Cracking the Emergency Fund

[kork13]

I'm hoping we can steer clear of politics ... but unfortunately this situation is mired in it. As a military member, unless a sudden deal is struck within the next couple days, I won't be getting my mid-month paycheck (along with hundreds of thousands of other servicemen, let alone all of the federal civilians who have been furloughed). And all indications are showing that this may end up going on for an extended period of time.

I ran my spending estimates tonight for the rest of October, and seeing the resulting red numbers, I started taking evasive action. Alot of my non-retirement automatic investments are now put on hold -- gratefully, that one change relieves most of my immediate cashflow problem due to how much of our income we invest. That plus our $2k-$3k float in checking should get us through the end of October without going into the red ... But if this madness continues even longer than that, it starts to get uglier.

I keep 2-3 weeks' expenses as a float in our savings account ... so that can probably see us through mid-November. But at that point, I'll have to start peeling open layers of my emergency fund. First layer is $5k cash, in a set-aside savings account. Next is $20k in I-Bonds, which I'd rather not have to cash in. Next up is my taxable investments ... there's plenty there, but I've already depleted those significantly over the last year, so I'm loathe to break into those again.

I haven't been able to talk to my unit yet (mostly 19-25 y/o, half of them married with kids) about how they're going to handle all of this. Some military-focused banks (USAA, Navy Fed, etc.) offer 0% loans to match their normal direct deposit amounts, allowing for low disruption. But only about 30-40% of people use one of those. The rest ... woof. I expect that some of them have savings set aside, but I'm confident that not all of them do. As a unit commander, ensuring that my people & their families are okay is going to be a significant challenge.

This is mostly just me thinking through this problem ... But until then, it's gonna start to hurt, and fast. I've generally viewed myself as low-risk as a military member with a very steady paycheck, and thus I have my EF less liquid than might otherwise be advised. But it's stuff like this that makes it clear that those assumptions are not always valid.

Have you ever actually had to crack open your emergency funds? What were the circumstances?

[ua_guy]

Thinking good thoughts for you and your unit, Kork, the US Military at large, and anyone else caught up in this mess.

I'd agree this is the kind of event which emergency funds are designed for. This would be a good financial and life-skill teaching opportunity if you're able to talk to your unit about strategizing for the future, should this happen again. Because it probably will. But that doesn't solve the problem of how to help them right now if they're unprepared. That's going to be really tough if a resolution isn't passed quickly.

[LivingAlmostLarge]

Thinking good thoughts as well for you and everyone involved to get paid!

Well first time we took a year sabbatical (8/205-7/2016) and had it all in cash. We had a guess as to how much we were going to blow and were pretty much spot on with our spending $5k/month. But it took us some time to build all our savings back up. What helped for us was planning for it. We never used our EF outside of that.

Can I make a suggestion for you and feel free to take it with a grain of salt? Opinions like body parts every one has one! hehe

Why don't you have more cash on hand? I ask because I have a "ton" of cash on hand without an EF. Just due to the cashflow of running our household. Every pay period biweekly for us I set aside $3k. $1k goes to Roth IRA savings, $1k goes to sink funds (kids acitvites, car repairs, etc), $1k goes to property taxes insurance (PT $15k, $2k life insurance, auto $8k/year, Home $2k/year). that's $3k x 26 a year that I guess I could invest and pull but it doesn't seem to make sense to me. I probably need to add $1k to a travel fund.

As a suggestion, and you have it why are you investing your Roths/ESA(2000 x 3) monthly? One way to mitigage any of this happening to someone fiscally responsible would be to put the 2 Roths and 3 ESA about $20k into a HYSA for the year, monthly savings and then invest it January 2nd into the accounts. then rinse and repeat and you'd have $20k on tap. I know you are abroad but when you get a house again or a rental wouldn't you have a large cash base? That's what our sink fund is for to cover stuff that pops up. I can't mentally handle the idea of breaking into my taxable accounts and I have yet to do it (knock on wood). But once in it doesn't come out. I don't pull it out for investments or real estate. If I want real estate or an outside investment I better be able to fund it outside what I already set aside. So to me the DCA and sending money to a brokerage is nice monthly, but if I wanted to invest $50k into real estate I'd have it set aside and not pulled. I don't like paying taxes to cash out stuff.

