The Benefits of Budgeting in Bad Economic Times

The need for smart financial management has never been more apparent than in today's rough economic climate, and the home improvement sector is no different than any other. The fact is that home remodels aren't providing the big returns these days that they did even just a few years ago. Remodeling Magazine's 2007 Cost vs. Value Report notes that "rising remodeling costs, coupled with an overall slowdown in housing activity nationwide, have combined to extend the overall downward trend," a trend that has seen the average returns on home remodeling projects drop from an 82.5% average return in 2003 to 70.0% on the dollar in 2007, according to Cost vs. Value data.

On the other hand, the home improvement industry isn't exactly shrinking, either. The Joint Center for Housing Studies at Harvard University predicts that, despite the nation's economic woes, homeowner spending on home improvement will increase by as much as 25% between 2008 and 2015, to the tune of 50 billion dollars or more. Where does that leave the average Joe homeowner? There's little doubt that Americans will continue to maintain and improve their homes. However, setting a budget and being smart about which projects you invest in are now more important than ever.

Developing a "Personal Spending Plan"
SayLending.com, a website dedicated to promoting smart lending and spending practices, says that an honest and accurate self-financial evaluation is at the heart of any responsible home improvement undertaking. That involves going through several important steps, including:

• 1. Determining "Steady Income"—SayLending.com suggests you start by identifying all of the income sources you have that you can count on, day in and day out. Steady income should include any regular source of income, including investment dividends, salaries, social security, and disability payments. It does not include one-time financial gains, such as monetary gifts or that winning lottery scratch ticket in your glove box.
  
• 2. Cataloging Monthly Expenses—Once you've figured out how much you make, the next step is adding up all of the expenses that you consider "necessary" for survival, such as mortgage, utilities, student loan payments, car payments, grocery bills, etc.
  
• 3. Identifying Potential Expenditures and Spending Goals—Once you've identified how much you make, how much you spend, and how much you have left over, the next step is to sit down and figure out exactly what your project is going to require of you. That includes a line item list of materials and labor costs, including factoring in a little bit extra for the unexpected expenses that go hand-in-hand with a major project.
  
• 4. Setting a Budget— In this final step, homeowners need to make sure that the home improvement of their dreams is a realistic undertaking. Can you really afford it? This means figuring out a way to either save enough money to pay for a project outright, or making sure that you have enough income left over, above and beyond the necessities, to be able to make regular payments if you choose to finance your project.

Do Your Homework
Of course, they key to creating an accurate budget is being completely honest with yourself about how much you make, how much you have to spend, and maybe most importantly, how much you're going to have to spend in order to meet your goals. Interior decorator Claudia Morales of Claudia Interior Design in San Juan Capistrano, CA, says that unrealistic expectations are one of the biggest road blocks she routinely runs into with her customers. "Nine times out of ten, people want extravagant, elegant designs. They want a quality sink or desk, but they don't realize it's going to cost them," says Morales. "They want a desk that costs $3,000, but then they tell me they only have $950 to spend on the total project." That's further complicated by the fact that Morales could easily charge $950 for her services alone. Morales' advice: think hard before hiring a professional contractor, and always be sure to price things out ahead of time. That way you'll have an honest assessment of what your project is going to take to complete, as well as whether you have the funds to pull it off.

There's no question as to whether times are tough or not, or whether it pays to count your pennies. Nevertheless, hard times on Wall Street don't have to mean your new kitchen, or bath, or family room is out of the question. It just means that you need to be extra cautious about developing and sticking to a budget you can live with.