I’m starting to look at purchasing a home. I have some cash saved for the down payment. However, I’m not sure how much I should keep in my bank account for emergencies. Should I have multiple savings accounts? One for emergencies? One for the house? Any insight you can provide would be appreciated.
— Hopeful Homeowner
--------------Congratulations on beginning to research a home purchase! Home buying can be both an exciting and sometimes stressful time. Keeping funds in a savings account as a hedge against a financial emergency is wise! How much you should have saved? How many accounts should this money be in? Well, these answers are dependent on a few different factors.Establishing an emergency savings account becomes increasingly important when you purchase a home. Ideally, your emergency fund should consist of at least three months of your living expenses. Once fully funded we can then look toward a separate savings account specifically for home maintenance or repairs.Generally, I gravitate toward a safety net of $1,500. Most home repairs, short of an HVAC replacement or something catastrophic, can be funded via this savings account. Knowing the details of your home purchase might increase or decrease my initial recommendation. For example, purchasing an older home with older appliances is likely to require a greater amount of cash than a newly renovated home. If a home repair exceeds this $1,500 balance the funds could be pulled from your established emergency fund. But it’s vital that you replenish this fund in a timely manner if cash is removed from the account. In the case of planned improvement, I would suggest saving for these projects separately from your emergency savings account or home repair account. If you have a kitchen renovation planned, need a new roof, or plan on completing a large yard project saving for these events separately will be key.As far as where this money should be kept, I’m much more concerned with the liquidity than I am with the separation of the funds. If you are able to keep your emergency savings, home savings, and vacation savings in the same account and only use the funds within for their earmarked purposes; go for it! However, for many, keeping these balances separate can be an important component in their success.The most important element regarding these balances is safety. Money earmarked for emergencies or short term use should not be taking any risk. A plain old savings account is the ideal location for short term funds which includes home repairs and emergency savings. It’s not exciting, but it’s a sure fire way to ensure the money is available if you need it, which is the whole purpose anyway. One of the most important components of responsible home ownership is being prepared. By establishing these savings accounts and funding them appropriately you will accomplish just that.
