Saving for a Rainy Day on a Budget: Financing a Backup Fund for Home Emergencies
by guest blogger Julian Lane @ http://thefixitchamp.com/
There’s an element of luck in being a homeowner. If you go 10 years without facing a major home repair, consider yourself lucky — especially if you lack the financial resources to cover repairs. Unfortunately, the odds will eventually catch up with you. The roof will leak, the basement will flood, sewage will back up, or you’ll have tree roots in your septic system — something will go wrong requiring costly repairs. Without money in the bank, you could be left having to charge it or seek a personal loan. Either way, unless you can pay the debt right away, you’ll accrue interest and dig yourself a financial hole.
If you’re unlucky enough to have more than one major repair need come up within a short time (it does happen), your finances could take a major turn for the worse. That’s unnecessary and avoidable. Having an emergency repair fund, can save you from financial disaster, keep you out of a lengthy debt situation, and preserve your credit standing. But it takes some planning, especially if you’re trying to get a handle on your debt (debt-relief counselors can help with that) or if you’re trying to keep your household budget under control.
A Home Repair Fund
Maintaining a rainy day fund for home emergencies needn’t be a complicated affair. Basically, it’s a matter of setting money aside on a regular basis in a high-yield interest-bearing account you can access on short notice. Avoid long-term savings portfolios that will charge a penalty for withdrawal. The formula normally recommended by financial experts is to have at least three months of savings, with your ultimate objective being to save at least 1 percent of the total value of your house. This is money to be used to keep you out of debt should the unforeseen happen. And while you might be able to save some money on repairs by looking for online deals and taking advantage of coupons, you’ll still need plenty of padding in your account.
Before opening a high-yield savings account, find out what your minimum balance requirements are and what you’ll be charged should it dip below the minimum balance. Make sure the interest rate is permanent and not just part of a promotion to attract customers, and confirm that all funds are immediately available.
Choose an Account
A taxable account lets you withdraw money when needed without having to pay a penalty. If you invest in an all-market index fund, it’ll make a healthy addition to your emergency fund as long as money is going into it every month. (Avoid using an IRA, which makes your money more difficult to get to with being penalized.) If you invest in a Roth IRA, it can be used to augment an emergency fund with money you can access when needed without penalty since your contributions are on an after-tax basis. Be careful to withdraw only from the money you invested into the account, not the earnings, which will incur a penalty from the IRS.
Other Options
Contributing to a savings account or investment fund may not be possible, so think about possible alternatives. If you’re a homeowner, there may be an opportunity to tap into a home equity loan or home equity line of credit (HELOC), both of which use the value of your house to cover emergency expenses. A home equity loan is a lump sum, usually with a fixed rate of interest, while a HELOC is a credit line you borrow against as needed up to a maximum amount.
Hiring a Contractor
Spend some time online researching contractors before jumping into an agreement. Pay attention to customer feedback, get a minimum of three bids on your work, and consider the time it took to receive your estimates — the contractor who responds soonest may be your best bet. Make sure they’re insured and are in good standing with trade associations, and get everything in writing.
Saving for an emergency repair fund can be difficult if you’re on a tight budget, but compared to the catastrophic financial hit you could take from a major repair, it’s well worth finding a way to contribute to an account. If not, look into other options rooted in other assets or investments. When you’re hit with a massive repair bill, every dollar counts.
Want to complete your home projects on your own but also needs a little assistance? Get in touch with DIY with Pro Help today by calling 619-928-9349.