Money Management

With skyrocketing home values in the wake of COVID-19, a lot of people have more equity in their homes. Here’s why it might not matter as much as you think. [[{“value”:”

When was the last time you sat down and calculated your home’s equity? Has it been a day? A week? A month? Have you ever really thought about how much equity you have?

It’s OK if you haven’t. In fact, you’re probably pretty normal, really. But there’s a funny thing that happens to people when the real estate market ends up in the news a lot: They start to count their chickens before they hatch. By that, I mean, they start to look at their home equity like it’s a real thing.

What is home equity?

Home equity, as properly defined, is the amount of value your home has after any debts against it are satisfied. If you have a mortgage, your home’s equity is your home’s value minus what you owe your mortgage lender. But looking at your home’s equity is like looking at a single frame of a film — it’s only a peek at one moment in time. What your home equity is today isn’t the same as tomorrow. And there’s no guarantee that it’ll grow.

Here are some other important things to know about home equity.

Equity goes up and down

It’s vital to understand that equity isn’t static, and it definitely doesn’t always go up. Take, for example, the real estate market crash of 2007.

I had been a real estate agent for nine years at that point, and for the first time in my career, I was very painfully aware that home equity isn’t static, nor is it guaranteed to be cumulative. This was when we all learned the terms “upside down” and “underwater mortgage,” which was not a great time for us — both of these terms refer to negative equity in a home, where the mortgage is more than the property it secures is worth.

CNBC reported in early 2008 that 10.3% of homes would be upside down by the end of March, and it just kept getting worse. On the flipside of that, in 2020 and 2021, we saw a huge jump in equity for anyone who bought a home before the COVID-19 pandemic, and many who bought at some early point during that equity arc.

They’re still holding on to those massive equity gains, even if the years following only gained in the sub-3% range, but there’s literally no promise that this will be the case tomorrow or that equity will not go backward if a widespread affordability crisis sets in.

Remember, equity is just a snapshot of a moment in your home’s value versus how much you’ve borrowed against it.

Median Sales Price of Homes in U.S.

Other homes also gain equity at roughly the same pace

The funny thing with how the market has gained recently is that a lot of people are thinking about how much equity they can cash out if they sell. If you bought the median home in December 2018, for example, and sold it in December 2023, you’d be sitting on a 44.91% market gain, plus the amount of your mortgage that you paid down on your own.

That’s a pretty good chunk of change on the surface.

But if you’re looking to trade for a comparable home in a similar area, the only equity gain you’ve made is how much of your mortgage you’ve managed to pay down. The rest is a wash. You didn’t get that equity in a vacuum, you got it because all the other houses also got an equity bump. The only way to cash out that newfound equity is to move to a less costly area or downsize, which plenty of people have chosen to do, but doesn’t exactly move you up the ladder.

If you move up, you’ve still got the same amount of equity, but likely a higher-rate mortgage and possibly a higher payment. At its best, it’s a lateral move. This is why despite a huge equity gain, a lot of people still aren’t selling.

What is home equity good for?

While you’re busy paying a mortgage and earning your equity bit by bit, home equity has just a few limited uses. It’s great if you want to do some remodeling or upgrading that could potentially increase your home’s value and create bonus equity along the way. A home equity loan or home equity line of credit (HELOC) can tap the equity you’ve already built or gained through market growth, making it easy to pay for those upgrades.

And once you pay the mortgage off, there’s also the potential for generational wealth-building. When your kids get your house, that is a true gain for them for your hard work — after all, they put in $0 and got all the equity you earned out. It can help them get on the property ladder with less money, or enable them to simply not have to pay a mortgage, which frees up money for them to invest in other things like a brokerage account or their 401(k).

Home equity is rarely what people think, but it’s also not nothing. It’s not wealth-building in a direct sense, but it makes building wealth possible over the long term. You will always need somewhere to live, so you might as well make it count for something.