We can honestly cash flow most problems, but right now in capital one we have $40k in an account. Not EF but just cash for stuff and it's low because I literally bought a car about 3 weeks ago. I have multiple layers of defense including $120k ibonds which i guess is my true EF. I'm just building an ibond ladder since we have extra cash and it's turned into our EF. But the first line of defense is the cash in the checking account.

Just a suggestion and one I think would also work better for people who don't have a large asset base or a lot of disposable income and are running lean on an EF or building one. Is to have sinking funds and cash funds set aside for known expenses instead of cash flowing it. I also think for me personally we may be over or short for college, but our cash flow into these sink funds should help cover the differential. This cash means we never touched the EF for a new roof, 2 braces, painting the house, and new car between march and september of this year.

[disneysteve]

You said to steer clear of politics so I delete your political comment toward the end of your post.

The whole thing is a mess, but that's what EFs are for. In my mind, the #1 reason for an EF was to be prepared for any interruption of income. Not a flat tire. Not an ER copay. Loss of income first and foremost.

Unfortunately you have a very small liquid EF. I bonds and taxable investments are fine, but not for emergencies. For emergencies you need cash that you can access quickly and easily without worrying about market conditions. If this drags on, I guess you'll be selling some investments.

[disneysteve]

To answer your question, yes, we have used our EF. In 2000, I quit my job kind of spur of the moment as I hit that "last straw" moment. I did not have a job lined up. I hadn't even been looking, but it was time to get out of there.

Our EF allowed us to continue to live our lives with minimal change until I got a new job 3 months later. During the time I was off, we even took a pre-planned trip to Las Vegas for a medical convention and an un-planned 10-day trip to Disney World since I had the free time suddenly.

I have always kept a healthy EF. Even now, in retirement, we have about 20% of our portfolio in cash holdings.

[Fishindude77]

You are in the exact situation that an emergency fund should be set aside for.
I'm with D.S. I'd keep the emergency fund (3-6 months living expenses) is a simple savings account for easy access. Look around and you can probably find one that generates a little interest on the savings.

Good luck getting through this mess.

[disneysteve]

You are in the exact situation that an emergency fund should be set aside for.
I'm with D.S. I'd keep the emergency fund (3-6 months living expenses) is a simple savings account for easy access. Look around and you can probably find one that generates a little interest on the savings.

Yep. A high yield savings account like Ally or a high yield money market fund like VMFXX is the way to go. Save, accessible, and pays good interest. 6 months of cash is the standard recommendation for good reason.

[Drake3287]

Normally I'd blame someone for not having an emergency fund just for times like this but I certainly wouldn't expect military members like yourself to have that kind of money. Especially younger ones with families. Like Congress and the Senate, military members should be except from not receiving a pay check during these government shut downs. I only hope they get this figured out before the Oct. 13th deadline for the Oct. 15th paychecks. If I had a close friend or relative that was in this position I'd certainly loan them the money until it's over with.

[Jluke]

Is there anything you might do differently going forward once everything settles?

sorry you’re caught up in this situation

[disneysteve]

Normally I'd blame someone for not having an emergency fund just for times like this but I certainly wouldn't expect military members like yourself to have that kind of money. Especially younger ones with families. Like Congress and the Senate, military members should be except from not receiving a pay check during these government shut downs.

Nobody's paycheck should stop because of Congress' inaction. The two aren't related in any way. We know from numerous surveys that 60-70% of Americans live paycheck to paycheck. I'm sure it's that high or higher for Federal workers who are typically paid less than comparable private sector jobs. Most Americans would struggle if they missed a single paycheck. Miss two and people are skipping medication and standing in line at food banks. The designated essential workers, like air traffic controllers, start calling out because they simply can't afford to go to work for free. They have to pull their kids out of daycare because they can't pay the bill. They can't put gas in their cars to get to work. They need to pick up more Uber/Lyft/Door Dash shifts to keep money coming in. The military doesn't have the option of calling out, however. They're stuck working for free no matter what. The whole situation is a disgrace.

