Money Management

Mortgage rates are high and you don’t want to risk not being able to make your payments. Here’s why you need an emergency fund to become a homeowner. 

Buying a house can be a great thing. You get to have a place to call your own, which is a pretty amazing feeling. You get to decorate the way you want and set down roots. And, as you make each monthly mortgage payment, you get closer and closer to owning a valuable asset outright, so you can grow your own net worth.

That being said, you do not want to just buy a home without really thinking through the huge decision you’re making. You’re going to be making a major commitment, because selling a home can be expensive and difficult. And you’re going to be agreeing to pay back a mortgage lender for decades, which can impact every aspect of your financial life.

Before you jump into the home-buying process, there is one step you absolutely must take first to make sure you don’t end up with major regrets. Here’s what it is.

Do this before you buy a home

Before you even consider purchasing a home — especially in this current economic market — the one big thing you need to do first is to save up an emergency fund. Specifically, you’re going to want an emergency fund that has enough money in it to cover around three to six months of living expenses, including the mortgage payment you’ll be taking on.

This probably sounds like a really difficult — and perhaps annoying — task to accomplish. After all, you’re already working hard to save up for a down payment, and now you’re being told you need to save even more money. Not what you want to hear.

But, there’s a really, really good reason why you need an emergency fund. Having one could save your home in case of a crisis, and could make it possible for you to maintain your house in the way you need to.

Here’s why an emergency fund is so important

There are two big reasons why it is critical you have an emergency fund before you become a homeowner.

First and foremost, buying your house means committing to a mortgage payment. And, mortgages are expensive right now. As of Dec. 14, 2023, the average 30-year mortgage rate in the U.S. hit 6.95%, according to Freddie Mac.

That’s actually lower than rates have been for months, but it’s still high based on recent standards. Just a few years ago, rates were around the 3% to 4% range and a rate near 7% means your home loan isn’t going to come cheap. In fact, if you bought a $431,000 home (the median price in the third quarter of 2023), and you borrow $344,800 to do it (assuming a 20% down payment) you’d be looking at a $2,282.40 per month payment for principal and interest. You’d also have to pay for property taxes, home insurance, and possibly homeowners association fees on top of that.

Even if you lose your job or your income declines and you don’t have an emergency fund, you still have to keep making that payment. While you might have more options if you rent — like breaking your lease if you have to — stopping your mortgage payments could lead to foreclosure. This would destroy your credit and could mean losing the equity in your home. And selling takes time, so you probably wouldn’t be able to do it fast enough to avoid a missed payment.

Even if you don’t need your emergency fund to save your house, you may end up needing it when you have an unexpected repair crop up. If your air conditioner goes out in the heat of summer or your heater breaks on the coldest day of the winter, you’re going to want that emergency money to cover it if you don’t have a home repair fund.

The bottom line is, it’s annoying to have to wait to buy a house until you’ve saved up an emergency fund but it’s a lot less annoying than losing your home or dealing with a leaky roof for months because you can’t afford to get it fixed.

So, if you dream of becoming a homeowner, get that high-yield savings account open today and start working on saving up your emergency fund so you can really get into the best financial position to own a home.

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It’s not the best feeling to be nearing retirement age with limited savings. Read on for ways to handle that situation. 

By age 60, Fidelity says you should try to have eight times your salary socked away in a retirement plan. If you’re 60 years old with less than $100,000 in your IRA or 401(k), it means you may be approaching retirement age feeling less than confident about your prospects.

Now one thing you should be aware of is that the average 60-something today only has a retirement savings balance of $112,500, per Northwestern Mutual. So if you’re 60 years old with close to $100,000 in your brokerage account, you’re not that far behind.

But either way, you may be stressed about the idea of wrapping up your career and having to live on a minimal nest egg. If so, here are some steps to consider.

1. Ramp up your savings efforts from this point forward

Maybe life got in the way of your retirement savings efforts at various stages. It could be that in your 30s, you were struggling to keep up with child care expenses, and in your 40s, the bulk of your money went toward your mortgage loan.

But if things have calmed down to an extent and you’re not being pulled in as many directions, financially speaking, then you do have an opportunity to contribute more toward retirement between now and when your career wraps up. So do your best to pump some extra money into your IRA or 401(k).

If you manage to save $500 a month over the next seven years and your investments in your IRA or 401(k) give you an average yearly return of 5% (which is fairly conservative, as it’s half of the stock market’s average), you’ll end up with almost $49,000 on top of your current balance.

2. Consider delaying your retirement

Many people retire in their mid or late 60s. But there’s no rule saying you have to do that. And if you enjoy what you do professionally and your job isn’t particularly stressful, then there’s no reason not to stick with it a few extra years.

