Pros and Cons of Paying Cash for Home Improvements After You've Retired

If you're retired and either need or want to make some home improvements, it can be challenging to decide whether to withdraw cash from a retirement account to cover the costs. After all, you spent years building that asset, and for some, withdrawing more than necessary is akin to pain. While the fear of spending money on retirement is a problem in its own right, here, the focus is on the pros and cons of paying cash for home improvements.

Image source: Getty Images.

Where to invest $1,000 right now? Our analyst team just revealed what they believe are the 10 best stocks to buy right now. Continue »

Pros of paying cash

There are plenty of "pros" associated with paying cash. For example:

No interest

With an average interest rate of more than 20%, putting home improvements on a credit card rarely makes sense, unless you plan to pay it off in full before the due date. Imagine spending $10,000 on upgrades to the master bath using a credit card with a 21% APR. If you make a $300 payment each month, it will take you 51 months (four years and three months) to pay the card off in full. By that time, you will have paid $5,140 in interest.

Instead, let's say you take out a personal loan to pay for the upgrades. With a FICO score of 700 or more, your interest rate is likely to hover around 12.25%. By paying $224 monthly, you'll spend 60 months paying off the loan and incur $3,423 in interest.

It may be easier to control the budget

Studies show that there's a significant difference in the way people spend when paying cash. Retailers have long been aware of the difference, which helps explain why many stores encourage customers to use their credit cards.

Paying with cash is more painful for most people. You're likely to spend less because you've taken time to consider what you need and want before parting with the money. The same is true whether you're buying toilet fixtures or new golf clubs.

Simply put, it's harder for most people to part with cash.

You could be building home equity

Some home improvement projects offer an impressive return on investment (ROI), adding value to your property. New garage doors, minor kitchen remodels, and adding a backup generator are three examples of projects that add value to your home. On the other hand, you're unlikely to significantly increase your home's value by adding a walk-in closet, converting a garage into a bedroom, or installing high-end fixtures.

Choose your home improvement projects carefully, and paying cash means there's no loan to pay off before you benefit from the additional home equity.

Cons of paying cash

There are downsides to paying cash for home improvements. They include:

Less cash on hand

Any time you spend cash, you're taking it from somewhere you might need it more. For example, emptying an emergency savings account to pay for new flooring could come back to bite you if the water heater breaks or the basement floods.

Missed opportunities

Parting with cash to make home improvements may mean not being in a position to take advantage of higher-than-usual rates on money market (MM) or certificate of deposit (CD) rates. While a new deck may be far more fun than waiting for CDs to mature, it won't do as much for you in retirement. And what about if a new, hot stock comes along? Having enough to buy in while it's still reasonably priced could pay impressive dividends in the long run.

It may be easier to overspend

As mentioned, people who use credit to pay for purchases are less price-sensitive. It's possible that you'll spend more than you initially planned and find yourself spending years paying back more than necessary. What happens "later" is a concept that's difficult to focus on when you're excited about what you're gaining at this time.

Given the cost of high-ticket items, such as central air conditioning and roofs, you'll want to set aside money for expensive upgrades. One rule of thumb is to set aside 1% to 4% of your home's value for annual home maintenance. For example, on a $300,000 home, that means setting aside $3,000 to $12,000 for yearly upkeep.

Considering today's inflated home values, it's not realistic for most homeowners to save that much for upkeep. Instead, you may want to consider an alternative plan. For example, try saving $1 for each square foot of space. If you have a 2,000-square-foot home, you'd want to save $2,000.

This money isn't for expenses like paying property taxes. It's strictly for upkeep and maintenance.

The point is to ensure you have cash available when needed. If you're able to pay cash for upgrades to your home and still have enough to cover emergencies, the decision to pay cash is straightforward. If not, consider alternative financing options with lower interest rates, such as credit cards with 0% promotional rates and home equity lines of credit (HELOCs).

The Motley Fool has a disclosure policy.