If you’ve spent much time watching football at some point you’ve heard the following from a football coach…”We need to concentrate on Blocking and Tackling and then the wins will come.” What does the coach mean by that? Well, I’m not an expert on football but I’m pretty sure the coach means that without solid basics you can’t try the fancy plays and you can’t win games. The same applies to your financial future. Don’t even try the fancy “plays” like precious metals, leveraged ETFs, options or even stocks and bonds until you have your financial blocking and tackling in place. If you do try the fancy “plays” first, you’re setting yourself up to “lose” when it comes to your financial future. So just what is the blocking and tackling of your financial future? There are a couple, but the first one you need to get in place is your Emergency Fund. I know, Emergency Funds are boring…they’re not exciting to talk about at a cocktail party. But just like blocking and tackling in football, an Emergency Fund is essential.
There was a time, about 10-15 years ago, that I didn’t really think that an Emergency Fund was that important for a military member. If you were on active duty and did a reasonably good job you had solid job security. Now, that is not necessarily true. Within the last week I’ve read articles about the USAF conducting a Reduction in Force (RIF) and planning a Date of Separation (DOS) rollback. Folks affected by these boards will get about 6 months’ notice and will then be out of uniform and looking for a job in a pretty tough job environment. As forces return from the Middle East and budget pressures set in, I’m fairly confident that we’ll see more force shaping activities and these activities will affect more and more people. So, do you have an Emergency Fund to carry you through the job transition phase or other scenarios where your income is significantly reduced?
Hopefully, the discussion above convinces you that you need an Emergency Fund. But how big should it be? Well, the conventional wisdom is that an Emergency Fund should have enough money in it to cover your expenses for about 6 months. That is probably a minimum. In today’s job environment, you may want 9 to 12 months’ worth of expenses. Now, remember we’re talking about covering your expenses not replacing your income. Some things you won’t have to pay or that will be significantly reduced are income and payroll taxes, expenses associated with your job like dry cleaning uniforms and commuting to work and you will probably want to reduce the amount you spend on optional expenses like dinners out and entertainment. On the other hand, you’ll probably need to budget for job hunting expenses. The bottom line is that you will need to look at your budget and figure out how much money you need if you don’t have a job. Once you figure out how much you will need, you need to do the really hard part…figuring out how you will fund the Emergency Fund.
I don’t know about you, but for me for most my time on active duty, the money was pretty much gone at the end of the month. I didn’t feel like I had a lot of opportunity to save or invest. So, what I did was every year, about this time, was I would look at what the planned pay increase would be come January 1. I would then take a portion of that and automatically send it to a savings or investment account before I ever got used to having the money. I used both payroll deductions and automatic transfers from my checking account. Since I didn’t invest the total amount of the raise I still had some extra spending money and I was saving towards my long term goals. I did the same thing when I got a promotion or a longevity raise. It does work. Finally, once you make the commitment to saving the money for your Emergency Fund, you need to decide where to put the money.
Generally speaking you want to put your Emergency Fund money in a very liquid account with little to no risk. By that, I mean when you need the money you need to be able to get it now and you want to be able to get out the money you put in without investment losses. Typically, Emergency Funds are invested in Savings Accounts and Money Market Mutual Funds. You can also consider putting a portion of the funds into short-term CDs to earn a little extra interest but you might incur an interest penalty if you withdraw the funds before the CD matures. Once you get the money going into your account, you are on your way.
Sorry, this post isn’t about the triple reverse, razzle dazzle investment “play”. But just like those coaches that focus on getting the blocking and tackling in place first, if you put an Emergency Fund in place first, you’ll be well on your way to success for your financial future.
The information contained in this blog is for general financial education and should not be construed as individual financial advice. Please consult your own financial, tax or legal advisor prior to applying any principles discussed here to your own financial situation.