Money Management

If you don’t have the money in savings to renovate, here are some choices to explore. 

If you’ve been eager to renovate your home for quite some time, then you may be ready to take the plunge — even if it means paying more than usual due to inflation. In a recent survey by Today’s Homeowner, 17% of homeowners are spending more on improvements this year. And many plan to dip into their savings accounts to cover their costs. If that’s not an option for you, then here are a few borrowing choices to consider.

1. A personal loan

A personal loan lets you borrow money for any purpose. If you have a home improvement project on your radar, it’s an option worth looking at if your credit score is in great shape. But if your credit isn’t so stellar, then you may want to go another route.

Personal loans are unsecured, which means they aren’t tied to a specific asset. And when you don’t have such great credit, it can seem like a lender is taking on a bigger risk by writing that loan. That means you could get stuck with a higher borrowing rate that makes your loan less affordable.

2. A home equity loan

Home equity is measured by taking the amount of money you owe on your mortgage loan and subtracting it from your home’s value. If your home is worth $300,000 and you owe $200,000 on your mortgage, that leaves you with $100,000 in home equity.

One of the great things about having home equity is that you can borrow against it. And one route to take in that regard is to sign a home equity loan. This works very much like a personal loan in that you borrow a fixed amount at a preset interest rate, and you pay your loan back in installments over time. The main difference, though, is that your home is used as collateral for your loan. This means that you may have an easier time qualifying for a home equity loan than a personal loan if your credit score isn’t in such great shape.

Of course, the danger in taking out a home equity loan is that if you fall behind on your payments, you could eventually risk losing your home. But if you take out a loan whose payments you can afford, you’ll minimize that risk a lot.

3. A home equity line of credit

Like a home equity loan, a home equity line of credit, or HELOC, lets you borrow against your home’s equity. Only instead of borrowing a fixed amount, you get access to a line of credit you can take withdrawals from over a period of time — for example, five or 10 years.

The upside of a HELOC is that you get flexibility. If you’re not sure how much your renovations will cost, you can take out a larger line of credit and only withdraw the amount you need. The downside, though, is that HELOC interest rates tend to be variable, so your monthly payments could rise over time if your interest rate increases. And, like a home equity loan, if you fall behind on your payments, you put your home itself at risk.

Many people can’t afford to pay for home renovations outright. If that’s the case for you, these options are all worth considering.

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A smaller refund does not mean you botched your tax situation. 

Some people procrastinate on their taxes and wait until the last minute to get them done. But if you’re anticipating a tax refund this year, you may be motivated to get your taxes done well ahead of the April 18 filing deadline. After all, the sooner you get your taxes done, the sooner you can anticipate your refund landing in your bank account.

In 2022, the average tax refund amounted to $3,121 — not a small number. And if you got a similar refund last year, you may be anticipating a repeat payday this filing season.

But you may find that your tax refund isn’t as robust in 2023 as it was in 2022. If so, don’t panic — that’s not actually a bad thing, even though it might seem like one.

Why tax refunds could be lower this year

A number of tax credits got a boost in 2021 that didn’t carry through to 2022. And perhaps the most notable of those was the Child Tax Credit.

In 2021, the Child Tax Credit was worth up to $3,000 for children aged 6 to 17, and up to $3,600 for children under age 6. But in 2022, the Child Tax Credit’s maximum value was only $2,000. That’s the same value that’s been in place since the 2017 Tax Cuts and Jobs Act was put into place, so it shouldn’t come as a shock. But when you sit down to look at your taxes this year, you may notice a lower refund due to the Child Tax Credit reverting to its usual value.

But that’s not the only reason you may be looking at a lower tax refund this year. Maybe you worked a side hustle for a few months but never paid taxes on that income. Or maybe you earned more interest income in your savings account, and that caused your refund to shrink. It could also be a combination of different factors — a lack of a boosted Child Tax Credit and more income on your part.

Don’t get upset if your tax refund is lower

Your first inclination may be to get frustrated or even panicked if this year’s tax refund is lower than last year’s. But one thing you must remember is that a tax refund is not free money.

