Financial peace for Federal Agents often traces back to one key financial element.
According to MarketWatch, from 1948 to 2007 there were NO fiscal quarters in which the average unemployment was 6.2 months. However, since 2008 there have been 32 quarters in which the average time that people were unemployed was 6.2 months. A clear signal that in current economic times, people are jobless longer. Unemployment is just one of the signs of tough times. Rising inflation, increasing home costs and benefit cuts can really add up to more financial stress and less financial peace for Federal Agents. That is, for those who aren’t prepared. But you aren’t one of those. You are strong. You are resilient. And you’ll prepare for the “just in case” scenario.
As of this past December (2024) the average duration of unemployment was about 5.5 months. That means if you or your spouse were laid off for any reason, you’d want to consider having at least that much in cash reserves to cover your expenses. Recall that your cash reserves are based on your monthly expenses. They aren’t related to your income.
Rules of Thumb
Let’s talk about “rules of thumb” for a second. These are sometimes called heuristics or shortcuts in financial planning. I’m a fan of “rules of thumb”. I think they at least give us a starting point to start thinking about our money. For example, the “rule of thumb” for emergency cash is 3-6 months worth of expenses. Great place to start. The goal is that if you have this much saved up, it will provide you with enough liquidity to handle unexpected emergencies such as job loss, medical emergencies, car breakdowns and untimely home repairs. You can do so by avoiding debt (no credit cards) and dipping into your emergency fund to cover the costs. If we use 3-6 months worth of expenses as a starting point, then you can further customize the amount for your personal situation. Factors that may push your cash reserve amount up or down may include job stability, health, food costs, condition of your home and condition of your vehicles, to name but a few.
Example please:
Morgan Earp typically spends about $5,000 per month to fund his current lifestyle. That pays for the mortgage, feed for the horses, utility bills, repairs to the conestoga wagon, cigars and groceries. All his expenses for one month. Morgan then starts a goal of saving for the low end of the “rule of thumb”. So $5,000 x 3 months equals $15,000. Morgan evaluates. This feels pretty decent, he thinks to himself. As the Marshal in town he has a stable government job and does not fear being laid off. Inflation has been stable so he feels comfortable that the prices of food and sundries will remain fairly level. He just replaced the water tower on his ranch and anticipates no other major repairs this year. Morgan is in good health and his horses are young and not likely to experience major vet bills. BUT…Morgan doesn’t quite sleep great when he lays his head on the pillow at night. As such, he saunters down to his trusted financial advisor’s office and pours a cup of coffee. Together, they realize Morgan needs at least one more month (an additional $5k) to sleep well at night. Done and done. Morgan’s new goal is $20,000 ($5,000 x 4 months) for his cash reserve emergency fund.
A great way we measure your cash reserves is through the use of a Liquid Term score:
What is it?
Liquid Term (Lt) indicates the number of years you could live on your current liquid assets at your current lifestyle if neither changed.
CALCULATION
Liquid assets include all cash accounts (checking, savings, CD, business cash, etc.) and after-tax investments (brokerage, insurance cash value, after-tax annuity, etc.).
Example please:
If you have $50,000 in cash and $300,000 in brokerage accounts, and you spend $100,000 annually, then your Liquid Term score is 3.5.
$350,000 / $100,000 = 3.5 years. Meaning you could live approximately 3.5 years on the liquid assets that you have.
Why is it important?
This is important because knowing this score gets you oriented to your finances today. Right here and now. It also helps you adjust your behaviors such that you can work to increase your Lt (Liquid Term) score if need be…so that you can sleep better at night like Morgan. Conversely, it can help you realize that you may be comfortable actually lowering your score a bit…say, to take advantage of using some cash to start a business.
Keeping adequate liquidity means having enough money in the bank and/or after-tax accounts to weather the unexpected or pursue the next stage of growth in your life. Without adequate liquidity, you can feel more stressed about
day-to-day decisions and become less able to see the big opportunities in front of you. Maintaining the right amount of liquidity will help you feel less anxious about your finances in turbulent times and give you the confidence you need to live in the moment. However, as in all things, finding balance is critical. There are certainly times where you might need to be willing to sacrifice some liquidity for the right investments and opportunities.
So pour a hot cup of Death Wish coffee and have a chocolate covered doughnut with your friendly neighborhood financial advisor this morning. Ponder your liquidity needs and analyze how much cash you may need to sleep at night. Then be sure to talk with your family about how they feel. What good financial behaviors can be put in place to ultimately improve your financial health? Communication between and amongst your family is crucial.
Remember, your overall goal with any decisions is to: “Align Your Life & Money with Your Values”
You’ve got this.
Be the Hero for You and Yours!
