Basics of Budgeting for Military Families
Lori Waddell & Joe Wallace
Basics of Budgeting For First-Time Budgeters
Have you ever wondered where all your monthly income went? We work hard every week and can’t seem to save anything or invest in our future. Some don’t have a budget and don’t keep track of how they spend over time.
Budgeting can be a day-to-day transformation of how you value and treat your hard-earned money. It won’t fix or solve your financial problems immediately, but it will change how you view your money and how it works for you.
Step 1 – List Income and Expenses
- Know your current income. Net income calculates the amount of income you receive after taxes and deductions. Net income is the baseline you should use to standardize your budget as it simplifies your expected take-home pay.
- Know your future income. Military members can view their pay charts to see what they will earn in the next higher pay grade or even in the next higher pay tier based on time in their current rank. Future budgets may depend on those numbers; it’s smart to anticipate them.
- Know your future expenses. Are you planning a change in family size? Do you have a school-age child you’ll be sending to college soon? Anticipate these future costs, they will be upon you sooner than you think.
- Determine your monthly fixed expenses. Fixed expenses do not change from month to month. List all fixed expenses you have whether they are essential or discretionary such as; car payments, insurance, phone bill, Netflix, rent, savings, investing, and student loan payments.
- Know your variable expenses. Variable expenses can change from month to month. List all variable expenses you have, whether essential or discretionary such as; fuel, food, entertainment, clothing, and home or vehicle maintenance.
Step 2 – Subtract Expenses From Net Income
- Set aside money – if your expenses are less than your net income, this presents a great opportunity to set aside more money for your financial goals.
- Adjust as necessary – if your expenses exceed your net income, then you need to adjust your discretionary spending to see where you can reduce costs.
- Identify roadblocks – identifying expenses allows you to better understand where you are spending your money. This will help you identify where your financial roadblocks are.
- Don’t forget about your taxes – Did you buy a house recently? Have you started college courses? You may have deductions waiting for you at tax time that can help your budget. But don’t underestimate the potential for having to pay the IRS if your tax calculations didn’t include a crucial deduction or one that was permitted in years past but no longer.
- Situational expenses count – Did you have to move this year? Did you get a Permanent Change of Station orders and relocate to a new base? Was your home damaged in a natural disaster? Don’t overlook such issues when it comes to your budget. It may be wise to start a contingency fund to handle unexpected costs along the way.
Step 3 – Identify Your Goals and Make Adjustments
- Have a goal – having a goal behind your budget will help it succeed by increasing motivation. Review the areas where you spend money and see if they align with your new goals. You might need to eliminate or reduce some expenses if they don’t.
Examples of goals would be paying off debt, saving for retirement, paying off college, building a savings account, saving for a vacation, and saving for a down payment.
- 50/30/20 Rule – if you are just starting with budgeting and not sure of how much money you need to accomplish your goals but want an easy starting point, start with the 50/30/20 rule.
50% of your income should be spent on essentials, 30% should be spent on discretionary spending, and 20% for savings and investing.
- Remember variable expenses like food and gas – variable expenses can be tricky to budget for, especially food. When budgeting for food, find a dollar amount per person per day that seems reasonable.
Another variable expense that gets people is fuel. Review your last few months of fuel costs and use the average amount as your monthly budgeted cost. It pays to overestimate these costs a bit if you can. It’s better to earmark a bit more upfront in your budget than to be caught short.
After completing these steps, you may be ready to set up and start your new budget. If not, you can always get financial advice from Department of Defense resources. Once you have set a budget, it’s important to review it every few months; your goals and resources can change.
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