By Michelle Kuehner, Financial Coach

We all know (or should) that an emergency fund is a vital part of any savings plan. Having three to six months’ worth of non-discretionary monthly expenses to continue paying the mortgage, vehicle payments, and other bills can be such a blessing in the event of a financial catastrophe. However, that isn’t all you should be saving when it comes to protecting the roof over your head.

Another Savings Bucket

A housing maintenance fund should also be established to help cover those inevitable expense that creep up. Here’s why.

Say you finally were able to save three months of salary when suddenly your roof decides to spring a few leaks. Odds are your homeowners policy won’t pay for the repair (or at least not all of it) since it typically doesn’t cover normal upkeep and maintenance. That means the possibly $6,000- $8,000 bill will have to come from somewhere. Most times, this is when people end up tapping into their emergency funds. To make things a little more interesting, let’s say right after forking over the cash for the new roof you get laid off of your job. Now what?

If you had a home maintenance fund in place, you may still be able to manage your temporary setback. So how much should you set aside? Here are some ideas:

The One Percent Rule

Many experts suggest you stash away 1% of the purchase price of your home per year. That means if you purchased your home for $300,000, then you need to save $3,000 per year. Read that correctly…$3,000 each year, not $3,000 total.

This does not mean you’ll end up spending the full amount each year, but this allows the funds you don’t use to accumulate for a larger ticket item down the road.

While this is a great idea in theory, there are a few drawbacks to this method. First, it suggests you save 1% of your purchase price. But what if you got a heck of a deal on your home? The maintenance costs may outweigh your savings rate.

Better yet, what if you purchased the home many years ago in a down market, and the value has since skyrocketed. Using the current fair market value may be a better solution when determining a desired savings amount. Same goes for inherited property.

The Square Foot Rule

This technique suggests using the square footage to calculate a reasonable amount to save. Simply multiply the square footage of your home by $1 to give you the maintenance savings goal. Let’s say your $300,000 mortgage was able to buy you a 2,000 square foot home. Using this scenario, you would want to put aside $2,000 per year.

There is a bit more validity to this method, as many contractors charge based on the area that needs to be repaired. However, it does not account for the full value of the materials required, nor the increasing labor costs. Let’s face it, certain cities have a higher cost of living than others, so this method may not allow you to accumulate a large enough amount for large ticket items.

It also does not take into account the types of materials to be used. While it may give you a good base amount to start with, higher quality materials will require a higher savings amount.

 

Other Factors to Consider

Age: The age of your home plays a large factor in your needed savings. A newer home will most likely require fewer repairs than an older one.

Climate: The weather your home is exposed to has a big role in the repairs that may need to be completed. Homes where freezing temperatures are a norm may experience higher repair bills than unexposed homes. The same goes for homes in extremely warm areas, and those that experience a large amount of rainfall.

Condition: How well did the previous owners of your home take care of the property? Shoddy repairs, cutting corners, and neglect can all contribute to how well your home holds up.

Materials Used: Upgraded materials will obviously increase the costs of repairs, so make sure to accommodate your account savings level to your desired taste. Replacing carpet with tile, or using granite instead of Formica can make a big difference as to whether or not you meet your financial goals.

Home Warranty Plans: Having a home warranty plan that cover your systems and appliances can drastically decrease the out of pocket costs you may encounter. However, like any insurance policy, there’s no way to guarantee that the costs of the repair will outweigh the price of the plan. Running various costs analysis projections can give you a better idea of which policy may or may not be a good fit.

If you are good with your hands, and can handle most minor repairs, these plans may not be as cost effective for you. An extended warranty on a particular item might be an alternative.

 

How Much Should YOU Budget?

I like the idea of using the best of both worlds, so let’s combine both strategies.

Average the two amounts together, and make adjustments to the total. For example, the average of $3,000 and $2,000 is $2,500. Take the $2,500 base amount and add 10% for any adverse factors you may have. So if your home is 10 years old and the climate is prone to drought, add an additional $500 (20% [10% for age + 10% for climate] x $2,500) to your $2,500 total. Your annual amount to save should be $3,000 per year, or $250 per month.

If you have a home warranty plan, calculate the total costs of all potential repairs/replacements that could happen over time. Take into account any trade service call fees and other out-of-pocket expenses that could occur. Always use the worst case scenario!

These funds should be dedicated to all household repairs. That includes appliances, roofing, flooring, and plumbing. Make sure not to go overboard with one repair, and not leave enough for another. While the self-cleaning toilet sounds like an amazing find, it’s best not to flush away your entire budget with one repair.

Michelle Kuehner is a Registered Investment Advisor Representative and Managing Director for Personal Money Planning. She is also a Certified Credit Counselor, Certified Financial Health Counselor, writes Fix Our Budget blog, and has over 24 years of experience in the financial industry.