Updated on 07.15.07

Building A Home Maintenance And Improvement Fund

Trent Hamm

niceHaving lived in a house that needed constant upkeep when I was young, I know the value of having money on hand to take care of home maintenance. As a new homeowner, that means I’m going to christen a home maintenance and improvement fund so that when such issues appear, I can handle them.

What’s a home maintenance fund? A home maintenance fund pays for the continual maintenance of things that we have right now. This includes things like pest spraying, weatherproofing the deck, having the chimney swept, replacing furnace and air filters, replace worn-out carpets, and so on.

How much will that cost? I’ve heard various recommendations, but we’ve settled on putting away 1% of the assessed value of the house and land annually into the account for home maintenance. This means that an amount equal to 1/12th of 1% will be pulled out of our primary checking each month into that account (for a $200,000 house, that means $166 a month), and then when home maintenance issues occur, we’re free to tap that fund to get the lawnmower fixed or replaced, to buy sealant, and so on.

OK, what’s a home improvement fund? Over time, we’re going to want to upgrade a few things around the house. We haven’t even moved in yet and my wife is talking about planting a small row of fruit trees along the farm-facing edge of our property, for example. Things like this are things that don’t currently exist but can improve the value of the property over time. We want to plant two apple trees and two cherry trees, and if we care for them properly and guide them to adulthood, they’ll increase the value of the home. Another topic we’ve talked about is installing quartz countertops in the kitchen.

We also want a home improvement fund so we can avoid home equity loans, a strategy I talked about last week.

How much will that cost? We estimate that improvements will likely be more expensive than maintenance, so we’re going to sock away 2% of the assessed value of the house and land annually into that same account for home improvements. This means an amount equal to 1/6th of 1% will be pulled out of our primary checking each month (for a $200,000 house, that means $333 a month). This is pretty high, we think, but it does enable us to start thinking and planning home improvement projects and knowing that we’ll be able to pay for them when we decide what to do.

It seems expensive now, but if we look at this as just another bill to pay, it will lead us to success in the long run.

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  1. Lauren says:

    My husband and I think this is a wonderful idea! instead of pulling money out of savings when we do something just pull out a little out of each check a month and put it in a seperate account we won’t ever even feel when we do maintence on the house. We get gloomy when ever we take any money out of our main savings

  2. Kevin says:

    I still don’t understand people having several different savings account. Wouldn’t it be easier to have one and track different categories through a spread sheet?

  3. Matt says:

    I use ING because it allows you to create subaccounts. I have 4 right now. So, I have the ease of 1 savings account but my money is split into different categories otherwise I would spend money I had allocated for a different reason.

  4. Liz says:

    It’s in the emotion of the thing, the bottom line. When you get your statement every month, you’ll see the affects of taking out the money on home improvement, and it won’t feel like you’ve saved money, it will feel like you tapped into your life’s savings – or, as I assume this will be in a money-market or just plain savings type fund for invested liquidity, into your emergency cash. Eep!!!! Never mind that you have earmarked the money for home improvement and maintenance, the feeling that you’ll get when you look at the balance on your “Emergency Fund” is that you’ve spent it, and that can be nerve-wracking.

    So having it separate means that the balance on your emergency cash continues to go up with the rate of inflation, and life is good, and you KNOW you can spend every dime of the home improvement fund, because it has one point, and that is to be spent.

    If you can achieve the same feeling with Excel, that’s fine too. Some of us get real nervous when we open the envelope and see a number that wasn’t the one we were expecting, and that moment of thinking, what did I spend?! is too nerve-wracking to justify anything BUT having multiple accounts.

  5. Cory says:

    Who are you guys banking with? I use HSBC, and since they don’t have sub accounts like ING I would need to literally open up a new account for every separate fund. Is this how you guys handle it?

    At the moment I’m just using Quicken to track savings goals … but I would rather have multiple accounts for savings goals … I just wish HSBC had sub accounts.

  6. Engineer says:

    I’ve followed a similar approach for about 10 years. My savings are not for ongoing minor expenses such as replacing furnace filters, but rather for major repairs. My savings rate is slightly less than 1% per month, maybe should be a bit higher.

    But when I needed a new roof several years ago, and a new central air/furnace the year after, the funds I had set aside came in handy.

    I also apply a similar approach to my vehicles. I paid cash for my last two vehicles. I assume a car lifetime of 100,000 miles. For each mile I drive, I save 1/100,000 of its cost, for example $0.20 for a $20,000 car, plus I throw in a couple of extra cents per mile for major repairs and tires. You might argue that a car should last more than 100,000 miles, but the older a car gets the more repairs it will need. My method may not be perfect, but it gets me in the ball park. Budgeting for gasoline, insurance, and taxes is done separately.

