Troops face unique situations and opportunities that can affect their finances. To help, here are 5 financial tips for members of the military.
Financial tips for members of the military are similar to what they are for anyone else. The complication of course is that as a member of the military there are times when you’ll have less direct control over your finances. You may even find yourself getting into certain uncomfortable financial situations as a result of that separation.
Here are five ways you can avoid that outcome.
1. Avoid Debt Like the Plague
Debt is a problem for millions of Americans. But it can be a specific problem for members of the armed forces, who may be looking to fix a short-term money problem.
Credit cards are an obvious issue. The revolving nature of these debts, as well as the very low monthly payments–usually only about 2% of the amount owed–makes them very easy to use in a pinch.
But that’s one of those treadmills that once you’re on it, is very difficult to get off. If you borrow too much on credit cards, you may eventually find yourself borrowing even more to help you make the monthly payments. You generally can’t use one credit card to make the monthly payment on another. But you can use one credit card to pay a bill for living expenses, so that you can use your paycheck to pay for another credit card.
That’s the Catch-22 that leads people straight into bankruptcy court.
The Payday Loan Trap
It can be tempting to sign on for payday loans to cover expenses. But the loans are short-term and the interest is sky-high, and that’s the problem. Payday loans typically charge in excess of 300% per year.
In a typical payday loan scenario, you might borrow $500, with the understanding that you will pay it back when you get paid in two weeks. But with an interest rate of about 1% per day, when payday comes in two weeks, you’ll have to pay back $570.
That will leave you $570 short on your next paycheck, which might create the need for yet another payday loan.
People get into that trap all the time. Each loan requires the repayment of a slightly higher amount. Eventually there’s no pay left in the paycheck, and you end up in default. That creates all kinds of ugly outcomes and should be avoided.
It’s not just a problem of getting too deep in debt. Heavy credit card debt and payday loans can destroy your credit. That can become an even bigger obstacle once you’re out of the military, and looking to establish yourself in civilian life.
2. Don’t Be in a Hurry to Buy a House
The so-called American dream isn’t always the best strategy for active members of the military. Transfers and deployments can make homeownership problematic, as well as causing a large number of unanticipated expenses for repairs and maintenance.
There’s an especially big temptation to buy a house for members of the military. You’re eligible for VA mortgages, which allow you to borrow up to 100% of the purchase price of a home. That means a zero down payment arrangement, making VA mortgages just about the best deal available in the mortgage universe.
Unless you’re in a very long term basing assignment, it’ll probably be better for you if you hold off buying a home until after you’re discharged.
3. Maximize Your Retirement Contributions
As a member of the military, you have the defined benefit plan allowing you to retire after 20 years. But that will give you a monthly pension benefit, not a lump sum retirement portfolio that you can use at your discretion.
Under either plan, you can contribute up to $18,500 per year, or $24,500 per year if you’re 50 or older. That will not only enable you to save a lot of money for retirement, but it will also greatly reduce your taxable income.
But even if you can’t make the maximum contribution, plan to contribute at least 5% of your income to either plan. At that level of contribution, the military will make a matching contribution of 5%, giving you a total contribution of 10% of your pay.
Though you may have other uses for the money you would contribute to the TSP or BRS, it’s important to begin saving for retirement at any age. That way by the time you get out of the military, you’ll already have a head start. And when you go into civilian employment, you can join whatever retirement plan is available there, and continue building your retirement nest egg throughout your life.
That will give you many more options as you move toward retirement age.
4. Learn What You Can About All Things Financial
When you’re in the military, the financial world can seem like it’s a million miles away. But rest assured it isn’t. There are heaps of financial entanglements you can get into while you’re in the military. What’s more, one day when you are discharged, you’ll hit the financial world head-on. The more you can learn about it in advance, the better prepared you’ll be for civilian life.
Read books, attend seminars, listen to podcasts, and watch videos about all kinds of financial matters. This should include saving money, the cost of money, debt, basic banking, mortgages, auto loans, credit cards, investing, and retirement planning.
Sure, you’ll have plenty of time to tackle those subjects when you get out. But things happen quickly when you transition from military life to civilian life. Finances will be a big part of that transition. The more you can learn while you’re still in the service, the better prepared you’ll be when that day comes.
5. Set Your Finances on Automatic Pilot in Case of Sudden Deployment
As a member of the active military, plan to keep your financial life as simple as possible. You can never know when you’ll get orders for a sudden deployment. There may not be much time to reorganize your finances for a prolonged period of absence. For that reason, plan to automate your finances.
If you’re participating in either the TSP or the BRS, that will already be happening through payroll deductions. But you can do something similar with virtually every other area of your finances.
For example, you should have a payroll deduction going into basic savings. That will ensure emergency funds are available either for your family, or for you when you return from deployment.
Another big one is setting up automatic debits for bills. You can do this for loan payments, services (like insurance or subscriptions), utilities, or any other expenses you have.
The idea is to create a system in which your finances will continue to function smoothly even in your absence. And most likely, when you return from deployment, you’ll want to keep it all set up the same way. Putting your finances on automatic pilot is the easiest, most stress-free way to manage your finances. That’s true whether you’re in the military, or in civilian life.
And just as important, the financial strategies you implement during military service will benefit you in civilian life. You’ll already have your finances organized, retirement savings in progress, and debts minimized. That will benefit you for the rest of your life.Topics: Personal Finance