With federal budget cuts and an uncertain economy, it’s always wise for military families to keep a close eye on their personal finance decisions. Nowadays, it seems like it is pretty easy to create a budget and financial game plan; that’s because of the tried and true money rules that you read in magazines, newspapers and trusted websites.
However, some of the tried and true rules of the past may not apply to your family. Here are six of these rules and instances when you may want to break the rules.
1. Save Approximately 10% of your Annual Income
As reported by USAA, a popular financial institution for military members and their families, putting aside 10% of your income into savings is an old, and typically good, rule of thumb. However, if you are a late bloomer when it comes to saving, you’ll want to save a larger chunk of your income to ensure that you have enough set aside when it’s time to retire.
As stated by J.H. Montanaro, a financial planner through USAA, “If you’re in your 30s or beyond and just getting started, 10% probably is not enough.” To determine how much you should be setting aside, USAA recommends utilizing a retirement calculator through a trusted source. Many banks, credit unions and financial planners feature these calculators on their websites for clients to use.
2. Convert a Traditional IRA into a Roth for Tax Savings
As told by SmartMoney.com, in the past, many consumers have been attracted to Roth IRA’s. This is because with a Roth IRA, contributions are taxed instead of withdrawals. This has been thought to be a prudent choice as tax rates could be higher in the years to come. And now, consumers are able to convert their traditional IRAs into Roths to take advantage of this so-called benefit.
However, taxpayers may see better benefits by staying with the traditional IRA. As explained by David Peterson, president of Peak Capital Investment Services, the traditional IRA will lead to larger savings for those people who are about five to 10 years away from when they would like to withdraw money. This is because it will take at least five years to make up the cost of converting from a traditional to Roth IRA.
In the past, those who converted from traditional to Roth IRAs also had more time to pay the taxes on the conversion. Now, it’s taxable at once and could bump you into a higher tax bracket. This means it’s probably not a great option to convert all of your IRA at once if your family’s cash flow has decreased.
3. Buy a House if the Price is 2.5 times your Annual Income
USAA warns that while this is typically a reasonable guide to follow when determining whether you can afford a house, there are many more factors you first need to take into consideration. This includes calculating in the cost of taxes, insurance, house maintenance and the amount of cash you have available for a down payment.
Military families also need to keep in mind how long they plan to live in the house. If you are active military, is there a chance that you could relocate in the next couple of years? If so, you will want to determine if you would be looking at the property in question as rental income or if you would need to sell it again in a short amount of time. Even if the listing price falls in line with your annual income, the costs involved in purchasing and then selling the property fairly soon thereafter are likely to outweigh any investment benefits.
4. Choose a Mortgage with the Lowest Possible Interest Payments
In order to get the lowest possible interest rates, consumers must have a large down payment (at least 20%) and have a shorter mortgage term. As told to SmartMoney.com by Chip Cummings, president of Northwind Financial, these steps “create a setback for a borrower – especially in still-uncertain housing and employment markets”.
When home values are in a decline, it may be a smarter choice for consumers to opt for a smaller down payment and keeping the rest in savings. And by opting for a 30-year mortgage instead of the 15-year mortgage, your rate may be slightly higher but you typically will see a monthly payment that is 20 to 30% smaller, which will increase the monthly cash flow for your family.
5. Pay with Cash Whenever Possible
While it’s good to ensure that your family stays as debt-free as possible, paying only with cash can create problems for you down the road.
SmartMoney.com advises that in order to build and maintain a good credit score, you need to use your credit. Many consumers have found that when they stop using their credit cards, their credit card issuers are decreasing their limits. This can come back to haunt them if they are in an emergency and need to make a high ticket purchase.
Credit cards also provide your family with certain security protections that can really pay off. For example, if you pay with cash for merchandise that then breaks and the merchant is unwilling to honor their warranty, you are immediately out that money. But if you used a credit card, you can dispute that purchase through your credit card company and have greater chances of getting that money back. And if your credit card is stolen, you are only responsible for up to the first $50 of fraud. If your cash is stolen, well, it’s stolen.
6. Carry a Credit Card Balance to Build your Credit
This has actually never been a rule; just a myth that keeps getting repeated over and over again. Many consumers believe they need to carry a balance on their credit cards in order to improve their credit score. However, carrying too high of a balance can actually harm your score. It will also harm your family’s savings because it will cause you to have to pay interest on your purchases.
Instead, focus on keeping your credit card account active but pay your entire credit card balance each and every month. This will make it so you are paying $0 in interest and still getting the benefits of credit cards. It will also help you build your credit score, as potential lenders will see that you pay your bill on time each month!