Should I buy now or build on?

NEA Today, Oct 2001 by Rowland, Mary

Q: Is it better to build on to a house or buy a new one?

A: I loved this question because I learned so much doing research for it. Of course. the answer depends a good deal on you. Yet there is a surprising amount of informotion available.

Remodeling magazine does an annual Cost vs. Value Index that provides the average cost for various remodeling jobs in different parts of the country. It also gives the average amount the renovation project will add to the resale value of your home and shows you what percentage of the cost you're likely to recover in a resale.

The magazine has a Web site at www.remodeling.hw.net. Go to the left navigation bar and click on "Cost vs. Value Report" and you'll get a list of projects such as attic bedroom, home office, bathroom remodeling, and kitchen renovation.

Because my husband and I have dreamed of adding a conservatory to our house, I clicked on "sunroom." I live in the East and learned that a sunroom might cost me $28,212 and that it might add $18,178 to the resale value of house, so I would recover just 64 percent of my cost. I also saw tips on how to get the most out of my renovation.

Equally interesting was what I found at www.realtor.com, where I went to look for the average prices of homes in different parts of the country. This site now has something much better than average prices. You can type in your address and zip code and ask for recent sales on your street or in your neighborhood. Or you could ask for the most recent price on a specific house. Here's a place where the Web has provided us with something really useful.

In the end, of course, you must decide what kind of tradeoffs you want to make. It's important to consider the value of your home as an investment. But to me, it's even more important to consider your home as your home. What will make you and your family happier and more comfortable? I think the family priorities should come first and the financial details second.

Q: What's the best mutual fund for a beginner?

A: I am asked this question more than any other. So you won't be surprised that I have a couple of things to say about it.

The first thing beginners must learn is that there is no one magic mutual fund. Investing is not like the search for the Holy Grail. There are lots of good mutual funds and lots of bad mutual funds. You should not be looking for the hottest performer over the past six months. You should be looking for a good fund that suits your needs.

Three things make a fund right for a beginner. First, it should have low expenses. If you are picking the fund yourself, you should expect to find one without a front-end load or commission and without a deferred sales charge. I like funds with annual expenses of less than 1 percent. And I try to avoid a 12 (b) 1 fee, which is a separate annual fee that is taken out of your investment every year.

Second, if you are buying just one fund, it should be well diversified. Beginners do well with balanced funds. A balanced fund invests in both the stock and bond markets; the bonds provide stability during stock market turmoil.

Third, you want a fund that you will stick with. This is critical. Countless investors pick a top-performing fund and then, when the market goes down, they get weak-kneed and bail out. That is a recipe for losing money. Study the fund before you buy it and make certain that you can take its ups and downs.

Q: I have $15,000 in credit card debt. I am getting married next spring, and I have promised to shut the door on the problems that got me into debt and start saving for our future. How should I get started?

A: Pay off your debt. Paying off debt yields a guaranteed return of whatever your interest rate is. So if you have credit card debt with an interest rate of 16 percent, paying it off earns you 16 percent. There is no place else where you can got a guaranteed return that high.

I know it's frustrating. When you decide to save, you want to save, to watch the money start building up in your bank account. But paying down the debt is the way to make the most of your money and to clear up your financial situation fastest. Talk to your partner about this before you get married.

Mary Rowland is an author and contributor to several financial planning magazines. You can E-mail your personal finance question to her at MoneyQuestions@neamb. com.