If you’re in the process of searching for a home to buy, you know that there are many expenses that are guaranteed to come from buying a property. Not only will you have to focus on the long-term mortgage payments, but on top of that, you should already have saved up money for a down payment and closing costs.
With all of these expenses that come from buying a home, it’s easy for many homeowners to get overwhelmed and forget about the importance of saving for an emergency. This can be especially dangerous when buying a home. Houses can come with a lot of unexpected expenses, and when homeowners aren’t ready for them, it can lead to lots of long-term debt if they fail to prepare for emergencies.
At the end of the day, all it takes is a leaky roof, broken heater, or natural disaster to cause tens of thousands of dollars worth of damage to your home. But don’t worry, there’s hope!
What Should I Do?
If you feel you aren’t financially prepared for one of the many emergency situations that can arise while owning a home, you aren’t alone. Despite the fact that unexpected expenses happen all of the time, and can be enough to put many into debt, most Americans don’t have enough money saved up to cover a $1000 emergency. However, once you understand this, and are ready to take the next step to secure your finances, there is action you can take to make sure you will never be blindsided by a financial emergency.
This comes in the form of preparing an emergency fund for your home. An emergency fund is a type of savings account created for the express purpose of having money put aside for an emergency situation, such as an immediate home renovation or unexpected hospital trip. This way, instead of potentially needing to take out a loan to pay for an emergency, you’ll have enough cash in the fund from long-term savings that you can withdraw to cover these expenses.
Another type of fund you can start is called a sinking fund. This is like an emergency fund in that it is a long-term savings fund set aside for things like home repairs and medical costs. The difference, however, is that a sinking fund is used to prepare for expected expenses. These can be especially useful if you know both the age of your house, it’s appliances, and how often these things need to be replaced, repaired, or maintained.
For example, if you know the roof on your house hasn’t been repaired in 5 years, and most roofs need to be fixed up every 10-20 years, it might be a good idea to start putting some savings away for a roof repair, knowing that you will need to be ready for one within the next five years. This also gives you the motivation to think about the expenses you are going to incur from homeownership well in advance of needing to pay for them, helping you stay focused on long term financial goals.
How to Get Started
While having an emergency and sinking fund is a great idea, many people don’t have them because they feel that they can’t afford them. After all, with many people living paycheck to paycheck, it may be hard to find that extra income to put aside each month for savings. However, starting an emergency fund does not require a lot of money for it to be effective. If you were to put aside just $50-$100 a month into an emergency fund, you could end the year with $600-$1200 in savings ready for an emergency situation. On top of that, you can continue to grow these savings until you have well over $5,000-$10,000 put into your emergency fund.
If you want to find ways to cut back on your monthly expenses in order for you to start putting an emergency fund together, start by crafting a budget. Having a monthly budget will allow you to see where your money is going, and therefore, where you can afford to cut back. For example, if you find yourself buying coffee every day on your way to work, you could potentially save more than enough for an emergency fund by making coffee at home a few times a week!
So how much money should you have set aside in an emergency fund? That’s entirely up to you. The general recommendation for an emergency fund is about 6-12 months' worth of your income. However, a fund like that takes a while to build up and may not be feasible for many people. One thing that you can do to figure out how much you want to put aside in an emergency fund is to look up the average cost of home expenses that might come up in an emergency. For example, if you know that a roof repair will cost you $1000, having that much money put aside in an emergency fund is a great starting point.
It’s never a bad time to start saving, and having money put aside for an emergency could save you from long term-financial hardship. Keep in mind that you may never need to use an emergency fund, however, it is better to be prepared in case you do. At the end of the day, it’s better to have the money for an emergency and not need it, than need the money and not have it.