it, spend it, or save it. The devil is in the details—knowing how much to put in each bucket, where it goes from there, and how to make the best use of every dollar.

Here we’ll break down each option with ideas for how to manage your money wisely, however you choose to divide it up.

1. Invest your home sale proceeds to make money out of money.

Logical investments provide you with more income down the road. The key is knowing how to use your home sale proceeds to invest in financial assets that will provide profitable returns.

Buy another property.

Remember how much you bought your house for, and how much you can sell it for now? Not a bad investment, right?

“Most people, when they sell a primary residence, take the funds and reinvest it into their next house,” says Chris Carter, who ranks in the top 2% of 2,633 real estate agents in Jackson County, Missouri.

It’s common to sell a home, then turn around and use the money you’ve gained to purchase another home, and repeat the process down the line.

If you don’t want to buy a new home to live in, you could use the money to purchase an income property. From there, you can rent it to tenants to make immediate income and grow equity in the property over time.

If you plan to buy another property with the proceeds of your home, Carter says to be prepared to put money down upfront. You may need anywhere from 3.5-20% of the sale price as a down payment for a mortgage, depending on the loan you choose.

“Talk with a professional first and figure out what you can afford, how you’re going to structure your loan, what you’re looking at for a monthly payment and the down payment, and where that money is coming from,” Carter says.

Explore the stock market.

Take all the money you made in your home sale and turn it into more money with the purchase of stocks and bonds.

Talk to a financial advisor or stockbroker to choose the best stock investment options for you. No matter how much money you choose to invest in the stock market, the savviest financial pros can get every dollar working in your favor.

Sunny Wang, president and financial advisor at Essence Wealth and Insurance Services in Santa Clara, California, has a 5-star ranking on Yelp. He advises his clients to put their money to work as soon as possible.

“You can’t work forever. But money can,” he says. “Money works 24 hours a day, 7 days a week. So put your money to work right away.”

When it comes to investing, Wang says the earlier you start, the better. If you hold onto cash for just a few months, you’ll miss out on a potential return.

“If you had cash in the last few years that you never invested, you just missed probably 50% in return. $100,000 was turning into $150,000,” Wang says.

Investing in the stock market, of course, isn’t without its risks. It’s not something you can jump into—there’s a lot more than just, “buy low, sell high.” If you’re a first-time investor, consult with a professional before you invest in any stocks.

2. Spend your home sale proceeds while thinking about the long term.

Resist the urge to splurge on material items with the new cash in your pocket. If you are going to spend your money, think long-term about putting it toward experiences and investments in yourself that you won’t look back and regret.

Pay off debt.

Use your home sale proceeds to pay off debts for credit cards, loans, or medical bills. It’s not as satisfying as a return on investment or a shiny new watch, but it will help your financial stability in the future.

Nearly 3 in 4 U.S. workers say they are in debt today and more than half think they will always be, according to a CareerBuilder survey.

High-interest rates make it harder to pay back debts, and the more you owe, the more interest you’ll have to pay.

Debt can also negatively affect your credit score and make it harder to get approved for loans on purchases like cars or homes. Your home sale proceeds can relieve some of the stress of lingering debt and give you the freedom do something productive with the money you make moving forward.

Invest in priceless experiences, memories, and skills that last a lifetime.

Instead of a shopping spree, spend money on something that will last for years and may even help you make more money some day.

Material items like electronics, clothes, and cars can seem worth it in the moment, but these items eventually become obsolete when a newer version comes out.

Instead, use your spending money on these things that never lose value:

  • Education. Learn a language, a new instrument, or a skill that will add value to your life or career.
  • Travel. For the same amount you’d spend on a fancy new laptop, you could visit a different country and immerse yourself in a culture for a priceless experience.
  • Experiences. Have you always wanted to go skydiving or see your favorite performer live? These fulfilling experiences will make you happier than any designer handbag.

3. Save your home sale proceeds so you always have a backup plan.

Set up an emergency account.

It never hurts to have some money saved for a rainy day. In fact, a survey released by HomeServe USA shows that nearly 1 in 5 Americans have nothing set aside to cover an unexpected emergency. Yikes.

Non-essential expenses like entertainment subscriptions shouldn’t be budgeted into your emergency funds. And although the general rule is to save 3-6 months of salary, it all depends on your spending habits.

“Hire a professional to conduct a cash flow analysis to tell you how much you need to cover your monthly expenses,” Wang says.

Keep it for a down payment on a new house.

