Kiplinger Advisor Collective
I recently had a call with a client who was looking to fund the construction of a swimming pool at his house. The client had enough cash to pay for the project but wanted to weigh all the financing options. This is the type of advice we as financial planners are often asked to give.
Funding a large purchase should be thoughtfully planned. I always recommend that clients take a moment to consider how a potential purchase impacts their overall financial plan and long-term goals, and I work with them to quantify those impacts.
If you decide that a purchase aligns with your goals, then you can think about how to fund it. Here’s a rundown of some common options.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Cash reserves
Cash reserves are usually the best option for funding a project. However, you must determine whether raiding your cash stash would put its balance below the recommended threshold for covering any emergency needs — say, to manage expenses if you lose your job or to pay medical bills resulting from an unexpected illness. As a rule of thumb, I suggest maintaining six months’ worth of living expenses in an easily accessible account.
Investments
Using money from your investment portfolio can also be a solid choice, although you’ll want to evaluate the pros and cons of taking out funds for the project now compared with leaving them in your account, allowing them to grow and be used for other goals.
If you decide to withdraw from your investment account, be aware of the tax implications. You’ll typically owe capital gains tax on investment earnings; long-term gains from selling investments that you’ve held for more than a year are taxed at rates of 0%, 15% or 20%, depending on your taxable income. Assets you’ve held for a year or less are taxed at the same rate as your ordinary income, with rates ranging from 10% to 37%.
A home equity line of credit
A HELOC, which is a line of credit that allows you to borrow against the equity in your home, can be a good source for financing a project — especially if you can get a reasonable interest rate. Recently, the average rate on a $30,000 HELOC was 9.07%, according to Bankrate. HELOC rates are usually variable, rising and falling based on market conditions.
HELOCs typically involve a draw period of up to 10 years, during which you can borrow money and may be required to pay only interest each month, followed by a repayment period of up to 20 years. During the repayment period, you’ll need to pay back the full amount borrowed plus interest.
If you use HELOC funds for a home improvement project, the interest on up to $750,000 of debt (or $375,000 if you’re married filing separately) may be tax-deductible.
A no-interest credit card offer
Some credit cards offer an introductory 0% interest rate on purchases for a limited time — typically anywhere from six to 21 months. Applying for one of these cards may be a good way to get short-term financing for a project, but it’s important to pay off the balance before the 0% period expires.
Otherwise, you’ll pay the card’s standard rate, which is usually much higher, on the remainder of the balance. Or worse, you may pay retroactive interest on the full purchase amount if you don’t pay off the entire balance before the promotional period ends. Retailers, such as home-improvement stores, commonly use these deferred-interest payment plans on their credit cards.
Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.
Related content
-
Selling Your Haunted House? What You Have to Tell Buyers (and What You Don’t)You don’t need ghosts to spook buyers, sometimes a home’s past is enough. Here’s what sellers should know about disclosure laws, pricing and perception when a property has a haunted history.
-
CMS Brings Back Furloughed Staff for Open Enrollment LifelineThe government has recalled approximately 3,000 workers to assist with Medicare and ACA Marketplace Open Enrollment.
-
Selling Your Haunted House? What You Have to Tell Buyers (and What You Don’t)
You don’t need ghosts to spook buyers, sometimes a home’s past is enough. Here’s what sellers should know about disclosure laws, pricing and perception when a property has a haunted history.
-
New Opportunity Zone Rules Triple Tax Benefits for Rural Investments: Here's Your 2027 StrategyNew IRS guidance just reshaped the opportunity zone landscape for 2027. Here's what high-net-worth investors need to know about the enhanced rural benefits.
-
A Vacation Home Sounds Dreamy, But Is It the Right Move for You?A vacation home can be a relaxing getaway or a financial burden. Learn the pros and cons of owning a second home and how to decide if it fits your goals.
-
Planning a Major Home Renovation? 3 Smart Ways to Finance ItFrom HELOCs to personal loans, here’s how to pay for a major home renovation without draining your savings.
-
Financial Fact vs Fiction: The Truth About Social Security Entitlement (and Reverse Mortgages' Bad Rap)Despite the 'entitlement' moniker, Social Security and Medicare are both benefits that workers earn. And reverse mortgages can be a strategic tool for certain people. Plus, we're setting the record straight on three other myths.
-
I Made Some Mistakes Buying My First Home. Here's How I'm Making Sure It Doesn't Happen AgainHome Buying Buying a home can be a complicated process. I'll show you some common mistakes we encountered and provide expert tips to help you avoid these.
-
I'm a Real Estate Investing Pro: This 1031 Exchange Strategy Can Triple Your Cash FlowSavvy investors can use 1031 exchanges to unlock value by moving capital across markets in a play called geographic arbitrage. These tax implications can make or break the strategy.
-
How Location Changes the Math on Owning a Vacation HomeThe market you choose can make your dream getaway a smart investment — or an expensive mistake.