A tax refund simply represents money you were entitled to earlier on but didn’t collect. So if this year’s tax refund is smaller, it means you did a better job of collecting your money upfront, as you earned it.

That said, many people count on their tax refunds to do things like pay bills, tackle home projects, or fund vacations. A better bet? Save for those things rather than rely on a refund to make them happen.

Tax refunds can be hard to predict. There are lots of different factors that go into calculating a refund that can change from one year to the next. A smaller tax refund is definitely not a bad thing. But you shouldn’t put yourself in a position where you’re reliant on that money to meet a specific need or goal.

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If you have a credit card, you need to read this. 

Finance expert Dave Ramsey is not a big fan of credit cards — to put it mildly. In fact, Ramsey recommends not using cards at all, despite the benefits they can provide (including generous rewards and the ability to boost your credit score). Ramsey recommends opting for cash instead, and using the debit card that comes with your bank account in place of a credit card.

There’s a lot Ramsey doesn’t like about credit cards, but there’s one feature in particular he says “straight up sucks.” And it’s a feature that every cardholder needs to be aware of.

Ramsey’s right that this credit card feature can be bad news

The credit card feature Ramsey warns about relates to how interest is charged on your cards.

“Most credit card companies use compound interest to determine daily charges — which is basically interest on the interest you’ve already racked up,” Ramsey explained. “And listen, we like compound interest when it helps grow your investments. But it straight-up sucks when it’s being used against you.”

To understand how compound interest works, and why it can be so costly, consider a simple example. Let’s say you owe $5,000 on a credit card with a 17% annual interest rate, and interest compounds daily. At the end of one day, you’ll have been charged $2.33 in interest. That would be added to your balance so on day two, you’d be charged interest on $5,002.33.

Each day, your balance would grow a little bit, and you’d find yourself paying more interest that is tacked onto your balance. Understandably, Dave Ramsey is not a fan of this feature because it means even if you stop charging purchases on your card, your balance can still grow and your interest costs can still increase.

What can you do about it?

Dave Ramsey is right; compound interest does suck, to borrow his expression. But it isn’t necessarily something every credit card user has to worry about.

See, if you pay off your credit card balance in full by the payment due date when you receive your statement, you won’t pay any interest at all. You just pay back the money you actually charged on your card without any interest charges being assessed.

If you can pay off your balance in full, you get the benefits that come with a credit card like the points, miles, or cash back many card companies offer. But you don’t have to pay this additional charge that card companies tack on for people who carry a balance.

The trick is to make sure you actually do pay off your cards. You can do this by living on a budget, tracking your spending, and making sure you don’t charge more on your cards than you’ll have available in your bank account when your statement comes. This can seem daunting at first, but once you get in the swing of sticking to spending limits on your card, it should be doable.

If you already have credit card debt you’re struggling to repay and you are worried about this unpleasant feature on your cards, you also have options. Consider a balance transfer or debt refinancing using a personal loan to see if you can reduce the interest you’re paying and to make debt payoff easier.

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Don’t spend your gift cards without reading this first. 

If you received gift cards over the holiday season or for other special occasions, you may be wondering what the best use of them is. While you could just head to the store and spend the money, Suze Orman has some tips for using gift cards as wisely as possible.

Here are the two things Orman suggests doing when a gift card has ended up in your wallet.

1. Buying essentials with the gift card

Orman suggests that any gift card that can be used for necessities should be used for that purpose, rather than just for buying things you want.

“If you have a gift card from a general retailer that sells groceries, or home supplies, or anything that qualifies as a ‘need,’ I sure hope you will spend your gift card on one or more essentials,” Orman said. She acknowledged that this may not be your first preference when someone has given you a gift, but thinks it’s the smartest move you can make with the card.

“Please don’t ‘oh, Suze’ me with a story that your relative/friend/boss gave you the card as a gift, not to help you pay for essentials. I don’t think that’s really true. They gave you the card for you to decide what you’d like most. What you would value. Using the card to pay for essentials is my definition of making the most of a gift,” Orman advised.

Orman is absolutely right to make this recommendation. If you use the gift card to buy things you need, these are items that won’t have to be put on your credit cards or come out of your bank account. You can free up some cash to save money, use it for other important goals, or use it for “wants” you’ve already built into your budget rather than just randomly splurging since someone happened to give you a gift card.

