Emergency Funds: Why They Matter More Than You Think

Welcome to Military Wealth Coach, where we guide service members like you on the path to Financial Freedom. Today, we’re diving into a crucial topic: emergency funds. Many people underestimate the importance of having an emergency savings account, but it plays a vital role in ensuring financial security, especially for those in the military. Let's explore why emergency funds matter more than you think.

What is an Emergency Savings Fund?

The Emergency Savings Fund (ESF) is a stash of money set aside to cover unexpected expenses, aka "financial emergencies." These expenses can range from sudden medical bills, car repairs, home maintenance issues, or even unforeseen travel costs. They are not for "IRL emergencies" -- only when whatever happened causes the potential for financial hardship.

Here's an example: you drop your phone in Lake Havasu while on leave and need a new one. If you have an extra $1,500 in your checking account, this is not a financial emergency, so just buy the phone with the cash you have on hand. On the other hand, if you have $0 in your checking account and the only way to get a new phone is to take a PayDay loan or finance it, you have a potential financial emergency and should dip into your ESF.

Taking on debt is the biggest threat to achieving your financial goals, because suddenly you incur another monthly bill and end up using money you planned to save in order to pay off the debt. That means the main purpose of your ESF is to stay out of debt. The goal is to have a financial cushion that helps you navigate these surprises without derailing your overall financial plan.

Why Emergency Savings Are Essential for Financial Security

1. Protection Against Unexpected Expenses: Life is unpredictable. Whether it’s a family emergency or a broken appliance, unexpected expenses can crop up at any time. Having emergency savings ensures that you’re prepared to handle these costs without resorting to high-interest loans or credit cards.
2. Peace of Mind: Knowing you have a financial buffer can significantly reduce stress and anxiety. This peace of mind is invaluable, allowing you to focus on your daily duties and long-term goals without constantly worrying about potential financial setbacks.
3. Maintaining Financial Stability: An Emergency Savings Fund helps maintain your financial stability by preventing you from dipping into your savings or investments for routine expenses. This stability is crucial for building wealth over time, as it ensures that your long-term financial plans remain on track.

The Unique Financial Landscape of Military Life

Military life comes with its own set of financial challenges and uncertainties. Deployments, relocations, and changes in duty stations can all lead to unexpected expenses. Here’s how your ESF can specifically benefit military personnel:

1. Covering Relocation Costs: While the military provides some support for relocations, there are often additional costs that can arise. Worse, is you have to pay the bill up front on your Government Travel Charge Card (GTCC) and wait for your service to pay you back. The last thing you need is to wind up with credit card debt and take a hit on your Credit Score because of your job! Emergency savings can help cover these out-of-pocket expenses, making transitions smoother for you and your family.
2. Unforeseen Travel: You'll be stationed all across the globe, making an unplanned trip home in response to a Red Cross Message way more expensive than what a "normal" citizen might have to cover to support their family. Just like PCS costs, you'll need cash to cover the major out-of-pocket expense without having to take on a loan or rack up credit card debt.
3. Supplementing Gaps in Military Pay: Let's face it, DFAS makes mistakes -- and your unit's admin shop definitely makes mistakes. There may be times when your pay is delayed or even dead wrong, like not getting Basic Allowance for Housing (BAH) switched on or updated to the right location, leaving you thousands short for months. Emergency savings can provide a financial bridge during these times, allowing you to stay on top of your bills and commitments.

Building Your Emergency Savings Fund

In the military, your Emergency Savings needs are NOT the same as they are for civilians, so you've got to throw out the advice you've heard from your friends, parents, co-workers, and even social media. So, how do you start building an emergency fund? Here are some practical steps:

1. Set a Goal: You must have enough cash to cover your emergencies, and have enough if more than one happens at the same time. That means that if you are driving home to see a sick family member and your car breaks and you lose your phone, you may need $10,000 or more in order to pay for the trip, buy a new car, and replace your phone. This has nothing to do with the conventional wisdom applied to civilians of "3-6 months income."
2. Automate Your Savings: Set up an automatic transfer to your Emergency Savings Fund each payday, and don't stop until you reach your goal. This ensures consistent contributions and reduces the temptation to skip a deposit. But once you reach your goal, you can turn off the automatic transfers and start using that money to save cash and start investing!
3. Start Small: If saving a large sum feels overwhelming, start with smaller, achievable goals. Even saving $500 to $1,000 can make a significant difference in handling minor emergencies.
4. Use a Separate Account: This is absolutely critical for two reasons: (1) you  CANNOT steal from your Emergency Savings Fund, and (2) you must protect it from losing value over time. Open a High Yield Savings Account (HYSA) for your Emergency Savings Fund, and make sure it is not connected to any accounts and only has a single way to access it (checkbook or debit card). This prevents you from dipping into it for non-emergency expenses, ensures you can access the money quickly when needed, and earns an Annual Percentage Yield (APY) of 4-5% so it keeps up with inflation.

If you buy or download our book Service and Wealth: Ten Proven Money Habits to Master Your Finances in the Military you'll find specific guidelines and handy charts that help you plan exactly how much you need to save based on your age, rank/grade, and life situation. We also walk you through the process of opening and managing a HYSA. For more, download our courses, or sign up for coaching for 1-on-1 help planning for all of life's possible emergencies.

Conclusion

An emergency fund is more than just a financial safety net; it’s a cornerstone of financial security, especially in the unpredictable world of military life. By prioritizing emergency savings, you can protect yourself and your family from destructive debt, maintain financial stability, and achieve greater peace of mind.

At the Military Wealth Coach, we’re here to help you navigate the unique financial challenges of military service and build a secure, prosperous future. Start building your Emergency Savings Fund today and take the first step toward financial freedom.

Thank you for reading, and stay financially secure!