Planning to move out for the first time can be incredibly exciting, but it’s also a period of high stress. After all, you’ll likely need to attend various meetings with advisors and your bank, not to mention the financial strain you might experience at this time. It’s all enough to consume your thoughts entirely, which is why keeping savings in the bank might not exactly be a priority.
In reality, though, first-time buyers could find themselves in trouble if their financial planning doesn’t stretch further than the buying stage. They certainly won’t be able to make their new house a home without at least a little left in the bank. This might seem like an impossibility when you’re looking down the barrel of the biggest purchase of your life, but even mortgage lenders like to see an emergency fund.
So, how much should you actually keep in the bank throughout the buying process, and how on earth can you save it amidst other expenses? Let’s consider!
The 3-6 Month Rule
If you do a quick Google search about ‘first-time buyer emergency funds’, you’ll probably stumble across the 3-6 month rule. As the name suggests, this basic concept outlines that you should keep roughly 3-6 months’ worth of funds in the bank for your move. This budget should include your entire monthly outgoings, including your mortgage, bills, and groceries. On top of this, most experts recommend keeping at least $1,000 floating for major household expenses like repairs and decoration.
The benefits of setting aside this much cash are undeniable. With such a large buffer, new buyers have significant breathing room to take time off work and get started making their new house a home. But, if you’re shaking your head as you read this, then you’re certainly not alone.
Because, on the flipside of this 3-6 month pipedream lies the fact that many first-time buyers are required to save for down payments of between 9-10% on average. That’s $40,000 if you’re buying a $400,000 house. And, when you’re already saving that much money, the idea of topping up the pot to this extent simply isn’t feasible.
Luckily, there are down payment assistance programs that can help any first-time homebuyer to reduce down payment amounts to as little as 1%. This can help you to free up a little more saving power but, even then, a full six months of savings can feel like a reach.
What do the Experts Say?
While mortgage lenders do like to see some form of savings safety net to ensure payment coverage, most are only looking to see around 2-3 months’ worth of protection left in your bank after buying.
This is still a sizable sum, but it’s far more manageable than trying to save enough for six months of living, which is effectively another down payment in itself. It’s also worth noting that, when you’re working with lenders to get your savings right, this is something you can factor into your mortgage payments.
In other words, you might be able to increase monthly mortgage amounts to ensure that you actually have that 2-3 month buffer to hand. This can provide undeniable relief, and it’s always worth pursuing. So, if in doubt, talk to a mortgage lender. They’ll be able to advise you on both how much you should save and the best ways to make that possible.
Bearing Your Chosen Property in Mind
The amount you need in the bank also ultimately varies depending on your chosen property. Few houses come completely ready for you to move in, so bear your savings abilities in mind as you consider your options.
By choosing a new-build or a house in good condition, homeowners with limited savings in the bank should still be able to secure a comfortable situation. The immediate livability of properties like these can certainly buy you the time to save all-important money once you’ve moved.
By comparison, some properties on your list may need immediate renovation or work before you can move in. The need to pay for this, and potentially buy alternative accommodation while they’re finished, will obviously require a larger financial buffer.
That’s not to say one choice is financially better than the other. After all, improving a property can increase its value. But it is worth bearing these things in mind, and knowing that saving requirements will vary quite drastically across these options.
Remember that it isn’t All About Your Property.
Buying a home is all-consuming at any life stage, but this is especially the case for first-time buyers, who may have focused their financial dreams on this real-estate goal for years. It’s hardly surprising that you may struggle to think past that property, even when it comes to savings.
As mentioned, you’ll certainly need enough money in the bank to cover a few months of your mortgage, and also pay for renovation, decoration, and so on. But remember that you also need enough money to live during the moving period, when you might not be working all that much.
First-time buyers need to be especially aware that, aside from big-hitting improvements, they’ll also need to furnish that new home. This can cost as much as $4,000 in even a small home, and it’s an expense you’ll face immediately after moving in.
More generally, you’ll need to factor in living costs, including the need for takeout until your new kitchen is up and running, and other more generalized expenses. If you don’t have money for these things, then moving could be a real struggle. And, you really don’t need that stress!
So, sit down and work out realistically how much you’ll need to live for at least the first couple of months after moving. Understanding your budget in this way can point you to a figure that you should definitely aim to keep in reserve.
Buying your first home is a major outlay, but it shouldn’t clear your bank account. Bear these considerations in mind to ensure the emergency fund is right for your first-home journey.