Let’s say you just left your AME’s office without a medical. They found a heart murmur that needs investigation. You’re 45 years old with a mortgage and three mouths to feed, and now you can’t work — and it may take months to get your medical back.
This is a real-world situation airline pilots can find themselves in. There’s no way to ensure we never lose our medical, but we can reduce the immediate consequences and our level of panic by having an emergency fund.
Emergency funds are the bread and butter of my financial plans. It’s priority number one because they provide breathing room and peace of mind. But how much is enough? We don’t want too much cash on hand, because ideally our money is kept busy working for us. But we definitely don’t want too little cash on hand either, because there are many life events that can force pilots to dip into their emergency reserves. There’s a sweet spot for everyone.
If you Google how large an emergency fund should be, you’ll typically find something like “three to six months of non-discretionary expenses,” which looks something like:
(Mortgage/rent + utilities + food + gas + insurance + car loan + other loans + cable + internet + phone) x 6 = emergency fund
This rule of thumb is great for most households. It covers a layoff, a broken fence or a car repair. However, while three to six months of expenses is a good starting point for airline pilots, a pilot’s emergency fund needs to cover more than the average ground dweller’s would. Here are three important reasons why.
The airline industry is volatile. Although airlines can’t find enough pilots right now, just a few years ago they were furloughing, and pilots were struggling to find other sources of income. Many pilots were just starting out at their dream airline — with dream pay and a dream lifestyle fast approaching — when they received a furlough notice. Emergency fund or no, that’s a major stressor.
We don’t know what will cause the next round of layoffs, but it’s a near certainty. When pilots are furloughed, they quickly find their expertise doesn’t always translate well in other career fields, and there are few jobs that compete with pilot pay and lifestyle. For that reason alone, pilots need a healthier emergency fund than most.
Bankruptcies, mergers and acquisitions are all familiar scenarios in the industry, and every one of them can severely impact your seniority and quality of life. It’s difficult to anticipate exactly how a single pilot can be affected over a career, but it can often lead to moving, commuting and/or changing airlines. Changes in pay and benefits are also likely consequences. Unlike in many other careers, there are few lateral moves in airline flying.
Even when we plan for it, pay changes can present a challenge. I once had a group of new hires at a specific airline become clients of mine at the same time. Although it was a dream move for them, they had taken a pay cut — and it was a challenge to support a family on first-year pay. Even with career advancement, an emergency fund is critical.
Disability (Need I Say More?)
Another important reason pilots need a more robust emergency fund is the possibility of disability. Yes, airlines provide long-term disability insurance, but maximum benefits are almost always capped well below normal pay rates. Meanwhile, short-term disability insurance is expensive and sometimes doesn’t provide the benefits you thought you were paying for. In fact, sometimes you’re actually better off saving would-be premiums in various other accounts.
Cash is not king, but peace of mind might be. Pilots ought to have enough in an emergency fund to cover the unexpected. Although doing so won’t eliminate your stress entirely, a proper emergency fund can help make unexpected life changes easier to manage.
Also, if you store your emergency fund in a high-yield savings account (HYSA) instead of a typical savings account, all the better — this practice will allow your money to keep working for you while it also functions as a safety net. HYSA rates are as high as 4% right now, while normal bank account savings rates are around 0.01%. Should you have amounts exceeding the FDIC limit ($250,000 per depositor per bank), consider holding the excess in a brokerage account invested in a money market that owns only U.S government-issued debt.
The bottom line is this: aviation careers are uncertain, and an emergency fund can provide stability and peace of mind.
At Creative Planning, we strive to increase our clients’ financial IQ. An informed choice is a wiser choice, and an informed client makes a stronger partner. What destinations can we reach together? To learn more, please schedule a call.