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Current members and veterans of the U.S. Armed Forces face unique challenges and circumstances. Not only have they been tasked with the great responsibility of protecting our country, they must also provide for their own financial well-being and that of their families. Service members and veterans have sources of income and benefits that may not be available to civilians.
While being tasked with the burdens of protecting our country, members of the military also need to be aware of how their military service impacts their personal finances. In addition, service members have sources of income and savings options that aren't available to civilians. Understanding these benefits and taking advantage of them could not only help you to work toward financial goals for you and your family, but you may be able to focus better on the demands of your service commitment.
Developing a comprehensive financial plan and putting it in place generally involves the following steps:
Determining financial priorities and goals is ultimately your responsibility. Start by making a list of your short-term goals (e.g., new car, vacation) and your long-term goals (e.g., home purchase, child's education, retirement). Then,try to prioritize those goals. How important is each goal to you and your family? How much will you need to save in order to reach each goal? Once you have a clearer picture of your goals, you can work toward establishing a budget that can help you pursue them.
Creating and maintaining a budget may not only help you target your financial goals, but regularly reviewing and updating your budget can help keep you on track, particularly when your circumstances change. To develop a budget that is appropriate for your lifestyle, you'll need to identify your current monthly income and expenses. Start by adding up all your income. A service member’s income can come in several forms of monetary and nonmonetary compensation. In addition, some forms of income are taxable while other types of income are nontaxable.
Understanding whether income is taxed is very important because disposable income, or income that's left after paying taxes, is what you have available to pay bills and save for future goals. Taxable basic pay varies with rank and time of service, so changes in base pay should be factored into your budget. Several forms of military compensation are nontaxable, such as Basic Allowance for Subsistence, Basic Allowance for Housing, uniform and clothing allowance, hostile fire pay, basic pay and occupational incentive pay during periods of deployment to a hostile theater, and family separation allowance.
In addition to your military income, be sure to include other types of income, such as dividends, interest, a spouse's civilian pay, and child support. Next, add up all your expenses. It helps to divide them into two categories: fixed expenses (e.g., housing, food, clothing, and transportation) and discretionary expenses (e.g., entertainment, vacations, and hobbies). You'll also want to make sure that you have identified any out-of-pattern expenses, such as holiday gifts, car maintenance, and home repair.
Once you've added up all your income and expenses, compare the two totals. If you find yourself spending more than you earn, you'll need to make some adjustments. Look at your expenses closely and cut down on your discretionary spending.
A sound financial plan could help ensure that you are protected when financial emergencies arise. Having a cash reserve or emergency fund may help you avoid taking on additional debt when you don't want to. The amount of your reserve depends on your own personal situation, but it's generally suggested that your cash reserve should equal three to six months of ordinary living expenses.
The savings vehicles you use should depend on two factors: your time horizon and risk tolerance. Generally, the longer the time horizon, the more risk you may be able to assume. Bank savings options include savings accounts, money market accounts, and certificates of deposit. These are typically more stable choices with the lower risk; other alternatives include investments that can go up or down in value and may or may not pay interest or dividends.
Note: All investing involves risk including the loss of principal. Before investing, carefully consider its investment objectives, risks, charges, and fees, which can be found in the prospectus available from the fund. Read the prospectus carefully before investing.
One of the most important financial goals is saving for retirement. Even if you expect to qualify for a military pension, it probably won't provide all of the retirement income you'll need. A retirement savings option available to members of the military is the government's Thrift Savings Plan (TSP).
The TSP is like the government's version of the private-sector 401(k) plan. Your contributions are deducted directly from your paycheck before taxes (which can lower your current taxable income), and your contributions and earnings accumulate tax deferred until withdrawn, at which time you'll generally pay income taxes on the amount you take out of the TSP. There are limits on how much you can contribute each year. You can also contribute after-tax dollars to a Roth TSP account, from which qualified withdrawals are generally received tax free.
Insurance programs are often a vital part of a sound financial plan. Auto insurance, homeowners or renter’s insurance, health insurance, and life insurance should be investigated, with the cost of each type of coverage factored into your budget.
Life insurance provides financial protection for your family and loved ones. Service members' Group Life Insurance (SGLI) is part of a service member’s benefit package. Basic SGLI coverage is provided automatically when you join the military (although you can opt out or elect lesser coverage amounts), and premium costs are deducted from your pay.
Active-duty service members, retired service members service members, their qualified family members and certain survivors may receive health-care coverage through TRICARE, the medical program for the U.S. military. Depending on your status, the availability of medical care at military facilities, and the TRICARE option you choose, you may receive care either through military or civilian providers.
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Last Revised 11/15/2017