How to properly budget for home repairs
Anyone who's owned a home for more than a couple years will tell you that home maintenance is unpredictable. You may have some idea of when things will give out, but surprises still happen. You can go for long stints without having to replace anything, and then have to replace and fix several things in a short window of time. I've said over and over that you have to budget for home maintenance. But how?
A Typical Emergency Fund Doesn't Cut It
Most financial gurus recommend having an emergency fund to cover unexpected costs. Typically they recommend keeping roughly $1000 in the fund. The fund is supposed to cover any unexpected and necessary expenses. By most stipulations for emergency funds, home repairs and appliance replacements would be appropriate costs for an emergency fund to cover.
The problem with using this kind of approach to cover home maintenance is that home maintenance expenses can easily be far larger than a mere $1,000 or even $2,000. Furthermore, even if you did have enough in your emergency fund to cover a home maintenance cost, draining your emergency fund to cover it would leave you vulnerable to another home repair or other emergency expense.
Home Maintenance Escrow Fund
If you're a homeowner, you are probably familiar with using escrow to pay for your property taxes and insurance. Typically escrow funds are held by a third party to pay for future expenses so that you don't spend the money elsewhere. However, you can apply the same concept on your own. Set up a separate account that's designated for home maintenance.
Most people fund their emergency fund by going into 'super-saving mode' until their emergency fund is fully funded. Once their emergency fund is back to where they want it, they stop contributing until they have to draw from their emergency fund again. Instead of doing this for your home maintenance fund, budget a regular contribution. If you happen to go several months with no maintenance issues, just let your fund grow. You won't regret it when issues do crop up.
How Much To Budget For Home Maintenance
Of course, the million dollar question is how much you should budget. There are so many variables, ranging from size and age of house to where you live. Maintenance expenses also will depend on how much you are willing to do yourself.
Over time, you'll start to get a sense of how much home maintenance will cost you in your particular situation (although until you replace a roof or fix a foundation don't jump to any conclusions). Until you do get a good idea, aim high. One good rule of thumb is to budget 2-3% of the home's value for maintenance. This somewhat factors in location and size of your home (larger homes tend to be more expensive, and areas with higher land values also tend to have higher labor costs). If your home is newer, you're probably safe budgeting 2% of your home value. For an older home, stick with 3%.
Aim For The Worst Case
Ideally, you'll always have enough to cover the worst case scenario. In other words, figure out the most expensive repair you'll have to pay for, and aim to stash that away in your maintenance fund. For most people, this is a roof replacement, although if you have signs of a cracking basement, foundation repair may be your worst case. Whatever it is, get a quote for your worst case scenario.
Obviously, you're not going to reach your target right away. However, if your maintenance fund can't seem to get passed a few hundred before something else crops up, you probably need to increase the amount you're budgeting. On the other hand, if your maintenance stash seems to be growing at a good pace, great! Once you reach your magic number, you may be able to decrease how much you're budgeting, but until then keep it up!
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