[kork13]

I do normally have a little more in cash savings, but when my father & I bought a house for my grandmother, I had to drain most of my readily available cash to minimize the amount I stole from my taxable investments. So in this case, it's just poor timing. And it's not that our EF isn't there -- I could easily cash in our EF I-Bonds, and have the money in my account within 3 business days. That speed of access is why I'm comfortable most of the time to just rely on the buffers that I keep in my accounts, plus the $5k EF cash that stays liquid & reserved. I just don't want to go that route if I can avoid it.

I think the biggest thing I need to change is just rebuilding my cash balances to provide a better buffer against the unknown. For example, my general savings account currently has just ~$5k, while normally it has around $10k-$20k. Likewise, I normally have had $10k+ sitting in MM cash in our taxable brokerage -- that's currently at only $2k.

[kork13]

Today I had to talk with my unit about it all, and it was emotionally draining for me. I know that not getting paid on the 15th is going to be a challenge for many of them, and there's only so much I can do to help them (especially if they don't ask for help & choose to suffer in silence).

[ua_guy]

Today I had to talk with my unit about it all, and it was emotionally draining for me. I know that not getting paid on the 15th is going to be a challenge for many of them, and there's only so much I can do to help them (especially if they don't ask for help & choose to suffer in silence).

Is it simply too late to get paychecks and EFT's out on the 15th, at this point, even if the government agreed on funding today? I don't have much hope for that happening today or in the next 4 days but wasn't sure about the mechanics of how military payroll works.

[LivingAlmostLarge]

Today I had to talk with my unit about it all, and it was emotionally draining for me. I know that not getting paid on the 15th is going to be a challenge for many of them, and there's only so much I can do to help them (especially if they don't ask for help & choose to suffer in silence).

okay I'm going to throw out did you tell them to only pay rent and everything else on the CC? I know it's not the best idea but in a situation where you are stretching dollars pay only the things that absolutely require cash and everything else on credit cards to get sorted out later. Not ideal and I understand the problem with making that sort of suggestion but it's likely what I would tell most people.

But overall Kork do even $10-20k in cash in your general savings do you leave it that low? Is the ibonds your actual ef? I had no idea you could get it in 3 days. I mean $10k would likely be enough for me if I put everything on on CC and then paid it off by the end of the cycle. I find myself becoming less cash efficient as I get older and caring less.

I also find myself not happy with touching my taxable account and seeing it go down. Mentally the idea of pulling money makes me shudder. I know when you retire soon I think you will have large enough pension to cover everything. But have you considered SORR?

i know for me without a pension we need to look at TIPS ladder for 5 years. But it's not something I'll build till a year out. But in general since you have a deadline plan and pension if it's not better to round out the plan earlier?

[kork13]

Our expenses are actually fairly well controlled, and the $20k I-Bonds+ $5k cash is sufficient as our EF -- it's 6mo of essential expenses, and 3-4 months of normal expenses. So those are very much adequate. I'm just hesitant to pull the trigger on cracking it open unless it's absolutely necessary (which I think is the idea of an EF).

For my unit, I didn't tell them specifically how to handle their money or expenses... Mostly just informing them of the likelihood to not get paid next week, discussed a few readily-available avenues for assistance, and telling them to speak up/ask for help if they run into financial difficulty or otherwise (because we do have some options to help them if needed). However, I did briefly mention the importance of keeping some emergency savings for times like this ... Not sure how well it landed, of course, since some of my folks earn a quarter of my income (which is no secret, with our pay tables publicly available). The good news is that some of my youngest, lowest-earning, & least responsible folks still live in the dorms & are still on a meal card, so at least their food & housing is free to them.