Different Budgeting Approaches
The 1% rule is the most commonly used approach for budgeting home maintenance expenses. It suggests setting aside 1% to 4% of your home’s value each year for repairs and replacements. For example, if you bought your home for $400,000, you should save between $4,000 and $16,000 annually. Scott Lieberman, the founder of Touchdown Money, advises that if your property is under 10 years old, you may feel more comfortable sticking closer to the 1% mark. However, if your property is older, there is a higher likelihood of costly replacements like the roof or HVAC system.
Another approach, although less popular, is the square footage rule. This method involves setting aside one dollar for every square foot of your home. However, this rule of thumb is not as effective because it only considers the size of the home and not its value or age. It doesn’t make as much sense to aim for the same savings for a brand-new 2,000-square-foot home and a 70-year-old home of the same size.
Alternatively, you can choose a set dollar amount based on your savings capacity. If you have a tighter budget, selecting a realistic figure can help you consistently save money. Whether it adds up to 1% or more for the year or not, any amount you save can prevent you from having to borrow money for repairs. Automating this amount into a separate savings account is a good way to stay on track.
When determining how much to set aside, consider factors such as the size, location, and age of your home. If you have an older home in an expensive city prone to extreme weather, you will need to save more compared to someone in a newly built home with modern systems and appliances, or someone living in a less expensive area with moderate weather conditions.
Both of these choices offer the opportunity to borrow against the equity in your home, but they do come with a certain level of risk. It’s important to remember that your home serves as collateral, so it’s crucial to ensure that you have the means to repay the borrowed amount.
Additionally, there is an application process involved, and you will need to meet the lender’s specific requirements. However, it is likely that you will qualify for lower interest rates compared to other borrowing options.
When it comes to personal loans, they are generally unsecured and allow you to borrow a lump sum that you can repay in fixed installments over a predetermined period of time. While this can be a viable option, it’s important to consider that the interest rates and fees associated with personal loans can make borrowing quite expensive, especially if you don’t have excellent credit.
On the other hand, credit cards may have higher interest rates, but they offer the advantage of not requiring an application process like home equity products or personal loans. For smaller repairs, using a credit card can actually be the most sensible and convenient choice, particularly if you can repay the debt within a short timeframe. If you are considering getting a new credit card, it may be beneficial to open one with an introductory period of 0% annual percentage rate (APR) to give yourself extra time to pay off the balance without incurring interest.