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Hate paying taxes? Read on for some tips to legally lower your IRS bill this year. [[{“value”:”

If you’re not a fan of paying taxes, you’re no doubt in good company. However, taxes are a part of life, and to an extent, they can be unavoidable.

That doesn’t mean you can’t take steps to lower your tax bill, though. Here are some tricks when filing your taxes you may not have known about.

1. Participate in a traditional IRA or 401(k)

Contributing to a retirement plan is a great way to set yourself up with extra income for the future. But it can also lower your tax burden in the present.

Contributions to an IRA or 401(k) up to a certain annual limit can exempt some of your income from taxes. This year, the limit for IRAs is $7,000 if you’re under age 50 or $8,000 if you’re 50 or older. For 401(k)s, it’s $23,000 if you’re under 50 or $30,500 if you’re 50 or older.

However, you’ll only get this benefit with a traditional IRA or 401(k). If you contribute to a Roth IRA or Roth 401(k), you’ll get tax benefits that include tax-free gains and withdrawals. But you won’t lower your 2024 taxes by contributing to a Roth retirement plan.

2. Fund an HSA

A health savings account, or HSA, is an account you contribute to on a pre-tax basis (like traditional IRAs and 401(k) plans). The money in your account can be invested if you don’t need it right away, and medical withdrawals are tax free.

Funding an HSA could exempt some of your earnings from taxes the same way IRA and 401(k) contributions do. This year, HSAs allow for contributions of up to $4,150 if you have self-only coverage and are under age 55, or up to $8,300 if you’re under 55 with family coverage. If you’re 55 or older, the limits that apply this year are $5,150 for self-only coverage or $9,300 for family coverage.

Your health plan needs to meet certain requirements for you to fund an HSA, however. For self-only coverage, you need a minimum deductible of $1,600 and an out-of-pocket maximum of $8,050 in 2024. For family coverage, you need a minimum $3,200 deductible and a $16,100 out-of-pocket maximum. You can filter by HSA-eligible plans on Healthcare.gov or ask your plan sponsor for more information about eligible plans.

3. Donate to charity

Being charitable isn’t just good for the soul; it can also be good for your tax bill. If you donate money to a registered charity, you’re allowed to claim it as a tax deduction.

You can also take a deduction for donated goods, whether it’s gently used clothing, toys, or furniture. However, in that case, you’ll need a detailed receipt, and you should plan to work with a tax professional to determine what deduction to claim.

When donating goods, you can’t deduct their original value. Rather, you’re looking at a deduction for their fair market value — what they’re worth based on their condition at the time of your donation.

You should also know that you must itemize on your tax return to claim a deduction for charitable donations. If you claim the standard deduction, you won’t get a tax break for giving to charity — though it’s still, of course, a nice thing to do.

4. Donate your required minimum distribution

If you have a traditional IRA or 401(k) plan and you’re 73 years old, you’re forced to take withdrawals, known as required minimum distributions (RMDs), from your account every year. (Note that the age for RMDs will increase to 75 in 2033.)

Normally, those RMDs are taxable, and they could lift you into a higher tax bracket. However, one thing you’re allowed to do is arrange for your RMD to go directly to a registered charity. If you do so, your RMD won’t trigger a tax bill for you.

There’s no reason to pay the IRS any more money than you’re required to. Use these tips to lower your tax bill this year — and, if applicable, in future years as well.

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Figuring out which step to take first can be tricky. Here’s why you should build your emergency savings before doing anything else. [[{“value”:”

Any time you focus on improving your personal finances, you’re doing something right. But sometimes, one step may be better than another to reach your goals.

If you’re trying to figure out whether to pay off your debt first or build an emergency fund, you should probably put money into your savings account first. Here’s why.

Build emergency savings first

The main reason why you should focus on having an emergency fund first is because financial emergencies are inevitable.

