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Author Phillip Hulme | Stars and Stripes Financial Advisors
Service members face unique financial challenges and opportunities. From managing income earned through service benefits to preparing for long-term financial goals, effective financial planning is essential. In this article, we'll explore a few financial planning tips for service members, including budgeting basics, emergency funds, deployment savings options such as the Savings Deposit Program (SDP), Thrift Savings Plan (TSP) savings opportunities, managing debt, setting long-term financial goals, frugal living tips, utilizing military resources, and retirement planning.
Budgeting Basics:
Budgeting is fundamental for financial stability for service members as much as it is for anyone else. One way to begin your own budgeting is by calculating your income, including base pay, allowances, and any benefits. Next, list your expenses, including essentials like housing, food, and transportation, as well as discretionary spending. Set realistic spending limits for each category and track your expenses to stay within your budget. A helpful way to make sense of your budget is to break it down into the following three segments.
Fixed Expenses: These are expenses that remain consistent from month-to-month and are necessary for maintaining your lifestyle. Examples include rent or mortgage payments, utilities, insurance premiums, car payments, and subscription services.
Variable Expenses: These are costs that can fluctuate from month-to-month and may be discretionary in nature. Examples include groceries, dining out, entertainment, clothing, and transportation costs.
Irregular Expenses: Irregular expenses are occasional or non-recurring costs that don't fit neatly into your monthly budget. Examples include car repairs, medical expenses, gifts, home maintenance, and annual subscription renewals.
By categorizing your expenses into fixed, variable, and irregular categories, you can gain a clearer understanding of your spending habits and make better decisions about how to allocate your financial resources so they are aligned with your goals and values.
Emergency Funds:
Service members should prioritize building an emergency fund to cover unexpected expenses and avoid financial catastrophe. As Murphy’s Law reminds us: if it can go wrong, it will go wrong. A typical strategy is to aim to save three to six months' worth of living expenses in a liquid and easily accessible account such as a checking, savings or money market account. Check to ensure these accounts are FDIC Insured. You may want to adjust your savings target up or down based on your personal situation. For example, a household with children to support is at a higher risk of unforeseen expenses and may find a larger emergency fund to be a more prudent choice.
These funds provide a financial safety net in case of emergencies, such as car repairs, unexpected deployments, or unexpected Permanent Change of Station (PCS).
Deployment Savings:
While deployed service members have unique opportunities they can benefit from. Some of those options to save are listed below.
Savings Deposit Program (SDP): The SDP allows deployed service members to save up to $10,000 at a guaranteed interest rate of 10% annually while serving in designated combat zones. Contributions to the SDP provide a secure way to build savings during deployment, with the added benefit of earning interest on deposits. Members must be receiving Hostile Fire Pay and be deployed for at least 30 consecutive days, or 1 day in each of 3 consecutive months in order to participate in the program.
Extra TSP Savings Opportunities: Service members have the opportunity to contribute additional amounts to their Thrift Savings Plan (TSP) beyond the standard elective deferral limit. These contributions allow personnel to maximize their retirement savings potential.
For 2024, the elective deferral limit for TSP contributions is $20,500. Additionally, participants aged 50 and older may contribute an additional catch-up contribution of $6,500, bringing the total limit to $27,000 for those eligible.
However, the Combat Zone Tax Exclusion (CZTE) expands the annual addition limit to $69,000. This allows service members to contribute a larger portion of their tax-exempt income to their TSP accounts, maximizing their retirement savings potential. BRS participants should be careful though as that amount includes matching contributions from the government.
Managing Debt:
Service members should be cautious about taking on debt. With a fixed income it can become problematic to accumulate too much debt. Here are two popular debt paydown strategies to consider:
Debt Snowball: Focus on paying off your smallest debts first while making minimum payments on larger debts. Once the smallest debt is paid off, roll the amount into the next smallest debt, gradually building momentum until all debts are paid off. This strategy provides a psychological boost by allowing you to see progress quickly, which can motivate you to continue paying off your debts.
Debt Waterfall: Prioritize debts based on their interest rates. Start by paying off the debt with the highest interest rate first while making minimum payments on lower-interest debts. Once the highest-interest debt is paid off, move on to the debt with the next highest interest rate, and so on. This strategy helps you save money on interest over time by eliminating high-interest debts first.
By choosing the debt paydown strategy that best suits you and staying committed to your debt repayment plan, you can make significant progress towards your financial goals.
Another set of protections and benefits service members should be aware of came from The Servicemembers Civil Relief Act (SCRA). The SCRA provides various protections and benefits to military personnel to alleviate financial burdens while serving on active duty. Some of the key debt relief benefits under the SCRA include:
Interest Rate Cap: The SCRA caps the interest rate on pre-existing debts incurred before entering active duty at 6%. This applies to all types of debts, including credit cards, mortgages, and student loans.
Protection from Foreclosure: Service members are protected from foreclosure on their homes while on active duty and for up to one year thereafter, provided the mortgage was originated before entering active duty.
Delay of Civil Court Proceedings: The SCRA allows service members to request a delay or stay of civil court proceedings, including lawsuits, foreclosures, and evictions, if their military service materially affects their ability to participate in the legal proceedings.
Lease Termination: Service members can terminate residential or vehicle leases without penalty if they receive orders for a PCS or deployment lasting 90 days or more.
Protection from Default Judgments: Service members may be protected from default judgments in civil lawsuits if their military service prevents them from appearing in court.
These debt relief benefits are designed to alleviate financial stress and provide peace of mind to service members and their families during periods of active military service. It's essential for service members to familiarize themselves with their rights under the SCRA and seek assistance from military legal assistance offices or other qualified professionals if needed.
