Many in the personal finance community often preach about the importance of having an emergency fund stocked with several months worth of living expenses in the event of a job loss or any other unexpected financial shock. Those of us who own a house, especially an older one, are no strangers to the occasional large financial outlay. It's not if something breaks, it's when it breaks. A job loss may or may not happen, yet it's still important to have an emergency fund. If a large home expense will most certainly happen, shouldn't we be prepared for it too? People who own a condo or co-op are required to pay a maintenance fee every month to take care of the expenses and the upkeep of the common areas of the building. They have to pay it like they have to pay their mortgage. When they bought their apartment, they knew about this going in and factored it into their budget when they were figuring out how much apartment they could afford. Why should the owner of a house be any different? You are going to pay one way or another. Either you do things the easy way and set aside $300 every month... or you do nothing for years and then have to scramble to come up thousands of dollars because all of a sudden your roof leaks and needs replacement. Treat it like you treat your mortgage. Set the money aside every month and be consistent about it. Pretend you will get thrown out of your house if you don't. And don't just set it aside. You want it to be placed in a dedicated and separate savings account. This is important. Don't just lump it in with money for other stuff, not even your regular emergency fund. Set up a separate interest bearing savings or money market account and put the money in there like it's an escrow. But why does it need to be kept separate? To answer this, let's look at the example of Fernando and Mark. Fernando is married with five children and owns a beautiful Victorian house. He is financially responsible so he has six months worth of living expenses in his emergency fund. Not only that, but he puts a few extra dollars in there every once in a while just in case something else goes wrong. He has been working hard and saving money every month so that he could take his family on a vacation to Argentina so that they can visit relatives they haven't seen in many years. He's been looking forward to this for years and has $8,000 saved up, which is enough to pay for everything. The economy isn't doing so well so Fernando is a little worried about job security. However he has six months in his emergency fund so he thinks he will be okay. The only thing is that everything is in the same savings account. His emergency fund money, the money for the trip, and whatever extra he puts in. Since the economy is bad, he is aware of a potential layoff risk and is careful to make sure the six months will still be there after the $8,000 for the trip is spent. However, nothing bad's happened to his house in years so he forgot to think about what else could go wrong. One day he hears a loud noise in his basement and goes down to investigate. A pipe burst in his boiler room and damaged both his boiler and his hot water heater. He shuts the water off, but now his house has no heat or hot water. He gets estimates from a few plumbers and the bids range from $5,000 - $7,000. He could raid his emergency fund, but given the state of the economy, he feels it would be too risky. Reluctantly, he cancels the trip. Mark is also a home owner. Not only does he have an emergency fund, but he's been setting aside $300 every month for years and putting it into a separate savings account to pay home repairs out of. He is also saving up money so that he can invest in the stock market. Some of the money he invests, but a good chunk of it he keeps on the sideline because economic indicators have started to deteriorate. He wants to jump in after the market goes down because he is confident in the overall long term trend of the stock market. He is really excited about a possible opportunity to buy stocks when they are "on sale". The recession hits and the market crashes. Unfortunately for Mark, so does his roof. For a second, he is upset about having to pay to fix his roof because that means there's less money to buy stocks at once-in-a-generation, fire sale prices. But then he remembers that he has a few thousand sitting in his home maintenance fund. Who do you think is more disappointed? Fernando or Mark? As you can see, the benefit from a dedicated (separate) home maintenance fund is mostly psychological. There's a peace of mind in knowing that your goals are not being set back if something bad happens to your house. If you mix the funds, you run the risk of getting excited and inadvertently earmarking the money for something else. Once that happens, being forced to spend it on some unexpected repair instead will be one bitter pill to swallow. In summary:
And the fund should be used for real repairs, not granite countertops.
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