It’s easy to make money mistakes. Everyone makes them — military service members are no exception. What’s important is catching, rectifying, and learning from those mistakes. When you do so, you can chart a course for a successful financial future.
There are myriad things you can do to ensure your family’s financial security, but there are also numerous things you shouldn’t be doing. Saving money in the military isn’t impossible, but it’s challenging.
Listed below are the top 15 financial mistakes service members make and, more importantly, how to fix them.
How many are you guilty of? Which can you change today?
1. Not Budgeting or Tracking Your Spending
It’s hard to manage the money coming in if you don’t manage the money going out. There are plenty of software programs and smartphone apps which can help you categorize and track your spending. Frequently look back at your habits. What stands out? Where are you spending more on than you should?
Of course, it’s okay to spend some of your money on the things you want, but are you spending too much on those things? Do you have a defined plan for where your money should go each month?
You’d be surprised at how quickly a daily coffee drink or sandwich can add up. Look also at recurring costs. Are you getting the most out of them? Could you replace a cable subscription with Hulu? Could you live without satellite radio? Seemingly small changes can really add up over several months — and years!
It’s important to distinguish between the things you want and the things you need, and then it’s important to budget for the two. Consider setting aside a certain monthly dollar amount for the “wants” — the lattes and the latest technology — but when that amount is gone, there’s no more frivolous spending until next month.
Identify the total amount of money you have coming in, and decide how you want to allocate money for spending, saving, and giving. Account for every penny and stick to your plan.
2. Incurring Too Much Debt/Using Too Much Credit
Ever-changing technology, clothes, holiday shopping, new furniture — it adds up quickly. And it’s all too easy to charge these purchases on a magic plastic card which lets you pay it off a little at a time.
But try not to live beyond your means. Can you pay for the item in cash right now? If the answer is “no,” consider holding off on the purchase until you can.
Don’t be tempted by credit card mailings offering low introductory rates or sign-up rewards. They may seem attractive — until you exceed your credit limit or carry a balance. Then you may find yourself in even bigger financial trouble, suffering from high fees and interest and increasing debt.
It’s easy for debt to get overwhelming. According to National Debt Relief, say you owed $10,000 on your credit cards at an average interest rate of 15% with a minimum payment of $225 a month. It would take 335 months to pay off the $10,000, and it would cost you $11,979.29 just in interest.
But debt is also easy to manage, if you try. For example, spend a little extra each month to pay down outstanding debt. Or raise a little extra money by having a garage sale, selling items on Etsy or eBay, or getting a side job. Any steps you take toward reducing your debt will go a long way in easing your financial burden.
If you do find yourself already in debt, make sure you stop borrowing. Don’t put any additional purchases on credit cards — pay for them in cash, but only if your budget allows for the purchase.
3. Not Paying Attention to Your Credit Report
Every 12 months, you can get a free credit report from each of the three nationwide credit reporting agencies: Equifax, TransUnion, and Experian.
Make sure you take advantage of this free service and review your credit report at least yearly to ensure there are no errors. Errors can dramatically affect your ability to be approved for loans, housing, lower interest rates, and more. Checking your report can also ensure no identity theft has occurred.
4. Not Taking Advantage of Education Benefits
The Department of Veterans Affairs offers numerous education benefits to service members, all helping to cover the costs associated with education or training. From college degree programs to flight training to apprenticeship training, the GI Bill®¹ — an umbrella term encompassing all education benefits — is certainly a benefit you don’t want to miss out on.
Re-entry as a civilian can be difficult, but knowing you can enhance your life and career with free or discounted additional training is an incomparable benefit.
5. Counting on a Promotion Being Imminent — or Mishandling the Financial Effects of a Promotion
It’s easy to assume a promotion is just around the corner — especially if you’ve been on a fairly regular cycle of promotions — and to start spending accordingly. But the solution is simple: Don’t spend money before you have it. It’s too easy to find yourself in trouble if you’ve upgraded your lifestyle and things don’t happen as you’ve planned.
