Experts often recommend keeping three-to-six months of living expenses as an emergency fund. About to get out of the military? You should probably hold more cash than you do now. While I doubt anyone in the military lost their job or paycheck as a result of COVID-19, there were many civilians who did, including some people who thought they were in recession proof professions, like medical providers. In the end, everyone should reassess their emergency fund due to COVID-19.
There are a few things to take into account when it comes to your emergency fund. First, it is for real emergencies. It is not for when your Playstation 4 breaks, but for when you have a significant and unexpected expense. Things that would qualify would include an insurance claim that requires you pay a substantial deductible (like an earthquake or flood), medical expenses, legal expenses, or loss of a job that reduces your income.
Second, you may have a larger emergency fund than you realize. You can withdraw any contributions (not earnings) you’ve made to a Roth IRA without tax or penalty. You can sell any taxable investments you’ve made. You’d have to pay taxes on any capital gains you have, but if it really is an emergency this might be a reasonable way to deal with it.
You can also use credit. If you have home equity, you may have already set up a home equity line of credit you could tap. Finally, you have credit cards you could use to fund any emergencies on a short-term basis. I wouldn’t recommend that you pay credit card interest because it could be a very high interest rate, but if it is truly an emergency this is always an option.
Third, if you are in the military you have a few significant advantages others don’t have. While you could always get yourself in trouble and get kicked out, you probably won’t lose your job. Being a TRICARE beneficiary limits the amount of out-of-pocket medical expenses you’d be exposed to. Both of these may limit the amount of emergency money you need to keep in reserve. For me, what I call my “emergency fund” is really just extra money I keep accessible for home improvements and repairs, automobile purchases, and vacations.
If you’d like to read my take on the emergency fund, go to 1st Step to Financial Freedom – Establishing an Emergency Fund.