My wife and I have just bought our dream house. Well, it will be our dream house when we’re done renovating it. Right now it has a hideous kitchen, psychedelic paint and floors that desperately need refinishing. Our back of the napkin estimate is $80,000 to pay for everything. Can you help us figure out how to pay for the upgrades? I have a nice car, worth about $30,000 if I sold it, but no other assets.
I don’t like budgeting. It isn’t a very effective process for most people in their day-to-day lives and usually devolves into tracking expenses from the past instead of providing helpful guidance now. While you still need a budget I think you’re asking the wrong question. Instead of ‘how do we pay for upgrades?’ I would ask, ‘how do we set priorities?’ You need to think about this fantastic house in the context of your whole life. [More: What is your house really worth?]
Here’s what I mean:
Create a renovation budget
Start by developing an actual budget for the renovation. You can use that napkin to wipe the tears from your eyes as you see the costs add up. A budget is the best way for you to create your dream house on paper and it sets you up to make the tough call on what work you are going to do first. It will also help you to distinguish between what is a need and what is a want—which is no easy task. I have seen way too many people overspend on renovations, leaving them so stressed about debt repayment that they can’t even enjoy the soaker tub they pined for. [More: How much house can I afford?]
There’s more to life than a reno
While this house is clearly your focus right now, priorities can change with time. Perhaps you want kids, a vacation, or the ability to retire one day. Putting everything you have, and then some, into a renovation will leave you with nothing for anything else—and there can be consequences for making that choice. For instance, if you focus on paying for your renovation at the expense of you retirement savings you might find that you have a nice roof over your head when you retire, but no money to heat it.
Take a look at your cash flow: How much money is coming in, and going out each month? How have you accounted for other goals within that? Is a monthly RRSP contribution in there? Vacations? Sure interest rates are super low today and your bank might be more than willing to give you the $80,000, but in the context of everything you want in life, does it really make sense to do it all at once? [More: Rent to save money]
List your renovation must-haves
Remember that your priorities may not be the same as your wife’s. Here are some questions to guide your thinking on setting priorities:
- What is truly a need? What do we need to invest in to ensure we are safe and the house is safe?
- What is our No. 1 want? Knowing that we can’t do everything, what will have the biggest impact on our quality of life?
- What are the quick wins? Paint can be quick fix, but a new kitchen can be quicksand.
Now, go back to your budget, highlight your top two or three items and see what the numbers look like.
Save your way there
This is a retro idea, one that is completely out of fashion in today’s low interest rate environment, but it is a good way to go. You might be thinking, “It will take us forever to save that money.” Well then, imagine how long it will take to pay off. [More: Free appraisal is worth every penny]
Renovations can occur all at once—and are sometimes cheaper that way—but for many families it’s not always the most practical solution. If you don’t have the ability to do your renovation in one big go then perhaps you should think about creating a master plan for your dream house, one that comes to life in phases.
While we all like to show off our creative side when it comes pick paint colours and arranging furniture, why not use that same creativity to figure out how you can finance your project. Look at different ways to improve your cash flow: Try to pick up overtime for the next six months; go car free or get a less expensive used car; or bring in friends with renovation skills to tackle the easier tasks and get the job done for the cost of pizza and beer.
The bottom line: As you create the aesthetic of your dream home, create the plan to pay for it too.