• According to Outofyourrut.com, while many people dream of retirement, they’re actually preparing for the opposite.

• Lessons from a trade: So you lost a bundle in your trading account? Might as well learn what happened so you don’t make the same mistake again.

After all, if you’re good with your hands you can buy a fixer-upper for a song and transform it into the home of your dreams. It’s a chance to create a custom home that you’d never be able to afford otherwise. At least, that’s how it works in theory.

Problem is, lurking among those handyman specials are the dreaded money pits. These homes have massive hidden problems that suck your bank accounts dry before you even get started on the work you were intending to do. To save your finances, and your sanity, here are four tips on how to spot—and avoid—the money pit.

Beware rock bottom prices
For Joyce Wayton and her husband Craig, that low, low price was the reason they bought their four-bedroom, two-bathroom home in Lower Sackville, N.S. Located in a neighbourhood where homes usually sell for $250,000, the Waytons snapped up their bungalow for only $120,000. (We changed their names to protect their privacy.)

They knew the home had issues: for almost 15 years it had been rented out and, as Joyce says, “it was not well-maintained.” There were broken windows. The garden was overgrown and the kitchen and bathrooms needed updating. But it had potential, says Joyce. “I could definitely see our kids growing up in that house.”

Initially, the Waytons planned to gut the basement and update the main floor, eventually adding a second-floor addition to accommodate their four young children. They had a modest budget of $40,000, but they were willing to do a lot of the work themselves.

Once they moved in and started opening up walls, however, their plans got shelved. Almost immediately they found knob and tube wiring throughout the house. Then they discovered there was no insulation in their ground-level basement. The fireplaces were inoperable. Worse, the basement demolition exposed a big crack in the foundation that ran the length of the house.

Charles Sezlik, an Ottawa-based realtor, says the too-good-to-be-true price that the Waytons paid should have raised big red flags. If a home is much cheaper than other similar homes in the area, “you need to dig to learn what’s wrong with the place,” he says. At the end of the day, dramatically underpriced homes usually mean big problems.

Get it inspected
Joyce confesses they didn’t bother having the home inspected by a professional before they bought. Instead, they relied on her husband’s construction experience. But even if you have some knowledge of home building and repair, it’s worth paying for an objective outsider’s second opinion, says Sezlik.

If you’re looking at a real fixer-upper, he suggests finding a home inspector with a background in structural engineering. “You’ll pay more up front but you’ll save thousands in the long run,” he says, because such an inspector is more likely to find hidden, expensive-to-fix structural issues.

The biggest money-sucking problems to look for during the inspection include foundations built on mixed granular, pervasive musty smells (which indicates a mold-infestation), and foundation cracks that appear to have widened over time.

Is your fix-it-up budget realistic?
You can’t tell if a fixer-upper is a good deal unless you know how much it will cost to turn your diamond in the rough into a gem, so it’s important that you get that estimate right. Your home inspector’s report, along with various online tools, can help you get a grip on what your renovation budget should be. But these tools can’t estimate the complexity of a project—and complexity adds to cost.

So once you’ve created a budget, experienced renovators say you should add another 50% to it, as a contingency fund. Then add that larger budget to the cost of your fixer-upper. If the total is more than the price of similar homes in the area that have already been renovated, it may not be a deal.

Know when to walk away
If, like the Waytons, you have already bought a place and it’s slowly dawning on you that you’ve bought a money pit, at some point you have to decide whether to keep moving forward.

The key here is to be honest with yourself. If you have a history of being overly optimistic about how much it would cost to complete various renovations, get a professional in to help cost it out. Then ask yourself: Do you really have enough time, patience and money to do the renos you need to do? If not, you might want to put that money pit right back on the market.

The Waytons had hoped to do all the work they needed on their house, plus add a second floor for their kids, for $40,000. But they ended up spending $30,000 just to fix unexpected plumbing, electrical and roofing issues. Eventually, they realized there was no way they were going to get the extra bedrooms they needed. So they’ll spend another $15,000 completing the last of the necessary repairs, then list their home for sale. If they’re lucky, sighs Joyce, they’ll at least break even.

Starting early and plugging away diligently means you won’t have to put as much away each month. If you start saving in your early twenties, you need only put away 6% of your income to end up with enough. You can pace yourself for the long haul. You have time working for you, and you can adjust your stride as you go to deal with whatever you may encounter.

Wait until you’re in your thirties and you’ll have to pick up the pace. You know the ol’ “save 10%” rule: it’s the least you can do because you won’t have as much time for your money to compound. But you’re still fine.

Wait until you’re in your forties and you’ll have to run faster, socking away 18% of your income to have what you’ll need or putting off retirement so you can put time back on your side.

So would you rather save 6% starting early, or 18% later when you also have kids to put through university, a mortgage to pay, and only the lord knows what other competing priorities? Life doesn’t get easier just because you make more money. If that were true, nobody who makes an above-average income would be worried about retirement.

Treat your savings like a marathon instead of a sprint and you’ll achieve three things:

• you can take less out of your cash flow to meet your goals
• you’ll put time on your side so compounding can do its magic
• you’ll have to think about it less.

Dan Solin’s excellent new book, The Smartest Portfolio You’ll Ever Own (see my review here) devotes several chapters to whether passive investors should work with an advisor. It’s a question I’ve considered before, and I think Solin has a lot of interesting insights to share.

The suggestion that most investors should use an advisor is a tough sell in the financial blogging community. Most Canadians with significant assets work with advisors, but the proportion of DIY investors is surely much higher among regular visitors to websites like this one. Indeed, many Couch Potatoes embraced the strategy after a negative experience with an advisor, and that aftertaste will take a long time to fade.

