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Paying for Home Improvement Project

Home Personal Finance and Budgeting Paying for Home Improvement Project

  • Avatar G 
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    Status: Physician, Small Business Owner
    Posts: 1390
    Joined: 01/08/2016

    I would keep saving til you can pay outright or cashflow combined with what you have saved. If you must, skip the retirement taxable contribution.

    Consumer Reports (I think) did an analysis on the ROI for home renovations. It’s not as great as you would think, so dont kid yourself it’s an investment…But you’re the one living in the house, not an author from a magazine!

    Your savings is low compared to the locals here, however not everyone needs to be laser focused on FI.

    Enjoy your spruced up place. (The behavioral economists would say that you get satisfaction in the planning/anticipatory time too!)

    #180063 Reply
    Liked by Anne
    Avatar John Q MD 
    Participant
    Status: Physician
    Posts: 7
    Joined: 01/09/2019

    I have learned a number of things today

    1- I (we) can always do better with our personal finance and this forum is a blessing to remind us that.

    2- I am really bad at using online forums (newbie). I have both accidentally liked my own post and replied to my own comment when I was trying to reply to someone else’s comment. Again, we can always learn!

    #180064 Reply
    Avatar G 
    Participant
    Status: Physician, Small Business Owner
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    Joined: 01/08/2016

    Sorry, my slow tapping on mobile meant I missed your last post: saving 37% sounds great to me.

    #180065 Reply
    Avatar Anne 
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    Status: Physician
    Posts: 842
    Joined: 11/07/2017

    I hope my comment before didn’t offend you, and I hope this comment doesn’t as well.  I post on these types of things to challenge your thinking to try to help.  You don’t have to explain your spending to anyone.  You make 800k which is incredible, you are winning.  But I still vote for no loan/line of credit/refinance, regardless of how quickly you plan to pay off said loan.  My personal experience has been that when you decide you are not going to take out any loans, you are just going to pay for stuff with what you’ve got, you make better decisions with money.  And better decisions to me doesn’t mean spending less money necessarily.  It means spending money on what you truly value.  Maybe that doesn’t hold true for you.  But I think it holds true for a lot of people.  Feel free to do as you wish.  But I think this is the type of purchase best made with money you have already earned.   If you can’t part with that money and would rather build up your taxable first, I totally understand.  But perhaps it’s not yet the right time to renovate.

    #180066 Reply
    Avatar fatlittlepig 
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    Status: Physician
    Posts: 553
    Joined: 01/26/2017

    Thanks for all the input. I am basically going to cash flow the project and pay off HELOC over 1 year at most. I am not borrowing for the whole project. Again I have already set aside cash for ~50% of it and will have even more by the time we start in 6 months. I may Just need to use HELOC for the purpose of the in and out and timing issues of payment for the other 100k of the project over the 4 months that it lasts. My income is variable month to month. I could just pay every month but wanted to keep putting 10,000 in my brokerage account every month, continue my backdoor Roths, my 529 contributions, my charitable contributions, and not deplete my other true separate emergency fund that is 50,000.  I just didn’t like the idea of the variable rate debt from HELOC in case something happened.

    For those few who just wanted to insult me, I am not sure what the point of that was. It definitely won’t encourage other MDs to come on here with questions. I am also pretty sure you have a hard time understanding someone else’s circumstances enough to make such insults without knowing all the facts.

    1- I have only made this kind of money the last 24 months. I made less than half of that amount prior years. I am really a few years LESS (not 7) out of training but changed that fact around above to protect identity a little more (overly cautious but didn’t think it effected my specific question).

    2- I paid off 200k of student loans in 2.5 years while making 300-400k. I paid off another 35k of personal debt during that same time period.

    3- I now (the last 2 years) pay over 200k in taxes every year (W2 income so my effective tax rate is VERY high, close to 30%). Take home pay VERY different than gross pay at this level.

    4- I am saving 20% gross towards retirement now (it was even higher percentage before my pay went way up 2 years ago), also putting 20k in my kids college accounts, and saved another 110,000 dollars in the Ally account just in the last 12-18 months on top of that with plans for this home project. Once I get the home project done in next year, I will be putting another 50-100k per year in brokerage (the amount I have been setting aside for the home improvements the last 12-18 months).

    5- My current mortgage at this point is about 75% of my actual annual income (WCI talks about no more than 2X, I am 0.75X at this point so why would I be in a huge rush to pay off fixed interest debt at 3.9% that is tax deductible). My mortgage is tiny as far as debt to income ratio so that’s why I was at least asking question of cash out refinance and doing 15 year mortgage (pays off mortgage sooner than currently). But in all honesty, I really wasn’t leaning towards that option at all but those are the “3 options” I was at least throwing out there.

    6- You have no way of knowing about my charitable contributions.

    7- You have no idea what I do to help a family member because of someone else who died prematurely.

