How do you plan for major household expenses?

In My Humble Opinion (IMHO)
#1

Here’s the situation - I’ll have been in my house three years in August. The first year, the previous owners paid for a home warranty, which I used several times. Renewed last year, also used several times. This year I hadn’t used it at all… until yesterday, when it bought me a new water heater.

The thing is, either from me upgrading or from something failing and the warranty replacing it (only the water heater), I’ve replaced everything major - range, dishwasher, refrigerator, water heater… everything but the heater/air conditioner. (The warranty isn’t all that much help with the roof - only covers the leak right there, not water damage or anything.)

Of course, the heat and air, that’s the big thing. It’s more than 10 years old. It will, someday, fail.

The question is, should I continue renewing the warranty? The price goes up every year, as does the deductable. I could put the money into a CD or something and save it for when something happens, but frankly it won’t pay for a new unit, particularly if it fails soon.

Is there some other way to insure one’s furnace? How on earth do you pay for a new unit, when it’s likely to be, what, five grand? Ten grand? That’s a number that would be VERY difficult for me to save. People have to get new units all the time, though.

Advice?

#2

I’m accumulating savings for major expenses and things like tax refunds go directly in that account. But rather than a home warranty, I figure if something huge fails that I don’t have enough cash for, I’ll get a loan to pay for it.

#3

I have no experience with a home warranty, so I do not know the costs associated. I would guess, however, that you might well be better off saving the amount you would pay in premiums, and using that for any repairs you might need.

In my 20+ years of experience as a home owner, things don’t tend to fail catastrophically all at once. Using your HVAC example, we have a HVAC guy do a service call once a year, at which time he does any maintenance the system might need, and is able to give us an expert assessment of how things look. Over the past 10 years we replaced both our AC and our furnace - the originals were from mid-70s, but neither had completely failed when we replaced them. Instead, when we thought costly problems were increasingly likely, added to the possibility of energy savings, we started saving to replace them.

For us, it all comes down to budgeting. We tend to pay for most things out of current income. We probably do not save as much as we should - outside of our pre-tax workplace contributions. But we also try to avoid spending out of savings, so what we have saved tends to grow.

We keep an “emergency fund” of around $5G in a bank account that is readily accessible in case of any emergency. Then the majority of our savings could be accessed within days/weeks if needed. If something happens such that we spend down the emergency fund, then we build it back up out of current cash. And we delay any discretionary spending until we get it back up to $5G.

OTOH, we don’t face many emergencies. When we decided to replace the furnace, we got a quote, and figured out how many months it would take to pay for it out of cash. Does that make sense?

An alternative would be to save on an ongoing basis. Then when you emergency fund gets to a certain level - say $10G, you could decide to pull out $5G and either invest it or blow spend it however you wish.

Of course, doing things like this requires that you have more income coming in reliably than needed to cover your basic expenses, and are responsible enough to budget.

#4

I got central air (and an air purifier!) installed in May 2007. I had a salesman come out and sell me the unit (not a terribly hard sell - I wanted him to sell it to me) and he also brought along a loan application for a line of credit from some company that works with the HVAC company for loans.

I filled out the application and got a loan (or line of credit, I think) for the entire amount, No Interest/No Payments Until May 2008. If I didn’t pay the full amount by May 2008, I’d pay 17.99% interest on the entire amount.

So what I did was start plunking money into a high-interest savings account (odd job cash and tax refunds like tremorviolet did) with careful planning to be able to hit my goal of $5k by April of 2008 (some months I had to put a lot extra in there). I’ve hit my goal and am letting it accumulate some interest for the next couple months, and then will drain it out and pay off the loan people.

My backup plan, if I wasn’t able to meet my goal by April 2008, was to put the remainder I needed to cover the loan on my credit card which has a much lower interest rate.

It’s highly doubtful that any reputable service company would not be able to set you up with a loan and a payment plan. Most of the places I see advertise that they have loan plans. It’s up to you then to figure out how to pay the loan back.

#5

So all of you guys have MAJOR emergency funds.

#6

I think you just have to take it for granted that when you buy a house, it will need some expensive maintenance on a periodic basis. Painting is 4-5K every few years, a new roof is about the same, furnace – yup, same ballpark.

So probably the best you can do is to try to put about $1K aside each year, earmarked for big house expenses. The ease with which you can do that obviously depend on your income.

#7

Perhaps the easiest/cheapest way to establish such a fund is to get a mortgage for $5K more than you need to buy the house.

I’m not sure our “emergency fund” is too terribly different from our savings, or really exists as anything other than an accounting entry on our budget. Realistically, whatever we have in savings or in stocks are pretty readily accessible. The only money we couldn’t get to within a couple of weeks might be some CDs and retirement accounts. So whether your savings are $10K, $100K, or $1million, you can consider a portion of that your emergency fund.

And, if you own a house and don’t have at least a few thousand saved, IMO you’d better tighten things up and get started.

#8

No, actually. My “major emergency fund” is either a gracious loan from my dad or my rather large credit limit. My savings fund right now is dedicated to paying off a loan for a large household expense, not for purchasing said expense in cash.

It is indeed in my financial plan for the upcoming years to build up such a fund, but right now I am not able to do it. Then again, that is why I bought a shitty house with a good roof & mechanicals.

#9

We have a money market account through our credit union. Every month, we put at least $200 in it. That’s for house, car and other unexpected expenses, as well as things like vacations and computer upgrades. Right now, we’ve about 9K in there.

#10

Um, no. I have no major emergency fund. I have a savings account that I try to keep a grand in. If something major went out (and we’ve already replaced the roof and all appliances including hvac), we’d stall as long as we could, we’d pay for what we could, and then put whatever we couldn’t manage on some sort of a credit plan.

#11

We set up a home equity line of credit which we can use for major household stuff - the year we set it up, we used it for a new central A/C unit for example (we’ve also used it for a sprinkler system and major landscaping). That winds up being an ongoing monthly payment then, of course (we try to pay more than the minimum). We pay for lesser repairs out of current income.

Ideally we’d tuck away a couple hundred dollars a month to build up savings rather than using the HELOC.

#12

I do now, but I haven’t always. Several years ago I was able to refinance my home at a lower rate. I kept my payments the same, and I was able to take some of the equity out and bank it for that purpose.

That might not be possible for you, but you might want to consider a home equity line of credit (HELOC). I hate like hell the thought of borrowing against my home for disposable goods, but I felt very comfortable having the HELOC to pay for home repairs or remodeling. I figured that, if I needed to sell, I had at least used the money to improve the thing that I was borrowing against and could recoup some of the money. In this market, that might not be quite as true as before, but it is at least worth considering.