The following is a guest post from Jeff Rose, author of the new book Soldier of Finance: Take Charge of Your Money and Invest in Your Future.
“No plan ever survives contact with the enemy,” as Prussian Field Marshal Helmuth von Moltke observed. In other words, there are always things you cannot predict. That’s why the Army has an official means of adjusting plans based on unexpected events. They call it FRAGO, for Fragmentary Order.
Ordinary people (civilians) can use a FRAGO of their own to do basic personal finance training and begin to build a savings account.
In this case, FRAGO would stand for a Financial Reserve and Goal—Fund. With a FRAGO Fund to rely on, there’s less worry and no reason to reach for credit cards when any emergency, even a dreaded job loss, strikes. Here is what you need to know to begin.
Determine how much money you need for one month. How much money should you have in your FRAGO Fund? While three months is ideal, you need at least one month of living expenses on hand. Use a simple military formula to determine the FRAGO Fund minimum: BAH (Basic Allowance for Housing—that is, mortgage or rent) + ME (Monthly Expenses). In monthly expenses, be sure to include variables (birthday gifts, eating out) and at least the minimum payment on any outstanding loans and credit card balances.
Open a savings account. If you already have one, designate it as your FRAGO Fund. The primary purpose of keeping your FRAGO Fund in savings is so you can access it quickly if you need it.
Decide on an amount from each paycheck that you will deposit into your FRAGO Fund until you reach your minimum. Then, make a commitment and muster the discipline to stick with it.
Make sure you have enough in your FRAGO Fund. If there isn’t enough to cover your emergency expenses, it won’t be a very useful emergency fund. Be aware: many banks charge a fee if your average balance falls below a certain point. If your bank does, learn the exact point and do whatever it takes—sacrificing designer clothes, dinners out—to keep your account balance above it.
Make sure you get the best interest rate possible. Nothing says you have to put your money in the bank around the corner. Shop around—including online institutions—to find the best return for your money.
Make sure you don’t have too much in your FRAGO Fund. More than three months’ living expenses sitting in a saving account adds up to a poor investment. “Be prepared for emergencies,” Rose stresses, “but once that is covered, project into the future and establish a plan for building wealth.”
Jeff Rose is a Certified Financial Planner™ and an Iraq combat veteran. A regular contributor to U.S. News & World Report, MarketWatch, and Equifax.com, he is the author of two popular personal finance blogs, SoldierofFinance.com and the nationally recognized goodfinancialcents.com, which has been featured in Forbes, The Huffington Post, Kiplinger, and The Wall Street Journal.