    Given I have paid off my debts other than 0.75X annual income mortgage on my house only 5 years out of training, am saving 20% of a large gross amount for retirement in addition to 529 contributions for my kids, I feel I can choose to spend some money on fixing up my home. I have set aside cash for first 50% and will cash flow as much as I can (with HELOC of up to 100k only around for 12-18 months unless something unexpected happens at work). I will just pay it off quickly. I do choose to send my children to private schools because it’s important to me. I do choose to spend money on travel because I think experiences are more important than things. I don’t make all perfect financial decisions. But when I met with a fee-only hourly planner, they felt we were on the right path.

    Sorry for feeling the need to respond. I initially tried to just ignore the remarks from the few who wanted to make this some personal issue. However, I do think those types of attitudes don’t serve this forum well. It only scares people off from asking questions.

    Again, thanks for those who posted genuinely helpful feedback. This is a great place for docs and other professionals to learn how to thrive financially.

    Click to expand…

    home renovations are an elective expense. going into debt to renovate your home when you are pulling in that kind of money, makes no sense. you are right this is a financial forum, unvarnished advice is better than an echo chamber. personally fatlittlepig would pay off the house before doing renovations. this kind of thing is why physicians don’t do as well as they should be doing.

    #180068 Reply
    Avatar John Q MD 
    Participant
    Status: Physician
    Posts: 7
    Joined: 01/09/2019

    Anne- No offense taken at all. Your comments were constructive and appreciated. Without naming names, there were just 2 people who made snarky comments at beginning of thread (which is their right) that I felt were over the top. I have no problem with people suggesting I do things differently. I asked the question because I wanted opinions. It’s been helpfully and I now have a plan.

    I am going to save as much cash flow allows in next 6 months before we start (should be able to get to 150-175 in Ally acct before we start) depending on variable income. Project will take 3-4 months so will come up with more cash during that period too. I may end up with 75-100k HELOC at 3.79% for first 12 months. Should be able to pay that off with cash flow before coverts to prime. Worst case scenario can drop contributions to brokerage acccount for a few months to get HELOC paid off in short period.

    #180069 Reply
    Avatar fatlittlepig 
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    Status: Physician
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    Anne- No offense taken at all. Your comments were constructive and appreciated. Without naming names, there were just 2 people who made snarky comments at beginning of thread (which is their right) that I felt were over the top. I have no problem with people suggesting I do things differently. I asked the question because I wanted opinions. It’s been helpfully and I now have a plan.

    I am going to save as much cash flow allows in next 6 months before we start (should be able to get to 150-175 in Ally acct before we start) depending on variable income. Project will take 3-4 months so will come up with more cash during that period too. I may end up with 75-100k HELOC at 3.79% for first 12 months. Should be able to pay that off with cash flow before coverts to prime. Worst case scenario can drop contributions to brokerage acccount for a few months to get HELOC paid off in short period.

    Click to expand…

    so you can’t wait an extra few months to have all the cash, in order to avoid having to apply for a loan?

    you are right this is a valuable forum because you will get to hear from people who have been very successful and see how they have become successful. in real life you would never get this kind of feedback from fatlittlepig, or anyone else. up to you to understand it.

    #180071 Reply
    Avatar John Q MD 
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    Status: Physician
    Posts: 7
    Joined: 01/09/2019

    FLP- Agree not useful if this is just Echo chamber. I do understand your perspective. I am just not interested in paying off 30 yr fixed mortgage that is 0.75x my income overly aggressively. After tax deduction, the interest rate is like 2.6% and it is a pretty good inflation hedge. But you have convinced what I already thought- that taking on debt (refi or HE loan) is stupid. I will cash flow plus the savings I have set aside now and more prior to starting. I may use HELOC (I know debt) for cash flow reasons but will only hold that debt for 12 months or less in all likelihood. I realize I could just wait 12 months but don’t see paying 3.79% interest on 75-100k for up to 12 months as life changing or financial suicide. And I do aggressively erase debt with my cash flow (based on student loans paid off in 2.5 years out of training).

    #180074 Reply
    MPMD MPMD 
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    Status: Physician
    Posts: 2043
    Joined: 05/01/2017

    FLP- Agree not useful if this is just Echo chamber. I do understand your perspective. I am just not interested in paying off 30 yr fixed mortgage that is 0.75x my income overly aggressively. After tax deduction, the interest rate is like 2.6% and it is a pretty good inflation hedge. But you have convinced what I already thought- that taking on debt (refi or HE loan) is stupid. I will cash flow plus the savings I have set aside now and more prior to starting. I may use HELOC (I know debt) for cash flow reasons but will only hold that debt for 12 months or less in all likelihood. I realize I could just wait 12 months but don’t see paying 3.79% interest on 75-100k for up to 12 months as life changing or financial suicide. And I do aggressively erase debt with my cash flow (based on student loans paid off in 2.5 years out of training).

