In honor of Military Appreciation Month, I want to recognize my brothers and sisters still wearing the uniform as well as their families. Military members and their families face one-of-a-kind challenges, such as deployment to conflict zones, overseas assignments and the constancy of change - all of which make dedicating time to personal finance a challenge. Luckily, there are special tax breaks and other benefits unique to service members. Follow these five tips to take advantage of potential benefits and simplify your military family’s personal finances.
Tip #1: Focus on Retirement Savings
The Thrift Savings Plan is one way to save for retirement that's specific for military members. You may also have access to a Roth TSP, which acts similarly to a Roth IRA but without income restrictions. By contributing to a Roth TSP, you don't lower your taxable income now, but you will be able to withdraw the money tax-free when you enter retirement.
Tip #2: Save with High Interest
The Savings Deposit Program allows eligible personnel serving in designated combat zones to deposit up to $10,000 and earn up to 10 percent in annual interest.1 This can be an effective way to get a boost on your savings for the future. By comparison, it's not uncommon to find savings accounts at various banking institutions that offer less than one percent in annual interest rates.
Tip #3: Tax-Free In, Tax-Free Out
Saving in a Roth IRA may be a good idea if you receive tax-free combat-zone pay. This allows you to deposit tax-free income and take tax-free qualified withdrawals in retirement. You can also withdraw contributions to a Roth IRA at any time, without the income taxes or penalties.
Tip #4: Take Advantage of Your Education Benefits
The Post-9/11 GI Bill covers the full cost of in-state tuition, up to 36 months, plus housing fees and $1,000 a year to use for books and supplies.2 You can even transfer these benefits to your spouse or children if you don’t plan on using them yourself.
Tip #5: Low-Cost Life Insurance
Backed by the Department of Veterans Affairs, the Servicemembers’ Group Life Insurance protects your family with low-cost term life insurance coverage. If you are an eligible service member, you may be automatically enrolled in this program.3 Depending on your status or branch, you may have other life insurance options available to you as well. If you haven’t already, you’ll want to review your options and determine whether or not your coverage is up-to-date.
More Ways to Maximize Your Money
Aside from specialized programs and offerings, there are a few things every military family can do to help get or keep their financial standings in order.
Like any mission, success begins with articulating goals you want to pursue. Make sure they’re measurable, attainable and timely. When I work with clients, we set long-term goals, and then break them down into manageable steps with action items in 1, 3 and 6 month increments, and then reevaluate progress every 6 months.
Pay Yourself First
Determine how much money you need to set aside to reach your savings goal, deduct this amount from your paycheck and budget yourself to live within the limits of what remains. Another way to pay yourself first is to pay off debt.
Control Your Debt
Indebtedness is one of the enemies of financial independence. Focus your efforts on paying down high-interest debt, like credit cards or personal loans. Credit cards should not be used for making payments on other types of debt like car payments or mortgages. All this does is move lower interest rate debt (car loans or mortgage) to a much higher interest rate on most credit cards. This means you will end up paying a lot more in interest over the long-term. A great way to attack debt or prevent taking on debt in the first place is to use a spending plan or budget.
Establish a Spending Plan
A spending plan can serve as the foundation of financial discipline. Having a weekly or monthly plan in place can help you control spending impulses that lead to greater debt levels. If you are new to spending plans or budgets, I highly recommend using a 50/30/20 approach. Of your take-home pay (after taxes and retirement savings) 50% or less should be allocated towards necessities like housing, food (not eating out), basic clothing, transportation, etc. Less than 30% goes to wants like eating out, travel, subscription services and hobbies. The remainder (over 20%) should go towards future goals and paying off debt. This is where paying yourself first can really shine. If you make sure to dedicate the first 20% or more of every paycheck to future goals and paying off debt, and then covering your basic necessities with the next 50%, you won't have to worry as much about overspending because whatever is left (the remaining 30%) is there for your wants.
Establish an Emergency Fund
Uncertainty marks the life of military families, so be sure you have an emergency fund that allows you to be as prepared as possible for these changes. Your emergency fund should have enough cash to cover 3-6 months of essential spending (rent/mortgage payments, utilities, food, etc.), and should be held in a savings account. The purpose of the emergency fund is to have cash on hand to cover unexpected expenses or disruptions to your income. $1,000 in your checking account is not an adequate emergency fund. Additionally, the emergency fund needs to be easily accessible without concern for market conditions, so it should not be invested. No stocks, no bonds, not mutual funds or ETFs and definitely no crypto in your emergency fund. Frequently, events that might cause you to need to use your emergency fund can coincide with market volatility, meaning if you invest it, you might have to take money out at a time that causes you to lose money on the investments.
As you think through your financial goals, remember that taking action today is your first and most important step. Take advantage of all your unique benefits and opportunities, so that you and your family can live your best financial life.