Managing Money After Selling a House: Saving Proceeds Until Your Next Purchase
Home sales can be unpredictable. You may receive an offer right away, before you’ve even thought about your next move. If you’re not ready to buy again, you’ll need a strategy to help manage your money after selling a house. Here are a few key considerations to keep in mind.
Options for Short-Term Liquidity
If you’re actively searching for a home and need access to cash quickly, a money market fund may be your best bet. Money markets generally pay higher interest than basic savings or checking accounts, though they typically allow you to write only a certain number of checks each month. With a money market, you’ll still have the ability to use the cash should you find a home and need to put a deposit down quickly.
Short-term certificates of deposit (CDs) with minimum balances of $2,500 offer investment periods as short as seven days and up to six months. No matter which option you choose, when investing a large sum in a money market account or CD, you should be mindful of the $250,000 FDIC insurance limit.
Managing Sale Proceeds During a Transition Period
If a home sale accompanies a transition in your job or lifestyle, you may not be planning an immediate purchase. Homebuyers become renters for many reasons, including moving to a new city and taking time to learn the lay of the land. If you’re not ready to purchase a new home right away, then consider an investment product. For example, you could put your money in a longer-term CD, which comes with a higher interest rate than its short-term counterpart.
In addition to finding the right savings option, you may also consider using the proceeds of your house sale to pay down outstanding debts, like credit card balances. Eliminating interest expenses and lowering your minimum monthly payments can help improve your overall credit, which in turn could allow you to qualify for better mortgage rates and features when you do buy a new home.
If you’re holding cash for an extended time horizon — not months, but years — your risk/reward balance may shift toward other investments, including stocks, bonds or mutual funds. While these types of investments carry a higher level of risk, they also offer the chance to earn a higher rate of return. Before investing, it’s a good idea to check in with a professional advisor for guidance on the best investment options for your risk tolerance and overall financial picture.
Mutual funds are available in a wide range of risk profiles and can meet the diversification needs of a well-balanced portfolio. Structured for longer-term investing, mutual funds’ returns do fluctuate, and your balance can go up or down. To give you an idea of long-term performance, the Financial Industry Regulatory Authority (FINRA) offers an online fund analyzer tool that allows you to select and compare different mutual funds over a holding period of 10 years.
Generally, the proceeds from a home sale are excludable up to $250,000 for individual filers and $500,000 for married couples, as long as the home was your primary residence and you lived in it for at least two of the last five years. Amounts over the exclusion limit are subject to capital gains tax. The entire gain must be reported on your tax return, even if part of it is excludable. You may also take advantage of this exclusion more than once, should you decide to invest your sales proceeds in another home that will become your main residence.
If you’re looking to invest money after selling a house, it’s wise to speak with a wealth management professional and outline your short-term and long-term goals. Making smart financial decisions will ensure that you’re able to make the most of your lump-sum payment.