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Can you save for a down payment and emergency fund at the same time?
Saving money for two goals at one time can feel like spinning plates. Sure, saving for emergencies and for a down payment on a home are both important goals, but can you effectively do them both?
Not exactly. Until you have enough money set aside for emergencies, your finances will always be shaky. When a one-off expense comes up, you'll be tempted to draw from your down payment savings, putting you back at square one.
So instead of multi-tasking, make emergency savings your first priority and then move on to saving for your home down payment.
Can you save for a down payment, but also an emergency fund?
You can save for an emergency fund and a down payment at the same time, but doing this is counterproductive. Why? Because you'll be in an unstable financial position until your emergency fund is built.
For example, let's say you have $2,000 saved for your down payment but $0 for emergencies. If you experience a financial setback, like the loss of employment, a medical emergency, or a car breakdown, you'll likely pull the money from your down payment savings.
In other words, any money you have saved will automatically become your emergency fund. This isn't necessarily a problem if the money is in a checking or savings account, but it can cost you if the money is in a time-bound investment like a CD.
How to prioritize your savings
If you're not sure where to start, make emergency savings the priority, since this fund is one of the keys to your financial stability.
Having cash available for emergencies will prevent you from relying on high-cost alternatives such as credit cards or payday loans when times are tough. Plus, avoiding high-cost debt will make it easier to qualify for a mortgage when you’re ready to buy.
Once you've built your emergency savings fund, you can redirect your surplus of cash to build up your down payment savings.
How much should I save for emergencies?
It may seem lofty, but the ideal amount to save for emergencies is three to six months' worth of your living expenses — at minimum. Why? You need enough money to keep you afloat for several months during a worst-case financial scenario: a total loss of income.
For example, if your total monthly expenses are $4,000, your ideal emergency savings fund is between $12,000 and $24,000. That's a wide range, but you'll want to aim for the higher end if you're in one or more of these groups:
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You have dependents
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You're self-employed
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You own a home
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Your work is seasonal
If the three- to six-month goal seems impossible, remember that a little bit of savings is better than none. To start building momentum, set a smaller goal, like saving the equivalent of one month's rent.
Read more: How much money should I have in an emergency savings account?
How to save more for emergencies
Here's how you can get started with building a robust emergency fund:
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Pay off high-interest debt first: Before funding your emergency savings, use your excess cash to pay off any debt that has an interest rate of 7% APR or higher. Otherwise, the high-interest charges will eat away at the savings you accumulate.
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Go for a new account bonus: Look for a bank that gives you a cash bonus for opening a savings account to give yourself a head start. Prioritize accounts with no monthly fees.
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Start small: Don't let a tight budget stop you. Even if you can only save $40 per paycheck, make it a habit to set the money aside. In a year, you'll have over $1,000 in savings.
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Make it automatic: Remove the temptation to spend your whole paycheck by setting up a recurring direct deposit to your savings account every payday. Alternatively, you can set up a recurring transfer from your checking account to your savings account. Just be sure you maintain a buffer of cash in your checking account so you don’t accidentally overdraft.
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Watch out for lifestyle inflation: When your finances improve, resist the temptation to increase your spending. Instead, increase your automatic savings contributions.
Read more: 7 ways to save money on a tight budget
How much should I save for my home down payment?
There's no set amount you need to save for your down payment. But the more you save, the more likely you are to qualify for a low interest rate and an affordable payment. Here are a few down payment numbers to keep in mind:
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20%: Minimum down payment required to avoid private mortgage insurance (PMI) on most mortgage loans.
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14%: Average amount buyers put down in early 2024, according to Realtor.com.
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3%: Minimum required for Freddie Mac's Home Possible and HomeOne loans
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0%: Minimum required for USDA and VA-backed loans
The amount you decide to save for a house down payment depends on your financial situation and how quickly you’re looking to buy. Keep in mind that with the average home sale price now at $360,000, a 20% down payment would come out to $72,000. On top of that, with closing costs that range from 2% to 5%, you'd need another $7,200 to $18,000 to cover your up-front costs.
Read more: Saving to buy a house? Here's where you should park your down payment money.
How to reach your down payment savings goal
Saving five figures may seem difficult, but don't throw in the towel just yet. Try these tricks for speeding up your homebuying timeline and reducing the up-front costs:
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Earn interest: Deposit your savings to an account that earns a solid interest rate, such as a high-yield savings account, CD, or money market account.
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Take advantage of homebuyer programs: Search for loan programs that allow low down payments and closing costs, including government-backed loans and state and local programs for first-time homebuyers.
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Get help from family: Ask a loved one to help you with your purchase by gifting you money to add to your down payment.
Where should you put your savings?
