No one wants to start a redecorate, remodel or move project and then find out that the stress on their cash flow means they have to stop part way through or that the stress keeps them from enjoying the project and the end result. The best way to assure you will enjoy your project is to stress-test your cash flow before you get started.
No matter if you decided to redecorate, remodel or move, the funds to pay for your choice will have to come out of your cash flow. You may use your cash flow to directly pay for the project or you may decide to borrow the money using a home equity line of credit (HELOC) or some other form of debt. If you borrow the money they you will have to use your cash flow to pay back the loan.
So, if you are going to have to use your cash flow to pay for the project, you are left the question; can your cash flow handle the extra expense. There is actually a fun and productive way to answer this question. The key is to tie your decision to your cash flow management system. Here’s how to do that.
Naturally it all starts with an estimate. How much will your project cost. If it is a redecorate or remodel project, then your estimate is the cost of materials and labor. I suggest you add an extra 30% to whatever estimate you come up – there will always be a tempting option to upgrade. If the project involves a move, then the estimate is a bit more complicated since you have to consider moving expense and expenses to get your new home set-up the way you want. Try to be comprehensive and realistic when you make your estimates and then add 30% for contingencies.
If you plan to borrow the money to pay these expenses, then you have one more step. Determine how quickly you want to, or have to, pay back the loan. Then you can calculate how much your monthly payment will be (use a financial calculator or an on-line calculator). This will be the extra expense your cash flow will have to be able to handle.
Now, go into your cash flow management system and create an expense category titled, “Vision Expenses”. The first line item under “Vision Expenses” will be the name of your project. Then budget in the amount of monthly cash flow that will be needed to pay for the project.
For example, assume you are planning a $40,000 remodel project. You are going to use your HELOC to pay for it and the interest on the HELOC is 3.5%. If you want to pay that off in 5 years, your monthly payment will be $757.67. So, you will want to budget this amount for the remodel line item you created.
Now, you want to be sure to actually take $757.67 out of your income each month and put that money into a separate savings account that you title, “Remodel Project”. It is important to actually move the money into this account because the experience of seeing that money go out every month is different than simply imagining what the experience will be. You have to make the loan payment every month whether some unexpected expense comes up or not. By actually moving the money to a separate savings account, you can find out if your cash flow can handle the unexpected.
The other advantage of actually moving the money to savings is that you will build up money to help pay for the project. Seeing that money growing each month is motivation to keep going and builds excitement about your project.
Of course the purpose of this exercise is to see if your cash flow can handle the extra expense so you will have to determine if you have more money going out each month then you have coming in. The most straight-forward way to determine this is to keep an eye on your credit card balances. If you have more going our than coming in, it has to come from somewhere and most often it comes in the form of credit card balances that are not paid-off each month. If you find your balances are slowly creeping up, then you will have to make adjustments in your monthly spending.
Stress-test your project before you start and you will be set to totally enjoy your project.
If you’d like to explore this topic more, give me a call at 425-889-7848 or email me at firstname.lastname@example.org