  7. !wanda says:

    Where does the 1% rule come from? That can’t be right for all areas; the same house can be worth wildly different amounts in different cities. Plus, some climates are milder, which means that maintenance costs are different, as well. Places with more expensive housing have higher costs of living in general, but housing can be disproportionately expensive. One percent may be a good guideline for this year, but you should probably keep track of what you are paying this year and save 10% over that amount for subsequent years.

  8. Kathryn says:

    Did you make up the 1% or do you have a source for that recommendation?

    My personal experience is that house maintenance is more than 1% of the value of the house, but it’s so variable that it’s hard to know what number to use.

  9. Daria says:

    Like some of the above posters, I struggle with having too many bank accounts. Ultimately, we just end up building money for these “extra” into our monthly budget. I feel like otherwise we would have a travel account, car account, home account and other emergencies account. I find that the expenses actually sort of balances out on a monthly. That might be counter to some budgeting techniques but it works for us.

  10. Dr. T says:

    I will have to agree with Kevin. It seem like keeping separate accounts for an emergency fund, home repairs, car repairs, etc.. will just complicate your finances with multiple transactions and statements.

    for me, less clutter = peace of mind.

  11. laurak says:

    I have read that the rule of thumb for savings for home maintenance is 1-5% of the home’s value per year (cannot find a website that says this, as I never can when I’m looking for it). I’m currently at the 1% mark, but my plan is to increase savings by 0.25% each year. It’s slow going, but I pay for the majority of my maintenance costs, as well as minor home improvement costs (paint, etc), out of my monthly budget and only use my savings for bigger expenditures. I do most of my work myself but, for example, hired someone to review what I did to make sure it was done correctly and do a few things I did not want to do myself, and paid for that out of my home improvement savings.

    I have a separate ING account my home improvements savings. For me it makes it psychologically easier to track. I, too, struggle with the number of accounts but find it easier when I keep everything separate.

  12. plonkee says:

    I think the 1% is just a guess and is a fugure of approximately the right magnitude that in future years you can adjust – perhaps as suggested by wanda.

  13. Rick says:

    1% is a widely quoted rule of thumb. Sure, as some have pointed out, it can be different based on your local market, as well as the age of your home. But Trent did not just make up this figure. It is fairly well-known.

  14. Amy Haden says:

    Yes, I’ve read the 1-3% amount in many sources as well. And it seems to be about right from my experience (we’ve owned our home for 14 years & are looking at needing a new heatpump & roof soon — and even the “smaller” stuff that we’ve done in the past — like a new hot water heater, having the septic tank pumped, having the house painted, having all the pipes replaced — add up & have been paid for from our savings account).

  15. pam says:

    1% isn’t only for maintenance – it is also for replacement. A roof has about a 20 year lifespan. A water heater can last 10-15 years; a furnace about 20 years.

    You can extend the life of these things by performing regular maintenance (or shorten it by NOT doing maintenance), but at some point they give out.

    Wouldn’t you rather save a little every year than have to take out a home equity loan for a large expense like that?

    If you buy a house that is less than brand new, knowing how old these items are is essential to financial planning. What if the roof is already 15 years old and is original? You could have that expense much sooner. In this case, saving 1% a year isn’t enough – although much better than nothing.

  16. Em says:

    Although I also have too many accounts, it’s not because of having many savings goals. But I have a suggestion — you can account for many savings goals within one account if you know Excel. (I used to use Quicken and it’s savings goals, but found it easy but too messy.)

    I have a spreadsheet that has each goal in a row. I have a BEGINNING BALANCE and CURRENT BALANCE column and then, any time I add money or subtract money, I add a new dated column with the amount in or out (one column per date, can accomodate entries for multiple goal).

    As long as I keep backups, this is working great! As long as the TOTAL CURRENT BALANCE for all goals = my account balance, I’m in balance.

  17. Great concept Trent, this is something that myself and my wife started a few years back and it really can take the sting out of large maintence bills when work just has to be done. I’d also add that sometimes it can also be a good investment to pay to attend a course, like Plumbing, Painting and DECORATING or basic building skills as this can save you a fotune in the long term by doing things yourself.

  18. Mike H says:

    I follow a variation on the theme in terms of separate accounts for this. I budget a monthly amount for home repair. At the end of the year, I take any funds not used from my budgeted amount and drop them into a special-purpose savings account (ING Direct). I then continue the same for the next year, paying most minor expenses from the monthly budget, and only tapping into the account for major expenses.

    This provides the benefits of keeping a “dedicated” fund, but removes some of the burden of managing lots of transfers to/from the extra account.

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