How to Tackle the Emergency Fund

CNBC published an article in January with a sad statistic: 60% of Americans cannot pay for a $1000 emergency such as an emergency doctor visit, car repair, or other emergency by using their savings. That means 60% of Americans are just a few weeks away from bankruptcy if they lose their main source of income.

If you hover around any personal finance forums, you have seen someone mention the Emergency Fund. Most people I’ve interacted with know about the concept, but usually it is executed poorly. Let’s fix that.

Defining the Emergency Fund

The emergency fund is just another word for a savings account that you use for emergencies. This is money we’ve set aside for the proverbial “Oh shit!” moment. Life is not about if things will go wrong, it’s about when they will go wrong. Something completely unpredictable or unplanned will happen to you. You’ll get into a car accident. You’ll get fired or laid off. Your cat will scare a squirrel up a tree, that squirrel will run out on a limb on said tree, put too much weight on a limb, cause that limb to fall down, bust a hole in your roof, and then fall on your cat.

That’s right. Your life is going to be shitty sometimes, and you need to be prepared for it.

Why do you need a savings account for emergencies? Don’t you have a credit card for that? 

Right, because spending money you don’t have at a rate of 20% interest, which you can’t afford, is a good idea.

Wrong. “I didn’t know it was going to happen,” is never an excuse to use a credit card. Abandon that idea immediately. You need a store of cold, hard cash available to float you in times of need.

What Should You Use Your Emergency Fund For?

Different people define emergencies in different ways. Some people think it’s an emergency when their iPhone breaks. Other people don’t think it’s an emergency when they might have broken their foot after falling down some stairs. Different strokes for different folks.

I know I said “unplanned” earlier as an emergency, but I’m going to retract that now. In your finances, you shouldn’t have “unplanned” expenses. Christmas has been happening for a long time. Just because you forgot to include someone in your thoughts doesn’t mean it’s an emergency.

That also goes for routine maintenance on your car. Go look at your tires. Is the tread low? Can you already see the top of Abe Lincoln’s head when you put a penny in it? If it’s close, you know that you’re going to have this large expense in a few months. So you should start saving for it now.

If none of that stuff counts, what does?

Emergency funds are for things that are not predictable. Medical expenses. Dental expenses. An UNEXPECTED car maintenance issue. Maybe you got fired or laid off. You could also use to to buy a flight last minute if you’ve lost a loved one.

These are all very reasonable. In fact, you should use this money for those things. That’s what it’s for.

How Much Money Should I Have in My Emergency Fund?

Your first goal should be around $1,000. This will prevent you from having an immediate crisis for a smaller issue. What’s the overall goal, though?

In the reserves, we’ve got three groups of people: AGR, ADOS/ADSW, and M-Day (that’s someone who just shows up to drill for all you active duty folks). My rule of thumb is this:

If you’re AGR/Active Duty, with a good, stable income, 3 months of expenses should be fine. This should cover any emergencies and cover you for the time being if there’s a hiccup in pay or you have an unexpected expense.

If you’re ADOS/ADSW, which means you’re on active orders, but can be fired, you should have closer to 6 months of expenses. Why so much more? Because year to year, you may not have a job. A lot of factors can affect that, and you know that every September, soldiers start getting a little antsy about next year’s budget. You should be ready for this before it happens.

If you’re M-Day, it’s going to depend on what type of employment you have. Do you have a cushy government job where you have all the job security in the world? 3 months of expenses might be just fine. Are you a contractor and work for 6 month stints here and there? You may need up to 12 months of expenses.

Ultimately, you need enough money in that account that you can sleep well at night.

Note here that I’m saying expenses, not income. While it’s a lofty goal, saving up to your income is not usually necessary. The key here is that you need to know what your expenses are. Ball-parking it is completely unacceptable when it comes to your financial future. 

Write. It. Down. For this purpose, I recommend creating two budgets. One is what you typically spend on a month-to-month basis. Multiply this number by 3, 6, or however many months of stability you’re trying to achieve. That’s your Emergency Fund Savings Goal.

The other budget is a complete austerity budget. Cut everything you don’t need to survive. Entertainment, cable, dining out, morning coffee. This budget is bare-bones survival. This is handy to have just in case, so you know for how long you can stretch your emergency fund.

