The purchase of a home can be an excellent investment if done correctly and with a solid financial plan. If you currently don’t have an emergency fund, make it a goal to build one.
Here’s how you can start:
Open a savings account.
For an emergency fund to be beneficial, it must be useful. Tap into your 401(k) for home repairs or renovations, and you’ll face substantial early-withdrawal penalties. Store your emergency fund in a savings account, that allows you to access your money simply and for free.
This account should be separate and different from one where you’d save for short-term goals, such as a vacation or a similar type of expense.
Start small but keep saving.
An emergency fund that’s too tiny won’t be able to cover life’s unexpected moments. Dealing with a challenge such as a sewer pipe problem, for example, could potentially set you back financially or worse, create debt.
Establishing an emergency fund that’s too large has its own drawbacks as well. With more buffer than necessary, those extra funds will earn little in interest in a savings account when they could be building assets faster in investments or paying off high-interest debt.
To find the perfect savings spot, aim to start with $1000. This amount could be enough to keep you from having to take cold showers if your heater breaks and provides a financial cushion if any other household problem were to arise.
Once you have these funds established, continue to add money to your safety net, so that you’re prepared if bigger crises were to happen, like losing your job or a reduction in household income.
Start by building up a fund that would potentially cover living expenses for three months, then work up your way up to six months.Figure out exactly how much to save by determining your monthly payments for electricity, heat, water, food, rent, health care, home mortgage and other necessities. Multiply the sum of those costs per month by the number of months you’re aiming to cover.
This method isn’t a perfect science, given that everyone’s situation is different. Depending on your home life and circumstances, you may want to save for a larger reserve.
Once you’ve established an emergency fund that covers up to six months of essential living expenses, focus your savings towards retirement and debt repayment.
Buying a home can be an incredible investment if your finances are in order. Start saving today; your future self will thank you.