Home Renovation Financing: Cash vs HELOC Considerations

Homeowners should prioritize emergency funds before using cash for renovations; a HELOC may be necessary.

### Financial Decisions: Cash vs. HELOC for a $125,000 Home Renovation
* 💰 Kaden is considering a significant home renovation costing **$125,000**, but currently has **$104,000 in cash** and a gross income of **$165,000**.
* 🏦 At 27 years old, Kaden saves **15% of his income** and has **$60,000 in Roth IRAs**, yet it's unclear what his **spending rate** is.
* ⚠ Spending all available cash on the renovation could **deplete emergency reserves**, placing Kaden in a **precarious financial situation**.
* 🔍 It’s advised that Kaden should not solely rely on cash for the renovation; a combination of **cash and a Home Equity Line of Credit (HELOC)** may be necessary.
* 📊 He should assess his burn rate for emergency reserves, aiming for **3 to 6 months of expenses** to maintain financial stability.
* 💡 The renovation should align with his overall financial plan, ensuring he doesn't neglect contributions to **retirement accounts and other benefits**.
* 📉 At 27, saving only 15% is deemed insufficient; Kaden should aim to **save 25%** to better position himself for such **large expenses in the future**.
* 🔮 It’s crucial for Kaden to evaluate the **long-term financial impact** of the renovation and ensure he is making decisions at the **right stage of his financial journey**.

He says we're planning an addition for $125,000. Should we pay for it in cash or use a HELOC? We have about $104,000 in cash currently, and our gross income is $165,000. We're 27 years old, save 15%, and our Roth IRAs are at $60,000. We prefer to keep the cash so we can invest it. What do you think?

Whoa, whoa, whoa, whoa! There was a lot there, right? Whoa, okay. Home renovation, but also here's all of this other...

Kaden, the renovation is going to be $125,000. This is not a small renovation. Uh, we have $104,000 in cash currently. Our gross income is $165,000. We're 27, save 15%, and we have Roth IRA savings done. We don't know what their spending rate is, though.

But here's what I know: I know they've got $104,000 in cash. And look, I don't do a lot of really good public math, but if I got a thing that cost $125,000 and I know that I've got $104,000...

and I'm going to try to pay this thing in cash, I'm going to use all my cash...and well, what about emergency reserves? I'm assuming that's what the $104,000 is for. Yeah, but you just told him he's going to spend that and then some. That's the point that...

I'm making. There's no way, in my opinion, Kaden, you're not in a position where you even have the choice or the option to pay cash right now because what you can't do is, whenever you're doing a home renovation or you're buying...

A second property, or you're closing on a home, or whatever the thing may be, you just can't spend your cash all the way down to zero. We see people do this over and over again. It's going to put you in a precarious situation that

you do not want to be in. So when he asks a question, "Should I pay cash or do a HELOC?" I don't really think he actually has that choice. Agree, disagree? I think what's going on, and I kind of can hear it because it's almost like

theme music. I hear Kenny Loggins; I see you playing the part of Goose, and I've got my Maverick helmet on. This does this every time. This sounds like the danger zone. I mean, it really does. I mean, I hear the music accompaniment kicking in.

It's B; it's exactly right. You have... I think this is going to be, Kaden, if I had to tell you, I think it's going to be a balance of both. You're going to need to figure out what your burn rate is on emergency reserves. You've got to have 3

to six months in step for the financial order of operations, and then so that you're going to have extra, and that money can go right into that home improvement project that you've been saving for. But then you're probably, if you can't come up with the gap, maybe the

home equity line, but you've got to... but I want to tell you before I give you permission to do that, you've got to begin with the end in mind. How do you pay back the renovation? Obviously, if you've got $104,000 of savings, you are able

You're disciplined in living below your means, but ensure this aligns with your financial plan.  Don't neglect Roth contributions, retirement matching, and other crucial financial benefits.

You're building future financial opportunities while addressing current needs. I'll play the 'mean one' for a moment. Kaylen mentioned saving 15%; however...

Was this $125,000 home renovation a necessity or a want? If a need (e.g., expanding for a growing family), that's understandable.

But if it was a bonus room, pool, or deck upgrades, you need to be further along in your financial journey before undertaking such expenses.

At 27, saving only 15% is insufficient; aim for 25%.  While $60,000 in your Roth is great, the $125,000 renovation requires careful consideration.

At 27 years old, saving only 15% is insufficient; aim for 25%.  While $60,000 in your Roth is great, the $125,000 renovation needs more careful consideration.

Big nut if you go to moneyguy.com/resources and plug that $125,000 into the wealth multiplier, I want you to see how much this renovation is actually costing you in terms of future dollars you're walking away from.  Make sure you're making

this decision at the right part of your financial journey and not accelerating it prematurely. That's my opinion; that's my cold water. Uh, you agree with that? You're not going with that? Thanks for being the heavy; thanks.

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Initial Question: Cash vs. HELOC for $125,000 Home Renovation

Couple considering cash or HELOC for a $125,000 home addition.

They have $104,000 in cash, a $165,000 gross income, and $60,000 in Roth IRAs.

They are 27 years old and save 15% of their income.

They prefer to keep their cash for investment purposes.

Using all available cash for the renovation leaves no emergency fund.

Spending all cash on a renovation is financially risky and inadvisable.

Depleting cash reserves to zero creates a precarious financial situation.

The couple likely doesn't have the option to pay entirely in cash.

Maintain 3-6 months of emergency savings.

Use savings for the renovation after securing emergency funds.

Consider a HELOC to cover any remaining costs.

Prioritize financial planning, including Roth contributions and retirement matching.

Assessing the Renovation's Necessity and Long-Term Financial Implications

Determine if the renovation is a necessity or a want.

Prioritize needs over wants, especially at this stage of their financial journey.

A 15% savings rate is insufficient; aim for 25%.

Carefully consider the long-term financial impact of the $125,000 renovation.

Use a wealth multiplier to assess the opportunity cost of the renovation.