    Click to expand…

    You’re doing fine dude, all will be well.

    I think what some are saying artfully or otherwise is that we hope you are moving towards a point where you’ll get out of the debt business altogether. I think you’ll find that most of the conservative regulars on here are just sort of over owing people money. As WCI put it on another unrelated thread, I don’t want to be someone else’s passive income stream.

    You’ve done well with debt management so far, just make sure you don’t continue to aggressively/impressively pay off new rounds of debt for the next 20 years!

    #180077 Reply
    Avatar Tim 
    Participant
    Status: Accountant
    Posts: 1789
    Joined: 09/18/2018

    “Worst case scenario can drop contributions to brokerage acccount for a few months to get HELOC paid off in short period.”

    With all due respect.
    1) First open a 10 year HELOC.
    2) With monthly cash flow, it’s easy to shift fund to focus on taxable acct or savings or paying LOC.
    Now we have a revolving credit agreement without the high interest rate with only interest required.
    3) Paying off $75k-$100k In 6 to 12 months is very low risk and the interest is basically immaterial.
    4) The flexibility of the LOC allows “float” rather than waiting.
    5) This is simply a bad habit. The HELOC, isn’t bad. Using it is a signal that some expenditures need attention.

    #180081 Reply
    Avatar SLC OB 
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    Status: Physician
    Posts: 385
    Joined: 06/23/2018

    Sorry you felt that way John Q MD.

    FYI, we all just laugh at FatLittlePig… he has no filter. (Click on his name and read some of his other posts… it’s is not just aimed at you!)

    Sounds like you are doing very well for yourself. I agree, if you can not hold off (it’s hard when you are planning it and it starts to snowball), then use the HELOC and pay off in one year. If you can hold off (especially since projects get delayed), try to cash flow it. But you will be fine either way.  I do agree also that this renovation should be for you and your family, not to try to add value to the home.

    My husband just said to me “When do I get to build my shop?”  I said “When we are out of debt.”  (Just have mortgages for us now, primary and rental)

    He said “Oh, so never?”
    I said, “No, I have a plan to pay off by July 2022” He was shocked but please that we could start talking about his “shop” at that time! 😉

    #180086 Reply
    Molar Mechanic Molar Mechanic 
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    Status: Dentist, Small Business Owner
    Posts: 351
    Joined: 10/29/2017

    You’ll die wealthier if you delay.  You’ll die wealthier if you learn to delay to the point of not purchasing certain things.  You’ll spend less on the project if you are making decisions based on cash on hand.  If that’s your goal, you should wait.

    We all have to play financial offense and defense.  Most of the world has limited offense, so has to play strong defense.  You have very good offense, so it really doesn’t matter either way.  If it makes you happy, and you can sleep with the debt, then go for it.  You are accepting the risk that halfway through your renovation is when you go on disability and can’t work (low probability, but high pain).  We did a lot of renovation a few years back.  I was a new partner, and figuring out my income still.  I had the money in a taxable account, but by the time I was ready to go for the project, it had appreciated to the point I didn’t want to pay the tax to sell it, so I used a HELOC and cashflow.  Like you, my offense is very good, so it probably only cost me a few hundred in interest, or less than an hours work.  I’d do it the same.

    Whatever you do, don’t forego your maximum retirement savings to kill a debt a few months differently.

    I’ll just be impressed if you can complete $300k in renovations in 3 months.

    #180109 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
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    Joined: 01/09/2016

    According to this clarification from the IRS back in Feb 2018, the interest from a HELOC (or HE loan, or second mortgage) is all tax deductible as long as the money was used to build or substantially improve the home that secures the loan.

     

    https://www.irs.gov/newsroom/interest-on-home-equity-loans-often-still-deductible-under-new-law

     

    Click to expand…

    A home equity (HE) loan and a home equity line of credit (HELOC) are 2 different kinds of loans.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
    https://fox-cpas.com/for-doctors-only/

    #180112 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
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    A home equity (HE) loan and a home equity line of credit (HELOC) are 2 different kinds of loans.

    Click to expand…

    …but, YOU are right! I just re-read your post. My resources were wrong. Thank you for correcting my comment!

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
    https://fox-cpas.com/for-doctors-only/

    #180114 Reply
    hatton1 hatton1 
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    Status: Physician
    Posts: 2848
    Joined: 01/11/2016

    I hope my previous comment was not offensive.  I have done a lot of renovations over the years.  I owned my practice and paid the contractor in defined payments over the life of the project.  (An expensive kitchen remodel).  Then 6 months later did a butler’s pantry.  Then a year later did a bathroom.  All was cash flowed but took a couple of years.  Now it needs to be done again but I am going to cashflow a new house.  I think Kamban is doing this also.  Try not to hurry.

    #180128 Reply
    Liked by Anne, Kamban

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