How to plan your 'emergencies'

A home cache

Saving for home maintenance and repairs requires a slightly different technique.

Homeowners quickly learn that big expenses come with the territory. A new roof or furnace, for example, can set you back thousands of dollars.

But you typically won't face such big bills every year. So the trick is to start saving early so that you have a stash ready for such costs.

Many homeowners got out of this habit because they could tap home equity or use low-rate credit cards. But with lenders clamping down in both areas, savings is once again the best way to go.

How much to set aside? Eric Tyson, the author of the best-selling "Personal Finance for Dummies," recommends a simple guideline: Set aside 1% of your home's purchase price each year to pay for inevitable repair and maintenance costs. If you paid $250,000 for your home, you should be saving $2,500 a year, or about $208 a month.

You won't use up that money each year, Tyson says, but eventually you're certain to face an expense that uses up every dime you've accumulated.

What if you're a renter? You may not have to pay for a new furnace, but you'd still be smart to set aside some money for moving expenses and a deposit on your next place. That way you're prepared if the landlord jacks up the rent, loses the place to foreclosure or turns the apartment next door into a crack den.

Medical bills

How much you should set aside depends on the details of your insurance, such as:

• Your deductible (if any).

• Your out-of-pocket maximum (if any).

• Your co-payments.

You can find out these details by reviewing your policy (your insurer may have the details online) or talking to your company's human-resources department.

Some policies require you to pay the first $1,000 or more of your medical bills out of your own pocket before coverage kicks in, but then everything after that is paid for, or your co-pays are capped at a certain dollar amount. You'd be smart to try to save at least the full amount of your deductible, if possible, and, ideally, your total out-of-pocket maximum.

Other policies require you to pay only a portion of each bill -- say, 20% or 30% -- but may not have any cap on how much you'd have to shell out in a year. Your exposure to big bills in that case could be catastrophically high.

Even if you don't have an out-of-pocket maximum, you should try to save enough to cover what you spent last year on co-payments, plus a few hundred dollars more, to cover your most likely expenses. (And if you have a choice, you might consider switching to a less-risky policy.)

Check your vision and dental coverage as well. Chances are, it's pretty limited. The yearly benefit on a dental policy, for example, is often just $1,000 to $1,500, which could be exhausted in one complicated procedure. Unfortunately, the older you get, the more likely those procedures become, so you'll want to save some extra for those.

If your employer offers a flexible spending account for medical expenses, you should definitely take advantage of that to put aside pretax money using a deduction from each paycheck. But contribute only what you're likely to spend that year, since flexible account savings that aren't spent are lost forever.

Another option is a health savings account. If you're self-employed or your company offers HSA-compatible policies, you could combine a high-deductible policy with a special tax-advantaged savings account. The good news is that any money you don't spend can be saved for a future year. For more details, check out HSAInsider.com.

Otherwise, additional cash for medical bills should be funneled into your medical savings subaccount.

All this assumes you have health insurance. If you don't, predicting your expenses with any degree of accuracy will be tough. You might want to read "A survival guide for the uninsured" for coping strategies.

Saving for future expenses acknowledges the reality that we can't always predict what our lives will cost. But we're always better off having extra savings to meet our needs than scrambling at the last minute to come up with the cash.

Meet Weston at The Money Show

MSN Money's Liz Pulliam Weston will be among dozens of experts on hand at The Money Show in Las Vegas, May 11-14, to help you learn what you need to know to make smart money decisions during the economic crisis. Admission is free for MSN Money users.

To register, call 1-800-970-4355 and mention priority code 012866, or sign up online.

Liz Pulliam Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "Your Credit Score: Your Money & What's at Stake." Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board.

Updated April 8, 2009

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