Let’s say you want to pay off $5,000 in credit card debt and have $0 in your savings account. Even if you come up with the best debt payoff strategy, pay down the debt every month, and cut back on other spending, you won’t be immune to a financial emergency.

One car repair or leaky roof could completely derail your debt payoff plan. That $5,000 in debt could quickly turn into $7,000 or more if you don’t have an emergency fund.

Start with $1,000 in emergency savings

Many financial experts recommend having $1,000 in your emergency fund. Is it possible a financial emergency will surpass this amount? Of course.

But the point is to have a sizable amount that can cover many minor financial emergencies and lessen the blow of larger ones. I’ve had to use my emergency fund for previous car and home repairs. Once it’s gone, I get right back to building it up.

The $1,000 goal is a cushion that makes financial emergencies easier to handle, so you can move on to your bigger goal of paying off your debt.

How to reach $1,000 in savings

If you don’t have any money in your savings account, saving $1,000 can feel like an impossible goal. The best way to tackle it is to add a small amount to your fund every month by setting up automatic deposits from your checking account to your savings account.

Automating your savings is the best way to ensure you make progress every month.

Let’s assume you’re starting with $0 in savings, and you want to build your emergency fund as fast as possible. To reach $1,000 in six months, you’ll need to put about $167 into your savings account each month.

That’s not an insignificant amount of money and will likely require financial sacrifices. You may need to comb through your monthly expenses and see if there are things you spent money on over the past few months that could have gone toward your emergency fund.

Focus on the big picture

There will be hurdles to reaching your $1,000 goal and even more as you work toward paying off debt.

But one important thing to focus on is where you want to be financially. You may not know what your finances will look like beyond one year. That’s OK. Just set one goal at a time and focus on that.

Once you reach the first one, like putting $1,000 in the bank, you can move on to the next one.

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Child care can be super expensive. Read on for ways to lower your costs. [[{“value”:”

If you’re a parent, you may be well aware that the cost of having children could be astronomical. Ascent research reveals that it costs roughly $300,000 to raise a child from birth through age 17. But you might rack up a serious tab during your child’s early years if you work and are forced to pay for daycare.

Data from Care.com finds that the average cost of daycare for one child is $321 per week for an infant. For a toddler, it’s $293. The reason toddler care tends to be a bit cheaper is that daycare centers usually don’t need as small a caregiver-to-child ratio with older kids as with younger ones.

If you’re tired of emptying your savings account week after week to cover your daycare costs, the good news is that with a little creativity, you might manage to spend less on child care. Here are some tricks to employ.

1. Ask for discounts — constantly

Your daycare center might advertise its sibling discount. But there may be hidden discounts you can snag if you’re bold enough to ask.

Let’s say your daycare center is open from 7:00 a.m. to 6:00 p.m. every day, but because you work from home, you only need care between the hours of 9:00 a.m. and 5:00 p.m. If you’re consistently not dropping your child off for a full day, ask to have a small amount of money taken off your weekly bill. It certainly won’t hurt.

Your daycare center may also have a referral program where you get money off of your care if you help bring new clients in. It’s worth spreading the word if you’re happy with your daycare center — other than the cost, which is understandable.

2. See if you can flex your hours at work

Depending on your situation at home, working different hours than your current schedule might make it so you don’t have to put your baby in daycare on a full-time basis. Let’s say your company hours are 9:00 a.m. to 5:00 p.m., but your job is such that you don’t really collaborate with your peers, but rather, work independently. In that case, your manager may be willing to let you work from 1:00 p.m. to 9:00 p.m. instead of 9:00 a.m. to 5:00 p.m. as long as you get your work done.

How does that help you? Well, if you have a spouse or partner who gets done with work around 5:00 p.m. or 6:00 p.m. and can take over child care at that point, you may be able to sign your baby up for half-days at your daycare center instead of full days. And that could mean paying a lot less.

3. Look into home daycare

Some people run smaller daycare centers out of their homes. If you find one in your neighborhood that’s licensed with great reviews, making a switch could mean spending less.