2. Selling the gift card for cash

If you cannot use your gift card for essentials because the store it is for doesn’t sell them, Orman suggests taking an unconventional approach. Rather than buying things with the card at a store that only sells “wants,” she advises converting your gift card into cash by selling it — even though you’re likely to get only about 80% to 90% of its value when you do so.

“If trading in gives you cash to put towards a need, I think it’s a reasonable tradeoff,” she says, regarding selling for less than the card is worth. She believes you’re better off getting a portion of the money to use for your emergency fund, debt payoff, or retirement investing rather than spending all of it on something you don’t really need.

This advice may also make sense for many people, unless you were genuinely going to splurge on a “want” regardless of whether you got the gift card to do it — and you had already built that “want’ into your budget.

Ultimately, if you can use the gift card in a way that improves your financial situation by following Orman’s advice, this is the best gift you can give yourself.

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Stick to worrying about what you can control. 

The U.S. has debt. A lot of debt. About $31 trillion dollars worth, which is $94,000 per U.S. taxpayer. Some members of Congress have threatened to prevent the government from lifting the debt ceiling, leaving the nation to default on its dollars.

Right now, the U.S. federal budget deficit sits at 1.4 trillion. American voters have concerns, and rightly so. A big question mark is what happens to personal savings and investments if the country defaults on debt.

Suze Orman, financial guru, recently addressed whether you will lose your Treasuries if the U.S. defaults on its debt on her Women and Money podcast.

This is what Suze Orman thinks of a U.S. default

Suze Orman said, “The short answer is there is no place to hide. If the U.S. government defaults, it would be cataclysmic. Which is why I have a high level of confidence… it just won’t happen.”

In other words, Orman thinks the consequences are too severe for U.S. congresspeople to follow through on threats to let the U.S. default on its debt. Everyone from foreign governments (which hold trillions in U.S. Treasuries) to insurers would be affected.

Suze Orman spoke to Sheila Blair, former chair of the Federal Deposit Insurance Corporation (FDIC), who shares Orman’s opinion. They believe that despite the drama in Congress right now, the chance of the U.S. government defaulting on its debt is tiny.

While no one knows precisely what a default would entail, consumers can rest assured that their Treasuries and certificates of deposit are reasonably safe.

No money is 100% safe from a default

Orman acknowledges that no money is 100% safe from a U.S. default: “A large portion of the 24 trillion dollars is held by foreign countries… the consequences would be cataclysmic.” The consequences of a default would ripple beyond North America.

At the very least, everyone in Congress is strongly motivated to raise the debt ceiling or otherwise avoid default. No one wants to be responsible for throwing a country into crisis.

Don’t let anyone tell you that an investment is 100% safe — no investment is. Systems change. But history suggests U.S. Treasuries are one of the safest places to invest your money.

Prevent and prepare for bad weather

Sticking to your financial plan is the best way to prepare for a default. Long-term savers should consider voting for rational candidates and diversifying their investments.

Vote for rational candidates

Voting is top of the list of things U.S. citizens can do to prevent a U.S. default. Vote for rational candidates who understand the terrible consequences a U.S. default would have. It’s a little late for that this year, but it’s something to remember during the upcoming election cycle.

Diversify your investments

In the meantime, stay diversified. Diversified investments steady your portfolio. Diversification creates a foundation that better weathers unexpected financial disasters, including a potentially earth-shaking U.S. default.

It’s a good idea to save an emergency fund. Consider stashing six months of earnings in a high-yield savings account to prepare for the unexpected. You can lean on your emergency savings to avoid drawing on long-term savings during a market crash or if you lose your job.

Another way to diversify is to invest in property. Even if the market value of a property drops, a home can be lived in or rented out. Unused property can be listed on Airbnb or similar short-term rental websites to earn rental income.

Keep up with sound financial habits

Worries abound, but one of the best things you can do is maintain good financial habits. Do you have a long-term plan? Don’t let the threat of a U.S. default dissuade you. There’s no use in worrying about what you can’t control. Continue saving money in the manner that works best for you.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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