For the same reason, don’t go crazy with the financial “surplus” once that promotion does happen. Keep within your budget, and think about using the extra money to pay down debt, increase savings, or invest for retirement.
6. Buying a House
When you know you won’t be staying in the same location for more than two or three years, buying a house doesn’t usually make financial sense. Much of your mortgage payment each month actually goes to things like interest, taxes, and insurance rather than paying down principal.
It’s unlikely your property will appreciate enough to increase your investment and cover the transaction costs you incur when selling your home. Plus, there’s usually a surplus of housing near military bases, which means these homes generally appreciate at a much slower rate. And because you might not recoup your investment by the time you need to sell it, you may decide to rent it out instead. Now you find yourself needing to save even more, to cover potential vacancies and repairs.
As a result, buying a house might not be the smartest or most efficient way to save money.
But if you do decide to purchase a home, ensure that you’re financially prepared to do so. Ideally, you’re otherwise debt-free and have the resources to make a 10%-20% down payment. Shop around for the best rates on loans and insurance, and ensure the cost of your home doesn’t amount to more than 25% of your take-home pay
7. Buying a New or Too-Expensive Car
When it comes time to purchase a new car, make sure you have room in your budget for it. It’s a big investment — and one which depreciates nearly 20% the moment you drive it off the lot and 40%-60% during the first five years.
It’s easy to buy more car than you have the budget for, but it’s important to stay financially secure when making such a big purchase.
When shopping around, consider following the 4/10/20 rule:
- Don’t get a car loan for longer than four years.
- Spend less than 10% of your salary on your car loan.
- Put at least 20% down when you buy a new — or new-to-you — car, so you never owe more than what the car is worth.
To follow this rule, you may have to buy a cheaper car which fits your budget. Can’t pay off the car in fewer than four years? It’s probably not the right car for you or your budget.
And don’t forget there’s more to the price of a car than just the sticker price. Don’t forget about insurance costs and the interest rates on loans, which can vary greatly depending on the provider and on the car you select. Choose wisely. Shop around for insurance and loan providers to get the best deal.
In the end, your monthly car expenses such as gas, maintenance, insurance, and loan payments shouldn’t total more than 10% of your monthly income. If it does, consider selling your car for a more economically sound alternative.
Don’t let high car payments reduce the money you can put away for retirement or emergencies.
8. Not Insuring Your Property
Whether you own your own home or are renting, ensure you have the proper amount of coverage for your possessions. Call around to get quotes on homeowner’s or renter’s insurance to get the best rates and the most coverage. You don’t want to be left uncovered in the event of a fire, flood, or other catastrophe that destroys your property. Saving money by not carrying insurance now could prove to be an expensive decision in the future.
9. Not Saving for Retirement
It’s important to not only save for retirement, but to save often. It may seem like a long way away, but it will arrive sooner than you think — bringing a significant switch in family and financial dynamics.
Start as soon as possible to put away as much as you can for your retirement, including contributing to the Thrift Savings Plan (TSP) or the Savings Deposit Program, for those deployed to a combat zone.
The longer money is in a savings vehicle, the more it can earn. For example, if at age 18, you had started investing $200 a month in a retirement savings vehicle, at age 65, that investment would be worth $1.1 million, assuming 8% investment returns. Compounding interest is definitely something you want to leverage.
Saving for retirement is important, regardless of your age, rank, and long-term plans. And with the TSP, it’s also easy. Your investment mix, or asset allocation, affects the performance of your TSP account — you can diversify among five TSP funds with various asset allocations to meet your needs.
And because the TSP has some of the lowest investment fees in the country, your money will be working for you 24/7, instead of working to pay the fund manager.
It’s important to contribute as much of your basic pay — from 1%-100%, up to the $18,000 yearly maximum — as possible to this account to help you prepare for life in retirement. Note: The 2016 contribution limit was $18,000 — visit the TSP website for updates.
Today is always the right day to start an automatic deposit into your retirement account, whether you’re newly enlisted or a 20-year veteran. Even if it doesn’t seem like much now, it will at retirement. And when you receive a raise, try to continue living within your same means but increase the amount you’re saving. Aim for saving at least 15% of your gross income each year.
