Buying a home is an exciting venture. With homeownership comes all the financial responsibility of repairing and maintaining it. Emergencies can happen to anyone, any time — basements flood, trees fall onto rooftops, mold grows, termites invade. Are you prepared for anything that might come your way?
Comprehensive home insurance is an important step to protect your home, but it doesn’t always cover every situation. Building an emergency fund is necessary to help you pay for unexpected major repairs without relying on credit cards. Using a credit card for a one-time emergency is tempting, but keep in mind the actual cost to you will be higher with interest, unless you pay it off right away.
How much should you set aside for emergencies? The general rule of thumb is three to six months’ worth of expenses. Think in terms of what you will need to pay your mortgage and other regular bills. If disaster strikes, you’ll have some cushion to either pay for the repair or ease the pressure of cutting into your monthly budget.
There are a few different ways to build up to a comfortable emergency fund. Consider selling items around the house you don’t use or need. A yard sale or online selling options are great ways to convert your belongings to cash. Things of value, of course, will add more money to the fund. You might also get a second job. Put those paychecks specifically into the emergency fund and don’t spend them. Also, get into the routine of setting aside just a little bit of money every week. Even $15 or $25 dollars will add up.
One important aspect of any emergency fund is that it needs to be quickly accessible. So, a basic savings or money market account is the best place to keep it. A separate checking account is another option — that way, you can pay the repairman right away without a hassle. Just don’t be tempted to write checks for any other purpose!
Thinking about worst case scenarios and planning for how to cope with them financially is daunting. Is there any hope if you don’t have an emergency fund ready? Many homeowners have the option of taking out a home equity loan or line of credit. The amount you qualify for is based on the value of your home. A loan from the bank will give you one lump sum at a fixed interest rate, while a line of credit lets you draw money as you need it up to a predetermined maximum.
Whatever stage of life you’re in, set your savings goals and be patient as you work toward them.
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