Emergency fund for a military member

[navydavey]

Evening everyone,

I am in the Navy (if you didn't decipher from the handle) and have about a 7 year commitment left. A question has been lingering in the back of my mind as I've continued to build my emergency fund. Everyone seems to define an emergency fund as money you would need should you suddenly lose your income. This seems wise in the civilian world, but I find it unlikely that I would suddenly lose my job without any warning. My concern is that I have far too much in my emergency fund that could be of better use elsewhere at no risk to my financial security.

I understand this question sounds like I'm fishing for an excuse to invest my emergency fund, but I'd like to hear military members' thoughts on the emergency fund.

Stats:

Age - 25
Not married
Renting

Net Income - $56,000

Investments - $80,000
Roth IRA - $36,000
TSP - $13,000
Mutual funds - $30,000

Emergency Fund - $28,000

Debt - $37000 @ 1%

 

[clifp]

I think you are right. Although I know if you run a ship aground they tend to court-martial you pretty damn quick, or sleep with the admirals wife.

You have $30K in mutual funds which could act as an emergency fund, and I suppose in a bad situation you might have to liquid after 25% correction.

As civilian I went through my whole life without a 6 months in emergency fund.
I think it is sufficient to assume bad things happen in threes and come up with enough safe money (CD's etc count) to handle those contingencies.

Mom is in hospital, Airline ticket full price to see her
Car dies, sufficient down payment for replacement
You have to find a new apartment, first month, last month, and moving expense.

Wild ass guess $10-15K and go ahead and invest the rest.

 

[Dash man]

An emergency fund is just as valuable for a military member as it is for civilians. I'm an Air Force vet and was caught up in the reduction in force in the mid 90s. I had known many who were forced out sooner than they expected and were not ready financially, including me. Besides a RIF, others were forced out for medical reasons, failure to get promoted, court martial (usually for fun getting out of control) and even for financial irresponsibility.
Emergency funds should not be invested in stocks or bonds because the markets fluctuate and you don't want to be forced to liquidate in a down market. Keep at least a year of expenses in the emergency fund. Don't think you predict an emergency.

 

[pb4uski]

I view an emergency fund for a combination of unexpected expenses and protection against loss of income. When I was your age I didn't carry near that much as an emergency fund.

Credit cards can be used for unexpected expenses as long as you can access enough money to pay the credit card bill when it is due 20 to 50 days later.

I would put $3-5k in an online savings account and the rest in an equity mutual fund in a taxable account. If the markets happen to be down at the same time you lose your job you can still liquidate the fund and take the loss, you'll just have to find a job quicker. Beyond that, you can always fall back on Roth contributions.

 

[Nords]

Heh-- this question seems awfully familiar!

Most people's "emergency" fund is a euphemism for "unemployment" or "health insurance deductible". If you're in the military then you could cut your "emergency" fund down to "vehicle repair" or "plane tickets for emergency leave".

If you want to get radical with your military financial management, then don't have an emergency fund at all. Maximize a Roth IRA contribution when you open the account, and then see whether you'll ever need to withdraw the contributions. You might get through the rest of your Navy career without touching it.

You can also try to tap into funds from sources like the Navy & Marine Corps Relief Society or advance pay. Of course those have their own issues, and you may not want to come to the command's attention by taking these actions, but they offer huge peace of mind for a true emergency.

It's a comforting feeling, but it goes against everything that the conventional financial gurus would advise.

If you're abruptly downsized, of course, then your emergency fund will be your "job search fund". The worst case I've heard of so far is two months' notice, and most downsizing discharges are more warning than that. You'd immediately stop TSP/IRA contributions, cut your spending back to "deprivation" level, and pile up every bit of cash possible while conducting as much of the job search as you could before your military paycheck stopped.

I don't know how long you've been contributing to your TSP, but you only have seven years left to exploit the world's smallest expense ratios. One way to draw down that $28K would be to raise your TSP deductions to 92% and live off your cash stash. "92%" is as high as myPay will let you go (they want the other 8% to pay your FICA deduction) and the TSP will automatically stop your contributions when you hit the contribution limit-- whether than happens in June or December.

You want to maximize the TSP contributions as early as you can and as often as you can, because if you decide to separate after that seven years then you'll want to start piling up a job-search fund during your last year or two in uniform.

Let me know if you have more questions. This is a great subject, and I'm going to write it up into a blog post.

 

[haloFIRE]

I agree with Nords.

Pump up your TSP and use your emergency fund money to pay your expenses until you max out your TSP. After you max it out for 2014, you may want to stop until 2015, repeat until you reduce your emergency fund to a few K.

