How do you prioritize home improvement projects when the economy is uncertain, rates are high, some industries are seeing layoffs, and inflation is still high? What should a homeowner be thinking about if they have updates to make? For example, how should you preserve your nest egg? How can you prioritize if you have multiple projects that you want to do? How can you budget so that even if you get a home equity loan, credit line, or personal loan, you can ensure you're not overextending your finances?

The best case scenario is having emergency funds set aside already. So that's always step number one. Priority number one is to have cash on the side for emergencies, just in case things happen. Suppose your home improvement project is a real emergency like you need to replace a water heater. If troubles happen, that's a prime reason why there is a high level of importance for putting aside cash just for emergencies. So around six months' worth of your expenses is a worthy goal. Put aside money in a separate bank account for when unexpected costs happen, and you can utilize it quickly. For example, if someone has $5,000 in monthly expenses, $30,000 would be the 6-month cash reserve goal.

Now, when it comes to home improvement projects, if it's home improvement projects that are more for improving the living situation or just improving lifestyle. Ideally, you pay with cash and don't take out loans. Someone might say, "We have a $180,000 improvement we want to do. We have to do a loan, or we have to do a line of credit." Well, you have to do what you must do.

If you take out loans, count the cost. Look at the entire loan cost, including interest payments over the life of the loan. Knowing the total cost will provide a "gut check." And then, of course, look at the payment amount and see what that does to your monthly spending. And if you have the margin in your monthly expenditures to pay for that payment over the loan's timeframe or even to pay off early if you want to avoid paying the total interest over the life of the home equity line.

The best-case scenario is to delay the home improvement until you have cash saved up. And in the interim, while saving up money for your home improvement, you can get multiple quotes and estimates of what it will cost. The delay might help you get the best pricing because you're taking your time to get the best quotes. You can also time the project better for your contractor, improving costs.

Another element to consider is if you are making the home improvement to allow your property to create an income. So if you have a short-term rental or an ADU(https://www.investopedia.com/terms/a/accessory-dwelling-unit-adu.asp), a separate unit that you want to

improve to be able to create a rental income because you're going to list it online or somewhere to have tenants short-term or longer-term. That could change things regarding improving why it's okay to get a home equity line. If you have to get a loan, the rental provides more income, making it much more of a viable plan to pay it back. In other words, the debt for the improvement is creating an income stream in the future. So that's much more valuable.

When it comes to improving your home for personal reasons to make it look better to have a better living situation, that's still a great reason. There's going to be no income created, obviously, for paying back the loan. So that's why I advocate trying to pay with cash saved. In expensive places like California, someone might say, "It's too hard to save and pay in cash." Well, that's another reason to look at what you're doing and prioritize why you're doing it. If it's an essential improvement, and you must take a loan, make sure there's a plan to pay it off. Avoid getting the loan just because a loan agent said you could qualify for a certain amount.

Hopefully, that sheds some light on home improvement considerations and projects. I'm Eric Maldonado, CFP®, MBA, owner of Aquila Wealth Advisors in San Luis Obispo, CA. You can reach us on our website, aquilawealth.com. I'm happy to do an initial complimentary consultation with anybody interested in creating a financial plan and achieving their goals.

Eric Maldonado, CFP®, MBA

Owner, Aquila Wealth Advisors, LLC

info@aquilawealth.com

San Luis Obispo, CA

www.aquilawealth.com