Do Military Members Need An Emergency Fund?
Here’s a great Twitter question from a servicemember:
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 Roth IRA contributions can be withdrawn at any time for any reason with no taxes or penalties.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.