Ever seen the movie Deep Impact? If not, in the movie scientists discover that a comet is on a collision course with the Earth – a comet so massive that its impact with earth will cause an “E.L.E,” an Extinction Level Event. An event so catastrophic it will change – eliminate? – life as we know it. Applying that doomsday scenario to finances I coined the phrase Catastrophic Financial Event and the resultant acronym “C.a.F.E.”
What is a C.a.F.E.? Hint: It is not a place you might go for a sandwich and a nice cup of coffee. As the name suggests, it is something that has the potential to be catastrophic if it were to occur. It is something beyond the scope of an emergency fund, discussed on this blog … and every other personal finance blog at some point.
We all know that an emergency fund is created and maintained to address an emergency, to fill a critical financial gap, or to meet an unexpected expense. Simply put, it is immediate access to cash – typically maintained in a checking/savings account – that allows you to take care of unforeseen circumstances without impacting the money you have committed to saving and investing. Typical uses of an emergency fund might include a child’s visit to the emergency room, repairing or replacing the transmission in your car or having your washing machine repaired. Potentially significant events that are aggravating and force you to spend money when there was no expectation. Significant but not catastrophic.
A C.a.F.E. is an event that has the potential to devastate your finances, impair your ability to save for retirement and fundamentally change your life. So what got me to thinking about a C.a.F.E? The 2020 Force Structure Realignment born out of the Budget Control Act of 2011. The Act – including its sequestration provisions – considers huge reductions at nearly every military installation. Considering that both Mrs. SavvyJames and I are federal employees that work on an Army base, we could be impacted at some point over the next few years as this realignment plays out.
While I am not concerned about either of us losing a job, I have begun to think about what would happen if one – or ever worse, both of us – were required to move to keep our existing positions. Clearly, moving to two different locations is a nonstarter for us. What about one of us being required to move and the other staying put? A possibility for some.
Having spent 30 years in the military community I have seen couples do just that; maintain two households in geographically dispersed areas for some period of time. For us however, at this point in our lives, that is nearly as much of a nonstarter as moving to two new locations. The bottom line for us is that we prefer to stay in our current location … together.
That gets us to my C.a.F.E. The Army moves my, or my wife’s, current position to another installation at some point over the next 12 years, when we plan to retire. My wife being asked to move is less of a C.a.F.E. as my salary exceeds hers by a fair margin and we could more easily just have her resign her position and look for another job, albeit most likely at a lower salary. It would be significantly tougher if her job remained at our present location and I was required to move if I wanted to maintain my position. So that is the C.a.F.E. as I have started to imagine different possibilities. “The Army requires one of us to move – if we want to maintain the employment position – five, six or seven years from now, which is still multiple years away from our desired retirement date; and we retain a strong desire to stay in our current home in Arizona?”
The only answer I have at this point is that we would stay put and the person being required to move would resign their position vice moving. Hopefully, whichever resigned their government position would find another job at a comparable salary. Worst case? Another job cannot be found. Next worst case? A job is found, but the salary is substantially lower. That is a C.a.F.E. for us as it has the potential to impact our current standard of living and with a reduced household income, our ability to maximize contributions to our retirement plans would be in jeopardy … and of course, less money contributed in the intervening years means less money in retirement.
My approach to preparing for this potential C.a.F.E.? Work ourselves into a position whereby we can maintain a comfortable standard of living and continue to maximize contributions to our retirement plans on only one – preferably mine – income. The key to overcoming our C.a.F.E. is to stay clear of credit card debt, be prepared to reduce expenses (e.g. go down to one car, eliminate cable TV, eat out a little less. etc.) and pay off our mortgage as quickly as possible.
Have you identified any potential C.a.F.E.s on your horizon. If so, are you taking steps to mitigate its impact?