Don’t put Your Emergency Fund in Your Primary Bank

One of the biggest mistakes people make with their emergency fund is putting it in their primary bank. I know, it’s soooooo convenient to have the balance right beside your checking account, but personal finance isn’t all about numbers. It’s about controlling your behavior and emotions.

Put that money in another bank. I recommend picking a High Yield Savings account at a reputable bank to store it in. Your bank probably offers terrible interest rates, and current rates for a High Yield Savings can be above 2% as of the writing of this article. It’s not much, but it means your fund will be adjusted for inflation

Out of sight, out of mind is the rule when it comes to emergency funds. Set it up your monthly transfers to it, set your goal, and then forget about it. 

How to Build the Emergency Fund

$1,000 or 3 to 6 months of living expenses may sound like a hurdle at first, but the important part isn’t the speed at which you build it, but that you start building it. Even $50 a month is a good start and will start you on the path. Making little decisions now will pay dividends later. Especially if you use a High Yield Savings account.

Refer back to the budget you created while building your monthly expenses. Hopefully, your monthly expenses are less than your income. If so, identify a portion of your leftover income, and automatically allocate it to your emergency fund. Doing this automatically is key; I’ve noticed over my financial history that I save way more when I remove myself from the process.

Once this is on auto-pilot, quit thinking about it. Let it build in the background while you focus your energy on optimizing other parts of your finances.

Got something else to add?

Write a comment below about a misconception you had, or something you’d like me to add as an article! You can also e-mail me at ReserveFI@gmail.com

4 Reasons Why I love the Reserves

I’m a strong believer in not looking a gift horse in the mouth. I know a ton of service members who view their time in the reserves as a place to pass time and hopefully get out one day. While they view their time in the service as an inconvenience, I’ve always seen it as a way to develop my education, career skills, leadership, and my finances.

Here’s why.

#1. It’s a Part-Time Job with a Pension

Did you hear about the new pension McDonald’s was now providing their cashiers who work nights? How about the car wash down the street, for their weekend workers? Yeah. You didn’t. Because it doesn’t exist.

While the pension for us M-Day service members may not be quite as glamorous as the High-Three, 50% of your base pay for life that Active Duty members receive, it’s still a good benefit. The dirty secret about the reserve component is our “time in service” doesn’t stop when we “retire.”

Upon retirement, most reservist enter into the Retired Ready Reserve, where you don’t gain any additional retirement points. Your overall time in service keeps ticking, though. If you enlisted at the age of 18 and don’t pull your pension until age 60, you have 40 years of creditable service. Assuming you ended you career at 20 years with 1800 retirement points, that’s 5 years of creditable service, which works out to 12.5% of your base pay. For an E-8 with 40 years, that’s $774 a month. That’s nothing to sneeze at.

Where Active Duty personnel pull their numbers from the middle of the pay charts, ours are all the way to the right.

#2. Your Insurance Woes are Over

I’ll keep this blog as non-political as possible, but I think it’s fair to say our healthcare is a bit of a soup sandwich. Regardless of your opinion on how to fix it, Tricare Reserve Select is one of the lowest cost healthcare plans on the market right now. As a guardsman, you get the benefits of subsidized healthcare without having to deal with Military Treatment Facilities and the associated referrals. All for the low cost of <$250 for a family.

This gives you major flexibility in your job selection in the civilian sector. You’re able to take a job at a smaller firm without great benefits, scratch your entrepreneurial itch, or do some independent contracting without worrying about a fall costing your $20,000, plus income.

Further, once you hit 20 years, you’re eligible for Tricare For Life in your retirement. One of the largest unexpected costs in retirement is medical expenditures. If our healthcare situation hasn’t been fixed 30 years from now, this retirement benefit will help you protect your assets from an illness that’s out of your control.

Thanks, Uncle Sam.

#3. Paid Job Training

Although it’s my opinion that youngsters should go active duty for a few years before transitioning to the reserves, the job training aspects in the military are awesome. Where else will an organization take someone with just a high school diploma and teach them to speak foreign languages, manage computer and network infrastructure, and perform maintenance on aircraft or tracked vehicles? Oh, by the way, they pay you to do it, too.

This is nuts! It’s awesome. Also, the guardsmen are notorious for having multiple MOSes/Rates while serving. A service member can easily volunteer to attend additional training to pick up an additional job skill identifier. This benefits your military career by making you more versatile while serving your civilian career by developing your skill sets.

