A homeowner emergency fund: how much and where to keep it

Two kinds of emergencies

Homeowners face two distinct kinds of shocks, and a good fund plans for both.

Income shocks. A layoff, illness or reduced hours. The mortgage, taxes and insurance still have to be paid, and missing payments on a mortgage has serious consequences. This part of the fund is measured in months of essential spending.

House shocks. A failed furnace, a leaking water heater, a storm-damaged roof or a sewer line backup. These are measured in dollars and often arrive without warning. Some are covered by insurance, but only after you pay the deductible.

How much to keep

The CFPB says the right amount depends on your situation, and suggests thinking about the most common unexpected expenses you have faced and what they cost. It also says that even a small amount provides some financial security.

A practical way to set a target is to add three pieces:

Percentage deductibles deserve attention. The Texas Department of Insurance explains that a deductible may be a fixed dollar amount or a percentage, and that you should know how a percentage translates to dollars. It also notes that home deductibles apply to each claim, not once a year. On a home insured for $300,000, a 2 percent deductible is $6,000.

Adjusting for your home

Your target should reflect the house, not just your budget:

• An older home with original systems is more likely to need a major replacement soon.
• A newer home with systems under warranty may need less for repairs at first.
• A condo shifts some repairs to the association but can bring special assessments.
• A single income or variable pay calls for a larger income cushion.

Your inspection report is a good guide. Items noted as near the end of their life belong in the big-item buffer.

Where to keep it

The CFPB's guide says the fund should be safe, accessible and somewhere you will not be tempted to spend it on non-emergencies. For many people, that means a federally insured savings account at a bank or credit union, separate from checking. Investments that can lose value are a poor fit for money you may need next month.

Building it

The CFPB lists several strategies, including creating a savings habit, managing cash flow and saving one-time money such as a tax refund. It says managing cash flow or saving part of a refund are the easiest ways to start. For new homeowners, some practical steps:

• Automate it. A transfer on payday is easier than deciding each month.
• Start with the deductible. It is the most likely house expense in an emergency.
• Use windfalls. Tax refunds and bonuses can jump-start the fund.
• Redirect old costs. If your housing payment is lower than your rent was, send the difference to savings.

What counts as an emergency

Decide ahead of time. A broken furnace in winter is an emergency. A kitchen remodel is not. Planned maintenance belongs in a separate maintenance budget so it does not drain emergency money.

A home warranty is not a substitute. The Texas Department of Insurance points out that a home warranty, also called a residential service contract, is different from home insurance: it covers certain items that break down from wear and tear, depending on the contract. It may pay for some repairs but not for lost income or insurance deductibles.

Rebuilding after you use it

Using the fund is what it is for. Afterward, raise your automatic transfer for a few months, pause extra mortgage payments if you make them and direct any windfalls back into the fund until it is whole.

The bottom line

A homeowner's emergency fund should cover both lost income and the house itself. Size it around your essential spending, your insurance deductibles and the systems most likely to fail. Keep it in a separate, insured savings account, automate deposits and refill it after each use.