South Dakotans are not known for being a huge fan of credit. The average credit card balance-to-income ratio of the Mount Rushmore State is 11.79%, which is one of the lowest in the United States. The average number of credit cards in South Dakota is 2.8 only, which is, again, one of the lowest in the nation.
While not being heavily indebted is a positive thing, seeking credit when tackling a home improvement can be highly advantageous. Any honest window, siding, and roofing contractor in Rapid City, Sioux Falls, and Pierre would agree that below are the drawbacks of using your own money to fund home projects.
Draining Your Emergency Fund
The purpose of having an emergency fund is to help you weather financial storms over a certain period in order to keep you from acquiring debt when you are not in a good position to do so. If your finances are in bad shape, you are more likely to miss your payments and dig yourself a deeper hole.
Unless you are dealing with an emergency repair or restoration project, do not touch your savings. Set it aside for more serious financial problems that might come your way like a sudden job loss.
If you have a stable income and minimal debts, finance your home improvement instead. Yes, you may have to pay for interest, which makes your project more expensive than paying everything with cash, but it will help keep your emergency fund intact. Besides, a loan with fixed payments are easy to manage, so it would not affect your regular budget considerably.
Failing to Build Your Credit
Home improvement is an opportunity to improve your creditworthiness. If you have bad credit, there is no way to positively change it other than borrowing money. Cash is untraceable, so it can’t help increase your FICO scores no matter how punctual you are with your payments.
As a general rule, you ought to establish a good payment history and observe proper credit utilization. In other words, you must never pay late and max out your credit limits. Also, mix it up by using lines of credit and installment loans to impress credit bureaus and lenders with your ability to manage different financial obligations.
Missing Out on Promising Investment Opportunities
Learning how to make money work for you is a mark of a financially literate individual. Investing your cash wisely can passively build your wealth and help give for a comfortable retirement later in life.
The United States is experiencing a retirement crisis at the moment. A 2019 survey revealed that 64% of Americans are likely to retire broke. A significant number of the respondents confessed to having $0 to their name while a few admitted that they have less than $10,000 set aside for their sunset years.
If you are still years or decades away from retirement, use your time to build up a nest egg to prepare for your future. All investment vehicles come with risk, but they are your best bets to beat inflation and create wealth passively.
Financing your home improvement could worsen your financial standing, so play your cards right. Understand the pros and cons of each credit option to take calculated risks and make the most out of your cash in the long run.