#4. Pivot from a Civilian Job

Stuck in a civilian job you hate? I’ve been there. You don’t have one career as a reservist; you have two. Side by side, your civilian career and military career are often in conflict.

Use them to feed each other, instead. I was in a rut in a civilian career and realized I was in a field where I was competent, encouraged, and completely unhappy. I just couldn’t see myself doing that job for 20 more years.

Some old contacts offered me a position on temporary orders and it turned into a longer-term gig. Not only did I end up in a lower-stress job, I also got a 50% pay bump, worked better hours, and more than doubled my paid time off.

While temporary orders don’t lend themselves to job security, they do allow you to develop new skills through new opportunities. Over the course of the past few years, I’ve started developing skills that will make me very employable in the civilian world. Additionally, I’ve been able to place myself into new fields within the military. That’s a win for the service and a win for me.

Final thoughts?

The military is a powerhouse of opportunity for someone beginning their career, trying to develop it further, or someone playing the long game with pensions. If you play your cards right, you can enter into an exciting career field with no training, no education, and no work experience and end up with all three in just a few years.

You know what else is funny about this list? I didn’t even mention college benefits.

GOT SOMETHING ELSE TO ADD?

Write a comment below about a misconception you had, or something you’d like me to add as an article! You can also e-mail me at ReserveFI@gmail.com

The Top 5 Misconceptions about the Thrift Savings Plan (TSP)

One of the most powerful financial vehicles for service members is the humble Thrift Savings Plan (TSP). It’s also one of the most misunderstood. In a culture where pensions are the norm, many people don’t understand the power and versatility of TSP. Let’s highlight a few of the major misconceptions.

Misconception #1: TSP is a Pension

A pension is a regular payment from a fund that your employer manages. They put aside money periodically and invest it so that you can benefit from regular income in your retirement. While service members and federal employees have access to pensions upon retirement, TSP is not that pension.

TSP is a 401K for federal employees and military service members. The money that funds your TSP is your own, possibly with a match if you are participating in Blended Retirement System or the Federal Employee Retirement System.

Misconception #2: The Military Owns Your TSP

TSP is your money. This is your investment account. All of the grow in the account, minus some minor fees, is all yours. Your chain of command cannot take money out of your TSP. They have zero say in how much money goes into your TSP or in what funds you decide to place your TSP funds.

When you leave the military, you take all of the money and rights in your TSP with you. That’s right – even if you don’t put in 20 years, you still get to keep this money. That’s why I love the new BRS so much. You can leave the service and STILL have something to show for it, even if you decide not to be a lifer.

Misconception #3: You just put money in it, That’s it!

This misconception isn’t all wrong. Yes, you put money into TSP and it grows, tax free, without your involvement. Largely, that’s because it’s invested in the G Fund by default. The G Fund is invested into US Treasury bonds, and as of the writing of this article, has a 10-year return between 2-3%. While this doesn’t grow very quickly, it manages your downside risk quite well.

A number of other funds are available to you, including stock market index funds, corporate bond index funds, and target date retirement funds. Each of these funds exposes you to greater short-term risk, but they also expose you to greater gains. You can just put money straight into the G fund, but it’s worth doing a bit of research to see which of these funds will work best for you in your current situation.

Misconception #4: It’s free!

While many 401K’s have funds with high fees, TSP does not. It’s not free, either, but that’s okay and very normal. The main fee to pay attention to in retirement accounts is the expense ratio. These fees exist to pay for employees, computers, and the taxes associated when the fund buys and sells stocks or bonds. The market average for mutual funds is around .75%. This means that for every $100,000 in those mutual funds, you pay the funds $750 a year.

TSP’s expense ratios are far, far below the market average. That same $100,000 invested into any fund in TSP only costs you $40. While it’s not free, it’s pretty damn close.

Misconception #5: Just contribute to the match, that’s enough

FERS and BRS both provide a 5% match. For the first 5% that you put into TSP, you’re effectively doubling your money. Immediately. That’s 10%! The downside is this isn’t enough. If you’re planning on having a 40 year working career from 25 to 65, you should be contributing a minimum of 15%. If you’re getting a late start, it’s probably higher than that.

