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Dorothy Rosen -- The Dollar Diva Ask the Dollar Diva

Home equity: Spend only in emergencies

Dear Dollar Diva,
My husband and I bought a home last year. We would like to finish the basement and add a deck. Should we refinance our mortgage to pay for our additions or should we try to save bit by bit?
M.B.

Dear M.B.,
You've had your home for a year or less, and you're ready to plunder its equity for nonessentials. The Diva has two words for you: Tsk, tsk.

The home improvements may add value to your home, but it costs money to refinance and your mortgage payment will go up. If you can't save money with your current mortgage payment, a larger monthly nut could easily get you into financial trouble. The Diva gives an unequivocal thumbs-down on the refinancing.

Smart money doesn't plunder home equity
Smart people cherish and protect home equity. They pay off their homes before they retire and enjoy the peace of mind that comes from living without a mortgage.

Follow their lead: Don't touch your home equity unless you have a bona fide emergency. Needing to repair structural damage is an emergency; adding a deck is not. Read the Diva's "Loan consolidation: No" for more reasons why you should not tap into your nest egg.

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Control your "wants" or your "wants" will control you
"Needs" are essentials you must have in order to live, such as moderate housing, wheels, groceries and clothing. "Wants" are nonessentials that are nice to have, such as a lake view, SUV, gourmet olives and designer jeans.

The interesting thing about "wants" is, there's no end to them. Fill one "want," and another leaps onto center stage nagging to be taken care of. Buy a house, and you'll "want" a finished basement; finish the basement, and you'll "want" a pool table. It's goofy, but that's how "wants" work. Getting your arms around this concept will help you stay out of financial trouble.

"Wants" are good when you have them under control; they motivate you and your family to reach new heights so you can have the fun things in life. But be careful. Easy credit can put your "wants" in the driver's seat. When that happens, unbridled debt and misery are sure to follow.

Wish list
To control your "wants," make a wish list with the following columns: "What," "When" and "How I expect to pay for it." Note: "Wants" get paid for with belt-tightening, moonlighting and other cash generators; never with debt. The exceptions would be a modest home or car.

The list should include your current "wants" and those waiting in the wings. Put in target dates to motivate your savings efforts. Even small "wants," such as an electronic toy or new spring purse, belong on the list if they're "wants" that you don't have the cash for. Once you have the "wants" on paper, prioritize them, putting the most important one on top.

Never fill a "want" without referring to the wish list first. If it's on the top of the list and you have the cash, go for it. If it's not, hold off until it is. And remember, you're not being deprived, you're being enriched: Delayed gratification builds character.

If you have to put off the purchase, save the cash until you have enough to take care of your No. 1 "want." Don't leave the money in your checking account; it will get frittered away. Buy a U.S. Series I savings bond, instead; it's a good deal even though you'll have to wait six months before you can cash it and there's an early withdrawal penalty if you redeem it in less than five years.

For tips on saving up for "wants," read the Diva's "10 ways to save $50." Once you put your mind to it, it's easy to save $50 a month; and 12 months later you'll have an extra $600 plus interest saved up. The better you get at saving, the quicker you'll accumulate the cash you need to purchase the next "want" on your list.

-- Posted: Jan. 21, 2002

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See Also
Loan consolidation: No!
U.S. Series I savings bond
10 ways to save $50
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