Got a financial question or situation that’s keeping you up at night? Maybe you don’t know where to cut costs to save for that vacation. Perhaps your nest egg just needs a little padding. No matter how big or small your financial goal, we want to hear about it!
Tell us about it in 350 words or less, and you could be featured in a future issue of Military Money magazine – and get free advice from a USAA financial expert. Send your e-mail to michael.kelly@usaa.com. Please include a daytime telephone number.
But first enjoy the following story of a real military couple, the Davenports.
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Fall 2006
Quinyon and Melanie Davenport have been married for two-and-a-half years, but they still feel like newlyweds when it comes to their finances.
The Davenports live a modest lifestyle in Virginia Beach, Va., where Quinyon, 24, is an Information Systems Technician, Petty Officer 2nd Class. Melanie recently returned to the workforce, and the couple wants to use the extra income to improve their finances.
“There’s really not a clear understanding between the two of us as to what we can and can’t do with our money – whether we should spend or save. As long as it’s there, we do what we want,” says Melanie, 22, who works as a loan processor. “We need a budget that we follow strictly.”
The Davenports also want to improve their credit scores, buy their first home and start saving for college for their one-year-old son, Quinyon Jr.
With only $400 in savings, $1,300 in medical bills and two cars with “issues,” Melanie is concerned. “I always feel like something is going to come up, and we may not be prepared to pay for something extra,” she says.
So where do they begin?
All Goals Are Not Equal: Build Balance
With the help of June Qalbert, a Certified Financial Planner™ practitioner with USAA Financial Planning Services and a Lieutenant Colonel in the U.S. Army Reserve, the couple can begin to set some priorities:
Learn budget basics. Walbert recommends the couple keep track of where their money is going. “It’s difficult to know how much you can save if you don’t know how much you’re spending – and on what,” she says.
Quinyon admits that he is lax when it comes to money, so Walbert suggests recording their spending in a notebook. After the first month, the Davenports can use that information to establish a working budget.
“The golden rule is to pay yourself first,” Walbert says. “You should save at least 10 percent of your income. Right now, the Davenports are saving only four percent.”
Walbert suggests they make saving and investing an item on the budget and automatically transfer money electronically into their savings account or Thrift Savings Plan (TSP) before they see it – and spend it.
Use a formula for saving. Walbert recommends that the Davenports allocate their savings as follows: 45 percent for paying down debt, 45 percent for retirement, and 10 percent for Quinyon Jr.’s college education.
The great news is that the couple doesn’t have credit-card debt, so they can focus on paying down those medical bills. Then they can shift their focus toward building an emergency fund.
“The goal is to establish an emergency fund to cover three to six months of living expenses,” Walbert advises. “Save the money in a no-risk money market mutual fund or other high-yielding cash account that gives easy access, if needed.”
Once the emergency fund target is met, the Davenports can begin putting those funds toward a down payment on their first home.
Next, the couple needs to use the 10 percent savings goal to revisit their retirement savings.
Though Quinyon is putting away money in the TSP, Walbert suggests he and Melanie both open Roth IRAs to take advantage of tax-free compounding for retirement.
Because they’re moderate investors, Walbert recommends they allocate their Roth IRA funds as follows: investment-grade bonds, 40 percent; large-company stocks, 30 percent; small-company stocks, 10 percent; international stocks, 10 percent; high-yield bonds, 10 percent.
“The Davenports have the luxury of letting that money grow for the next 40 years,” Walbert says. “By diversifying their portfolio, they will smooth out the market’s ups and downs.”
To help ensure that their college savings grow as well, Walbert recommends the Davenports invest that last 10 percent in a no-load, low-cost Section 529 College Savings Plan.
“The growth on the money can be withdrawn tax-free when it’s time to pay for college. And there are no annual income limits,” Walbert says.
Establish good credit. Though the Davenports have very little debt, they want to improve their credit scores, which are low because they haven’t established credit.
Walbert suggests they start by obtaining a free copy of their credit reports at www.annualcreditreport.com and reviewing it for inaccuracies.
Since the Davenports currently don’t have a credit card, they should obtain a no-fee credit card, use it each month and pay it off in full.
“Credit cards can be a great tool for building credit and proving you’re a good credit risk. But be sure to pay off your balances each month if possible,” she says.
By improving their credit scores, the Davenports will have a better chance of securing a competitive interest rate on their first home loan.
More Coverage Needed: Revamp Insurance
Though the couple has adequate health insurance – thanks to Quinyon’s excellent military benefits – there are holes to fill in other areas:
Purchase renters insurance. Without a renters insurance policy, the couple’s belongings are at risk. “If your apartment burns down or is burglarized, the landlord has no responsibility to replace your belongings,” Walbert says. “And you may need a separate Valuable Personal Property policy for the gold heirlooms that were passed on to you from your grandmother.”
Get life and disability insurance. While Quinyon’s Servicemembers Group Life Insurance (SGLI) and disability coverage are excellent, Melanie is uninsured. She should obtain a $300,000 term life insurance policy in addition to the $100,000 spousal SGLI benefit. And since her income is important to their household, she needs to find out whether her employer offers disability insurance. If it does not, she should shop around for a policy to help replace her income if she becomes ill or injured.
Bump up liability coverage. To avoid a financial setback in the event of an at-fault car accident, Walbert suggests that the couple increase their bodily injury liability insurance limits to $100,000 per person, $300,000 per accident and $100,000 for property damage.
“It’s important to monitor your liability protection and increase it as your wealth grows,” she says.
Once Quinyon and Melanie have established their emergency fund, they should consider raising their collision deductibles from $200 to $500 to lower their premium.
Estate Planning Necessary: Create Documents
Quinyon already is on the JAG office’s list to have a will drafted that names guardians for their son, but Walbert wants to make sure he and Melanie develop a complete estate plan.
Walbert recommends that the Davenports work with JAG to develop a durable power of attorney, healthcare power of attorney and a living will.
She also suggests drawing up a letter of instruction and ensuring that the beneficiaries for their IRAs, TSP and life insurance are up to date, and that they name back-up beneficiaries.
Now that the Davenports have a financial plan to put into action, they can feel like old hands rather than newlyweds when it comes to managing their money.
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Michael Kelly is Executive Director of USAA’s military communications program and a retired Air Force Public Affairs Officer with 25 years of service. USAA is a diversified insurance and financial services organization that has served the military community since 1922. USAA Financial Planning Services refers to financial planning services and financial advice provided by USAA Financial Planning Services Insurance Agency, Inc. (known as USAA Financial Insurance Agency in California), a registered investment advisor and insurance agency, and its wholly owned subsidiary.
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Tips For Repairing Damaged Credit
Credit scores range from 300-850. Scores above 680 are good, while scores below 620 may indicate credit problems. If your score is less than stellar:
1. Check your credit report for mistakes. Review your report at least once a year. You can get a free report annually at www.annualcreditreport.com.
2. Pay off or pay down credit debt. Pay off the bill with the highest interest rate first. Discuss payment plans with your creditor if you’re having trouble making payments.
3. Keep a low balance. If you must carry a balance on your credit card(s), keep it to 30 percent of your credit limit. If your maximum is $1,000, try to carry a balance of $300 or less.