Frugal Living Tips and Utilizing Military Resources:
Implementing frugal living practices and making use of available military resources can help service members can stretch their income further and improve their overall financial well-being. Here are some tips to consider:
Meal Planning: Plan your meals in advance to minimize food waste and reduce grocery expenses. Consider incorporating "One Pot" meals into your meal plan. These meals, made using just one pot, pan, skillet, or slow cooker, are not only convenient but also help to streamline meal preparation and cleanup, saving you time and effort in the kitchen. Whether it's a hearty stew, flavorful pasta dish, or nutritious stir-fry, "One Pot" meals are a versatile and budget-friendly option for busy service members and their families.
Utilize Military Discounts: Take advantage of military discounts offered by retailers, restaurants, and service providers. Many establishments offer special pricing or incentives for service members and their families. It’s worth sitting through the obligatory “thank you for your service” if it means a good discount.
Carpooling and Transportation: Explore carpooling with a battle buddy to save on fuel costs and reduce vehicle wear and tear. Coordinate transportation with fellow service members or utilize public transportation when possible.
Shopping on Military Installations: Shop at military exchanges (BX/PX) and commissaries for tax-free shopping opportunities. These facilities often offer a wide range of products at discounted prices, and may be exempt from state and local sales taxes, providing additional savings for service members and their families.
Commissaries: Commissaries are grocery stores located on military installations that offer a wide range of food and household items at reduced prices. One of the significant advantages of shopping at commissaries is the potential tax savings. Since commissaries are operated by the Defense Commissary Agency (DeCA), they are often exempt from state and local sales taxes. This exemption can result in significant savings on groceries and other essentials for service members and their families.
Military Exchanges (BX/PX): Military exchanges, also known as Base Exchanges (BX) or Post Exchanges (PX), are retail stores located on military installations that sell a variety of goods, including clothing, electronics, household items, and more. Similar to commissaries, military exchanges may also offer tax-free shopping privileges, depending on the state and local laws governing the installation. Service members, retirees, and their families can take advantage of tax-free shopping at military exchanges to save money on a wide range of products.
Online Exchange Shopping: In addition to brick-and-mortar locations, military exchanges also operate online stores that offer tax-free shopping to eligible patrons. This allows service members and their families to access tax savings even if they are unable to shop at a physical exchange location.
Make Use of On-Base Amenities: Take advantage of on-base amenities such as gyms, libraries, recreational facilities and childcare services. These facilities are typically available at little to no cost and can provide opportunities for entertainment, exercise, relaxation and childcare.
Financial Counseling Services: Seek guidance from financial counselors on base or utilize online resources like Military OneSource for financial education and assistance. These resources can provide personalized advice and support to help you navigate financial challenges and make informed decisions about your money.
Retirement Planning:
Planning for retirement is a critical aspect of financial preparedness for service members. With various retirement systems in place, understanding the options available is essential. Here's a detailed look at retirement planning for service members:
Thrift Savings Plan (TSP): The Thrift Savings Plan (TSP) is a cornerstone of retirement planning for service members. It offers a range of investment options, including lifecycle funds and individual fund options, allowing participants to build a diversified investment portfolio aligned with their risk tolerance and retirement goals. Military members can contribute to the TSP through payroll deductions, with contributions made on a pre-tax or Roth basis. Additionally, some service members may have access to TSP matching contributions under the Blended Retirement System (BRS), providing an opportunity to accelerate retirement savings.
Military Pension: Service members are eligible for retirement benefits under different retirement systems, depending on their date of entry into service:
Final Pay Retirement System: The Final Pay Retirement System was in place for service members who entered service before September 8, 1980. Under this system, retirement benefits were calculated based on the service member's final basic pay at the time of retirement. For example, if a service member retired at the rank of E-7, their retirement pay would be calculated based on their E-7 pay rate.
High-36 Retirement System: The High-36 Retirement System, also known as the High-3 System, is the retirement plan for service members who entered service between September 8, 1980, and December 31, 2017. Under this system, retirement benefits are based on the average of the service member's highest 36 months of basic pay, rather than their final pay. This average is calculated using the highest 36 months of basic pay received during their military career, which may or may not include their final months of service.
Blended Retirement System (BRS): The Blended Retirement System is the retirement plan for service members who entered service on or after January 1, 2018, and some members who opted into the system during a specified opt-in period. The BRS combines elements of the traditional defined benefit retirement system (similar to the High-36 System) with a defined contribution component, namely the Thrift Savings Plan (TSP). Under the BRS, service members receive a reduced defined benefit pension, calculated based on the average of their highest 36 months of basic pay, along with government matching contributions to their TSP accounts and continuation pay for those who commit to serving additional years.
Retirement Savings Goals: When planning for retirement, it's essential to set clear savings goals and regularly assess your progress towards those goals. Consider factors such as desired retirement age, lifestyle preferences, anticipated expenses, and expected sources of retirement income. By establishing a target retirement savings amount and developing a savings strategy to achieve that goal, you can work towards a financially secure retirement. A strong financial plan will have target savings rate as a percentage of either your total income or your total expenses.
By actively participating in retirement planning and taking advantage of retirement savings options like the TSP and military pension, service members can work towards a comfortable and secure retirement. Start early, contribute regularly, and stay informed about your retirement benefits to maximize your financial well-being in retirement.
*Disclaimer: The information provided in this guide is for educational purposes only and should not be construed as financial advice. While the content aims to offer helpful insights and suggestions for managing finances, it is important to consult with a qualified financial advisor or counselor before making any significant financial decisions. Individual financial circumstances vary, and what works well for one person may not be suitable for another. Readers are encouraged to exercise discretion and consider their own financial goals, risk tolerance, and unique circumstances when implementing any strategies or recommendations outlined in this guide.
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