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Military Finances 101: Emergency Funds...Yeah, They're Important

Managing Your Finances

Easy to Get Complacent While on Active Duty

I'll admit it, for the majority of my time in the Air Force, I didn't have much of an emergency fund. Maybe a couple grand. That changed when  I got closer to retirement. With my 20/20 hindsight, I realize I was lucky.

For those at or near military retirement, a substantial emergency fund should be your number 1 financial priority. And, those planning to be on Active Duty for a long time should have one too. If the COVID-19 response has taught me anything, there is absolutely no guarantees of a job or for that matter income. And, you may need to hold out for several months if not even more than a year until you have regular income.

What Does an Emergency Fund Look Like?

The first thing about an emergency fund, is that it has to be absolutely liquid. You need to be able to get it NOW when you need. And, you need to be able to get it with little to no risk that you'll lose a significant amount of money when you access the funds.

That means a savings account or money market fund are probably your best options. You might consider Certificates of Deposits (CDs), but realize you will probably lose some or all of your accrued interest if you cash out a CD early. One option might be to divide your emergency funds into 6 "piles" of money. Leave 1/6 in the savings account and take the remaining 5 "piles" and buy 5 CDs with maturities, 1, 2, 3, 4 and 5 years into the future. When a CD matures, buy another 5-year CD. This way you'll have some funds immediately available and funds maturing within a year. And if things get real bad, you dip into the other CDs and eat the penalties.

How Much Should I Have in an Emergency Fund?

That really is the question. To start, figure out how much you need per month to cover your essential expenses. If things get really bad, what could you cut? But, also what would increase...if you stop going out to eat, how much will your grocery bill go up? You can assume that you'll stop contributing to investments, if you want. If you are retired, you can subtract your military pension (after tax) and VA Disability Compensation from the monthly expenses.

I think after COVID-19, that the ability to cover one-year's worth of expenses, is a requirement. I used to be o.k. with 6 months, thinking that you could sell a house and move to a lower cost area in 6 months, if you really needed to. Not so sure about that any more. A goal of 18 months might not be a bad idea.

Get Started On It Now

If you're employed now is the time to start building your emergency fund. I'd even consider suspending retirement account contributions, until you have at least 6 months covered. Then you could start up your retirement contributions and contribute more slowly to your emergency fund. Get at it...Really.


If you found this article useful, you might like the following blog posts:

Military Finances 101: Common Scams to Be Aware of During the COVID-19 Pandemic


Military Finances 101: Using the OODA Loop to Get Your Finances in Order


Military Finances 101: How to Trick Yourself Into Saving Money




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