This content is provided courtesy of USAA.
Joining the military opens a wide world of opportunities. But those first few years in the service can put your budget through some grueling tests. Pitfalls wait around every corner and too many wrong moves could do irreparable damage to your financial future.
"Most new recruits are young, don't have money to burn and have relatively little experience managing their own finances," says Glenda Oakley, a USAA employee and former Army platoon leader. Oakley has seen their financial challenges firsthand, both on base and through 15 months in Iraq. "I tried to help my soldiers understand that the decisions they make now will stay with them their entire lives."
Oakley and USAA CERTIFIED FINANCIAL PLANNER™ J.J. Montanaro identify 10 money missteps that all new recruits and junior enlisted personnel should try to avoid.
1. Failing to Budget
"It's critical to live within your means," says Montanaro. "That requires sitting down and separating the things you want from the things you really need."
Oakley suggests setting aside a reasonable amount of "play money" at the start of every month, and using it to pay for non-essentials like entertainment or eating out. There's only one rule: "When it's gone, it's gone," she says.
Another important budgeting decision relates to where you live. Many junior enlisted want the freedom of living off-post, but it can be much more expensive than the low-cost housing and amenities available on base.
2. Buying Too Much Car
It falls into the budgeting discussion, but springing for a slick new ride is so common among new recruits, it deserves a separate mention. While it may not impress your friends, a new economy car or a sensible used car can help you stay on solid financial footing.
Also, says Oakley, remember that you're buying more than a car. Shop around for your auto loan and insurance to make sure you're getting competitive rates. And don't be afraid to ask a noncommissioned officer for advice. "They're there to help," she says.
3. Putting Off Retirement Savings
For anyone just starting their career, retirement seems like a lifetime away. But taking advantage of the military's Thrift Savings Plan from the very beginning could make it easier to build a nest egg for later in life.
"Even small contributions every month can start to add up over time," says Montanaro.
If you're deployed to a combat zone, don't overlook the Savings Deposit Program, a savings account that pays a 10% interest rate.
4. Blowing Your Bonus
Enlistment bonuses and other special pay just scream to be spent on a bigger TV or a new tattoo. But chances are you can think of a more responsible use of that money. One of these days, you'll thank yourself for paying off debts or setting aside a rainy-day fund.
5. Spending Money You Don't Have
The "I want it now" mindset is even more dangerous when you don't have the cash to pay upfront. Putting big purchases on credit cards, or worse, taking out a payday loan, can come back to bite you in the form of high fees, interest charges and mounting debt.
"Credit cards shouldn't be used to supplement your income," says Oakley. "If you do use them, pay them off quickly before the balance keeps growing."
6. Thinking Short Term
Learn to separate a good deal from a dud by looking at the total costs involved. Rent-to-own-furniture stores or promises of "no payments until 2015" might tempt you with low initial costs, but can nickel-and-dime your budget to death if you don't adhere to strict payment policies. As with any major purchase, if a deal seems too good to be true, it probably is.
7. Not Protecting Your Property
Even if you don't own a home, you likely have possessions (furniture, electronics and more) worth thousands of dollars, especially if you live off-post in an apartment.
"A lot of people are under the impression that their landlord covers their belongings if there's a fire or a flood, but that's not the case," says Montanaro. "An inexpensive renters insurance policy can help protect you from financial disaster if you have to replace everything you own."
8. Ignoring Your Credit Report
Once per year, take advantage of your right to get a free credit report at annualcreditreport.com. Your report details your history of borrowing money and making payments on time. Correcting any errors on your report could save you money by helping you qualify for lower interest rates on loans or get approved for affordable housing. If you've had a troubled history of managing debt, now's the time to change your ways and improve your credit.
9. Opting Out of Life Insurance
As a military member, you're automatically enrolled in Servicemembers Group Life Insurance (SGLI), unless you opt out. For young members without a family to support, saving some money by forgoing life insurance might seem like a good idea. But Montanaro says to think carefully before taking that route.
"Even if you don't need life insurance right now, keeping it can have benefits later on. If you interrupt your coverage, you could have trouble qualifying in the future, especially if you have a medical condition."
10. Flying Without a Parachute
Life is full of surprises, and they're not always good. A broken washing machine or a medical emergency could set you back hundreds or thousands of dollars. If you have no choice but to pay with credit cards, the expense could haunt you for years. A better way is to plan for these setbacks in advance, and set aside a financial cushion. Contributing a small amount to your emergency fund every month can add up quickly and help to ease the blow when trouble comes.
Living on a modest income, it's understandably hard to put aside funds for savings, insurance and debt reduction. But making sacrifices now is almost always better than paying the price later.