Even if you aren’t planning on buying a new house right away, who’s to say you won’t change your mind in a few years? With the financial ability to put money down on a house, you’ll save yourself time and stress if you stumble upon your dream home.

Add it to a college fund.

It’s never too early to start saving for college, even if you’re still changing diapers! Throw some money into a college savings account for your kids to prepare for their future and avoid student loan debt.

According to the College Board, the average cost of four-year college tuition ranges from about $37,000 to about $130,000, depending on the school. There are different college savings accounts to choose from that have various tax benefits for your financial needs. Talk to a financial advisor to create a college savings fund that works in your best interests.

Save it for retirement.

A 2017 Merrill Lynch Retirement Study reports that the average cost of retirement is life’s biggest expense, more than the costs of college, a child, and a home combined. The average cost of retirement is a whopping $738,400—and most Americans aren’t prepared to retire at 65 and live until 90.

About 42% of Americans have less than $10,000 in retirement savings, according to a survey by GOBankingRates. More than 1 in 3 (34%) said they have nothing saved for retirement. The biggest issue with saving for retirement is that you really don’t know how much you should save.

“The time horizon is very important. If you set aside money that’s going to be for retirement and you’re in your 30s or 40s, you have long, long time before retirement,” says Wang. And that presents many tempting opportunities to dip into the funds earlier than you’d intended.

But it’s never too early to start putting money into a retirement fund. Talk to your financial advisor about the best plan of action that will help you prepare for a long, prosperous life beyond your career years.

The dos and don’ts of handling the proceeds of your home sale

Do: Think about your financial goals and make a plan.

Create a budget and stick to it. A 2017 survey conducted by CareerBuilder shows that 78% of American workers live paycheck to paycheck. Have a plan for your future finances and how this lump sum of cash will be worked into that plan.

Use these budgeting tips to start off on the right foot:

  • Track your spending to identify patterns.
  • Prioritize your debt.
  • Find a goal and stick to it.

“It’s important to know what your needs are,” says Wang. “We want security, we want safety, we want protection, and we want this money to last forever. There are different strategies and products that we can look into based on your needs.”

Don’t: Let all the money sit idle.

“The biggest mistake is that they leave the money in the bank account and they don’t do anything about it,” says Wang.

His general rule of thumb is to do something with the money right away.

“You can’t just sit in cash. You need to meet with a financial advisor to talk about your goals,” he adds. “If you put in the market, you make more money on returns. But if you decide to leave the money in the bank, you’ll earn nothing. Especially right now, the interest rates are so low, the banks are not paying anything.”

Do: Spend money on memorable experiences.

The newest iPhone or designer outfit might suddenly seem in your budget with your new-found cash, but these material splurges provide little benefit in your long-term financial and personal success.

Dr. Thomas Gilovich, a psychology professor at Cornell University who has been studying the question of money and happiness for over two decades, says that you’ll get more happiness spending money on experiences than spending money on things.

So, if you can’t shake the need to pamper yourself after a successful home sale, spend a small amount of your home sale proceeds on an experience that will provide long-term satisfaction. Attend art exhibits, try new activities, learn a new skill, or travel to a new place.

Don’t: Put all of your cash into Robo-advisors.

Robo-advisors provide digital financial advice through an automated platform based on mathematics and algorithms. The first Robo-advisor, Betterment, launched in 2008 and since then, the industry has grown tremendously. Now, there are hundreds of Robo-advisors—each providing different tools, products, and algorithms for investment management and financial advice.

“Robo-advisors like Robinhood provide quick and easy investing options but they aren’t smart for large sums of money,” says Wang. “If you have a few thousand dollars for that, it’s OK. But if we’re talking hundreds of thousands of dollars, you need a human advisor.”

To find a top financial advisor in your area, check out the following resources:

  • The National Association of Personal Financial Advisors (NAFTA) is a professional association of highly trained advisors that abide by a written code of ethics and high standards.
  • Yelp provides client ratings and reviews on financial advisors in your area
  • Thumbtack allows you to compare professionals and receive free estimates for the help you need.

Be smart with your home sale proceeds, and enjoy the rewards!

Receiving a big sum of money all at once can be exciting… but also scary. You need to make sure you spend and invest it wisely, so you don’t wake up one day and realize it’s gone.

Take the advice of industry professionals before you make any major decisions with the proceeds of your home sale. Make a plan for how you’ll distribute your profit right away.

Although you may want to roll around in your cash, don’t sit on it for too long.

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