I was talking to my military friend Phil last night (name changed to protect the innocent!). Phil is reenlisting in the military next week and will be receiving a $28,000 reenlistment bonus. That’s some sweet cash, and he wasn’t sure exactly what do with it. He asked me what he should do with his reenlistment money, and allowed me to share his situation as long as I changed his name.
Here is Phil’s financial situation:
- He has $17,000 credit card debt.
- He has about $1,500 left on a zero interest loan for a widescreen TV and other electronics (zero interest expires soon).
- $15,000 car loan, at about 6% .
- He rents, and has no plans on buying a house any time soon.
- He has already decided 25% of his bonus will go to his Thrift Savings Plan.
Based on our calculations, Phil should receive about $15,750 now. The TSP contribution is immediately taken out of the full $28k, leaving $21k. Military bonuses are usually taxed at 25%. Subtracting 25% for taxes leaves him with about $15,750. These are rough numbers, but they are close enough.
Here is what Phil planned to do with his money:
- Immediately invest 25% ($7,000) into his retirement fund – TSP.
- Pay taxes
- Pay of his zero interest loan (it is small and will soon be over 20%).
- Pay a few thousand dollars on his car loan.
- Pay the remainder toward his credit card debt.
- Snowball his payments toward his remaining credit card debt.
- Pay minimum on his car, then snowball payments toward car loan when credit card debt is paid off.
I like Phil’s plan, but I made 2 recommendations:
- The first thing I recommended to him is having an emergency fund. He wasn’t too familiar with the term, so I gave him a quick explanation – keep a few thousand dollars cash in a high interest bank account where where you will not touch it, but will have access to it in the event of an emergency. I recommended having an on-line account such as Capital One 360 ($25 Bonus for new Capital One 360 accounts), Emigrant’s Direct, or some of the other banks that will give him easy access and high interest.
- The second recommendation – after paying off the zero-interest electronics loan, make the extra payments toward the credit card with the highest interest. Phil had wanted to put down a few thousand dollars on his car note. He agreed it made more sense to pay off his higher interest loans first.
Change bad habits. Phil and I also talked about his spending patterns, specifically his credit card debt, and he has really come a long way in the last year. He told me he had been living beyond his means and has curtailed his frivolous spending. Thankfully, Phil is willing and ready to make these changes. If he wasn’t, then the $15,000 he is soon to receive would be a wasted gift! Phil is in the right frame of mind to make these changes in his life, and I know he will be successful.
On the right track. I think Phil is on the right track and I told him so. In fact, I think he knew he was on the right track, but he is proud that he is making these changes and wanted to share with a trusted friend that he is turning a new page in his life. Awesome! I love sharing in people’s successes, and I am proud of him! He is going to be fine as long as he sticks to his plan. Phil said he should be debt free, including car payments, in about 3 years or so. I know he feels better already!
A $15,000 windfall is a great thing! Thankfully, Phil has come to his senses about his spending and credit card debt. Add to the fact that Phil has also started investing more for his retirement, and he is well on his way to financial freedom.