The very thought of budgeting and personal finance is enough to make some people’s skin crawl. Setting aside money for a savings account and limiting how much you can spend going out not only sounds boring, it sounds like it would make the rest of your life boring too.
Additionally, it’s hard to know where to start even if you wanted to. As a result, many of us go month to month paying our rent and utilities, insurance, car, phone, and credit card bills, and hope we have enough left over to have some fun before the next paycheck. When the next paycheck hits our accounts, we do the same thing, and again the time after that. If we’re not careful, we can spend years giving the vast majority of our money to phone carriers, insurance providers, credit card companies, fast food restaurants, and the bank to cover our loans. If that sounds like something you’re comfortable with, good for you. If not, you need to know how to pay yourself first, time and time again. Below is how to do it in six steps.
As with everything here, this involves no tricks, no sales, no software to download. You can, however, use this spreadsheet to help track your finances and see what we’re talking about as you read through this.
First Step: Your Emergency Fund
We recommend you make an emergency fund your first priority if you don’t already have one. It’s easy to lose sight of this in the military because our paychecks and jobs are about as secure as any in the world, but it’s a good idea to have at least three months worth of your salary set aside to cover any emergency that arises. If you’re getting out of the military or are changing duty stations in the near future or have a family to take care of, building that fund to six months or so worth of your salary is even better. If you can, set aside at least 10% of your income every month towards this until your emergency fund is built up to where you’d like it to be.
Money Gouge Tip
When you are considering whether you should have closer to three or six months savings be sure to include these factors:
- Will you be moving soon? Moving costs are high and you will likely be required to put a down payment or security deposit on a new place.
- Are you planning on buying a home? Your down payment should not come front our emergency savings but should be large enough to fix things like that AC that breaks after closing.
- Will you be deploying soon? Having a larger savings when you leave for deployment will give you the peace of mind that your family or personal financial picture is covered if you are not available.
- Anything that might increase your cost of living such as moving to a new area or having kids.
Second Step: Eliminate Your Damaging Debt
Let’s say you’ve built up an emergency fund using some portion of your paycheck every month to do so. On to the next step.
Your second priority should be to eliminate any debt with a “high” interest rate. If you have a good idea for what that number is, then great, use that. If not, we recommend you use 5%. Bottom line is that you need to pick a way to pay off your damaging debt and stick to it.
Third Step: Build a Habit of Saving for Your Retirement
Start investing in your retirement early. While you’re in the military, simply use the TSP do this. The S&P 500 (Or C-Fund in the TSP) averages an annualized return of about 9-10% every year. If you can find $500 a month to put into that fund, and keep doing that every month until you’re 65, below is how much that retirement account will be worth down the road. Note the difference between starting early and waiting until you “have more money” later on.
Age 20: $3.1 Million
Age 25: $2 Million
Age 30: $1.3 Million
Age 35: $819 K
Age 40: $500 K
It’s not hard to set up your account to automatically put money into the TSP and let the government match some of it. Our TSP article will walk you through it step by step. There will always be reasons not to start investing in your retirement, but once you start and you see your money begin to grow, you’ll never want to stop. Pay yourself first, early, and often. You’ll thank yourself later. We promise.
Fourth Step: Your Personal Financial Goals
The first three steps are things that we recommend everybody does, regardless of what your other personal financial goals are. Setting up an emergency fund, eliminating crippling debt, and starting to invest in your retirement can and should be top priorities for all of us. After those things are taken care of, you can start to focus on goals that are much more exciting. These look different for different people, and you should spend some time deciding what they are. Things to consider putting money toward:
- Down Payment on a House
- Down Payment on a Car
- Miscellaneous Big-Ticket items (TV, Furniture, Appliances, Etc)
- Upcoming Travel over Leave
- Expenses for upcoming PCS/PCA moves
Regardless of what it is you’re investing or saving for, determine how much you need for those items, how long you have to come up with the money, and how much you want to put aside every month to get there.
Fifth Step: Necessary Expenses
Necessary Expenses are all of the expenses we have no real choice but to pay. When it comes to getting your personal finances on track, a good rule of thumb is to use no more than 50% of your income for your necessary expenses. If you find this isn’t the case, find ways to cut your necessary expenses down. You might need to make a few sacrifices to do this. As you figure out how to do this, remember that nobody admires you for the car you drive or the house you live in. These things are interesting to look at, but the only person they really matter to is you.
Possible Solutions to cut Necessary Expenses
- Downgrade what you drive
- Downgrade where you live
- Downgrade or modify phone/TV/internet plans
- Take 15 minutes to meal plan every weekend to avoid constant trips to the commissary or eating out too frequently throughout the week
Sixth Step: Discretionary Expenses
Discretionary Expenses are all the things we buy but don’t need. This is where a lot of us hurt ourselves. Badly. There is nothing wrong with going out to eat, going out for drinks, or funding your hobbies. However, these things combined with countless small but regular expenses like energy drinks, coffee, cigarettes, various subscriptions, new clothes, or a new pair of shoes can quickly consume a ton of our income. Again, there is nothing wrong with setting aside money for discretionary expenses. In fact, we highly recommend you do so, but remember that this is money that could have worked for you, but you choose to never see again. Try not to let it take up more than 25% of your monthly income at most.
Set aside at least 25% of your income every month to pay yourself first. This looks like building an emergency fund and then paying off your debts. Once that’s complete, use that 25% to save for your retirement and contribute to your other financial goals. If you can do more than 25%, even better. Take a look at your necessary expenses and make sure they don’t take up more than half of your income. Do the same with your discretionary expenses to make sure they don’t take up more than 25%. It sounds simple, and it really is, but it takes time and discipline to do well. Automate as much of this as possible, especially transfers to build your emergency fund, debt payments, and retirement contributions.
Understand that there are many services available out there on how to create and stick to a spending plan on a daily basis, and many are very helpful. USAA and Navy Federal both have decent tools that allow you to make a budget and track your spending. Most credit card companies have some type of application that allows you to see what different types of things you spend your money on as well.
If you don’t want to use one of those, there are plenty of templates out there in addition to the one we offer here (simply type ‘budget template’ into Google and look at the countless results) that are free and relatively easy to use. You might even create a budget from scratch for yourself. If you especially struggle with budgeting and don’t want to have to put any legwork in, there are plenty of budgeting services out there designed to simplify it for you. YNAB and MINT are two of our favorites. They are incredibly helpful but they do have a small cost associated with them. Again, if budgeting is something you struggle with, this might be a great idea for you. Bottom line is that you need to find a way to track your monthly spending, and pay yourself first. Every time.