Money is a topic of conversation between me and all of my clients on a regular basis. They need to know how much they can comfortably spend on a project and I need to know what that amount is so I can determine how to best allocate it for them. I pulled in two fabulous financial contacts- Melody Townsend, financial planner extraordinaire; and the banker who is giving money away, Susie McEuen- to share some insight on how to prepare for a redecorating project (at home or in your business). I've broken up the interview into 4 installments and will be posting them daily between now and Wednesday. I hope you get a nugget or two that can help you in determining your financial picture!
Liz Toombs, C.I.D.: “How far in advance do you recommend people start saving money or applying for a loan that they would need for a large re-design project?”
Melody Townsend, CFP: “For a remodeling project, I would think a homeowner would take out a second mortgage or a home equity line of credit with someone like Susie. If someone wants to start a redecorating project, the savings time period would depend on the project, in terms of how big it’s going to be. If, for example, they want to start this project in 2 years they would need to have a budget in mind and divide the budget over 24 months to know how much to save each month. The other option is to start saving tax returns or company bonuses. My suggestion would be to break it down into smaller chunks because people have an easier time looking at it as a monthly or per paycheck savings versus one large lump sum.”
Susie McEuen: “Whether the client needs money for a project on their home or in their business, they would need to do a budget [personal side] or projections [business side] to determine if they have the cash flow to cover the additional debt they would be taking on. They really need to work with their banker to determine if they can cover this extra debt. I like it when people come to me and say “I’ve got an idea- this is what I want to do. This is how much I think I’m going to spend.” I like to see a budget of what they want to spend. We verify income and look at what we can use as collateral. It depends on the size of the loan and whether it is personal or business loan, but we typically ask for 3 years of financials. My side can go pretty quickly depending on how prepared they are with the information I listed. For lease-hold improvements we want as much information as possible: who is doing the project, how they are going to get paid, etc. The loan amount really dictates how much information we require [on the business side]. On the personal side it is a little easier to get funds, but we do look at if the improvements are going to drastically change the value of the house. If they are going to spend $50,000 to add on a sunroom we make sure they will be getting dollar for dollar back out of the project.”
Liz: “If someone is planning a major project what is the best method for them to prepare financially? Do you recommend them pulling from their savings account, cashing in a CD, or applying for a home equity loan?”
Melody: “If they are going to do a major remodeling project, I would love to know their plans several years in advance so I can get them in a position that it wouldn’t impact them as much financially. I look at their goals and help them prioritize how important the project is in comparison to their other goals such as putting their kids through school or their retirement picture, and then I help them determine what they can safely spend. First, I want to make sure that they have a fully funded emergency fund AND have a will in place. If they are on safe ground with these things, then I advise them on where to get their funding. I never advise them to put the project expenses on a credit card or to pull from their retirement or emergency fund!
Susie: “I would sit down with them to determine the reason behind the project. On the business side, I want to know what their 3-5 year plan is. I also consider whether they lease or own the building, because if they lease we may need to consider getting the landlord involved. If they own a building and need to expand because of company growth, we look at historical business numbers to determine whether it makes sense to give them the money. The bank will ask them to put cash into the project, because we won’t give 100% financing. This helps us ensure that they are committed to the project. But it all goes back to projections: What is their gain by adding on additional square footage? We don’t want to see them do a remodel that doesn’t add value.”
Come back tomorrow for more great info!