Do Military Members Need An Emergency Fund?

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Here’s a great Twitter question from a servicemember:

Image of a Twitter tweet about a servicemember's emergency fund

So how big should an emergency fund be for anyone in the military?

I understand the concern. The conventional advice is to keep at least six month’s expenses saved in an account that you can tap at a moment’s notice, and invested in liquid assets that won’t be hurt by stock-market volatility.

Unfortunately most of us end up putting the money in a “savings” account that only pays a fraction of a percent of interest. Others may take the extra steps of opening an online high-yield savings account or even a five-year CD (with penalties for early redemption) but the return is still barely 2%.

Conventional wisdom is great advice for a civilian. For most of the workforce, the “emergency” fund is a euphemism for “unemployment” or “health insurance deductible”.

However, when you’re in the military then you could cut your emergency fund down to “vehicle repair” or “plane tickets for emergency leave”.

There’s an even more radical approach to an emergency fund. Roth IRA contributions can be withdrawn at any time for any reason with no taxes or penalties. Servicemembers & spouses could open an account and contribute the maximum, and then see whether they’ll ever need to withdraw any of it. They might get through years without touching it.

What if you’re still paying off consumer debt and haven’t started investing yet, let alone built up an emergency fund? That’s a tough situation because you’re still vulnerable to expensive vehicle repairs or any other unexpected expense. Servicemembers could try to tap into funds like advance pay or their relief societies. Of course, those approaches have their own bureaucratic delays 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. Another option would be to divert $250-$500 of your debt payoff money to create a very small emergency fund in a savings account or a Roth IRA and then continue to pay off the rest of the consumer debt.

What if you’ve already built up a large emergency fund and decide to shrink it back down to a small amount in a taxable account or a Roth IRA? This is a good problem to have! One approach would be to boost your pay deductions to the Thrift Savings Plan (either the Roth TSP or the conventional TSP). You could attempt to maximize both your TSP and your Roth IRA contributions while spending down your emergency fund. One way to draw down that fund would be to raise your TSP deductions to 92% of your pay 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 deduction when you hit the contribution limit– whether than happens in December or even in June.

If you’re abruptly downsized by the military, of course, then your emergency fund will be your “job search fund”. The worst case I’ve heard of during this drawdown is two months’ notice, and most downsizing discharges have 6-12 months’ notice. You’d immediately stop your TSP/IRA contributions, cut your spending back to “deprivation” level, and pile up as much cash as possible while conducting as much of the job search as you could before your military paycheck stopped.

How much cash would you need for your military exit and your job search? That’s hard to predict because each bridge career has so many different decisions about your occupation, where you’ll live, and your expenses. It could take up to a year during a bad job market, but if you hit the search hard during your last few months of active duty (and your terminal leave) then you might not skip any paychecks. Save as much as you can, and remember that you’ll be cutting your expenses to the bone. Six months of a “job search fund” is a lot less than your typical spending budget. If you join the drilling Reserves or National Guard, or use your GI Bill benefits for a college degree or other certification, then you’ll stretch your transition fund even further.

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Where to put your savings while you’re in the military



WHAT I DO: I help you reach financial independence. For free. I retired in 2002 after 20 years in the Navy's submarine force. I wrote "The Military Guide to Financial Independence and Retirement" to share the stories of over 50 other financially independent servicemembers, veterans, and families. All of my writing revenue is donated to military-friendly charities.

5 Comments
  1. Disagree on many levels. The purpose of an emergency fund is exactly to have it liquid, and not as an investment. An emergency fund is also not a retirement fund. If you rely on retirement funds by tapping say your roth, it means you no longer benefit from the benefits of having the money in the retirement fund to begin with. Yes, you could ladder cd’s and have roth as a fall back end of the world last access account, but that is also not the point of the emergency fund. Military folks have to also consider they are going to be moving, different jobs will require a significant upfront outlay of cash, etc. Military might not need the emergency fund for income disruption based on a lay off, but chances are they will need one for required temporary cost surges. I can’t tell you how many times I have heard, witnessed, and experienced having up front costs and not getting reimbursed for 6 months or longer while in the military. I have experienced this a few times, with the last time not getting reimbursed over $18k for 6 months for out of pocket expenses. Of course, these are exceptional circumstances, but that is in fact the reason you want to have an emergency fund to begin with: exceptional circumstances.

    • Thanks for the comment, Tim!

      In a perfect world every servicemember would stay free of consumer debt, maximize their contributions to their TSP and their Roth IRA, save up to 40% of their remaining income in taxable retirement funds, and then set aside even more money for their emergency fund in a high-yield savings account.

      For every other servicemember (and their families), I think a small emergency fund is perfectly acceptable. Making the emergency fund part of a Roth IRA is a great compromise if a servicemember would otherwise have to skimp on their Roth IRA contributions to build their emergency fund. If there’s no emergency, then the money compounds in the Roth IRA. That’s far better than having no emergency while the money fights a losing battle to inflation in a savings account. If there is an emergency, then the money is pulled from the Roth IRA and the end result is the same as never having made the contribution and pulling the funds from the emergency account. Having to pull funds out of a Roth IRA might even help some people think real hard about what they consider an emergency, and keeping the cash out of an easily-accessible liquid account may help others avoid temptation.

      I would hope that the military is getting better about advance travel pay for “temporary cost surges”. Servicemembers could also draw interest-free advance pay for a transfer to a new duty station, but even an emergent PCS is hardly an emergency. A family would have time to temporarily cut expenses to pile up cash for the extra costs of the transfer.

      • Not disagreeing about need for an emergency fund; however, It’s concerning to hear/read more and more personal finance bloggers and even suze orman talk about melding money designed for different purposes. I view it similar to setting your watch or alarm ahead by 5 minutes, because you invariably know you have the extra 5 minutes. It becomes easier and easier to assume the 5 minutes, just like it is pretty easy to withdraw money from various other purpose investments. I believe you really need to reinforce the notion of having different purposes for money.

        Yes, you still have the ability take travel and moving advances; however, these were not cases where you could take advances. Moreover, I’ve been in several jobs which required at least $5K advance upfront costs, which I was later reimbursed; however, you could not receive reimbursement until after the fact. Even with travel/moving advances, invariably reimbursements get delayed and you find yourself in a no pay due situation, etc. I and some folks I know, must be unique, because whether it is TDY or PCS, I haven’t had much warning, or sufficient advance notice to pile up cash. So, I disagree an emergent PCS is not considered an emergency, since the emergency fund is designed to cover unexpected lapses in income and cost surges. As with some of my experiences, you also do not have sufficient time to lower expenses and stockpile cash.

        Everyone’s situation is different, but I do not believe advocating military folks should reduce an emergency fund amount compared to a civilian based on income disruption alone when income disruption is only one reason for having an emergency fund. Other reasons like unexpected cost surges are very much a part of being in the military, especially depending on the jobs military folks pursue.

  2. Doug, this is all excellent advice for us non-military folks also. I love how you offer lots of different options.

    Recently I learned first hand the value of an emergency fund in a situation that had nothing to do with job loss.

    My dad passed away and I had to travel thousands of miles, stay in a hotel, rent a car, eat out at restaurants, and spend money on other things that weren’t in the usual budget. I was thankful I had a credit card and the funds to pay the whole bill when it was due.

    Thanks for your advice which is terrific as always.

    And especially today — Memorial Day — a big “thank you” to you and all others who have served.

    Comment? Question? What's on your mind?