I wouldn’t recommend that you have thousands of dollars sitting in a savings account “just in case”, when that money can be invested or put to a better use. Most of us can handle emergencies without needing a bunch of cash sitting there. The exception, of course, is if the emergency is a big one that costs thousands of dollars. Or job loss.
However, when you buy a house you may find yourself scared to use your emergency fund as for anything small, because you may want to see that cash remain in your account for a home emergency.
One of the main reasons is that, when you own your home, emergencies for which you are responsible are much more likely to happen.
A pipe could burst, or the furnace could break, or job loss could happen, which holds far greater impact to those who own their homes. Home owners can’t just give notice, move out and live in a less expensive home if something happens to make their mortgage unaffordable. They can’t move in with family members while they get back on their feet, without finding renters or selling their home. Even if you have insurance for many potential disasters, you still have to pay the deductible, and some things aren’t covered.
So, if the rule-of-thumb for the general public is to put aside 3-6 months of living expenses in an emergency fund, how much should home owners have?
Already, there is a lot of advice out there saying that 1% of the home’s value should be set aside for maintenance per year. If you have the personal emergency fund of 3-6 months of living expenses, you should also have a home maintenance fund of 1% of the home’s value. You may not use the maintenance fund each year, so it’s a rolling total. However, a maintenance fund takes care of maintenance, not housing emergencies.(You should be getting a home inspection when you buy your house to begin with so that you are in a better position to anticipate these sorts of things)
We can handle most emergencies that crop up better than most. Since J is a ticketed carpenter and my dad sells building supplies, we are well equipped to fix a leaky roof or deal with other issues, but I’m still reluctant to transfer money from my emergency fund.
Unless you bought a complete money pit, I don’t think it’s likely that you’ll have that many emergencies crop up, but there are more opportunities for emergencies if you own your home.
A traditional emergency fund is supposed to cover you in case of job loss or another emergency. But life provides so many opportunities for emergencies, that it may be smart to have more funds built up just in case if you are a home owner.
Do you think you need a larger emergency fund as a home owner?
If I was a home owner, I would definitely have a larger emergency fund. Like you said, as a home owner you are 1) expected to pay for maintenance, unlike a renter and 2) not really able to reduce you housing expenses if job loss occurs. These two things necessitate a bigger EF.
I feel like I would need a huge emergency fund to feel safe as a homeowner. Knowing I’m not responsible AT ALL for my appliances, plumbing, heating, or any other fixes of my apartment lets me keep my EF low.
One thing about e-funds is that most big spendy emergencies don’t require immediate access to large sums of money. You might need to be able to pay a smaller amount in immediate relief (say the plumber or the electrician or the guy to remove the tree from your roof) but the more expensive clean up costs are usually things that you can wait a few days for a bank transfer. Or even wait for the insurance check to come.
It’s the same with life expenses. If you lose your job, you don’t need access to $10k all at once tomorrow. You need to be able to draw on that $10k over a period of weeks or months if the job search isn’t immediately productive.
Because of that, I have what I consider a safe amount of money in an e-fund that’s immediately liquid in a savings account. The rest of the bulk of my e-fund is split between money market accounts (limited number of withdrawals per year, but a higher interest rate) and auto-renewing CDs (have to wait 6 months to access, but also high interest rates). There’s money there I can get to in a reasonable amount of time, say 3-5 business days.
If absolutely necessary and I liquidate my entire savings fund, I still have a good whack of open credit on credit cards that I could use and then pay off as soon as I could pull from my money market account.
But realistically the likelihood of needing $10k (or more) right this very minute is slim to none.
We had and still do have a large amount in a savigns account even though it’s going towards the mortgage. In all the time we’ve had it there we’ve never had an emergency. We do save a portion each month for home maintenance and that we have used. It’s a projected expense in our budget and we save it until we need it because we know we will spend it at some point in time. Once we actually pay off this mortgage in the next month or so we will keep an ES just not at much as we used to.
We have a pretty decent sized emergency fund so we don’t have specific money set aside for homeownership costs. If we need something for the home it just comes out of the regular e-fund.
In a word, yes but I am in the camp that advocated for a bigger EF anyway. I just don’t like risk and like to have money that is easily accessible.
I can appreciate why you might be concerned, Daisy. There’s been a lot of flooding here in Alberta recently and countless people have lost all their possessions and homes damaged – sometimes beyond repair – in a few short days.
The scary thing is that flood damage is not covered by private insurance companies here so all those people have to rely on the federal and provincial governments for assistance. It’s a pretty precarious position to be in! I don’t want to scare you (sorry) but I know we’ve been worried about the amount we have in savings because of this flood stuff.
It sounds like you guys are really prepared though – good for you!