The Money Pit or Mr. Blandings Builds his Dream House
by Frances Rahaim, Ph.D.
aka "The Money Doctor"
This is the time of year when we begin to get excited about improving our domiciles, or at least doing much needed repairs. Good weather beckons, and visions of a fresh look and outside projects sooth our winter blahs. Home improvement stores offer paint sales and home renovation ideas to compete for our dollars.
Secretly we tell ourselves that spending money on our home ‘doesn't count.’ We rationalize that we are building equity and that home improvements are not frivolous expenses. Even if we take on debt to complete them we feel it was worth it. We reinforce our decisions with mantras like “A King's home is his castle”, and “we don't spend money on other things.”
Not surprisingly, it can become dangerous when we use plastic to pay for the renovations, but perhaps for less than obvious reasons. When we use plastic rather than cash, we may not realize that we have overextended ourselves until the minimum payments becomes untenable. Oftentimes we are trying so hard to meet the minimum payments on credit cards and protect our credit rating, that we are left without enough money to pay for other expenditures. Without proper budgeting, this can sneak up on us, and in extreme cases cause delinquencies on even a mortgage or car payment.
When you’re thinking, “I can make the low monthly payments,” notice how long you’ll be making them. Then, get your crystal ball out, and if you see possible changes in the future, which may require higher monthly outlay, you may want to rethink your plan. Perhaps a less expensive renovation might do the job, or maybe you delay while you save enough to complete the improvements in cash.
Remember that improving the equity in your home will only affect you financially if you plan to sell your home and recover more than the cost of the improvements, or if you plan to borrow against the equity.
Two Real Money Pits
1. Telling yourself, “I never spend money on myself – only on the house.” This is a very common sentiment and somehow seems to translate in our minds as “this debt or payment is guilt free. It doesn’t count because it’s for the home.”
2. Using zero percent credit cards which default to a higher rate if not paid within the “teaser rate” period. If something happens where you cannot pay in full by the deadline, you may be charged interest retroactively, perhaps even doubling your effective interest rate. Remember, a 20% off sale is not a sale if you’re paying 29% on your credit card to purchase it.
Favorite Money Doctor, Money Pit Tip
Remember to shop in bargain stores, and up-cycle items. Or… connect with a friend, and shop/swap in your own homes to get a fresh décor without spending a penny!
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