It is estimated that only four in ten Americans have savings they’d rely on in an emergency. An emergency fund is a key part of your financial picture. And while nobody can predict the future, it is fairly predictable you will have unexpected expenses at some point. Be it an accident, job loss, or worn out appliance, it’s important to have some money set aside. Being financially ready can make life’s emergencies a little less stressful.
How much should I have in my emergency fund?
Though there is no “one size fits all” for emergency saving, so you should consider your expenses and goals. Three to six months’ worth of money might be a good starting point, but depending on your situation you might need more.
The key to building your emergency fund is to budget for it, and a great way to do that is consider your emergency fund a regular expense. This will help you regularly pay into it.
Consider your home’s equity to help fund your goal
One option to add to your emergency fund is to use the equity in your home through refinancing. Refinancing has several advantages, including:
- Mortgage interest is tax deductible
- Mortgage interest rates are typically less than credit cards interest rates
Home equity is the amount you owe on your mortgage subtracted from the current market value of your home. To use the equity from your home, you can consider a cash-out refinance. This creates a new mortgage loan larger than your existing one. You’ll receive the difference between the two loans (equity) after any fees and closing costs.
Your home is worth $250,000 and you owe $150,000 on your mortgage.
Your available equity is approximately $100,000 ($250,000 – $150,000).
You’d like to get $25,000 of the equity, making your new mortgage about $175,000 (the $150,000 you still owe plus the $25,000 in equity).
At closing you’d receive the $25,000. The actual amount may be less because of fees and closing costs.
Deciding whether to refinance
There are several questions you need to ask yourself before refinancing:
- What is my credit score?
- How long do I plan to stay in my house?
- Will I use this money for something other than emergencies?
Once you have your emergency fund, remember what it’s for: emergencies. Although you may be tempted to use it for non-emergencies, you’ll be glad it’s there if you ever need it.
With a little preparation and planning, you’ll be ready next time the unexpected happens.
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