A budget is simply a tool that allows the tracking of expenses and income. A budget helps a family by providing a way to systematically plan for future expenses, achieve financial goals, and reduce debt. A budget is an interactive tool that helps direct each of your financial decisions.
What is the best time-frame for a budget?
Since military families receive their military pay and benefits on a monthly basis, as listed on the Leave and Earnings Statement (LES), it is best to use a monthly budget. However, when first starting out, keeping track of expenses should be done on a more frequent basis, either weekly or even daily. Once spending is under control, then the frequency of updating a budget can be reduced. Once established, a family should continue to use a monthly budget for at least one year, since many expenses are only encountered on a yearly or twice a year basis, such as auto insurance payments, or holiday gift giving.
How do I budget for one-time expenses?
Budgeting for a predictable, one-time expense is relatively simple. Take the annual, total amount of that expense and divide by 12. Save that amount each month and dedicate the funds to paying for the one-time expense when it comes due. An example of this type of expense that comes due only once a year is property tax (not escrowed). For example, if annually property taxes are $2,400 due on June 1st each year, set aside $200 each month.
For unanticipated occasional expenses, such as the car overheating or a laptop crashing, create a special fund earmarked for these types of events. Contribute a small amount each month to this fund, and only use those funds when such an unanticipated event occurs.
For true emergencies, such as a job-loss, emergency medical bills, or travel because of a death in the family, an emergency fund can be used. As discussed in a previous module, the emergency fund should be approximately two to six months of your necessary living expenses. If you do have to pull money from your emergency fund, afterwards reevaluate your financial plan and budget, and replenish your emergency fund as soon as possible.
What is discretionary income?
Discretionary income is the amount of money that is left over at the end of the month AFTER all expenses have been paid and accounted for. With a written budget, you’ll be able to track your income and expenses, and thus you will be able to identify if there is discretionary income available. Many families end up overspending each month by using credit cards to make purchases and carrying a credit balance. If savings is a financial goal, a portion of the discretionary income should be used towards that savings goal.
How should I prioritize where I save?
A military family has many pressures on them, including financial goals. However, there are certain financial priorities.
#1 Emergency Fund. Building an adequate emergency fund should be your top priority. This is money set aside for the worst-case scenarios and bona fide emergencies. Credit cards should never be used for emergencies, since they contribute to debt problems.
#2 Retirement Accounts. Each year, there are limits to how much you can contribute to your retirement accounts. If your employer offers 401k or other retirement plan contribution matching, then you should take full advantage of your employer’s match. Please refer to the Retirement Planning module for specific details on retirement planning and investing. Time slips by; you only have so many years to save for retirement. It should be a priority in you budgeting plan.
#3 Pay Down Consumer Debt. Paying down the debt you’ve accumulated through consumer purchases should be your next priority. Paying off your credit cards is essential for establishing healthy financial practices. If you have a balance on more than one credit card, you should make it a priority to pay off the card that charges the highest interest rate.
#4 Occasional Expenses Account. Once you have taken care of the previous three priorities, you should set aside funds for unanticipated, occasional expenses, such as a car or appliance breakdown.
In addition, you should look five to ten years into the future to anticipate rare events that may need significant amount of funds and begin to save for these. A few examples of this type of expense are: car replacement, major home repairs, school tuition, and a wedding.
For an individual consultation concerning your budgeting needs, call a Member Services Advisor at AAFMAA at (800) 522-5221.