Doing so achieves two important purposes. First, it allows you to add to your savings even more. Secondly, it gives you an opportunity to leave your nest egg alone a few more years, allowing all of that money to continue growing.

3. Plan to work part-time during retirement

Many people assume that once they resign from their careers, they won’t work again. But if you don’t have health issues preventing you from working, then why not plan to hold down a job as a retiree? It could help you avoid a financial crunch if you’re not coming in with all that much savings.

Remember, too, that the work you do in retirement could look very different than the work you’re doing now. Instead of taking an office job, you could work at a bakery in town. Or, if you’re crafty, you could sell homemade jewelry or artwork for income.

There are many options you can consider. And you may find that having a job is a great way to fill up your days as a retiree without having to go out and spend money.

In an ideal world, you’d have more than $100,000 in retirement savings by age 60. But if that’s not where you are, don’t panic. You’re definitely not doomed to a miserable existence as a retiree. And if you take steps to ramp up your savings, extend your career, or continue to work in some capacity, you may find that money isn’t nearly as tight in retirement as you expect it to be.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Maurie Backman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Dream big, but take the concrete steps to make your dream come true. Learn how to save for a major expense in 2024. 

According to findings from The Ascent’s research team, the second most popular financial New Year’s resolution for 2024 is saving money for a big milestone. That certainly sounds familiar to me; I ended 2022 planning to save a chunk of money to enable me to buy a home in 2024, and I achieved that goal (and I’m still saving). Let’s say your goal is to save $10,000 next year. Here’s how to approach a big savings goal like this one.

1. Find the right place to save

If you’re just getting the ball rolling on a savings goal, you might assume it’s best to stick with a bank account you already have — why make life harder for yourself? Well, good news! It’s not hard at all to open a new bank account, especially if you opt for an online bank. It’ll take about five minutes of your time to provide some personal information (like your name, date of birth, and address) and open the account.

But what kind of account is best? I recommend either a high-yield savings account or a money market account. Both account types have higher-than-normal APYs right now, thanks to the higher federal funds rate we’re all living with. A savings account is certainly the option with fewer requirements — you likely won’t need to meet a minimum deposit to open the account or maintain a minimum balance to earn that high APY. But you won’t have the easiest access to your money, as it’s rare for a savings account to come with a debit or ATM card.

If you open a money market account instead, you’ll likely get a debit card or even checks. But you may face a minimum deposit or balance requirement. The choice is yours — just weigh all your options to decide.

2. Break it down to smaller contributions — and pay yourself first

Saving $10,000 is significant, and that’s a big number to contemplate. Rather than getting hung up on the big number, I recommend focusing on and creating smaller goals for yourself along the way. If you have 12 months to save $10,000, that works out to just about $833 a month. If the average month has four weeks, that’s just about $208 a week. Or you can divide it by 366 (leap year!) and arrive at about $27 a day. Doesn’t that sound a lot more feasible?

This is the trick I used to save money all year. I ran the math and knew how much I needed to save every week, and with very few exceptions, I made that target. I also leaned hard on paying myself first. This meant that instead of waiting until after my bills were paid every month, I treated saving money as another bill, and one I couldn’t put off or disregard.

3. Increase your income

It’s not enough to have the goal — you must also have the means to carve out money to save. This isn’t easy for most Americans, as almost two-thirds of us can’t cover a surprise $500 emergency expense (according to data from SecureSave). While you might be expecting me to tell you to cut out your store-bought coffee and eat ramen noodles for every meal under a single 40-watt light bulb, I’m not going to do that.

The better way to find cash to save is to add to your income, if you can. That could look like signing up to drive for a ride-hailing service a few nights a week or perhaps increasing your hours at your current job, if you can. You could also ask for a raise, although getting one isn’t a guarantee (it’ll help if you can show your employer how much value you bring, though). Any extra money coming in won’t already be committed to your bills, so you can stick it in the bank.

4. Dream about your goal

Finally, don’t underestimate the importance of actively thinking about and planning for your goal. If you have just a vague notion to save $10,000 in 2024, you might easily lose focus in the face of all the stress that daily life brings. The way around that is to consider what it might be like to achieve that goal.

Let’s say that $10,000 is going to pay for a small backyard wedding and then a dream honeymoon. That money represents the start of a new chapter in your life, and being able to do this without going into debt is going to be wonderful. Dream about that feeling and turn the dream into reality.

If 2024 is the year you save a solid chunk of money to improve your life in some way, be it for buying a home, taking an amazing vacation, or shoring up your finances before welcoming a new baby, I’m rooting for you. And the feeling you’ll have when you achieve your goal will be worth all the saving along the way.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has positions in and recommends Target. The Motley Fool has a disclosure policy.

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