How to save for a down payment and an emergency fund
Saving for a down payment and an emergency fund are both important financial goals. While a down payment can help you become a homeowner sooner, an emergency fund provides a critical safety net for unexpected expenses. So, which comes first?
It’s a common question that doesn’t have a one-size-fits-all answer. But as a general guideline, it’s a good idea to start by saving three to six months of living expenses in an emergency fund. Once you have an emergency fund, you can look into ways to reduce your down payment.
Calculating your emergency fund: how much should you save?
How much should you have in your emergency fund? Either manually or using an online calculator, calculate an emergency fund goal to determine the amount to save.
For example:
- Option 1: $5,000 in monthly expenses x 3 months = $15,000 emergency fund
- Option 2: $5,000 in monthly expenses x 6 months = $30,000 emergency fund
Nearly 60 percent of Americans are uncomfortable with the amount they have saved. A wide gap exists between the desired and actual levels of emergency savings. While 89 percent of people would like to have at least three months of expenses saved, only 44 percent have reached this milestone.
If you need help beefing up your emergency savings, here are several strategies:
| Strategy | Details | Benefits |
|---|---|---|
| Prioritize saving | Set goals to put money toward emergency savings. Automatically deposit a portion of your paycheck for this purpose. | Consistently build up your emergency fund. |
| Cut unnecessary expenses | Assess your monthly budget and reduce non-essential expenses, like dining out, subscriptions, or entertainment. | Save more money each month. |
| Tackle debt | Focus on paying down debt to free up more money for savings. Pay off high-interest debt as soon as you can. | Decrease financial burdens and increase your savings capacity. |
| Negotiate bills | Review your bills and negotiate with providers to lower additional fees or monthly costs. | Reduce expenses and save more money. |
| Sell items you no longer use | Declutter your home and sell big-ticket items, like furniture, jewelry, or a car you’re not using. | Generate additional income to boost your savings. |
| Use cashback rewards | Take advantage of cashback credit cards or rewards programs to earn money back on your purchases. | Bring in extra money to contribute to your emergency fund. |
| Participate in a challenge | Set up friendly competitions or challenges with friends or family to stay motivated. | Increase your savings commitment and have fun while doing it. |
Ultimately, the amount you save should be an amount you feel comfortable with.
If you work in a seasonal industry or at a commission-based job, you may feel better having 12 months of living expenses saved. If you have multiple people to support, the amount you save may be larger. Certain life circumstances—like having a baby or anticipating a layoff—may require you to set aside more.
Still not adding up? Reach out to learn more about low and no down payment mortgages.
Building an emergency fund while budgeting for a house
Having emergency savings promotes financial health. As you save, you’re likely to create a budget, begin paying off debt and manage your bills—all steps that can make it easier for you to qualify for a mortgage and own a house. You can read more here about preparing for the monthly expenses associated with homeownership and saving for a down payment.
An emergency fund could support your homeownership goals in several ways:
- Financial security—Provides a cushion for unexpected expenses, such as repairs, maintenance or property tax/insurance increases.
- Job loss—Offers reserves in the event of unemployment, allowing you to continue making mortgage payments.
- Natural disaster preparedness—Covers costs associated with natural disasters, like floods, fires, blizzards or storms.
- Major appliance replacements—Can pay for replacing expensive appliances that break, like refrigerators or washing machines.
- Home improvement projects—Provides funds for necessary repairs or upgrades, like roof replacements, plumbing issues or electrical updates.
- Medical emergencies—Helps with unforeseen medical expenses, enabling you to maintain your mortgage payments.
Only about half of homeowners feel that they’re prepared for a disaster. Along with an emergency fund, it’s also important to consider emergency preparedness, especially if your home is in a flood- or fire-prone zone.
Many homeowners aren’t aware that flood coverage insurance isn’t usually included in standard home insurance policies. A separate policy needs to be purchased. You can buy flood coverage insurance at any time, but it may take 30 days for a policy to become active.
Reading your insurance policy to make sure you have adequate coverage, checking smoke detectors, locating electricity/water shut-off valves, trimming trees and sealing the basement are other ways to help prepare your home for an emergency or disaster.
Let’s put you on the path to homeownership
Ready to become a homeowner? We can help you get pre-approved so you can have a better idea of your down payment amount, which may vary based on loan program. Find your local loan officer.
The above information is for educational purposes only. All information, loan programs and interest rates are subject to change without notice. All loans subject to underwriter approval. Terms and conditions apply. Always consult an accountant or tax advisor for full eligibility requirements on tax deduction.