Granted, a home daycare situation may not offer the same amenities as a full-fledged daycare center. Your infant may not get to take art or music classes like your daycare center provides. But at that age, they have plenty of time to catch up on things like that. And giving up some amenities might save you a fortune.

Saving money on daycare could work wonders for your personal finances. Employ these tips so you can spend less on child care — and set aside more money for the many other expenses you’re apt to incur as a parent.

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Having the right investment accounts can help you reach your financial goals. Learn a few reasons you may want to open a new one this year. [[{“value”:”

People usually don’t make changes to their investment accounts too often. Once you’re investing regularly, it makes sense to stick to what’s working. And if you’re using any of the top stock brokers, you might not need to make any changes.

But there are some situations where making a change could save you money and benefit you as an investor. If any of the following are true, you should consider opening a new investment account this year.

1. You haven’t opened a retirement account yet

We all need to save for retirement. Social Security benefits normally only replace about 40% of pre-retirement earnings. They can help, but they’re not enough to comfortably live on for most of us.

The best way to save for retirement is with tax-advantaged retirement accounts. If you only save through a regular brokerage account, you won’t get any tax benefits. Most brokers have two popular types of individual retirement accounts (IRAs) that anyone can open:

Traditional IRAs let you deduct contributions from your taxable income in the year you make them. Withdrawals in retirement are considered taxable income.Roth IRAs let you make tax-free withdrawals in retirement. Contributions can’t be deducted from taxable income.

You’re allowed to make up to $7,000 in IRA contributions in 2024 (or $8,000 if you’re 50 or older). If you haven’t set up an IRA already, do so immediately so you can start saving on taxes. If you already have a broker you like, you can probably open an IRA there.

2. You’re paying too much in fees

There are plenty of safe, affordable ways to invest your money. All the major online brokers now offer commission-free trading. If your broker still charges commissions for buying stocks or investment funds, then it’s time to switch brokers.

You should also make a change if you’re currently paying a management fee to a financial advisor. Most investors don’t need a financial advisor, and the fees can cost a lot more than people realize. Instead of paying one, open a brokerage account, and invest in low-cost index funds.

Ramit Sethi, author of I Will Teach You to Be Rich, recently shared an example of how much fees can cost you. Let’s say you start by investing $50,000 at 30 years old, and then continue investing $1,000 per month. You get a 7% annual return over 35 years of investing. If you put your money in index funds with fees of 0.2%, you end up with $2.15 million. Here’s how that changes if you’re paying a higher amount to a financial advisor:

If you pay a 1% fee: You end up with $1.76 million — fees cost you an additional $390,000.If you pay a 2% fee: You end up with $1.39 million — fees cost you an additional $760,000.

3. You want more investment options

Not all stock brokers have the same types of investment products. They all let you buy and sell stocks, as you’d expect. And most of them offer exchange-traded funds (ETFs). Outside of that, options vary from broker to broker.

Some brokers don’t have bonds, or mutual funds. There are also brokers that don’t offer options trading or futures. And there are only a small number that let you buy cryptocurrencies.

You don’t need an account with a broker that offers everything. But if you’re disappointed in your broker’s mutual fund options, or you want to invest in something that your broker doesn’t offer, then you should probably get a new investment account.

4. You don’t like your broker’s trading platform

It’s important that your broker’s trading platform offers all the features you need. Some have useful charts and research tools — if you analyze stocks, then you’re probably going to want a broker with these features. If you like being able to invest using your smartphone, then you need a broker with a quality investment app.

You should also be comfortable using your broker’s platform. If you’re not, you may not invest as often. If you aren’t satisfied with your current broker’s features, or if you don’t like its trading platform, look for one that’s a better fit.

There are lots of great stock brokers, and it doesn’t take long to set up an account with them. If you’re ready to open a new investment account, check out The Ascent’s guide on how to choose the right brokerage firm.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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