Build financial security with your bonus
Today’s fast-paced operating environment is having at least one positive side effect for many servicemembers — a vastly deepened pot of available bonus dollars. Increased re-enlistment incentives and critical skills retention bonuses will result in additional monetary incentives that could be substantial for those who continue to serve.
If your bonus is on the way, you may be dreaming of what it can buy. Where does “financial security” fall on your list? Spending the bonus might seem like fun, but building financial security is one move you won’t regret. Before heading off to the car dealer or your favorite electronics store, consider using your bonus to accomplish one or more of the following:
Ditch the debt
Paying the minimum on your credit card is just what the credit company wants — but certainly not what is in your best interest (pun intended). In most cases, paying off credit card debt should be your top priority, even ahead of saving. The double-digit interest rate you’re paying on your credit card is probably higher than what you can earn from investments — and the interest savings on credit cards is guaranteed and immediate.
Save for emergencies
An emergency fund is one of the cornerstones of a solid financial plan. The fund should cover three to six months of basic living expenses, such as house and car payments, food and utility bills. Put your emergency fund in a savings or money market account to ensure the cash is accessible and safe. These types of accounts can be set up with your bank or mutual fund company.
Start a nest egg
Your bonus can be ideal to jump-start your program to save for retirement, college, a family vacation or a down payment for a new home.
For retirement, consider a Roth IRA and the military’s Thrift Savings Plan as tax-advantaged ways to put your money to work for you. An important fact that doesn’t dawn on many servicemembers is that you don’t pay taxes now on what you contribute to a TSP. For college, a Coverdell Education Savings Account or 529 college savings plan may be ideal. Finally, if you want to “put aside some monies for another goal, consider setting up a no-load mutual fund or funds in your name or jointly with your spouse. Although you won’t get any tax benefits, your investment can potentially grow over time. When it comes to savings, your biggest decision is the one to start saving now.
If you’re not sure what to do first, meet with a financial planner who does not work on commission. A basic financial plan can cost as little as $200. When your bonus comes in, use it to make a big impact on your financial future.
Joseph Montanaro is a salaried certified financial planner practitioner with USAA Financial Planning Services, one of the USAA family of companies.
Money on your hands?
Sometimes an unexpected bonus or a big salary increase can feel like a windfall. How would you use the extra cash? In a recent USAA survey, conducted by Harris Interactive, employed U.S. adults revealed what they do with the extra income. Where would you stash the cash?
Pay off debt: 51% Put aside for savings: 40% Pay household bills: 38% Deposit into checking account: 35% Purchase consumer goods: 21% Put into retirement plan: 18% Donate to charity: 11% Invest in stock market: 9%
Make unexpected cash work for youOdds are you won’t win the lottery. But surprising sums can come from other, more likely sources — a big tax refund, a re-enlistment bonus, or even a retention bonus. Next comes the decision about what to do with all of that cash.
1. Take it slow. You don't have to decide right away what to do with all of the money. Park it in a temporary and safe place like a savings account, money market fund, or certificate of deposit.
2. Write down goals. List your priorities from most to least important. Name your goals and determine what you’ll need and want to do first.
3. Treat yourself. While you shouldn’t overdo on celebrating, financial planner Joseph Montanaro says it’s OK to indulge a little. “A toy or two for yourself is fine, especially if it makes doing all the right things possible,” he says.
4. Get expert advice. Sure, you may want to tell all of your friends about your good fortune. However, your time might be better spent with trusted advisors.
5. Don’t expect miracles. Money doesn’t solve all of your problems, but it can make your life easier.