Having an emergency fund is vital to your long-term financial success. It’s really important to leave some amount of money completely separate just in case everything turns for the worse. You just never know what might happen and having cash on hand for an emergency is always a good idea.
We’ve had an emergency fund for over 10 years now. Luckily, we’ve never had to touch it either. I’m tempted to invest some of that money, but I don’t. I just know that the second touch it, something will happen.
Why Do You Need an Emergency Fund?
You never really know what might happen in life. Many service members find themselves in a pickle or might even miss a paycheck during a government shutdown. I bet they wished they had an emergency fund. Nobody has ever been sorry they had extra cash when something bad happened.
Having a cash reserve gives you space and time to make better choices. Pressure tends to have a negative effect on your choices with money – or at least that’s been my experience. Creating time and space to come back to a problem after you’ve had a chance to clear your head and think it through is really helpful.
Without that safety net, running on thin margins might be a really big source of stress. Running low on cash can become a real issue if something bad happens. You never know when a major car repair or something else might throw you off-track.
Do Not Invest Your Emergency Fund!
Investing your emergency fund is NOT a good idea. You could lose that money or tie it up so you can’t use it if you need it.
What would you use as a safety net instead? I’ve heard of people using a credit card, Home Equity Line of Credit (HELOC), or even borrowing against their TSP (not recommended at all!). These all have costs associated with them and only make the emergency worse.
Obviously, you can do what you want, but an emergency fund helps keep you on track and takes away the stress of the unknown. Sometimes an emergency fund might be the only thing standing between you and a major financial catastrophe.
Emergencies Will Happen
Imagine this, you’re working to get your finances on track, paying down debt, and your car breaks down. If you have an emergency fund, you pay for it with your cash and then build it back up and move on. If you didn’t have the emergency fund, you’d end up borrowing that money. This would further compound your problems. You can get stuck in a vicious cycle of just trying to keep your head above water.
For us, having cash in the bank has reduced our stress. We also avoid touching it like the plague. It’s also possible to adjust our expenses a little if something happens. We might end up running low for a while, but having that buffer really puts us at ease.
Where to Keep Your Emergency Fund
We keep the emergency fund in a totally separate bank from our normal checking and savings. This way we aren’t tempted to use it for random stuff. We have a checking account at the same bank, so we can transfer and use the money instantly if needed.
I also nicknamed the account as the emergency fund. This creates physical and mental separation from everything else. It just keeps it simple for me that way.
How Much Emergency Fund Should I Have?
Three to six months is considered a good baseline. For us, we started with a $1,000 baby fund. Then we ramped that up to six months of expenses. At the time, about $5,000. We’re actively working to grow this a little bit as our expenses have grown over time.
You’ll need to factor in how much you really need to live off of each month and how likely your pay will stop. For most service members, pay is pretty stable. However, I’ve seen three different government shutdowns since I’ve been in service – it does happen.
Building Your Own Emergency Fund
To get started, just get an account set up and start saving money each month. You might not be able to have six months of expenses saved right away. Start small – even if it’s only $100.
You can set up an allotment or an automatic transfer to start building it up $50-$100 per month. It’ll build over time.
A great way to get started is to just go around the house and sell some unused stuff you might have. You can also pick one expense to cut and start putting that money toward an emergency fund instead.
Final Thoughts
The main thing I want you to take away is how important it is to have some type of buffer between you and being dead broke. You don’t want to put yourself in a bind where the only thing keeping food on the table is taking out a loan or using the credit card. You’ll dig yourself a hole really quick – ask me how I know.
You always have the option of utilizing one of the military aid societies for no-interest loans or free grants if you’re in a bind. Definitely use these before you max out a credit card or take out a loan. I have links to all of them on my resources page.