As a DIY investor myself, I’m happy to support people who manage their own portfolio. At the same time, I believe that most investors are likely to do better over the long run if they work with an advisor—as long as it is the right kind of advisor. Unfortunately, there are huge problems with the advice industry in Canada, which is dominated commissioned salespeople who charge hidden fees embedded in financial products, and who believe that an advisor’s role is to select winning fund managers or pick stocks. Excellent fee-only advisors are out there, but many have minimum account sizes of $200,000 or more, which rules out the overwhelming majority of Canadians.

The situation is somewhat different in the US, where investors have more options, but Dan Solin’s take on the DIY-or-advisor question holds up pretty much anywhere. Here are his major arguments:

• If your assets are under $100,000, you may find it hard to find an advisor who will take you on for a reasonable fee. For this reason, as long as you have the ability to build a simple index fund portfolio and leave it alone, you would be better off on your own.

• If an advisor says he or she can help you beat the market, that’s a dealbreaker. “It’s one thing to decide you need assistance,” Solin writes. “It’s another to use a broker who transfers your wealth into his or her pocket.”

• Only go the DIY route if you are sure you have the necessary discipline. It’s easy to stick to the plan in a bull market, but an awful lot of investors panicked in 2008–09, and plenty more are doing so now. Solin points out that well-advised investors had appropriate asset allocations that allowed them to endure the volatility.

• Consider using an advisor “if you want continuity with your investments for your spouse and family when you die.” If you’re the only one managing the money and you get hit by a bus, is your partner going to be left to the sharks?

• An advisor can be extremely helpful in managing a portfolio for maximum tax efficiency. In Canada , this is especially true for retirees who are dealing with forced withdrawals from RRIFs and trying to avoid Old Age Security clawbacks and other benefits for seniors.

• If you’re a strong believer in the Fama-French principles, you may want to use Dimensional funds, which are only available through a select group of advisors (yes, Solin is one of them). Although you can capture some of these premiums using ETFs, Dimensional funds have a long track record of outperforming traditional small-cap and value index funds.

I tend to agree that passive investors who want to work with an advisor should look for one who uses Dimensional funds. It’s not just that these are excellent, low-cost funds. The real benefit is that the advisors who sell them get it. Solin quotes a Morningstar study that found “advisors who use DFA encourage very smart behavior among their clients.” ETFs can also be excellent tools, but many advisors use them for tactical asset allocation, sector plays and a lot of other nonsense that has nothing to do with passive investing.

As Solin reminds us, investing is about process, not products.

Do not make illegal downloads: Let’s set aside the moral reasons for a minute. Michael Geist writes in The Star how movie studios are taking Canadians making illegal downloads to court and under current law statutory damages could run as high as $20,000. That kind of money can pay for a lot of DVD/Blu-Ray movie discs.

Buying the Dips: Jason Zweig writes in The Wall Street Journal that the exhortation to “buy on the dips” sounds good in theory but doesn’t stand up to analysis.

Around the blogs

Million Dollar Journey takes a look at the new Capital One Cash Back Credit Cards.

Michael James on Money explains why investing in an index is like picking the brains of the best investors out there. David Chilton explains index investing in similar terms in The Wealthy Barber Returns.

Money Smarts Blog will be travelling to the US and researched ways to get a little bit less ripped off on cell phone data roaming charges.

Blunt Bean Counter offered a list of 20 things about income taxes that baffles him. I have one item on my list: why is the child care deduction capped at $7,000 per child? And why isn’t it even adjusted for inflation?

Canadian Financial Stuff is a big fan of paying for everything with cash but points out that, in all fairness, an all-cash approach isn’t without its flaws either.

Jim Yih pointed out that compound interest is a powerful force in growing your wealth. Keep in mind though that fees, expenses, turnover, taxes and inflation are forever working against compounding.

My Own Advisor sucked up to his wife with a post on financial lessons he learned from her. Just kidding, Mark!

The Wealthy Canadian, on the other hand, sucked up to Kevin O’Leary. Enough said!

Canadian Couch Potato reviews The Smartest Portfolio You’ll Ever Own and includes a model portfolio built with ETFs from the book.

Canadian Financial DIY slams a Investment Funds Institute of Canada report for employing questionable tactics in its bid to call all ETFs “expensive”.

Related Reading:

• Movie Theatre Ads
• This and That: Variable Rate GICs, Cognitive Errors and more…
• This and That
• This and That # 109
• Sample Investment Policy Statement

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Here’s another fee that makes me scratch my head: annual credit card fees. Banks want you to use their credit card so they can make millions on transaction fees, but you’re supposed to pay for the card too? Really?

With free cards a dime a dozen, who thinks it’s a good idea to drop $75-$120 for features you may only occasionally use? Hey, if you’re charging up a storm and paying your balance off in full every month, you may make a premium card pay. Carrying a balance? You’re a dope.

Cancellation fees are a big money-producer for cell phone and cable companies. Cancel a contract before the end of its term and you’ll flush hundreds of dollars down the toilet. That’s just bad planning, either when you took the contract or now that you’re thinking about dumping it. Think of a cancellation fee as a “stupid tax.” Still willing to pay it?

One of my favourite “You’re-a-Jackass” fees is the one people routinely pay because they can’t plan ahead or be bothered to walk down the block: the ATM fee. Folks routinely fork over $3 for a $20 withdrawal. Hey, I’ve seen the bank statements! And as for the non-bank cash machines, which will cost you up to $4.50 in fees, that should leave you braying!

• Got a mortgage? Moneycrush has a whole whack of ways to pay it off earlier.

• The Associated Press goes into the kitchen to find out exactly what a $16 muffin tastes like.