As a homeowner, you have a lot of responsibilities, especially when it comes to your finances. One of the most important is to save up a healthy emergency fund in order to afford the extra and unexpected costs that go along with owning your own place.
If you used most of your savings for your down payment or you already feel stretched saving for other financial goals like retirement, it can feel like a big challenge to start building an emergency fund. However, as a homeowner, you need to be prepared for the unexpected.
Repairs and maintenance
As a homeowner, any maintenance and repairs to your home are your responsibility. While a new paint job can be put off without any consequence, things like a broken water heater cannot. An emergency fund is essential to help you out of a bind quickly without having to resort to racking up debt.
You should budget 1% to 2% of your home’s value for regular maintenance and upkeep every year. The more you invest into maintaining and taking care of your home, the less likely something will shut down unexpectedly and catch you by surprise.
One of the reasons people choose to become a homeowner is to invest in real estate, with the expectation that their home will increase in value over time. However, the other ongoing costs of owning a home will also likely increase annually.
While you won’t know how much your property taxes will increase until your home is assessed, you should have some extra cash on hand in case your taxes increase significantly. Likewise, condo fees or homeowners’ association fees typically increase year over year so it’s important to set aside extra money in your budget for these expected increases. If you live in any kind of shared residence, sometimes a major repair for the building, such as an elevator replacement, is divided up amongst all of the condo owners based on the square footage of their unit. Being prepared for these higher or unexpected costs will make it easier when the bills come due.
Protection during job loss
One of the most important reasons to keep an emergency fund is so you can pay your bills in the event you lose your job or can’t work for an extended period of time. An emergency fund will ensure you can still make your mortgage payments, even when you don’t have any income. This will protect you from defaulting on your mortgage and keep your credit in good standing.
When it comes to building your emergency fund, a good rule of thumb is to save three to six months of living expenses. A cash cushion is essential to protecting both you and your home.
The bottom line
An emergency fund is essential even if you’re not a homeowner. It’s best to keep your cash in a high-interest savings account if you need to access your money quickly.