Does this sound familiar: Your furnace stops working just as the first signs of winter appear. Your sump pump backs up, flooding your basement. The spring on your garage door breaks, leaving your car trapped just as you’re leaving for work. You step into the shower, only to realize that there’s no hot water because your ancient water heater finally stopped working.
Have any of those experiences happened to you? How did you handle them? Better yet, how did you pay for them?
Even if you don’t own your home, having a “rainy day fund” is important. I can’t tell you how many windshields broke on my car when we lived in New Jersey. There was also that time when we carried our bed up the stairs of our apartment, gouging the drywall in the process.
Life’s unexpected dilemmas are expensive, and unless you budget for a new windshield, drywall repairs, or hot water heater, you may find yourself in hot water (or cold, depending on your perspective).
So, how do you plan for the unexpected, and how much will you need to save?
Why (and How) to Start a Rainy Day Fund
Experts recommend setting aside three to six months’ of your living expenses in a rainy day fund. That fund is to be used for emergencies, like losing your job or an unforeseen medical bill.
If you own your home, you will also need to set aside funds in a “household fund” so that you aren’t tapping into your regular savings every time your furnace breaks or your hot water heater takes a turn for the worst.
According to Paula Pant, budgeting and personal finance expert, there are three methods to figure out exactly how much you should save in your household fund.
1. The value of your home
Set aside 1% of your home’s value each year for home renovation costs. So, if your home is worth $200,000, you’ll need to set aside $2,000 each year, or $167 per month.
2. The square footage of your home
Set aside $1 per square foot of your home. If your home is 2,500 square feet, you’ll need to set aside $2,500 each year, or $208 per month.
3. The average of your home’s value and square footage
Depending on the age of your home, the current condition (how well it’s been maintained up until this point), and your home’s location, your household fund may need to be higher or lower than the average. For example, if you live along the ocean, hurricanes and flooding may be a factor that you’ll need to take into account. If you live in a colder climate, ice and wind may damage your home.
To calculate how much to save using the average method, take the average of the value of your home and the square footage method (using our examples above, this would be $2,250 per year). Then, add an additional 10% for each negative factor, such as severe weather, age, and the condition of your home. For example, if you live in a cold climate in an older home that was not well maintained, you would need to add an additional 30%. Using our example, this would add an additional $675 (30% * $2,250) to the average cost of your repairs. Using the average method, you would need to save $2,925 each year, or $244 per month, in your household fund.
Sound daunting? It can be! The good news is that you (hopefully) won’t need to do full renovations on your home every year. Once you make a major repair, it should last for a long time.
My house is over 40 years old. When we bought it, we knew we would need to make repairs and renovations, like installing a new furnace, hot water heater, and renovating the kitchen. We budgeted and planned for those items when we bought the house. Each year we tackled a new renovation. Now, we’re in “maintenance mode,” and we’re only making small improvements and maintaining things as they break.
Some years you may spend more, like years when you need a new hot water heater instead of just maintaining the one you have, and other years you’ll spend less.
If you’re having a great year and spending little on your home maintenance, make sure that you’re still saving. Over time, you’ll have enough saved for truly rainy days, like when you need a new roof or a new furnace.