I did this back in 2010 when I was Iraq. I had a bunch of cash saved up, so my wife and I paid bills out of it, and set my TSP to 90%. Since I was in Iraq, I was able to contribute +/-51K. Can't recall the exact legal limit at the time.

Great advice Nords (as per SOP!)

 

[HawkeyeNFO]

As usual, Nords is correct. And to further the point, even civilians don't necessarily need cash as an emergency fund, but rather ACCESS to cash. This could be the ability to liquidate part of your Roth IRA contributions, take a TSP loan, or use a 0% credit card for a limited time.

Always good to keep some cash on hand, but I don't believe that a US military person needs any more than a fraction of a typical civilian's amount. In the long run, you're likely to be better off taking some risks with the money. I do this by using a couple of different Vanguard mutual funds.

 

[Dash man]

It took me two years when I got out of the Air Force to find a decent paying job with proper benefits. My nephew, who has been out of the army for a little over a year is still looking. Too many are complacent regarding their finances in the military, but should use the time to learn to LBYM and build an emergency fund along with long term investments.

 

[Rustic23]

I think it depends on where your are in your career and how sure you are that you are rift proof. i.e. if you are a Lt. Col or Major, and Master Sgt. running a B2 maintenance squadron or F-22, than the odds of you being of reduction in force is slim.

We kept an emergency fund equal to double what it would cost us to get the entire family home from Europe or Japan (figured that was about the most expensive place they could have shipped us). As we got closer to retirement, I upped the amount we had. Here again, it depends on your situation. If you are going to retire from the service and not seek employment, then maybe not as much is needed. Here you might think about covering an unexpected medical emergency might be a better number. What ever you choose, I would double it as a goal. Why? Can't really justify that, but I sleep sounder knowing I have a pad.

 

[clifp]

As usual, Nords is correct. And to further the point, even civilians don't necessarily need cash as an emergency fund, but rather ACCESS to cash. This could be the ability to liquidate part of your Roth IRA contributions, take a TSP loan, or use a 0% credit card for a limited time.

.

I agree you need easy access to CASH not the actual cash.

An emergency fund is just as valuable for a military member as it is for civilians. I'm an Air Force vet and was caught up in the reduction in force in the .
Emergency funds should not be invested in stocks or bonds because the markets fluctuate and you don't want to be forced to liquidate in a down market. Keep at least a year of expenses in the emergency fund. Don't think you predict an emergency.

I think what you are missing is the opportunity cost of keeping money in cash.

Option A is keep 1 year expenses (say $50K) in cash in money marketing/saving earning approximately 0% interest (and losing money to inflation )

Option B is $10K (for air fare, moving whatever) the remaining $40k is invested in equity heavy (80/20) portfolio averaging say 7.2%/year.

During the next ten years you aren't laid off. Option A you still have $50,000 in your emergency fund Option B has 10K, in cash and $80K in a portfolio.

Then bad luck happens and we have a repeat of 2008 (stocks down -37% and bonds up 7%), plus you lose your job. Your $80,000 has shrunk to $67,000 which you sell to pay for living expense but that still is $27,000 more than you'd have keeping money in a money market all these years.

The only time you come out worse (especially into today interest rate environment) is if you get laid off in the next few years AND the stock market also crashes at the same time.

Now while there certainly is high correlation between job loss and stock market crash in the civilian world, there doesn't seem to be one in the military.

 

[LendingWire]

I'm not in the military, but that seems like pretty legitimate reasoning. I'd say if you get Roth IRA matches and you're not already maxing those out, you should get try to get the match. If you already are, you should invest most of it into paying off debt.

 

[Milton]

My concern is that I have far too much in my emergency fund that could be of better use elsewhere at no risk to my financial security.

Not "no risk", but "low risk" certainly applies. While Dash man is correct that surprise involuntary termination can happen to naval people, the fact is that it is much, much less common than for civilians. Given finite resources, it would be generally safe to play the odds and put more of your savings into longer term investments.

Good advice from Nords.

 

[Dash man]

Emergency funds are for far more than job loss. It's to prevent hardship for any major financial outlay, including car accidents and car replacement, family medical emergencies, major home repairs, law suits and legal fees, emergency travel, floods, weather disasters, etc. Military are also affected by change can station moves where not all costs are reimbursed. A solid emergency fund can be critical in avoiding these surprises that are not budgeted for. A full year of expenses in an emergency fund gives a lot of peace of mind.

 

[RetireAge50]

We have never had an "emergency fund". We did save up and buy our cars for cash. Also well insured for health and home.

If we had a job loss would get another job. Figure if unemployment rate was 10% then I had a 90% chance of getting another job.

