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!
For more information on managing finances visit http://www.powerdowndebt.com
Please send questions and comments to info@powerdowndebt.com
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