Building A Proper Budget

Building wealth is not about how much you make, it is about how much you keep. Creating a budget is an important step towards financial freedom. It is imperative to understand how to make the most with what you have and to live within (or below) your means. A well planned budget and the discipline to follow it will be the road map towards your financial success.

Steps to Building A Proper Budget

  1. How Much Money Is Coming In?
  2. Track Where Your Money is Going
  3. Know Where Your Money Should Go
  4. Create Your Plan
  5. Make Adjustments As Needed

How Much Money Is Coming In?

You should not spend what you do not have, so find out how much money you are bringing in. The term for how much money you make is called your “inflow.”

Luckily, it is very easy to find out how much you make a military servicemember. The pay chart for 2020 is shown below! 



Track Your Money!

Your next assessment should be how much of your money is going out, or your outflow. 

The digital age has made tracking your money simple. Personally, I track my money by putting all of my spending on my credit cards. I check my online credit card statements a few times every month to see where my money is going. Similarly, you can check your debit card statements if you use a debit card.

If you prefer to use cash, the envelope method is an alternative way to track your spending. Simply write down the name of an expense on an envelope, and deposit the amount of cash you need into each respective envelope. If you go grocery shopping with your groceries envelope and run out of cash, than you know that you have to budget more or cut back on grocery spending.

Two free online budget planners are Mint.com and PersonalCapital.com. I use PersonalCapital.com as my accountability partner. PersonalCapital.com sends me an email everyday letting me know if I spent more money or less money compared to last month. It also has some cool calculators and pie charts to visually show you where your money is going.

Know Where Your Money Should Go!

How you choose to spend your money is your choice, but some things should be a higher priority than others. A good order of priorities to follow is:

  1. Paying Rent/Mortgage
  2. Buying Groceries
  3. Paying Essential Bills
  4. Paying Income Earning Expenses
  5. Pay Health Care/Life Insurance
  6. Make Minimum Payments On All Debts
  7. Start Your Emergency Fund
  8. Pay Any Non-Essential Bills In Full
  9. Contribute To Your Thrift Savings Plan Up To Maximum Match
  10. Pay Any High Interest Debt
  11. Continue Building Your Emergency Fund
  12. Pay Any Moderate Interest Debt
  13. Contribute Towards MAXING Your IRA/Roth IRA Contributions
  14. Add To Your Saving Account For Large Purchases
  15. If You Have A High-Deductible Health Plan, MAX Yearly HSA Contributions
  16. Contribute To Savings/Investment Options, Such As A 529 Plan
  17. At This Point, If You Maxed All Your Tax-Advantaged Options, Either Contribute To Taxable Accounts Or Enjoy The Money

Creating A Plan

As an active duty military service member, your inflow is very easy to calculate. In fact, below are the enlisted and officer pay charts for 2020!

For a newly enlisted E-1 we can expect:

  • 23% Paid For Housing, Although We Will Assume BAH Covers This ($0)
  • 15% Paid For Taxes ($270)
  • 10% Invested For Retirement ($180)
  • 5% In Savings ($90)
  • 10% Paid For Transportation ($180)
  •  4% Paid For Insurance: SGLI/Renters ($72)
  • 15% Paid For Loans: Student, Auto, USAA Starter Loan, etc. ($270)
  • Everything Else: Groceries, Cell Phone Bills, Having Fun ($738)

For a newly commissioned O-1 we can expect:

  • 23% Paid For Housing, Although We Will Assume BAH Covers This ($0)
  • 20% Paid For Taxes ($620)
  • 10% Invested For Retirement ($310)
  • 5% In Savings ($155)
  • 10% Paid For Transportation ($310)
  • 2% Paid For Insurance: SGLI/Renters ($62) 
  • 15% Paid For Loans: Student, Auto, USAA Starter Loan, etc. ($450)
  • Everything Else: Groceries, Cell Phone Bills, Having Fun ($1,388)

You can see my personal budget as an O-1 here: https://militarymoneyjar.com/my-personal-budget-o1/

Your budget is personal to your situation. By now you should have the tools to track your cashflow and figure out where it should be going. How you choose to spend it afterwards comes down to your discipline and commitment to your goals. Fortunately, you do not have to live by the budget forever. You can make adjustments as necessary.

Make Adjustments As Needed

Chances are you are going to face many lifestyle changes during military service. Your budget should be flexible enough to adjust for changes such as income changes (promotion, spouse, government shutdown) or expense changes (child, moving, travel). By keeping your budget flexible you can put yourself in a position to put extra dollars to good use, or to protect yourself from overextending if money is tight.

If you are comfortable with you budget, it does not need to change with each promotion. “Lifestyle Creep” is a common term used to describe people that increase their style of living with their increased cashflow. This can be acceptable in your first few promotions, but always keep in mind how those extra dollars could be saved/invested and working for you instead. 

Tips

  • Budgeting
  • Saving Money
  • Credit
  • Debt
  • Loans
  • Investing Money