Remodel our home or save the cash?

@Money September 22, 2011: 12:46 PM ET

(MONEY Magazine) -- My wife and I spent most of our savings to buy an older house. We're planning to do some renovations, but are wondering whether we should restock our savings accounts before we start. What do you think? -- David, Tyler, Texas

While you may be eager to start sprucing up the place, holding off until you can replenish your savings makes the most sense for a number of reasons.

First, this is not a time when you want to be stinting on your cash cushion. The economy has been limping along at best this year and things could get worse before they get better. A recent survey of economists put the odds of the U.S. slipping back into recession at one in three.

And when it comes to the cornerstone of financial security -- holding a job -- well, the news isn't exactly upbeat there either. Unemployment claims have been rising and job growth has been virtually nonexistent.

Maybe you and your wife will be fortunate enough not to have to deal with a layoff. But just in case you do -- or in the event you face large unexpected expenses -- you'll want to have an emergency fund of three to six months' worth of living costs that you can fall back on.

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Otherwise, you could find yourself in the position of having to take on debt or sell off retirement investments or other assets to stay solvent.

Of course, since this is your savings stash you're talking about, you'll want to be sure you invest your money in a totally secure place.

There's another compelling reason, however, for not hurrying into refurbishing your home right now. In the first flush of enthusiasm after buying a home, it's only natural to imagine all the ways you can improve it: sprucing up the kitchen, updating the baths, maybe turning a spare bedroom into a home office or a gym... the list can go on and on.

But in my experience, once you've had some time to settle in, you may find that you can easily live with some aspects of the house that originally seemed to cry out for change.

At the very least, a little cooling off period will give you a better sense of what your priorities should be -- which projects you might want to consider undertaking first, which you can put on the back burner and which you may want to indefinitely postpone.

Once you do decide to tackle some renovations, don't make the mistake of spending lavishly on the theory that you're going to recoup the cost of the project and more when you sell later on.

The dirty little secret about home improvements is that, in a strictly financial sense at least, they're not usually great investments. If you check out "Remodeling Magazine's" latest Cost Vs. Value report, you'll find that most major home improvement projects don't boost your home's resale value by as much you spend.

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There are exceptions of course, but more often than not you're lucky if you recoup more than 70% of the cost at resale. That doesn't mean you shouldn't improve your home. But you want to be careful not to overdo it, especially given the muted appreciation prospects for home prices in the near future.

If the cost of renovation plus your purchase price puts you well above the market value of similar homes in your area, that's a red flag. And you should think of the return on your renovation dollar more as the extra enjoyment you'll get from living in a home more tailored to your tastes and needs rather than a traditional return on investment.

So by all means make a list of the improvements you're considering and maybe even do some research about how much different projects might cost in your part of the country.

But unless it's a project you absolutely have to do now -- like fixing a leaking roof or shoring up a sagging foundation -- focus your construction efforts on rebuilding your savings fund. To top of page

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