Emergency Funds: The First Step to Financial Freedom

Some expenses are predictable: car registration fees, cable bills, membership dues. And then there are those that blindside us: emergency travel back from an overseas duty station, car accidents, pet illnesses. Military families can prepare for predictable expenses by having a spending plan [LQ1] or budget in place. The best way to plan for unexpected bills is to build, and maintain, an emergency fund.

Why emergency funds are important

A study by the Federal Reserve showed that 41 percent of Americans would have difficulty covering a $400 unexpected expense. This means that one of life’s little speedbumps, like a badly damaged tire, could cause over a third of Americans to plunge into financial difficulties. Most respondents said they would be forced to take out a loan or sell something. An emergency fund, then, can serve as a safety net between military families and debt or financial hardship.

What is an emergency fund?

An emergency fund is a dedicated amount of money set aside for emergencies. The key word here is “dedicated.” It’s best to put funds in an earmarked bank account separate from the general account for paying bills. That way, there’s less chance of dipping into this fund for everyday needs or wants.

The size of the emergency fund will differ from person to person. If a family has high monthly expenses, such as a mortgage, car payments and daycare, they might only feel comfortable with three to six months’ worth of expenses sitting in a bank account. A person with lower expenses who perhaps lives in the dorms or barracks might feel that $500 to $1,000 is sufficient. The right amount for you is whatever amount allows you to rest easy at night.

The fund should also be liquid, meaning immediately accessible. It should not be in a certificate of deposit or other banking product that might charge a steep fee or penalty if withdrawals are made. It also shouldn’t be in the form of collectables that would have to be sold; Aunt Sally’s china collection and Grandma’s sterling silver do not make for a good emergency fund.

How to build a rainy-day fund

One way to quickly build a fund is to set aside part of a bonus or income tax refund. If it’s not possible to set aside the entire sum at once, though, the fund can be saved up slowly. Even $25 per paycheck will add up over time.

Building a fund should be a top priority — and should even come before making extra debt payments or contributing to retirement or education accounts. Once the fund has been amassed, then it’s perfectly fine to resume saving for other goals.

If you dip into your fund because of an emergency, and no, a smartwatch is not an emergency, then you need to prioritize building it back up. A spending plan and the size of the emergency fund should be reassessed periodically, especially when you have lifestyle changes such as a marriage, promotion or the birth of a child.

When the unexpected happens

Even the largest of emergency funds can eventually run out. If this happens, there are still places for military families to turn rather than seek out high-interest loans or other types of predatory lending.

Installation personal financial managers or personal financial counselors can help create and manage a spending plan and are a trusted source of information when there’s a sudden financial challenge.

Military relief societies, such as Army Emergency Relief, Navy-Marine Corps Relief Society, Air Force Aid Society and Coast Guard Mutual Assistance may be able to provide active-duty, reserve and retired military families with financial assistance for situations like emergency travel, car repair or medical issues. Assistance often comes in the form of an interest-free loan or grant. Banks and credit unions may be another place to turn.

The first step to financial freedom

Setting up an emergency fund is the first stop on the road to financial freedom. With a dedicated rainy-day fund as a buffer against life’s unexpected hurdles, military families can successfully plan for their short- and long-term goals.

And remember, you have accredited personal financial managers and counselors at your fingertips. Set up a no-cost appointment at your nearest Family Center to learn more about creating an emergency fund.

Follow the Office of Financial Readiness:

• Facebook:

https://www.facebook.com/DoDFINRED

• Twitter:

https://www.twitter.com/DoDFINRED

• Instagram:

https://www.instagram.com/DoDFINRED

• YouTube:

https://www.youtube.com/channel/UCg0MPnnOV4wVimcGH1i-T8Q

[LQ1]Link to Financial Management blog