Both of my parents are college professors. My dad has taught finance, including personal finance, for over 30 years. My mom taught accounting for almost 25 years. Growing up, I am sure they told me many things about money. Only a few of them stuck. Here are the four basic tenets of personal finance I learned from them. I’m sure they had other things that they taught at me, but I wasn’t picking up what they were putting down. This article is my attempt to explain the basics of personal finance in a way that I, and hopefully you, understand.
- Spend less than you make.
- Never carry a balance on a credit card.
- Put 10-15% of your pay every month into a retirement account.
- Have an emergency fund.
I’m sure there were several more lessons, but those are the ones that I remember. There was no discussion that I remember of the why or the how behind them. That being said, these 4 rules are the fundamental concepts you need to understand how to manage your money and potentially retire early.
For this article, let’s assume you make $20,000 per year (enlisted salary). You live in the barracks and eat on the military’s dime.
Base Rate | $20,000.00 |
Tax Rate | 12% |
Net | $17,600.00 |
Monthly | $1,466.67 |
So every month, so you need to spend less than $1,466 per month in order to spend less than you make. Using the budget I outline below, you will be saving for retirement and emergency funds. Generally speaking, credit cards can be a huge financial burden if managed incorrectly. However, there are perks such as travel points and cashback. Those benefits only outweigh the financial harm they can cause if the card is paid off in full every month.
The guidelines I would add to this are as follows.
- Develop a budget and follow it.
- Track your spending and savings.
- Always work to excel at your primary job.
Here is what many experts advise for how to allocate this money for. These numbers are generated accounting for taxes, using the 12% tax rate. This does not account for a state income tax, or any other obligatory payments you may have. It is broken down monthly.
Item | Percentage | Amount |
Housing | 35% | $513.33 |
Savings/retirement | 15% | $220.00 |
Transportation | 15% | $220.00 |
Food | 10% | $146.67 |
Medical | 10% | $146.67 |
Utilities | 5% | $73.33 |
Personal/Fun | 5% | $73.33 |
Flex | 5% | $73.33 |
100% | $1,466.67 | |
Some of these numbers, based on my experience are a bit off. For example, for my wife and I (if I was not in the military), our medical insurance cost was more than double that amount. We also spend more on food than that. This is a guideline, not hard and fast rules. The idea is to adapt this to your life and situation. If you have student loans or a car payment, that is a significant chunk of your income usually.
For those in the military on active duty, the majority of these are paid for by the government, either with a military barracks room or a housing and subsistence allowance. It also takes care of medical costs. That probably accounts for over 50% of the above list (hence why they don’t pay you as much when you live on base and eat in the dining facility). This gives you about $730 after taxes that you can reallocate to other areas every month.
Item | Percentage | Amount |
Transportation | 20% | $293.33 |
Food | 20% | $293.33 |
Retirement | 15% | $220.00 |
Savings | 13% | $190.67 |
Personal/Fun | 12% | $176.00 |
Utilities | 10% | $146.67 |
Flex | 10% | $146.67 |
100% | $1,466.67 |
This is how I would allocate your salary if you live in the barracks and have a meal plan. Note that in this accounting, retirement and savings are divided. This allows you to save for future expenses much more quickly than above. For transportation, that includes car payment (if you have one), fuel, insurance, and maintenance. Food counts for what you eat in addition to your meal plan. It probably includes a lot of alcohol and tobacco if you are like the soldiers I work with. That’s fine, but I would probably moderate your intake of both of those things. For retirement, set up your Thrift Savings Plan (military retirement account) and allocate your contributions. There’s several options to choose from, so do your research. At the very least get it out of the default setting. For savings outside of retirement, I would use a money market or high yield savings account. As you get more financially savvy, there are other options for saving and invest. I’d worry about that once you have the basics down.
For personal and fun funds, I would track that closely. It is easy to overspend in this area. For utilities I the barracks, I’d include phone and cable, as well as laundry costs. Flex lets you account for any unexpected expenses or areas that vary month to month, like saving for plane tickets home or presents for Christmas.
One thing I never understood until recently was how much I should have in an emergency fund. For a long time I tried to keep $5,000 in my checking account. Things that I should have been planning for, like car maintenance costs, always seemed to wipe that out. Known costs like car maintenance should be planned for, not taken out of an emergency fund. In reality, I should have had about 6 months of costs in cash sitting in an account I would have to take extra steps to get to. This would have been about $20k at the time, since I lived off post and was responsible for my own food. In terms of the above budget, I would keep the equivalent of 6 months of costs not including savings. 6x $1,056 = $6,336. Once you have that in an account, you can start exploring other options for your savings. This emergency fund is critical for reducing your stress level. When you are making $20k, this seems like a massive amount. At a minimum I’d work to have 3 month’s of cash, or $3,168. You can build up from there. Life is so much more enjoyable and less stressful when you aren’t worrying about whether you can pay for unexpected bills.
The budgets outlined above meet the first 5 guidelines. For #6, I would use Excel at a minimum to track all your stuff. You could also use Mint or Personal Capital (I use both of these). For #7, promotion is the best way to increase your base salary. If you work hard, go to schools, follow the advice of your supervisors, and lead from the front, you will have no problem getting promoted and being financially successful.