The emergency fund.
This staple of contemporary financial advice is the center of much debate for financial gurus. Do you pay into your emergency fund or pay off high-interest debt? How much should you have in your emergency fund? When can you tap it? Where should you keep it? What is more important, accessibility or growth? And so on.
Some of that debate is interesting. Some of it is important. But much of it -- like a lot of generic financial advice out there -- isn't particularly applicable to members of the military. In fact, the canonical "emergency fund" is a great example of how the unique aspects of military life make getting specific advice so important.
So what is an "emergency fund" really? For most folks, an emergency fund is a pot of money with two purposes: to cover large, unexpected expenses and/or to live off in the event that you lose your job. Without an emergency fund, you will inevitably put unexpected expenses on a credit card.... and if you don't have the money available to pay it off quickly, you may end up paying significant interest over and above the original tab. With that context, some of the debates mentioned above make sense. So let's start with how an emergency fund applies to MOST of the population.... then we'll talk about how its different for military families.
How much do you need? Before the 2008 recession, most financial advisors recommended 3 months of living expenses. However, extended unemployment during the recession have made many revise that number and now the recommended amount is 6 months of living expenses.
Where do you keep it? Because the emergency fund is designed for, well, emergencies, the idea is to keep it fairly accessible. As in, you could transfer money from it at any moment to pay bills. This makes a savings account the ideal vehicle, though some say a checking account is okay (as long as you aren't tempted to spend it!) or even an investment account (as long as you don't mind liquidating assets regardless of their value).
What priority does it have in your savings schema? There's some disagreement here, but the majority of advisors recommend building your emergency fund first, then funneling money into other locations: paying off debt, funding retirement accounts, buying investment property. In other words, the emergency fund is your top priority until it's fully funded.
When can you tap it? It's important to distinguish between an emergency fund and a rainy day fund. Emergency fund money is not to be used for vacations, renovations, or really anything except emergencies. So, if your furnace goes out in the winter, use your emergency fund. If you total your car or need to pay emergency medical bills, use your emergency fund. And of course, if you are laid off, tap the emergency fund first. Otherwise, that money should just sit there.
Okay, so now you have a good idea of how the majority of the working population understands emergency funds -- as money available for unexpected expenses and potential unemployment. This chart shows the most common reasons Americans tap into their emergency funds:
But you (and your family) are in the military. So let's walk through these possible expenses to see if they apply to you. If you live on base or rent from a landlord, then unexpected household expenses aren't a high probability -- though of course this changes if you own your home. Car expenses could certainly happen, but your health care is almost completely covered, so a trip to the ER isn't going to force you to come out of pocket for even a penny. One exception to this is pets: vet bills can be expensive and Uncle Sam does not cover Fido, Fluffy, or Mr. Ed. So keep that in mind both BEFORE you adopt and in thinking about what you should keep handy to pay for your furry family vet bills.
Being in the military means job loss isn't really a pressing threat for you. In fact, because enlisted personnel sign contracts and officers have commitments, your employment is pretty predictable. The US military isn't going to declare bankruptcy and fire everyone; when we do have lay-offs (or RIFs - Reductions in Force) they are slow-moving processes with ample notice and usually some kind of pay-out if you are separated.
Moving to the end of the list, cost of living increases are generally covered by increases in BAH, BAS, and annual raises in your salary, and of course the costs of relocation (aka PCS) are covered entirely by the military with an addition allowance to help cover out-of-pocket costs like rental deposits or starting utilities!
So, looking at this list, you're probably asking yourself: do I really need an emergency fund? This is a perfectly logical question: considering that your emergency fund is just a pot of money that sits there, earning relatively low interest rates and doing nothing for you, you'd be wise to ask if you could use that money to make more money by investing it. And if you follow the advice to keep 6 months of living expenses in that fund, that is NOT a small amount of money.
The answer is yes, you still need an emergency fund. But you need to think about it differently than the rest of America! The cookie-cutter financial advice doesn't apply to you here.... so here are answers to the same questions from before, tailored specifically to military members.
What is an emergency fund for? Yes, you still need some easily accessible money set aside for unexpected expenses, but since you're mostly looking at car repairs, that should be covered by a much smaller cushion. If you're in the military, we recommend you give the emergency fund a different purpose: to cover any lost income if you PCS to a place your spouse can't work. Military families move A LOT, and often it takes some time for a spouse to find work. An "emergency fund" can help supplement your income if you need it (though of course, Mr. FIRE and I recommend not being reliant on that income.... but that's a different post!). This fund can also be used to cover additional expenses incurred in deployment -- like more daycare or having to pay a plumber instead of you fixing the sink yourself. This makes the canonical emergency fund a not-so emergency fund for military families.
How much do you need? 6 months of living expenses is a HUGE amount of money to keep sitting idle. Since you're not worried about a surprise lay-off, we recommend not thinking of your fund amount in those terms. Rather, ask yourself what it might cost for your biggest unexpected expense? For us, that's replacing Mr. FIRE's truck transmission -- so maybe $2,000? Then add the amount you think you might need to supplement your income if your spouse can't work. If that amount is $0, then you're done. If it's $1,000 each month, then consider boosting your not-so emergency fund by 3 months of income, making your total $5,000. Compare this to hording 6 months of living expenses (that's over $30,000 for us) and we now can make $25,000 work for us in out investment portfolio. That's huge.
Where do you keep it? Because a PCS is predictable and deployments are *rarely* a complete surprise, you can keep your not-so emergency fund in a slightly less accessible place where it can get a higher rate of return. I'm not suggesting locking it away in a CD or investing it in real estate, but you can keep it in a high-yield money market or index fund where it will earn more interest. Then, if an expense pops up or you get closer to PCS, you can shift the funds into your checking account with plenty of notice. So, not only are you walling off less money than a traditional emergency fund, you can get a higher rate of return because of where you keep it!
What priority does it have in your savings schema? I still recommend the advice that your emergency fund is your top priority until it's fully funded. Since it's less money, that should be a shorted period of time. However, you could think of this fund as two separate priorities: one top priority for surprise expenses and a medium priority for PCS or deployment cushion. So in our example, we'd put every spare penny into our emergency fund until we hit $2,000 to cover the truck, then slowly add more in as we get closer to PCS to top it off to $5,000. During that slow trickle, we'd also be paying off debt or investing in the market....rather than waiting until the fund was full.
When can you tap it? The same rules apply for tapping the not-so emergency fund for unexpected expenses: that's what it's there for. Otherwise, follow the reasoning you used when you built it. If you planned $3,000 to cover your spouse's lost income after PCS, use it for that. If the goal was to offset deployment expenses, then dive in as you require while deployed. And otherwise, well, that money should just sit there.
One last observation for a military approach to the not-so emergency fund: keep whatever amount makes you feel comfortable. The emergency fund has an emotional component to it, so above a certain amount, it doesn't have to be a rational number. If having $10k makes you feel more confident and safe than $5k, then use that as your goal amount. Though you'll be sacrificing some returns on your money, the peace of mind you'll get knowing you are ready for anything is worth it.
Stay tuned for our next post where we'll continue to explore the how the financial advice given to the majority of Americans doesn't fit the military FIRE family. See you then!
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