10. Not Having Enough Life Insurance
Although all military members have automatic enrollment in Servicemembers Group Life Insurance, ensure it provides adequate coverage. The maximum $400,000 it offers might not be enough for a surviving spouse to care for and support a family. Carrying sufficient coverage now will help you increase or obtain coverage in the future if it’s needed. Don’t think life insurance is a cost that’s too expensive or too unnecessary to bear. It’s an important benefit for you and your family, should anything happen.
11. Not Building a Rainy-Day Fund
Having an emergency fund may be even more important to military families than it is to civilians. Moving every few years, military families often need a cushion to be able to move without accumulating debt. They also may need to be prepared for several months of job searching post-separation.
Beyond frequent moves, however, no one ever knows what’s around the corner or how long careers will last. Many military families are single-income families — due also, in part, to frequent moves — and if the military member unexpectedly stops receiving his or her paycheck, which makes a big impact on the family and finances. Government shutdowns happen. Injuries happen. New additions to the family happen. The unexpected happens.
If you’ve paid attention to the strategies so far, especially the budgeting section, you know it’s important to pay yourself first. Whether it’s $10 a month or $100, every bit counts. Aim for having three to six months’ worth of expenses saved — and then use it only when needed.
12. Failing to Prepare for Emergencies
Similar to having a rainy-day fund, it’s important to fiscally prepare your affairs for emergencies. This could mean:
- Hiring a professional to ensure you and your family have sufficient health, accident, and life insurance coverage.
- Speaking with a financial professional to ensure you have your affairs in order — e.g., wills, trusts, powers of attorney — in case the truly unexpected were to happen.
Sometimes it’s important to have money not for the smaller emergencies, but just being equipped for any larger expenditures that may come along. By being prepared, you can better enjoy life and the opportunities which come your way.
13. Allowing Only One Spouse to Manage the Money
It’s imperative that spouses work together to manage the household finances. Although one spouse is usually more financially inclined than the other and will often try to take care of everything him- or herself, it’s important to remember that you’re a team.
Military spouses experience frequent separations due to deployment or training and they — like civilian spouses — must also prepare for the unexpected. This means ensuring both parties have a clear understanding of the family’s goals, income, budgets, and financial position. Through supportive teamwork, you can achieve your financial goals quickly.
14. Spending Deployment Extras
It’s easy to quickly spend the extra funds received when your spouse deploys. Whether it’s spent on some understandable retail therapy or used to manage the household during your spouse’s absence, it’s important to stick to your budget. And when the spouse returns, it’s easy to spend big to celebrate.
Instead, direct some of that extra money to savings or retirement each month — saving it now will pay off in the long run!
15. Not Saving for the Next PCS
It’s easy to think the military will take care of all your permanent change of station (PCS) expenses. But there are always expenses which aren’t covered — like being over on weight allowances — so be prepared. By planning ahead, you’ll be ready for the unexpected and will have the money to cover unexpected moving expenses.
Saving Money in the Military: Focusing on the Bottom Line
It’s important to remember that as you navigate financial obstacles and save money as a military service member, you’re not alone. As part of the military family, you have access to numerous services to help you get — or stay — on track. You may be aware of some of the services available to you, like enrollment in life insurance policies, transition counseling, or legal counsel, but there are likely even more services you can take advantage of that you don’t know about.
Talk with other service members and their families to see how they’re navigating the financial waters. Research the free — yes, free! — financial management programs and classes your base offers, and learn more about how to leverage the options available to you.
It’s always important to focus on your financial bottom line. Do this by paying down debt, building up savings and retirement funds, and educating yourself about your options.
By conquering one or two of these 15 pitfalls at a time, you’ll be quickly on your way to getting the most out of your military benefits.
¹GI Bill® is a registered trademark of the U.S. Department of Veterans Affairs (VA). More information about education benefits offered by VA is available at the official U.S. government website at http://www.benefits.va.gov/gibill.