If you’re planning on working a full 40 year career, take the time to project what your pension will look like, what your social security benefits will look like, and then determine how much of a TSP balance you’ll need to maintain your lifestyle. A good rule of thumb is 25x your current expenses, minus any yearly benefits from your pensions or social security.

Got something else to add?

Write a comment below about a misconception you had, or something you’d like me to add as an article! You can also e-mail me at ReserveFI@gmail.com

Quit “Saving” for Retirement

When one doesn’t grow up affluent, they usually get really crappy money advice. Kids hear all the time that you have to save for retirement, but most of that advice surrounds poor savings and investment choices. In addition, the advice either falls into the “Strike it Big” category or the “Play it too Safe” category. The first one will result in nothing saved in retirement and the latter will result in not enough saved for retirement, but for well-intentioned reasons. Let us look at both approaches.

Strike it Big!

I like to call this one the Redneck Retirement Plan. You play the same lottery numbers every day for 30 years and through a complete misunderstanding of probability and statistics, you might win $100,000. Alternatively, you hear about the stock market and decide to pick the next Google, Amazon, or even better, Bitcoin, and turn $100 into $1,000,000. You can retire on that, right?

If this worked, we wouldn’t have poverty in America, and we wouldn’t be crying over raising the retirement age for Social Security recipients. The probability of picking the next big technology company is close to the probability of winning the lottery: almost zero. Should we play it safe, instead?

Playing it too Safe

One of my earliest investment memories is calling Fidelity to discuss the FDIC coverage of my Roth IRA account. Upon learning that the federal government doesn’t insure investment accounts (I was a little young and naïve, sue me), I felt that I had signed up for an online scam. I talked to my middle aged coworkers to discover the wonderful land of Certificates of Deposit (CDs). They have a guaranteed return with FDIC insurance! There’s no way to lose! I can use these to retire!

Pump the brakes, soldier. Yeah, you can’t lose anything, but you can’t make anything, either. A quick google in September 2019 shows that CDs are paying out a whopping 2.30% to 2.45%. The inflation rate in 2018 was 2.44%! That means I would’ve broken even!

Furthermore, the return on this would mean I would have to save 50% of my income for 30 years just to get the pleasure of living off that same 50% of my income, adjusted for inflation, for another 30 years. This is a garbage deal. Retirement accounts need growth.

The Solution

Saving 50% of your income is admirable. In my opinion, it’s a very good strategy for setting yourself up for having a solid retirement at an early age. Where do we get the growth we crave, though? We must invest our money to get the proper returns.

A number of asset classes are available that will produce a return that you can build upon and retire on. If you’re branching out into investing into stocks, bonds, real estate, or some other investment choice, make sure you do your research. Because the risk of losing your capital is so great with more specific investing, I recommend taking 12 to 24 months to educate yourself on the risks and benefits of those techniques.

The easiest way to get those returns is putting your savings in the Thrift Savings Plan (TSP). There we have access to a number of funds that have produced returns much larger than 2-3% a year for several decades. The C fund has boasted over a 10% yearly return since 1989. If you feel stocks are too risky, look at the F fund, which has produced a solid 5-6% return since it began several decades ago. Finally, if you don’t want to think about it, you can throw your cash into a Lifecycle fund in TSP and forget it exists.

If you don’t have a TSP, go to MyPay and set it up today. Follow the prompts on the screen to start your contributions. If you’re worried about missing the money, start at 3%. You won’t miss the six pack, I promise.

Welcome to Reserve FI!

Reserve FI was born from a series of career and finance discussions in my office. Military members are notorious for making mistakes with both. As an avid reader and personal finance aficionado, I found myself being the go-to guy for my peer’s personal finance questions. Through working as a reserve component NCO, I found myself mentoring my subordinates on college, their military careers, and their civilian careers.

Military resources, in general, suck. The websites are usually old, obsolete, and full of vague information. My goal for this site is to turn it into a hub for educating service members on personal finance, using their reserve career to fuel military and civilian career paths, and how to best use their military benefits to pursue entrepreneurship.

Like you, I’m constantly learning. I’m NOT an expert, but I AM willing to learn, fail, and repeat until I get the results I desire. I’m going to catalog my knowledge, research, and personal experiments here. My hope is that you find a great deal of personal value in this site, and you share this site with your fellow service members.

-RFI