Any time you have something big, you have to take care of it. We’ve been having maintenance work done on our home to repair windows and woodwork. My car is due for an oil change and tire rotation. These expenses always make me say “Oh Crap!” but it’s just part of ownership. Important items need regular maintenance, however, you never know when expensive repairs will occur. These costs can throw off your monthly budget. To avoid this budget busting event, I’m going to show you how to create a maintenance fund for your important assets.
The Purpose of Maintenance Funds
There are three main assets that require ongoing maintenance for most families:
- Home
- Vehicles
- Health
Everything we own requires upkeep. None of our assets just go on and on without a few tune-ups along the way — our bodies and material possessions are no exception. People require doctor appointments and dental cleanings, cars need oil changes and tires, and houses need painting and repairs.
Taking care of your belongings helps extend their lifespan and minimizes the total amount of money you’ll spend in the long run. The challenge is, maintenance does add up and if you’re unprepared your wallet can take a big hit.
Should I Use Emergency Funds?
By definition, maintenance is not an emergency. You should expect maintenance. Emergencies are completely unexpected. The challenge for maintenance is that the timing of the expenses is unknown. You should not use your emergency fund to deal with these on-going repairs.
Going into credit card debt is another no-go. It can be way too expensive. However, ignoring maintenance altogether only means that eventually, you’ll be looking at a much higher bill when something breaks completely.
You know the saying — when it rains it pours. You can expect to need new tires at the same time a hailstorm dents your roof which is also exactly when your son breaks his finger. When this happens, life will feel like an emergency because things are piling up. But these are all repairs and ailments that can be planned for.
Solution: Maintenance Fund
So what do you do if you want to keep your car running well, your household operating smoothly, and still manage your money well? The answer is: a maintenance savings fund. Think of it as an emergency fund for your ‘things’ — making all of those repairs easier to afford.
We tend to focus and spend our money on what’s right in front of our face, rather than think long term. Upkeep requires longer term thinking, so we need a system for creating this fund.
The easiest way to start is to incorporate regular, automated savings into your budget. Whether you regularly save $10 or $100 a month, you will have money set aside specifically for these expected but untimely expenses.
Have you ever started a workout regimen after a few weeks, months, or even years (no judgement here…) of little-to-no physical activity? How did you feel? Tired, sore, and ready to give up, right? I’ve been there more times than I care to count!
Funny thing, though. After a few weeks of getting back into an exercise routine, you start to feel energized, the pain subsides, and you become motivated and excited to stay on track. That’s because you have moved from starting at square one to maintaining. The same thing happens when you begin saving. It becomes a natural part of your budget and easier over time.
How Much Should I Save?
By now you’re probably thinking, “okay, Pam…I got it! I NEED a maintenance fund. But how much should I save and keep in there?”
While there is no hard and fast rule, here are some numbers that I have found that work.
For your home, you first want to have the amount of your homeowner’s insurance deductible on hand. If your deductible is $500, start with that much. If it is $1000, begin there. After that, save approximately 10 percent of your monthly mortgage payment into a high-yield savings account. For example, if your mortgage payment is $1,000, aim to put somewhere around $100 per month into your maintenance fund. If you are still working on your budget and don’t quite have that much, that’s OK. Some is better than none.
For your cars and vehicles, similar rules apply. Keep your deductible amount in the bank and save about 10% of your monthly payment amount. If you are not making car payments, then consider saving what would be a car payment. By saving $300 0r $500 a month, you will have funds available for major repairs or to purchase a new car in the future. Think of it as paying yourself instead of a loan.
Medical expenses can be tricky, but a great place to begin is by having your maximum out of pocket expense amount on hand. Check your medical insurance policy. If your maximum out of pocket expense is $5000, that is your starting point. You can hold these funds in a a tax-advantaged Health Savings Account, or in a regular savings account at your bank.
Chances are you won’t need to dip into these fund often, but the idea is to grow the balance over time and continue replacing funds as they are used. When something breaks, needs to be repaired, or even replaced, the money will be readily available and won’t affect the rest of your budget.
How Maintenance Funds Help Preserve Your Assets
This isn’t just some theoretical advice that I’m trying to sell you on because as a financial advisor I’m supposed to. No, we actually live this!
Here are some examples of how we have used our Maintenance funds. We purchased a NEW 2000 Ford Explorer back in, well, 1999. It was the first new car either of us ever bought. Over nearly two decades, we put money into maintaining this car, and we extended its life with us. I have to say, we loved this car, however, with over 234K miles, and doors that didn’t quite work the way they should, we weren’t sure that we could fix the power issue it was having. We finally had to let it go.
So, our $30K car lasted 17 years for an annual cost of $1764 per year, plus maintenance.
We needed new windows at the same time my son was impaled with a stake through his nose. While I’m not excited about the bills that I know are coming, I also am not afraid of them since we have funds set aside for incidents like these. (Maybe if you have boys, you will want to consider a larger fund.)
The Big Takeaway
Americans tend to have small savings accounts. A report from the Federal Reserve reveals that 70% of Americans would use cash, savings, or credit cards to cover an unexpected $400 expense. 35% would have difficulty covering this expense.
Here’s your big takeaway: if you have an expensive item, be sure to budget for its upkeep.
At a minimum, a maintenance fund can help you have enough money on hand to pay for the annual upkeep your life requires. Not to mention, it also keeps you out of debt, and provides peace of mind.
So tell us: do you have a maintenance fund? If not, what’s getting in your way?
Pamela J. Horack, CFP® of Pathfinder Planning LLC provides personal financial planning advice and asset management for a simple fee to young adults and working families in North and South Carolina through group classes, one-on-one planning, and ongoing advice.