An emergency fund is more than a nest egg, it’s a lifeline. Unfortunately, we can’t predict every cost associated with buying a home, new or old. When it comes to unforeseen but necessary replacements and renovations, the price tags can pile up.
The main point here is control. With an emergency fund, you have the ability to maintain a normal life if something goes wrong. Say your boiler must be replaced earlier than expected, or perhaps you’ve found termites in the walls. Instead of going into disaster mode, you can simply dip into the fund you’ve made for just this reason. An emergency fund is about giving you the room to breathe.
How Much Money Do I Save?
The amount you should save is proportional to your lifestyle. For example, if you are planning to build a house or do any renovations, you should definitely have a little contingency money around. If you have recently bought a home and there are no foreseeable issues with the structure, you should still build an emergency fund, just in case.
Financial guru Suze Orman (of Oprah fame) recommends saving enough money to live off of comfortably for eight months. Yes, really. Eight. Whole. Months.
And How Do I Save All That Money?
While it may seem like a lofty goal to build an eight-month emergency fund, it’s actually very doable with some slight cost-shaving. The best way to save is putting a little money away each month. Try creating sustainable goals, earmarking a certain amount you want to put away in a savings account each month.
Additionally, some people find success in cutting costs. Monthly subscriptions and bills weighing you down? Find ways to trim savings! Keep track of your expenses by going through all your checks, credit card charges and ATM withdrawals. Make a note whenever you spend: rent, mortgage, utilities, transportation, healthcare, groceries, meals, entertainment, clothes, etc. Is there anywhere you can cut back? Instead of going out to dinner 4 times a week, try 1 or 2. Ultimately, you should be shooting to save around $100 dollars by trimming extra expenses.
In more extreme cases for an immediate emergency fund, there are quicker solutions. Some people have taken on second jobs or side jobs. It can be as simple as babysitting or dog walking to bartending on the weekends. And, of course, one of the most obvious ways to earn some immediate cash is to sell things. If you can really do without the extra sofa, put it up on Craigslist for some quick cash!
Where Does This Money Go?
One of the most important lessons about an emergency fund is where to put it and where not to put it. Emergency fund money should preferably go in a savings account where it can stay as liquid cash. The worst place to put this money is somewhere that it is not easily accessible. That is to say, don’t invest an emergency fund; resist the urge to put that money back into the market or into stocks.
Once you have a nice stockpile of money, it’s a lot easier to go about your home owning business. Whether it is replacing some plumbing or getting a better energy and cooling system, you will be able to make improvements to your home without breaking a sweat or breaking the bank.