Home maintenance costs are some of the most common surprises for first-time home buyers. When they contemplate whether or not they can afford a new home, they typically consider whether they have enough money for the monthly mortgage payment, which normally includes taxes and insurance. Unfortunately, most people fail to add money to their monthly payment budget to cover home maintenance.
They forget about basics like landscaping, HVAC annual service, minor repairs and gutter cleaning. Never mind remembering to budget for painting, replacing the windows, fixing or replacing the roof or buying new appliances. It’s important to figure maintenance costs into your monthly expenses so you can save that money for home maintenance expenses before you need to pay for them.
So, what’s the magic dollar amount you should set aside for keeping up your home each year? It depends.
It depends on a few variables such as how long ago the house was built. If your house is 10 years old or less, your maintenance costs should be lower than a house that’s 25 years old. But how do you really know?
How to calculate an estimate for annual home maintenance
There are many “rules of thumb” you can use to estimate a budget for unexpected or expected home maintenance.
One recommendation is to set aside between 1 and 4% of the purchase price of your home each year. 1% is fine if your house is new. Older homes should plan about 4%.
For our clients, we take the insurance replacement cost of your home and divide it by 40 if you have a newer home. If your home is older, divide by 30. While it’s not an exact science (none of them are), your answer will provide you with an estimate that you can use for budgeting purposes.
Another way to estimate home maintenance costs is to mimic the commercial lender’s processes. When you apply for a commercial property loan, you need to show you either have five percent of the sticker price already set aside, or you’re planning to put that money aside for the property’s maintenance on an annual basis.
Let’s say after doing the math from any of the above calculations you find the average annual maintenance cost for your home is approximately ten thousand dollars. That’s a lot of money you may not expect to spend each year. Where will you find this money when the time comes?
Some folks will resort to taking money from their 401(k) plans or their kids’ 529 plans. And we know this is a terrible idea!
Tips to save for home maintenance costs
Create a targeted savings account
No matter how you calculate the estimate, it’s important to make a conscious effort to save. If you can do something to target savings towards these expenses monthly, the better. Otherwise, you’ll forget about these expenses. Then, when you need to install a new roof, you won’t have the money readily available to pay for it.
If you are a first-time home buyer, it may be beneficial to establish a bank account solely for maintenance and upkeep. Remember the phrase “saving money for a rainy day”? Home maintenance is one of those rainy days. Having money in an account you don’t touch except for home maintenance is a very good idea!
Consider downsizing earlier
If you’ve been in your home for a while and this makes sense for your lifestyle, another idea to free up money for home maintenance costs is to downsize earlier rather than wait until you retire. Downsizing cuts:
- Your maintenance upkeep
- Monthly mortgage payment
- Property taxes
- Costs of heating/cooling your home
- And other expenses that a larger home brings
For example, if you downsize to a fifteen hundred square foot house from a three thousand square foot house and invest the money saved over a 20 year period, it could amount to three to four hundred thousand dollars. Imagine what that sizable chunk of money could do for your retirement savings.
If you can start the process when the kids go to college, you could be in a smaller, less expensive to maintain home at least 10 years sooner than if you wait until 65 to move. And for most, it is easier to change when you are younger. The older you get, the more set in your ways you become, making it that much harder to move.
If you are thinking of buying a home, be sure to add home maintenance costs to your monthly budget. It will save you a lot of financial heartache in the future! Learn more by listening to our Financial Fridays podcast:
If you need some help preparing for your financial future, contact us for a free consultation.