Budget Hater

Emergency Fund First

Posted by Aaron Coleman
Jul 01, 2013

I have had some conversations with people lately about their “urgency” to buy a home now.  They are aware that mortgage rates are increasing and they are feeling the pressure to get into a home mortgage now before the rates get too high.

This is certainly a valid concern.  It makes sense to lock in the lowest rate possible on a home.  But I am counseling people that even though the rates are going up, they are still very low, historically.  And while I understand their pressure, it only makes sense to buy that home if your “financial house” is in order.

Why Wait?

What do I mean by having your “financial house” in order?  Many people are emptying out their entire savings to make a down payment on a home – including their emergency fund.  The rush to lock in that low rate is overriding the sound wisdom and purpose of having an emergency fund.

Here’s the problem.  By using your emergency fund as a means for buying a home, you are setting yourself up for expensive consumer debt later down the road.  Any savings you might realize by locking in that low rate now will be multiplied many times over should you face an emergency without adequate cash reserves.

Emergencies happen all the time.  And people never think they will happen to them.  But they are much more common that a person might think.  Here is a brief list, but all of these scenarios can drive you deep in to consumer debt without a well funded emergency fund in place:

-       Car accident

-       Un-insured natural disaster

-       Major injury or illness

-       Pregnancy

-       Job loss

-       Lawsuit

-       Family emergency

Again, any savings you might have realized by locking in that low rate by buying “now,” are quickly vanquished if you have to use credit cards, lines of credit or other expensive financing options to pay for life’s unintended consequences. 

I certainly don’t wish these unintended consequences on anyone.   But they happen.  And they happen more than anyone ever thinks about or plans for.   

I highly recommend home ownership.  A home is a great asset and can provide you and your family with much happiness and financial return over the years.  I recommend using your accumulated savings to make at least a 20% down payment, but DO NOT recommend tapping your emergency fund to make this happen. 

I know that is hard to hear for some folks.  You could gamble, drain the emergency fund and hope for the best.  But it’s a better idea to take the extra year and continue saving.  You will be glad you did.  

Aaron Coleman

For assistance in building your emergency fund, go to www.winningwithmoney.com.

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