Commentary

December 6, 2012

Planning your financial future

Capt. Nate Mealy
Legal Assistance NTC and Fort Irwin

When planning your finances, it is helpful to think in terms of five buckets of money that you will use for different purposes. Into the first bucket – living expenses – you are going to pour only that portion of your income which will cover your day-to-day living expenses, such as food, rent, clothing, gas, etc. When shaping your day-to-day living expenses, keep in mind that the lower your costs of living, the more savings you will have – savings you can use for your children’s education, outstanding debts, or the occasional vacation or big night out with the significant other. So, if you can live without cable, a brand-new sports car, a subscription for movie rentals, the next big video game, or unlimited data plan, try to do so. You’ll thank yourself in 20 years. Though reserving for yourself some discretionary income within the first bucket for “fun” things is absolutely fine, keep in mind that it should take up the least amount of room in your first bucket.

You should strike a balance between the remaining four buckets. The second bucket is an emergency savings bucket. It should contain enough money to cover three to six months of your most essential day-to-day living expenses (food, car payments, rent, etc.), as well as a chunk of money to cover an automobile or health crisis. Do not skimp on this bucket because if you lose your job or a family member falls ill, you will need it to stay on your feet without going deep into debt. It should take you a number of months of very intentional saving for you to fund this bucket. As your responsibilities increase – e.g. you have kids, acquire a mortgage, etc. – the amount in this bucket should increase.

The three remaining buckets are all closely related because they anticipate your financial needs years down the road. After you account for living expenses and emergency savings, your remaining money should go into long-term saving, a Thrift Savings Plan, and some other retirement plan.

The long-term savings bucket is used to save for large purchases/investments in the near to distant future. Examples of such purchases/investments are a car, a home, or a child’s college education.

The two remaining buckets, the private retirement investment account (i.e. 401(k)s and IRAs) and TSP buckets, relate directly to your retirement. Though the Army offers an excellent retirement pension plan for those who qualify for it (typically a monthly payment of half of the average of your last three years in the service), electing a supplementary retirement plan like an Individual Retirement Accounts or TSP is important.

The Army TSP allows you to automatically sign up to have DFAS redirect a percentage of your pay into a retirement savings account, which you can elect to invest in large company stocks, small company stocks, international company stocks, bonds, cash, time-based investments, or a combination of the above. You may invest up to $17,000 per year into your TSP when you are not deployed and $49,000 per year when you are deployed. There are two types of TSPs: (1) the standard TSP which defers taxes on the money you invest until you withdraw it and (2) the Roth TSP (new as of April 2012), which taxes the money that you invest before you invest it, so that when you withdraw it, you withdraw it tax-free. Please visit https://www.tsp.gov/index.shtml to sign up for a TSP and to learn more, particularly the limitations that apply to when you can withdraw your money and how Soldiers can roll their TSPs into 401(k)s should they leave the Army.

The final bucket consists of private retirement investment accounts like 401(k)’s and IRA’s. A 401(k) and IRA functions almost exactly like a TSP. Essentially, should you as a Soldier either feel that your military pension or your TSP is insufficient for your retirement or if you want to leave the Army to work in the civilian sector, then opening a 401(k) or IRA is good idea. A 401(k) is an investment account sponsored by your employer. Each year you are authorized to invest a specific amount of money, usually no more than a couple thousand dollars, which your employer can match. It is into these types of accounts that Solders leaving the Army typically roll their TSPs. An IRA is different from a 401(k) in that it is 100 percent controlled and sustained by you, whereas your employer chooses your 401(k) investment plan for you. An IRA works well for the self-employed or for people who seek another layer of retirement protection.

Should you have any questions about anything addressed in this article, please feel free to stop by Legal Assistance in building 288 to set up an appointment with an attorney. Army Community Services is a helpful resource for financial advice as well.




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