Emergency funding through sale?
Justin and his wife are wondering if it would be a good plan to complete their fully-funded emergency fund through the sale of their home. Dave walks them through a couple of scenarios to make sure they're on the right track.
QUESTION: Justin and his wife have completed the first two Baby Steps, and now they’re building a fully funded emergency fund in Baby Step 3. They would like to move out of their current home, so Justin asks Dave if selling the house is a viable option for funding the third Baby Step. They currently have about $32,000 equity in their present home.
ANSWER: Well, I wouldn’t sell the house just to do Baby Step 3. My goodness, that’s usually a fairly easy Baby Step after you’ve gotten out of debt. A fully funded emergency fund means saving three to six months of expenses, and you shouldn’t have to sell a house to pull that off.
But if you don’t like the house anyway, and you’re planning on selling it, then yes, set some of the equity aside. I would not put all of the equity into the next deal. I’d hold back my three to six months, so that when you move into another house you’re debt-free with a fully funded emergency fund sitting there.
There’s nothing to keep you from selling it today. So if that’s what you decide to do, just set back enough so that you still have an emergency fund in place and use the remainder for your down payment. If that equation works for you, then sell the house. If not, you may need to completely save up your emergency fund before you sell the house in order to make it work.
When you move, I want you to have an emergency fund and be debt-free in addition to your down payment. That’s what we’re after.