Radio personality Dave Ramsey says, “through knowledge and discipline, financial peace is possible for all of us.” Your military transition is a good time to assess your road map progress toward financial independence and financial peace — and it presents an opportunity to examine your personal financial habits and goals. As the backbone of achieving financial independence, financial planning should include examining your cash flow, debt and savings, taxes, protection such as life insurance, retirement and goal planning, and estate planning.
What Should Be in Your Financial Plan?
The four main components of a financial plan are your balance sheet, a budget, financial protection plan, and saving and investment goals. We’ll cover the last two topics in Part 2 of this story.
Balance Sheet
The balance sheet is an overview of your financial health at a specific moment in time. It considers your total assets, less your liabilities and provides your net worth. If your assets exceed your liabilities, you have a positive net worth. However, if your liabilities exceed your assets, you have a negative net worth. Why is your net worth important? It allows you to evaluate your financial status and can help you focus on what you can do to reach your financial goals.
Budget
Your budget is a plan that helps you manage your money by showing your monthly income, less your expenses. The result of a budget is to determine your available cash flow or the amount of money remaining after your expenses.
A good strategy is following the 50-30-20 budgeting rule. There are various ways to set your personal budget by allocating a certain percentage of your income towards your lifestyle. The 50-30-20 rule is an example of a guideline to which 50% of your income is allocated toward your needs such as (housing, bills, childcare, food, etc.), 30% for things you want such as (e.g., hobbies, entertainment, or travel), and 20% for savings and debt repayment. Living within your income and planning to save is the building block of financial independence.
As you plan your transition, you need to understand what your post-military income will be. It can include your military retirement, VA disability compensation (if applicable), post-military employment income and, in the future, your Social Security benefit, plus income from investments.
Other Considerations
While active, your base active-duty pay is taxed and your basic allowance for housing and subsistence entitlements are non-taxable income. Once you have left the service, you will be free to choose where in the country (or world) you live now. Understand how different states tax military retirement, as that could make a significant difference in your budget. You may need to consider your healthcare, dental and vision coverage, in some cases you may need to pay for or access these benefits through an employer provided plan. Another need you will plan for is purchasing a home, consider the VA home loan program. Working with a mortgage lender that understands military and VA benefits, such as AAFMAA Mortgage Services LLC (AMS), can help ensure you take advantage of all the benefits available to you.
For more information on additional topics to consider in preparing for military retirement, please see the following:
If you have questions about military benefits and entitlements, financial education, and independence before, during or after your military transition, please contact an AAFMAA Member Benefits representative at 800-522-5221, option 2, then option 2 again. Or email [email protected].
When you’re not yet ready to retire, but you are separating from the service, check out our 6 Decisions Before You Separate series for information about choices you’ll need to make.