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Creating a real Emergency Fund

One of the most difficult things for many military families to do is establishing an emergency fund of cash. It’s often easier for them to put money into retirement accounts because the money is “untouchable.” It seems that day to day life is full of “emergencies” that drive us to tap into our hard earned reserves.

The fact is that most of the time these are not actual emergencies, but deviations from our planned expenditures. The lawn furniture was “on sale” or the flat screen was “on clearance” and there goes the emergency fund.

To combat this situation, consider purchasing savings instruments that are more difficult to cash in easily, but still offer you the ability to access your money in actual emergencies.

1. Bank CDs. Certificates of Deposits are short-term loans you make to your bank. They are tied up for various maturities depending on how long you’re willing be without immediate use of the money. While these instruments are paying very low interest right now, they achieve the goal of keeping your emergency fund safe and accessible in actual emergencies. If you must get to your money before the maturity date, you often sacrifice the low interest rate return. (Check with your bank to understand the early redemption penalty.)
2. Money Market Mutual Funds. These funds are sold through banks, credit unions, and brokers and offer you continuous access to your money without sacrificing the interest. The mutual fund will give you a debit card and checkbook. Put these in a safe place, and only use this access in actual emergencies.
3. Savings Bonds. US Treasury Savings Bonds offer us the advantage of government insured bonds with no cost to purchase. Savings bonds must be held for 6-months before they can be redeemed, so they provide you a barrier to immediate use. I bonds currently pay almost no interest, but if we see inflation beginning to appear, these bonds will keep pace with that rate.
4. Roth IRA. If you think you can’t save enough to fully fund your Roth IRA because you have to save money for your emergency fund first, you might be able to kill two birds with one stone. According to Ray Lucia, a nationally syndicated radio and television talk show host, Roth IRA contributions can be taken out tax and penalty free. Only gains in these accounts are subject to tax and penalty. (Rules are slightly more restrictive for Roth conversion accounts, so check with your accountant or a tax professional before you make a move out of your IRA).
5. TSP loans. This idea goes along the same lines as fully funding your Roth IRA instead of splitting contributions between the IRA and a separate emergency fund. In this case you save as much as possible in the Thrift Savings Plan, and then borrow money from it (you can withdraw 1/2 of the value of the account up to $50,000 as long as you pay it back in 5 years.) The pitfall in the civilian sector is that such loans must be paid back within 60 days after you terminate employment for any reason (like being laid off). When times are tough you might find yourself out of work at the same moment as you are experiencing an emergency! In the military, however, with set enlistment and established “Dates of Separation” the risk is much lower. (At the same time, these are interesting times for military members, particularly those with either 20+ years of service or less than 4. I have had colleagues receive notice that their services were no longer required within just a few months of their retirement dates. This technique is most appropriate for mid-career officers and NCOs.

In each of these examples, the objective is to create minor obstacles to liquidity in order to ensure that the money will be available for actual emergencies. They also provide opportunities for long term savings that will benefit you years into the future.

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