FLM2017 Debt Advice: How to Keep Your Reno on BudgetNov 02, 2017
Planning home renovations this winter? November is Financial Literacy Month (FLM), so it’s a good time to learn the ins-and-outs of how renovations will affect your finances — and your debt.
Over half of Canadian homeowners had plans to complete some home renovations this year. For those of you who didn’t get around to this year’s plans, here’s some advice for any upcoming renovation projects you’ll be tackling.
Crunch the numbers: renovating vs. moving
Many Canadians think that renovating their current home rather than buying another is a financially responsible plan. And that isn’t necessarily wrong. But it’s important to do the math before you make a decision.
Consider the breakdown Barry Choi, a financial expert, did for purchasing a house in the GTA on his website Money We Have.
Prepare a renovation budget
Renovations aren’t always a safe financial bet. Even small projects can result in debt. For many Canadians, household consumer debt is already high. New interest rates can make it difficult to reduce even modest-seeming debt.
Use a budget calculator or budget spreadsheet to create a renovation budget. If you budget and spend conservatively from the beginning, you might be able to put extra money towards special features or finishings. That’s a great reward for careful budgeting.
Scott McGillivary has great advice about how to prepare a home renovation budget on his website.
Or, you can tuck the extra money away into your savings, to cover any future renovation or repair costs, or other emergencies. If you don’t already have an emergency fund, consider whether spending money on a renovation is the right use of your money.
Make sure you have a contingency fund
A contingency fund should equal 10 to 25 per cent of your total budget for renovation. If your finances don’t allow you to allot that much to a contingency fund, consider scaling back your project.
Remember that sometimes even a plump contingency fund might not cover everything you’re faced with. It’s better to have extra money at the end of your project than not enough, which will likely result in debt.
Be prepared to adjust your expectations
Unexpected issues, like upgrading electrical wiring or fixing a foundation, can eat up your entire budget, not just your contingency fund. If you go into your renovation unwilling to make concessions, the reality of not getting what you want might be difficult to swallow.
Save up for your reno
Unless you’re dealing with an urgent repair or upgrade, try to save money ahead of time to fund your renovation. That might mean putting off work for a few months, or even a year. But if you can avoid taking on any debt, or having to tap into your emergency fund for unexpected costs, your finances will thank you.
Learn how renovation debt could affect your finances in the BDO blog How to Avoid Debt While Renovating Your Home.