When I became an independent young adult and took on the responsibility of paying for my own way in life and covering my own bills; I quickly learned the importance of building an emergency fund as a backup was essential for peace of mind and financial security. Plus it can help you get out of a jam if something unexpected happens, like job loss or injury.
Now I’m a proud homeowner, but I have to admit that I’ve made some mistakes along the way. Lucky for me, I reflect and learn from the errors I make so I don’t repeat them over again.
I came into home ownership with an emergency fund geared toward my renter’s life, so I had a good foundation to build up my homeowners emergency fund. However, I underestimated the need for having additional funds on hand for a homeowners emergency until something unexpected happened. Luckily the costs were minimal in relation to the amount I had saved, but it hit home that increasing the amount of money in my emergency fund was of utmost importance.
Without sufficient money in an emergency fund, the need for a costly home repair could leave you borrowing off your credit cards, family members or having to refinance your mortgage. These are unnecessary financial burdens that you don’t need weighing you down as a homeowner.
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The Importance of Building an Emergency Fund When You’re a Homeowner
1 – Job Loss Security: Since the majority of homeowners rely on their income to pay the bills, including the mortgage payment; this is a huge reason that emergency funds are a necessity and not just something to think about doing some day. Maybe you’ll be entitled to unemployment benefits, but don’t count on a big payout. Employment Insurance benefits pay only 55% of your average insurable weekly earnings, so your emergency fund would have to supplement the loss of wages between your regular salary and the benefit amount you’re entitled to. It never hurts to save extra money for emergency expenses.
2 – Home Maintenance: Keeping up with regular home maintenance is essential to properly managing your home and it can save you big dollars later. Some of the maintenance expenses to consider include: heating, cooling, plumbing, electrical, exterior, appliances and security. While less important tasks may be put off temporarily, think about having a fiercely cold winter without a properly operating furnace (or even a broken one). Saving the correct amount for home maintenance expenses in your emergency fund can be hard to predict, so always think big. I’ve read the suggestion to save 1% of your home’s value but that may not always be accurate, depending on several factors. If your home’s value is really low than it may not be adequate, but if your home’s value is higher than average then it may be more than necessary. Your location and the availability of experts and materials can also play a factor. I used the Internet and past experience to justify the amount I decided to save; plus I had maintenance and repair price guidelines provided to me by my home inspector to help out as well. A little research can go a long way in planning potential costs and how much you should save.
3 – Home Repairs: Many items in your home have a life expectancy; which will help you plan a timeline for regular proactive repairs. However, you also need to be protected financially for unexpected home repairs which may arise. An unexpected leak in a roof can cause a trickle of problems throughout your home and this is one of the biggest home repair expenses that you could encounter. A backed up sump pump can cost thousands in loss and damage. Being prepared financially will allow you to expedite repairs and give you peace of mind.
4 – Increasing Utility Prices: This is a topic getting a lot of exposure in Ontario with the soaring costs of hydro. Other than cutting back on usage, you could avoid using hydro during peak hours, consider investing in solar panels or wind turbines and most importantly save extra money for potential (or rather, likely) price increases.
5 – Rising Property Tax Bill: Property taxes are dynamic, which means that you must plan for potential yearly cost increases when your municipality sets their annual budgets and tax rates. We’ve been relatively lucky that our property taxes have been static, but that doesn’t mean that we won’t get hit with a larger than expected hike. Municipalities across Canada have different formulas for increasing property tax fees, so consult your local municipal office for more information.
6- Short Term Disability: Getting injured or taking a medical leave can strain household finances; which is another reason why having a sufficient emergency fund is essential to alleviate the burden and worries that may follow a disability leave. Short term disability benefit options will definitely not cover 100% of your salary; if you even have any options open to you. Having a back-up savings plan for emergencies will help cover you for life’s unpredictable moments.
7 – Peace of Mind: Financial stress can negatively impact your health and wellness. A solid back-up emergency fund will help you rest easier and give you peace of mind, knowing that you’re covered in the event of a money related crisis. Being protected financially can also help you sleep better at night.
How much money do you actually need to save for an adequate emergency fund?
The well known recommendation is 3 months to 6 months in living expenses. However, there are situations where this may not be sufficient to cover emergencies. One example that comes to mind is the Angus, Ontario tornado which left some homeowners out of their homes for more than a year. The added expense of living in hotels and eating at restaurants can quickly deplete emergency funds; especially when you still have to cover your existing mortgage payments. You can take a more aggressive approach to building your emergency fund by saving 9 months to 1 year in backup funds. The more you save, the better you are prepared to deal with unforeseen financial circumstances. I know it seems easier said than done, however, just be consistent with deposits and you’ll get there eventually.
To keep up with inflation, I also recommend adding additional money to your emergency fund to cover the increases.
Are you adequately prepared financially in the event of an emergency?
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