Saving for a Rainy, Leaky Day

You know you need one, but you just haven't gotten around to it, right? As a homeowner, you simply can't afford to put it off any longer; even in a low-maintenance year, just doing small projects around the house can easily cost $1,000 or more. That's where your liquid cash savings come in; you want to be able to pay for those repairs out of your pocket, not with a high-rate credit card. Keep in mind that a $1,000 credit-card balance at 15 percent interest will cost you an additional $400 if you make only the minimum payment each month.

And don't think of your home insurance as a smart bail-out plan. Even if you have minor damage that is covered by your policy, it is foolish to make claims of just $1,000 or so. Insurance is meant to protect you from major losses—a devastating fire or a tree crashing through the roof—not the small stuff. When you make repeated small claims, your insurer is bound to jack up your premium, or even refuse to renew your policy. I think it's smart to boost your deductible to $1,000 or more; that way, you won't be tempted to use the policy for minor stuff, and, better yet, your annual premium might be lowered by 10 percent or more.

So that brings us back to the emergency cash fund. Check out the AmericanDream savings account at emigrant-direct.com, an online bank that currently offers 5 percent interest and has no minimum requirement for your initial deposit. The best part about this account is that your saving can be completely automated; you choose how much—and how often—you want to have money electronically transferred from your checking account into this account. Save only $100 a month and, with interest, you will have $2,529 in two years.

If you have a good credit score, you should be able to get a credit card with a zero percent interest rate. That can come in handy for surprise home repairs. The trick is that the zero rate is good only for a set introductory period of a year or so, which means you will need to shop for a new card deal when your old zero teaser rate expires. You'll want to make sure that you don't use the card for anything other than home repairs and that your zero rate applies to new charges (some cards offer the no-rate option only on balances transferred from other cards). The Discover Platinum card comes with a zero rate on new purchases for one year, while American Express Blue offers a similar deal for the first 15 months.

The equity in your house can indeed finance major repair costs, but please make sure you understand the risks involved. If you take out a home equity line of credit (HELOC) or a home equity loan (HEL), your home is the collateral. Fail to keep up with the payments, and you could lose it.

HELOCs are popular, but they can be a financial headache. They're a lot like credit cards: You have a set limit to tap anytime you want, and the interest meter doesn't start running until you actually take the money. So what's the problem? Well, most HELOC rates are adjustable, meaning they can—and will—change every time their benchmark index changes. And that means higher payments for you. The current HELOC rate (assuming you have a really great credit score) is a stiff 9.25 percent. Yes, it's true that interest payments can be tax deductible, but you'll still be paying way too much.

The interest rate on a HEL is fixed, meaning the rate you get at the start is what you pay forever. But the trade-off—and you knew there had to be one—is that your interest meter starts running immediately. If you take out a $25,000 HEL, you'll get $25,000 on day one and owe interest on it pronto. But if you are looking at a big-ticket repair job that you don't expect to be able to pay off within a year or so, a HEL will give you more stability than a HELOC.

Promise me you will not listen to anyone who suggests that taking a loan from your 401(k) is a great way to pay for a large home repair. It can be a doubly costly mistake.

Money you've invested in your 401(k) has not been taxed; the money is deducted from your paycheck before Uncle Sam takes his bite. But if you decide to take a loan from the 401(k), eventually you'll have to repay it with money you've already paid taxes on. Come retirement time, when you start to make withdrawals from your 401(k), you will owe taxes on that money again. That means you will pay tax twice on the money you use to repay the loan. Now tell me, where's the logic in that?