We know the effects of reckless spending all too well — the debt hangover and the scramble to get one’s finances back on track. But what could be wrong with prudent spending?
Not a lot — except when it comes to prudent spending gone wrong. According to Lara Warburton, managing director of Imara Asset Management, many upper- and middle-income earners make incorrect assumptions about pre-retirement planning — assumptions that are at odds with reality. The over 55s are especially at risk.
“One example is supposedly prudent spending on home extensions and renovations in the belief that a rand spent on the home is a rand invested in the future. This is not always the case,” says Warburton. She says value in a lifestyle asset can be unlocked by an eventual sale, but “market value” may be less than a proud homeowner assumes.
“Many older people think they can sell their large home on a large stand and realise enough capital to retire,” says Warburton. “They are sometimes shocked to find the sale proceeds won’t even cover the price of a small place in a retirement village.”
So what affects market value?
Warburton says you need to think about:
- A decline in an area’s desirability.
- The growing market power of younger buyers with different tastes. It may not be enough to renovate your bathroom and kitchen and replace carpets. Potential buyers might have radically different taste and may simply buy a property to redevelop it.
- Changing lifestyle requirements that focus on open plans and low-maintenance outdoor areas.
From a pure investment perspective, it may be more cost effective to sell and move rather than renovate — though there are exceptions.
“You can recoup outgoings if you live in a highly desirable area where land values are exceptionally high,” says Warburton. “Even if your house is flattened by a buyer, costs are recovered because of the land value. But in the short term, renovation spending is seldom recouped.”
Your financial planner should know your financial position and your personal values when it comes to spending, saving and your home. He or she may be in a position to tell you that, perversely, you can get a better “return” from a new set of golf clubs than from “prudent” spending on new bathroom tiles. So discuss your plans before you renovate.
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