Are You a Homeowner? An Emergency Fund Is a Must
As a homeowner, I often repeat the following mantra: with homeownership comes great responsibly – and oftentimes great expense. When you’re in the market for a house, it’s easy to get distracted by the allure of cosmetic upgrades—the hardwood floors, stainless steel appliances and granite countertops— and overlook potentially costly but essential repairs that you’ll invariably need at some point.
There are two types of expenses you’ll have to deal with: planned and unplanned. Planned expenses are tune-ups that you can budget for in advance, like a new roof and replacing the windows. The unplanned repairs are tougher to budget for, but you can find yourself in a financial pickle if you don’t have enough money set aside for them ahead of time. Just because it’s uncertain if and when these emergencies will occur, doesn’t mean you should stick your head in the sand and just hope they won’t materialize. They probably will in some capacity.
Trust me. I speak from personal experience.
My Homeowner War Stories
When I bought my house in August 2012, I did what most responsible homebuyers do—I got a home inspection. My new house passed the inspection with flying colours. The inspector did, however, note a couple minor issues, including a walkout from the basement that would need to be replaced “one day.”
So, picture this. Here I am two years into being a homeowner. I’m thinking, “hey, being a homeowner isn’t so bad.” Besides minor repairs like painting my garage door and installing a new apartment door, I haven’t had any major, costly snafus to contend with. That all changed when I woke up one fateful winter morning after one of our lovely Canadian storms and found two inches of water in my basement. That ominous “one day” the home inspector referred to had arrived.
The home renovations necessitated from the flood ended up taking about six weeks to complete and costing me $25K. They included new eavestroughs, a retaining wall, sidewalk, and front porch steps. Although they cost a pretty penny, they’ve increased the value of my home long-term, and they were necessary to ensure that my home wouldn’t flood again. So I’m happy that I got them done. (Although I wasn’t happy about writing cheques totalling $25K in one year for repairs.)
A good rule of thumb is to budget from 3% to 5% of your home’s value for these costs on an annual basis.
How to Budget for Home Maintenance, Repairs and Emergencies
I wish I could say that the flood was the one and only repair-related headache I’ve had to deal with, but since then I’ve also had to contend with furnace, sump pump and dishwasher breakdowns, as well as a freak windstorm that tore shingles off my roof. These debacles taught me quite a bit, and I can now impart my wisdom unto you. Here are a few key maintenance and repair takeaways I’ve accumulated in my six years as a homeowner.
Set Aside Part of Your Home Loan
When my lender said I could spend up to $500K on a home, I crunched the numbers and decided to set a maximum purchase price of $425K for my house instead. I was still able to find a home with almost everything on my wish list, but the lower mortgage payments, home insurance, property taxes and utilities gave me some financial breathing room, with some money left over at the end of the month to go toward maintenance and repair.
Calculate How Much to Save Based on the Value of Your Home
Freak events of nature and unexpected emergencies aside, over the years you’ll have to spend mega bucks on a new roof, furnace, windows . . . and the list goes on. A good rule of thumb is to budget from 3% to 5% of your home’s value for these costs on an annual basis. For a $500K home, that’s up to $25K each year.
Panicking yet? Take a deep breath. Remember that 3-5% is a rule of thumb, not an absolute. You can adjust the amount that you budget depending on the age and condition of your home. For example, you don’t typically need to spend as much on home maintenance and repairs on a new home versus a resale (used) home.
If you have a “century” home, however, you should probably consider putting even more than 3-5% aside. My father owns a century home and I assure you, the amount I’ve spent on home repairs is a drop in the bucket compared to how much he’s shelled out. Buying an abode build in the Edwardian era might seem dreamy and romantic. The asbestos and mold that accompanies it? Not so much.
Budget Separately for the Repairs You Know You’ll Need
For the expected repairs, budget and plan for them ahead of time and keep the money you save for them in separate accounts. For example, if you know you’ll need a new roof in 5 years, put money aside each month in a “new roof” fund in a separate savings account so the money’s there waiting for you when you need it. That’s what I did and it’s served me well over the years.
I find it’s beneficial to have separate accounts for different maintenance and repair needs versus one for all of them combined. It all comes down to psychology. It’s easier to meet savings goals if you make them as specific as possible. Instead of having one savings account for all your savings goals, by having separate sub-accounts for different goals, you’ll know exactly what the money is going toward and you’ll be less likely to be caught off-guard by any expenses that you forgot to budget for.
Save Money with Regular Home Maintenance
You can reduce the amount you spend on home repairs by properly maintaining your home. For example, by doing something simple like cleaning the eavestroughs, it can go a long way in preventing a flood. (I find it’s helpful to keep a checklist of home maintenance I should be doing depending on the season, so I don’t forget anything). In my case, if I had replaced my basement walkout in advance of the storm, it would have prevented my basement from flooding and causing other damage. Due to waiting to replace the walkout, the flood ended up costing me an extra $1K in repairs.
Now that you know how to budget for maintenance and emergencies, you might be wondering where you should keep the funds you’re setting aside. There are seemingly quite a few options out there for safeguarding and growing a stack of cash, but not all of them are equally suited to home maintenance and repair.
Where to Maintain and Grow an Emergency Fund
Though I had no idea that an epic basement flood was in store for me, I thankfully didn’t have to go into debt and carry a balance on my credit card to deal with the crisis. I’m a plan-ahead kind of guy, and as soon as I became a homeowner, I created a savings fund specially designated for home repairs and maintenance, and gradually added to it each month.
A high-interest savings account is the ideal place to keep cash assets liquid and stable enough to cover emergencies. While you might be able to earn a higher return from GICs, the money is typically locked in for a specific term, so it’s not ideal for dealing with crises that need immediate attention. As for ETFs or stocks, although they’re liquid, they’re also quite volatile. The last thing you want is for another financial crisis to happen and to lose 40% of your roof replacement fund overnight. The right savings account can give you immediate access to your funds when you need them, will be unaffected by market swings, and can gradually grow the amount you deposit (some savings accounts in Canada yield up to 2.5% interest).
Worried that you’ll be tempted dip into your emergency fund for non-emergencies? Remember to follow this cardinal rule and protect yourself from yourself: only use your emergency funds for a true financial emergency (i.e. a door crasher special on a big screen TV is not a financial emergency). And if you encounter a true emergency while you’re still working toward saving your annual 3-5%, and you don’t have enough money in the fund to cover the emergency, it might be a good idea to have a low-interest credit card handy so that you can cover the emergency without accruing a huge amount of interest-related debt in doing so.
Once you’ve saved your annual 3-5% of your home’s value, you can focus on other financial goals like burning your mortgage. Just remember to regularly replenish your emergency fund for the next time you’ll need to dip into it for an expected—or unexpected—home repair.
Don’t Procrastinate on Saving for Home Repair and Maintenance
When you’re taking the leap from being a renter to being a homeowner, the multitude of new concerns and responsibilities can make it easy to put saving for home repairs and renovations on the back burner. Don’t make this mistake. Some home repairs like a broken furnace or flooded basement can’t wait, and almost every homeowner has some kind of a war story to tell. Wouldn’t you rather make sure yours has a happy ending that doesn’t involve a deluge of debt? By having the money set aside, you won’t be caught in a panic when these catastrophes eventually happen. Remember, when it rains it often pours.