How Much Cash Should You Save in a Home Emergency Fund?

A home emergency fund is a cash reserve that’s specifically set aside for unplanned home expenses or emergencies. It’s rainy-day cash you can grab the minute you need it.

Before we dive into how to build yourself a home emergency fund and how much to put in it, we want to be clear about how important it is to also have a general emergency fund to cover non-home-related financial emergencies. We’re talking about the kind of unforeseeable events that interrupt your income stream and endanger your ability to make mortgage payments, make car payments, or handle emergency expenses. It could be losing your job, becoming ill and needing to take time off work, or responding to a death in the family. Learn more here.

Why you need a home emergency fund

In a minute, we’ll go over how much money you should consider keeping in a home emergency fund. But first, here’s why it’s so important to have one in the first place. Take a look at these three statistics:

• When faced with an unexpected $1,000 expense, more than one-third of Americans would borrow the money, according to a Bankrate survey.
• In its 2023 State of Home Spending Report, Angi, the home-improvement reference and contractor search site, found that homeowners completing emergency repairs spent an average of $1,667 in 2023.
• The Federal Emergency Management Agency (FEMA) says that just an inch of water in your home can do $25,000 of damage.

The lesson is: Don’t underestimate the power of a financial safety net. Here are some other benefits of a home emergency fund.

• Peace of mind. Unplanned challenges are always stressful. A home emergency fund provides a safety net during challenging times. It alleviates stress and lets you focus on the emergency at hand rather than worrying about how you'll make ends meet.
• Smart debt management. A home emergency fund can keep you from depleting your regular savings or taking on additional debt by relying on credit cards or loans to get you through rough patches.
• Judicious spending. Without emergency money for home repairs, you might be tempted to pull out your credit card to cover emergency expenses. But tread carefully. Unless you’re able to pay off those balances right away, charging costly home repairs is almost never a wise financial move. That card can accrue interest quickly and leave you with an even larger bill later. Also, setting aside money to be used only in a home repair emergency reduces the amount you have for discretionary spending, which can improve your overall financial well-being.

How much cash should you keep in a home emergency fund?

Let’s start with a good rule of thumb. Home insurance companies recommend saving 1% – 4% of your home’s value for home repair emergencies. For example, if your home’s value is $300,000, you might want to shoot for setting aside 3% of that, which is $9,000.

But the amount you may want to put aside depends on your situation. If you have a new home with brand-new systems and appliances, you might not need to tap into a home repair emergency fund for a long time. If you have a fixer-upper or an old home, you will probably want to have ready access to cash now.

If you’re living paycheck to paycheck or don’t get paid the same amount each week or month, putting any money aside can feel difficult. But, even a small amount can provide some financial security.

Where to put your home emergency fund

No need to get fancy. The best spot for an emergency fund is a savings or money market account at a bank or credit union, which allow you quick access to your cash without penalties for withdrawals. It’s best not to use a brokerage account since the value of the investments in them fluctuates with the market.

What NOT to use your home emergency fund for

Your emergency fund should never be used for anything other than actual emergencies. Resist the temptation to dip into it for non-emergencies like:

• Vacations
• Down payments (including homes and cars)
• Weddings
• Credit card debt
• Gifts for special occasions and shopping sprees

Do you need a home emergency fund if you have homeowners insurance?

Yes. Homeowners insurance policies can help cover the cost of expensive repairs,  especially ones that need immediate attention. Standard home insurance usually covers damages caused by a disaster — as long as it’s not excluded from your policy. But home insurance won’t cover damage caused by regular wear and tear. Review your homeowners insurance policy to understand what repairs are covered. And be aware of deductibles and coverage limits.

What to do if you don’t have a home emergency fund

If you have a financial emergency and don’t have the cash on hand to handle it, here are some other options to consider.  

• Home equity line of credit (HELOC). If you’ve built up equity in your home, consider opening a HELOC. It’s a line of credit based on the value of your home, and you can draw from it when needed for repairs. Interest rates on HELOCs are generally lower than credit cards. It’s important that you carefully consider the implications of borrowing against your home's equity. Ensure that you can comfortably manage making your HELOC payments and your mortgage payments, and have a plan to pay off the debt responsibly.
• Home equity loan. Using a home equity loan can be a practical solution for handling home repair emergencies, as it often provides lower interest rates compared to credit cards and personal loans. Just as with a HELOC, it’s important that you have a plan in place to pay off the debt responsibly.
• Cash-out refi. Cash-out refinancing means replacing your existing mortgage with a new one for a larger amount. The difference between the old and new mortgage is given to you in cash. This can be a good option to pay for a significant one-time home repair expense. But keep in mind that refinancing often involves closing costs, which can be substantial. Additionally, by increasing the size of your mortgage, you may be extending the period of your debt, potentially resulting in more interest paid over time.

How to build a home emergency fund

It’s never too late or too early to start your emergency home repair fund. But the best time is NOW. You might be surprised to see how setting aside even a little bit regularly can add up over time. Here’s a good way to build your fund — a step at a time.

1. Make a plan. If you don't already have a household budget, create one. This will help you see where your money is going and determine how much you'll need in your emergency fund to cover your living expenses for three to six months.
2. Start small. Set aside $500 to $2,000 to establish your initial fund. This will provide the money you need to handle a smaller emergency now while serving as the foundation of your rainy-day fund.
3. Make your savings automatic. Even if it's only a few dollars a week, get in the habit of contributing to your emergency fund regularly. Make it easier by having a portion of each paycheck directed into your savings account or automatically transferring funds every month.
4. Increase your contributions. As your income begins to grow, gradually increase the percentage you're saving or the amount of money you put into your emergency fund.
5. Celebrate your progress. If you’re sticking with your savings habit, congratulations! Take the opportunity to recognize what you’ve accomplished. Find a few ways that you can treat yourself, and if you’ve reached your goal, set your next one.

Let’s get you started on the road to peace of mind

Planning for the unexpected is the best way to take a lot of the worry out of being a homeowner.

Research the wide range of savings accounts that lenders have available for your emergency fund.  See how you can turn the equity in your home into cash with a HELOC or a cash-out refi.