I guess we are taking risk for all the emergencies but would rather have the funds in higher paying investments (long term). And I would likely spend the money on non emergencies were it available.

 

[JDARNELL]

I always made sure I had 60 days leave in the bank and some cash for the pop ups (ie emergency leave, car repair etc) I figured with 60 days of future pay owed to me I had some time to adjust fire if things went south quick. Maxed out TSP was a good option.

JDARNELL

 

[JDARNELL]

Emergency Fund

I always made sure I had 60 days leave in the bank and some cash for the pop ups (ie emergency leave, car repair etc) I figured with 60 days of future pay owed to me I had some time to adjust fire if things went south quick. Maxed out TSP was a good option.

JDARNELL

 

[RetireAge50]

Yeah that's about right. Some cash available for the normal stuff that pops up with the rest invested long term.

I guess I never liked the word emergency as most expenses that come up are expected (car repair, furnace, roof, etc) not emergencies.

 

[Milton]

Emergency funds are for far more than job loss. It's to prevent hardship for any major financial outlay, including car accidents and car replacement, family medical emergencies, major home repairs, law suits and legal fees, emergency travel, floods, weather disasters, etc.

True enough. However, most of the contingencies you mentioned are either relatively minor or mostly covered by private or public insurance.

A full year of expenses in an emergency fund gives a lot of peace of mind.

Again, true enough. However, the O/P clearly has limited funds and it is a question of putting them to the best use.

 

[nash031]

I understand this question sounds like I'm fishing for an excuse to invest my emergency fund, but I'd like to hear military members' thoughts on the emergency fund.

Stats:

Age - 25
Emergency Fund - $28,000

Congrats on a great start! I'm at 14.5 years, married, and went for a while without an e-fund when I was single.

I wouldn't recommend it, however, and particularly in today's age. I just witnessed an O-3 at my command who thought he would be fine to pick up O-4 despite a black mark in his record. He did not, and further did not get picked up for the Reserves. He had savings, but no e-fund, and is instead burning through the $100K severance he got after 12 years of service. That amounts to half of his total savings from that 12 years, and because he was involuntarily separated, he has no chance of ever earning a pension. In short, he's mid-30s and well behind where he was aiming to be now, and is presently still unemployed. That $100K will get him through a year or so at his spending level.

So, I don't think you need a $28K e-fund, but that also depends on your spending habits (aim to get through 3-6 months if something happens). We have a $30K e-fund (age 36, married no kids, with 5 years left on AD). I'd think you could get by with less, but I knowing what I know now and having seen what I've seen, I wouldn't go entirely without one.

(Disclosure: we already max my TSP (priority #1, IMO), my Roth IRA, her Roth IRA and her 403(b). In your situation, I'd maximize those long-term accounts, but keep something set aside for emergencies as Nords discusses.)

My $0.02.

 

[Dash man]

True enough. However, most of the contingencies you mentioned are either relatively minor or mostly covered by private or public insurance.





Again, true enough. However, the O/P clearly has limited funds and it is a question of putting them to the best use.

Seems to me many responders to this post have never experienced a true emergency. Insurance may not always cover everything or pay out quickly. Multiple bad things can happen close together. Jobs aren't always easy to find. The government doesn't always help, and sometimes makes things worse. Emergencies aren't planned, don't happen at a convenient time and can be catastrophic. Just because they're unlikely to happen is a poor reason to not be prepared financially.

 

[RetireAge50]

Being "prepared for an emergency" has a huge financial cost. For example maintaining $25,000 strictly for emergencies will forego the investment gains over time. In 10 years the 25k would grow to $50k, in 20 years $100k, in 30 years $200k, etc

 

[Dash man]

Being "prepared for an emergency" has a huge financial cost. For example maintaining $25,000 strictly for emergencies will forego the investment gains over time. In 10 years the 25k would grow to $50k, in 20 years $100k, in 30 years $200k, etc

Not being prepared can also have a significant cost. Your numbers are optimistic. Having to sell in a down market and potentially pay taxes and penalties if funds are in a tax deferred account can take a toll too.

 

[clifp]

Not being prepared can also have a significant cost. Your numbers are optimistic. Having to sell in a down market and potentially pay taxes and penalties if funds are in a tax deferred account can take a toll too.

Well first of all no one is suggesting putting the funds into tax deferred. You can't just stick $20k or 40K into one.

Ok imagine your son owes 50K to loan sharks or kidnappers, has to be pay by the end of the week, or his pretty wife will be in the hospital, or child is dead.

What is the difference between having 50K in money market at Vanguard
or 10K at Vanguard money market 30K in total stock market, 10K in total bond market?