What Is An Emergency Fund?
An Emergency Fund can be defined as a lump sum of easily accessible cash when, not if, an emergency happens. In the United States, 60% of Americans can not afford an unexpected $1,000 emergency expense. An Emergency Fund exists to properly plan for life’s unexpected emergencies that would keep you up at night otherwise.
It is commonly advised that the size of an Emergency Fund be 3-6 months worth of minimum expenses. As a servicemember, especially when first starting out, we can aim for 2-3 months of expenses and adjust from there.
The ideology behind 3-6 months worth of expenses comes from the very real possibility of losing your job. Fortunately, unless you plan on getting out of the military relatively soon, you have a bit more job security compared to the average American employee. This makes 2-3 months worth of expenses a realistic initial goal, especially if you have significant debt that you need to pay off.
What Is An Emergency?
If you have a sound budget, you have successfully prepared for things you can expect. You can plan for an oil change for your car or for a dream vacation. Then, there are things that you cannot plan for.
Simply put, an emergency can be described as a unplanned necessity that is otherwise outside the budget.
One personal example is of the car I recently purchased. Shortly after I bought my car I was cutoff on a merge and sideswiped a construction barrel on the highway. Unfortunately, my passenger side rearview mirror is now somewhere in Maryland. Although the mirror was not very expensive to replace, it turned out that the car needed an additional $2,500 in repairs! My Emergency Fund was the difference between covering the repair cost versus $2,500 in credit card debt.
A more extreme example would be in the event of a government shutdown. According to the Department of Defense, the military, along with essential civilians, are not paid until funds are appropriated. Servicemembers still earn their paychecks, but do not receive them unless and until a new spending bill that includes backpay is passed. If you do not have an Emergency Fund to fall back on, you are going to seriously struggle in a situation like this. In this case, an Emergency Fund can be the difference of peace of mind versus being unable to feed yourself without going into unnecessary debt.
Where Should You Keep An Emergency Fund?
The ideal place to deposit money into your Emergency Fund is wherever you can maintain immediate access to it in case of emergency.
Personally, I keep my Emergency Fund in a High Yield Savings Account. This way I maintain immediate access to my money and I earn a little bit more interest than with a traditional savings account. A regular checking or savings account is also an appropriate place to hold your Emergency Fund.
Holding an Emergency Fund in Certificates of Deposits, Bonds, or Stocks may not be the best idea. The primary reason is because of accessibility. Liquidating stocks may take a few business days, and bonds and CDs lock your money away for months at a time. I believe it is best to sacrifice the potential interest for the guarantee that you are immediately covered when the need arises.