Reflection No. 37

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Top of the morning to ya! This week, we’re diving into important topics impacting your financial future. First, we’ll look at what to consider when making your largest financial purchase and why putting 20% or more down is a major advantage. We’ll also touch on how to stay grounded during market fluctuations and a new investment savings account. 

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Three Quick Hits:

• Article: Home Buying Considerations

  Buying a home is a major milestone and likely the largest purchase most of us will make in our lifetime. It’s easy to get swept up in countertops, flooring, and finishes, but don’t forget about the financial decisions you need to make, too. And, if all else fails, remember: location, location, location. 

• Tip: Put at least 20% down when buying a home to avoid private mortgage insurance (aka PMI) and save on interest. The more you put down, the more you save on interest over the life of the loan. 

• Quote: “If you’re going to invest in stocks for the long term, or real estate, of course, there are going to be periods when there’s a lot of agony and other periods when there’s a boom. I think you just have to learn to live through them.” - Charlie Munger

Two Questions:

• What lessons did you learn from the last financial setback you experienced?

• What’s one mindset shift you need to embrace to become a more patient investor?

REFLECTION No. 37: Investment Accounts for Children

I - Issue: What is the new investment savings account for children?

R - Rule: The tax bill recently passed by the House introduces a new investment savings account for children born between January 1, 2025, and January 1, 2029. The U.S. Department of the Treasury will fund and administer these accounts.

A - Analysis: Under the proposed legislation, each eligible child would be automatically enrolled in the new account at birth, provided both the child and their parents have valid Social Security Numbers. Upon enrollment, the Treasury would make a $1,000 contribution, which would be invested in the stock market.

Beyond the initial deposit, parents and third parties could contribute up to $5,000 annually. The funds in the account could later be used to start a business, pay college expenses, or make a down payment on a house. 

Withdrawals would be phased. Beginning at 18, the account holder could access half of the balance if used for approved purposes. The remaining balance becomes accessible between the ages of 25 and 30. After 30, the funds can be used for any purpose without restriction. Any approved withdrawals qualify for capital gains treatment. Unapproved uses are taxed as ordinary income and hit with a 10% penalty.

Assuming a 10% annual rate of return, the initial $1,000 contribution would grow to ~$5,560 by age 18, ~$10,834 by age 25, and ~$17,450 by age 30.

C - Conclusion: The bill hasn’t passed into law yet, but this provision lays the groundwork for a meaningful financial head start for children.