Paycheck Chronicles

From The Mailbag: What's A Transition Fund?

One popular concept of personal finance is to have different buckets of money to handle different needs.  For example, you might have a car replacement fund, or a "my kid is going to need braces" fund, or a wedding fund.  If you are in the military, no matter how many years you think you have left, you need to be thinking about your transition fund.

Dear Kate,

I've heard you refer to a "transition fund."  What is that, how much do I need, and where do I put it?

Thanks,

Rex

I love, love the security of having a transition fund, and the earlier you start, the easier it will be.

Dear Rex,

Thanks for asking!  Transition fund is my name for the bucket of money set aside to help you through the transition from the military to the civilian world.  Everyone leaves the military eventually; being financially prepared will make it so much easier.

The size of your transition fund depends on a wide variety of factors.  Are you married, and do you have children?  Is your military income the family's only income, or is there other income?  What do you envision doing when you leave the military?  When do you think you will leave the military?  What happens if your military service ends earlier than expected?  Will you move?  Will you go back to school?  Will you have the GI Bill?  What will your family situation be when you get out?  (We'll have three kids in college -ack!)  Are there other variables?  Do you have a realistic understanding of how long it takes to find employment?  How much money do you need to survive each month?

Once you've thought about these questions, then you can do some rough math to figure out how much money you need in your transition fund.  If you're a single person who plans to go straight to college and use the GI Bill, you may not need much.  If you are the sole income for a large family, with a mortgage and other big bills, you're going to want a significant amount of money.  If you start thinking about transition when you enter the military (you should,) this number will change over time, typically going up until you reach eligibility for retirement, at which point it will go down because you will include retirement income in your calculations.  Keep in mind that there are likely some surprise expenses that you haven't considered, such as the cost of re-registering your vehicles in your new state of legal residence or putting your household goods in storage while you figure out where you want to live permanently.

Once you've figured out how much money you want to save, then comes the hardest part (for me, at least.)  Accumulating it.  It might not be too hard if the amount is small and you have few expenses, but many military families are spending all they earn each month.  This is why I strongly recommend starting your savings the day you enter the military.  Just a few dollars each month will add up, and your savings will grow as your need for a larger transition fund grows.  If you're starting late, you may need to be more aggressive or scale back the size of your fund.  Don't be discouraged - this is a situation where every dollar is valuable.

Where to keep this money is a difficult question.  Generally speaking, the shorter the timeline, the more accessible you want the money.  Unfortunately, you can't always predict when a military career will end.  Injury, changes in family situation, or just a reduction in forces can cause you to get out earlier than planned.  You want to keep this transition fund somewhat accessible while still earning as much interest as possible so that its value won't be eroded by inflation.  There are lots of different choices out there.  For me, laddered Certificates of Deposit, taking advantage of the various promotional rates available from different banks and credit unions, gives the best combination of earnings and accessibility.

Happy planning,

Kate

I love that this reader is thinking about this!  I get many questions from folks who waited until the last possible moment to consider their transition to military life, and those questions are usually from a state of panic.  Planning early will lessen the financial burden during a time of many changes.  And that's a good thing!

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